Criminally high

The owner and two employees of a Fredericksburg gas station were indicted in U.S. District Court this week and charged with trafficking contraband cigarettes from Virginia to New York.

A grand jury charged Vijay Nanubhai Patel, 50, Pullin P. Amin, 30, and Diveshkumar Desai, 23, with one count of conspiracy to traffic in contraband cigarettes and six counts of trafficking in contraband cigarettes. The grand jury also charged Mars and Roshni Inc., the company that owns the Citgo gas station, with failure to maintain cigarette sales records.

Since 2009, Patel, Amin and Desai are accused of purchasing cigarettes from several legitimate Virginia sources and purchasing taxed and untaxed cigarettes from undercover law enforcement officers. According to the indictment, cigarette traffickers would drive to the Citgo station to purchase contraband cigarettes in amounts exceeding fifty cartons (10,000 cigarettes) and transport them to points outside of Virginia, including New York and Pennsylvania, for resale.

Virginia's cigarette tax-- the second lowest in the nation-- is only $0.30 per pack. Pennsylvania collects $1.60 in taxes per pack, while New York State taxes smokers $4.35, according to the Campaign for Tobacco-Free Kids. In New York City, the rates are even higher: $5.85 per pack. Thus, selling untaxed cigarettes on the black market has the potential to gross huge profits.

During the peak of their criminal activity, Patel, Amin and Desai were selling approximately $1 million in cigarettes a month, the indictment reads. The Department of Justice accuses the men of selling almost 40,000 cartons of cigarettes to New York traffickers from 2010 to 2011, costing the City and State of New York over $5 million in cigarette and sales taxes.

According to Patrick Fleenor, economist at the Cato Institute, high cigarette taxes are linked to a thriving illegal cigarette market and an increase in associated crimes such as murder, kidnapping and armed robbery. "When governments try to extract tax revenue from the economy, they foster an array of responses from citizens who have an economic incentive to avoid the tax," Fleenor explained. "Higher tax rates create even greater incentives for avoidance, evasion and black-market activity."

Nationally it's estimated $5 billion in tax revenue annually is lost on the black market, according to Special Agent Chris Perez, Chief of the Alcohol and Tobacco Diversion Division for the Bureau of Alcohol, Tobacco, Firearms and Explosives. "Some smugglers trade firearms and drugs for tobacco products while we've had cases of groups that will hire a hit-man to kill someone they see as competition."

And cigarette bootlegging has even been used as a lucrative source to fund terrorism. In March 2003, Mohamad Hammoud, 29, was sentenced to 155 years in prison for leading a group that smuggled at least $7.9 million worth of cigarettes from North Carolina to Michigan, where they were resold without paying that state's higher taxes. The Lebanese man led what prosecutors called a terrorist cell and funneled money to the militant group Hezbollah.

"The failure of New York policymakers to consider the broader effects of high cigarette taxes has been a mistake repeated across the country in the stampede to maximize tax revenue from this demonized product," Fleenor said in a 2003 study, stating that the government failed to consider the negative economic incentives the taxes created. "Excessive tax rates have serious consequences-even for such a politically unpopular product as cigarettes."

Since the first cigarette taxes were enacted in the 1920s, a rash of cigarette bootlegging continued to grow, until former New York congressman Ned Pattison told the House Ways and Means Committee in 1978, "You almost can't find a legal cigarette in New York City."

In recent years, the Bureau of Alcohol, Tobacco, Firearms and Explosives has cracked down on cigarette traffickers, but the problem remains rampant. Because tobacco is a legal substance, it's hard to figure out who's paid taxes and who hasn't. Thus, contraband cigarette investigations are long and tedious. The financial complexity of tobacco cases often requires help from financial auditors, and investigations sometimes last years.

"Tobacco cases take time," said Perez. "It takes a while to gain the trust and infiltrate some of these organizations enough to track the money get to the people who are in charge."

Patel, Amin and Desai each face a maximum possible penalty of five years in prison and/or a fine of up to $250,000 for each count they are charged. Mars and Roshni Inc. also faces a possible monetary fine, and restitution may be ordered. An unnamed individual from the Bronx, N.Y., was also indicted in the case.

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