Utah “Bonds” E-Cigarette Makers to Hefty New Tax
Author: Jackson Cromer
Posted On: 07-21-2020
In an effort to limit vaping while raising tax revenue for the state, Utah Governor Gary Herbert signed SB37 Electronic Cigarette and Other Nicotine Product Amendments, establishing a 56% tax on all e-cigarette sales and a bond requirement to financially guarantee the payment of such taxes. The bill imposes the same tax regulations on e-cigarettes and vaping products as traditional tobacco products. Previously, e-cigarettes were exempt from Utah State tobacco taxes unless they contained tobacco. With the rise of underage use of vaping products the State of Utah hopes the new legislation will 1) combat the sale of vaping products to children, 2) provide the state with additional revenue to support schools and police officers and, 3) increase funding for vaping prevention programs.
The Utah State Tax Commission requires the collection of tax for the sale of electronic cigarette substances, a prefilled electronic cigarette, an alternative nicotine product, a nontherapeutic nicotine device substance, or a prefilled nontherapeutic nicotine device, as referenced in Utah Code 59-14-803. The purpose of the e-cigarette bond is to guarantee tax payments and faithful performance by the bond principal in relation to Chapter 14, Cigarette and Tobacco Tax and Licensing Act, of the Utah Code of Revenue and Taxation.
Below is a guide to the new E-Cigarette Tax Bond for carriers and brokers looking to offer the bond and Utah insurance agents looking to help their customers who sell vaping products.
Who Is Required to Purchase E-Cigarette Tax Bonds in Utah?
The Utah E-Cigarette bond is required of manufacturers, jobbers, distributors, wholesalers, or retailers that sell electronic cigarette substances. The amount of the bond is equal to the business’ estimated quarterly e-cigarette taxes with a minimum of $500 - $1,500 depending on the products sold (see chart below). If the actual quarterly tax outpaces the estimate, the Commission may require an increase to the bond amount.
The minimum bond amounts are determined as follows:
Vaping Products AND Cigarettes OR Other Tobacco Products
Vaping Products, Cigarettes AND Other Tobacco Products
The Utah State Tax Commission will require the bond to remain active for as long as the principal is licensed.
How Do Surety Companies Underwrite Utah E-Cigarette Bonds?
We have reviewed the bond form and statutes pertaining to this new requirement. The legislation underlying the bond is fairly straightforward - report and pay taxes for the sale of vaping products. Surety underwriters generally look askance at financial guarantee requirements; however, for businesses that qualify for bond limits anywhere near the tiny minimum penal sum, carriers will likely limit underwriting to a personal credit check of the principal to price the bond. Some carriers may consider the risk on these bonds so minimal that they provide automatic approval for any applicant who needs a bond under a $10,000 limit. Above this amount, most surety companies will require a credit check to properly determine their risk on the bond. Should a bond amount exceed $25,000 the surety company may require review of business financial statements.
While uncertainty is a given with any new surety requirement, we expect the risk on the Utah E-Cigarette Tax bonds will largely mirror other tobacco tax-related bonds.
How Does the Utah E-Cigarette Bond Form Language Impact Risk?
The Utah Vape bond form contains standard clauses favorable to the surety company. For example, the bond limits the aggregate liability of the surety company as follows:
|“the Commission may make demand upon the surety for the payment of the amount of the unpaid taxes, interest, and penalties by the Principal up to, but not to exceed the amount of the Surety’s liability as defined by this bond, and in addition any costs or attorney’s fees incurred in collecting the same from the Surety.”|
In addition, the new Utah bond contains a standard cancellation clause:
|“This bond shall remain in continuous force and effect until terminated as hereinafter provided. The Surety may at any time terminate this bond by giving 30 days written notice by certified mail to the Utah State Tax Commission”|
What Do Surety Companies Charge for the E-Cigarette Tax Bond?
As with most bonds, the premium charged on the new Utah bond ranges based on the size of the bond. Thus far, we’ve seen premium rates range between 1.2% - 5.0% of the bond amount. However, 1.2% of the minimum bond amount is only $6-18, insufficient to cover a surety carrier’s cost to issue and file the bond. Therefore, most carriers apply a minimum premium of $100
What Events Could Trigger a Claim on the Utah E-Cigarette Tax Bond?
Any violation of the regulations imposed by Utah Code Title 59 Chapter 14 Part 8 could result in a bond payout. As with any new bond requirement, historical data does not yet exist; however, we believe claim payouts will occur most often with the following violations:
- Failure to remit taxes for the quarter by the last day of April, July, October and January
- Failure to file a quarterly tax return
- Failure to report the tax collected in the previous calendar quarter
The Utah State Tax Commission requires tax records to remain on file for a period of three years following the date the statement was required to be filed. Principals diligent in their record keeping and proactive to ensure payments are made in a timely manner will remain in compliance and avoid claims activity.
Does the Utah State Tax Commission Offer Alternatives to the Surety Bond?
The Utah State Tax Commission will accept a “cash bond” aka a refundable cash deposit in lieu of the surety bond requirement. Regardless of which option is selected, such security must be delivered to the Commission prior to issuance of the principal’s license to sell electronic cigarette or nicotine products.
How Is the E-Cigarette Tax Bond Filed?
The original bond must be mailed to the Utah State Tax Commission at the following address:
Utah State Tax Commission
Attention: Taxpayer Services Division Director
Utah State Tax Commission
210 North 1950 West
Salt Lake City, Utah 84134
The Commission does not accept electronic bond copies at this time.