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TOBACCO BUSINESS
NOVEMBER/DECEMBER 2013
this vast criminal industry,” according to
Lesnak, who speaks a truth that those in
the tobacco arena have known for quite
some time, but a majority of so many
others, particularly those in legislative
positions, have not heard.
FOOLISH POLICY
“To ignore the correlation between
current tobacco policy trends—aggressive
tax increases, minimum price regulations,
display bans—and increased crime is to
ignore the obvious,” he validates. “Policy
makers are fooling themselves.They aren’t
fooling those in law enforcement.”
He points out that when politicians
say that increasing cigarette taxes lowers
smoking rates, what they aren’t saying is
that higher costs drive a large portion of
the market to illicit cigarettes. He says
the law of diminishing returns applies to
prohibitive tobacco rules and regulations
in certain high-tax states and cities like
New York City where tobacco taxes and
minimum price laws are fueling crime
rather than curbing smoking.
The Mackinac Center for Public Policy,
a research and educational institute
headquartered in Midland, Michigan,
quantifies that line of thinking. After
completing its third set of estimates
for tobacco smuggling in 47 of the 48
contiguous states, Mackinac found that
New York currently holds the top position
as the highest net importer of smuggled
cigarettes, with smuggled cigarettes
totaling a “staggering 60.9 percent of the
total market.” In this January 2013 report
(based on data through 2011), it wrote
that not coincidentally, New York also has
the nation’s highest state cigarette tax at
$4.35 per pack, plus another $1.50 levied
in New York City.
“Cigarette smuggling is far from new,
but the degree to which illegal smokes
are crossing from lower tax jurisdictions
to higher ones is [new],” explains
Todd Nesbitt, adjunct scholar with the
Mackinac Center and co-author of the
Center’s analyses. “Our estimate for New
Painting the
Black Market Picture
The Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) is
the federal law enforcement agency with primary jurisdiction over
the
Contraband Cigarette Traff icking Act
(CCTA) to stop tobacco
diversion. Congress enacted the CCTA in 1978 and amended it
in 2006 with the re-authorization of the
Patriot Act
. The CCTA
specifically addresses the interstate transportation, possession and
sale of non-state-tax-paid cigarettes and smokeless tobacco.
According to the ATF, some of the laws/charges in tobacco
enforcement investigations include:
• The CCTA makes it illegal to possess more than 10,000
unstamped cigarettes in a state that requires a tax stamp.
• Any person who distributes more than 10,000 cigarettes must
keep accurate records pertaining to the shipment, receipt, sale and
distribution of the cigarettes.
• The
Prevent All Cigarettes Traff icking Act
(aka PACT Act—the
amended
Jenkins Act
) makes it illegal to ship cigarettes to a non-
licensee in a state without notifying the state taxation authority.
• The Internal Revenue Code imposes a $1.08 per pack federal
tax and requires a permit for manufacturers and importers. The
ATF coordinates with the U.S. Department of Treasury’s Alcohol
and Tobacco Tax and Trade Bureau to enforce the law.
• There are two types of tobacco traffickers who move black
market tobacco products:
> The “casual” smuggler, which includes smokers who cross a
state line to purchase cheaper cigarettes because of the varying
state excise taxes.
> The “commercial” smuggler, which includes structured or
organized criminal groups, including terrorists.
The potential financial gain of tobacco smuggling is immediately
apparent when considering states with varying cigarette excise taxes.
For example, purchasing legally taxed products in Virginia (a low
excise tax state) for approximately $4.50 a pack and reselling them in
New York City (a high excise tax city in a high excise tax state) for
approximately $13 creates an estimated $8.50 per pack profit margin.
In the above situation, a single carton (10 packs) yields $85 in
profits, a single case (60 cartons) yields $5,100, and a single truckload
(typically 80 cases) yields $4.08 million.
Prior to 2003, the ATF averaged about 40 new diversion
investigations annually. From FY 2003 to FY 2012, the ATF
initiated 1,219 tobacco diversion investigations, an average of 135
investigations per year.
Source: The Bureau of Alcohol, Tobacco, Firearms
and Explosives (ATF) Fact Sheet, February 2013
