Document Number
06-29
Tax Type
Cigarette Tax
Local Taxes
Description
Study of Local Cigarette Tax Stamping Pursuant to HJR 12/27/05
Topic
Local Taxes Discussion
Date Issued
03-27-2006



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.

                      • Report

House Joint Resolution 664

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. A copy of this resolution is attached as Appendix A.

House Joint Resolution 664 required TAX to seek input from the Virginia Municipal League, the Virginia Association of Counties, the Virginia Retail Merchants Association, the Virginia Wholesalers and Distributors Association and other interested parties. TAX was required to complete its meetings by November 30, 2005 and submit an executive summary and a report of its findings and recommendations to the Governor and the General Assembly no later than the first day of the 2006 General Assembly.

Enforcement of the Virginia Cigarette Tax

Pursuant to Va. Code § 58.1-1001, the Commonwealth imposes a state cigarette tax at the rate of 1.5 cents per cigarette (30 cents per pack of 20 cigarettes). The cigarette tax is paid by wholesale dealers through the purchase of stamps, which under Va. Code § 58.1-1003 must be affixed to each container from which cigarettes are sold. Wholesalers file a monthly report with TAX showing the quantities of cigarettes purchased and stamped.

There are currently three Virginia revenue stamps: (1) a stamp for packs of 20 cigarettes; (2) a stamp for packs of 25 cigarettes and (3) a dual stamp for the state cigarette tax and the local cigarette taxes imposed by the localities that have delegated their cigarette tax administrative and enforcement authority to the NVCTB.

These stamps are sold by TAX. TAX also allows treasurers in six localities to sell these stamps to accommodate wholesalers who would otherwise have to travel a considerable distance to the nearest TAX office.

Local Cigarette Tax Enforcement

All cities and towns with general taxing powers are currently authorized to impose a cigarette tax with no rate limitations. Thirty cities and thirty-nine towns impose a cigarette tax. Only two counties, Arlington and Fairfax, are authorized to impose a local cigarette tax, the rate of which is limited to the amount of the state cigarette tax rate. The following table of local cigarette tax rates was compiled by TAX based on Tax Rates 2004, published by the Weldon Cooper Center for Public Service at the University of Virginia, industry information and survey responses and other communications with local government officials. Although it reflects the latest information available to TAX, cigarette wholesalers and retailers should confirm local cigarette tax rates with the localities in which they sell cigarettes. All rates are for a pack of 20 cigarettes.

County Rate City Rate Town Rate
Arlington .30 Portsmouth .50 Gordonsville .10
Fairfax .30 Radford .15 Grundy .05
Roanoke .27 Haymarket .25
City Rate Salem .15 Herndon .50
Alexandria .70 Staunton .15 Kilmarnock .25
Bedford .20 Suffolk .50 Leesburg .50
Bristol .04 VA Beach .50 Marion .12
Charlottesville .25 Waynesboro .20 Mt. Jackson .20
Chesapeake .50 Williamsburg .25 Orange .10
Covington .20 Pound .05
Fairfax .50 Town Rate Pulaski .15
Falls Church .65 Big Stone Gap .05 Purcellville .35
Franklin .50 Blacksburg .30 Saltville .05
Fredericksburg .31 Bluefield .03 Smithfield .25
Hampton .65 Cape Charles .05 St. Paul .05
Harrisonburg .30 Chilhowie .12 Tappahannock .15
Lynchburg .35 Christiansburg .30 Tazewell .03
Manassas .50 Claremont .045 Vienna .50
Manassas Park .50 Clifton .30 Warrenton .15
Martinsville .20 Clifton Forge .04 Warsaw .15
Newport News .65 Clintwood .05 Winchester .10
Norfolk .55 Coeburn .05 Windsor .25
Norton .05 Culpeper .10 Wise .05
Petersburg .10 Damascus .05 Woodstock .05
Poquoson .10 Dumfries .30 Wytheville .09

Code of Virginia § 58.1-3830 authorizes localities that impose a cigarette tax to use local tax stamps to evidence payment of the tax. Code of Virginia § 58.1-3832 authorizes joint enforcement agencies to issue their own tax stamp. Local governments and joint enforcement agencies are authorized by Va. Code § 58.1-3830 to use a dual stamp to evidence the payment of both the state and local taxes.

Northern Virginia Cigarette Tax Board

Current law authorizes any locality that imposes a cigarette tax to delegate its cigarette tax administrative and enforcement authority, including the authority to issue a revenue stamp, to an agency or authority pursuant to the provisions of Va. Code § 15.2-1300. Currently, thirteen Virginia localities participate in the Northern Virginia Cigarette Tax Board ("NVCTB"): the County of Fairfax; the Cities of Alexandria, Fairfax, Falls Church and Manassas; and the Towns of Clifton, Dumfries, Haymarket, Herndon, Leesburg, Purcellville, Vienna and Warrenton. The tax rates in these localities vary from $.15 to $.70 a pack.

The NVCTB enforces these local cigarette taxes using a dual stamp that represents both the state and local cigarette taxes. This dual stamp is sold by TAX at the state cigarette tax rate only. Wholesalers remit the tax to the NVCTB via a monthly return that lists all retailers by jurisdiction. TAX does not collect any revenues for the NVCTB.

The NVCTB audits wholesalers to verify tax has been collected on all stamps sold. The NVCTB conducts retail inspections to insure proper tax payments and to prevent retailers from shifting stamped cigarettes from lower tax localities to higher tax localities. The serial number on each roll is used to identify which wholesaler has purchased that roll. The NVCTB uses this serialized roll number to verify that the proper jurisdictional tax has been paid.

Enforcement of Cigarette Taxes in Other States

Every state that imposes a cigarette tax except for North Carolina, South Carolina and North Dakota requires the use of a tax stamp. With a few exceptions, cigarettes are subject to state, not local, taxation in other states. New York City and Cook County, Illinois are the best known examples of localities that impose cigarette taxes. Only in Alabama and Missouri are local cigarette taxes common.

New York City is the only locality in the state of New York that is authorized to impose a local cigarette tax. The New York City tax is paid using a joint city and state stamp.

In Illinois, most municipalities are authorized to impose a local cigarette tax. The state does not administer local cigarette taxes or sell local tax stamps. Cook County sells a county stamp, as well as combined stamps for cities within the county that also impose a cigarette tax, such as Chicago and Evanston. Stamps for the city taxes alone are also sold by the cities.

The Alabama Department of Revenue administers the local cigarette taxes in thirty counties. Although revenue stamps are used for the state cigarette tax, the county taxes administered by the Department of Revenue are paid using monthly returns. There is no dual stamp. Some counties that administer their own cigarette tax use revenue stamps, others use monthly returns.

With the exception of Kansas City and St. Louis, local cigarette taxes in Missouri are administered entirely by municipalities. Some localities use revenue stamps, others use monthly returns. Even though Kansas City and St. Louis have the same local tax rate, Missouri sells different dual stamps for Kansas City and St. Louis.

TAX's Study

In its study of the use of local tax stamps, TAX worked closely with representatives of local governments and cigarette wholesalers. TAX formed a working group that included representatives from the Virginia Municipal League ("VML"), the Virginia Association of Counties ("VACO"), the Commissioners of the Revenue Association, the Treasurers Association of Virginia, the Northern Virginia Cigarette Tax Board (the "NVCTB"), the Virginia Petroleum, Convenience and Grocery Association, the Virginia Retail Merchants Association and the Virginia Wholesalers and Distributors Association (the "Wholesalers Association").

TAX provided the working group with a tentative workplan outlining TAX's plan to carry out the study and drafts of the questionnaires TAX would distribute to localities and wholesalers. Several members of the working group, including VML, VACO and the Wholesalers Association forwarded these drafts to their members and solicited their comments and suggestions. The working group met on September 19, 2005 to discuss the workplan and questionnaires. After the meeting, TAX revised the questionnaires to reflect the comments and suggestions of the working group.

Three questionnaires were finalized and distributed. The first questionnaire was sent to the NVCTB and to the commissioner of revenue or director of finance in each NVCTB county and city and to the manager of each NVCTB town. The second questionnaire was sent to every other locality in Virginia authorized by state law to impose a local cigarette tax. The questionnaires were distributed by email to the commissioners of the revenue and directors of finance using the email address listed on the Commissioners of the Revenue Association web site and to town managers using VML's email list of town managers. The third questionnaire was distributed by the Wholesalers Association to its members. The surveys were distributed by email on September 23, 2005. Respondents were asked to return the completed surveys to TAX by October 21, 2005. Due to a low response, the deadline was subsequently extended by TAX to October 31, 2005.

TAX received survey responses from 23 localities that administer their own cigarette tax: Arlington County; the Cities of Chesapeake, Covington, Franklin, Fredericksburg, Hampton, Harrisonburg, Martinsville, Newport News, Poquoson, Portsmouth, Roanoke, Staunton, Suffolk, Virginia Beach, Winchester; and the Towns of Bluefield, Coeburn, Culpeper, Mount Jackson, Pound, Tazewell and Windsor. These survey responses are attached as Appendix B. TAX received a joint survey response from the localities that participate in the NVCTB. In addition, five localities that are members of the NVCTB, the Cities of Alexandria and Manassas and the Towns of Herndon, Purcellville, and Warrenton, also submitted their own responses. These survey responses are attached as Appendix C.

Additionally, TAX received survey responses from 6 distributors: Atlantic Dominion Distributors, J.T. Davenport and Sons, Eby-Brown Company, McLane, Merchants Grocery Company, Inc. and Sheetz Distribution Services. The survey responses of these wholesalers are attached as Appendix D.

Two localities and one wholesaler inadvertently completed the draft surveys provided to the interested parties for their review rather than the final surveys. As the draft surveys included all of the questions in the final surveys, their responses to the draft surveys were accepted.

Local Governments' Comments Concerning Local Tax Stamps

Local governments were asked about the benefits and the drawbacks of local cigarette tax stamps. Based on the survey responses, with the exception of Arlington County, every Virginia locality that administers its own cigarette tax requires the application of a local stamp. These localities strongly support the use of local stamps as a simple and cost effective method of enforcing local cigarette taxes. As the tax is paid at the time the wholesaler purchases the stamps, the locality receives its revenue immediately. When conducting site visits at retail merchants, the locality can readily determine whether or not the tax has been paid. Although a few localities cited the cost of the stamps as a drawback, they noted that any other method of administering the tax would be less effective and just as time consuming.

Most localities conduct site visits to ensure that retail merchants are selling only stamped cigarettes. Most localities do not audit wholesalers. Several localities stated that they might audit wholesalers if they were located in the locality.

Wholesalers are only required to file regular returns in four localities that administer their cigarette taxes with stamps: the Cities of Harrisonburg, Virginia Beach and Winchester and the Town of Culpeper.

Arlington administers its tax by requiring wholesalers to file monthly returns. Although this has resulted in lower administrative costs, Arlington acknowledges that the lack of a stamp has resulted in some enforcement problems.

Wholesalers' Comments Concerning Local Tax Stamps

When asked about the benefits and the drawbacks of local cigarette tax stamps, with one exception, the six wholesalers who responded to the survey see no benefits. Wholesalers see the following costs as the drawback of local cigarette tax stamps:

1. The substantial cost of maintaining an inventory of each local stamp.

2. The labor cost of applying rolls of different local stamps.

3. The additional costs of dual stamp machines that are more expensive to
purchase and maintain and require more space than single stamp machines.

4. The cost of cigarettes damaged when run through stamping machines twice to apply a local stamp.

5. The cost of maintaining a sufficient inventory of stamped cigarettes for each locality.

6. The labor cost of segregating stamped cigarettes by locality.

7. The administrative cost of handling customer and local government complaints when the wrong local stamp has been applied.

8. The administrative cost of applying for both state and local refunds on damaged or outdated product.

As illustrated by the "Double Stamp Processing Costs" exhibit prepared by Sheetz and attached to its survey response, these costs are substantial.

Only one distributor supported the use of local stamps. It noted that local stamps provide a control that ensures that its competitors and retailers pay the proper tax to each locality. Although it saw the cost of its stamp inventory as a drawback, it noted that the cost of applying local stamps is minimal because it must open the carton to apply the state stamp anyway.

Localities' Comments Concerning Uniformity and Consistency of Local Tax Stamps

Local governments were asked about the benefits and drawbacks of establishing uniformity and consistency among localities in the design and use of local cigarette tax stamps. Localities that administer their own cigarette tax stress that in order to be effective, each locality must have its own stamp that is clearly distinguishable from that of other localities. The NVCTB localities expressed similar concerns regarding this proposal.

Several localities felt that printing costs could be reduced by creating an otherwise uniform local stamp that was differentiated by locality codes and/or colors. Others, however, questioned the need for more uniformity because local stamps are already fairly uniform due to the limited suppliers of stamps and the need for stamps to be compatible with the stamping machines currently employed by wholesalers.

Wholesalers' Comments Concerning Uniformity and Consistency of Local Tax Stamps

When wholesalers were asked about establishing uniformity and consistency among localities in the design and use of local tax stamps, four of the six wholesalers that responded to the survey supported the concept of improving the uniformity and consistency of local tax stamps if it meant that there would be one common local stamp. One stated that it would be better to eliminate all local stamps and go to a reporting system. One stated that it did not see a way to improve the uniformity and consistency of local tax stamps without making them ineffective.

Local Governments' Comments Concerning Mandatory Use of a Dual Stamp

Local governments were asked about the benefits and the drawbacks of the mandatory statewide use of a dual stamp issued by TAX. With one exception, every locality that administers its own cigarette tax is opposed to this concept. The Town of Tazewell stated that TAX's administration of the local cigarette taxes may make it easier for small towns to impose a local cigarette tax. A few localities acknowledged that this proposal would benefit wholesalers and may result in printing savings for localities.

Localities are concerned that their receipt of cigarette tax revenues would be delayed if the tax was collected by TAX and then distributed to localities. Under the current system, the local tax is paid to the locality before the cigarettes are shipped to the retailer.

Citing instances where wholesalers have reported local sales tax incorrectly because of confusion caused by different localities sharing mailing addresses and ZIP codes, localities are concerned that revenues would be apportioned incorrectly. Localities argue that they are more familiar with their business communities and jurisdictional boundaries than TAX.

Localities are also concerned about losing control of a local revenue source. They feel that they would not be able to audit retailers to prevent the shifting of product from lower tax jurisdictions. Some localities questioned whether TAX would receive the funding or would be motivated to enforce a local tax. Some localities feel their ability to change their tax rate would be hampered. Others fear that the state would appropriate the revenues for state use.

One locality questioned the need for a dual stamp, stating that wholesaler's stamping machines can apply four stamps at once.

In general, the NVCTB localities expressed similar concerns regarding this proposal. They recommend that other localities form regional administration agencies to achieve the benefits of using a dual stamp without the problems associated with state administration of a local tax.

Wholesalers' Comments Concerning Mandatory Use of a Dual State-Local Stamp

When asked about the benefits and drawbacks of the mandatory statewide use of a dual stamp issued by TAX, wholesalers saw several benefits to this proposal. They observed that with a dual stamp, wholesalers would not incur the costs of financing an inventory of local stamps because the local tax would not be paid until the cigarettes are sold. Wholesaler's costs for financing and storing inventories of stamped cigarettes for the cigarette taxing localities would be reduced. Wholesalers would not need to purchase and maintain stamping machines that can accommodate more than one stamp. Additionally, wholesalers would reduce the labor and other costs of switching rolls of stamps on the stamping machines.

One wholesaler supported the concept of a dual stamp administered by TAX as being better than the current situation, but noted that it would be an administrative burden to file separate reports with localities. Another wholesaler felt that if a dual stamp was used, the local portion should be administered by a body set up by the localities similar to the NVCTB because localities have questioned TAX's distribution of local sales tax revenues.

Two wholesalers felt that this proposal would loosen the current controls on local cigarette taxes resulting in increased tax evasion which would make it more difficult for honest wholesalers to compete on price.

Localities' Comments Concerning Enforcement Through Wholesaler Returns

Local governments were asked about the benefits and drawbacks of eliminating all local tax stamps and requiring localities to administer their cigarette taxes using returns filed by wholesalers. With the exception of Arlington County, which currently relies on wholesaler returns, every locality that administers its own tax and the NVCTB localities are opposed to the concept of replacing local tax stamps with monthly returns filed by wholesalers.

Localities are concerned that a return system would cause increased administrative costs to enforce the tax and a delay in their receipt of cigarette tax revenues. They anticipate the need to dedicate resources to follow up on wholesalers who fail to file returns and to audit wholesalers' books and records.

Local governments question how they would audit wholesalers located outside of their jurisdiction. Some localities question whether they have the legal authority to audit wholesalers in other localities and other states. Additionally, localities question the effectiveness of relying on wholesaler returns when wholesalers have no control over cigarettes once they have been shipped to retailers. In contrast, stamps allow the enforcement of the tax to take place entirely in their jurisdiction.

Wholesalers' Comments Concerning Enforcement Through Wholesaler Returns

Wholesalers saw several benefits to eliminating all local tax stamps and requiring localities to administer their cigarette taxes using returns filed by wholesalers. As with the dual stamp proposal, wholesalers would not need to incur the cost of financing an inventory of local stamps. Their costs for financing and storing an inventory of stamped cigarettes would be further reduced as they would only need to maintain an inventory of cigarettes with the state stamp. Additionally, wholesalers would not need to purchase and maintain dual stamping machines. Wholesalers would further reduce the labor and other costs of switching rolls of stamps on the stamping machines.

One wholesaler felt that this proposal would loosen the current controls on local cigarette taxes resulting in increased tax evasion which would make it more difficult for honest wholesalers to compete on price. Three wholesalers noted the administrative burden of filing separate reports with localities.

Local Governments' Comments Concerning Enforcement Through Retailer Returns

Local governments were asked about the benefits and drawbacks of eliminating all local tax stamps and requiring localities to administer their cigarette taxes using returns filed by retailers. Localities that administer their own cigarette taxes and the NVCTB localities are opposed to this concept for many of the same reasons noted for their opposition of returns filed by wholesalers.

Although each retailer subject to the tax would be located in their jurisdiction, the books and records of larger retailers would likely be in other localities or other states. Localities would also be dealing with a much larger group of taxpayers when dealing with retailers instead of wholesalers. Localities are also concerned about collecting the tax from retailers who take a bankruptcy or go out of business.

Wholesalers' Comments Concerning Enforcement Through Retailer Returns

As wholesalers would be relieved of the need to stamp cigarettes and file returns, four wholesalers stated that the replacement of local tax stamps with retailer returns would be good for wholesalers. Three wholesalers, however, stated that this proposal would make it very difficult for localities to enforce local cigarette taxes. Although one wholesaler felt that this proposal would benefit retailers by reducing their cost of goods sold, two wholesalers stated that it would be an administrative burden for retailers.

Comments of Northern Virginia Cigarette Tax Board

Members of the NVCTB were asked about the benefits and drawbacks of delegating the administration of their cigarette taxes to the NVCTB. Their joint response stated:
  • There are only benefits to having Northern Virginia Cigarette Tax Board to administer, enforce and collect the cigarette taxes for the member jurisdictions. The Board has a 35-year proven track record of accurate and efficient tax collecting experience.
  • Benefits include:
    • a. Accountability - The NVCTB is directly accountable to its member jurisdictions and is audited on an annual basis by a certified CPA auditing firm. This financial report is published, sent to all member jurisdictions and filed with the Commonwealth's auditor of public accounts. The NVCTB conducts inventories and audits of all wholesalers, vendors and
      • Manufacturers Representatives both in state and out of state to ensure the proper reporting and collection of all cigarette taxes due. Retail locations are also audited as needed in order to ensure proper tax payments. As a result of the ongoing field inspection program the NVCTB ensures that both the local and state taxes are paid within the member jurisdictions.
    • b. Enforcement - The NVCTB conducts regular inspections of retail establishments in all thirteen jurisdictions to insure proper stamp usage and to prevent the possible evasion of the cigarette tax.
    • c. Local Presence/Accuracy - By being familiar with the local jurisdictional boundaries, the NVCTB can ensure that all retail locations are correctly listed and the proper taxes are paid. In addition, the NVCTB can quickly respond to tax rate changes, fraud complaints and other problems.
    • d. Cost Savings by Shared Expenses - The expenses incurred by the Board in the administration, collection and enforcement of the cigarette tax are shared by all member jurisdictions resulting in a cost savings to all member jurisdictions.
    • e. Expense Control - Member jurisdictions of the NVCTB controls the budget and therefore can control the expenses each fiscal year.

Summary of Survey Results

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.

Only one wholesaler, however, 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.

Public Meeting

In order to discuss the survey results and receive the comments of interested parties, TAX held a public meeting on November 29, 2005. Invitations were emailed to the VML, VACO, the Commissioners of the Revenue Association, the Treasurers Association of Virginia, the NVCTB, the Virginia Petroleum, Convenience and Grocery Association, the Virginia Retail Merchants Association, the Wholesalers Association (and its members), Sheetz, Inc., Wawa, Inc. and every locality that is authorized by state law to impose a local cigarette tax. A notice of this meeting was also posted on the Department of Planning and Budget's Virginia Regulatory Town Hall web site and the Commonwealth Calendar. Interested parties were provided with a preliminary draft of TAX's report prior to the meeting.

Approximately thirty interested parties attended the public meeting. TAX reviewed the survey results and solicited the comments of local government and industry representatives. The comments received by TAX from the interested parties were consistent with the positions set forth in their survey responses. Noting the conflicting positions of industry and local governments concerning local cigarette tax stamping, TAX asked the interested parties to recommend an alternative that would be mutually agreeable to local governments and industry. The interested parties acknowledged that such a solution is not readily apparent.

Written Comments

Subsequent to the public meeting, TAX received written comments from the cities of Chesapeake and Portsmouth and from Sheetz, Inc. and McLane Company. These comments, which are attached as Appendix E, reiterate many of the points previously expressed by local governments and industry in their survey responses and in the public meeting.

In order to address the concerns raised by wholesalers regarding the cost of stamping cigarettes, the City of Chesapeake notes that the Hampton Roads localities offer the following discounts to wholesalers to cover their operational costs:
  • LOCALITY DISCOUNT GIVEN MINIMUM RETURN POLICY
  • Chesapeake 8% NO
    Hampton 5% NO
    Newport News 8% NO
    Norfolk 6% NO
    Portsmouth 8% NO
    Suffolk 8% NO
    Virginia Beach 8% NO

Sheetz and McLane request that the legislature continue this study in order to give interested parties more time and resources to develop a system that is less burdensome to cigarette retailers and wholesalers.

Recommendation

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.



Rulings of the Tax Commissioner

Last Updated 08/25/2014 16:46