Studies indicate states are losing about $5 billion annually in tax revenue because of illegal tobacco sales, Phil Awe, who heads the tobacco-diversion division of the Bureau of [image-nocss] Alcohol, Tobacco, Firearms & Explosives, told the newspaper.
"We do not want to have our tax laws ignored and lose tax revenue from legitimate sales of cigarettes," Maryland State Comptroller Peter Franchot said of the crackdown. He estimates that his state is losing "hundreds of thousands of dollars" annually.
The focus on cigarette smuggling is one of several initiatives gaining momentum as states hunt for new revenue to avoid cutting services or raising taxes. Some are contemplating revising current laws or creating new ones that could force out-of-state online retailers to collect sales taxes.
With cigarette schemes, authorities see more organized crime and international rings supplanting mom-and-pop operations. As a result, many local jurisdictions are joining with federal authorities to target trafficking.
"It's a big business and it's getting horribly bigger," Paul Carey III, enforcement coordinator for the Northern Virginia Cigarette Tax Board, told the paper. He said there is smuggling even among counties with varying tax rates within a single state. The board, which conducts field inspections of retail stores to insure proper payment of taxes, said that in the past five months it has conducted seizures at 157 retailers in its 16 local jurisdictions, more than triple the total from the same time last year.
Carey said tobacco companies are working with authorities nationwide to assist investigators.
John Singleton, spokesperson for Winston-Salem, N.C.-based Reynolds American Inc., told the Journal that his company "works with the appropriate state and federal authorities" in investigating cigarette smuggling. "It's in our interest as a company to ensure our products stay in the legal supply chain."
He added that the company, maker of cigarette brands including Camel, Winston, Kool and Pall Mall, expects smuggling to increase because rising excise taxes are creating more incentive. The excise taxes on cigarettes are levied by states and some localities. Smugglers arbitrage the differences between lower- and higher-tax jurisdictions. New York City smokers take among the steepest hits, with combined state and local taxes of $4.25 a pack. Crimes include smuggling cigarettes bought legally in lower-tax areas and reselling them elsewhere, stealing state tax stamps and manufacturing counterfeit cigarettes, the report said.
In one recent case, an undercover investigation by the New York State Department of Taxation & Finance led to the arrests of 18 residents of Nassau and Queens counties. Investigators from the tax department posed as cigarette bootleggers and sold illegal, untaxed cigarettes to a network of convenience store owners. The operation cost state and local governments $2.1 million in uncollected taxes.
In a second New York case, ATF agents arrested two Queens residents who were trying to provide New York State/New York City tax stamps to an undercover agent in exchange for illegal cigarettes they allegedly planned to resell. In the course of the nine-month investigation, the two defendants bought nearly 32,000 cartons of untaxed cigarettes. The loss of tax revenue for the city and state was at least $1.8 million.
In Fairfax County, Va., Captain Dennis Wilson, commander of the criminal-intelligence division for the Fairfax County police, who are working with the ATF, told the paper, "People have smuggled cigarettes from North Carolina and Virginia up north in the past, but we haven't seen the volume we are seeing today where it's tracked by the trailer load."
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