SD11 - Report of the Task Force on the Modernization of Cigarette Stamping in Virginia and Regional Cigarette Tax Boards (Chapter 61, 2021 SSI)
2021 Senate Bill 1326 declared that it is the policy of the Commonwealth that, where practical, local cigarette stamping and tax collection is encouraged to be accomplished through regional cigarette tax boards modeled on the Northern Virginia Cigarette Tax Board. Recognizing that the current system of stamping and tax collection is antiquated and places a burden on wholesalers and distributors, the Department of Taxation ("the Department") was required to establish a task force to:
• Develop methods for modernizing the system; and
• Provide assistance as appropriate to localities seeking new regional cigarette tax boards.
The task force was required to include local government representatives, local commissioners of the revenue, cigarette wholesalers and distributors, and representatives of the Northern Virginia Cigarette Tax Board. The task force was required to submit its recommendations to the Virginia General Assembly by November 1, 2021. The Department reached out to interested parties to solicit their input and conducted a survey of those involved. Participants were also provided a draft of the report to review and offer further comments.
Background on Cigarette Taxes in Virginia
In Virginia, cigarettes are subject to a state cigarette tax administered by the Department. 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. The stamps must be affixed to each pack of cigarettes and serve as proof that the tax has been paid. Recent legislation extended to all localities the authority to tax cigarettes. Previously, only cities and towns and the counties of Arlington and Fairfax were authorized to impose local cigarette taxes. As with the state tax, most localities that impose a local cigarette tax, require the use of their own tax stamp. Wholesalers pay these taxes by purchasing rolls of stamps from each locality or a regional cigarette tax board.
Modernization of the Virginia Cigarette Stamping Process
Virginia law requires the state cigarette tax to be paid by affixing stamps equaling the amount of the tax to each pack in such a manner that their removal will require continued application of water or steam. The current process of stamping in Virginia relies on heat transfer to affix stamps to packs of cigarettes. The Department sells stamps to stamping agents holding a current permit for use on the cigarettes they will sell.
As part of this study, the Department reached out to providers of cigarette stamping technology. Representatives from the stamping industry stated that there is technology available that would upgrade the current system used in Virginia, to streamline the process of stamping at both the state and local levels. These new stamping methods could work either with existing machines or allow for transition to a different type of stamp that would require new equipment. According to technology providers, the benefits of such upgrades would include better tracing technology for individual stamps, better inventory management, more automated payment options at the state and local levels, and enhanced tools that could be used for enforcement. A similar system recently implemented in Louisiana cost approximately $4.5 million over 5 years. The greatest portion of that total is the cost is for maintenance. The new stamps themselves could cost between five and ten times more than the stamps currently used in Virginia.
Regional Cigarette Tax Boards
Current law authorizes any locality that imposes a cigarette tax to delegate its cigarette tax administrative and enforcement authority, these typically take the form of regional cigarette tax boards, the longest-standing of which is the Northern Virginia Cigarette Tax Board (the "NVCTB").
The NVCTB, which was established in 1970, administers and enforces local cigarette taxes on behalf of 19 Northern Virginia jurisdictions. Stamping agents remit the local cigarette tax to the NVCTB using a monthly return that lists all retailers by jurisdiction. The Department of Taxation sells a dual stamp at the state rate for use in NVCTB localities. The NVCTB pays for the dual stamps as part of a statewide contract which allows them to acquire the stamps at a lower cost than individual localities because they can take advantage of larger purchase volumes. 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. Additionally, the Chesapeake Bay Regional Cigarette Tax Board (CBRCTB) was formed in 2021 and is modeled after the NVCTB.
Many of the new taxing jurisdictions and some established cigarette taxing jurisdictions have formed or are in the process of forming regional boards. However, there are only two regional cigarette tax boards currently operating, the NVCTB (established in 1970) and the Chesapeake Bay Regional Cigarette Tax Board (established in 2021 ). There are two additional regional boards, the Mount Rogers Regional Cigarette Tax Board and the Blue Ridge Cigarette Tax Board planning for an implementation date of January 1, 2022. The process of establishing a regional board is ultimately a local process and the state has a limited role in the actual formation of the boards beyond providing dual stamps for evidence of payment of local and state taxes. However, the Department has offered advice and guidance to localities looking to form regional boards.