Tax revenue is an essential means through which most governments receive funding. A typically effortless way to raise tax revenue is through the use of so-called “sin taxes”. Sin taxes are taxes levied against goods or services that are usually considered to be harmful to society—e.g. cigarette taxes, alcohol taxes, and taxes on lottery winnings. While sin taxes seem to arise out of good intentions to create a healthier, better society, one of the strangest sin taxes is the tax some states impose on possessing illicit substances.
Imagine this scenario: an individual visits a local drug dealer to purchase an illicit substance. Not wanting to ignore a civic duty to pay the required taxes on the purchased item, the individual immediately proceeds to the state’s Department of Revenue. There, the individual reports to the cashier the quantity and type of illegal drug the individual purchased and pays the appropriate tax due. The individual may now enjoy possessing the illicit substance, knowing that no further tax obligations are owed if the individual is arrested for the illegal drug. While this scenario may sound a bit farfetched, it is not all that unbelievable.
Known by various names among the states, such as the Controlled Substances Tax, the Drug Tax, and the Unauthorized Substance Tax, just twenty states impose some sort of tax on illicit substances as of 2014. The procedure is pretty straightforward: when an individual is in possession of an illegal substance, the individual is required to report this possession to a state’s revenue department and pay the appropriate tax due. In return, the individual receives a stamp to affix onto the illegal substance to show that the tax has been paid. The tax levied on illicit substances is typically an excise tax. As opposed to a sales tax, where the tax due is a percentage of the price of an item, an excise tax is a flat tax against the quantity of an item. For example, the North Carolina tax rate for cocaine is $50 per gram with a minimum of seven grams needed in possession before the tax is due.
The purpose behind many of these drug tax laws is to tax the typically tax-free profits of criminal enterprise. However, the idea that states would expect individuals in possession of an illegal substance to voluntarily admit possession in order to pay a tax is a bit absurd. Even at first blush, the taxes imposed on illegal drugs seem to have glaring implications on the Fifth Amendment protections against self-incrimination and double jeopardy within the criminal justice system.
Since paying the tax on illicit substances does not immunize an individual from criminal prosecution, states avoid potential self-incrimination violations by allowing the individual reporting and paying taxes for possession of an illegal drug to remain anonymous. It may come as no surprise that, even with anonymous reporting, most people in possession of illicit substances do not report the drugs they possess or pay the applicable taxes. For example, from 1990 to 2010 the North Carolina Department of Revenue had received just 106 orders for drug tax stamps totaling nearly $5,900. In fact, a spokesperson for the North Carolina Department of Revenue stated that most of the drug tax stamp purchasers are stamp collectors.
Moreover, a federal appeals court found that North Carolina’s illicit substance tax rates were so high that the tax could be considered a second punishment in tandem with the criminal punishment for drug possession. A Tennessee chancery court cited the same reason for declaring Tennessee’s “crack tax” unconstitutional. The Supreme Court finally established a test for whether a drug tax subjects an individual to double jeopardy in the Court’s 1994 Department of Revenue of Mont. v. Kurth Ranch decision. The three-part test the court established seeks to determine whether a tax is punitive enough to subject an offender to a second punishment for the same crime. The test requires the determination of “(1) whether the tax’s rate is high enough to make it a significant deterrent; (2) whether the tax is conditioned on the commission of a crime; and (3) whether the tax [is levied] on goods the taxpayer no longer owns nor lawfully possesses when the tax is assessed.”
Despite the various challenges, some states have received substantial revenue from the taxation of illicit substances. From 2001 to 2014, Iowa collected more than $7 million in drug tax revenue, and North Carolina collected more than $135 million from taxes on illicit substances from 1990 to 2010. As mentioned previously, since many individuals do not pay the tax when obtaining an illicit substance, the majority of these profits are collected once the individual has been arrested for possession of an illicit substance. Furthermore, the increased revenue of states already imposing a tax on illicit substances may override any legal battle concerns and provide enough incentive for other states to enact similar drug tax laws in the future. Missouri, for example, proposed a bill in April of 2015 that would enact a tax on illicit substances, with additional funding being a major justification for the proposal.
Thus, it appears for the time being that while states imposing a tax on illicit substances may find themselves faced with a flurry of legal challenges, these states will likely continue to tax illicit substances in an attempt to reap the benefits of increased revenue.
Published on December 28, 2015.