Virginians to pay more starting Wednesday

RICHMOND, Va. (AP) – Virginians will start paying more to the state Wednesday – especially those who smoke.

Increases in the state’s sales and cigarette taxes take effect Sept. 1. The sales tax will go from 4.5 cents to 5 cents on the dollar, while the levy on a pack of smokes jumps from 2.5 cents to 20 cents.

Two other, more obscure tax changes also will take effect: A tax on real estate transactions will increase from 15 cents to 25 cents per $100, and a sales tax exemption for tangible personal property purchased by utilities and other public service corporations will be repealed.

The changes were part of a $1.4 billion tax increase package passed by the 2004 General Assembly to balance the state budget.

Tax Commissioner Kenneth Thorson said the Department of Taxation’s biggest challenge has been implementing the tobacco tax increase because it affects both wholesalers, who purchase and affix tax stamps to each pack of cigarettes, and retailers.

One of the goals was to provide merchants enough cigarettes at the lower tax rate to meet demand through August, but not enough to allow them a windfall at state expense after the new rate takes effect.

“On September first, the price will go up 17-and-a-half cents per pack whether they have the old stamp or the new stamp,” Thorson said. “There could be profiteering by retailers at the expense of the commonwealth and consumers.”

To prevent retailers from stockpiling cigarettes at the lower rate, the tax department imposed a tax stamp quota on wholesalers. The quotas were based on monthly sales figures, with some growth to accommodate increased consumer demand. Wholesalers were allowed a 2 percent increase in 2.5-cent stamps in May, 5 percent in June, and 10 percent in July and August.

An appeals process was implemented for wholesalers who claimed significant growth in their business warranted a bigger increase. Thorson said 15 of 150 wholesalers filed appeals. Six were denied, two received the amount of stamps requested and seven got additional stamps but fewer than requested, Thorson said.

Last Wednesday was the last day wholesalers could buy 2.5-cent tax stamps; Friday was the last day they could affix them to cigarette packs.

“Even though we wanted to ensure that the new tax is collected on cigarettes sold after Sept. 1, we know there will be product out there on the shelves that has the old tax rate,” Thorson said. “There’s no way to capture that. But we believe with the system we put into place, most of the product at the old rate will be flushed out.”

Laurie Peterson, president of the Virginia Retail Merchants Association, said the system has “caused some hassle for some retailers and wholesalers” but that there was no perfect solution for making the transition to the higher tax.

The main concern for retailers was having enough supply to meet an unknown demand, she said. Some hoarding by consumers was expected, but there was no way to project how much because this is the first increase in the 44-year history of Virginia’s cigarette tax.

“It’s a learning experience,” said Thorson, adding that officials will put the lessons to use next year when the cigarette tax goes up an additional 10 cents, effective July 1.

Consumers might ultimately also foot the bill for some of the public service corporation sales tax exemption repeal. Legislators gave the corporations authority to recoup the costs from their customers.

The state’s largest utility, Dominion Virginia Power, will take the next year to decide when to recover the additional costs from its ratepayers, spokesman David B. Botkins said.