Common methods of cigarette tax evasion include:
- Sale of unstamped cigarettes or untaxed tobacco products.
- Intentionally importing or smuggling tobacco products from outside the state without payment of the appropriate state and local taxes.
- Sale of cigarettes with counterfeit or missing tax stamps.
- Possessing, owning, storing or selling untaxed cigarettes or tobacco products
Cigarette tax evasion costs taxpayers over a billion per year. One of the reasons for the high incidence of tax evasion is the disparity in cigarette prices. In New York City, the minimal price of cigarettes is slated to rise to $13 per pack. (Many stores already charge that price.) Drive just four hours, however, and the average price per pack in Virginia is just over $5.00.
Because of their size and the relative ease in counterfeiting tax stamps, cigarette tax evasion is on the rise. In this post, we will discuss recent prosecutions and how you can earn whistleblower rewards for inside information about these illegal schemes.
Before we discuss recent enforcement actions, lets first look at why cigarette and tobacco taxes are so important. If you think cheating the state out of tobacco tax revenue is a victimless crime, think again.
Cigarette Tax Revenues and The Hidden Costs of Cigarette Tax Evasion
Cigarette and tobacco taxes generate between $30 and $40 billion each year for the federal and state governments. The federal excise tax on cigarettes is used to help fund the Children’s Health Insurance Program. State tobacco related taxes are often earmarked for breast cancer research (California), Medicaid subsidies and children’s health.
We have all heard the statistics that smoking cigarettes reduces one’s life expectancy by seven or eight years. But what are the costs to society?
The Centers for Disease Control say that smoking costs $170 billion each in increased healthcare costs. States therefore often use tax revenues from cigarette and tobacco sales for healthcare treatment and education programs. By evading cigarette taxes, the states are not getting back their healthcare dollars lost to the tobacco industry.
Tobacco and cigarette tax evasion also hurts legitimate businesses. By collecting taxes, honest business owners often face impossible competition from illegal bootleggers. It’s hard for a business in New York to charge $13 dollars a pack when there is a guy around the corner selling smuggled cigarettes from his van and charging just $10 a pack.
Because the profits from untaxed cigarettes is so high, in some areas of the country, cigarette tax evasion often involves organized crime. With organized crime comes additional problems such as hijackings and violence.
The ATF and other law enforcement agencies already have their hands full with terrorists and drug cartels. They certainly don’t have the resources to investigate the guy who drives to Roanoke, Virginia and brings back cheap Virginia cigarettes simply to sell to neighbors who pay cash.
Cigarette Tax Evasion is a Crime
Uncle Sam and the states don’t like competition! Cheating the state or federal government out of tax revenues is a crime. In fact, in almost every state it is a felony.
Most people are not surprised that it is a felony to drive a truck load of untaxed or undertaxed cigarettes across the border with another state. But even selling cigarettes without a license is a crime in most states as is purchasing cigarettes on an Indian reservation for sale elsewhere.
Do you have to stop and throw out your cigarettes when you drive from Florida to New York on vacation? No! Just like many people stop at state liquor stores in New Hampshire, others buy cheap cigarettes in Missouri, Kentucky or Virginia. Depending on where you live, bringing home a carton of cigarettes for personal use is not going to land you in the slammer. But filling the family SUV with tens of thousands of cigarettes and selling them when you get home certainly is a crime.
Whistleblower Awards for Cigarette and Tobacco Tax Evasion
The federal government offers cash awards to those with inside information about tax evasion. The IRS Whistleblower Program pays awards but those awards are infrequent in tobacco cases.
Why? Most tax evasion schemes involving cigarettes involve bringing cigarettes from one state to another. There is no loss to the IRS when that occurs. Let’s use an example.
If I bring cigarettes that cost $5.06 per pack from Missouri to New York where the price is $12.85 per pack, New York is the victim because of the lost city and state taxes revenues. But the chances are good that the IRS was already paid. Cigarette manufacturers and major importers all collect the federal excise tax of $1.01 per pack upon import or sale to distributors. In our example, the federal government has most likely already received its tax.
There are exceptions. Some sophisticated criminals have successfully figured out ways to import cigarettes into the United States without payment of the tax or divert cigarette shipments destined for overseas. (The IRS doesn’t charge a tax on cigarettes destined for sale outside the United States.)
If the federal government doesn’t pay many whistleblower awards, who does?
The answer is the states. It should come as no surprise that the states with the highest tobacco taxes have the highest rate of cigarette tax evasion. The tax on a pack of smokes in Missouri is just .17¢. In New York City? After adding state, city and sales taxes, the taxes add about $8.00 to a pack of cigarettes.
Several states – and many of the higher cigarette tax states – have whistleblower award programs that pay cash awards for inside information about cigarette tax evasion. These include New York, Illinois and California.
In most of these states, collecting an award means filing a sealed complaint in court. The state then investigates your information and either takes over the case or allows your lawyer to prosecute the case.
That may sound like a hassle but it is not difficult if you have the right lawyer. Lawyers experienced in filing whistleblower claims generally do so on a contingent fee basis. They investigate, they file the lawsuit, they prosecute if necessary and you never pay unless they win and collect money on your behalf.
Whistleblower cases aren’t cost effective in smaller cases where one person is driving across the border to bring back cheap smokes for friends and co-workers. We have seen, however, several organized efforts where the profits from these illegal schemes are in the millions of dollars.
Recent Cigarette Tax Evasion Cases
In November of 2014, the United States Department of Justice indicted two Russian nationals and several people from Kentucky in a massive scheme to illegally import untaxed cigarettes into the United States.
The federal PACT Act (Prevent All Cigarette Trafficking Act) was passed by Congress in 2010. That law says that all importers of tobacco must be registered and that all shipments of tobacco products must be declared to Customs immediately upon entering the country. The law also generally prohibits mailing cigarettes through the U.S. Postal Service.
The feds say that beginning in 2003, John Maddux Jr and Christina Carman operated a business called “Your Kentucky Tobacco Resource.” (Kentucky was once the lowest tax state for cigarettes.) They also operated a business with several other partners called European Supply Resource.
While Maddux, Carman and several others were operating in the U.S., the feds say that several others were involved in Europe and the Mid East. They included Mikhail Serov and Alexander Sergeev who ran a cigarette fulfillment company in Moldova, Israel and Ukraine. Yuriy Pak was accused of running a fulfillment company in Kyrgyzstan. Finally, an American named Jonathan Morgan was accused of operating a supply house in Israel.
Maddux and Carman’s operation was not overly sophisticated but was massive. The feds say the two accepted orders from customers across the United States. To better hide their illegal operation, they used the name of a specialty glass company for credit card sales. By using the glass company name, inspectors and postal authorities would not suspect the shipped parcels contained cigarettes.
Until they were caught, the IRS and ATF claim that the two sold $34,900,000 of untaxed cigarettes to their own customers and caused state and local governments to be defrauded of approximately $22,800,000 in excise tax revenues.
Christina and Maddux were not satisfied in simply cheating the states of their tax revenues. They wanted to squeeze even more profits out of their illegal scheme. Court records show that the two conspired with several of the international actors in the indictment to bring cigarettes into the United States that had no federal excise tax paid.
The international conspirators would often ship the goods directly to customers. Individual parcels coming into the United States are rarely inspected by Customs. Instead, Customs and Border Patrol relies on shippers to properly declare the goods coming into the U.S. The indictment says that the overseas shipments were improperly marked to suggest they contained “glass replacement.”
Once again, the volume of these operations was huge. Just one of these foreign shippers was accused of selling $17,900,000 of untaxed cigarettes to customers. That caused federal, state and local governments to be defrauded of approximately $19,000,000.
Ultimately, the IRS and ATF rounded up all the U.S. suspects and several of the international ones. The last suspect that was caught was sentenced in December of 2016. The sentences received were as follows: John Maddux 10 years; Christina Carmen 60 months; David H. White 24 months; Julie Coscia 36 months; Michael E. Smith 42 months; Alexander Sergeev 46 months; and Mikhail Serov, 46 months. (The other suspects named in the indictment were either released, remain at large or are presumed innocent. We remind everyone that until convicted, suspects are presumed innocent and the allegations in an indictment are just that, allegations.)
In announcing the sentences, Lexington Kentucky’s U.S. Attorney said, “This case represents a milestone in enforcement of the PACT Act. [The co-conspirators] devised a complex criminal enterprise of international proportions which cost public treasuries millions of dollars. Congratulations to the law enforcement agencies and our trial team for their superb work in unwinding this criminal scheme.”
In February of 2017, police in Washington, Missouri busted three people using counterfeit credit cards to purchase thousands of dollars of low priced cigarettes at convenience stores. Cops suspect the three were part of a larger East Coast smuggling ring. That arrest followed an earlier federal bootleg cigarette bust by the feds in St. Louis. That case also involved cigarettes purchased in Missouri and later sold in New York City. (Prosecutors say the St. Louis bust involved more than $20 million in lost tax revenues for New York.)
Bootleg cigarettes have become such a problem in New York City that the Brooklyn D.A. says that half the cigarettes sold in New York have no tax stamps or counterfeit tax stamps. This week the New York Post called New York the cigarette smuggling capital of the nation. The Tax Foundation says the city and state lost an estimated $1.63 billion in tobacco tax revenues in 2015.
Whistleblower Call to Action
Cigarette tax evasion costs Americans billions of dollars in lost tax revenues each year. Whether you are a smoker or disagree with tobacco taxes, cigarette smoking costs our economy billions of dollars annually. The government earmarks a significant portion of cigarette tax revenues to healthcare programs.
Smugglers and bootleggers hurt taxpayers and hurt honest retailers. As seen in the recent Missouri arrests, often smugglers use counterfeit and stolen credit cards to increase their profits and make detection more difficult.
If cigarettes are being illegally diverted from export shipments or are coming into the United States untaxed, IRS whistleblower awards may be available. If cigarettes are being sold with missing, counterfeit or reused tax stamps, whistleblower awards may be available in many states including California, New York and Illinois.
To learn whether you qualify for an award, give us a call. We can handle a cigarette tax evasion case from beginning to end. Because our team includes a former state enforcement agent and tax prosecutor, we know how smugglers operate and how to prosecute these cases.
For more information, contact us online, by email () or by phone (414) 704-6731 (direct). All inquiries are protected by the attorney – client privilege and kept confidential.
MahanyLaw – America’s Cigarette Tax Evasion Whistleblower Lawyers