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    Michigan Considers Crackdown on Stores Selling Illegal Cigarettes

    High-tax states are seeing diminishing returns as illegal and Internet activity grows.

    LANSING, Mich. – Michigan, a ripe destination for illegal cigarettes because of its high per-pack tax ($2 per pack compared with 98 cents, 99.5 cents and $1.25 per pack in neighboring Illinois, Indiana and Ohio), could start going after store owners and others caught with smaller quantities of tobacco smuggled from around the country.

    State law generally allows incarceration or fines for violations involving six or more cartons, or more than 1,200 cigarettes. According to the Associated Press, this month’s state lame-duck legislative session is mulling bills that would make it a civil infraction to have as few as 180 illegal cigarettes, nearly one carton's worth. The state treasurer also would be able to suspend a store's sales tax license if it sells tobacco products illegally, according to AP.

    Significantly, the new bills target retailers instead of those smuggling the illegal smokes.

    "If you take away their [store owners] right to be involved in the sale of tobacco, that would be a significant deterrent not to violate the act," said Michigan State Police Detective Lt. Judy Anderson, who leads the agency's five-person Tobacco Tax Enforcement Team.

    Michigan's cigarette tax is sixth-highest in the country, causing some residents to simply drive to Indiana or Ohio, where taxes are up to $1 less per pack. It's illegal to possess cigarettes in Michigan without a Michigan tax sticker.

    According to the AP report, Michigan’s Department of Treasury also flagged more than 23,000 residents over 3 1/2 years who owe taxes on tobacco bought from Internet or mail-order companies. Total taxes and penalties from those sales was $36 million.

    Because of black-market cigarettes it is difficult to quantify how much revenue Michigan loses every year, but one estimate said the figure could reach $138 million—most of which would go to K-12 public schools and health care for the poor and disabled.

    Taxable cigarette sales are down 30 percent since 2001, when the cigarette tax was 75 cents a pack. It rose to $1.25 in 2002 under Republican Gov. John Engler and $2 in 2004 under Democratic Gov. Jennifer Granholm, according to the report.

    Much of the sales decline is because people smoke less when the "sin" tax goes up, according to the state. But some of the drop is due to smokers knowingly or unknowingly buying cigarettes that didn't go through proper distribution channels.

    A report by Convenience Store News (November 3, 2008) found that many states are reaping diminished returns from their cigarette tax hikes of the past few years. R.J. Reynolds, which tracks states’ tobacco tax hikes as well as the projected revenue generated by those hikes, reported that since 2002, nearly half of the projected revenue predictions were inaccurate and equals "over $1 billion in state revenue shortfalls." Read "The Reverse Effect" at http://www.csnews.com/csn/cat_management/tobacco/article_display.jsp?vnu....

    The Michigan legislation, which is pending in the House after winning Senate approval earlier, is backed by the tobacco industry. The industry opposes higher cigarette taxes as unfair, but at the same time wants to ensure products are kept inside a legitimate distribution system.

    "You want customers to be absolutely satisfied," said David Sutton, spokesman for Philip Morris USA, the No. 1 U.S. cigarette maker. "With contraband trade, you don't know how old it is, how it's stored, how's it's been shipped."

    Meanwhile, in the State of Washington, Attorney General Rob McKenna unveiled a plan to keep cigarettes out of the hands of kids. He said Monday that he will ask the 2009 Legislature to ban the shipment of cigarettes from mail order or Internet sales to anyone other than licensed wholesalers or retail stores. A state law that had required shipping companies to verify the age of someone receiving an order of cigarettes was negated by the U.S. Supreme Court, he said, which struck down a similar Maine law in February. "So, we're just going to make it illegal to sell it online altogether," he announced to students at Bush Middle School in Tumwater, Wash., where he, Gov. Chris Gregoire and Health Secretary Mary Selecky led an assembly to mark the 10th anniversary of the Tobacco Master Settlement Agreement.

    Washington, Maine and other states had attempted to forbid the ability of children to order cigarettes over the Internet by requiring shipping companies to verify that the recipient of the package was 18 or older. But U.S. Supreme Court ruled in February that the verification requirement was a regulation on the shipping companies, which the states are forbidden to enact by federal law. Alcohol is one exception to that rule.

    The Tobacco Master Settlement Agreement between the U.S. tobacco companies and most of the states requires the tobacco companies to make annual payments to the states in perpetuity, yielding $206 billion during the first 25 years of the settlement.

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