Smuggling to increase with tax

Officials worry that smuggling of untaxed cigarettes will be on the rise.

NEW YORK (AP) — The big cigarette tax increases that many states are instituting to balance their out-of-whack budgets are raising fears that the trend will make black-market smokes more profitable and lead to more cigarette smuggling.

Cigarette smuggling has been going on for generations and already costs states untold billions in lost tax revenue.

Criminal gangs stock up in low-tax states like Virginia and Missouri, truck the cigarettes north and illegally resell them in high-tax states like Michigan and New Jersey. Other buy cartons and cartons of tax-free smokes on Indian reservations and sell them elsewhere. Buyers order untaxed cartons of murky origin on the Internet. And ships arrive from China carrying cargo containers filled with counterfeit cigarettes.

Law enforcement officials and others worry that the widening price spread between taxed and untaxed cigarettes will only make the situation worse.

Phillip Awe, the chief tobacco law enforcer for the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, said the agency has taken notice. ATF is refining its national strategy for fighting cigarette trafficking, he said, and has substantially expanded its investigations, opening up some 700 new cases in the past five years.

“There are truckloads of cigarettes that are being transported across state lines right now,” he said, “all for the sake of exploiting the difference in the tax rates.”

Fourteen states have raised tobacco taxes in the past two years, according to the Tobacco Merchants Association, an industry group. With the economy in a slide, legislation asking for increases is pending in 19 other states.

New York state is raising its tax $1.25 to $2.75 a pack, the highest in the nation. New York City charges an additional $1.50, which will bring the cost of a typical pack of cigarettes here to $9.

Cigarettes are sold tax-free on tribal lands in New York state, a status that has been exploited for years by crooked entrepreneurs who resell the packs as far away as the Midwest and Canada. Indian reservations in New Mexico, Oklahoma and other states also have had trouble with smuggling.

Places like New York’s Poospatuck Indian Reservation have become major sources of contraband cigarettes. Hidden away in a nondescript suburb on eastern Long Island, it is a 60-mile haul from New York City. But to bootleggers, the trip is worth it.

The reservation sold an eye-popping 10.4 million cartons of cigarettes last year — enough to supply every smoker in New York City with a pack a day for 31‚Ñ2 months. One store grossed an average of $35 million per month, federal agents said.

Rules regarding cigarettes sold on Indian reservations vary from state to state, but in general, buyers may not purchase huge quantities of low-tax or untaxed reservation cigarettes and resell them elsewhere without paying a state tax.

Smugglers have also long turned to counterfeiting cigarette tax stamps to disguise packs on the black market.

Illegal cigarettes can put a big dent in state budgets. California officials estimate that taxes go unpaid on about 15 percent of all tobacco sold in its markets, at a cost of $276 million per year. New York put its losses at more than $576 million in a study released in 2006.

Congress is considering bills that would increase the penalties for smuggling, bar the shipment of cigarettes through the mail, and require all tobacco products to carry a high-tech federal tax stamp.