Refund of Cigarette Tax


Oftentimes, tobacco consumers are not aware of the tax implications that apply as purchasers of tobacco products, a taxable item on the state and federal level. But what can happen if an individual possesses untaxed tobacco products? As shown by a recent case, the individual can be liable for state tax, penalty, and interest of the cigarettes purchased.

At issue, the woman was driving with 93 cartons of untaxed cigarettes and 1 roll of untaxed chewing tobacco. This was discovered by a police officer during a stop. In addition, the Taxpayer admitted that she bought Indian brand cigarettes that she did not pay tax on approximately 20 times in the last four years. Each time, she would collect money and distribute the cigarettes when she returned. She did not have a license to distribute or possess untaxed cigarettes. She purchased 79 cartons of untaxed cigarettes, which amounts to $3,400 of tax.

In addition, she was charged with willfully possessing or transporting 10,000 or more unstamped cigarettes for the purpose of sale in violation of S1814(c)(1). The Department then issued a determination that asserted a penalty of $44,400 because the petitioner was found to be in possession of unstamped or unlawfully stamped cigarettes and/or tobacco products. The Commissioner has assessed the maximum penalty of $600 per carton for 74 of the 79 cartons purchased. A penalty was not assessed on the additional 5 cartons purchased because it is prohibited by the Tax Law S481(1)(b)(i)(A).

The Taxpayer filed a petition for a tax refund of cigarette tax under article 20 of the Tax Law. The issues included: (1) whether the petitioner was in possession or control of unstamped or unlawfully stamped cigarettes so as to be liable for the penalty imposed pursuant to Tax Law S481(1)(b)(i); (2) whether the penalty imposed against petitioner pursuant to Tax Law S481(1)(b)(i) is excessive.

New York State imposes an excise tax of $4.35 per pack of 20 cigarettes on “all cigarettes possessed in the state by any person for sale” (Tax Law S471 (1)). This tax is imposed on all cigarettes sold on an Indian reservation to non-Indians. An affixed cigarette tax stamp serves as proof that packages by any person other than an agent or distributor is presumptive evidence that such cigarettes are subject to the tax. Further, a penalty of up to $600 per carton may be imposed for every two hundred cigarettes, in excess of one thousand cigarettes (five cartons) “unstamped or unlawfully stamped packages in the possession or under the control of any person” (Tax Law S481(1)(b)(i)(A)).

The taxpayer argued the penalty imposed by the Division is excessive and the imposition of a penalty is not automatic and is within the discretion of the Commissioner. The only limit on the Commissioner’s use of such discretion is that the amount of the fine cannot exceed $600.00 for every 200 cigarettes or fraction thereof in excess of 1,000 cigarettes in unstamped or unlawfully stamped packages. (see Tax Law S 481(1)(b)(i)(A)). Here, the ALJ determined that the Commissioner imposed the maximum fine allowed by law. In order to reduce the penalty, the Taxpayer would’ve had to prove that mitigating factors existed including establishing by clear and convincing evidence that the imposition of the penalty imposed by the Commissioner was an abuse of discretion. In this case, the Taxpayer was not able to establish this. This case is a good example of why it's important for both the tobacco distributors and tobacco purchasers to have an understanding of the laws that apply.