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January 24, 2008

In Taxing Illegal Drugs, the Trouble Comes in Collecting

By ANNE BARNARD

The Tennessee tax authorities slapped a young concertgoer with $11,506 in taxes and penalties when he was caught with marijuana-laced Rice Krispie Treats. North Carolina collected $11 million in taxes last year on illegal drugs and moonshine. And in Alabama, the rare drug user who chooses to pay state taxes on a stash is issued a sticker to place on the package that declares, “Say no to marijuana.”

Strange as it may seem to levy a tax on a commodity that no one is supposed to have, 29 states have passed laws that impose taxes on illegal drugs and controlled substances, and on Tuesday, Gov. Eliot Spitzer proposed that New York become the 30th.

The plan was part of a package of new or increased taxes and fees that the governor proposed in an effort to close an estimated budget deficit of $4.4 billion.

Across the country, a variety of drug tax laws have sparked legal disputes over issues like the constitutional protection against double jeopardy and the weight of spiked baked goods — as in the case of William Hoak, the Tennessee man who argued in court that he should have been taxed only for the weight of the marijuana in his Rice Krispie Treats, not for the cereal and marshmallows.

The laws have evolved over the past 20 years in response to court challenges. Some were struck down for violating the Fifth Amendment protection against self-incrimination; new laws then specified that taxes could be paid anonymously and that authorities could not report the taxpayers to the police.

North Carolina levied taxes so high that a federal appeals court ruled that the state unconstitutionally penalized drug dealers twice for the same crime: once with jail and once with the tax.

“It’s just a veiled attempt by the government to get these guys to come in and incriminate themselves for possessing drugs,” Jonathan A. Street, Mr. Hoak’s lawyer, said.

But officials say the taxes give states a new and easier way to seize drug money, handing law enforcement a tool to hobble the drug trade and replenishing state coffers along the way. Mr. Spitzer’s aides say the tax could bring in $17 million a year. That figure is extrapolated from the take in North Carolina, which revised its law in response to the federal court ruling and devotes an entire division of its Department of Revenue to enforcing it.

Paying the proposed New York tax — $3.50 per gram for marijuana and $200 per gram for other drugs — would not allow the taxpayer to keep illegal drugs, and the governor does not intend the tax to be a step toward drug legalization, said Robert Megna, who was confirmed as state tax commissioner on Tuesday.

But in order to make the laws constitutional, states must create at least the theoretical opportunity for drug users and dealers to pay the tax legally, said Verenda Smith, government affairs associate at the Federation of Tax Administrators in Washington.

For example, imagine that there is a drug dealer in North Carolina who wanted to do everything by the book. He would go to the authorities — anonymously, of course — and pay a tax based on the weight and the type of drugs he was holding. He would be given a tax stamp, not unlike the tax stickers on cigarette packs. The dealer could then place the stamp on his quarter-ounce bag of marijuana or kilo of cocaine to show that he had paid the tax.

Almost no dealers actually do this, nor does Mr. Spitzer expect them to. The vast majority of revenues from the tax are collected after law enforcement officials seize the drugs, said Kimberly Y. Brooks, a spokeswoman for the North Carolina Department of Revenue.

Officials look for the tax stamps on drugs, but not surprisingly, almost never find them, Ms. Brooks said.

Officials then can assess how much tax is owed, and the payment can be taken either from any cash found with the drugs or from the dealer’s other assets.

“It’s really about cutting the drug dealers off at the knees,” said Ms. Smith of the tax administrators group. “It kind of goes back to the Al Capone model.” Proving tax avoidance is much easier than proving a drug crime, she said, so the tax laws help the authorities keep seized drug money even when a suspect accused of dealing drugs goes free.

Since North Carolina’s law was passed in 1990, only a few dozen people have voluntarily bought the stamps. “They’re mostly stamp collectors,” Ms. Brooks said.

Ms. Smith said she had heard of only one drug dealer who paid the tax regularly, a young man in Oklahoma.

“For a drug dealer, apparently he was a very likable kid,” she said, adding that he decorated his bags of drugs with the tax stamp. “So when they caught him, they had to give him his money back. He had paid the tax.”