What is a Cigarette Tax bond ?
Cigarette tax bonds are a subset of the broader financial guarantee bond category that must be filed with the government agency (city, county, or state) responsible for regulating tax payment activity in the cigarette taxpayer’s jurisdiction . Many states handle cigarette and other tobacco product tax directly, while others allow local municipalities to regulate and collect cigarette tax payments.
Cigarette tax bonds must be issued by insurance carriers admitted in the state where the government agency requiring the bond resides. The insurance carrier issuing any surety bond, such as a cigarette tax bond, will also be referred to as the “surety company” or the “bond company”. Cigarette tax bonds refer to the taxpayer as the Principal, the surety bond company as the Obligor and the government agency as the Obligee.
Why is a Cigarette Tax bond required?
Cigarette producers, distributors, retailers or salespeople are required to purchase financial guarantee bonds by state and local statutes to protect a government agency by transferring to a surety bond company the cost of ensuring the government agency is compensated for damages resulting from a business failing to pay applicable taxes on cigarette sales. The surety company provides the government a guarantee (the surety bond) that the government will receive payment for financial damages due to a violation of the statutes and regulations referenced in the bond form up to a limit specified in the bond (“penal sum” or “bond amount”). Ultimately, business owners are responsible for their tax obligations and required by law to reimburse the surety company for any payments made under the bond or face indefinite license suspension or civil action.
How much does a Cigarette Tax bond cost?
Cigarette tax bonds generally cost between 2% and 8% of the bond limit.
Example: $10,000 Cigarette Tax Bond Cost
| Credit Score | Premium Rate | Bond Cost |
|---|---|---|
| 680 or above | 2.0% | $200 |
| 650-679 | 2.5% | $250 |
| 625-649 | 4.0% | $400 |
| 600-624 | 5.0% | $500 |
| 550-599 | 7.5% | $750 |
| 500-549 | 8.0% | $800 |
The actual cost of a specific cigarette tax bond can vary widely depending on the risk associated with legal precedent in the jurisdiction, the language in the bond form and the taxpayer’s payment history, experience and creditworthiness. Cigarette tax bonds required by a local government (city or county) tend to have the lowest cost, while state requirements have potentially higher costs and/or more strict underwriting requirements.
Is a Credit Check Required for Cigarette Tax Bonds?
Credit checks are required for most bonds required by state agencies. Cigarette tax bonds required by cities, townships or counties with bond amounts under $25,000 generally do not require a credit check to purchase the bond. Ultimately, the surety insurance company determines how it will underwrite and price a surety bond.
How does the wording in the bond form impact the cost of a Cigarette Tax bond?
The bond form is a tri-party agreement which defines the rights and obligations of the government agency (obligee), surety company (obligor) and cigarette distributor or salesperson (principal). While many bond forms use similar language, each bond form can be customized by the government agency requiring the specific bond and may contain provisions that increase potential costs for the surety company, which will ultimately be passed on to the taxpayer via higher bond premiums, stricter underwriting or collateral. The primary text to consider in a cigarette tax bond surrounds (1) aggregate limits, (2) cancellation provisions and (3) forfeiture clauses.
Aggregate Limits
Bond forms always specify the penal sum defined as the maximum amount of financial damages any single party can recover from the bond related to a single claim occurrence. Most bond forms also contain a clause which limits the amount of financial damages from all parties and all claims to a specific amount (“aggregate limit”), usually the same amount as the penal sum. For example, a $15,000 cigarette tax bond with an aggregate limit of $15,000 will pay out no more than $15,000, regardless of the number of damaged parties or claim occurrences. Cigarette tax bonds without an aggregate limit will be more expensive than a bond with similar coverage containing an aggregate limit.
Cancellation Provisions
Most bonds contain a provision allowing for the surety company to cancel the bond (“Cancellation Provision”) by providing a notice to the cigarette taxpayer and government agency requiring the bond with the cancellation taking effect within a set period of time, usually 30 days (“Cancellation Period”). Cancellation provisions allow the surety company to cancel the bond for any reason, but most often due to the taxpayer failing to pay premiums due, claim payouts, or material changes in the taxpayer’s credit score. Cigarette tax bonds with no cancellation provision or cancellation periods greater than 30 days will be more expensive than a bond with similar coverage containing a standard cancellation provision.
Forfeiture Clause
Surety bond claims are paid by surety companies to damaged parties to reimburse that party for the financial loss incurred up to the bond penalty amount. Certain bonds contain a clause which requires the surety company to pay the full bond penalty to the damaged party, regardless of the actual damages incurred (“Forfeiture Clause”). Cigarette tax bonds with forfeiture clauses will be more expensive than a bond with similar coverage that does not contain the clause.