TAF-35-10-00002-P Sales of Cigarettes on Indian Reservations

9/1/10 N.Y. St. Reg. TAF-35-10-00002-P

NEW YORK STATE REGISTER

VOLUME XXXII, ISSUE 35

September 01, 2010

RULE MAKING ACTIVITIES

DEPARTMENT OF TAXATION AND FINANCE

PROPOSED RULE MAKING

NO HEARING(S) SCHEDULED

 

I.D No. TAF-35-10-00002-P

Sales of Cigarettes on Indian Reservations

PURSUANT TO THE PROVISIONS OF THE State Administrative Procedure Act, NOTICE is hereby given of the following proposed rule:

Proposed Action:

Addition of sections 74.6 and 74.7 to Title 20 NYCRR.

Statutory authority:

Tax Law, sections 171, subd. First; 471(1), (4) and (5); 471-e; 475 (not subdivided); and L. 2010, ch. 134, part D

Subject:

Sales of cigarettes on Indian reservations.

Purpose:

To implement certain provisions of recently enacted legislation concerning sales of cigarettes on Indian reservations.

Substance of proposed rule (Full text is posted at the following State website:www.nystax.gov):

This rule concerns the collection of taxes on sales of cigarettes made on New York State Indian reservations as required by sections 471 and 471-e of the Tax Law, and provides procedures to be followed by New York State licensed cigarette stamping agents for the certification process required by section 471 of the Tax Law. The rule was previously adopted as an emergency measure.

Section 1 of the rule adds a new section 74.6 to the cigarette tax regulations to address sales of cigarettes on Indian reservations and to describe the two statutory mechanisms (systems) for the delivery of quantities of tax-exempt cigarettes to Indian nations or tribes for the personal use and consumption of their qualified members based on their probable demand plus the amount needed for official nation or tribal use. Indian nations or tribes may elect to participate in the Indian tax exemption coupon system established in section 471-e of the Tax Law, or, if such election is not made, the prior approval system established in section 471(5) of the Tax Law will be used. Under the prior approval system New York State licensed cigarette stamping agents and wholesale dealers that have received prior approval from the Tax Department may sell certain quantities of stamped untaxed packages of cigarettes to Indian nations or tribes and reservation cigarette sellers. The rule provides specificity concerning the methodology and procedures to be used by the department for the statutorily required calculation of probable demand used in both systems.

Section 2 of the rule adds a new section 74.7 to the cigarette tax regulations relating to the statutory provisions of section 471(4) that require every cigarette stamping agent that purchases unstamped packages of cigarettes intended for resale in New York State to annually provide its supplier and the Tax Department with a certification, under penalty of perjury, that the cigarettes will not be resold in violation of Article 20 of the Tax Law. Procedures to be followed for the certification process are set forth in the rule, such as certification signature and swearing requirements, time periods covered by the certification, and the contents of the certification. With regard to the contents, the certification must specifically provide that the agent will only make sales of tax-exempt stamped packages of cigarettes to Indian nations or tribes or to reservation cigarette sellers that are in accordance with the provisions of new section 74.6 of the rule.

Text of proposed rule and any required statements and analyses may be obtained from:

John W. Bartlett, Tax Regulations Specialist 4, Department of Taxation and Finance, Taxpayer Guidance Division, Building 9, W. A. Harriman Campus, Albany, NY 12227, [phone], email: [e-mail]

Data, views or arguments may be submitted to:

Same as above.

Public comment will be received until:

45 days after publication of this notice.

Regulatory Impact Statement

1. Statutory authority: Tax Law, sections 171, subdivision First; 471, subdivisions (1), (4), and (5); 471 e; 475 (not subdivided); and Part D of Chapter 134 of the Laws of 2010. Section 171, subdivision First provides general authority for the Commissioner of Taxation and Finance to make reasonable rules and regulations that may be necessary for the exercise of the Commissioner's powers and the performance of his or her duties under the Tax Law. Part D of Chapter 134 of the Laws of 2010 amended sections 471(1) and 471-e and added section 471(5) to the Tax Law to set forth a dual system for the delivery of quantities of tax exempt cigarettes to Indian nations or tribes for the use or consumption of the nations or tribes and their members up to their probable demand. Section 471(1), as amended by Chapter 134, imposes the tax on cigarettes, including all cigarettes sold on an Indian reservation to non-members of the Indian nation or tribe and to non-Indians, and provides for a dual system to ensure that adequate quantities of stamped but tax exempt cigarettes are available for purchase by the nation or tribe and its members for their use or consumption based on their probable demand. Section 471-e, as amended by Chapter 134, establishes the "Indian tax exemption coupon system" which Indian nations or tribes may elect to participate in to obtain such tax-exempt cigarettes. Section 471(5), as added by Chapter 134, provides that for any year that this election is not made, the "prior approval" system will be used. Section 471(4) provides that cigarette stamping agents must provide their suppliers and the department with a certification, under penalty of perjury, that cigarettes will not be resold in violation of Article 20 of the Tax Law, which imposes the cigarette tax. Section 475 authorizes the Commissioner specifically to administer the tax on cigarettes imposed under Article 20 of the Tax Law.

2. Legislative objective: The rule is being proposed pursuant to such authority to administer statutory amendments made by Part D of Chapter 134 of the Laws of 2010 and to take regulatory action to help enable the department to better ensure compliance with the provisions contained in Article 20 of the Tax Law that call for the imposition of cigarette taxes as well as sales of sufficient quantities of untaxed cigarettes for the use or consumption of Indian nations or tribes and their members up to their probable demand. The rule provides specifics concerning the methodology for the statutorily required calculation of probable demand for cigarettes by qualified Indians and the Indian nations or tribes. The rule also provides procedures for the agent certification process required by section 471(4) of the Tax Law.

3. Needs and benefits: This rule is necessary in connection with the implementation of recently enacted legislation concerning sales of cigarettes on Indian reservations. The rule details the dual statutory system that provides for adequate quantities of stamped but tax-exempt cigarettes to be available for the use or consumption of Indian nations or tribes and their members based on their probable demand. Indian nations or tribes may elect to participate in the Indian tax exemption coupon system established in section 471-e of the Tax Law. For any year that such election is not made, the prior approval system established in section 471(5) of the Tax Law will be used. Under the prior approval system New York State licensed cigarette stamping agents and wholesale dealers may sell certain quantities of stamped untaxed packages of cigarettes to Indian nations or tribes and reservation cigarette sellers with the prior approval of the Tax Department. The rule provides specificity concerning the methodology and procedures to be used by the department for the statutorily required calculation of probable demand used in both systems. The probable demand for tax-exempt use by the Indian nations or tribes and their members is set based on Census data and federal consumption figures. For purposes of this calculation for the twelve-month period beginning September 1, 2010, that is contained in the rule, these figures are derived from the United States Department of Agriculture, Economic Research Service.

The rule also provides procedures to be followed for the agent certification process required by section 471(4) of the Tax Law, such as certification signature and swearing requirements, as well as the time periods covered by the certification.

4. Costs: (a) Costs to regulated parties. The rule applies to approximately 73 New York State licensed cigarette stamping agents and approximately 265 New York State licensed wholesale dealers (including the licensed cigarette agents). Although the implementation of the statutory amendments requiring the use of a dual system to provide adequate quantities of stamped tax-exempt cigarettes to Indian nations and tribes and those requiring the certification of stamping agents will have fiscal consequences in terms of collection and payment of taxes that are already due under the Tax Law, the consequences are the result of the statute imposing the taxes. There will be no tax liability impact for the implementation of and continuing compliance with this rule. Requirements for both the use of the dual system and the agent certification process are statutory. The provisions of the rule regarding the calculation of probable demand merely provide greater specificity to the calculation required by the statute, and the provisions regarding agent certification merely set forth procedures to comply with the statute. Any agents or wholesale dealers that make sales involving Indian reservations will be required to use the prior approval system as to the amount of stamped untaxed cigarettes that they may sell to an Indian nation or tribe or reservation cigarette seller on its reservation if the nation or tribe has not timely elected to participate in the Indian tax exemption coupon system. The prior approval system will be a simple system resulting in minimal administrative costs.

(b) Costs to the State and its local governments including this agency. The costs of obtaining and providing the coupons, processing refunds, developing forms that stamping agents will be required to file, and issuing the technical memorandum to explain the rule are all attributable to the implementation of the statutory changes. There will be minimal administrative costs to the department associated with granting prior approval to agents and wholesale dealers to sell stamped untaxed cigarettes to Indian nations or tribes and reservation cigarette sellers. Although the implementation of the statutory amendments regarding the dual system for ensuring adequate quantities of stamped tax-exempt cigarettes to Indian nations or tribes and the certification of stamping agents will have fiscal consequences in terms of collection and payment of taxes that are already due under the Tax Law, the consequences are the result of the statute imposing the taxes. The rule itself does not have any State or local fiscal consequences apart from the statutory amendments.

(c) Information and methodology. This analysis is based on review of the rule and statutory requirements and discussions among personnel from the Department's Office of Tax Policy Analysis, Office of Counsel, Office of Tax Enforcement, and the Office of Budget and Management Analysis, including the Management Analysis and Project Services Bureau.

5. Local government mandates: The rule imposes no mandates upon any county, city, town, village, school district, fire district, or other special district.

6. Paperwork: The rule does not impose any additional reporting or paperwork requirements on agents or wholesale dealers making sales of untaxed cigarettes to an Indian nation or tribe, a reservation cigarette seller, or any other person on a reservation.

7. Duplication: There are no relevant rules or other legal requirements of the federal or state governments in effect that duplicate, overlap, or conflict with this rule.

8. Alternatives: There are no alternatives to the statutory dual system that provides for adequate quantities of stamped tax-exempt cigarettes to be available for purchase for the use or consumption of Indian nations or tribes and their members based on their probable demand. This rule introduces a probable demand formula developed by the department to estimate the demand for cigarettes by Indian nations or tribes and their members. The formula uses federal data because it is the most reliable and consistent source of information regarding cigarette demand. It is noted that the methodology was previously published in the March 10, 2010, issue of the State Register in the department's proposed rule making number TAF-10-10-00004-P, upon which public comments were invited. A medical doctor submitted comments on the proposed rule making stating that the method of computing probable demand of cigarettes by the Indian nations or tribes and their members resulted in a calculation that is too high. The doctor suggested that, rather than basing the calculation on federal data, a survey should be commissioned every five years. The department believes that the rule's reference to widely available federal per capita data is appropriate, and the methodology will "leave ample room for legitimately tax-exempt sales" consistent with Department of Taxation and Fin. of N.Y. v Milhelm Attea & Bros., Inc. (512 US 61, 75-76).

9. Federal standards: This rule does not exceed any minimum standards of the federal government for the same or similar subject areas.

10. Compliance schedule: There is no period of time necessary to enable the stamping agents and wholesale dealers to achieve compliance with this rule. This rule will take effect on the date that the Notice of Adoption is published in the State Register. The department's prior emergency rule making number TAF 27 10-00013-E for this action was previously published in the July 7, 2010, issue of the State Register, and applies to all cigarettes sold on or after September 1, 2010, in the manner provided in Part D of Chapter 134 of the Laws of 2010, as amended by Chapter 136 of the Laws of 2010.

Regulatory Flexibility Analysis

1. Effect of rule: The rule will apply to the approximately 73 New York State licensed cigarette stamping agents and the approximately 265 New York State licensed wholesale dealers (including the licensed cigarette stamping agents), some of which may be small businesses as defined in section 102(8) of the State Administrative Procedure Act. The rule does not distinguish between different business sizes and applies to all stamping agents and wholesale dealers in the same manner, regardless of the size of the business operation. Under the statute, agents or wholesale dealers that make sales involving Indian reservations will be required to use either a prior approval system pursuant to section 471(5) of the Tax Law, or, with respect to Indian nations or tribes that timely elect, the Indian tax exemption coupon system under section 471-e of the Tax Law, to determine the amount of stamped untaxed cigarettes they may sell to an Indian nation or tribe or reservation cigarette seller on its reservation. Approximately 10 stamping agents currently make sales involving Indian reservations. The amount of stamped untaxed cigarettes under either system is determined based upon the probable demand of the qualified Indians on the nation's or tribe's qualified reservation plus the amount needed for official nation or tribal use. The rule provides specificity concerning the methodology and procedures to be used by the department for the statutorily required calculation of probable demand.

The agent certification process described by the rule is applicable to all agents pursuant to section 471(4) of the Tax Law.

2. Compliance requirements: The rule will not impose any adverse economic impact or any additional reporting, recordkeeping, or compliance requirements on local governments.

For any year that an Indian nation or tribe elects to participate in the Indian tax exemption coupon system established in section 471-e of the Tax Law, agents and wholesale dealers may make sales of the amount of stamped untaxed cigarettes to that Indian nation or tribe or reservation cigarette sellers on that reservation as allowed on each Indian tax exemption coupon received. For any Indian nation or tribe that does not make such election, agents or wholesale dealers that make sales involving that nation's or tribe's reservation will be required to use the prior approval system as to the amount of stamped untaxed cigarettes that they may sell to the Indian nation or tribe or reservation cigarette sellers on its reservation. The act of obtaining prior approval from the Tax Department under this system will be simple.

Section 471(4) of the Tax Law provides that every cigarette stamping agent that purchases unstamped packages of cigarettes from any person, including, but not limited to, a tobacco product manufacturer, that are intended for resale in or into New York State, must provide that person and the Tax Department with a certification on an annual basis under penalty of perjury that the cigarettes will not be resold in violation of Article 20 of the Tax Law. The rule provides further guidance pertaining to certification requirements.

This rule will take effect on the date that the Notice of Adoption is published in the State Register. The department's prior emergency rule making number TAF-27-10-00013-E for this action was previously published in the July 7, 2010, issue of the State Register, and applies to all cigarettes sold on or after September 1, 2010, in the manner provided in Part D of Chapter 134 of the Laws of 2010, as amended by Chapter 136 of the Laws of 2010.

3. Professional services: The rule imposes no requirements for professional services upon small businesses or local governments. However, an affected stamping agent may decide to use professional services, in addition to those it may already employ to prepare its tax returns, to comply with the certification paperwork required pursuant to the statute and set forth in the rule.

4. Compliance costs: There are no compliance costs to local governments as a result of this rule.

The rule applies to approximately 73 New York State licensed cigarette stamping agents and 265 New York State licensed wholesale dealers (including the licensed cigarette stamping agents). There will be no tax liability impact for the implementation of and continuing compliance with this rule. Any agents or wholesale dealers that make sales involving Indian reservations will be required to obtain prior approval from the Tax Department for their sales of untaxed packages of cigarettes involving Indian reservations when the reservation's Indian nation or tribe has not timely elected to participate in the Indian tax exemption coupon system. The act of obtaining such prior approval by agents or wholesale dealers under the prior approval system required by statute will be simple and result in minimal administrative costs.

The requirement for agents to provide the certification to their suppliers and to the department is statutory.

5. Economic and technological feasibility: The rule does not impose any economic or technological compliance burdens on small businesses or local governments.

6. Minimizing adverse impact: The rule details the dual statutory system that provides for adequate quantities of stamped but tax-exempt cigarettes to be available for the use or consumption of Indian nations or tribes and their members based on their probable demand. While there are no alternatives to this dual statutory system, the rule provides specifics concerning the methodology for the statutorily required calculation of probable demand. This rule also relates to the statutory requirement that every cigarette stamping agent that purchases unstamped packages of cigarettes from any person, including, but not limited to, a tobacco product manufacturer, that are intended for resale in or into New York State, must provide that person and the department with a certification on an annual basis under penalty of perjury that the cigarettes will not be resold in violation of Article 20 of the Tax Law. In this regard the rule provides further guidance pertaining to certification requirements.

7. Small business and local government participation: The following organizations were notified that the Department was in the process of developing this rule and were given the opportunity to participate in its development: the New York State Association of Wholesale Marketers and Distributors; the Association of Towns of New York State; the Office of Coastal, Local Government, and Community Sustainability of New York State Department of State; the Division for Small Business of Empire State Development; the National Federation of Independent Businesses; the New York State Association of Counties; the New York State Conference of Mayors and Municipal Officials; the Small Business Council of the New York State Business Council; the Retail Council of New York State; and the New York Association of Convenience Stores. In addition, a copy of the emergency rule was sent to all New York State licensed cigarette stamping agents and wholesale dealers.

Rural Area Flexibility Analysis

1. Types and estimated numbers of rural areas: The rule will apply to the approximately 73 New York State licensed cigarette stamping agents (about 10 of whom currently make sales involving Indian reservations) and the approximately 265 New York State licensed wholesale dealers (including the licensed cigarette agents), some of which are located in rural areas as defined by section 102(10) of the State Administrative Procedure Act. Some of the Indian reservations are located in rural areas. There are 44 counties throughout this State that are rural areas (having a population of less than 200,000) and 9 more counties having towns that are rural areas (with population densities of 150 or fewer people per square mile). The rule applies to all stamping agents and wholesale dealers in the same way; it does not distinguish between stamping agents and wholesale dealers located in rural, suburban, or metropolitan areas of this State.

2. Reporting, recordkeeping and other compliance requirements; and professional services: Under the statute, agents or wholesale dealers that make sales involving Indian reservations will be required to use either a prior approval system pursuant to section 471(5) of the Tax Law, or, with respect to Indian nations or tribes that timely elect, the Indian tax exemption coupon system under section 471-e of the Tax Law, to determine the amount of stamped untaxed cigarettes they may sell to an Indian nation or tribe or reservation cigarette seller on its reservation. Approximately 10 agents currently make sales involving Indian reservations. The amount of stamped untaxed cigarettes under either system is determined based upon the probable demand of the qualified Indians on the nation's or tribe's qualified reservation plus the amount needed for official nation or tribal use. The rule provides specificity concerning the methodology and procedures to be used by the department for the statutorily required calculation of probable demand.

For any year that an Indian nation or tribe elects to participate in the Indian tax exemption coupon system established in section 471-e of the Tax Law, agents and wholesale dealers may make sales of the amount of stamped untaxed cigarettes to that Indian nation or tribe or reservation cigarette sellers on that reservation as allowed on each Indian tax exemption coupon received. For any Indian nation or tribe that does not make such election, agents or wholesale dealers that make sales involving that nation's or tribe's reservation will be required to use the prior approval system as to the amount of stamped untaxed cigarettes that they may sell to the Indian nation or tribe or reservation cigarette sellers on its reservation. The act of obtaining prior approval from the Tax Department under this system will be simple.

Section 471(4) of the Tax Law provides that every cigarette stamping agent that purchases unstamped packages of cigarettes from any person, including, but not limited to, a tobacco product manufacturer, that are intended for resale in or into New York State, must provide that person and the Tax Department with a certification on an annual basis under penalty of perjury that the cigarettes will not be resold in violation of Article 20 of the Tax Law. The rule provides further guidance pertaining to certification requirements.

The rule does not require professional services. An affected stamping agent may decide to use professional services, in addition to those it may already employ to prepare its tax returns, to comply with the certification paperwork required pursuant to the statute and set forth in the rule. The rule does not impose any requirements on public entities in rural areas.

This rule will take effect on the date that the Notice of Adoption is published in the State Register. The department's prior emergency rule making number TAF-27-10-00013-E for this action was previously published in the July 7, 2010, issue of the State Register, and applies to all cigarettes sold on or after September 1, 2010, in the manner provided in Part D of Chapter 134 of the Laws of 2010, as amended by Chapter 136 of the Laws of 2010.

3. Costs: There are no variations in costs for public or private concerns in rural areas. The regulated parties to which this rule is applicable are approximately 73 New York State licensed cigarette stamping agents and approximately 265 New York State licensed wholesale dealers (including the licensed cigarette stamping agents). With regard to the affected agents or wholesale dealers located in rural areas or elsewhere, there will be no tax liability impact for the implementation of and continuing compliance with this rule. Any agents or wholesale dealers that make sales involving Indian reservations will be required to obtain prior approval from the Tax Department for their sales of untaxed packages of cigarettes involving Indian reservations when the reservation's Indian nation or tribe has not timely elected to participate in the Indian tax exemption coupon system. The act of obtaining prior approval by agents or wholesale dealers under the prior approval system required by statute will be simple and result in minimal administrative costs.

The requirement for agents to provide the certification to their suppliers and to the department is statutory.

4. Minimizing adverse impact: The rule does not distinguish between cigarette stamping agents and wholesale dealers located in rural areas and those located elsewhere. The rule details the dual statutory system that provides for adequate quantities of stamped but tax-exempt cigarettes to be available for the use or consumption of Indian nations or tribes and their members based on their probable demand. While there are no alternatives to this dual statutory system, the rule provides specifics concerning the methodology for the statutorily required calculation of probable demand. This rule also relates to the statutory requirement that every cigarette stamping agent that purchases unstamped packages of cigarettes from any person, including, but not limited to, a tobacco product manufacturer, that are intended for resale in or into New York State, must provide that person and the department with a certification on an annual basis under penalty of perjury that the cigarettes will not be resold in violation of Article 20 of the Tax Law. In this regard the rule provides further guidance pertaining to certification requirements.

5. Rural area participation: The following organizations were notified that the Department was in the process of developing this rule and were given the opportunity to participate in the its development: the New York State Association of Wholesale Marketers and Distributors; the Association of Towns of New York State; the Office of Coastal, Local Government, and Community Sustainability of New York State Department of State; the Division for Small Business of Empire State Development; the National Federation of Independent Businesses; the New York State Association of Counties; the New York State Conference of Mayors and Municipal Officials; the Small Business Council of the New York State Business Council; the Retail Council of New York State; and the New York Association of Convenience Stores. These organizations include members in rural areas. In addition, a copy of the emergency rule was sent to all New York State Indian nations or tribes and all New York State licensed cigarette stamping agents and wholesale dealers, some of which are located in rural areas.

Job Impact Statement

A Job Impact Statement is not being submitted with this rule because it is evident from the subject matter of the rule that it could have no impact on jobs and employment opportunities.

This rule relates to recently enacted legislation regarding the collection of taxes on cigarettes sold on New York State Indian reservations to non-Indians and non-members of an Indian nation or tribe and methods to make available adequate quantities of tax-exempt cigarettes for the use or consumption of the nation or tribe and its members based on their probable demand. The statute, specifically, section 471(1) of the Tax Law, imposes the tax on cigarettes, including all cigarettes sold on an Indian reservation to non-members of the Indian nation or tribe and to non-Indians, and provides for a dual system to ensure that adequate quantities of stamped but tax-exempt cigarettes are available for purchase by the nation or tribe and its members for their use or consumption based on their probable demand. The rule provides specifics concerning the methodology for the statutorily required calculation of probable demand for cigarettes by qualified Indians and the Indian nations or tribes. The rule also provides procedures to be followed for the agent certification process required by section 471(4) of the Tax Law, such as certification signature and swearing requirements, as well as the time periods covered by the certification.