Tobacco Bonds for Licensed Sellers

The U.S. Department of the Treasury’s, Alcohol and Tobacco Tax and Trade Bureau (TTB) requires any person who owns a business that manufactures tobacco products or who operates an export warehouse to purchase a tobacco bond. The required amount of the bond (the bond’s “penal sum”) depends on the type of business and is based on the company’s estimated annual sales tax liability.

Not all states mandate a tobacco bond, but many of them do. In the states that require tobacco bonds, the governing jurisdiction typically is the state’s Department of Revenue or its Alcohol Tax and Firearms Agency. A given state’s tobacco bond requirement may apply to all tobacco-related businesses (manufacturers, distributors, wholesalers, retailers, importers, warehousing operations, etc.) or only to certain types of businesses.

Some states require a tobacco bond that covers taxes due on sales of all tobacco products, while others require one bond for cigarette sales and a second bond for all other tobacco products.

As with federal TTB bonds, the penal sum for state tobacco bonds varies according to the specific type of business and its estimated tax liability.

Every tobacco bond is a legally binding contract among three parties: the “obligee,” the “principal,” and the “surety.”

• The obligee is the taxing authority requiring the bond—the TTB for federal tobacco bonds or a state’s ATF or other government entity with jurisdiction over the tobacco industry.
• The principal is the specific tobacco-related business required to purchase the tobacco bond.
• The surety is the company that underwrites and issues the tobacco bond.

Failure to remit taxes due on the sale of tobacco products can result in the obligee filing a claim against the principal’s bond and collecting the overdue taxes plus any related fines or penalties. When a claim is received, the surety will investigate to ensure that it’s valid and may try to negotiate a settlement.

Absent a settlement, the surety will pay the claim (up to the bond’s full penal sum) on behalf of the principal. However, the principal is legally responsible for paying all claims and must reimburse the surety.