N.C. examining cig stamps again to deter smuggling

For years, buying low-tax North Carolina cigarettes and selling them on the black market in a high-tax state up north has been an easy way to make big money for criminal enterprises.

Load up a van of Camels or Marlboros and reap a $100,000 profit to sell them if the destination is New York City, which has a $1.50-per-pack excise tax in addition to the $2.75 state cigarette tax.

“The cigarette tax evasion stampede is out of control,” said Jim Calvin, president of the New York Association of Convenience Stores. More than half of cigarettes purchased in his state are bought without paying state or local taxes, largely because of out-of-state smuggling and Internet sales.

Catching people with North Carolina contraband is difficult because it’s one of three states that don’t require tax stamps affixed on every pack being sold.

Interest in restoring the stamps after a 16-year hiatus has been revived as a way to deter smuggling from North Carolina – and in an ironic change – into North Carolina. The state now may be the target for cheaper cigarettes from South Carolina, which has a 7-cent-per pack tax and doesn’t use stamps. North Carolina’s 45-cent tax has grown nine fold since 2005, creating a cross-border difference of $3.80 per carton.

“We’ve only been at a tax disadvantage since the tax went up in the past couple of years,” said Gary Harris with the North Carolina Petroleum and Convenience Marketers Association.

Stamps provide evidence the wholesaler has paid the state tax before packs are shipped to retailers. Black-market vendors have a harder time selling stamped packs because they can’t easily hide their origin or must try to replace the stamp with a counterfeit from another state. North Dakota is the only other state without stamps.

In 2002, a federal jury in Charlotte convicted two Lebanese citizens of diverting millions of dollars in cigarette smuggling proceeds to the radical Islamic group Hezbollah by shipping North Carolina cigarettes to Michigan for resale. Another grand jury indicted nine people in November for a smuggling operation that prosecutors alleged reaped at least a $5 million profit.

“Criminal organizations all over the country exploit variants in state excise taxes and tax stamping laws to generate millions and millions of dollars in illicit profits,” said Sandy Sands, a lobbyist representing Philip Morris USA, which wants the stamps restored. “We’re not talking about the people that come down and vacation at the beach and take eight or 10 cartons home with them to Ohio and Pennsylvania.”

Lawmakers studying the issue over the past month in a revenue law committee sound interested in restoring the stamps first used in North Carolina in 1969, when lawmakers approved its first 2-cent tax on cigarettes.

The General Assembly eliminated the stamps in 1994 because the 3 cents per carton tax wholesalers got to keep for administrative expenses was hardly enough to defray the costs of sticking them, said Sands, a state senator at the time of the repeal.

Today, wholesalers receive a 2 percent discount – about 9 cents per carton – to help with filing monthly revenue reports to the state. But they’re concerned that won’t be enough if they’re required to stamp again.

Stamping machines can cost $80,000 each, said Sonny Wooten, president of Southco Distributing Co. in Goldsboro, and additional employees may have to be hired. Large retailers who act as their own wholesalers don’t want their costs raised during a recession.

Wooten said a 4 percent discount may be enough. Otherwise, the extra cost is eventually passed on to consumers, said Andy Ellen with the North Carolina Retail Merchants Association.

Doubling the discount could take away several million dollars away from the state’s coffers, months after the General Assembly raised the cigarette tax by 10 cents a pack.

Add word from legislative researchers that the state actually would lose another $5.4 million in annual tax revenues with stamps at the current 2 percent discount – and spend $1.2 million every year to run the program – and some lawmakers are sure to have second thoughts during tight budget times.

The analysis found the stamp requirement would discourage cigarette smuggling out of North Carolina, estimated at 18 million packs this year.

While lawmakers want more information about the bill before the session reconvenes in May, many suggested curbing smuggling was the priority.

“I’m beginning to look more favorably at the bill,” said Rep. Bill McGee, R-Forsyth, a former R.J. Reynolds Tobacco Co. employee. “It doesn’t raise taxes, it only helps us to collect the taxes that were due us and it would prevent some of this other untoward activity.”

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