Tobacco Road

Cigarette smuggling threatens to become a major problem.

Ed Carson from the March 1995 issue

(Page 2 of 3)

The study was commissioned by the National Coalition Against Crime and Tobacco Contraband, which is financially backed by R.J. Reynolds Tobacco Co. The coalition also includes other tobacco companies, wholesalers, distributors, and retailers.

Anti-smoking forces dismiss the coalition as a tobacco-industry front group and say its warnings are scare tactics. John Bloom, who works on tobacco-tax issues for the American Cancer Society, says the Lindquist Avey estimate "is just about as believable as the tobacco industry's claim that nicotine isn't addictive." In fact, he argues that "a major federal tax increase would not cause a significant international smuggling problem and would actually reduce what little interstate smuggling that is going on," by reducing the price differential percentage between states.

Nonetheless, international cigarette smuggling appears to be on the rise in the United States. Perhaps the most visible tip-off is what's going on at the Mexican border. The Department of Agriculture estimates that U.S. tobacco companies exported 148.3 million packs to Mexico in 1994, an increase of 2,424 percent from 1990. As with Canada's exports, it's assumed that the vast majority of these untaxed cigarettes are smuggled back into the United States.

The volume of traffic at border crossings, which has increased since the passage of NAFTA, makes it difficult for U.S. Customs officials to detect smuggled goods--and even then they are looking primarily for illicit drugs, not untaxed cigarettes. Individuals buy untaxed cigarettes at duty-free shops, drive into Mexico, and cross back into the United States. Illegal immigrants commuting to work in Texas sometimes smuggle cigarettes in backpacks, says Kevin Koch, vice president of McLane Company, a cigarette distributor.

But as was the case in Canada, most international cigarette smuggling appears to be controlled by organized crime. Couriers, or "mules," were used by one Los Angeles organization to transport cigarettes from Mexico into California. Until it was raided in July 1994, the ring reportedly was smuggling 7,000 cartons every week.

Organized crime groups have been involved in interstate smuggling for years, but because smokers can easily cross state lines, crime groups account for only a small portion. However, the experience and criminal infrastructure that these groups have developed to evade state taxes is helping them adapt to evading federal cigarette taxes.

The Mafia's smuggling competitors include the increasingly powerful Russian mafia, Mexican rings, and various American Indian organizations.

Cross-border smuggling is especially acute in California. Monte Williams, administrator of the excise tax division of the State Board of Equalization, says smuggling in California "keeps getting worse every month." He estimates that up to 7 percent of the state tobacco market was illegal in 1994 and that the state treasury could lose $50 million as a result.

Many of the for-export-only cigarettes intended for Mexico never make it across the border. Organized crime groups illegally obtain cigarettes from free trade export warehouses along the border, and then forge the paperwork to make it appear that the untaxed cigarettes had been exported.

In the New York City area, for-export cigarettes housed in bonded warehouses or officially loaded onto ships destined
for Europe, Asia, or the Middle East have been found in Brooklyn warehouses, according to Paul Rickard of the New York state tax and finance department. Lindquist Avey's Stamler says that it often is less risky for organized crime to divert untaxed cigarettes into New York City from a New Jersey free-trade zone warehouse or other nearby points of entry than to truck cigarettes all the way from North Carolina.

"[Cigarette] smuggling is more profitable than narcotics and less risky," says Det. Lieut. Robert Manes, who heads Michigan's state police Treasury Enforcement Team. With its high cigarette tax and recent history of smuggling cigarettes to Canada, his state appears ripe for a major increase in contraband sales. Right now, says Manes, his team is primarily "trying to gather intelligence."

But early indications suggest that cigarette smuggling in Michigan is growing substantially. Preliminary state treasury figures indicate that cigarette sales have dropped significantly since the tax increase.

Manes says that some of this drop may be due to retailers who stockpiled cigarettes before the tax went into effect. But interstate tax-dodging also seems to be a factor: Ohio and Indiana both report increases in their cigarette sales, especially near the Michigan border. And in Kentucky, where cigarette taxes are $7.20 a carton less than Michigan's, statewide cigarette sales were up 5.7 percent following Michigan's tax increase.

Bill Zeiler of Zeiler's Farm Market in Temperance, Michigan, says that cigarettes used to account for 20 percent to 33 percent of total sales at the store, which is located just across the border from Toledo, Ohio. Since the tax increase, he says, cigarette sales have fallen almost 85 percent.

Zeiler also says that the store is losing more than just cigarette sales: "People would buy [cigarettes] every day or every couple of days, and they'd usually buy something else. Now they're going to Ohio stores to buy those things."

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