Amends the percentages used to determine the presumed cost of doing business for agents and wholesale dealers that sell cigarettes

Summary of specific provisions

Section 1: Amends Tax Law section 483(b)(2) to increase the presumed cost of doing business from seven- eighths of a percent to two and five-eighths percent of the basic cost of cigarettes for sales to wholesale dealers. It also increases from one and one-half percent to four and one/half percent the percentage of the basic cost for sales to chain stores and from three and seven-eighths percent to six and one-half percent the percentage of basic costs for sales to retail dealers.

All percentages are in addition to a fixed component, left unchanged, of plus one cent per package of ten cigarettes, two cents per package of twenty cigarettes, and two and one-half cents per package exceeding twenty cigarettes. Also provides that the cost of doing business of the wholesale dealer making a sale with respect to sales to retail dealers shall be presumed to be increased from three to three and seven-eighths percent of the basic cost, and from five-eighths of one percent to one and seven-eighths percent of the basic cost with respect to sales to chain stores.

Section 2: Amends Tax Law section 483(b)(3) provide that the cost of doing business by the retail dealer shall be presumed to be increased from seven to eleven percent of the basic cost plus the cost of doing business by the agent with respect to cigarettes sold to retail dealers.

Section 3: Adds a new Tax Law section 472-a to require the Department of Taxation and Finance to incorporate a new encrypted counterfeit-resis- tant tax stamp or other means of identification for the collection of taxes on cigarettes. This provision establishes standards for creating such an enhanced cigarette tax collection system. The cost of establish- ing this enhanced tax collection system shall be borne by wholesale cigarette dealers that are also licensed agents that are authorized to buy and affix tax stamps. The Cigarette Wholesalers Association is in support of this proposal.

Section 4: This free standing section of the law outlines the procedure for conducting a Request for proposal and time periods to select a vendor to operate such a system.

Section 5: Amends Tax Law section 472 to make technical amendments.

Section 6: Amends Tax Law section 480 to make it clear that the cost of establishing this system will be borne by wholesale cigarette dealers.

Justification

Increased excise taxes on tobacco in New York State, the passage of the bottle disposal legislation and a variety of other meas- ures have created a difficult burden on convenience stores, bodegas and a variety of other retail and wholesale outlets. This legislation would give retailers and distributors a small but badly needed increase in their retail price. This legislation confers no benefits to manufactur- ers of tobacco products.

Due to the high tax rate on cigarettes in New York, there is an increas- ing amount of tax avoidance with regard to the purchase and delivery of cigarettes in this State. For example, over the past 7 years, the number of cartons of cigarettes legally sold and taxed has decreased from approximately 95 million cartons to only 45 million cartons annually. National studies have indicated that the demand for cigarettes is gradu- ally declining; however demand had not been cut in half over the past 7 years. This sizable reduction has been caused, in part, by an increasing black market for the distribution of untaxed cigarettes. This bill establishes a newer system of tax collection to help minimize the evasion of the payment of cigarette taxes and reduce the amount of ciga- rettes that are sold on the black market.

In 2006, The Department of Health estimated that New York state may be losing as much as $550 million in taxes through the illegal sales of untaxed cigarettes. Other estimates maintain that up to 35% of all ciga- rettes sold in this State are not stamped legally for proper tax collection. The State of New York may be potentially losing up to hundreds of millions of dollars in uncollected revenues due to the ille- gal sale cigarettes. Further, those participating in this black market include organized crime and, perhaps terrorist organizations, who use revenue gained from this activity for their nefarious activities.

Last year the U.S. House Committee on Homeland Security completed an investigation on cigarette smuggling in New York, and they concluded that terrorist organizations, such as Hamas and Hezbollah, were benefit- ing from untaxed cigarette sales. Further, that this activity was caus- ing losses in State revenue in the hundreds of millions of dollars.

California was one of the first states in the nation to implement this new encrypted tax collection system and to phase out its old heat applied decal stamp tax collection system. Further, a California Audito- ria report indicated that this new system has helped to significantly reduce tax avoidance in that State. Another benefit of the new encrypted system is that law enforcement agents will be able to utilize hand held scanning devices to monitor cigarette shipments and detect false or illegally stamped cigarettes.

Prior legislative history

This bill has been previously introduced as S.4802 in 2006 and S.2281 in 2007.

Fiscal implications

Increasing the minimum price of cigarettes sold in New York should help to generate $18 million annually to the State in increased revenue. Further, the establishment of a new encrypted ciga- rette tax collection system should raised significant amounts of money, perhaps well over tens of millions of dollars.

Effective date

This act shall take effect immediately.