Tobacco tax and shisha tobacco in German criminal tax law: The increasing popularity of shisha bars and water pipe tobacco has not only stimulated the market, but has also aroused the interest of the customs administration. With the introduction of the Tobacco Tax Modernization Act and stricter tobacco tax regulations, the industry is facing considerable challenges.
In particular, the German tax liability when mixing tobacco components and the strict packaging regulations pose considerable criminal law risks for retailers and consumers. In this article, we highlight the legal pitfalls and the risk of criminal tax proceedings in connection with waterpipe tobacco.
1. the current legal situation regarding tobacco tax on waterpipe tobacco
The Tobacco Tax Modernization Act
Legislators are constantly tweaking the regulations on the taxation of waterpipe tobacco, sometimes with the aim of avoiding tax liability. In any case, the additional tax, which was once 15 euros per kilogram, has since been increased to 19 euros in 2023 and has now been set at 21 euros since 01.01.2025, must be known.
Multi-component systems and the tax trap
A widespread practice is the separate sale of pipe tobacco and the liquid component glycerine/molasses. This so-called “two-component system” enables end consumers to produce their own waterpipe tobacco. From a tax law perspective, however, this is a manufacturing activity that is only permitted under certain conditions.
Ruling of the Munich tax court: In its ruling of June 26, 2024, the Munich Fiscal Court clarified that even the mixing of tobacco with glycerine is to be regarded as manufacture within the meaning of Section 6 TabStG, even if this takes place outside a tax warehouse. It is sufficient for the mixing to result in a taxable tobacco product, without the actual smokability of the product being relevant.
Urteil des FG München: Das Finanzgericht München stellte in seinem Beschluss vom 26. Juni 2024 klar, dass bereits das Mischen von Tabak mit Glycerin als Herstellung im Sinne des § 6 TabStG zu werten ist, selbst wenn dies außerhalb eines Steuerlagers erfolgt. Dabei reicht es aus, dass durch das Mischen ein steuerpflichtiger Tabakerzeugnis entsteht, ohne dass es auf die eigentliche Rauchbarkeit des Produkts ankommt.
Criminal law risks for retailers
The participation of dealers in this system is not without consequences. The sale of components for the production of waterpipe tobacco without appropriate taxation can be regarded as aiding and abetting tax evasion.
Judgement of Frankfurt am Main Regional Court: Frankfurt Regional Court sentenced two defendants to suspended sentences for commercial tax evasion and tax evasion in connection with the import and sale of untaxed water pipe tobacco. The court clarified that participation in the distribution and resale of untaxed tobacco is also sufficient to constitute tax evasion in accordance with Section 374 AO.
2. the economic impact of the new regulations
Burdens for the shisha industry
The new tax regulations and the limitation of pack sizes to 25 grams have caused prices for legal water pipe tobacco to rise sharply. According to the German hookah tobacco association, the price per kilogram for consumers has almost doubled, while the purchase prices for hookah bars have even quadrupled. As a result, legal suppliers are coming under increasing pressure.
Promotion of the black market
Due to the high prices and strict regulations, the black market for water pipe tobacco has become considerably more important. The German Waterpipe Tobacco Association estimates that the black market now accounts for up to 80 percent of the total volume. Illegal tobacco is offered at significantly lower prices, but often without the required tax stamps and under questionable hygienic conditions.
3. criminal law consequences for consumers
Tax evasion through self-mixing
Consumers who buy separate tobacco and glycerine components and mix them themselves are committing a punishable manufacturing act from the point of view of tobacco tax law. Section 370 AO (tax evasion) applies here.
Ruling of the Munich tax court: The court ruled that products consisting entirely of tobacco substitutes are also taxable as smoking tobacco, provided they are smokable and serve as a substitute for traditional tobacco.
Practical challenges in criminal prosecution
Although the legal situation is clear, practical enforcement is proving difficult. Customs checks are often only carried out on a random basis and it is almost impossible to determine the actual quantities of illegal tobacco. Added to this is the flourishing online trade in untaxed waterpipe tobacco, which makes prosecution by the authorities even more difficult.
4. tax evasion through self-mixing in shisha bars: an underestimated risk
Operators of shisha bars are increasingly the focus of customs authorities when it comes to evading tobacco tax. A particularly common practice is the mixing of tobacco components directly in the bars. Instead of purchasing taxed and ready-to-sell water pipe tobacco, many operators buy the ingredients separately: dried raw tobacco on the one hand and glycerine and flavorings on the other. This method has one main purpose: to avoid the high tobacco tax levied on finished waterpipe tobacco.
The legal classification: production instead of consumption
From a tax law perspective, however, this practice does not constitute mere consumption, but rather the manufacture of tobacco products. According to Section 6 of the German Tobacco Tax Act (TabStG), the tax liability arises as soon as the components are mixed, regardless of whether the tobacco is intended for personal consumption on the premises or for sale. Operators of shisha bars thus effectively become manufacturers of tobacco products and are obliged to pay the tobacco tax due.
Munich tax court ruling: In a ruling dated 26 June 2024, the Munich Fiscal Court clarified that even the mixing of raw tobacco with glycerine and flavorings is to be regarded as taxable production if this takes place outside an approved tax warehouse. It is irrelevant for the tax liability whether the mixtures are made directly on site in the shisha bar or in a separate room. The only decisive factor is that the production results in a taxable tobacco product.
Tax evasion through “self-mixing”
Many operators try to circumvent the tax liability by claiming that the individual components are purchased separately and only mixed immediately before consumption. However, this argument regularly fails in court. In a case at Frankfurt am Main Regional Court, a shisha bar operator was convicted of commercial tax evasion because he regularly purchased raw tobacco and molasses separately and mixed them in the bar without paying the tobacco tax due. The court argued that this was a commercial production of tobacco, which is subject to tax.
Criminal consequences for operators
For operators of shisha bars, self-mixing can have serious criminal consequences. Tax evasion in accordance with Section 370 AO can result in prison sentences of up to five years or fines. In the case of commercial tax evasion, i.e. if the self-mixing is carried out regularly and to a considerable extent, there is even a risk of imprisonment of six months to ten years.
Particularly problematic: customs often consider the operators to be liable for tax, even if they officially purchase the components. The fact that the ingredients are mixed directly on site is considered sufficient evidence of tax evasion. In addition to criminal prosecution, there is also the threat of retroactive payment of tobacco tax, including late payment penalties and interest.
In practice, customs authorities are often at the door to check the kitchen, for example, where you will find everything you need to mix yourself. In view of the increasing controls by the customs authorities, it is therefore urgently recommended that you adapt your sales practices and seek legal advice before the tax investigators show up at your door.
5. overview
The current regulations on tobacco tax for waterpipe tobacco have not only led to a significant price increase, but have also considerably increased criminal law risks for retailers and consumers. In brief:
- Urgent need for reform: regulations promote the black market and burden legal providers.
- Mixing of tobacco and glycerine by consumers or operators of shisha bars: Criminal manufacturing and tax evasion.
- Traders: Risk of aiding and abetting tax evasion.
- Relevant judgments: Munich Tax Court and Frankfurt Regional Court confirm tax liability and criminal law risks.
A reform of tobacco tax law appears to be urgently needed in order to strengthen the legal market and effectively combat tax evasion. It is advisable for retailers to check their sales practices carefully and seek legal advice if in doubt. Consumers should be aware that even the private production of waterpipe tobacco can have criminal consequences.
Operators of shisha bars should be aware of the legal risks associated with the self-mixing of tobacco. Without an official permit to manufacture tobacco products, there is not only the risk of tax evasion, but also the risk of high fines and even imprisonment.
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