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March, 2010

A tale of increased regulations causing crime and confusion

For years, buying cigarettes in the low-tax US state of North Carolina (NC) and selling them on the black market in a high-tax state in the north has been an easy, if not legal, way to make a quick profit. It is said that a vanís worth of cigarettes can reap a $100,000 profit when the destination is New York City, which has a $1.50-per-pack excise tax in addition to the $2.75 state cigarette tax.

However, authorities have had difficulties catching people with North Carolina contraband, as NC is one of only three states that don't require tax stamps affixed on every pack being sold. Now, following a 16-year hiatus, there is restored interest in NC to reintroduce the stamps as a way to deter smuggling. But not in considerations to NCís northern neighbors, but rather - in an ironic change of events - to deter increased smuggling into NC. The state may now be the target for cheaper cigarettes from South Carolina, which has a puny 7-cent-per pack tax and also doesn't use stamps (North Dakota is the only other state without stamps). NCís 45-cent tax has grown nine fold since 2005, creating a cross-border difference of $3.80 per carton.

The history of the stamps coming and going into play is one of bureaucracy and red tape that is a necessary byproduct of singling out an industry for regulations. Stamps were used in North Carolina at one point. They were first seen in NC in 1969, when lawmakers approved its first 2-cent tax on cigarettes. The General Assembly eliminated the stamps in 1994 because the 3 cents per carton tax wholesalers got to keep for administrative expenses was hardly enough to defray the costs of sticking them.

Today, wholesalers receive a 2% discount - about 9 cents per carton - to help with filing monthly revenue reports to the state. But they're concerned that won't be enough if they're required to stamp again. Stamping machines can cost $80,000 each and large retailers who act as their own wholesalers don't want their costs raised during a recession. Doubling the discount could take away several million dollars away from the state's coffers, months after the General Assembly raised the cigarette tax by 10 cents a pack. According to some researchers, the state would actually lose another $5.4 mn in annual tax revenues with stamps at the current 2% discount - and spend $1.2 mn every year to run the program - not a popular legislative vote during a recession.

Basically this is the mess of confusion and criminality repeated around the world when local governments look to raise funds by attacking an unpopular consumer product.

- E. D.

Tobacco International - March, 2010


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