Buyers, sellers not the only winners from smuggling

By Mickey Gorman

Tobacco has always been a cash crop for Virginia. Part of that cash has gone to the state as cigarette taxes. But now more than ever, a large chunk that tax money is from smuggled cigarettes.

About one in five cigarettes legally sold in Virginia in 2012 were smuggled out of the state and resold to undercut cigarette prices in states with higher cigarette taxes. That’s according to a study released by the Tax Foundation, a tax policy think tank based in Washington, D.C.

Based on the estimated number of Virginia cigarettes that are smuggled, nearly $36 million of the state’s $170 million annual cigarette tax revenue could be paid by illegal out-of-state buyers. A Virginia Department of Taxation official could not confirm that estimate.

“The Virginia Department of Taxation is responsible for collecting the proper amount of cigarette and tobacco products taxes,” Joel Davison, communications director for the department, said in an email. “When these products are purchased legally in Virginia, we have no way of knowing the ultimate disposition of the product.”

Virginia’s tax revenuefrom cigarettes is dedicated to Medicaid payments and other state healthcare costs, said Koury Wilson, public affairs specialist with the Virginia Department of Taxation.

A tractor-trailer truck can haul 800 cases of 60 cigarette cartons each. That one shipment can yield profits of more than $4 million to a smuggler, according to estimates from the federal Bureau of Alcohol, Tobacco, Firearms and Explosives.

Meanwhile, legitimate merchants suffer. Chris Ganpat, 32, works at his family-owned gas and service station in Pelham, N.Y., near the northern border of New York City’s Bronx borough. As smuggling has become more prevalent, Ganpat has seen his store’s cigarette sales dwindle.

“I probably don’t sell half as many cigarettes as I used to,” said Ganpat, who charges from $10.50 to $12 per pack. “People come in here and ask the price and say, ‘You know what, forget about it.’”

Manor Auto in Pelham Manor is one of many New York stores where sales have plummeted as former customers turn instead to cigarette smugglers. Photo by Mickey Gorman.

One ring of cigarette smugglers in New York collected an estimated $55 million, and dodged at least $80 million in New York State taxes, according to New York State Attorney General Eric Schneiderman’s office. The smuggling ring purchased tax-stamped cigarettes in Virginia and transported them up the coast. That’s tax money in Virginia’s pocket, but tax revenue that New York is losing.

Ganpat says the problem is so rampant because smuggled cigarettes are not only cheaper, they taste fresher. He said the shorter path from manufacturer to wholesaler to retailer makes a difference in flavor for cigarettes sold in Virginia.

Chris Ganpat has seen the legal sales of cigarettes dwindle as the rate of cigarette smuggling has increased. Photo by Mickey Gorman.

“They taste like they came straight from the field,” Ganpat said.

New York’s cigarette tax nearly tripled, from $1.50 per pack to $4.35, from 2006 to 2012. But the total cigarette tax revenue collected in those years rose by only 64 percent.

And the $1.45 billion the state collected in cigarette tax revenue in 2013 was down 5 percent from the year before.

The decrease in tax revenue is believed to be largely the result of fewer smokers, not necessarily smuggling, said Cary Ziter, a spokesman for the New York State Department of Taxation and Finance.

Connecticut’s cigarette tax revenue appeared to take the biggest dip, dropping 13 percent, or $26.5 million, from 2011 to 2013. Connecticut, like New York, has more than doubled its state cigarette tax since 2006.

In the same seven-year period, the number of smuggled cigarettes smoked in Connecticut more than doubled, from 12 percent of the total to 25 percent.

Rhode Island is the only state other than Connecticut and New York with a cigarette tax of at least $3.40 per pack. But smuggling cigarettes into Rhode Island is on the decline. In 2012, 32 percent of cigarettes smoked in the state were still illegally imported, but that was down from 43 percent in 2006.

Lt. Col. Michael Winquist of the Rhode Island State Police credits the reduction in smuggling to his division’s close relationship with the state’s Division of Taxation in the Department of Revenue.

Michael Winquist, Rhode Island State Police

“They’ll come to us and say, 'We need to do some sort of criminal investigation,'” Winquist said. “[Smuggling] increased to the point where the Division of Taxation gave us a lot of tips and leads.”

Last year Rhode Island collected $132. 4 million in cigarette tax revenue, a 2.3 percent increase from 2012.

Since 2006, Virginia’s 30-cent-per-pack tax rate has stayed the same. But tax revenue has varied. In 2012 it hit $174 million, its highest level in more than six years. But last year it dropped 2.5 percent, to about $170 million

Although cigarette smuggling seldom means a loss of tax revenue for Virginia, the state is trying to help stop the practice.

The problem is that funding major investigations and appropriately staffing the State Police to stop cigarette smuggling is expensive, said Lt. Kevin Hood of the State Police Bureau of Criminal Investigation.

Right now Virginia police rely on routine traffic stops and the infrequent anonymous tip to stop smugglers. There doesn’t seem to be a better way to stop smuggling without a big influx of money, Hood said.

“If I knew it, I’d be doing it.”