From: Richmond Times-Dispatch
By: Frank Green
A $4.50 pack of cigarettes in Virginia can go for $13 in New York City, thanks in large part to the difference in excise taxes aimed at discouraging smoking and raising revenue.
Five dozen cartons purchased in Richmond and sold in Brooklyn can net a $5,100 profit — a truckload, more than $4 million. So it’s no wonder organized crime and even terrorists have been attracted to the long-running, illegal trade.
Much of the contraband cigarettes sold in some of the populous, high-tax, Northeastern states are obtained from or pass through Virginia, a top tobacco-producing state with — at 30 cents a pack — the second-lowest tax in the country.
The Virginia State Crime Commission has been studying the scope of the contraband and counterfeit cigarette problem, the loss in revenue to Virginia and other states, the health implications of nonregulated cigarettes, and possible legislative answers.
Earlier this year, the General Assembly passed a law barring anyone without a cigarette-sales license from possessing more than 25 cartons.
The new law allows investigators to make immediate arrests without having to wait for the violator to cross a state line, and it’s aimed at buyers who purchase relatively small amounts of cigarettes at a time for sale in other states.
Kristen Howard, executive director of the commission, said the staff will present the first of two reports on the subject today at the commission’s meeting.
“It really is a world that I knew nothing about. It has been eye-opening,” she said. “All of the different schemes that are available for making massive amounts of money very easily and very quickly on cigarettes — it’s scary.”
The ATF says the price of a legally purchased pack of cigarettes in the U.S. includes $1.08 in federal excise tax; $0.17 to $4.35 a pack in state excise taxes; local taxes; and typically $0.60 per pack to a settlement fund for tobacco-related health care costs.
Virginia’s tax is $3 per 10-pack carton, and the combined local ($15) and state ($43.50) tax in New York City is $58.50 per carton. “So, you’ve got a $55.50 profit window in there that’s capitalized on by organized crime,” said Ken Mosley, an ATF special agent in Richmond.
Under federal law, contraband cigarette trafficking carries a maximum sentence of five years in prison and a fine of $250,000.
Though the financial impact in Virginia, a source state, is not as great as in other states, the illegal trafficking is associated with all sorts of criminal activity.
And because related crimes such as drugs, money laundering and counterfeiting are often involved in the tobacco black market, offenders are sometimes charged with crimes other than Contraband Cigarette Trafficking Act violations, the ATF says.
“Some violent gangs now are selling cigarettes, drug traffickers are selling cigarettes — there are definitely some violent people who are involved,” Cohen said.
“In the past, some terrorist organizations have financed their activities with cigarette trafficking because it’s a relatively easy crime to do and because it’s not a high-profile crime like drug trafficking or firearm trafficking,” he added.
He was one of 14 people charged in an investigation that involved purchasing or trading more than $8 million, drugs and nearly 40 firearms for 388,000 cartons of contraband cigarettes to sell in New York.
Another ATF investigation in Virginia has led to charges against six people who traded millions in cash, cocaine, heroin, jewelry, automobiles and even erectile dysfunction pills for more than 100,000 cartons of untaxed cigarettes sent to New York for resale.
In June, the leader of the group was sentenced in federal court in Richmond to nine years in prison and ordered to make $17 million restitution. Officials would not offer further details because the case is still under investigation.
In another Virginia case this year, two Rhode Island men were arrested on Interstate 95 in Richmond with more than 850 cartons of cigarettes purchased at a local Sam’s Club store for $35,000 but that had a retail value of $80,000 in Rhode Island.
The cartons were concealed behind hidden panels inside a van. The two men and a third defendant now awaiting trial were allegedly selling the Virginia cigarettes with altered Virginia tax stamps at a store in Providence.
In a new twist, Paul J. Carey III, chief of enforcement for the Northern Virginia Cigarette Tax Board, said smugglers have been caught using their own military IDs or improperly obtained ones to purchase tax-free cigarettes on military bases in Virginia.
Manufacturers pay the $1.08 per pack federal tax, but not for cigarettes sent to military PX stores and commissaries.
For example, Carey said that in March a Staten Island, N.Y., man who had been a translator for the military was stopped just after leaving Fort Belvoir in Fairfax County, where he purchased 172 cartons of cigarettes at the PX and loaded them into his car. The man was charged in Fairfax County with possession and transportation of untaxed cigarettes.
The Northern Virginia Cigarette Tax Board was formed in 1970 to enforce 17 Northern Virginia jurisdictions that impose local cigarette taxes in addition to state and federal taxes.
Carey said there have been a couple of cases in the Manassas area where dozens of cartons of fake Newport cigarettes with counterfeit Virginia tax stamps have been seized.
Michael Thorne-Begland is the director of brand integrity and assistant general counsel for Altria Client Services, which supports the brand-protection efforts of Phillip Morris USA. He said counterfeit cigarettes are not as big a problem in Virginia as elsewhere.
That is because traffickers can sell counterfeits for more money in high-tax states than they can here. However, he said, they are a serious problem for Philip Morris and other legitimate manufacturers by harming the brand names.
Consumers may believe they are purchasing Marlboros but are instead buying cigarettes smuggled into the U.S. that may have been made in a cave or pig farm with no regulatory oversight.
Thorne-Begland said Altria strongly backed Virginia’s 25-carton limit and other efforts to curb the illegal trafficking of genuine cigarettes between states for multiple reasons.
“When all the players play by the same rules … we win. We get the full benefit of our investment in the legitimate distribution chain, the full benefit and return on our promotions,” he said.
“Cigarettes cost states vast amounts of lost taxes,” which is an obvious problem, he said. But, he added, it also creates a problem for Philip Morris when states increase taxes on cigarettes to make up for the losses caused by contraband sales.
