State to Levy Tax on Drug Sales

BOSTON--Massachusetts revenue officials, ever on the watch for a new tax source, are planning to expand their efforts at tapping the ill-gotten gains of drug dealers by levying the state sales tax on their illegal transactions.

"There is obviously a lot of money in drug dealing and our charge is to tax income, however that income is earned," Revenue Commissioner Stephen Kidder said yesterday. "And that is what we intend to do."

Massachusetts' multi-state effort to snare delinquent taxes owed the Commonwealth netted a record $526 million in fiscal 1989. Of that, about $600,000 was collected from $2.1 million in income tax assessments on criminal profits.

The unreported income of prostitutes, bookies and drug dealers was targeted by Massachusetts for the first time in 1988. This year, beginning in the fall, the Commonwealth plans to go after the unreported sales of illegal drugs as well.

The Commonwealth plans to levy the state's 5 percent sales tax, plus 18 percent annual interest charges and other penalties on these drug sales as detailed in the dealers' own records seized by law enforcement officials.

"These people do keep very, very good records, albeit oftentimes in code," said Betsy Houghteling, revenue department spokesperson. "We'll get them, we'll go through them and really perform a regular audit on these people and [levy the taxes]...on what the records indicate."

The revenue officials plan to attack the drug dealers matter-of-factly. If a dealer's records show he sold $100,000 worth of drugs, "he should have been charging a 5 percent sales tax. He should have gotten $105,000 from the [sales] and then turned that $5000 over to the state," Houghteling said.

"If he didn't, then we just give him a bill for the $5000, plus any interest and penalties," she said.

"There is no exemption in the [state] statue for illegal income, for illegal goods. It doesn't say anything about if it is illegal you don't have to collect a tax on it."

Internal Revenue Service (IRS) spokesperson Johnell Hunter said it wasn't the IRS's policy to comment on the tax enforcement efforts of the individual states. "That's their business," she said. "But I know that we feel here at the IRS that to get the drug dealers where it really hurts, is to take the money away from them."

The courts have upheld similar efforts in limited cases by Virginia and Michigan to levy sales taxes on criminal activities, Kidder said.

Kidder said the revenue department intends to work with local and state police to go after unreported assets that drug agencies are unable to seize through direct links with drug money.

Whether those assets are immediately found is not imperative. Houghteling said that once the state levies its tax bill, it will have six years to collect. "So if three years from now [a dealer] buys a house on the Cape, that could be held to pay off his tax tab," she said.

The tax collectors aren't expecting to get a lot of voluntary compliance from their crackdown. Nor are they expecting dealers to start charging a 5 percent sales tax to their buyers.

"No, I probably think they would not start doing that," Kidder said. "I think what we would see as a result is just another weapon available to us and to law enforcement officials to use against drug dealers."