Although some states have adopted laws to tax little cigars like cigarettes, NATO joined the Cigar Association of America and Arango Cigar Co. in a lawsuit filed on July 30, 2012 against the Illinois Department of Revenue because the Illinois law that took effect on July 1, 2012 which taxes numerous little cigar products as cigarettes is vague and results in over-taxation.
Effective July 1, 2012, the Illinois state cigarette tax increased by $1.00 per pack to $1.98 per pack, and the new law also included little cigars in the definition of cigarettes. Several provisions of this new definition of what constitutes a cigarette were vague and the law also required that little cigars be stamped with the state's cigarette tax stamp.
With the Illinois Department of Revenue unwilling to clarify the vague definition and not require cigarette stamping of those little cigars contained in packages that are not the same size as cigarette packages, an urgent situation arose since the law would allow the Illinois Department of Revenue to confiscate unstamped little cigars and fine retailers who had unstamped little cigars on their store shelves as of August 1, 2012.
Moreover, the Illinois Department of Revenue intended to apply the $1.98 cigarette tax to packs of little cigars containing less than 20 little cigars resulting in an overpayment of the cigarette tax. For example, if a package of little cigars contains five cigars, an Illinois wholesaler is required to charge retailers, remit the full $1.98 per pack tax to the revenue department, and then file a refund request with the Illinois Department of Revenue for the excess tax on fifteen little cigars. However, the retailer must pay the full tax as if each package of little cigars contains 20 cigars and then the consumer is charged the full $1.98 per pack in tax without the ability to obtain a refund of the excess tax.
After filing the lawsuit on Monday, July 30th, a Cook County Circuit Court judge issued a temporary restraining order on Tuesday, July 31st prohibiting the Illinois Department of Revenue from confiscating little cigar products and enforcing the civil and criminal penalty provisions of the new law. Several days later, the judge issued a supplemental temporary restraining order holding that little cigar that fall under the new definition of cigarette and come in packages of less than 20 are not required to be stamped with a cigarette excise tax stamp.
This decision on not stamping little cigars in packages of less than 20 is significant because wholesalers would have been required to stamp little cigar packages with the cigarette stamp by hand, which is labor intensive. The likely outcome would have been that wholesalers would forego the hand stamping process and simply not sell those little cigars in packages that were not the same size as a package of cigarettes.
During an August 9, 2012 hearing to determine if the court would proceed to issue a preliminary injunction against the Illinois Department of Revenue, the judge extended the temporary restraining order involving the Illinois little cigar tax to August 24, 2012. This means that the Illinois Department of Revenue was prohibited from confiscating little cigar products and enforcing the civil and criminal penalty provisions of the new tax law, while continuing to exempt little cigars that come in packages of less than 20 from being stamped with the state’s cigarette excise tax stamp.
On August 24, 2012, the judge hearing the case granted a preliminary injunction in favor of the Cigar Association of America, NATO and Arango Cigar Co. and extended the prohibition on the confiscation of little cigar products, the enforcement of penalties under the new tax law, and the exemption from stamping little cigars in packages of less than twenty until a final ruling is issued on the pending lawsuit. In the near future, the lawsuit will go to trial or a permanent injunction hearing will be held where the judge will rule on the entire case including the over-taxation of little cigar products.