Posted on 11/27/2001 8:56:44 AM PST by Tumbleweed_Connection
David Cross scans a pack of cigarettes at his dad's store, Cross Smokeshop, in Fife.
For years, Washington state has been waging a losing battle with cigarette smugglers. By the state's admittedly crude estimate, nearly one out of three cigarettes sold is contraband, meaning no tax is collected.
The outlook seems even darker as law-enforcement and state revenue officials peer into the post-Initiative 773 era, which starts Jan. 1.
The measure, overwhelmingly approved by voters earlier this month, will tack an additional 60 cents in taxes onto each pack of cigarettes. State revenue forecasters maintain they took the illicit market into account when they originally projected the initiative would generate $130 million a year, most of it dedicated to improving health care for low-income people.
Projections have since been lowered by about $12 million.
State economists disagree about how higher prices will affect taxed sales. And they have no clue what effect they will have on untaxed sales.
With its new $1.425-per-pack tax, Washington will become the most expensive state in the nation in which to be a taxpaying smoker. The initiative will also increase the retail price of other tobacco products, such as cigars, by about 30 percent.
Mark Smith, a spokesman for the Brown & Williamson tobacco company, predicts: "All hell is going to break loose."
That may prove to be hyperbolic, but there is no question the incentive to cheat will increase.
"If I were a betting man," said Department of Revenue spokesman Mike Gowrylow, "I'd bet that the level of evasion will increase."
Avoiding the tax
And why not, considering the easy, cheap alternatives?
• A trip to neighboring Idaho (28 cents in taxes per pack) or Oregon (68 cents a pack in cigarette tax and no sales tax).
• A trip to one of the numerous Puget Sound-area tribal smokeshops, which do a thriving business selling tax-free cigarettes.
• A trip to the Web, where a growing number of online vendors sell cigarettes and other tobacco products, in some cases promising not to reveal any trace of the transaction to state revenue officials.
As Carter Mitchell, who heads the tobacco-enforcement program for the State Liquor Control Board, puts it: "You can't become the highest-taxed state in the nation and not be in for a helluva ride."
Mitchell stops short of criticizing the initiative's backers — a coalition of anti-tobacco groups and health-care organizations — for not including extra money for law enforcement.
"We're going to see how effective we can be with what we've got," he said, referring to the agency's 14 agents and $1.3 million budget dedicated to tobacco-tax enforcement.
Mitchell's crew has had only modest success since it took over enforcement efforts from the Department of Revenue in 1997. Since then, it has recouped about $1.3 million in lost cigarette-tax revenues. That represents only a fraction of a percent of the hundreds of millions in lost tobacco-tax revenue. Last fiscal year alone, the loss was estimated at $107 million.
What's harder to measure, Mitchell said, is the potential deterrent effect of large seizures.
No smoker's remorse
Feeling completely undeterred, however, are consumers who patronize tribal smokeshops or fire up their PCs to beat the state's high tobacco taxes.
Take the 61-year-old woman outside a Puyallup tribe smokeshop in Milton, Pierce County, who earlier this month purchased a carton of Winstons for $32.95. That price, she said, included the "senior discount" the tribal smokeshop offered her. The same purchase at Fred Meyer would have cost her $48.31, including all taxes.
The woman, who lives in nearby Edgewood, didn't want to give her name, but admitted she was not a Puyallup tribal member and therefore was not entitled to the tax-free discount.
She had no compunctions about doing business with the Puyallups.
"It's like bringing booze home from Reno," she said. "You're not supposed to do that, either."
A few hours after her purchase and 20 miles to the north, Jeff stood outside Rain City Cigar in Seattle's Georgetown neighborhood, puffing on a cigar. Jeff often visits the shop because it's a convenient way to sample various cigars. He buys one or two at a time.
But when he finds a brand he likes, he turns to his computer to order by the box online, thereby cutting his costs by more than half.
"I couldn't afford them if I bought them by the box here," he said, referring to Rain City.
And that's before Initiative 773 takes effect, which will make the difference even more dramatic.
Is Jeff at all conscience-stricken that he's cheating the state? "I have no problem with it," he says.
Every time the Edgewood woman and Jeff cheat, they are committing a gross misdemeanor that is technically punishable by a $5,000 fine and a year in jail, plus civil penalties. In reality, their chances of getting caught are next to zero, because the state seldom hassles smokers.
And when the state tried to crack down on online vendors, it had very limited success. Revenue spokesman Gowrylow said his agency sent letters to 36 online vendors over two years ending last July. In the letter, the state cited a federal law that requires remote cigarette sellers to disclose details about interstate transactions.
Only 12 vendors responded, and of those, only two sent a list of customers. Those efforts netted about $25,000 in tax payments from 467 people, Gowrylow said.
A significant number of online vendors are tied to New York state-based Indian tribes, he said. Such tribes were handed a victory last summer by a New York federal judge, who overturned a state law that sought to prohibit use of the mails to transport cigarettes. The case is on appeal.
Meantime, 8 percent of total tobacco consumption nationwide involves smuggled products, according to FIA International Research, a Toronto-based company that has studied the illegal market. Last year alone, tobacco-tax evasion cost state and federal governments about $1.75 billion, according to the company.
FIA President Mario Possamai said Washington already ranks among the most contraband-prone states because of its high tobacco taxes. Initiative 773 will produce even more incentive for consumers to look for cheaper alternatives and could turn otherwise law-abiding citizens into smugglers, he said.
Mounting problems?
If the experience of other states is any measure, Washington could see hijackings of tobacco-laden trucks and an increase in convenience-store holdups, said Mitchell of the Liquor Control Board.
Cigarettes, he said, represent a "highly convertible commodity that any group can use to generate cash." At the same time, Mitchell said, the punishment is fairly light.
The state's latest large bust, which occurred nearly a year ago near Ellensburg, is illustrative. Agents seized 4,093 cartons of untaxed cigarettes with a wholesale value of $85,000 and $33,767.25 in evaded taxes.
Authorities charged two tribal members, both of whom pleaded guilty to a felony charge of unlawful possession of more than 60,000 unstamped cigarettes. Each got a 30-day jail sentence, all but four days of which were converted to community-service hours, and $1,010 in fines and fees.
The contraband problem in California has grown so severe that the state attorney general recently pledged to push legislation to fight financial fraud and organized crime associated with tobacco-tax evasion.
The problem escalated in 1999, when California increased the tax 50 cents a pack and manufacturers boosted the price another 50 cents. California's contraband problem now accounts for $400 million a year in missing revenue.
States would like to see tougher federal laws to deal with the problem, including a shift in enforcement responsibilities from the FBI to the Bureau of Alcohol, Tobacco and Firearms and a lower threshold for ATF to get involved in felony prosecutions. But Mitchell said he didn't blame the feds for not getting more involved locally; they have other priorities.
"We had a couple of cases we would have liked to have some (federal) action on, and that didn't happen," he said.
How will the liberals exist without the spending. Tax rates will be reduced.
Republican answer = Let's rape and pillage MORE industries than the liberals so we can be MORE compassionate!
The internet is wonderful!
You can thank rob reiner for that in CA.. boycott meathead
Gladly. Tell me more. How can I boycott this reiner jerk. I do not know who he is.
Yes, but the taxed ones are. In this particular case, the only reason why one would prefer the untaxed ones are to save money.
Almost makes me want to take up smoking, just to buy them Injun ciggies.
BTW, I'm paying $11.12 per carton for these horsesh## things I'm smoking these days. Can you do better than that price?
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