Last month, the FBI charged two Brooklyn, N.Y., men with buying 15 cases of cigarettes from a New Jersey undercover agent who says he told the men the smokes were stolen.
Each case held about 600 packs on which no state tax had been paid, keeping the price down. If the alleged buyers had resold them on the black market, as the FBI says they intended, they could have hiked the price by at least a dollar a pack and still undercut New Jersey stores.
If they had resold them in New York, where the cigarette tax is the highest in the nation, they could have pocketed more.
In the end, authorities allege, the transaction could have netted the pair at least $9,000 for less than a day's work.
With Pennsylvania and New Jersey considering raising their cigarette tax, the already bustling black market could soon be even busier, law enforcement officials say.
Some criminal entrepreneurs resell cigarettes that - often illegally - have not had state taxes levied on them. Others buy them legally in places with lower taxes, then smuggle them across state lines and resell them for a profit. The wider the disparity between states' prices, say officials, the more the underground market thrives.
Cigarette-running is easy and can pay off big, said Charles Potts, an auditor with the Camden office of the federal Bureau of Alcohol, Tobacco, Firearms, and Explosives. Smugglers can pull in more than $500,000 for moving one truckful, according to ATF officials.
"Do it right and it's like free money," Potts said. "It's the best thing since Prohibition."
New Jersey treasury officials declined to estimate how much tax revenue vanishes by way of illegal sales. A study put New York's loss in 2004 between $436 million and $576 million.
Though it has existed for decades, cigarette smuggling boomed about five years ago, when states started to raise tobacco taxes to close budget gaps.
New Jersey's tax has increased four times since 2002, most recently in 2006. Now $2.57 a pack, it is second only to New York's $2.75 levy. Pennsylvania's tax is $1.35, slightly above the national average of $1.21. Govs. Corzine and Rendell have proposed increases to address their budget deficits - 12.5 cents a pack in New Jersey and 10 cents in Pennsylvania.
According to state records, however, both states lost money the last time the tax was raised. New Jersey budget analysts say part of the reason was that smoking has become less popular and because the state banned indoor smoking around that same time.
Low-tax advocates, however, say revenue fell because area smokers have a better option: Delaware, which adds only $1.15 in tax per pack.
More smokers also started to buy untaxed cigarettes online (the Web sites counsel buyers to research whether they're running afoul of local tax laws) or at Indian reservations, where they are tax-free.
Smugglers from New Jersey, New York, and other high-tax states make runs to states such as South Carolina, which has not increased its 7-cent tax since 1977. They go from store to store and buy hundreds of cases, said Robert Irwin, a New Jersey agent with the ATF.
Others traffic in untaxed cigarettes - identifiable by the lack of a state stamp on the pack - that sometimes are stolen.
The enterprise is relatively low-risk, Irwin said. "You don't have to wait down by the docks for a shipment and get something smuggled in," he said.
Cigarettes bought in other states usually are repackaged to show counterfeit stamps for the state they're resold in. They're fenced to stores at a reduced price or sometimes traded for drugs, counterfeit goods, or weapons.
The counterfeit stamps "give this the appearance of legitimacy," said William Campbell, a senior agent with the ATF in New Jersey. It ensures that "no one's going to call in a tip on the store."
Federal tax, which also is levied on cigarettes, is paid when cigarettes leave the factory. And because many resold cigarettes start off lawfully purchased, tobacco firms make their fair share. Only states lose, authorities say.
Officials contend that smuggling would end if the states instituted a uniform tax, but most acknowledge that's unlikely to happen.
Anthony and Eugene Degidio, the men arrested last month, were charged with federal conspiracy to receive stolen goods and conspiracy to buy and sell stolen goods.
The Degidios have not been indicted. Their attorneys declined to comment on the charges.
According to the FBI, meetings took place in December between the Degidios and a federal undercover agent from Newark, N.J. The three met in Atlantic City, according to a complaint filed in U.S. District Court, and the agent twice sold them unstamped cigarettes he claimed had been stolen from Virginia.
The Degidios were among 26 people arrested in an FBI sweep that targeted alleged crime organizations operating in countries including the United States, Albania, Macedonia, Kosovo, and Serbia. Most are also accused of trafficking in drugs, weapons, or other counterfeit goods.
Authorities have struggled to crack down on smuggling. State law enforcement agencies regularly inspect stores that sell cigarettes and conduct undercover stings. Cigarette smugglers often are arrested in connection with drugs or weapons operations.
If convicted, smugglers - who are charged with anything from money laundering to trafficking contraband - face fines and of up to five years in federal prison.
"It's like drugs and gangs," Irwin said. "The difference is it's not as violent as the drug world, and the penalties aren't as harsh. And the money can be much greater."
By Allison Steele
April 17, 2009
The Philadelphia Inquirer