Concern Grows Over Black Market as Cigarette Taxes Climb

Tucked away on just 55 acres in a nondescript Long Island suburb, the Poospatuck Indian Reservation is easy to miss on the long drive up the coast from New York City. But to anyone looking for cheap tobacco, the 60-mile haul is worth the trip.

Once lawmakers approve a tax increase crafted last week, the cost of a pack of cigarettes will increase to about $9 in New York City.

Cigarettes are sold tax-free on tribal lands in New York, and the savings are eye-popping. Under the latest tax hike, smokers will be able to avoid $2.75 in taxes per pack by buying on the reservation. That discount jumps to $4.25 if you factor in the municipal tax added in New York City.

The huge price difference is one of the reasons why smoke shops on New York's Indian reservations sold nearly 304 million packs of cigarettes last year — nearly a third of the state's recorded total.

The numbers are equally eye-popping when broken down by reservation. The Poospatuck reservation, with a population of about 270, accepted shipment of about 100 million packs of cigarettes last year — enough to supply every smoker in New York City with a pack a day for 3 1/2 months, according to the state's finance department.

But Indian reservations are far from the only source of tax-free smokes. Law enforcement agents say smugglers now routinely use container ships to import counterfeit cigarettes from China. Criminal gangs stock up on cigarettes in low-tax states like Virginia and illegally truck them north. Buyers big and small order an untold number of untaxed cartons on the Internet.

Some experts are concerned that instances of smuggling, bootlegging, and questionable reservation sales will only increase when the tax goes up.

Higher taxes could mean the potential for even bigger profits for entrepreneurs who buy cigarettes from untaxed sources and illicitly resell them, the executive director of the New York State Association of Wholesale Marketers and Distributors, Arthur Katz, said.

"You'd have to be crazy to go and buy cigarettes at the store at almost $9 per pack," Mr. Katz said. California officials estimate that taxes go unpaid on about 15% of all tobacco sold in its markets, at a cost of $276 million per year. New York put its losses at more than $576 million in a study released in 2006.

Rep. Anthony Weiner has proposed a bill that would increase the penalties for smuggling, bar the shipment of cigarettes through the U.S. Postal Service, and make it a federal offense for Internet retailers to ignore state tax laws. A hearing on the bill has been scheduled for April 15.

Mr. Weiner called it a "great mystery" why New York hadn't also cracked down on bulk purchases of cigarettes at Indian reservations by scofflaws who resell them elsewhere. Cigarettes sold on New York's reservations now routinely turn up for sale in other states and in Canada.

"You go stand in front of the Shinnecock Reservation on Long Island, in the Hamptons, and you can see people loading boxes and boxes and cases into their trucks," Mr. Weiner said.