News: CJ Exclusives

State Tax Endorses Disobedience

DOR has taxed illicit drugs and moonshine since 1990

RALEIGH—One way to reduce North Carolina’s estimated $1.5 billion budget deficit is to generate more revenue, while maintaining current spending levels.

While perusing the state Department of Revenue Web site, a reader can find a little-known revenue-generating item that begs to be exploited. Since 1990, North Carolina has used an excise tax for unauthorized substances. According to the DOR website, a taxable unauthorized substance is “any controlled substance (marijuana, cocaine, etc.), illicit spirituous liquor (“moonshine”), mash and illicit mixed beverages.” In some twisted way, the state, by taxing an outlaw, is endorsing disobedience.

The Controlled Substance Excise Tax (GS, Ch.105, Art. 2D) walks a thin line between unconstitutionality and genius. It took some time for the legislation to become brilliant (before it was simply unconstitutional), but as with spirituous liquor, perfection takes time.

To avoid unconstitutionality, the substance of the law had to circumvent double jeopardy, a feature of the Fifth Amendment. Double jeopardy means that if a defendant was found innocent of one crime, he could be charged with the same crime again. In other words, if the punishment for not paying his unauthorized-substance tax were so punitive as to be considered a criminal offense, then, if he was found innocent of possessing an unauthorized substance (a criminal offense), he could not be prosecuted for tax evasion of your unauthorized substance, or vice versa.

The U.S. Fourth Circuit Court of Appeals case, Nivens v. Gilchrist (2003), decided that North Carolina’s tax was a civil offense, and not criminal. As it stands today, the penalty for not paying the unauthorized substance tax could equal 150 percent of the tax due.

Skeptics who doubt such a law exists can verify for themselves by calling the DOR helpline, 1-877-308-9103.

Now, let’s examine the logistics behind it. Suppose, say, a drug dealer determines it’s his patriotic duty to pay taxes on the proceeds of his civil disobedience. He’s in luck; the law forbids the DOR from reporting him to criminal justice authorities. All he needs to do is go to the DOR office or apply via mail or fax, attention Denise Lanier. Payments are preferred by money order. After paying, the dealer will receive a stamp via certified mail that authorizes his possession of an illegal substance.

Nevertheless, the burden is on the conscientious drug dealer to set up a timetable for compliance. The state generously gives him 48 hours in which to report his illegal substance for taxation. Unfortunately, it takes a full two weeks to mail him the stamps. Even if our patriotic payer had a PDA to organize his imports and exports, compliance would be nearly unfeasible.

How many avail themselves of this service? According to DOR officials, only 77 people have fulfilled their civil unauthorized-substance tax obligation since 1990—and most of them, the DOR told CNN last April, were likely philatelists adding the unique stamp to their collections. In fact, the fewer people comply, the better off the state is. Over the course of 15 years, the state has acquired $78.3 million through the law.

So how can we tweak this law to help the budget?

One way is to encourage more drug dealers to come to North Carolina, make compliance with the law more impossible by hiding the necessary forms within the bowels of the DOR, halve the 48 hours dealers are allowed to apply for and receive their stamps, and then ramp up enforcement. All revenue collected in this manner does not have to be earmarked, as is the current case; it could all be thrown into the General Fund.

Another option would be to raise the tax by 100 percent to 200 percent, then advertise the change and the tax in general, along with the philatelists’ idea that the stamp itself has value. Emboss them. Suggest them as suitable Christmas or birthday gifts for your local dealing buddies. In each case, the state could be rolling up the dough.

Paul Messino is a public-policy intern of the John Locke Foundation.