Relates to the licensure of cigarette manufacturers; requires the exclusive use of encrypted counterfeit-resistant cigarette tax stamps

Justification

New York State uses a heat applied decal cigarette stamp tax whose technology was developed right after World War II, and is easily counterfeited. It is estimated that at least 35 percent of the cigarettes sold in New York State are not legally stamped by the State. Counterfeit cigarettes continue to be an increasing problem. The state tax is now $2.75 per pack and the sale of counterfeit cigarettes and the use of counterfeit tax stamps in New York is on the rise. Illegally stamped cigarettes are entering New York from a variety of locations and sources including crime organizations, terrorist groups, North Korea, China and Vietnam. US authorities said, "The North Korean regime could be earning $80 million to $160 million in annual payoffs from smugglers alone." Tens of millions of dollars are getting into the hands of organized crime, gangs and street-level criminals. Downstate and the New York City region is particularly vulnerable. Both State and New York City excise taxes add $4.25 to each pack sold. As a result, the illegal sale often (10) untaxed cartons of cigarettes costs the State's taxpayers almost $500.00 in uncollected State and local excise and sales taxes.

New York is losing hundreds of millions of dollars in lost tax revenue through the sale of cigarettes shipped illegally into the state. This bill is patterned after a California law. California officials have deemed the program a huge success, and credit additional licensing procedures, improved enforcement and the encrypted stamping of every pack of cigarettes with bringing in additional revenues over $120 million dollars in the first phase of operation. A California State Auditor report agreed with the state's Board of Equalization that "the act has increased cigarette tax compliance...".

The New York cigarette tax of $2.75 per pack compares to 87 cents per pack excise tax in California and New York's adoption of a like system should prove equally beneficial in terms of recovering lost revenues and preventing counterfeiting.

Additionally, state enforcement officers are provided hand-held scanning devices to detect false and/or illegal stamps while store operators are able to use retail scanners to authenticate the stamp. The encrypted stamping process will increase the number of packages stamped, improve distributor's (wholesalers-stamping agents) profits, and provide the state with more accurate data on cigarette shipments and sales. Finally, when fully operational, any future revisions of the stamp or changes in the encryption can be accomplished using computer programming and software. This bill also creates a special enforcement fund known as the Cigarette Tax Criminal Enforcement Fund. The monies in this fund shall be used solely for the purposes of criminal enforcement and provide the necessary audits of cigarette and tobacco taxes. These improvements will support homeland security efforts.

Legislative history

2007-08: S.6506-A/A.11733

Fiscal implications

New York stamp sales equal one half of such sales to California. New machines needed for the application of the new digital encrypted stamping system have been estimated at approximately $145,000 per placement. Manufacturer licensing fees, an increase in the commission paid to licensed stamping agents and the creation of a dedicated fund will offset the costs of implementing the technology and enforcement. The encrypted stamping system will regain tens of millions of dollars in lost revenues to the State of New York in just the first year.

Effective date

This bill shall take effect immediately.