Tobacco and Homegrown Terrorism

Tobacco and Homegrown Terrorism

06/11/2010

The clock is ticking down towards a shutdown of government or the delivery of a

balanced, but much leaner state budget. At this time, I must state my opposition to
increasing tobacco taxes. (As a nonsmoker, I’m mystified why anyone continues to
smoke or picks up the habit.) First, a 100% increase of the excise tax on “other tobacco
products” (OTP) will drive cigar shops and lounges out of business in New York. Surely,
Governor Paterson did not intend to break his pledge against business-killing taxes.
Second, raising the cigarette excise tax by another $1 per pack will only reward
bootleggers, some of whom will use their illegal proceeds to fund terrorist attacks on
America and her allies, notably Israel. I think Governor Paterson is unaware of the
growing link between terror financing and cigarette taxes.

The federal Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), has published
on its website, that tobacco is the new commodity for terrorists. The ATF has concluded
that contraband cigarette trafficking funds international money laundering and terrorism.
The ATF reported that in 2002 Mohammed Hammound was sentenced to prison for
using his cigarette bootlegging operation to fund terrorist activity. Mr. Hammound and
nine other men, including his brother, Chawki, conspired to buy cigarettes in North
Carolina, which had a 5-cent per pack tax, affixed phony tax stamps, and sold them in
Michigan which had a 75-cent excise tax. Over four years, they amassed $1.5 million
profit which they shared with Hezbollah --an avowed enemy of Israel and America.

Writing for the Scripps Howard News Service, Delroy Murdock (“Tobacco taxes finance
terrorism”) reported that counterfeit cigarette tax stamps were found in an apartment
used by the men who carried out the 1993 bombing of the World Trade Center.
Murdock also cites a 2008 Homeland Security Committee report wherein New York law
enforcement officials estimated that cigarette smuggling networks generated $200,000
to $300,000 weekly and that a large percentage of that money is used to “directly or
indirectly finance groups such as Hezbollah, Hamas, and al-Qaida.” Mr. Murdock’s
article made the hairs on the back of my neck stand up.

Along with Senator Jeff Klein, I sponsor (A.10373A/S.1891E) an act requiring the use of
encrypted counterfeit-resistant cigarette tax stamps or markers. Our measure would
make it more difficult for criminals and terrorists to make phony tax stamps.

Due to the high tax rate on cigarettes in New York, there is an increasing amount of tax
avoidance with regard to the purchase and delivery of cigarettes in this State. For
example, over the past 7 years, the number of cartons of cigarettes legally sold and
taxed has decreased from approximately 95 million cartons to only 45 million cartons
annually. National studies have indicated that the demand for cigarettes is gradually
declining; however, demand had not been cut in half over the past 7 years. This sizable
reduction has been caused, in part, by an increasing black market for the distribution of
untaxed cigarettes. This bill establishes a newer system of tax collection to help
minimize the evasion of the payment of cigarette taxes and reduce the amount of
cigarettes that are sold on the black market.

In 2006, The Department of Health estimated that New York State may be losing as
much as $550 million in taxes through the illegal sales of untaxed cigarettes. Other
estimates maintain that up to 35% of all cigarettes sold in this State are not stamped
legally for proper tax collection. The State of New York may be potentially losing up to
hundreds of millions of dollars in uncollected revenues due to the illegal sale cigarettes.
Further, those participating in this black market include organized crime and, perhaps
terrorist organizations, who use revenue gained from this activity for their nefarious
activities.

Last year the U.S. House Committee on Homeland Security completed an investigation
on cigarette smuggling in New York, and they concluded that terrorist organizations,
such as Hamas and Hezbollah, were benefiting from untaxed cigarette sales. Further,
that this activity was causing losses in State revenue in the hundreds of millions of
dollars.
Collect tobacco products excise tax - The Legislature must call upon Governor David
Paterson to authorize Attorney General Andrew Cuomo to execute tax warrants due on
the sale of tobacco products and goods sold on reservations by tribal retailers to non-
tribal consumers. For over twenty years, New York State has authorized the taxation of
goods sold to non-tribal consumers and in 1994 the law was upheld by the Supreme
Court. We can no longer allow tribal leaders to avoid paying excise taxes while
supplying extensive cigarette bootlegging operations. Because Governor Paterson has
reversed his position on collecting this revenue, I will introduce a resolution calling upon
the Governor to uphold the law and his commitment to collecting these taxes. Projected
tax revenues: $65 - $400 million annually.

An act to amend the tax law, in relation to amending the percentages used to determine
the presumed cost of doing business for agents, and wholesale and retail dealers of
cigarettes and to amend the tax law, in relation to requiring the use of encrypted
counterfeit-resistant cigarette tax stamps or markers.

Increased excise taxes on tobacco in New York State, the passage of the bottle
disposal legislation and a variety of other measures have created a difficult burden on
convenience stores, bodegas and a variety of other retail and wholesale outlets. This
legislation would give retailers and distributors a small but badly needed increase in
their retail price. This legislation confers no benefits to manufacturers of tobacco
products.

Due to the high tax rate on cigarettes in New York, there is an increasing amount of tax
avoidance with regard to the purchase and delivery of cigarettes in this State. For
example, over the past 7 years, the number of cartons of cigarettes legally sold and
taxed has decreased from approximately 95 million cartons to only 45 million cartons
annually. National studies have indicated that the demand for cigarettes is gradually
declining; however, demand had not been cut in half over the past 7 years. This sizable
reduction has been caused, in part, by an increasing black market for the distribution of
untaxed cigarettes. This bill establishes a newer system of tax collection to help
minimize the evasion of the payment of cigarette taxes and reduce the amount of
cigarettes that are sold on the black market.

In 2006, The Department of Health estimated that New York State may be losing as
much as $550 million in taxes through the illegal sales of untaxed cigarettes. Other
estimates maintain that up to 35% of all cigarettes sold in this State are not stamped
legally for proper tax collection. The State of New York may be potentially losing up to
hundreds of millions of dollars in uncollected revenues due to the illegal sale cigarettes.
Further, those participating in this black market include organized crime and, perhaps
terrorist organizations, who use revenue gained from this activity for their nefarious
activities.

Last year the U.S. House Committee on Homeland Security completed an investigation
on cigarette smuggling in New York, and they concluded that terrorist organizations,
such as Hamas and Hezbollah, were benefiting from untaxed cigarette sales. Further,
that this activity was causing losses in State revenue in the hundreds of millions of
dollars.

California was one of the first states in the nation to implement this new encrypted tax
collection system and to phase out its old heat applied decal stamp tax collection
system. Further, a California Auditor's report indicated that this new system has helped
to significantly reduce tax avoidance in that State. Another benefit of the new encrypted
system is that law enforcement agents will be able to utilize hand held scanning devices
to monitor cigarette shipments and detect false or illegally stamped cigarettes.

• made bulk deliveries off the nation

• Under federal and state law, the state has no right to assess taxes as long as the
cigarettes are for the use of Native American Inhabitants
• But fewer than 20,000 Indians live on reservations in New York – and in 2007
sold more than 30 million cartons – six billion cigarettes with a retail value of
nearly $2 billion – according to the State Department of Taxation and Finance,
those cigarettes amounted to nearly one-third of all cigarettes sold in New York,
where cigarette excise taxes are the highest in the nation – bulk of sales went to
the Poospatucks and the Seneca Nation
• Law enforcement authorities say New York Indians operate five of the Internets
top 10 web sites that sell cheap cigarettes and that reservations are the primary
source of cigarettes for smuggling rings that place counterfeit stamps on
cigarettes and sell them in retail stores
• many states have entered agreements with Indian tribes that either establish
quota systems for cigarette shipments or provide for collecting taxes on off-
reservation sales
• but since the 1997 Seneca protest briefly shut down the New York Thruway, it
has been state policy not to curb Indian cigarette sales in New York – since that
policy, known as “forbearance” went into effect, wholesale shipments of
cigarettes to New York reservations have soared
• bootleg cigarettes impact the ability of a smokers ability and motivation to quit
• A federal jury found that Rodney Morrison – owner of Peace Pipe Smoke Shop
on the Poospatuck Reservation that he sold millions of contraband cigarettes
without the required tax stamps
This day of reckoning was set in motion when the state treasury was awash in cash, so
tax rates were cut and state spending was ratcheted upwards to win approval from one
special interest after another. No one really complained because the economic boom on
Wall Street provided a steady flow of tax revenue to state coffers. Then 9/11 happened.
Terrorist attacks struck at the heart of our state and our nation. The destruction of the
World Trade Center not only exposed gaps in our national security, but it exposed the
weakness of New York’s dependence on Wall Street. The Governor and State
Legislature made temporary adjustments but did not make long term plans to reduce
state spending in the event of another shock to the economy. The collapse of the
housing bubble and the near-collapse of the banking system was an economic shock,
we were unprepared for. The resulting national recession, sustained job losses, and
declining tax revenues are forcing us to reduce state expenditures.

In an effort to increase revenues to sustain “reduced” state spending, Governor

Paterson has proposed raising the cigarette excise tax by another $1 per pack. (I’m a

nonsmoker and I’m mystified that anyone continues to smoke given the health

implications and economic costs.) Each year, millions of dollars are written off, as

cigarette bootlegging operations continue to thrive throughout our State. For decades,

New York residents have taken advantage of our inability to enforce taxation on

cigarettes sold on reservations. Because of the Department of Taxation and Finance’s

failure to collect these taxes, our ability to help smokers quit and our efforts to produce a

balanced budget have weakened. Based on our previous efforts, it is time that we bring

both sides together to achieve a mutual agreement for New York State and our Native

American Nations.