HD5 - Use of Tax Stamps as Evidence of Payment of Local Cigarette Taxes

Executive Summary:
House Joint Resolution 664, passed by the 2005 General Assembly, required the Department of Taxation ("TAX") to study the use of tax stamps by local governments as evidence of payment of local cigarette taxes by wholesalers and whether a single stamp could be issued for evidence that both state and local cigarette taxes have been paid. TAX was also asked to examine the feasibility of establishing uniformity and consistency among localities in the design and use of tax stamps or other evidence of payment of local cigarette taxes by tobacco wholesalers.

After obtaining the comments and suggestions of representatives of local governments and cigarette wholesalers, TAX distributed survey questionnaires to the members of the Virginia Wholesalers and Distributors Association and every locality in Virginia authorized to impose a local cigarette tax. The survey questionnaire asked local governments and wholesalers to evaluate 1) the current use of local cigarette tax stamps, 2) establishing uniformity and consistency in the design and use of local cigarette tax stamps, 3) requiring the statewide use of a dual stamp issued by TAX, 4) requiring wholesale dealers to file regular returns, and 5) requiring retail dealers to file regular returns.

With the exception of Arlington County, every Virginia locality that administers its own cigarette tax requires the application of a local stamp. Thirteen Virginia localities participate in the Northern Virginia Cigarette Tax Board ("NVCTB"). The tax in these localities is enforced using a dual stamp sold by TAX at the state cigarette tax rate. The NVCTB collects the cigarette tax for the thirteen localities through a monthly wholesaler return system.

Localities are, in general, opposed to the alternatives to the current local cigarette tax stamping laws raised in the survey questionnaires. Overwhelmingly, localities that administer their own local cigarette taxes stress that in order to be effective, each locality must have its own stamp that is clearly distinguishable from that of other localities and each locality must be able to collect its own tax. The NVCTB localities recommend that other localities use the authorization currently granted by state law to form similar regional administration agencies.

Wholesalers would like to reduce or eliminate the costs of local cigarette tax stamps, including the substantial costs of maintaining inventories of local stamps and stamped cigarettes and the cost of applying different local stamps. Of the six wholesalers who responded to the survey, only one wholesaler supports the current stamping system. The remaining wholesalers support one or more of the alternatives raised in the survey questionnaires. One wholesaler would like to see a dual stamp that is administered by one office. One wholesaler would like to see all localities that tax cigarettes be required to participate in one of several regional enforcement agencies. Two wholesalers would like to see either a dual stamp or simply a wholesaler return system. One wholesaler would like to see a wholesaler return system.

In order to discuss the survey results and receive the comments of interested parties, TAX held a public meeting on November 29, 2005. Interested parties were provided with a preliminary draft of TAX's report prior to the meeting. Noting the conflicting positions of industry and local governments concerning local cigarette tax stamping, TAX asked the interested parties to recommend alternatives that would be mutually agreeable to local governments and industry. The interested parties acknowledged that such a solution is not readily apparent.

Based on the survey responses and comments received from local governments and wholesalers, TAX cannot discern any change in the local cigarette tax stamping laws that would be acceptable to both local governments and wholesalers. Although the stamping of the different local cigarette tax stamps imposes a substantial cost on wholesalers, local cigarette tax stamps are considered by the localities to be the most practical and effective method for local governments to enforce local cigarette taxes. The alternatives to the current stamping system suggested by the interested parties would either 1) make it easier for dishonest cigarette sellers to evade local cigarette taxes, giving them a substantial price advantage over honest dealers, or 2) require the Commonwealth or local governments to conduct expensive and invasive audits of cigarette wholesalers and retailers, or 3) only reduce, but not eliminate, the administrative costs currently imposed on sellers of cigarettes. Bringing the interested parties together has initiated a dialogue between the local governments and cigarette wholesalers. Given the substantial differences between the positions of local governments and cigarette wholesalers, TAX is unable to recommend a viable solution to resolve their differences at this time. It is recommended that the General Assembly direct the interested parties to continue their discussions.