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Illegality no barrier to taxing drugs

The Tennessee tax authorities slapped a young concertgoer with US$11,506 in taxes and penalties when he was caught with Rice Krispie Treats laced with marijuana. North Carolina collected US$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 legislation that impose taxes on illegal drugs and controlled substances, and on Tuesday, Governor 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 US$4.4 billion.

Across the US, 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.

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.

But tax officials say the levies 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.

North Carolina, devotes an entire division of its Department of Revenue to enforcing it and collects far more revenue from illegal drugs than most states, North Carolina and other states' officials said.

Paying the proposed New York levy -- US$3.50 per gram for marijuana and US$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 first 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 tax authorities -- anonymously, of course -- and pay a levy 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 7g bag of marijuana or kilo of cocaine to show that he had paid the tax.

Proving tax avoidance is much easier than proving a drug crime, said Kimberly Brooks, a spokeswoman for the North Carolina Department of Revenue, so the tax laws help the officials keep seized drug money even when a suspect accused of dealing drugs goes free.

Brooks said only a few dozen people have voluntarily bought the stamps since North Carolina's law was passed in 1990 -- mostly stamp collectors.
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