Were bidis cigarettes for Virginia tax purposes, and could an unlisted brand trigger the 500% contraband penalty?

Plain-English summary

Virginia treated bidis as cigarettes, deemed the unlisted packs contraband, and upheld a penalty equal to 500% of retail value. The wholesaler had bought 19,440 packs for resale from a manufacturer or brand family not listed in Virginia's directory of cigarettes legal for sale.

Bidis contained nicotine and functional tobacco, were intended to be burned, and were offered in cigarette-like sticks and packs. They therefore met Va. Code § 58.1-1000's cigarette definition. A separate criminal statute's distinct reference to bidis did not control administration of the cigarette tax.

Virginia law barred sale or possession for sale of brands absent from the Attorney General's directory and treated them as contraband. The wholesaler had sold other listed bidis and continued selling the disputed product after investigators' initial visit, changing the invoice description to "Novelties 501." Virginia found no basis to reduce the penalty.

Common questions

Q: Did calling bidis something other than cigarettes avoid cigarette-tax law?
A: No. Virginia applied the product definition in the cigarette-tax chapter.

Q: Why did the Department uphold the 500% penalty?
A: The products were unlisted contraband, and the evidence showed the licensed wholesaler knew the directory rules and continued the sales.

Citations and references

• Va. Code §§ 3.2-4200, 3.2-4206, 3.2-4207, and 3.2-4212.
• Va. Code §§ 18.2-371.2 and 58.1-1000.
• IRC § 5702(b).

Subject

Contraband cigarettes

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 12-18

Original ruling text

March 5, 2012

Re: § 58.1-1821 Application: Virginia Cigarette Tax

Dear *:

This is in response to your letter submitted on behalf of * (the "Taxpayer"), in which you seek abatement of the penalty assessed on contraband cigarette packs for the period March 2008 through January 2009. I apologize for the delay in responding to your letter.

FACTS

The Taxpayer is a wholesaler of tobacco products. As a result of an investigation by the Attorney General's ("AG") office, the Taxpayer was found to have purchased 19,440 packs of bidis cigarettes for resale. The contested bidis are not listed in the directory of legal cigarettes sold in Virginia (the "Directory") and were deemed contraband pursuant to Va. Code § 3.2-4212 B. As a result, the Department's auditor assessed a penalty at 500% of the retail value of the contraband cigarettes in accordance with Va. Code § 3.2-4212 A.

The Taxpayer contests the penalty assessment on the basis that "bidis" does not meet the definition of "cigarette" as defined in Va. Code §§ 3.2-4200 and 18.2-371.2 for purposes of the Virginia cigarette tax. In support of its contention, the Taxpayer cites Va. Code § 18.2-371.2 B, which separately lists bidis and cigarettes. Further, the Taxpayer notes that Va. Code § 18.2-371.2 H provides a separate definition for bidis. The Taxpayer contends that the question of whether bidis is a cigarette for purposes of the Virginia cigarette tax falls outside the Department's specialized competence and is a matter of statutory interpretation for the court. The Taxpayer asserts that an appeal to the circuit court will interpret the definition of "cigarette" in light of the separate listing of bidis in the subsections cited above and remove bidis from the definition of "cigarette" in Va. Code § 3.2-4200.

DETERMINATION

Definition of Cigarette

The Department administers and enforces the Virginia cigarette tax under Chapter 10 of Title 58 of the Code of Virginia . For purposes of the Virginia cigarette tax imposed under this chapter, Va. Code § 58.1-1000 defines the term "cigarette" to mean:

any product that contains nicotine, is intended to be burned or heated under ordinary conditions of use, and consists of or contains (i) any roll of tobacco wrapped in paper or in any substance not containing tobacco; (ii) tobacco, in any form, that is functional in the product, which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette; or (iii) any roll of tobacco wrapped in any substance containing tobacco which, because of its appearance, the type of tobacco used in the filler, or its packaging and labeling, is likely to be offered to, or purchased by, consumers as a cigarette described in clause (i) of this definition ....

Contested Issue

Beedies, variously know as "bidis", "bidi" and "biri", is a small, thin hand-rolled cigarette that consists of tobacco wrapped in a tendu or temburni leaf and secured with a string at one or both ends. Bidis contain tobacco that is functional in the product, contains nicotine, and intended to be burned or heated under ordinary conditions of use. Bidis are packaged twenty-five sticks per pack and twenty packs per carton. Because of its appearance and packaging, bidis are likely to be offered to or purchased by consumers as a cigarette.

The Department relies on the definitions established by the Internal Revenue Code in defining cigarette and other tobacco products in Chapter 10 of Title 58 of the Code of Virginia . The definition of "cigarette" in Va. Code § 58.1-1000 is consistent with the meaning of "cigarette" as defined in § 5702 (b) of the Internal Revenue Code. Based on Va. Code § 58.1-1000, bidis meet the definition of a cigarette for purposes of the Virginia cigarette tax under this chapter.

Moreover, the Taxpayer's argument that bidis is not a cigarette based on the separate definition and listing of bidis in Va. Code §18.2-371.2 is not valid for purposes of the Virginia cigarette tax. Chapter 8 of Title 18 of the Code of Virginia is the administration and enforcement of the Virginia laws on crimes involving morals and decency by a different authority and is not a related statute. For this reason, the definition of "cigarette" in Va. Code § 18.2-371.2 is not applicable in the administration and enforcement of the Virginia cigarette tax under Chapter 10 of Title 58.1 of the Code of Virginia .

Contraband Cigarettes

Virginia Code § 3.2-4206 provides that the AG is required to post a directory of the tobacco product manufactures that have provided current certifications conforming to state law. The removal of a manufacturer or brand family from the website is deemed to provide notice to purchasers that the cigarettes may no longer be sold in the Commonwealth. Virginia Code § 3.2-4207 provides that "[i]t shall be unlawful for any person... (ii) to sell, offer or possess for sale in the Commonwealth, ship or otherwise distribute into or within the Commonwealth, or import for personal consumption into the Commonwealth, cigarettes of a tobacco product manufacturer or brand family not included in the Directory."

Virginia Code § 3.2-4212 B states, "Any cigarettes that have been sold, offered for sale or possessed for sale in the Commonwealth, or imported for personal consumption in the Commonwealth, in violation of § 3.2-4207, shall be deemed contraband and may not be sold or offered for sale unless such cigarettes are listed in the Directory . . . ."

In this instance, the Taxpayer's possession and sale of bidis are deemed contraband cigarettes because the manufacturer or brand family was not listed in the Directory of legal cigarettes for sale in Virginia during the period the Taxpayer sold, offered, or had in its possession for sale such cigarettes.

Penalty

The auditor assessed the penalty on the Taxpayer's possession and sale of 19,440 packs of contraband cigarettes at 500 percent of the retail value of the cigarettes pursuant to Va. Code § 3.2-4212.

Virginia Code § 3.2-4212 A provides, in pertinent part, that "[i]n addition to any other civil or criminal penalty or remedy provided by law, upon a determination that any person has violated § 3.2-4207 or any regulation adopted pursuant thereto, the Commissioner . . . may also impose a civil penalty in an amount not to exceed the greater of (i) 500 percent of the retail value of the cigarettes sold or (ii) $5,000."

As a licensed stamping agent engaged in the business of selling tobacco products in the Commonwealth, the Taxpayer is presumed to be aware of the Virginia tax laws governing the sale of cigarettes and other tobacco products in Virginia.

According to the AG's office, the Taxpayer stamped and sold other bidis from a manufacturer listed in the Directory of legal cigarettes for sale in Virginia. As such, the Taxpayer was aware that the possession or sale of bidis from a manufacturer not listed in the Directory is illegal. Further, after the initial visit by the Department's auditor and the AG's office, records indicate that the Taxpayer continued to sell the contraband cigarettes but changed the name of the cigarettes from bidis to Novelties 501 on its sales invoices. This would further indicate that the Taxpayer was aware that it was selling illegal cigarettes.

CONCLUSION

Based on all of the foregoing, I find that the auditor correctly assessed the Taxpayer penalty at 500% of the retail selling price of the contraband cigarettes. Accordingly, the assessment is correct and there is no basis for adjusting the audit assessment. An updated bill, with interest accrued to date, will be mailed shortly to the Taxpayer. No additional interest will accrue provided the total balance due as shown on the updated bill is paid within 30 days from the date of the bill.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this determination, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Craig M. Burns

Tax Commissioner

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