Mar 9, 2009
Illegal cigarette smuggling is costing Michigan millions in lost revenue
LANSING -- Michigan loses $127 to $140 million in tax revenue every single year through illegal cigarette smuggling that is destined for the School Aid Fund and Medicaid, but a Michigan company has a solution to stop the bleeding and illegal activity.
Wyoming-based R.E.D. Stamp Inc. has patented and is marketing a Cigarette Tax Stamping Machine that will put a dent in smuggling and help Michigan recover 25 percent of the lost revenues and put $32 million back into Michigan’s coffers.
The problem is Michigan’s $2 a pack cigarette tax is one of the highest in the nation, and Michigan is fifth in the nation for the highest rate of cigarette smuggling. The whole system is ripe for abuse.
Michigan border states have much lower tax rates; Illinois at 98 cents a pack and Indiana at 99.5 cents a pack. People cross the border to buy cartons for personal consumption, costing border retailers sales and the state tax revenue. Some people cross the border to buy cartons by the trunk load and either sell them out of the trunk of their cars to individuals or to less than honest retailers.
It’s even done on a larger scale, and even organized crime and private entrepreneurs are involved. A truckload of 500 cartons shipped from Kentucky where the tax is just 30 cents a pack or Missouri at a mere 17 cents a pack to Michigan could net a smuggler a tidy profit of more than $8,000.
Getting away with it is also pretty easy. There are currently only four members of the Michigan State Police Tobacco Smuggling Unit to cover the entire state. Forging the tax stamp on the bottom of a package cigarette is fairly easy, as well of the theft of the stamp.
The fairly unsophisticated stamps are sold to Michigan’s 60-70 cigarette wholesalers in a roll of 30,000 stamps costing $60,000 that resembles a roll of paper towels. Organized crime has gotten involved by either buying them on the black market, stealing them off the UPS truck or even strong arm robbery from the truck. They are applied using heat transfer, similar to a cool iron on transfer for your t-shirt.
R.E.D. Stamp has teamed up with Authentix, a leading product authentication, to produce as system that is foolproof. The stamps can be downloaded digitally, eliminating the need and risks of shipping them to the wholesaler. The machine can transfer the stamps to the cigarette packs at a speed of 90 cartons of cigarettes a minute.
Plus, the stamps are almost impossible to forge, and it makes it easier for law enforcement to spot smuggling. The officer can use a small, handheld device that resembles the device that sets your car alarm that the officer can scan the pack with it.
It will give a simple yes or no. A larger handheld unit that reads the bar code and can tell where and when the pack was purchased and other information is also available.
The problem is it will cost about $11 million to replace the 85 older machines, but because of the speed of the new machines I don’t think they will need that many. Plus, the estimated $32 million it will bring in more than pays for the new machines in just the first year. The Michigan Distributors and Venders Association supports the concept, but they want help with purchasing them. Adding a few more boots on the ground and an increase to the Tobacco Smuggling Unit should bring even more money when coupled with the machines.
But the real hang-up is from the Michigan Department of Treasury, and according to the subscription only Gongwer treasury department officials said it did not have any studies that it trusts that “show how much smuggling and counterfeiting of tax stamps is happening.” I’m not sure what world they are living in, but there are a few reports out there.
Rightwing think tank the Mackinac Center for Public Policy recently released a study that proves the smuggling and an extensive report by the Detroit Free Press on March 14, 2008 prove Treasury wrong.