Tuesday, February 5, 2013

Tax Break for Tobacco Manufacturers Giving Cigarettes and Cigars to Their Own Employees

The Internal Revenue Code contains several excise taxes on manufacturers and importers of cigarettes and cigars:
1. 5 cents for each cigarette or small cigar,
2. up to 40 cents for each large cigar,
3. $1.51 per pound of snuff, and so on.

The excise tax adds up to around $10 per carton of 200 cigarettes.

Fortunately for tobacco manufacturers, the excise taxes do not apply to tobacco products that a manufacturer gives to its own employees for use or consumption.  In addition to the ample smoke breaks, this is one of the many perks of working in the tobacco industry.

The exemption was first created in 1924, but only up to 21 cigars or cigarettes per week were tax-free for each employee at the time.  Coincidentally, 1924 was also the year that Congress tried and failed to ban child labor with an amendment to the Constitution

The 21-cigarettes cap was lifted in 1954 in order to modernize the law.

The excise tax exemption does not apply to employees of cigarette importers and cigar importers.

The exemption is oddly specific to the tobacco industry and does not appear anywhere else in the Internal Revenue Code.  A refinery would still have to pay excise taxes on gasoline that the refinery employees siphon off for their own use.

§ 5704 Exemption from tax.

(a) Tobacco products furnished for employee use or experimental purposes.
    Tobacco products may be furnished by a manufacturer of such products, without payment of tax, for use or consumption by employees or for experimental purposes, in such quantities, and in such manner as the Secretary shall by regulation prescribe.

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