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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There’s quite a bit the United States can learn from the rampant black market plaguing Jones’ home base of Canada, he says. While Canada’s illegal tobacco centers around illegally produced products, as opposed to the intrastate smuggling in the United States, the central issue—price—is similar. 
 
In Ontario, a carton of legally purchased cigarettes costs $100. On the street, a “baggie” of 200 counterfeit cigarettes runs just $10.
 
“They’re readily available at lunch-money prices,” Jones says of these illegally manufactured cigarettes, which once accounted for more than 30% of Canada’s tobacco market. “For the price of a movie ticket, you can get a carton of cigarettes. It started out very small and quickly grew to about a third of the marketplace because of the price point and because of very sophisticated distribution lines.”
 
It’s this same price disparity that fuels the black market in the United States. The Mackinac Center for Public Policy, Midland, Mich., in January released its latest estimates for cigarette smuggling by state, and the data clearly shows a link between high state excise taxes and illegal tobacco trade. States with top smuggling rates included Arizona (who had a $2-per-pack state excise tax in 2011), New Mexico ($1.66 per pack), Washington ($3.03 per pack) and Rhode Island ($3.46 per pack). Not surprisingly, New York—with its $4.35-per-pack excise tax—had the all-time high rate for the Mackinac Center of nearly 61%, up 70.2% since 2006.
 
“With high taxes on cigarettes, states are creating a ‘prohibition by price’ with all of the same consequences of real prohibition,” said Michael LaFaive, director of the Mackinac Center’s Morey Fiscal Policy Initiative, in a news release.
 
Cliff Brazie, director of retail merchandising for Kwik Fill/Red Apple Food Marts, oversees locations surrounding his company’s headquarters of Warren, Pa., as well as in Ohio and New York. For him, it’s a no-brainer why New York’s black market is so massive: “the $43.50 tax per carton in New York state,” he says. “Pennsylvania’s [tax] is only $16 per carton.”
 
“For criminals, the greater the excise tax, the greater the rewards for avoiding these taxes,” concurs Ralph Brown, vice president of legislative affairs at Cheyenne International, Grover, N.C. “The black market generates most of its revenue when it can sell product in a state with high state and/or local excise taxes. If you look at low-tax states, you will find that there is little to no activity in the black market.”
 

Real Retail Implications

Unfortunately for legitimate retailers operating within the confines of the law, as long as this tax disparity exists, illegal tobacco trade is likely to continue to attract criminals looking to make a quick buck.
 
“The illegal tobacco trade generates enormous profits for organized crime that are then used to finance other criminal activity,” says Jones.  
 
Briant reports that NATO members in highly taxed areas have seen a steep decline in their tobacco sales due to black-market activities. This has led to layoffs and, at times, store closures. “These are retailers that followed the law but were penalized because the actions of lawmakers fueled the black market,” he says.
 
NYACS released an economic report conducted by John Dunham & Associates last December, which found that cigarette tax evasion (from smuggling as well as tribal lands and Internet sales) cost the state of New York at least $1.7 billion a year in tax revenue and 6,700 jobs. Calvin says this smuggling epidemic “deprives law-abiding retailers of legitimate business, and undermines the public health policy goal of deterring smoking through hypertaxation.”
 
The effects on retailers will only worsen if the black-market trend continues. According to the Quebec Convenience Stores Association, at one point one c-store a week was closing as a result of contraband tobacco.

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