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BILL NUMBER:S2895

TITLE OF BILL: An act to amend the tax law, in relation to requiring the exclusive use of encrypted counterfeit-resistant cigarette tax stamps to provide a commission to agents for the purpose of leasing or the purchase of machinery and a sell-through provision for retailers

PURPOSE: To require the Department of Taxation and Finance to adopt the use of an encrypted; cigarette tax. security system to prevent cigarette stamp counterfeiting and improve State revenue collections. The implementation of this proven, state-of-the-art system will provide the Department with the ability to monitor product distribution and shipments, increase collections on excise taxes and sales taxes owed to the state and municipalities.

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.

Text

STATE OF NEW YORK
________________________________________________________________________

2895

2011-2012 Regular Sessions

IN SENATE

February 3, 2011
___________

Introduced by Sen. ESPAILLAT -- read twice and ordered printed, and when
  printed to be committed to the Committee on Investigations and Govern-
  ment Operations

AN  ACT to amend the tax law, in relation to requiring the exclusive use
  of encrypted counterfeit-resistant cigarette tax stamps to  provide  a
  commission  to  agents  for  the purpose of leasing or the purchase of
  machinery and a sell-through provision for retailers

  THE PEOPLE OF THE STATE OF NEW YORK, REPRESENTED IN SENATE AND  ASSEM-
BLY, DO ENACT AS FOLLOWS:

  Section  1.  The  tax  law is amended by adding a new section 472-a to
read as follows:
  S 472-A. TOBACCO TAX SECURITY. 1. PURSUANT TO THE POWERS VESTED IN THE
COMMISSIONER UNDER SECTION FOUR HUNDRED SEVENTY-TWO OF THIS ARTICLE, THE
COMMISSIONER SHALL INCORPORATE A SYSTEM FOR SECURING TOBACCO  TAXES  DUE
TO  THE  STATE.  SUCH  A SYSTEM SHALL BE COMPRISED, AT A MINIMUM, OF THE
FOLLOWING:
  (A) THE USE OF ENCRYPTED TAX STAMPS BY STAMPING AGENTS LICENSED PURSU-
ANT TO SECTION FOUR HUNDRED SEVENTY-TWO OF  THIS  ARTICLE.  SUCH  STAMPS
SHALL BE ENCRYPTED TO IDENTIFY, AT A MINIMUM:
  (I)  THE  NAME AND ADDRESS OF THE LICENSED STAMPING AGENT AFFIXING THE
STAMP;
  (II) THE DATE THE STAMP WAS AFFIXED TO THE PRODUCT; AND
  (III) THE DENOMINATED VALUE OF THE STAMP OR METER IMPRESSION.
  (B) THE SECURE MANAGEMENT OF ANY DATA REQUIRED UNDER PARAGRAPH (A)  OF
THIS SUBDIVISION AND OTHER DATA AS MAY BE REQUIRED BY THE COMMISSIONER;
  (C)  THE ENFORCEMENT OF SECTION FOUR HUNDRED SEVENTY-TWO OF THIS ARTI-
CLE, INCLUDING SUCH DEVICES AS MAY BE USED BY THE DEPARTMENT  AND  OTHER
STATE EMPLOYEES AUTHORIZED BY THE COMMISSIONER.
  2. SUCH ENCRYPTED TAX STAMPS SHALL:
  (A)  BE  PRODUCED  IN A PROVEN SECURE FACILITY CERTIFIED IN ACCORDANCE
WITH THE SECURITY ASSISTANCE STANDARDS ESTABLISHED IN TWO THOUSAND  FIVE

 EXPLANATION--Matter in ITALICS (underscored) is new; matter in brackets
                      [ ] is old law to be omitted.
                                                           LBD07605-01-1
S. 2895                             2

BY  THE  AMERICAN  NATIONAL  STANDARDS  INSTITUTE AND THE NORTH AMERICAN
SECURITY PRODUCTS ORGANIZATION;
  (B)  INCORPORATE  A  MINIMUM  OF FOUR LAYERS OF OVERT, SEMI-COVERT AND
COVERT DATA;
  (C) BE APPLIED BY MACHINES  WHEREUPON  THE  ENCRYPTED  DATA  SHALL  BE
INSTANTANEOUSLY CAPTURED AND STORED BY AND FOR THE DEPARTMENT;
  (D)  BE  READABLE  AND TRACEABLE FROM THE POINT OF STAMP PRODUCTION TO
SUCH POINT AS DEEMED APPROPRIATE BY THE COMMISSIONER; AND
  (E) BE CAPABLE OF BEING READ BY A SCANNING OR SIMILAR DEVICE THAT  CAN
BE  UTILIZED BY ENFORCEMENT AGENTS OF THE STATE AND OTHERS DEEMED APPRO-
PRIATE BY THE COMMISSIONER.
  S 2.  The department of taxation and finance shall issue a request for
proposal for the purpose of providing the system  described  in  section
472-a  of  the  tax  law, as added by section one of this act, within 90
days of the effective date of this act.   Bids  from  qualified  vendors
shall  be  received  by  the department of taxation and finance no later
than 60 days following the issuance of the  request  for  proposal.  Any
contract  issued pursuant to this section shall be issued within 90 days
following receipt of bids and installation of such system  completed  by
the successful bidder within 180 days of the issuance of such contract.
  S  3. Subdivision 1 of section 472 of the tax law, as amended by chap-
ter 629 of the laws of 1996, is amended to read as follows:
  1. The commissioner shall prescribe, prepare  and  furnish  stamps  of
such denominations and quantities as may be necessary for the payment of
the tax on cigarettes imposed by this article, and may from time to time
and  as  often as he deems advisable provide for the issuance and exclu-
sive use of stamps of a new design and forbid the use of stamps  of  any
other  design, in the manner and with the effect provided in section two
hundred seventy-four  of  this  chapter.  The  commissioner  shall  make
provisions  for the sale of such stamps at such places and at such times
as he may deem necessary and may license agents for  such  purpose.  The
commissioner  may  license  dealers in cigarettes, who maintain separate
warehousing facilities for the purpose  of  receiving  and  distributing
cigarettes  and conducting their business, who have received commitments
from at least two [cigarette] manufacturers whose aggregate market share
is at least forty percent of the New York state [cigarette] market,  and
importers,  exporters and manufacturers of cigarettes, and other persons
within or without the state as agents to buy or affix stamps to be  used
in  paying  the tax herein imposed, but an agent shall at all times have
the right to appoint the person in his employ who is to affix the stamps
to any cigarettes under the agent's control. The  fee  for  filing  such
application  for  an  agent's license shall be one thousand five hundred
dollars, unless such fee has  been  paid  during  the  preceding  twelve
months,  in  which case, the fee for a new license shall be one thousand
dollars. All of the provisions of section four hundred  eighty  OF  THIS
ARTICLE relating to wholesale dealers' licenses, including the procedure
for  suspension, revocation, refusal to license and for hearings, except
for paragraphs (c) and (g) of subdivision one of such section, shall  be
applicable  to  agents' licenses applied for or granted pursuant to this
section, as if such provisions had been set forth in full in this subdi-
vision and had expressly referred to the applicant for,  or  the  holder
of, an agent's license. Whenever the commissioner shall sell and deliver
to  any  such  agent  any  such  stamps, such agent shall be entitled to
receive as compensation for his services and expenses as such  agent  in
selling  or  affixing such stamps, and to retain out of the moneys to be
paid by him for such stamps, a commission on the par value thereof.  The
S. 2895                             3

commissioner  is  hereby  authorized  to prescribe a schedule of commis-
sions, not exceeding five per centum, allowable to such agent for buying
and affixing such stamps. Such schedule shall be uniform with respect to
the different types of stamps used, and may be on a graduated scale with
respect to the number of stamps purchased, PROVIDED HOWEVER, SUCH AGENTS
SHALL  BE  ENTITLED  TO  AN  ADDED  COMMISSION IN EXCESS OF THE FIVE PER
CENTUM TO BE DETERMINED BY THE COMMISSIONER TO  MITIGATE  THE  COSTS  TO
SUCH AGENTS IN RELATION TO THE LEASE OR PURCHASE OF THE MACHINERY AND/OR
EQUIPMENT NECESSARY TO APPLY OR AFFIX SUCH STAMPS AS REQUIRED IN SECTION
FOUR HUNDRED SEVENTY-TWO-A OF THIS ARTICLE. The commissioner may, in his
discretion,  permit  an  agent to pay for such stamps within thirty days
after the date of purchase and may require any such agent to  file  with
the  department  [of  taxation  and  finance]  a bond issued by a surety
company approved by the superintendent of insurance as to  solvency  and
responsibility and authorized to transact business in the state or other
security  acceptable  to the commissioner, in such amount as the commis-
sioner may fix, to secure the payment of any sums due  from  such  agent
pursuant  to this article. If securities are deposited as security under
this subdivision, such securities shall be kept in the  custody  of  the
commissioner and may be sold by the commissioner if it becomes necessary
so  to  do  in order to recover any sums due from such agent pursuant to
this article, but no such sale shall be had until after such agent shall
have had opportunity to litigate the validity of any tax if it elects so
to do. Upon any such sale, the surplus, if any, above the sums due under
this article shall be returned to such agent.
  S 4. The department of  taxation  and  finance  shall,  following  the
implementation period and annually thereafter, report to the legislature
and to the governor on the effectiveness of the provisions of this act.
  S  5.  This act shall take effect immediately, provided, however, that
section two of this act shall take effect on the one  hundred  eightieth
day  following  the  awarding  of  such  contract  pursuant to this act;
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.