New cigarette tax driving more smokers to black market



Bio | Email | Follow: @cjingalls

Posted on October 20, 2010 at 10:00 PM

Updated Thursday, Oct 21 at 4:42 PM

Editor's Note: After this story originally aired, the WA Dept. of Revenue pointed out an error in our tax calculations.  While the number of cigarette stamps sold in WA has dropped because of the new tax -- we incorrectly reported that fewer tax dollars are being collected.  The online stories include the corrected information.

SEATTLE --  Tax hikes are never popular. However, Washington state is relying on a boost in the cigarette tax to help it out of its budget crisis.

A KING 5 Investigation reveals how lawbreakers are undermining that effort, committing their crime on your dime.

The state’s cigarette tax rose by $1 in May, leaving a taste for many smokers that’s as bitter as the cheapest pack of smokes.

With state taxes now totaling more than $3 per pack, would smokers cheat the tax man if they could?

“Yeah, if I knew of a place I’d be there,” said John King after he spent $80 on a carton of cigs at Tobacco Lane in Shoreline.

“I'm just trying to get my cigarettes for as cheap as I can," said Dallas Provencal, another customer.

That's what's fueling a growing black market, documented in surveillance video recorded by the KING 5 Investigators.

Our cameras rolled as people moved cartons of contraband cigarettes in Seattle’s International District. In one scene, two women can be seen lifting a large garbage bag into a car trunk. They accidentally allowed a box of bootleg cigarettes to fall out of the bag where it could be clearly seen on camera.
The KING 5 Investigators also recorded them selling illegal cigarettes for cash to a steady stream of customers.

Black market cigarettes are for sale in other places, too.  Provencal bought some from a man selling them out of a backpack.

"I actually bought them at a Seahawks game,” he said. “I saw them there selling them for $5 a pack. I thought, ‘Hey, $5 a pack. You can't beat that.’"

With our hidden camera, we followed a man who bought a carton of cigarettes from a woman selling at 12th Avenue South and South Jackson Street in Seattle.  The man paid $50 cash for a carton of Marlboros. That’s $30 less than store prices. The packaging reveals that the cigarettes are from Vietnam. They're actual Marlboros that sell for much lower prices overseas.

Owners of legitimate tobacco stores can't compete with the black market.

"It's growing. Nobody pay sthe taxes,” said Tobacco Lane owner Imran Janoo, whose Shoreline store is already suffering in the bad economy and from a massive street construction project outside his front door.

The illegal trade hurts taxpayers in Washington, too. The Vietnamese smokes have no state tax stamp on the bottom. The stamp is the proof on each pack of cigarettes that the $3 tax has been paid.

The bootleg cigarette market isn't new.  However, there's evidence it is growing since the new tax hike went into effect.

Data from the Washington Department of Revenue shows that tax stamp sales fell in the months after the May tax increase by an average of three million stamps per month.  The state is generating more money because of the new tax, on average $5 million more per month.  But the number of tax stamps that cigarette wholesalers are buying, an indicator of legitimate cigarette sales, is down.

That would be great if it meant people like Dallas Povencal were quitting.

“Me and my wife just talked about it,” he said. “It would save us $400 a month.”

Instead of quitting, more smokers are likely cheating.

The Washington state Department of Revenue, the tax collectors, estimates that soon one of every three cigarettes sold in Washington will be untaxed contraband.

Most of them are illegally sold in Washington after being trucked in from neighboring states like Idaho where the tax on each pack is only 57 cents.

But law enforcement sources tell us that sophisticated, international smugglers have also moved in.

The woman who sold us the un-taxed Vietnamese cigarettes is Ahn Nguyen. When approached by the KING 5 Investigators she denied running black market cigarettes.

“I smoke. I don't sell. I don't do nothing. I smoke," said Nguyen, explaining the cash and the cartons of cigarettes she was seen handling.

Shortly after her interview Nguyen was arrested by federal agents and Seattle police for another scheme to cheat taxpayers: food stamp fraud.

The Bureau of Alcohol, Tobacco and Firearms says it is currently involved in an investigation of large scale cigarette trafficking. But due to the sensitive nature of the case, it would not provide any details.

FACT:  Shoreline's Tobacco Lane sells a pack of Marlboros for $8. More than half of that price goes to taxes. $1/pack - federal tax, $3.025/pack - state tax.

For more information on Washington's cigarette tax click here.