Cigarette Trafficking Grows as Taxes Climb

Published June 1, 2006

As cigarette taxes in many states have climbed, so has the illicit cigarette trade. The Bureau of Alcohol, Tobacco, Firearms, and Explosives made 35 arrests for tobacco trafficking in 2003 and 162 such arrests in 2005, according to Philip Awe, chief of the alcohol and tobacco enforcement branch.

Awe attributes the sharp rise in cigarette trafficking arrests to an increase in illegal activity and improved investigation methods. A major factor in the rise in illegal activity, he said, may be higher cigarette taxes. As taxes climb, the profit potential of smuggling grows.

Awe is from Michigan and recalls that in 1993 or 1994 the state raised its cigarette tax from 25 cents to 75 cents a pack.

Criminal Enterprises Move In

“When that happened we had mom and pop smugglers going to North Carolina, Kentucky–the low-tax states–and bringing cigarettes back to Michigan. They were taking minivans and loading them up,” Awe said. “Michigan and other states have limits on how much people can bring back into the state, and Michigan started enforcing it. They have their own tobacco tax unit within the state police, and they were able to address that part of the problem.

“Then Michigan started [requiring tax stamps] on their cigarettes. That whittled out the mom and pop smuggler, but it brought in criminal enterprises dealing in contraband cigarettes,” Awe said.

Counterfeit Stamps Increasing

Awe said counterfeit tax stamps are “a nationwide problem” because most states require tax stamps to sell cigarettes. “If you are diverting a legitimate product for non-payment of taxes, you now must supply a counterfeit tax stamp to reduce the chances of getting caught,” Awe said.

He could not estimate how much product is sold illegally but said it must total billions of dollars.

“Contraband cigarettes are a worldwide problem. We’re talking billions of dollars,” Awe said. He said contraband cigarettes include counterfeit products as well as legitimately made cigarettes that are smuggled to avoid taxes.

“There are counterfeit cigarettes being made from tobacco fields in foreign countries and packaged as U.S. product or European product,” Awe said. “The counterfeiters ship those cigarettes into the United States through various ports and distribute them to criminal organizations. The really bad thing with counterfeit cigarettes is there are no standards with their manufacture. They could be laced with anything.”

Steve Stanek ([email protected]) is managing editor of Budget & Tax News.