Report Links Tax-Free Cigs To International Terrorism

Suffolk Life
June 11, 2008

By: Robert Wargas

Illegal cigarette sales in which vendors don't levy the proper taxes on their products have led to a surge in tobacco smuggling and a consistent cash flow for global terrorist groups, according to a recently released congressional report.

The Committee on Homeland Security report states that "recent law enforcement investigations ... have directly linked those involved in illicit tobacco trade to infamous terrorist organizations such as Hezbollah, Hamas and al Qaeda."

The illegal trade hinges on evasion of tobacco excise and sales taxes, the report says, with "the smuggling networks [relying] primarily on access to the Native American Indian reservations for tax-free cigarettes - for obvious financial reasons."

Federal law exempts Native Americans from the usual taxes levied on the sale and purchase of cigarettes and other tobacco products. New York State, however, is allowed to collect taxes on tobacco sales between non-Indians and Indians selling the product on their reservation. A "non-Indian" is considered anyone who doesn't live on a particular reservation.

The problem, according to the report, stems from the failure to collect the taxes from such cigarette sales, resulting in smugglers being attracted to the low cost of a carton of cigarettes on the Indian reservations.

As a result, smugglers are able to buy cartons at low cost from Indian vendors. The smugglers then affix phony tax stamps to the cartons, the report said. This enables them to re-sell the cartons at a much higher cost, at times turning as much as a $14-per-carton profit.

New York State law enforcement officials estimate that a well-organized cigarette smuggling network could generate between $200,000 and $300,000 per week. The congressional report said a large percentage of that money is sent back to the Middle East, "where it directly or indirectly finances groups such as Hezbollah, Hamas and al Qaeda."

The profits generated from smuggling just 1,500 cartons of cigarettes are enough to fund as many as 10 bombing operations, the report stated - and just two months' worth of cigarette smuggling could allow a terrorist cell to generate enough funds to carry out another 9/11-style attack.

US Congressman Peter King (R-Massapequa Park), a ranking member of the committee that issued the report, said he has been in touch with NYS Governor David Paterson, state Attorney General Andrew Cuomo and New York City Mayor Mike Bloomberg about strictly enforcing the cigarette tax laws. A spokesman for Paterson failed to return repeated phone calls for comment as of press time.

"It's blatant disrespect for the law," said King. "New York State isn't enforcing its own law."

The effects extend beyond national security and into the economic realm. For Suffolk County, sales tax revenues make up a significant portion of the county budget, though exact figures were unavailable as of press time. County Executive Steve Levy, a former state assemblyman, said Suffolk and all other counties are crippled by New York's failure to collect the cigarette taxes on Indian reservations

"When I was up in Albany, this issue always came up, but somehow it always got swept under the carpet," said Levy. "We're losing tons of money."

Illegally sold cigarettes account for 10.7% of the more than 5.7 trillion cigarettes sold globally each year, according to the World Health Organization.

The Bureau of Indian Affairs of the US Department of the Interior recognizes 561 Indian tribal governments in the United States. The agency reports that 55.7 million acres of land are reserved for Indians across the country.

On Long Island, there are two Native American reservations - the Shinnecock Indian Nation and the Poosepatuck. A spokesperson for the Shinnecock Nation said she had no information regarding vendors' policies on taxing cigarettes on the reservation. However, a source on the Poosepatuck reservation said vendors there sell tax-free cigarettes to non-Indians "all the time."

On the state level, officials in New York have blasted current policy. Assemblyman David Townsend (R-Sylvan Beach), an Upstate legislator, considered legal action against former Governor Eliot Spitzer earlier this year, claiming the government was too lax in tax collection and that retailers were losing business to Indian reservations, according to Townsend's office. Other officials also have decried the effect of an unenforced tax policy on both the economy and national security.

"Why is our state government not concerned about this?" asked Arthur Katz, executive director of the New York State Association of Wholesale Marketers and Distributors. "Think about all we could do with that lost money."

New York State sells 61 million cartons of cigarettes a year, according to Katz. That amounts to 610 million packs and 12.2 billion individual cigarettes.

A 1994 US Supreme Court decision affirmed that New York State must collect the sales taxes on tobacco transactions between Indians and non-Indians on reservations, according to a summary of the case from Cornell University Law School.

But a 2006 advisory report from the state Department of Taxation and Finance explicitly states that "the Department has no intention to alter its long-standing policy" of not collecting taxes on such sales.

Tom Bergin, a spokesman for the agency, said cigarettes in New York State are taxed several times. Excise taxes, which are levied on the product itself before sale, recently rose from $1.50 to $2.75 per pack. There is also a state sales tax, which is levied at 4% of the sale price. Other taxes include a federal excise tax - $0.39 per pack - and certain local taxes. In New York City, for instance, an extra $1.50 is levied on every pack.

The loss of such tax revenue in New York State - the highest tobacco taxer in the country, according to several sources - is estimated differently by different people. Bergin said New York loses about $125 million annually from untaxed cigarette sales, but both King and Katz set the figure at upwards of $1 billion a year.