HLA Agrees to Stop Supplying Unstamped Smokes

Spitzer's deal with distributor, tax agent will help stop illegal web cigarette sales

ALBANY, N.Y. New York Attorney General Eliot Spitzer said that one of the state's largest cigarette tax stamping agents has agreed to stop supplying unstamped cigarettes to companies that illegally resell them over the Internet or by mail order.

This is the latest step in our ongoing effort to shut down illegal cigarette traffickers, Spitzer said. These organizations prosper because they illegally obtain access to unstamped cigarettes. My office intends to do everything it can to reduce the diversion of unstamped cigarettes into the black market.

The agreement announced today with Northeast convenience store distributor Harold Levinson Associates (HLA) is the first of its kind, said Spitzer.

The New York Association of Convenience Stores (NYACS) hailed the development. I applaud [AG] Spitzer and [HLA] for their initiative in moving New York State one step closer to a level playing field for all sellers of tobacco products, said James Calvin, NYACS president. Everybody loses when cigarettes are sold without age verification or tax collection. State and local governments lose hundreds of millions of dollars each year in tax revenues. Brick-and-mortar retailers lose an enormous volume of legitimate trade. And public health loses because it thwarts efforts to prevent youth access to tobaccoand to encourage smokers to quit by making it too expensive.

Tax stamping agents like HLA are licensed by New York State and purchase tax stamps from the state. Tobacco manufacturers sell their cigarettes to the licensed stamping agents, which place tax stamps on the packages and then re-sell them to licensed cigarette wholesalers and retailers.

Certain entitiessuch as the federal government, the United Nations and Indian tribesare permitted to purchase unstamped cigarettes for their own use, but must provide the stamping agent with certification that they are exempt from taxes. Some entities, claiming to be exempt from taxes, have purchased huge quantities of unstamped cigarettes from licensed tax stamping agents, and have then illegally sold those cigarettes over the Internet to purchasers who should have been charged taxes.

HLA sells more than 80 million packs of unstamped cigarettes per year.

This has resulted in immense profits for illegal cigarette traffickers, Spitzer said. The New York State excise tax is $1.50 per pack and New York City imposes its own excise tax of an additional $1.50 per pack. Thus, while a carton of stamped cigarettes might cost $65 in a retail store in New York City, a carton of unstamped cigarettes can be purchased on the Internet for less than $30. This price differentialwhich is caused almost exclusively by illegal tax evasionhas led to the significant growth in Internet sales.

The agreement with HLA is an important step towards stopping these practices by the Internet retailers located in New York, said Spitzer. In particular, the agreement prohibits HLA from selling unstamped cigarettes to anyone who is not exempt from paying taxes, and to anyone known to be engaged in unlawful Internet sales. In addition, HLA will hire an independent compliance officer to ensure compliance with the agreement.

We intend to ask all New York State licensed stamping agents to sign similar agreements, so that this becomes a model for the industry, said Spitzer. If we are successful, it will be a major step towards cutting off the supply of unstamped cigarettes to Internet sellers in New York.

There are approximately 100 licensed stamping agents in New York, of which only about 20 sell unstamped cigarettes.

Illegal cigarette trafficking poses a wide range of problems, including:

Costing the state tens of millions of dollars in tax revenue. Providing traffickers with a major source of funding for other criminal activities. Diverting business from legitimate mom-and-pop retailers. Providing an easy way for children to get access to cigarettes. Increasing smoking rates. Increasing smoking related health care costs borne by taxpayers.

The current announcement is the most recent action in Spitzer's ongoing effort to stop illegal cigarette trafficking. In March 2005, Spitzer and other state AGs announced a landmark agreement under which the major credit card companies agreed to stop processing payments for the illegal Internet sellers. In July 2005, Spitzer announced that DHL had agreed to stop shipping cigarettes directly to consumers nationwide, and a similar agreement was reached with UPS in late October. Spitzer also has called on Congress to pass legislation preventing the U.S. Postal Service from delivering cigarettes to consumers.

In order to survive, Internet cigarette traffickers need a supply of unstamped cigarettes, a mechanism for obtaining online payments, and the means to quickly deliver their product to consumers, said Spitzer. By addressing these three vital areassupply, payment and deliverywe hope to greatly reduce illegal Internet cigarette trafficking nationwide.

Along with cigarettes, Farmingdale, N.Y.-based HLA offers more than 18,000 products, including confectionary, snacks, grocery, general merchandise, beverages, frozen foods, energy and nutrition products, foodservice, coffees, teas and cigars.

Click here to view the Assurance of Compliance document.