Finance

States Crack Down on Cigarette Tax Evaders

More than half the price of a pack of cigarettes is taxes and other fees, which states don't get when smugglers and bootleggers find a way around them.
by | July 2011
 

Over the last decade, states and the District of Columbia have aggressively pushed to increase cigarette taxes -- collectively hiking them 100 separate times. Today, more than half the retail price of a pack of cigarettes is composed of taxes and other fees, and last year, cigarettes generated more than $16.8 billion for state governments, according to the U.S. Census Bureau. That aggressive push has had an unintended consequence: It’s made the cigarette market very attractive to smugglers and bootleggers.

The intent behind cigarette taxes has always been to discourage an unhealthy habit that increases health-care costs while generating revenue in a way that is politically palatable to most voters. But all those cigarette taxes give criminals extra incentives: They make money if they can get away with selling cigarettes sans the state fees. Estimates of just how much cigarette tax evasion costs states are hard to come by, though the Government Accountability Office is expected to take a stab at the number later this year. California has previously pegged the cost of cigarette tax evasion to the state at $182 million annually, plus another $94 million for other tobacco products.

As a result, states are trying to recoup the revenue they’ve lost from cheats, and they’re launching high-profile takedowns of cigarette tax scofflaws. The Michigan Treasury Department is notifying 300 businesses that it will start cracking down on those selling homemade cigarettes without a tax stamp. Pennsylvania recently put more than 2,000 liens on homes and properties of residents who didn’t pay taxes on cartons bought online, and New York City has billed more than 7,000 customers $7.1 million for buying untaxed cigarettes online from retailers with names like eSmokes.com. New York City also sued 32 residents accused of buying nearly half a million cartons of untaxed cigarettes from a Kentucky dealer. “In these challenging economic times, we will continue to use the law to defend the public fisc from tax evaders,” New York City Corporation Counsel Michael A. Cardozo said in a statement.

Evaders skip the tax in a number of ways, including illegally selling cigarettes on American Indian land, marking cigarettes with phony tax stamps and reselling smokes bought in a different state with lower taxes. That last method is especially tempting, given the wide disparity in cigarette taxes among states. For example, a case of cigarettes purchased in Virginia, which has among the lowest cigarette taxes in the nation, can be illegally resold in New York City, which has among the highest taxes, for a profit of $3,300.

Meanwhile, the increasing cost of cigarettes has coincided with the rise of e-commerce, making the Internet a haven for cigarette outlaws. A federal law called the Pact Act, which took effect last year, beefs up laws targeting Internet retailers and is helping states secure data to collect taxes from their customers. Using information dating to 2005, Pennsylvania, for example, has so far collected $23 million of $27.5 million in taxes owed on the purchase of more than 1.7 million cartons. “We can’t just turn our heads and ignore it,” says Elizabeth Brassell, a spokeswoman for the Pennsylvania Department of Revenue. “If we have a credible data source, how do we not pursue that? It’s our job to collect that money.”

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