RD496 - Workgroup on Modernizing and Unifying Cigarette Stamping Pursuant to 2020 Senate Bill 588 and House Bill 785 Final Report – October 30, 2020
Effective July 1, 2021, Senate Bill 588 and House Bill 785 (2020 Acts of Assembly, Chapters 1263 and 1214), authorize all counties to levy a tax on cigarettes. Under prior law, only cities, towns, and two counties were authorized to tax cigarettes.
In its sixth enactment clause, the legislation directed the Department of Taxation (the "Department") to convene a work group of stakeholders to identify and make recommendations for:
• Modernizing the process for using stamps to certify that tax has been paid on cigarettes; and
Background on Cigarette Taxes in Virginia
In Virginia, cigarettes are subject to a state cigarette tax administered by the Department of Taxation (the "Department"). Additionally, all cities and towns and two counties (Arlington and Fairfax) are authorized to levy local cigarette taxes.
The state tax is paid by wholesalers who are licensed as stamping agents by the Department. Wholesalers pay the tax by purchasing rolls of stamps from the Department and recover the cost of the stamps when they sell the cigarettes to retailers. Alternatively, stamping agents may post a bond to obtain stamps prior to payment. The stamps must be affixed to each individual package of cigarettes and serve as proof that the tax has been paid. As with the state tax, most cities and towns that impose a local cigarette tax, require the use of their own tax stamp. Wholesalers pay the tax by purchasing rolls of stamps from each locality.
The Northern Virginia Cigarette Tax Board (the "NVCTB") administers and enforces local cigarette taxes on behalf of 19 Northern Virginia jurisdictions. The Department of Taxation sells a dual stamp at the state rate for use in NVCTB localities. Since jurisdictions have different tax rates, wholesalers remit the local cigarette tax to the NVCTB using a monthly return that lists sales to retailers by jurisdiction. The NVCTB audits stamping agents to verify the local cigarette tax has been paid on all stamps sold. The NVCTB conducts retail inspections to ensure proper tax payments and to prevent retailers from shifting stamped cigarettes from lower tax localities to high tax localities.
Stakeholders were identified by the Department and placed in three groups for initial discussions. The groups were cigarette wholesalers, cigarette retailers, and local governments. Representatives in each group were contacted to participate in an initial teleconference with Department staff. When contacted by the Department, representatives of cigarette retailers declined to participate in the workgroup.
The initial teleconference for representatives of cigarette wholesalers was held on July 27, 2020. The initial teleconference for local government representatives was held on July 29, 2020. A joint virtual meeting was held on October 14, 2020 with representatives of cigarette wholesalers and local governments. At the conclusion of these meetings, official comments were solicited from attendees. Those comments are attached. This is the final report of the workgroup studying cigarette stamping procedures in Virginia.
The Virginia Wholesalers and Distributors Association (the "VWDA") primarily represents the businesses that stamp cigarettes and sell them to retailers. The VWDA expressed its concerns about the difficulty its members would have complying with new local cigarette taxes in up to 93 counties, each potentially with its own tax stamp. Wholesalers would need to invest significant capital in an inventory of different local tax stamps. Different localities would also have different ordinances and different enforcement policies.
The VDWA advocates for a county cigarette tax board structure to manage the new county taxes. With either one board or several regional boards, wholesalers would benefit from a process that is more uniform and consistent throughout all the new taxing jurisdictions. The board or boards would enforce the county taxes much like the NVCTB. The Department of Taxation would sell dual stamps to wholesalers at the state tax rate. Wholesalers would file a monthly report with the board listing sales to retailers by jurisdiction. The board would distribute revenues to each locality. Administration and enforcement of the tax would be the same in each locality covered by the board. The VWDA acknowledges that it will be difficult to stand up a new board or boards in time for the possible July 1, 2021 effective date of the new county taxes. Accordingly, the effective date of the authority for the new taxes may need to be extended past July 1, 2021 if the new board or boards cannot be implemented by July 1, 2021.
Reaction to VWDA Proposal
Representatives of counties that do not currently tax cigarettes recognized that they will face challenges implementing and administering new cigarette taxes.
Generally, all participants recognize the potential benefits of forming regional cigarette tax enforcement bodies similar to the NVCTB. Localities can share the costs of administering and enforcing their local cigarette taxes. Wholesalers can benefit from uniform compliance provisions in every locality that is a member of the same board. Wholesalers can avoid the cost of financing inventories of different local cigarette stamp, because they can pay local cigarette taxes after they have sold the cigarettes. All participants recommend that localities consider this approach. AJI localities are currently authorized to form or join such regional bodies under current law. There is also an example, the Northern Virginia Cigarette Tax Board (the "NVCTB"), of how such boards can be established and operated.
No county, however, expressed any interest in delaying the effective dates of its new cigarette taxes for the time necessary to form such bodies and get them in operation. A few county representatives also expressed doubt that there is sufficient interest among their neighboring localities to form regional enforcement bodies so they would not be viable in the near term unless the state mandated that counties join regional boards. Most county representatives have no interest in making regional bodies mandatory.
Representatives of local governments that currently impose local cigarette taxes made it clear that they are not interested in any changes that would affect their administration and enforcement of their local cigarette taxes, including delegating their enforcement powers.