Learn more about tobacco bonds below, or request a quote online today. At Surety Bond Professionals, our experienced surety agents are ready to assist with all of your bonding needs and any questions you may have.
What Are Tobacco Bonds?
In addition to the federal bond required nationwide by the Alcohol and Tobacco Tax and Trade Bureau, most states require cigarette bonds or tobacco bonds to ensure the payment of sales tax on cigarette and other tobacco sales. As a type of sales tax bond, they are categorized as financial guarantee bonds. Some local governments also require a bond in order to license a business to sell cigarettes and other tobacco products.
Who Needs Them?
Depending on the state, a tobacco bond requirement may apply to distributors, manufacturers, wholesalers, importers, and/or retailers of tobacco products. In short, any business required to collect sales tax related to cigarettes and other tobacco products may be required to obtain a bond guaranteeing the remittance of that tax to the state. It all depends on the state in which you operate your business.
In some states, a single bond covers the sale of both cigarettes and other tobacco products, while other states require one bond for the sale of cigarettes and a second for the sale of other tobacco products. The rules and the terminology vary from state to state, and a few states do not require bonds at all.
How Do They Work?
The three parties to a tobacco surety bond contract are the state entity requiring the bond (the obligee), the business required to purchase the bond (the principal), and the underwriter that issues the bond (the surety). The terms of the bond indicate the contractual requirements the principal must meet.
If the principal fails to properly report or remit sales taxes according to the terms of the bond, the obligee can file a claim against the bond. Once the surety determines the claim to be valid, it will pay the obligee up to the full penal amount of the bond. The principal must subsequently reimburse the surety.
What Do They Cost?
The obligee (the state) establishes the penal amount of the bond by estimating the principal’s annual tax liability. The surety then establishes the premium rate you will pay based on an assessment of your personal credit score, industry experience, and personal and business financials. Applicants with good personal credit typically pay a premium rate in the range of 1-3%, which is the standard market rate. Those with poor credit may pay a higher premium.
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