Strange but true tax-code tales
By Jenny C. McCune • Bankrate.com

Drug dealers beware. The tax collector is looking for you. He also wants to talk to vintners and visiting athletes.

These are just a few of the out-of-the ordinary tax constituencies that local revenue departments are going after. State tax collectors see specialized taxes as a way to plug growing budget holes. By taxing distinctive categories, even illegal ones, treasury officials find they can make a bit more money without much effort.

Here are a few of the stranger state tax laws.

Taxes on illegal drugs
Several states tax illegal drugs and their related activities.

Alabama, for example, levies an excise tax on possession, distribution, sales, use and other transactions involving certain drugs or controlled substances. Kansas officials require drug dealers to purchase drug tax stamps as soon as the seller takes possession of the illicit substance. A similar stamp purchase is required of North Carolina dealers.

Does this tax requirement mean drug activity is suddenly government sanctioned? No way. Every state that levies drug taxes notes that dealing marijuana and controlled substances is an illegal, albeit taxable, activity. States pass drug tax laws to give them the ability to collect money from the dealers when they are arrested.

Some dealers even seem to fear the tax collector as much as the traditional lawman. One state tax administrator recounts how a young man conscientiously bought a tax stamp for his stash. When he was nabbed for drug dealing, he displayed his tax stamp, noting that he been abiding by at least part of the state's laws.

States actually take their cue from Uncle Sam. The U.S. tax code expressly states that illegal income must be reported. And in some cases, says Sandy Botkin, author of Lower Your Taxes Big Time, the perp can write off what he spent to acquire ill-gotten gains. That means an arsonist or a hit man not only must include his payoffs on his 1040, but technically he can deduct business expenses such as matches, bullets and mileage to drive to his target.

Drug dealers on the federal level, however, are not afforded such a break. While they must report their drug trafficking profits, they can't deduct business expenses. "So you can deduct if you're a murderer, but if you're a trafficker of drugs, you can't," says Botkin.

A home run for state treasuries
In building up coffers, state (and some city) tax departments don't depend just on residents. They levy an extreme commuter tax.

Last summer, the Tax Foundation reported that 20 states apply their income tax laws to the money earned by visiting professional athletes. According to the nonprofit tax research group, the jock tax began with California trying to get back at Michael Jordan for beating the Los Angeles Lakers in 1991. The concept soon spread, and thanks to the burgeoning salaries of professional athletes, has added to state and local treasuries.

Tax Foundation researchers say athletes who pay the most are those who live in states with no state income tax or a low tax rate. The group released its findings to coincide with Major League Baseball's annual all-star game and the case of Texas Rangers shortstop Alex Rodriguez is illustrative. Rodriguez's $252 million contract broke the sport's pay records but did little for the Lone Star state's bottom line since Texas has no income tax. However, when Rodriguez arrived in Milwaukee for the midsummer classic, Wisconsin collected almost $9,000 in taxes from the infielder. The tax was assessed before Rodriguez even set foot in Miller Park.

It's hard to muster much sympathy for high-paid athletes, but it's not just on-the-field personnel paying the tax. David Hoffman, Tax Foundation economist and author of the report, notes that almost everyone who travels with a professional team falls under the state tax laws. Often, so do visiting entertainers performing in jock-tax jurisdictions.

"It's getting out of hand," says Hoffman. "Thousands of people are forced to file income tax returns in more than a dozen states, and many of them aren't athletes or earning a lot of money."

Tax-fairness debates notwithstanding, don't expect this revenue source to disappear from tax codes anytime soon.

The wages of sin
Then there are those taxes that rely on personal peccadilloes. Every state taxes to some extent tobacco and alcohol. These so-called sin taxes bring in big bucks to many a state treasury. Some states have even expanded the levies in these areas.

For elaboration on tobacco fees, head west, young man. California's tax code devotes almost a half a page to snuff, a powdered smokeless tobacco product. While it's a relatively small part of the overall tobacco market, Golden State tax officials want to make the most of it and have set different rates depending on whether the snuff is dry or moist. Dry snuff is more prized and taxed at a higher rate: 256 percent of the wholesale cost of $1.70 or more, whereas moist snuff is taxed at only 131 percent of the wholesale cost of $1.70 or above.

New Mexico also gets specific when it comes to taxing another popular vice, enjoying a glass of wine. The Land of Enchantment has a levy on fortified wines such as port or sherry. "It makes it sound like you're taxed for wine that you've added vitamins and minerals to," says Barbara Weltman, tax attorney and author of J.K. Lasser's Tax Savings in Your Pocket.

And then there was the strange case of exotic dancers in Florida. A Sunshine State attorney who would rather not be named swears that the state used to tax such entertainers. "The law was repealed several years ago," the lawyer says, "probably because of concerns about how this would be audited."