Relates to the use of an advanced system for securing tobacco taxes; requires 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.
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.
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 FIVEEXPLANATION--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. TheS. 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.