In our Oct. 23, 2014 Multistate Tax Update, we wrote about Minnesota’s plans to increase its cigarette tax in 2015, and the potential rise in cigarette smuggling. Minnesota is not the only state struggling to combat the ill effects of this black market. Earlier this year, Bloomberg.com reported that between $7 billion and $10 billion in state and federal tax revenue is lost each year because of smuggling, up from $5 billion a few years ago, as measured by the U.S. Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF). The ATF cites the smuggling of cigarettes between states to take advantage of tax differentials as the most pervasive type of tobacco-related tax avoidance schemes.
The Tobacco Road
The East Coast is another area of concern. In fact, there is so much smuggling there that the interstate highway that runs from Maine to Florida acquired a new nickname last spring: Tobacco Road. However, this year, states along the Tobacco Road have begun to see their efforts to mitigate their losses pay off.
According to the Tax Foundation’s article "Cigarette Taxes and Cigarette Smuggling by State," New York has the highest state cigarette tax at $4.35 per pack, not counting the local New York City cigarette tax, which is an additional $1.50 per pack. Unsurprisingly, it is the highest net importer of smuggled cigarettes, totaling 56.9 percent of the total cigarette market in the state.
Consequently, Gov. Cuomo declared the creation of the Cigarette Strike Force at the end of March 2014. The initiative is coordinated and managed under the leadership of the Tax Department’s Criminal Investigations Division. According to Gov. Cuomo, the “law enforcement strategy will help to crack down on these illegal cigarette sales and capture those smugglers who seek to evade the law and rob the state of the revenue it is rightly owed, thereby putting an additional burden on law-abiding taxpayers.”
Members of the Cigarette Strike Force include the following agencies:
- New York State Department of Taxation and Finance
- United States Bureau of Alcohol, Tobacco, Firearms, and Explosives
- United States Custom and Border Protection
- United States Department of Homeland Security
- United States Food and Drug Administration
- New York County District Attorney’s Office
- Richmond County District Attorney’s Office
- Rockland County District Attorney’s Office
- Cattaraugus County Sheriff’s Department
- Erie County Sheriff’s Department
- New York City Sheriff’s Office
- Niagara County Sheriff’s Office
- Suffolk County Police Department
In mid-July, Gov. Cuomo announced that in its first six months, the Cigarette Strike Force had already seized nearly $1.7 million in cash and contraband, including 2.7 million cigarettes and cigars.
In October, the New York State Department of Taxation and Finance publicized the arrest of four traffickers, two in the Bronx and two in Buffalo. Investigators seized more than $500,000, including more than 1,500 contraband cartons of cigarettes.
The Bloomberg.com report highlights Maryland as another state that is focusing on curtailing cigarette smuggling. “We are all-hands-on-deck as far as cigarette smuggling because it’s no longer a mom-and-pop operation,” said Maryland Comptroller Peter Franchot. At the end of September, the Comptroller’s Office revealed that in fiscal year 2015 to date (which began on July 1, 2014), agents had arrested seven people for transporting contraband cigarettes in the state. The agents seized 22,798 packs of contraband cigarettes, valued at $147,047 and representing a tax loss to the state of $45,596.
Similarly, Rhode Island’s Governor Lincoln Chafee signed HB 7762 into law in June 2014. TheNewTobaccoRoad.com cheered, blogging that “the governor signed into law stiffer penalties, making many former misdemeanor offenses felonies and increasing the criminal penalties by as much as ten times what they were a year ago.”
TheNewTobaccoRoad.com also applauded New Jersey’s efforts, recognizing its Guide to the Enforcement of the New Jersey Cigarette Tax Act, as well as the Tax Enforcement Unit’s work to stop the flow of over half a billion dollars of tax revenues needed to fund schools, roads, and other civic projects.