Center for Public Health and Tobacco Policy Cigarette Tax Evasion in New York January 2011 This work provides educaonal materials and research support for policy iniaves and does not constute and cannot be relied upon as legal advice. January 2011. All rights reserved. Center for Public Health & Tobacco Policy. Funded by a grant from the New York State Department of Health. Authored by: Micah Berman Marlo Miura Thank you to John Waldron for research and early dra ing assistance. Thank you also to Amy Chow for review and eding assistance and to Elizabeth Alfred for eding assistance. The Center for Public Health & Tobacco Policy at New England Law | Boston 154 Stuart St. www.tobaccopolicycenter.org Boston, MA 02116 Contact : Phone: 617-368-1465 Fax: 617-368-1368 [email protected] The Center for Public Health & Tobacco Policy is a resource for the New York tobacco control community. It is funded by the New York State Department of Health and works with the New York State Tobacco Control Program and its contractors to develop and support policy iniaves that will reduce tobacco-related morbidity and mortality in New York. This work provides educaonal materials and research support for policy iniaves and does not constute and cannot be relied upon as legal advice. CigaretteCenter Tax Evasion infor New PublicYork Health and Tobacco PolicyJanuary 2011 CIGARETTE TAX EVASION IN NEW YORK “Evidence-based reviews have concluded that increases in the price of cigarettes through excise taxes or other strategies are an effective policy intervention to prevent smoking initiation among adolescents and young adults, reduce cigarette consumption, and increase the number of smokers who quit. [The World Health Organization] stresses that implementation of effective strategies to limit smuggling and the availability of untaxed tobacco products is essential to maximizing the effectiveness of higher taxes in reducing tobacco use.” — How Tobacco Smoke Causes Disease: A Report of the Surgeon General (2010) 1 Introduction Cigarette tax increases are a “win-win” Just as all previous tax increases have for state governments and for public resulted in higher state revenue, 3 the health advocates because they recent tax increase is projected to result generate revenue for the state and in $290 million a year in increased concurrently decrease smoking rates, revenue for the state. 4 The potential particularly among youth. New York benefits of tax increases, however, are State’s high tobacco tax rate helps reduced by tax evasion. Even before the explain why smoking prevalence in New latest tax increase, surveys showed that York is significantly lower than the “cigarette tax evasion is fairly national average. 2 Beginning July 1, widespread in New York State with 2010, New York started enforcing a nearly half of smokers reporting some $1.60 per pack increase in its state form of tax evasion in the past year, cigarette excise tax, bringing the total especially from [Native American] state excise tax to $4.35 a pack – the reservations.” 5 Since the July tax highest in the nation. increase, news reports have suggested that tax evasion activity may be ● ● ● increasing. For example, a recent cover Table of Contents story in the New York Post reported that “[b]ootleg cigarettes are flooding into Big Part 1 – Reasons Cigarette Tax Evasion Is a Problem .... 2 Apple bodegas from low-tax states in Part 2 – Current Tax Law ............................................... 7 the South, [Native American] reservations and even China – costing Part 3 – Sales by Native American Retailers .................. 9 New York state as much as $20 million Part 4 – Online Tobacco Sales and the PACT Act .......... 18 a month.” 6 Part 5 – Smuggling and Counterfeiting ........................ 22 Part 6 – Recommendations and Conclusions ................ 27 AppendixCenter A: for Useful Public Links Health and Tobacco Policy 1 ● ● ● Cigarette Tax Evasion in New York January 2011 This report details some of the problems Part 1 – Reasons Cigarette Tax caused by tax evasion, as well as some Evasion Is a Problem proposed solutions. In New York, the most significant source of untaxed This first section describes the serious cigarettes is Native American impact that cigarette tax evasion has on reservations. In surveys conducted New York. In short, cigarette tax between mid-2008 and mid-2009, 31.7 evasion: percent of smokers in New York said (1) deprives the state of needed tax that they had purchased cigarettes from revenue; Native American reservations in the past (2) undermines the public health 7 year. Smokers may also purchase benefits of cigarette taxes; untaxed cigarettes from online retailers (3) enables youth access to (often located on Native American cigarettes; reservations) or from retailers and street (4) creates imbalanced and unfair vendors who resell smuggled cigarettes. business competition; and (5) funds organized crime and Part 1 of this report details some of the terrorist groups. reasons why cigarette tax evasion is an important problem to address. Part 2 then summarizes current law related to Tax Evasion Deprives the State of state and federal cigarette tax evasion. Tax Revenue The following three parts examine the most common avenues for cigarette tax Like other states, New York has faced evasion in New York: Part 3 looks at multi-billion-dollar budget shortfalls cigarette sales by Native American since the economic downturn, and there retailers to non-Native American is a strong need for the state to purchasers, Part 4 addresses cigarette generate tax revenue in order to fund sales by online vendors, and Part 5 the services it provides, including reviews cigarette smuggling and health-related services. 8 In New York, counterfeiting. Current law and legal 76 percent of the money collected from issues pertaining to these topics are cigarette excise taxes funds the tobacco analyzed in the relevant sections. control and insurance initiatives pool, Finally, Part 6 concludes the report and from which the state funds major health recommends an aggressive, multi- initiatives as well as tobacco prevention pronged approach to addressing tax efforts. The other 24 percent goes into evasion in New York State. the state’s general fund. 9 It is projected that because of the recent tobacco tax increase, New York State’s revenue from cigarette and other tobacco taxes will amount to $1.63 billion in the current fiscal year, 19.3 percent more than what was collected in fiscal year 2010. 10 However, the amount collected would be much higher if not for tax evasion. Tax evasion deprives the state of needed revenue to pay for tobacco- Center for Public Health and Tobacco Policy 2 Cigarette Tax Evasion in New York January 2011 related healthcare expenses, tobacco equates to less money available for use prevention and cessation programs, state-funded programs that are and general services. dedicated to reducing smoking and tobacco use. State-funded efforts can While estimates differ on the amount of reduce tobacco use and initiation rates revenue lost from state cigarette tax by educating the public about the risks evasion, it is certainly hundreds of and hazards of cigarette and tobacco millions of dollars per year. 11 A report use, by providing assistance to prepared for the Department of Health individuals who attempt to quit their estimates that in fiscal year 2009 New tobacco use, and by changing cultural York lost approximately $500 million norms and perceptions about tobacco because of cigarette tax evasion use. A 2002 article in The Journal of ($467.5 to $612.8 million). 12 Other Law, Medicine and Ethics reported that estimates of annual lost revenue range for every dollar spent on tobacco control from $200 million to more than $1 billion programs, over three dollars are saved per year. 13 in “avoided direct medical costs.” 17 Although the impact of the 2010 tax These types of programs are an integral increase is not yet known, after the June part of government efforts to improve 2008 tax increase there was significant the public health and welfare, but growth in the number of New Yorkers spending by states on tobacco control purchasing cigarettes from internet programs is the lowest it has been since cigarette vendors and Native American 1999. 18 In fiscal year 2010, funding for cigarette retailers. 14 Comparing twelve- New York State’s Tobacco Control month periods before and after the June Program was cut by approximately 30 2008 tax increase, the percentage of percent due to state budget shortfalls. 19 New York adult smokers that purchased The potential state revenue lost to cigarettes from a Native American cigarette tax evasion further depresses reservation jumped from 24.7 to 31.7 the state’s ability to adequately fund percent. 15 Also, during that same period, tobacco control and cessation the number of New York adult smokers programs. who reported purchasing cigarettes through the internet increased from 1.9 Less cigarette tax revenue collected by to 5.0 percent. 16 Unless the state is able the state also results in less funding to begin collecting taxes from online available for healthcare costs incurred sales and sales by Native American from smoking-related illnesses. New retailers, the 2010 tax increase could York spends about $8.17 billion a year lead to even more New Yorkers utilizing on health care costs resulting from untaxed cigarette sources. smoking-related disease, with approximately $5.47 billion coming from Less Money for Tobacco Control and the state Medicaid fund. 20 These figures Smoking-Related Diseases far outweigh the roughly $1.4 billion that the state generates annually in tobacco The loss of tax revenue is harmful to tax revenue. 21 tobacco use prevention and cessation campaigns in New York because it Center for Public Health and Tobacco Policy 3 Cigarette Tax Evasion in New York January 2011 Reduction in Settlement Agreement Tax Evasion Undermines the Public Payments Health Benefits of Cigarette Taxes Under the Master Settlement Agreement “[D]uring the 1 year after the June 2008 (MSA) of 1998 between the major U.S.