As states hike tobacco taxes, concern grows over black market and tribal sales

By David B. Caruso
New York, New York (AP) 4-08

Tucked away on just 55 acres in a nondescript Long Island suburb, the Poospatuck Indian Reservation is easy to miss on the long drive up the coast from New York City. But to anyone looking for cheap tobacco, the 60-mile haul is worth the trip.

Cigarettes are sold tax free on tribal lands in New York, and the savings are eye-popping. Once lawmakers approve the state’s latest hike, crafted during April, smokers will be able to avoid $2.75 in taxes per pack by buying on the reservation. The discount jumps to $4.25 if you factor in the municipal tax added in New York City.

That huge price difference is one of the reasons why smoke shops on New York’s Indian reservations sold nearly 304 million packs of cigarettes last year – nearly a third of the state’s recorded total.

The numbers are equally eye-popping when broken down by reservation. The Poospatuck reservation, with a population of about 270, accepted shipment of about 100 million packs of cigarettes last year – enough to supply every smoker in New York City with a pack a day for 31/2 months, according to the state’s finance department.

But Indian reservations are far from the only source of tax-free smokes.

Law enforcement agents say smugglers now routinely use container ships to import counterfeit cigarettes from China. Criminal gangs stock up on cigarettes in low-tax states like Virginia and illegally truck them north. Buyers big and small order an untold number of untaxed cartons on the Internet.

Some experts are concerned that instances of smuggling, bootlegging and questionable reservation sales will only increase when the tax goes up, and they caution that the problem extends far beyond New York.

“This is a global problem. It is a national problem,” said Phillip Awe, a chief tobacco law enforcer for the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives.

Already, from coast to coast, contraband cigarettes are trafficked daily by schemers exploiting differences in tax rates, Awe said, at a cost of “billions and billions of dollars” in lost revenue to the states.

Traditionally, the illicit cigarette business has flourished in cities with organized crime, but lately there have been incentives for the trade to expand elsewhere.

Fourteen states have increased tobacco taxes in the past two years, according to the Tobacco Merchants Association, an industry research group.

Legislation asking for hikes is pending in another 19 states, including a proposed 50-cent increase in South Carolina, where the current 7-cent tax is the nation’s lowest, and New York, which would jump from 16th to 1st by raising its tax from the current $1.50 per pack. The tax increase will bring the cost of a pack of cigarettes to about $9 in New York City.

Higher taxes could mean the potential for even bigger profits for entrepreneurs who buy cigarettes from untaxed sources and illicitly resell them, said Arthur Katz, executive director of the New York State Association of Wholesale Marketers and Distributors, a group that represents tobacco dealers.

“You’d have to be crazy to go and buy cigarettes at the store at almost $9 per pack,” Katz said.

The business is already a big one.

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.

The issue has already prompted some action. The ATF said it is refining its national strategy for combating trafficking in contraband cigarettes and has substantially expanded its investigations, opening up some 700 new cases in the last five years.

In March 2005, major credit-card companies agreed to stop processing payments from Internet retailers. Shippers DHL and UPS Inc. agreed to stop shipping cigarettes to residential addresses.

U.S. Rep. Anthony Weiner, D-N.Y., has proposed a bill that would increase the penalties for smuggling, bar the shipment of cigarettes through the U.S. Postal Service, and make it a federal offense for Internet retailers to ignore state tax laws. A hearing on the bill has been scheduled for April 15.

Weiner also called it a “great mystery” why New York hadn’t also cracked down on bulk purchases of cigarettes at Indian reservations by scofflaws who resell them elsewhere. Cigarettes sold on New York’s reservations now routinely turn up for sale in other states and in Canada.

“You go stand in front of the Shinnecock Reservation on Long Island, in the Hamptons, and you can see people loading boxes and boxes and cases into their trucks,” Weiner said.

For years in New York, state officials fearing tribal protests have hesitated to enforce an existing law requiring reservation smoke shops to collect taxes from non-Indian buyers.

They have been especially reluctant to interfere in western New York, where the Seneca Nation, a major distributor of cigarettes, is an economic force in a region that is struggling financially.

But New York City has gone to court to force the issue; the lawsuit against tobacco wholesalers is pending.

Law enforcement agencies have at times put reservation smoke shops under surveillance to try and catch outsiders illegally loading up on cigarettes, and over the years there have been dozens of arrests.

On the Poospatuck Reservation, federal authorities have also charged the owner of the Peace Pipe Smoke Shop, Rodney Morrison, with engaging in a “reign of terror” to protect his multimillion-dollar cigarette business.

Prosecutors said Morrison orchestrated the 2003 murder of an associate who opened a competing store, robbed another rival of tens of thousands of dollars, and set fire to the car of a third competitor. Morrison’s lawyers say he is innocent. A jury began deliberating in the case last week.

Harry Wallace, the owner of a smoke shop on the reservation and the chief of the Unkechaug Nation, is quick to point out that Morrison is not an American Indian by birth; before marrying into the tribe and moving to the reservation, he lived in Brooklyn, where prosecutors said he was once a cocaine dealer.

“Whatever crimes he’s committed, or not committed, we’re not like he is,” Wallace said. He said the tribe didn’t condone purchases of tobacco on the reservation by anyone who doesn’t intend it for “personal use.”

As for New York’s expected tax hike, Wallace predicted it would bring nothing but pain to Indian cigarette merchants, and he called it “an absolute certainty” that there will be a pressure for the state to begin taxing reservation sales.

“We’re going to be scapegoated again as the sole reason why there is all this illegal activity.”

 

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