About 40 percent of all online cigarettes smoked in New Jersey are smuggled into the state illegally — the highest percentage of any state in the nation — resulting in a loss of more than $500 million in uncollected tax revenue each year, according to a report obtained by The Star-Ledger.
The reason is hardly surprising: New Jersey levels a $2.70 tax on each pack of buy cigarettes sold, one of the highest rates in the nation.
Mobsters, people with ties to terrorist groups, and small-time crooks turn a quick profit by smuggling large quantities of cigarettes store from other states or overseas and selling them in New Jersey, according to the 2009 state Treasury Department report.
And every day, smokers in New Jersey avoid the steep tax by ordering cheap cigarettes on the internet or driving to neighboring states, most often Delaware, where they cost far less.
"New Jersey faces a consequential problem from cigarette tax evasion and smuggling," wrote Eric Friedman, a tax specialist with the Treasury Department who authored the report. "An increase in the tax rate will produce fewer legal, and more illegal, sales of cigarettes."
The report, which was completed but not officially released in 2008, is the first official estimate of the financial toll cigarette smuggling takes on the state, and raises questions about whether New Jersey is doing enough to combat the problem in today’s austere budget climate.
The estimated $519 million in uncollected tax revenue, about 1.5 percent of the 2012 budget, is about the same amount raised by the controversial millionaire’s tax in 2009. It also comes close to the $735 million that records show the cigarette tax itself raised last year.
"It’s an untapped resource of legitimate revenue," said state Sen. Joseph Vitale (D-Middlesex), who sponsored a measure signed by Gov. Jon Corzine in 2008 that called for the state to conduct the study and develop ways to combat smuggling, including the use of high-tech tax stamps that provide a history of every pack.
The overwhelming majority of cigarettes smuggled into the state — about 75 percent — are brought in by those looking to turn a quick and hefty profit, the report said. Often, these black market retailers use cheap, counterfeit tax stamps to elude detection. Far fewer packs are brought in by smokers trying to save money, and they are aided by the police, who rarely arrest those who cross state lines to buy cigarettes.
The report, taken together with new leadership at the state Office of Criminal Investigation, which focuses on tax evasion for the Department of Treasury, has led to an increase in the number of smugglers being caught.
It urged the state to bolster its depleted investigative team and adopt law enforcement strategies often associated with narcotics investigations, like controlled buys, video surveillance and the use of paid informants.
In addition, the 28-page report said the state should team up with the federal government and increase its investigation of retailers in Delaware, Pennsylvania and Virginia to help catch those crossing the border to buy discount cigarette online and stiffen the penalties for violators.
Charles Giblin, a veteran police officer who heads the Office of Criminal Investigation, said before he took over two years ago and shifted its attention to cigarettes online smuggling, the office focused heavily on white-collar crime.
Since then, he said, smuggling arrests have risen from 45 in 2009 to 192 last year.
Miroslaw Sapinski, a 63-year-old butcher from Saddle Brook, was arrested for smuggling and in April was sentenced to three years in prison. He was caught buying cartons of discount cigarettes in Virginia for about $35 a carton and reselling them at his shop for $58. Ordinarily, a carton of discount cigarettes sells for $80 in New Jersey
The Bergen County Prosecutor’s Office said Sapinski was selling about 500 cartons a week, which cost the state about $13,500 in lost tax revenue. When police seized the cars belonging to him and his wife, they said they recovered more than $80,000 in cash.
"We are using a multi-pronged approach," Giblin said. "We are going to seize assets and use whatever powers we have to curtail smuggling."
The state is also considering the use of high-tech tax stamps suggested in Vitale’s measure, which are encrypted with codes that include the history of each pack of cigarettes. Retailers and enforcement officials use hand-held scanners that reveal if a stamp is authentic, as well as where the pack came from and where it has been.
The encrypted stamps, combined with increased enforcement, have helped lift cigarette tax revenue in California, and they are also being used in Massachusetts. But New Jersey officials question whether investing in the technology will pay off.
"We are sending out requests for information later this year, and we will evaluate them," said Andy Pratt, a spokesman for the state Treasury Department. "But right now we are not convinced the technology itself increases revenue."