Requires the use of encrypted counterfeit-resistant tobacco product tax stamps and markers

Summary of specific provisions

Section 1: Adds a new Tax Law section 472-a to require the Department of Taxation and Finance to incorporate a new encrypted counterfeit-resistant 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 establishing 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.

Section 2: This free standing section of the law outlines the procedure for conducting a Request for proposal and time periods in which the department is to select a vendor to operate such a system.

Section 3: Effective date

Justification

The high tax rate on cigarettes in New York has resulted in an increasing amount of tax avoidance with regard to the purchase and delivery of cigarettes. 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. While national studies have indicated that the demand for cigarettes is gradually declining, that decline does not account for all of the observed drop in sales. Contributing to the observed reduction in reported sales has been an increasing black market for the distribution of untaxed cigarettes. This bill establishes a modernized system of tax collection to help minimize the evasion of the payment of cigarette taxes and reduce the amount of cigarettes that are sold on the black market.

In 2006, The Department of Health estimated that New York state is losing as much as $550 million in taxes through the illegal sales of untaxed cigarettes. Other estimates maintain that up to 35% of all cigarettes sold in this State are not stamped legally for proper tax collection. Further, these untaxed sales severely undermine the financial viability of the legitimate merchants who collect and remit all lawful taxes and endanger thousands of jobs in communities throughout the state. In contrast, participants in the illegal black market include organized crime and terrorist organizations who use the profits generated from this activity to subsidize their other nefarious activities.

Last year the U.S. House Committee on Homeland security completed an investigation on cigarette smuggling in New York, and they confirmed that terrorist organizations, such as Hamas and Hezbollah, were benefiting from untaxed cigarette sales. Further, they determined that this activity was causing 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 Auditor's report indicated that this new system has helped to significantly reduce tax avoidance in that State. There is every reason to expect that New York State would experience similar benefits from modernizing its collections system.

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.3896-A of 2009. Similar provisions were also incorporated into S.1891-E of 2010.

Fiscal implications

The establishment of a new and secure encrypted cigarette tax collection system will significantly reduce the incidence of cigarette tax stamp counterfeiting, which is estimated to cost the state tens of millions of dollars annually.

Effective date

This act shall take effect immediately, provided, however, that section two of this act shall take effect on the one hundred eightieth day after it shall have become a law; provided further that any product in the possession of a cigarette retail dealer on the effective date of this act and stamped to the commissioner of taxation and finance's satisfaction may continue to be offered for sale and sold to cigarette purchasers.