The average price of cigarettes in New York City is now $14.50 per pack. Drive just 598 miles to Kentucky and the price of cigarettes drops to $4.96. That means that you can buy 3 packs of cigarettes for each pack purchased in New York. You may not even have to drive 600 miles to find cheap cigarettes, some Indian nations and illegal Internet based retailers are selling them for steep discounts as well.
When I was Maine’s revenue commissioner, cigarettes in Maine were about $2 a pack more in Maine than across the border in New Hampshire. (Now the difference is about 53 cents.) Folks very near the border often crossed the state line for a pack of smokes but a few enterprising sorts would truck van loads from the then low tax southern states. Several times a year people would be arrested for tobacco tax evasion after getting caught selling cigarettes out of the back of their van.
For legitimate retailers – and for states that rely heavily on sin taxes – tobacco tax evasion is a serious problem. It has also become more complex and high tech. Although the traffickers who make cigarettes runs to Kentucky will also be a problem, the new law enforcement concerns are the online retailers and tribes.
In testimony before the U.S. Senate Committee on Finance last week, the National Association of Convenience Stores testified about the widespread nature of tobacco tax evasion. “Many Native American tribes and tribal retailers are abusing their sovereignty to evade state taxes on sales of tobacco. Such tribes and retailers abuse their ability to sell tax-free to their own members and expand those sales to non-members even though the Supreme Court has said states can tax tribal sales to non-members.”
The association says that near some tribal areas, retailers have lost more than 80% of their revenue as non-tribal members purchase untaxed cigarettes. According to the association, New York State alone loses $1.7 billion annually and 6,700 jobs to tobacco tax evasion. Unfortunately, state governments are often powerless to sue sovereign Tribal nations.
The association also claims that Internet sales are hurting revenues. Although Congress attempted to address the problem of mail order cigarettes, the c-stores claim that the law remains unenforced. (I went on line and found Marlboros on sale for $17.90 per carton, slightly more than a single pack in New York City.)
Prosecutions for tobacco tax evasion main quite rare. As states continue to lose revenues, however, we expect to see more. We also expect to see states crack down on loose tobacco wholesalers that label their product as pipe tobacco instead of cigarette tobacco. In most states, there is a sizable difference in tax rates between the two products.
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