Relates to the use of an advanced system for securing tobacco taxes

The 2008 excise tax increase produced a tremendous opportunity to circumvent the law with the use of counterfeit tax stamps. When this Counterfeit-resistant stamping process is utilized; in New York, the Commissioner of the Department of Taxation and Finance will have gained new technologies to access data, improve compliance, and bolster enforcement efforts to reduce black-market sales of illegal cigarette products in New York State. The bill allows the Commissioner of the Department of Taxation and Finance to mitigate the costs of the lease or purchase of the machinery and/or equipment for stamping agents, and provides a product 'sell through' period for cigarette retailers to sell inventory previously stamped with the state's heat applied decal tax stamp.

Justification

Increased Federal, State and local taxation is driving up the costs of a pack of cigarettes, making the smuggling and sale of illegal products more lucrative. In 2006. the State Health Department estimated that New York State might be losing as much as $576 million in taxes through the illegal sales of untaxed cigarettes. Other estimates show that up to 35 percent of the cigarettes sold in New York State are not stamped legally by the State. The Federal government acknowledges that New York is losing hundreds of millions of dollars in uncollected revenues due to the sale of illegally stamped cigarettes, and those profits from these illegal sales goes directly to organized crime, terrorist organizations, as well as to China, Vietnam, North Korea.

The U.S. House Committee on Homeland Security completed an investigation on cigarette smuggling in New York. They discovered that terrorist organizations such as Hamas and Hezbollah are benefiting from untaxed cigarette smuggling as New York State loses hundreds of millions of dollars in tax revenue. A May 200. Wall Street Journal article reported on the arrest of Queens resident Rafea al-Nablisi, who was smuggling 12,000 cartons of cigarettes a week. Similar arrests and convictions have occurred in Western New York and Upstate. The Wall Street Journal reported that "butt-leggers" could make over $1 million on each tractor-trailer load of smuggled cigarettes.

California is the first state to drop the utilization of the 50-year old "heat-applied decal tax stamps" with the implementation of the encrypted counterfeit-resistance cigarette tax stamp. The California Board of Equalization has credited additional licensing procedures, improved enforcement and the encrypted stamping of every pack of cigarettes with bringing in additional revenues of over $100 million dollars in just the first phase of operation. A California Auditor's report showed that the use of the encrypted stamp "increased cigarette tax Compliance..." California is now looking to expand the use of this technology on additional regulated products.

The implementation of a similar system in New York should prove equally beneficial. The application of an encrypted tax stamp will provide New York with additional security. In addition, state enforcement agents will use hand-held devices to monitor shipments and to detect false or illegal stamped products for sale. Store operators will be able to use special retail scanners to authenticate products. The process can provide the Tax Department with up-to-date, accurate data on cigarette shipments and sales statewide. Finally. when operational, future revisions on the encrypted stamp to secure the stamp's integrity can be accomplished with computer programming and/or software revisions.

Encryption technologies will be implemented in Canada and Massachusetts this year. Similar encryption technologies are used today to protect and secure the world's currencies. This process will benefit New York State, local governments residents and legitimate business owners by reducing tax evasion, the collection of owed revenues, (excise taxes and sales taxes), greater enforcement and reduced criminal activities in our communities.

Fiscal implications

New York has stamped cigarette sales are approximately one-half of California. New machines needed for the application of the new digital encrypted stamping are typically leased at an estimated price of $1.500 per month. The encrypted stamping will regain tens of millions of dollars in lost revenues to the State of New York in the first year of operation.

Effective date

This act shall take effect immediately, provided, however, that section 2 shall take effect 180 days following the awarding of such contract pursuant to this act; provided further that any produced in the possession of a cigarette retail dealer on the effective date of this act and stamped to the commissioner's satisfaction may continue to be offered for sale and sold to cigarette purchasers.