Law enforcement officials in at least three states have been strictly enforcing laws on cigarette trafficking and tobacco tax evasion, prompting the arrests of several suspected cigarette traffickers and seizure of contraband cigarettes and other materials.
Cigarette smuggling has been on the rise in recent years, partly because of an increase in cigarette and tobacco tax rates. State and local tobacco taxes raise over $17 billion in revenue each year, according to revenue data compiled by the Tax Policy Center. However, the Bureau of Alcohol, Tobacco, Firearms and Explosives estimates that between $7 and $10 billion in federal and state tax revenue is lost each year because of smuggling.
The increase in smuggling is particularly prevalent between low tax jurisdictions such as Virginia, and high tax jurisdictions, such as New York. For example, smugglers can purchase cigarettes in a low tax state, such as Virginia ($0.30 per 20-pack) or North Carolina ($0.45 per 20-pack), and take them into higher tax jurisdictions, such as Massachusetts ($3.51 per pack) or New York ($4.35 per pack, the highest in the nation), and sell them at a premium on the black market. If they sell the cigarettes in New York City, the price difference would be even bigger because the city imposes a $1.50 local excise tax, for a total tax of $5.85.
To crack down on cigarette smuggling, states have been enacting legislation that increase penalties for violators and have been creating special task forces whose mission is to crack down on smuggling to prevent lost revenues.
In March 2014, Gov. Andrew Cuomo (D) created a Cigarette Strike Force composed of officials from several law enforcement agencies to increase enforcement efforts within New York. During its first six months, the strike force seized $1.7 million in contraband cigarettes, cigars, loose tobacco and cash, according to a July 2014 press release from the governor's office. And in October, strike force investigators seized over 1,500 cartons of contraband cigarettes that carried either Virginia tax stamps or counterfeit New York or New York City tax stamps during the arrests of four individuals, according to a press release from the New York Department of Taxation and Finance. The value of the contraband cigarettes and tax stamps was almost $500,000.
Maryland has also been increasing its enforcement efforts. So far in fiscal year 2015, while arresting individuals for transporting contraband cigarettes, members of the Maryland Comptroller’s Office Field Enforcement Division have seized almost 23,000 packs of contraband cigarettes that represent a tax loss of $45,596, according to a news release from the Comptroller's office.
And the federal government has not been left out of the action. A Connecticut man is facing federal charges for trafficking contraband smokeless tobacco products, along with charges of wire fraud and money laundering, according to a press release from the U.S. Attorney's Office for the District of Massachusetts. The indictment alleges that the man involved filed false excise tax returns in Massachusetts and Connecticut for several years, and court documents reveal that the estimated loss attributed to the defendant is at least $43 million for the years 2008-2012.
In a press release about the arrest, U.S. Attorney Carmen Ortiz said that the “indictment exposes a form of tax evasion that deprives states . . . of badly needed revenue . . . . When tobacco tax laws are evaded, . . . honest tobacco distributors suffer, as does the honest taxpayer.”
But even though cigarette smuggling has been on the rise, some state and local jurisdictions are still looking to raise additional revenue by increasing tax rates.
In September, Pennsylvania Gov. Tom Corbett (R) signed H.B. 1177, which allows Philadelphia's school district to raise cigarette taxes by $2. Pennsylvania's state tax rate is $1.60. The new tax is expected to generate between $55 and $90 million in additional revenue to fill a funding gap in Philadelphia.
The incentive to smuggle cigarettes could more than double in Pennsylvania if tax rates increase, according to the Tax Foundation. As a result, Pennsylvania could actually lose sales to out-of-state purchases, resulting in lower revenues. The same phenomenon could occur in other states if tobacco tax rates continue to increase and smuggling could continue to be a problem for higher tax jurisdictions.
Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Should states continue to raise cigarette tax rates even though high rates encourage smuggling?
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