New York Tax Evasion Case Shows That State Attempts to Ban ‘Buttlegging’ Aren’t Just Smoke and Mirrors


Cigarette smuggling, or “buttlegging,” has been making the news recently, including a Virginia smuggling ring purchasing cigarettes under false business identities and a Maryland shop owner selling non-taxed cigarettes from Delaware. However, laws banning buttlegging aren’t confined to individual players. A recent federal court decision in New York emphasized the need for heightened diligence by third parties operating in jurisdictions prone to smuggling activity.

Under the May 25 New York v. United Parcel Serv., Inc. decision, UPS must pay almost $247 million in penalties to New York and New York City for its role in trafficking untaxed cigarettes. The penalties were for violating various anti-smuggling laws and agreements:

 

  • Total Penalties to New York State: $165,817,479
    • State Assurance of Discontinuance (AOD) - $80,468,000
    • Federal Prevent All Cigarette Trafficking Act (PACT Act)- $35,258,750
    • State Public Health Law § 1399-ll - $41,410,000
    • Federal Contraband Cigarette Trafficking Act (CCTA) - $8,679,729
    • Nominal CCTA penalties - $1,000
  • Total Penalties to New York City: $81,158,135
    • Federal Prevent All Cigarette Tracking Act (PACT Act) - $43,091,250
    • State Public Health Law § 1399-ll - $37,345,000
    • Federal Contraband Cigarette Trafficking Act (CCTA) - $720,885
    • Nominal CCTA penalties - $1,000 

This follows an earlier decision in the same lawsuit this March (corrected in May), when the court determined that UPS willingly violated the anti-trafficking agreement it signed in 2005, along with the aforementioned laws, by shipping untaxed cigarettes to in-state purchasers from Native American reservations.

New York continues to have the greatest amount of cigarette smuggling into the state; the Tax Foundation has often attributed this to its tax rate ($4.35 at the state level; $5.85 in New York City), which is the highest in the country. States near New York have lower tax rates, enabling smugglers to bring in cigarettes from those cheaper jurisdictions. Virginia, which has the second lowest rate ($0.30 per pack), is a popular source of smuggled cigarettes.

Based on the New York–Virginia example, the same situation can be expected elsewhere in the wake of rising cigarette tax rates.

Earlier this year, California upped its tax rate from $0.87 for a 20-pack to $2.87. As Bloomberg BNA has noted before, the disparity in the tax rates between California and its surrounding states is likely to incentivize smuggling. Louisiana, West Virginia and Pennsylvania are among the states that increased their rates last year, and may also see increased trafficking as a result.

And, as New York v. UPS shows, states likely aren’t satisfied with slapping offenders on the wrist.

For example, under Cal. Rev. & Tax. Code § 30475(b), those who try to get around paying the tobacco taxes and transport at least 40,000 cigarettes that have a value of $5,000 or more can face either a year in jail, a $25,000 maximum fine, or both. And in case that’s not enough of a deterrent, people who are found guilty of violating the state cigarette tax code laws deliberately to evade taxes are charged with felonies if the tax liability is $25,000 or more during a consecutive 12-month period (Cal. Rev. & Tax. Code § 30480). This means a penalty between $5,000 and $20,000, up to a maximum jail time of 3 years, or possibly both. And in the Keystone State, 72 Pa. Stat. § 8273 considers transporters carrying unstamped cigarettes (other than common carriers) and who don’t have invoices and delivery tickets to possess illegal contraband; penalties can go up to $15,000.

The UPS case illustrates “how far some companies must go to police the activities of their customers in an era when online sales have greatly increased the number of packages being shipped,” in the words of Bloomberg News’ Erik Larson. The March opinion listed various factors giving the company notice of illegal activity that led to the court’s decision: multiple inquiries about shipping status of suspect packages, shippers being located at reservation shops that advertised cigarette sales, as well as the company’s training efforts, which the court deemed inadequate.

Going forward, shippers, commercial carriers and other entities that carry items across state lines should make sure that they are in compliance with federal and state laws regarding the transportation of cigarette and tobacco products and be aware of the penalties that may be imposed for violating those laws.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the New York UPS case will help deter future cigarette tax evasion?

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