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NC Department of Revenue explains taxing of illegal substances
Marijuana Taxation

NC Department of Revenue explains taxing of illegal substances

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HICKORY – The Catawba County Sheriff’s Office seized about 20 marijuana plants from a Hickory home Sept. 4.

The suspect, Kelly Gene Hines, 53, of Hickory, was charged with multiple felony charges including felony trafficking in marijuana, according to a Sept. 4 Hickory Daily Record report.

The North Carolina Department of Revenue taxed Hines more than $66,000 for the marijuana. Many Hickory Daily Record readers expressed confusion on how a suspect could be taxed for an illegal substance.

Hickory Daily Record crime and courts reporter Monica Vendituoli interviewed North Carolina Department of Revenue Director of Public Affairs Trevor Johnson about how illegal substances such as marijuana are taxed in North Carolina.

Hickory Daily Record: What illegal substances do the Department of Revenue tax?

Trevor Johnson: The substances to which North Carolina’s Unauthorized Substances Tax applies are defined in General Statutes of North Carolina §105-113.106. That statute incorporates the controlled substances set forth in the North Carolina Controlled Substances Act, which is found in Article 5 of Chapter 90 of the General Statutes of North Carolina. Further, the Unauthorized Substances Tax also applies to illicit mixed beverages, illicit spirituous liquor, and mash. Certain exemptions to the Unauthorized Substances Tax may be found in General Statutes of North Carolina §105-113.107A. Generally, any scheduled drug or illicit alcohol product for which a person may be charged criminally under North Carolina law if found in unlawful possession will be taxable under North Carolina’s Unauthorized Substances Tax.

HDR: How does the Department of Revenue determine how much to tax people for illegal substances?

TJ: The tax rates for the various substances taxed under North Carolina’s Unauthorized Substances Tax are set forth in General Statutes of North Carolina §105-113.107. The rates vary by type of controlled substance from 40 cents per gram to a maximum of $200 per gram or, in the alternative, from $50 per 10 dosage units to a maximum of $200 per 10 dosage units. Illicit alcohol products have separate rates ranging from $1.28 gallon to a maximum of $31.70 per gallon, depending on the type. Tax penalties, interest, and collection assistance fees may also apply that increase the balance due as provided by Chapter 105 of the General Statutes of North Carolina.

HDR: When did the Department of Revenue start taxing people for illegal substances?

TJ: North Carolina’s Unauthorized Substances Tax first went into effect Jan. 1, 1990. A federal court decision in January of 1998 resulted in a brief period where the tax was not enforced until the enabling legislation could be amended to conform to the court’s decision. The revised tax became effective Oct. 31, 1998, and has been continually in effect since that time.

HDR: Why does the Department of Revenue tax people for illegal substances?

TJ: The department enforces North Carolina’s Unauthorized Substances Tax because it is statutorily obligated to do so as provided in Article 2D of Chapter 105 of the General Statutes of North Carolina.

HDR: Where does the tax money from illegal substances go after the Department of Revenue collects it?

TJ: The use of tax proceeds from the Unauthorized Substances Tax is controlled by General Statutes of North Carolina §105-113.113. The Department distributes 75 percent of the tax proceeds to the state or local law enforcement agency or agencies that conducted the investigation that led to the assessment of the tax. The other 25 percent of the tax is remitted to the North Carolina General Fund. Taxes are to be distinguished from penalty, interest and collection fees that may form part of the total amount assessed. Penalties are remitted to the Civil Penalty and Forfeiture Fund for the benefit of the public schools of North Carolina. Interest is remitted to the North Carolina General Fund. Collection fees are retained by the department to help fund its activities.

HDR: The man in this story did not have $66,000 in cash, so his truck was taken. Can you please explain how the Department of Revenue decides what items are taken in these instances?

TJ: In general, a demand is made to a taxpayer to pay his or her Unauthorized Substances Tax assessment in full. If payment is not immediately made or if other appropriate arrangements for payment in the discretion of the department (such as a payment plan) are not agreed upon, the department may proceed to serve a tax warrant or a tax garnishment pursuant to its authority under General Statutes of North Carolina §105-242 and force collect the assessment. Unauthorized Substance Tax assessments are considered jeopardy assessments due to the nature of the tax and the extreme likelihood that assets may disappear if not immediately seized. If monies cannot be seized or garnished to satisfy the tax, items of personal property may be seized pursuant to service of a tax warrant, to satisfy the assessment. Such property may include vehicles, business assets, and/or household goods. Agents will use their discretion to seize those items that are financially feasible to auction with due consideration for transport costs and ultimate sale value. Alternatively, tax warrants may be issued to a North Carolina sheriff to collect the assessment. The department may also file liens against the real property of a taxpayer and may pursue an execution sale of such real property to satisfy an assessment.

HDR: In addition to illegal substances, are there any other illegal actions or items that the Department of Revenue can tax? If so, what are they?

TJ: Income derived from criminal activity is taxable under the Internal Revenue Code. Accordingly, North Carolina’s income tax would apply to this income since it is includible on a federal return for purposes of determining adjusted gross income.

HDR: How much money did the Department of Revenue get from taxing illegal substances in the last fiscal year?

TJ: $6,586,782.94 was collected for the fiscal year ending June 30, 2015.

HDR: Is there anything else that you feel our readers should know about the taxing of illegal substances?

TJ: Information about this tax is available on the department’s website. Please visit http://www.dornc.com/taxes/usub/.

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