Tobacco Update

Black-market woes, e-cig booms, dollar-store growth and more news from the tobacco category

Amid ever-looming regulation, growing competition from other retail channels, and the still-nebulous electronic-cigarette market, the tobacco category is likely in for another roller-coaster year. To help you stay abreast of the latest tobacco news, Convenience Store Products has compiled a digest of the top headlines affecting the category.

Black-Market Boom, C-Store Bust

The c-store industry last year made the news in a not-so-savory way: Independent operators sold much of the estimated 20,000 cartons of illegal cigarettes a week brought into New York City as part of a $55-million smuggling ring taken down by the New York Attorney General and the New York City Police Department last May.

These cigarettes were not counterfeits made by illegal manufacturers. They were legitimate products smuggled into New York—which boasts the highest cigarette excise tax in the country—from lesser-taxed states such as Virginia.

A widening gap in state excise taxes is spurring a dramatic increase in black-market trade across the country. With much money to be made “importing” untaxed cigarettes into high-taxed states, many believe that this bust—which cost New York approximately $80 million in lost sales revenue—represents only a minute sample of the illegal activity going on.

Black-market tobacco encapsulates a wide variety of trade and products: Besides state-to-state smuggling, it can include counterfeit products, legitimate or altered products smuggled in from other countries and products sold by unlicensed retailers.

With so many options for criminals, it’s understandably a huge market. A 2009 Federal Bureau of Alcohol, Tobacco, Firearms and Explosives report estimated tobacco-product smuggling and black-market activity cost state and federal governments more than $5 billion a year in lost revenue from unpaid tobacco excise taxes.

 “With certain states and cities raising cigarette and tobacco tax rates further in the past four years, the loss of tax revenue is even higher given the expansion of the black market,” says Tom Briant, executive director of the National Association of Tobacco Outlets (NATO), Minneapolis.

Data estimating cigarette smuggling rates by state from the Mackinac Center for Public Policy, Midland, Mich., clearly shows a link between high state excise taxes and illegal tobacco trade. States with top smuggling rates included Arizona (who had a $2-per-pack state excise tax in 2011), New Mexico ($1.66 per pack), Washington ($3.03 per pack) and Rhode Island ($3.46 per pack). Not surprisingly, New York—with its $4.35-per-pack excise tax—had the all-time-high rate for the Mackinac Center of nearly 61%, up 70.2% since 2006.

Cliff Brazie, director of retail merchandising for Kwik Fill/Red Apple Food Marts, oversees locations near his company’s headquarters of Warren, Pa., as well as in Ohio and New York. For him, it’s a no-brainer why New York’s black market is so massive: “the $43.50 tax per carton in New York state,” he says. “Pennsylvania’s [tax] is only $16 per carton.”

Unfortunately for legitimate retailers operating within the confines of the law, as long as this tax disparity exists, illegal tobacco trade is likely to continue to attract criminals—particularly organized crime looking to make a quick buck to finance other criminal activity.

Briant reports that NATO members in highly taxed areas have seen a steep decline in their tobacco sales due to black-market activities. This has led to layoffs and, at times, store closures.

This illicit activity directly contradicts the frequent goals legislators cite for increasing tobacco taxes: to deter people—especially youths—from smoking and to raise money for state and local governments.

“Bans and increased taxes create the demand for black-market products … and the black market does not check ID,” says Lyle Beckwith, senior vice president of government relations for NACS, Alexandria, Va. “In fact, the black market exposes youth to other illegal products as well.”

On the flip side, legitimate retailers such as c-store operators often join state and local governments in the fight to keep tobacco products out of the hands of minors. As such, Beckwith suggests that politicians need to recognize retailers as their allies in this fight.