STATE System Tax Stamp Fact Sheet
When a licensed vendor (e.g., manufacturer, distributor, wholesaler) has paid the state excise tax for tobacco products, they receive a stamp from the state to affix to the tobacco products in order to sell at retail. Essentially, tax stamps are evidence of the payment of tax. Tax stamps have been historically required since excise taxes were first imposed on tobacco products, much like stamps are used on other licenses and products states regulate (e.g., hunting, alcohol sales). Forty-eight states and the District of Columbia, Guam, and Puerto Rico currently require a tax stamp affixed to tobacco products. It is illegal in those states to sell tobacco products without tax stamps.
The majority of states use outdated tax stamps, which have little protection against counterfeiting. Old stamps contain a heat-applied decal or watermark containing a serial number unique to each roll of stamps.1 The state licensing process does allow for the state to know which serial numbers are given to which vendor and state agencies do conduct inspections and other enforcement activities.1 States lose revenue with the counterfeiting of tobacco tax stamps. As tax rates rise, it becomes more lucrative to take unstamped cigarettes and try and resell them, or to buy cigarettes from a lower tax state or Native-American reservation and place a counterfeit stamp on them in a high-tax state. Evasion of tobacco excise taxes costs states millions of revenue dollars every year. After the switch to the new high-tech tax stamps, California collected an additional $110 million dollars in revenue, without raising the excise tax.2
As cigarette and tobacco taxes increase, so does the incentive to counterfeit tax stamps. States in turn lose out on tax revenue. California was the first state in 2005 to require new counterfeit resistant tax stamps.3 These new, high-tech tax stamps may have one or more of the following features:
• Encryption protection within the tax stamp to help stop counterfeiting.
• Readability by portable scanners for more effective and efficient enforcement.
• Color shifting dyes to make counterfeiting more difficult.
• Tamper-evident surface cuts to make removal or alteration more difficult.
• Unique serial number.4
Currently three states (California, Massachusetts, and New Jersey) require the stamp to have a hologram or encrypted image. Three states (California, Michigan, and New Jersey) require a barcode or other scannable code in the tax stamp. States are now beginning to act in this legislation area as Massachusetts law went into effect January 1, 2012, and Michigan’s law went into effect June 20, 2012.
Counterfeit Resistant Tax Stamps May be Effective at Reducing Tax Evasion
Within two years of new legislation including encrypted tax stamps, California saw a 37% decline in cigarette tax evasion and increased tax revenue of $110 million.5
OLD Technology Tax Stamp, Virginia
NEW Technology Tax Stamp, California
NEW Technology Tax Stamp, Massachusetts
1. Indiana Department of Revenue. Changing the Cigarette Tax Stamp: Feasibility Studypdf iconexternal icon Report Indianapolis: IN. Indiana Department of Revenue; 2009. Accessed October 7, 2014.
2. Boonn A. The Case for High-tech Cigarette Tax Stamppdf iconexternal icon pdf icon[PDF – 148 KB]external icons. Campaign for Tobacco Free Kids. January 3, 2013. Accessed March 21, 2013.
3. California State Board of Equalization. The Cigarette and Tobacco Products Tax Law (Chapter 881, Statutes of 2002)pdf iconexternal icon pdf icon[PDF – 7 KB]external icon. Sacramento: CA. Accessed September 10, 2012.
4. California Board of Equalization. New California Counterfeit-Resistant Cigarette Tax Stampexternal icon. Sacramento: CA. December 2010.
5. McIntosh A. Tobacco tax cheating falls. Sacramento Bee. June 27, 2007.
6. Healthy People 2020 [Internet]. Washington, DC: U.S. Department of Health and Human Services, Office of Disease Prevention and Health Promotion. Accessed September 15, 2015.
DISCLAIMER: The STATE System contains data synthesized from state-level statutory laws. It does not contain state-level regulations; measures implemented by counties, cities, or other localities; opinions of Attorneys General; or relevant case law decisions for tobacco control topics other than preemption; all of which may vary significantly from the laws reported in the database, fact sheets, and publications.