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TOBACCO BUSINESS
NOVEMBER/DECEMBER 2013
York, for example, is at an all-time high
for any state we have examined and up
70.2 percent since just 2006.”
“People don’t realize the degree to
which government induces illegal and
dangerous activity with bad policy,”
adds Michael LaFaive, director of the
Mackinac Center’s Morey Fiscal Policy
Initiative. “In this case, individuals
cross borders for personal smokes and
an organized, criminal class brings in
contraband cigarettes by the van full.”
UNINTENDED CONSEQUENCES
The authors have cautioned lawmakers
repeatedly that smuggling is not the only
unintended consequence of imposing
higher cigarette taxes. High rates also
induce violence against people, police
and property, including theft and
truck hijackings, and the production of
adulterated and dangerous product.
“With high taxes on cigarettes, states
are creating a ‘prohibition by price,’ and
with all of the same consequences of real
Prohibition,” says LaFaive.
Exacerbating the problem is that ATF
undercover tobacco investigations have
been slammed for mismanagement. Since
2006, federal undercover investigations
that allowed authorities to use more
than $100 million generated from illegal
tobacco trafficking could not account
for millions of dollars linked to some of
the (about 35) investigations, as recently
reported in
USA Today.
Justice Inspector
Michael Horowitz faulted the ATF for “a
serious lack” of management, finding that
the investigations were never reviewed
as required by the agency’s Undercover
Review Committee prior to their
submission for approval.
ATF Director B. Todd Jones said in a
written response to Horowitz’s findings
that the agency identified the problem
in 2011 and issued a directive calling for
more “stringent controls and restrictions”
on how the funds are used, according to
the daily publication.
Consider recent media headlines that
blasted that topic, as well as the larger
problem of state taxes and cigarette
smuggling:
• “ATF lost track of 2.1 million cartons
of cigarettes in sting operations, report
finds”
• “Study: Nearly 40 percent of cigs in
Washington are contraband”
• “Proposed cigarette tax increase in OR
could light up black market”
• “State revenue agents [Wis.] intercept
70,000 packs of contraband cigarettes”
• “KC [Kansas City] prosecutors accuse
17 people and one business of smuggling
[cigarettes]”
• “Border residents [Mass.] flock to New
Hampshire for cheaper smokes”
• “Maryland’s cigarette tax: The negative
implications”
• “State cigarette tax hikes totally earning
cash—for other states”
• “Up in flames: Cigarette taxes create
opportunity for revenue and crime”
SO NOW WHAT?
So what can be done? The states are
attempting to do their part to keep
cigarette purchases legit and criminal
activity down.
States like Colorado have clear
instruction on their Department of
Revenue website. On its “Consumer
Information” page, the state has a specific
section entitled “Untaxed or Contraband
Cigarette and Tobacco Products,”
whereby consumers are alerted that
anyone who purchases tobacco products
without paying applicable taxes must pay
the Colorado tobacco excise tax within
30 days of receiving the product. Failure
to pay the tobacco products tax within 30
days will result in a 500 percent penalty
plus tax and interest, the state warns.
This summer, New Jersey passed a
bill that increased fines and jail time
for cigarette smuggling, according to
States News Service. The act increased
the penalties for selling and smuggling
counterfeit cigarettes, selling cigarettes
without a license, failing to pay cigarette
taxes, and failing to produce relevant
business records for tobacco sales.
In New York, the district attorneys in
several counties signed an agreement
with Greenwood Motor Lines, doing
business as R&L Carriers, that aims to
curb trafficking in untaxed cigarettes from
Native American reservations to locations
in New York. According to an AP report,
the September agreement stemmed from
an investigation of R&L Carriers.
In Illinois, Cook County officials
confiscated more than 75,000 illegal
cigarette packs, issued more than 3,400
citations, and collected over $1.8 million
in fines in crackdowns on smuggling
and illegal cigarette sales since Toni
Preckwinkle, president of the Cook
County Board of Commissioners, took
office in 2010, according to a September
Seized Overseas
From an international perspective, EU customs authorities revealed this summer
that cigarettes topped their list of counterfeit goods seized last year by a wide
margin. Most of the detained goods were cigarettes (30 percent), followed
distantly by packaging materials (9.84 percent) and clothing (8.51 percent).
Not surprisingly, China was the largest exporter of the counterfeit products,
including cigarettes.
According to the ATF, counterfeit cigarettes can contain higher levels of tar,
nicotine and carbon monoxide than genuine cigarettes. Furthermore, many
contain contaminants such as sand and other packaging materials, including
bits of plastic.
