43
TOBACCO OUTLET BUSINESS
NOVEMBER/DECEMBER 2012
i
t’s the tobacco industry’s deepest,
darkest side. And while it isn’t
expected to lighten up any time
soon, some light can be shed on
it.
The U.S. Department of Justice
estimates that federal, state and local
governments in the country lose $5
billion annually because of the illegal
cigarette trade, or black market. This
illegal trade, consisting of counterfeit
and contraband cigarettes, damages
not just the tobacco sector, but also
fuels the nation’s most serious crimes,
with proceeds funding activities like
drug smuggling, human trafficking and
terrorism.
Black cigarette trade ranges in scope
from the “casual smuggler” (which
includes smokers who may cross a state
line to purchase cheaper cigarettes
because of the varying state excise
taxes) to organized crime, with the
latter being popular with criminals who
run in the same illegal circles as those in
money laundering, gun smuggling and
drug trafficking due to one ugly fact:
cigarette smuggling is reportedly more
profitable to criminals than heroin or
cocaine.
By selling non-tax paid cigarettes at
or just below “tax-paid prices,” criminal
organizations reap a substantial profit,
according to the Bureau of Alcohol,
Tobacco, Firearms and Explosives
(
ATF), the federal law enforcement
agency with primary jurisdiction over
the
Contraband Cigarette Trafficking Act
(
CCTA) to stop tobacco diversion.
For example, purchasing legally taxed
products in Virginia (a low excise tax
state) for approximately $4.50 a pack,
and transporting them for resale to
New York City (a high excise tax city
in a high excise tax state), where a pack
sells for approximately $13, creates an
estimated $8.50 per pack profit margin.
In this instance, a single carton (10
packs) yields $85 in profits; a single case
(60
cartons) yields $5,100 in profits and
a single truckload (typically 800 cases)
yields $4.08 million.
The ATF reports that organized
crime groups, including those with
ties to terrorist organizations, have
increasingly engaged in the illegal
trafficking of tobacco products,
particularly counterfeit cigarettes.
Illegally manufactured and imported,
counterfeit cigarettes have been
reported to contain higher levels of tar,
nicotine and carbon monoxide than
genuine cigarettes. Even worse, many
are contaminated with sand and other
packaging materials, such as bits of
plastic, reports the ATF.
Prior to 2003,ATF averaged about 40
new diversion investigations annually.
But from FY 2003 to FY 2011, ATF
initiated a total of 1,164 tobacco
diversion investigations, upping the
new average to about 129 investigations
per year, an increase of 222.5 percent.
Consider some of the latest black-
market-related headlines (from this
August, September and October alone):
•
Tobacco Wholesalers Broke Law
by Selling Untaxed Cigarettes,
Judge Rules (New York)
•
St. Louis Couple Charged in
Massive Contraband Cigarette
Scheme (Louisville, Kentucky)
•
Seneca Nation Businessman
Charged Over Untaxed Cigarette
Deal (New York)
•
Nationwide Illegal Cigarette
Trafficking Conspiracy Started in
Kansas City (Missouri)
•
Federal Agents Detail Tobacco
Wholesaler (New York)
•
Federal Agents Seize Seneca-
Cayuga Tobacco Co. Bank Account
(
Oklahoma)
•
Identity Theft Suspect Linked to
Black Market Cigarettes
(
Minnesota)
Law enforcement’s goal is to protect
the legitimate channel of distribution,
which, of course, includes tobacco outlet
retailers. But in the current scheme of
the tobacco outlet world these days,
black market cigarettes are, for some, a
background issue.
“
It’s not a noticeable issue to us,”
says Randy Silverman, president of
Klafters in New Castle, Pennsylvania.
He recognizes that in towns bordering
states where taxes are significantly
lower, such as, in his chain’s case,
West Virginia, where taxes are more
than a dollar a pack lower than in
Pennsylvania, the business loses volume
to the aforementioned casual smugglers.
“
But it’s been that way for so long, so
we don’t worry about it,” he says.
Terry Schmitz, zone leader for
Tobacco Outlet Plus in LaCross,
Wisconsin, regards the black market
similarly. “I know it’s out there, and
believe it affects our business, but I’m
By renee Covino
ade : black market
Shade of Black
Billion
THE
Continued on page 46