REPORT TITLE: 
Cigarette Tax


DESCRIPTION:
Creates a system utilizing stamps for payment of the cigarette
tax by wholesalers & dealers & providing criminal & civil
penalties for violations. 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                        
THE SENATE                              S.B. NO.           788
TWENTIETH LEGISLATURE, 1999                                
STATE OF HAWAII                                            
                                                             
________________________________________________________________
________________________________________________________________


                   A  BILL  FOR  AN  ACT

RELATING TO TAXATION.
 


BE IT ENACTED BY THE LEGISLATURE OF THE STATE OF HAWAII:

 1      SECTION 1.  The legislature finds that in 1996, 61,200,000
 
 2 packages of cigarettes were sold in the civilian retail market
 
 3 versus 18,170,000 packages sold to the military.  The legislature
 
 4 also finds that a study published in April 1997, by the Tax
 
 5 Foundation of Hawaii entitled, "Perspectives on the Hawaii
 
 6 Tobacco Tax," indicates that there may already be substantial
 
 7 leakage of cigarettes into the civilian retail market from
 
 8 military reservations.  
 
 9      The legislature finds that "bootlegging" of untaxed
 
10 cigarettes into the retail markets presents a threat of
 
11 substantial tax revenue loss.  For example, a single "bootleg"
 
12 container shipment of cigarettes can contain up to 1,000 cases or
 
13 600,000 packages of cigarettes, at a tax rate of $1 per package,
 
14 representing a tax revenue loss of $600,000.
 
15      Requiring stamping of cigarettes sold to the military, even
 
16 if legally permissible, would only address a portion of the
 
17 problem.  The only comprehensive method of preventing sales of
 
18 "bootleg" cigarettes is to require that all cigarettes sold in
 
19 the retail market be identified with a tax stamp so that
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 cigarettes for which the cigarette tax has not been paid can be
 
 2 readily identified.
 
 3      The purpose of this Act is to reduce the loss of cigarette
 
 4 tax revenue to the State from the illegal sale of untaxed
 
 5 cigarettes by requiring that each package of cigarettes sold
 
 6 within the State be identified with a tax stamp.
 
 7      SECTION 2.  Chapter 245, Hawaii Revised Statutes, is amended
 
 8 by adding a new part to be designated as part II and to read as
 
 9 follows:
 
10                 "PART II.  STAMPING OF CIGARETTES
 
11      §245-A  Payment of tax through use of stamps.(a)  The
 
12 tobacco tax imposed by this chapter with respect to the sale or
 
13 use of cigarettes shall be paid by wholesalers and dealers
 
14 through the use of stamps.
 
15      (b)  The department shall furnish stamps for sale.
 
16      §245-B  Sales through financial institutions; rules.  The
 
17 department may enter into agreements to permit the sale of stamps
 
18 by designated financial institutions located within the State.  A
 
19 list of financial institutions designated to sell stamps shall be
 
20 made available at the department.  The department may adopt
 
21 necessary rules for this purpose.
 
22      §245-C  Designs, specifications, and denominations of
 
23 stamps; affixation; cancellation.  Stamps shall be of designs,
 

 
Page 3                                                     
                                     S.B. NO.           788
                                                        
                                                        

 
 1 specifications, and denominations that may be prescribed by the
 
 2 department.  The department shall adopt by rule the method and
 
 3 manner in which stamps are to be affixed to packages of
 
 4 cigarettes and may provide for the cancellation of stamps.
 
 5      §245-D  Affixation prior to distribution.  A wholesaler,
 
 6 dealer, or the authorized agent or designee of a wholesaler or
 
 7 dealer, shall affix an appropriate stamp to the bottom of each
 
 8 package of cigarettes prior to the distribution by a wholesaler
 
 9 or dealer of cigarettes.
 
10      §245-E  Department approval required for transfer of stamps.
 
11 Unaffixed stamps shall not be sold, exchanged, or in any manner
 
12 transferred by a wholesaler or dealer to another person without
 
13 prior written approval of the department.  Any person who
 
14 violates this section shall be fined not less than $500 nor more
 
15 than $1,000 for each violation thereof.
 
16      §245-F  Payment of tax without use of stamps in certain
 
17 transactions; rules.  The department by rule may provide that the
 
18 tax imposed by this chapter with respect to cigarettes shall be
 
19 paid without the use of stamps in connection with a particular
 
20 type of transaction.
 
21      §245-G  Price; payment; deferred payment purchases.(a)
 
22 Stamps shall be sold to licensed wholesalers and dealers at their
 
23 denominated values, plus a stamp fee of 0.2 per cent to pay for
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 the cost to the State of providing the stamps; provided that the
 
 2 department by rule may modify the stamp fee payable to the State
 
 3 to reflect the actual costs incurred by the State in providing
 
 4 the stamps.  
 
 5      (b)  Wholesalers and dealers may include in the price of
 
 6 cigarettes to which there is affixed the stamp required to be
 
 7 affixed under this part a fee of one per cent of the denominated
 
 8 value of the stamp to cover the stamp fee paid to the State and
 
 9 other costs incurred by the wholesaler or dealer to affix the
 
10 stamp; provided that the department by rule may modify the fee
 
11 which may be included in the price of cigarettes by a wholesaler
 
12 or dealer to reflect the actual costs incurred by wholesalers and
 
13 dealers to acquire and affix the stamps.
 
14      (c)  Payment for stamps shall be made at the time of
 
15 purchase; provided that the department by rules shall permit a
 
16 licensed wholesaler or dealer to defer payments therefor as
 
17 provided for in section 245-H.
 
18      §245-H  Application to fix maximum amount of deferred-
 
19 payment purchases; financial security.(a)  A licensed
 
20 wholesaler or dealer may apply to the department to fix the
 
21 maximum amount of deferred-payment purchases of stamps that the
 
22 wholesaler or dealer may have unpaid at any time.  Upon receipt
 
23 of the application and any financial security required pursuant
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 to subsection (b), the department shall fix the amount.
 
 2      (b)  The department by rule may require that a wholesaler or
 
 3 dealer who submits an application for deferred-payment purchases
 
 4 of stamps post a bond or provide a letter of credit or other
 
 5 financial security in an amount of up to one hundred per cent of
 
 6 the maximum amount of the deferred-payment purchases as a
 
 7 condition to the approval by the department of the application.
 
 8 Any rules adopted by the department requiring financial security
 
 9 for deferred-payment purchases shall include the terms and
 
10 conditions under which exemptions to those requirements may be
 
11 authorized by the department and provide for reasonable
 
12 alternative methods of providing financial security.
 
13      §245-I  Time for payment of deferred-payment purchases;
 
14 manner of payment.  Amounts owing for stamps purchased on the
 
15 deferred-payment basis in any calendar month shall be due and
 
16 payable on or before the last day of the following calendar
 
17 month.  Payment shall be made by a remittance payable to the
 
18 department.
 
19      §245-J  Authority to order purchases for wholesaler or
 
20 dealer; duration; revocation.  A wholesaler or dealer shall
 
21 authorize in writing those persons who may order purchases of
 
22 stamps for the account of the wholesaler or dealer at a location
 
23 where stamps are sold.  The authorization shall continue in
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 effect until written notice of revocation of the authority is
 
 2 delivered at the sales location in a manner that may be
 
 3 prescribed by the department.
 
 4      §245-K  Suspension of privilege to purchase on deferred-
 
 5 payment basis or reduction of amount of permissible purchases.
 
 6 The department may suspend without prior notice, a wholesaler's
 
 7 or a dealer's privilege to purchase stamps on the deferred-
 
 8 payment basis or may reduce the amount of permissible deferred-
 
 9 payment purchases fixed for the wholesaler or dealer, if:
 
10      (1)  The wholesaler or dealer fails to promptly pay for
 
11           stamps when payment is due;
 
12      (2)  Any bond, letter of credit, or other financial security
 
13           required of the wholesaler or dealer is canceled, or
 
14           becomes void, impaired, or unenforceable for any
 
15           reason; or
 
16      (3)  In the opinion of the department, collection of any
 
17           amounts unpaid or due from the wholesaler or dealer
 
18           under this chapter is jeopardized.
 
19      §245-L  Penalty for failure to make timely payment.  Any
 
20 wholesaler or dealer who fails to pay any amount owing for the
 
21 purchase of stamps within the time required, shall pay a penalty
 
22 of ten per cent of the amount due in addition to the amount due
 
23 plus interest at the rate specified in section 231-39, from the
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 date on which the amount became due and payable until the date of
 
 2 payment.
 
 3      §245-M  Unused stamps.  The department, by rule, shall
 
 4 refund or credit to a wholesaler or dealer the denominated values
 
 5 of any unused stamps.
 
 6      §245-N  Cigarettes and tobacco products shipped outside of
 
 7 the State for sale or use outside of the State; refund or credit
 
 8 of taxes.(a)  The department, pursuant to rules, shall refund
 
 9 or credit to a wholesaler or dealer the tobacco tax imposed on
 
10 cigarettes and tobacco products pursuant to this chapter that is
 
11 paid on the distribution of cigarettes or tobacco products that
 
12 are shipped to a point outside of the State for subsequent use or
 
13 sale outside of the State.
 
14      (b)  This section shall not apply to cigarettes or tobacco
 
15 products delivered to the consumer in this State and subsequently
 
16 taken outside of the State.
 
17      §245-O  Monthly report on distributions of cigarettes and
 
18 tobacco products, and purchases of stamps.(a)  On or before the
 
19 last day of each month, every wholesaler and dealer shall file on
 
20 a form prescribed by the department a report of the wholesaler's
 
21 or dealer's distributions of cigarettes and purchases of stamps
 
22 during the preceding month, and any other information that the
 
23 department may require to carry out this section.
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1      (b)  On or before the last day of each month, every
 
 2 wholesaler and dealer shall file on forms prescribed by the
 
 3 department a report of the wholesaler's or dealer's distributions
 
 4 of tobacco products and their wholesale cost during the preceding
 
 5 month, and any other information that the department may require
 
 6 to carry out this section.
 
 7      §245-P  Counterfeiting stamps.  Any person who:
 
 8      (1)  Falsely or fraudulently makes, forges, alters, reuses,
 
 9           or counterfeits any stamp provided for or authorized
 
10           under this part;
 
11      (2)  Causes or procures to be falsely or fraudulently made,
 
12           forged, altered, reused, or counterfeited, any stamp;
 
13           or
 
14      (3)  Knowingly and wilfully utters, publishes, passes, or
 
15           tenders as genuine, any false, forged, altered, reused,
 
16           or counterfeited stamp,
 
17 for the purpose of evading the tax imposed by this chapter, shall
 
18 be guilty of a class C felony.
 
19      §245-Q  Sale of packages of cigarettes without stamps; fines
 
20 and penalties.  Any person who knowingly possesses, keeps,
 
21 stores, or retains for the purpose of sale, or sells or offers to
 
22 sell, any package of cigarettes to which there is not affixed the
 
23 stamp required to be affixed under this part, when those
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 cigarettes have been obtained from any source whatever, shall be
 
 2 guilty of a class C felony and, upon conviction thereof, shall be
 
 3 fined not more than $100,000 or imprisoned for not more than five
 
 4 years, or both; provided that a corporation shall be fined not
 
 5 more than $500,000.
 
 6      §245-R  Vending unstamped cigarettes; offense; punishment.
 
 7 Any person in possession or control of, or having access to, a
 
 8 cigarette vending machine who knowingly or wilfully places for
 
 9 sale in the vending machine any cigarettes not contained in
 
10 packages to which are affixed Hawaii tax stamps, shall be guilty
 
11 of a class C felony and, upon conviction thereof, shall be fined
 
12 not more than $100,000 or imprisoned for not more than five
 
13 years, or both; provided that a corporation shall be fined not
 
14 more than $500,000.
 
15      §245-S  Enforcement; injunction; disposition of fines.(a)
 
16 Enforcement of this part shall be under the concurrent
 
17 jurisdiction of the attorney general and the police department of
 
18 each county.
 
19      (b)  The attorney general may apply for and the court may
 
20 grant a temporary or permanent injunction restraining any person
 
21 from violating or continuing to violate this part notwithstanding
 
22 the existence of other remedies at law.  The injunction shall be
 
23 issued without bond.
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1      (c)  Where a county police department initiates and conducts
 
 2 an investigation resulting in the imposition and collection of a
 
 3 fine or penalty pursuant to this part, thirty per cent of the
 
 4 fine or penalty shall be distributed to the police department
 
 5 whose officers or employees initiated and conducted the
 
 6 investigation, and the balance shall be distributed to the State.
 
 7      §245-T  Confiscation of unstamped cigarettes.  The attorney
 
 8 general and the police departments of each of the counties are
 
 9 authorized to seize and confiscate any cigarette, package of
 
10 cigarettes, or carton of cigarettes which is possessed, kept,
 
11 stored, or retained for the purpose of sale, or sold or offered
 
12 for sale in violation of this part.
 
13      §245-U  Forfeitures; disposition of proceeds.(a)  The
 
14 forfeiture of any cigarette, package of cigarettes, or carton of
 
15 cigarettes unlawfully possessed, or kept, stored, or retained for
 
16 the purpose of sale, or sold or offered for sale, in violation of
 
17 this part, may be enforced pursuant to chapter 712A by an
 
18 appropriate administrative or judicial proceeding.  Any
 
19 cigarette, package of cigarettes, or carton of cigarettes
 
20 forfeited as provided in this section may be ordered destroyed,
 
21 or may be ordered sold to a licensed wholesaler or dealer, wholly
 
22 or partially.
 
23      (b)  Where a county police department initiates and conducts
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 an investigation resulting in the forfeiture and sale of
 
 2 cigarettes pursuant to this section, thirty per cent of the net
 
 3 proceeds of the sale, after payment of the cigarette tax and
 
 4 costs of the sale, shall be distributed to the police department
 
 5 whose officers or employees initiated and conducted the
 
 6 investigation, and the balance shall be distributed to the State.
 
 7      §245-V Sale other than at retail of packages of cigarettes
 
 8 without stamps; fines and penalties.  Beginning September 1,
 
 9 1999, any person who knowingly possesses, or keeps, stores, or
 
10 retains for the purpose of sale other than at retail, or sells
 
11 other than at retail or offers to sell other than at retail, any
 
12 package of cigarettes to which there is not affixed the stamp
 
13 required to be affixed under this chapter, when those cigarettes
 
14 have been obtained from any source whatever, shall be guilty of a
 
15 class C felony and, upon conviction, shall be fined not more than
 
16 $100,000, or imprisoned not more than five years, or both;
 
17 provided that a corporation shall be fined not more than
 
18 $500,000.
 
19      §245-W Purchase of packages of cigarettes without stamps;
 
20 fines and penalties.  Beginning September 1, 1999, any wholesaler
 
21 or dealer who knowingly purchases from any other wholesaler or
 
22 dealer any package of cigarettes to which there is not affixed
 
23 the stamp required to be affixed under this chapter, shall be
 

 
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                                     S.B. NO.           788
                                                        
                                                        

 
 1 guilty of a class C felony and, upon conviction thereof, shall be
 
 2 fined not more than $100,000, or imprisoned not more than five
 
 3 years, or both; provided that a corporation shall be fined not
 
 4 more than $500,000.
 
 5      §245-X Retail sale of packages of cigarettes without
 
 6 stamps; fines and penalties.  Beginning January 1, 2000, any
 
 7 person who knowingly possesses, or keeps, stores, or retains for
 
 8 the purpose of sale at retail, or sells at retail or offers to
 
 9 sell at retail, any package of cigarettes to which there is not
 
10 affixed the stamp required to be affixed under this chapter, when
 
11 those cigarettes have been obtained from any source whatever,
 
12 shall be guilty of a class C felony and, upon conviction thereof,
 
13 shall be fined not more than $100,000, or imprisoned not more
 
14 than five years, or both; provided that a corporation shall be
 
15 fined not more than $500,000.
 
16      §245-Y Vending unstamped cigarettes; offense; punishment.
 
17 Beginning January 1, 2000, a person in possession or control of,
 
18 or having access to, a cigarette vending machine who knowingly or
 
19 wilfully places for sale in the vending machine any cigarettes
 
20 not contained in packages to which are affixed the stamp required
 
21 to be affixed under this chapter, shall be guilty of a class C
 
22 felony and, upon conviction thereof, shall be fined not more than
 
23 $100,000, or imprisoned not more than five years, or both;
 

 
Page 13                                                    
                                     S.B. NO.           788
                                                        
                                                        

 
 1 provided that a corporation shall be fined not more than
 
 2 $500,000."
 
 3      SECTION 3.  Section 245-1, Hawaii Revised Statutes, is
 
 4 amended by adding a new definition to be appropriately inserted
 
 5 and to read as follows:
 
 6      ""Department" means the department of taxation."
 
 7      SECTION 4.  Section 245-3, Hawaii Revised Statutes, is
 
 8 amended by amending subsection (a) to read as follows:
 
 9      "(a)  Every wholesaler or dealer, in addition to any other
 
10 taxes provided by law, shall pay for the privilege of conducting
 
11 business and other activities in the State an: 
 
12      (1)  Excise tax equal to:
 
13           (A)  4.00 cents for each cigarette sold, used, or
 
14                possessed by the wholesaler or dealer, after
 
15                August 31, 1997; and
 
16           (B)  5.00 cents for each cigarette sold, used, or
 
17                possessed by a wholesaler or dealer after June 30,
 
18                1998,
 
19           whether or not sold at wholesale, or if not sold then
 
20           at the same rate upon the use by the wholesaler or
 
21           dealer; and 
 
22      (2)  Excise tax equal to forty per cent of the wholesale
 
23           price of each article or item of tobacco products sold
 

 
Page 14                                                    
                                     S.B. NO.           788
                                                        
                                                        

 
 1           by the wholesaler or dealer, whether or not sold at
 
 2           wholesale, or if not sold then at the same rate upon
 
 3           the use by the wholesaler or dealer.
 
 4 Where the tax imposed has been paid on cigarettes or tobacco
 
 5 products which thereafter become the subject of a casualty loss
 
 6 deduction allowable under chapter 235, the tax paid shall be
 
 7 refunded or credited to the account of the wholesaler or dealer.
 
 8 In applying the tax[,] to tobacco products, the tax shall be
 
 9 applied against the latest of the activities of selling, using,
 
10 or possessing[.] the tobacco products.  The tax shall be imposed
 
11 at the time of the last of the following activities to occur: the
 
12 sale; the use; or the possession of [cigarettes or] tobacco
 
13 products.  The tax shall be applied to cigarettes through the use
 
14 of stamps."
 
15      SECTION 5.  Section 245-5, Hawaii Revised Statutes, is
 
16 amended to read as follows:
 
17      "§245-5  Returns.  Every licensee, on or before the last day
 
18 of each month, shall file with the department [of taxation] a
 
19 return showing the cigarettes and tobacco products sold,
 
20 possessed, or used by the licensee during the preceding calendar
 
21 month and of the taxes chargeable against the taxpayer in
 
22 accordance with this chapter.  The form of the return shall be
 
23 prescribed by the department and shall contain such information,
 

 
Page 15                                                    
                                     S.B. NO.           788
                                                        
                                                        

 
 1 including a separate statement of the number and wholesale price
 
 2 of cigarettes, the amount of stamps purchased and used, and the
 
 3 wholesale price of tobacco products, sold, possessed, or used, as
 
 4 it may deem necessary for the proper administration of this
 
 5 chapter."
 
 6      SECTION 6.  Section 245-6, Hawaii Revised Statutes, is
 
 7 amended to read as follows:
 
 8      "§245-6  Payment of taxes; penalties.  At the time of the
 
 9 filing of the return required under section 245-5 and within the
 
10 time prescribed therefor, each licensee shall pay to the
 
11 department [of taxation] the unpaid amount of taxes imposed by
 
12 this chapter, required to be shown by the return.
 
13      Penalties and interest shall be added to and become a part
 
14 of the taxes, when and as provided by section 231-39."
 
15      SECTION 7.  Section 245-8, Hawaii Revised Statutes, is
 
16 amended by amending subsection (a) to read as follows:
 
17      "(a)  Every wholesaler and dealer shall keep a record of
 
18 [every]:
 
19      (1)  Every sale or use of cigarettes and tobacco products by
 
20           the wholesaler or dealer[, the];
 
21      (2)  The number and wholesale price of cigarettes[,]; and
 
22           [the]
 
23      (3)  The wholesale price of tobacco products, sold,
 

 
Page 16                                                    
                                     S.B. NO.           788
                                                        
                                                        

 
 1           possessed, or used, and of the taxes payable thereon,
 
 2           if any, together with the amounts of stamps purchased
 
 3           and used,
 
 4 in such form as the department [of taxation] may prescribe.  The
 
 5 records shall be offered for inspection and examination at any
 
 6 time upon demand by the department and shall be preserved for a
 
 7 period of five years, except that the department, in writing, may
 
 8 consent to their destruction within the five-year period or may
 
 9 require that they be kept longer.  The department, by rule, may
 
10 require the licensee to keep such other records as it may deem
 
11 necessary for the proper enforcement of this chapter."
 
12      SECTION 8.  Section 245-15, Hawaii Revised Statutes, is
 
13 amended to read as follows:
 
14      "§245-15  Disposition of revenues.  All moneys collected
 
15 pursuant to this chapter shall be paid into the state treasury as
 
16 state realizations to be kept and accounted for as provided by
 
17 law[.], except for the amounts designated by sections 245-S and
 
18 245-U for distribution to county police departments."
 
19      SECTION 9.  Sections 245-1 to 245-15, Hawaii Revised
 
20 Statutes, are designated as:  "PART I.  GENERAL PROVISIONS".
 
21      SECTION 10.  This Act does not affect rights and duties that
 
22 matured, penalties that were incurred, and proceedings that were
 
23 begun, before its effective date.
 

 
Page 17                                                    
                                     S.B. NO.           788
                                                        
                                                        

 
 1      SECTION 11.  In codifying the new sections added by section
 
 2 2, and referred to in this Act, the revisor of statutes shall
 
 3 substitute appropriate section numbers for the letters used in
 
 4 designating the new sections in this Act.
 
 5      SECTION 12.  Statutory material to be repealed is bracketed.
 
 6 New statutory material is underscored.
 
 7      SECTION 13.  This Act shall take effect on July 1, 1999;
 
 8 provided that sections 2, 4, 5, 6, 7, and 8 shall take effect on
 
 9 September 1, 1999.
 
10 
 
11                           INTRODUCED BY:  _______________________