The Black-Market Boom

Illicit tobacco trade hits close to home for retailers across the globe.

By  Melissa Vonder Haar, Tobacco Editor

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When you mention “the black market,” it evokes imagery of back-alley deals among criminals, not the less fearsome picture of mom-and-pop grocers conducting transactions with their regular customers.
 
Yet it was the latter who recently came up in headlines about the black market. Independent operators sold much of the estimated 20,000 cartons of illegal cigarettes a week brought into New York City as part of a $55 million dollar smuggling ring taken down by the New York Attorney General and the New York City Police Department last May. 
 
These cigarettes were not counterfeits made by illegal manufacturers. They were legitimate products smuggled into New York—which boasts the highest cigarette excise tax in the country—from lesser-taxed states such as Virginia.
 
It was a big bust for the NYPD and attorney general, but it was only one interception in a game of many passes and illicit completions. A widening gap in state excise taxes is spurring a dramatic increase in similar black-market trade across the country. With much money to be made “importing” untaxed cigarettes into high-taxed states, many believe this single smuggling ring—which cost New York approximately $80 million in lost sales revenue—represents only a minute sample of the illegal activity going on.
 
“We applaud the enforcement agencies for interdicting this smuggling ring,” says New York Association of Convenience Stores (NYACS) president Jim Calvin. “Unfortunately, it’s only the tip of the iceberg.”
 
Lyle Beckwith, senior vice president of government relations for NACS, agreed that the high-profile bust was merely “scratching the surface. A few high-profile drug smuggling busts doesn’t stop the flow of marijuana and cocaine into the U.S.” 
 

Prohibition by Price

Black-market tobacco encapsulates a wide variety of trade and products: Besides state-to-state smuggling, it can include counterfeit products, legitimate or altered products smuggled in from other countries and products sold by unlicensed retailers. Beckwith defines illicit tobacco as “any tobacco sold outside legitimate channels that collect and remit taxes and verify age.”
 
With so many options for criminals, it’s understandably a huge market. A 2009 Federal Bureau of Alcohol, Tobacco, Firearms and Explosives report estimated tobacco product smuggling and black market activity cost state and federal governments more than $5 billion a year in lost revenue from unpaid tobacco excise taxes. It’s a figure that likely is growing. 
 
“With certain states and cities raising cigarette and tobacco tax rates further in the past four years, the loss of tax revenue is even higher given the expansion of the black market,” says Tom Briant, executive director of the National Association of Tobacco Outlets (NATO), Minneapolis.
 
Internationally, it’s an even bigger issue. Just ask Bryan Jones, vice president of corporate affairs in the Americas region for JTI. Jones says almost 40% of Ireland’s tobacco sales come through the black market; that figure “drops” to 30% in areas such as the U.K. and Brazil.
 
“Globally, it’s a massive problem,” he says. “It’s estimated that about 10% of all cigarettes are counterfeit, contraband or duty-not-paid.”

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