Cigarette smuggling costs country billions in lost tax revenue

From: StarNewsOnline

By Brian Freskos

Ramon Gomez would be rolling in cash if he wasn’t in prison.

His business venture turned a profit of more than $1 million over the course of seven years. The only problem was that his venture was cigarette smuggling, an illegal enterprise estimated to cost the United States billions of dollars annually in lost state and federal tax revenue.

Earlier this month, Gomez was found guilty and sentenced to 2 1/2 years in prison after a federal trial in the Eastern District of North Carolina, a fitting location because it was here that the 42-year-old opportunist was able to exploit the state’s unique laws to amass a mound of illegal profits.

Because it levies a comparatively low tax on tobacco, North Carolina has long been a clearinghouse for an illicit trade that poses a threat to national security and public health, according to several experts and federal government reports.

Cash revenues generated by these networks have financed other types of organized crime and even ended up in the hands of terrorist organizations, including Al Qeada. Moreover, health advocates say the availability of bootlegged tobacco has allowed cigarette use to seep further into segments of society that are most vulnerable, including children and the poor, a phenomenon costing the nation untold sums in added health care costs.

“It’s not a victimless crime,” said Mariam Ozaltin, U.S. government affairs director for SICPA Product Security, a Switzerland-based company that provides counter-smuggling technology to 47 states.

Tax patchwork

Since 1992, federal and state governments have steadily increased excise taxes on tobacco in a bid to reduce smoking and increase revenues. But the lack of uniformity has created a patchwork where no two states have the same rate.

The disparities have allowed smuggling to flourish, with black market profiteers able to buy cigarettes in low-tax states like North Carolina and resell them in high-tax states like New York.

The practice is fueling debate between tobacco companies, who want to eliminate excise taxes, and anti-smoking groups, who want to equalize them across the board by raising rates in low-tax states so that smokers pay the same price everywhere in the country.

A pack of cigarettes that sells for $5 in North Carolina, where the tax rate is 45 cents, can be resold in, say, New York for $10, where the tax rate is the highest in the country at $4.35 and legal packs cost about $13 retail.

Smokers like it because they get their sticks at a discount. Smugglers like it because the rewards are high and the risks low.

“You’re not dealing with cocaine. You’re not dealing with heroin,” Ozaltin said. “A lot of times police departments, because it’s not their jurisdiction, will take a look at these cigarette packs and walk away.”

Big-time smugglers have learned they can easily buy from retailers in bulk, transport the cigarettes at minimum expense and watch the profits pour in. A single van stuffed with 2,940 cartons, or 29,400 packs, netted Gomez an estimated profit of $132,300, according to court documents.

And that is small potatoes compared to other cases documented around the state and country that have made multi-millionaires out of ill-gotten gains. A ring operating out of Charlotte until its leaders were arrested in 2002 made more than $8 million in four years, at least part of which was sent to Hezbollah, a Lebanon-based militant group that the U.S. considers a terrorist organization.

Gomez’s scheme operated from late-2003 to early-2010, according to court documents. His partner, Manny Cruz, pleaded guilty in June and was sentenced to five years probation and nine months house arrest. Cruz was also fined $447,930, a spokeswoman for the U.S. Attorney’s Office in North Carolina’s eastern district said.

The indictment shows that Gomez and Cruz came to Lumberton on multiple occasions carrying stacks of cash to buy cigarettes. They packed a van or rental truck with cartons, some of which had also been stolen, and drove north.

By the time their venture ended, they had skirted $825,930 in taxes and grossed $1,087,590 in profit.

Smoke stamp

When U.S. Attorney Thomas Walker announced the trial results for Gomez in a news release earlier this month, he noted that cigarette smuggling is easier in states such as North Carolina that do not stamp cigarette packaging before packs are sold at retail.

Such “tax stamps” provide proof that all taxes were paid by the wholesaler. Law enforcement can also use the stamp as a tool to detect smuggling and trace packs back to their source.

“Without stamps it’s much easier to move product out of North Carolina and sell it in another jurisdiction and nobody knows where the product came from,” said David Sutton, a spokesman for Altria Group, the parent company of Philip Morris USA, which is among at least two major manufacturers that support stamping in North Carolina.

North and South Carolina and North Dakota are the only three states without stamps on their packs.

North Carolina once required the stamp but administrative costs prompted legislators to repeal it in the mid-1990s, according to the Campaign for Tobacco Free Kids, an advocacy group.

Any campaign to reimpose the stamp requirement has been kept at bay by opposition from tobacco wholesalers, many of whom contend that stamping will produce higher overhead costs that might drive them out of business.

This year, two Republican state lawmakers – Sen. Fletcher Hartsell Jr., from Concord, and Rep. Bill McGee, from Clemmons – introduced bills in their respective chambers to revive stamping in North Carolina.

Though the measures have not made it out of committee, Hartsell said the bills have forged an unlikely alliance between tobacco companies and anti-smoking groups, with the former viewing stamping as a tool to mitigate counterfeiting and the latter to improve public health.

“It’s a very unusual combination when the American Cancer Society and Philip Morris are arguing on the same side at one time,” Hartsell said.

Despite making allies out of enemies, the bill has still failed to attract support from wholesalers concerned about the fiscal impacts.

A March 2010 memo from the N.C. General Assembly’s fiscal research division estimated that stamping would cost wholesalers $48,596 each year, including equipment and personnel costs.

But Andy Ellen, general counsel at N.C. Retail Merchant’s Association, a trade group that opposes stamping, said that estimate seemed low. He said the machinery alone runs as high as $100,000, a significant investment in something that he argued did little to alleviate the problem.

“Because you make somebody put a stamp on a pack of cigarettes is not going to change what those people do,” Ellen said about smugglers. “Even if we have a stamp, they’ll buy cigarettes here and apply counterfeit stamps.”


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