The NSW Liberals were against a proposed reform that aims to protect owners of newly established small businesses who accidentally fail to obtain a licence but sell legal tobacco.
First-time offenders face an $11,000 fine with subsequent offences drawing up to $44,000, under an amendment pushed by the Greens to the state Labor government's wider tobacco reforms.
Health Minister Ryan Park made it clear, however, that those who sell illicit tobacco will continue to face the harshest penalties - up to $770,000 for corporations.
Both Victoria and NSW dialled up efforts last week to reduce illegal tobacco activity and force retailers to be licensed, following more than 100 tobacconist arson attacks of which many are linked to organised crime.
"The first-time offence provision is a very reasonable amendment to protect small businesses during this transition," Mr Park said.
"It's aimed at protecting owners of especially newly opened small businesses who want to do the right thing and it doesn't hurt to ensure the laws are proportional."
He accused the coalition of trying to "obstruct real action on illegal tobacco".
"If it were up to the Liberals, the tobacco licensing scheme could have been delayed by months," Mr Park said after the laws passed parliament on Wednesday.
But opposition health spokeswoman Kellie Sloane said Labor had stuffed up and watered down their own bill.
The bill - without the Greens' pro-business amendment for first offences - had been earlier backed by the coalition.
"When we are seeing firebombing after firebombing on tobacconists, Labor shouldn't be getting into bed with the Greens to weaken penalties for selling tobacco without a licence," she told AAP.
Retailers back NSW introducing a paid licence scheme, on the expectation it will make business safer and hobble criminal activity.
Australian Association of Convenience Stores chief executive Theo Foukkare said the amended bill would help bring the illegal tobacco and vaping market under control.
It marked a significant improvement on current fines of $1600 and minimal enforcement, he said.
The current system only requires retailers, not wholesalers, to notify NSW Health that they're selling tobacco or e-cigarettes.
"Now we need to see the enforcement inspections increase, illegal stores shut down, illegal operators prosecuted and people in jail for breaking the law," Mr Foukkare told AAP.
Every jurisdiction bar NSW and Victoria already had a paid licence scheme.
The two major states plan to have their new schemes operational in mid-2025.
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