Extras on Excise: Cigarette Smuggling is a Frustrating Version of Whac-A-Mole for Law Enforcement

Cigarette trafficking – transporting cigarettes from one jurisdiction to another without paying applicable excise taxes—keeps popping up across the country like a non-stop Whac-A-Mole game.  But where is the seemingly endless supply of game tokens coming from?

The Tax Foundation has identified increased excise tax rates in certain states as a probable reason. Another possible influence is federal Native American tax jurisprudence’s effect on state and tribal relations.

Back in February, federal agents in California pulled over a truck headed for tribal-owned company Big Sandy Rancheria’s facilities on its reservation.  The agents seized untaxed cigarettes worth $609,811, citing the federal Contraband Cigarette Trafficking Act as authority. Last month, the company filed a motion, In re 365,380 Ea 640 Boxes of Cigarettes Worth $568,000.00, in the Central District of California to recover the cigarettes.

The government first filed a motion in opposition, but returned the cigarettes last week. The court dismissed Big Sandy Rancheria’s motion as moot on May 22.

Of note is the case law that Big Sandy Rancheria relied on its motion—Moe v. Confederated Salish and Kootenai Tribes of the Flathead Reservation, 425 U.S. 463 (1976).

Moe determined the extent of a state cigarette excise tax’s applicability on a Native American reservation; the tax was not due on Native Americans’ purchases, but the tribal store did have to pay tax on purchases by customers who were not Native Americans. Big Sandy Rancheria cited this law to assert that tax stamps are not required for distribution on in its own reservation.

In recent years, reservation compliance with state excise taxes has been shaky. This has been particularly true for New York, which has the nation’s highest cigarette excise tax rate ($4.35 for a pack). New York Gov. Andrew Cuomo made a settlement in 2013 with the Oneida Nation, in which the tribe agreed to impose its own tax on cigarettes that is the same rate as state and local taxes or higher.

However, both New York State and New York City have identified Native American tribal shops’ participation in cigarette smuggling as a continual problem. The jurisdictions filed a lawsuit in February against UPS for shipping untaxed cigarettes across the state. The complaint cites numerous instances of tribal-owned shops refusing to collect applicable taxes on their tobacco sales to non-Native Americans, and claims that the untaxed cigarettes UPS shipped came from reservation stores.

This lawsuit has come on the heels of a suit that New York State joined last year against FedEx for similar charges.

Whether the states and federal government will finally bring down their mallets hard enough on the moles is yet to be determined.

Continue the discussion Bloomberg BNA’s State Tax Group on LinkedIn: What measures are needed to successfully prevent cigarette trafficking across the states?

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by Laura Lieberman