In the Middle of Tobacco Road: Contraband and Illegal

In the Middle of Tobacco Road:
Contraband and Illegal Cigarettes
Zoe Sanders
Nelson Mullins Riley & Scarborough LLP
In 2011, nine people in South Carolina were
arrested in relation to their sales of
"contraband cigarettes": cigarettes on
which taxes had not been paid. According
to the federal prosecutors, those people
sought to avoid taxes by buying the
cigarettes in Virginia and later selling them
in convenience stores in other states,
including South Carolina.1 The next year,
two other South Carolina men were
charged with conspiracy to traffic
Zoe Sanders is a
partner with
Nelson Mullins
and has
experience with
tobacco and
alcohol law.
Zoe began her law
career in 1992 as a prosecutor. She joined
Nelson Mullins in 1993. In her year as a
prosecutor Ms. Sanders gained trial
experience acting as lead counsel in 15 jury
trials. Since joining Nelson Mullins in 1993,
Ms. Sanders has represented clients in
state and federal courts practicing in the
areas of corporate investigations,
administrative law, gaming and
sweepstakes law, alcohol law, tobacco law
and election law. Ms. Sanders’ experience
with alcohol and cigarette related matters.
1
Mike Ellis, $33 million contraband cigarette ring
Contact
Zoe:
NelsonATF
Mullins,
rounded for
up in
multi-state
raids, Columbia
Anderson (SC)
SC
803-255-9513;
Independent
Mail, cell
Nov.803-960-3109.
3, 2011, available at
http://www.independentmail.com/news/localzoe.sanders@nelsonmullins.com
news/crime/33-million-contraband-cigarette-ringrounded-multi.
contraband cigarettes, facing a maximum of
ten years imprisonment.2 Recently, two
Maryland brothers pleaded guilty to selling
contraband cigarettes and face a maximum
of five years in prison for their actions.3
Although South Carolina merchants may
think they are immune from liability unless
they actively participate in conspiring to sell
contraband cigarettes, they may be wrong:
mere possession of the cigarettes may
trigger liability. A South Carolina
convenience store owner came into
possession of cigarettes when he purchased
a store in "as is" condition, including its
cigarette inventory, After the sale, two
brands of those cigarettes were "delisted"—declared illegal to sell—by the
state Attorney General's Office. Eleven
years after the store owner purchased the
inventory, an agent for the South Carolina
Department of Revenue (SCDOR) seized the
now-illegal cigarettes when the store owner
could not present evidence that he paid
taxes on them, and the SCDOR issued a
penalty for possessing five packs of
cigarettes at $500 per pack, for a total of
$2,500. A South Carolina Administrative
Law Court last year agreed that the store
2
Local man charged in cigarette trafficking
operation, WAFF TV, Jan. 4, 2012, available at
http://www.waff.com/story/16447516/hollywoodman-cigarette.
3
Brothers Plead Guilty to Conspiracy to Distribute
More Than $6.6 Million in Contraband Cigarettes,
Federal Bureau of Investigation, Jan. 29, 2012,
available at http://www.fbi.gov/baltimore/pressreleases/2015/brothers-plead-guilty-to-conspiracyto-distribute-more-than-6.6-million-in-contrabandcigarettes.
owner was liable, but reduced the penalty
under the circumstances of that case.4
intended to be legal advice. If you have any
questions please contact Zoe Sanders.
Additionally, in recent months a federal
lawsuit was filed in New York against United
Parcel Service for merely delivering
contraband cigarettes, which the lawsuit
claims was undercutting anti-smoking
efforts and depriving the state of millions of
dollars in tax revenue, even though UPS
claims that it did not know that the
cigarettes were illegal.5 That lawsuit
followed a similar one filed against Federal
Express last year.6
How the Government thinks
Anyone in a business involving cigarettes
should be aware that cigarettes are highly
regulated by the Government and present
liability risks for those who do not follow
the applicable governing laws and
regulations.
This article seeks to provide a brief
overview of key cigarette laws enforced by
both South Carolina and the federal
government.7
This information is not
The state and federal government regulate
cigarettes as a matter of public health.
According to a 2014 Surgeon General's
report, cigarette smoking is the single
leading cause of preventable death in the
United States, killing over 400,000 people
each year.8 To combat these harms and to
protect the public health of its citizens, the
states—like the federal government—tax
the sale and use of tobacco products, such
as cigarettes.9
The Government believes that higher taxes
increase public revenues and improve
public
health
by
decreasing
the
consumption
of
tobacco
products,
especially cigarettes. The Government
views cigarette taxes as a valuable and
effective policy measure10 and believes that
raising cigarette prices "is one of the most
effective interventions to prevent and
reduce cigarette use."11
4
See NSS d/b/a Sav A Ton Truck Stop v. S.C. Dep't of
Revenue, No. 13-ALJ-17-0408-CC, 2014 WL 1857029
(S.C. Admin. Law J. Div. May 5, 2014).
5
UPS Illegally Shipped 136 Million Contraband
Cigarettes In New York, Says New Lawsuit (Feb. 18,
2015), The Huffington Post, available at
http://www.huffingtonpost.com/2015/02/18/upscigarettes-lawsuit-new-york_n_6706866.html.
6
Attorney General Eric T. Schneiderman, A.G.
Schneiderman Announces $70 Million Lawsuit
Against Fedex For Illegally Shipping 80 Million
Untaxed Cigarettes To Consumers, Mar. 31, 2014,
available at http://www.ag.ny.gov/press-release/agschneiderman-announces-70-million-lawsuitagainst-fedex-illegally-shipping-80.
7
The statutes referenced in this article are the most
likely to trigger state and federal government
scrutiny of cigarettes. Other statutes such as RICO,
mail fraud, and wire fraud, could be triggered but
are not discussed in this article.
8
U.S. Dep't of Health & Human Services, The Health
Consequences of Smoking-50 Years of Progress, A
Report of the Surgeon General, at 11, 678 (2014).
9
2014 Surgeon General Report, at 788.
10
Id.
11
RTI International, 2011 Independent Evaluation
Report of the New York Tobacco Control Program, at
40 (2011) (citation omitted); see also Institute of
Medicine, Ending the Tobacco Problem: A Blueprint
for the Nation, at 182 (2007); U.S. Dep't of Health &
Human Services, How Tobacco Smoke Causes
Disease: The Biology and Behavioral Basis for
Smoking-Attributable Disease, A Report of the
Surgeon General, at 654 (2010) (noting that
"increases in the price of cigarettes through excise
taxes . . . are an effective policy intervention to
prevent smoking initiation among adolescents and
young adults, reduce cigarette consumption, and
increase the number of smokers who quit").
2
SOUTH CAROLINA STATE LAWS
Contraband Cigarettes
Under South Carolina law, a “cigarette” is
defined as follows:
(1) any roll for smoking containing
tobacco or any substitute for
tobacco wrapped in paper or in
any substance other than a
tobacco leaf; or
(2) any roll for smoking containing
tobacco or any substitute for
tobacco, wrapped in any
substance,
weighing
three
pounds per thousand or less,
however labeled or named,
which because of its appearance,
size, type of tobacco used in the
filler, or its packaging, pricing,
marketing, or labeling, is likely to
be offered to, or purchased by,
consumers as a cigarette
described in item (1).12
distributing, or importing cigarettes in
South Carolina are required to pay the tax.13
The tax is paid only once. If cigarettes are
purchased from a licensed distributor, then
the retailer would owe no excise tax. The
tax is paid with a monthly report, South
Carolina Department of Revenue Form L922, and monthly tobacco tax return.
At one point in our history, stamps
conveying that a tax had been paid were
placed on the cigarette package. Now,
however, the only way to know if taxes
have been paid is to inspect invoices and
records of whomever is in possession of
the cigarettes.
The tax is imposed on the person first
receiving the untaxed cigarettes for sale,
distribution, or other disposition in South
Carolina14 and upon any person first
importing, receiving, or acquiring untaxed
cigarettes from outside South Carolina for
use or consumption.15
The following are examples of persons who
are liable for the cigarette tax:
"Contraband cigarettes" are cigarettes upon
which the required cigarette tax has not
been paid.
The South Carolina state tax on cigarettes is
$0.0285 per cigarette or 57 cents per pack
of 20 cigarettes and 71.25 cents per pack of
25. The cigarette tax is a combination of
two taxes: an excise tax of 3½ mills per
cigarette and a surtax of $0.025 per
cigarette. This tax applies to all cigarettes
and tobacco products sold in South
Carolina. All persons selling, purchasing,
12
S.C. Code § 12-21-625(D).
(1)
Wholesalers first receiving
untaxed cigarettes from outside
of South Carolina for sale or
distribution in South Carolina.
(2)
Retailers first receiving untaxed
cigarettes from outside of
13
S.C. Code § 12-21-610.
S.C. Code § 12-21-735.
15
S.C. Code §§ 12-21-610 & 12-21-140. The
definition of a “cigarette” as set forth in these two
code sections became effective May 13, 2010.
However, it has always applied to cigarettes made
with “any substitute for tobacco” as well as
cigarettes made of tobacco.
14
3
South Carolina for sale or
distribution in South Carolina.
(3)
Manufacturers who bring
untaxed cigarettes into South
Carolina for give-away
promotions.
(4)
Manufacturer who employ
sales representatives who bring
untaxed cigarettes into South
Carolina for promotional and
other purposes. For example,
manufacturers may send “car
stock”
to
their
sales
representative
in
South
Carolina for restocking or
promotional purposes.
(5)
Operators of fairs, circuses, and
carnivals (or vendors at such
locations) who bring untaxed
cigarettes into South Carolina
to sell or give-away as prizes.
(6)
Individuals who bring untaxed
cigarettes into South Carolina
for their own use or
consumption.
The penalty for the sale and/or
possession of untaxed cigarettes
products is $50 to $500 for each
violation (each pack upon which no tax
has been paid). Thus, penalties can be
sky high: $5,000 for one contraband
carton ($500.00 x 10 packs=$5,000).
Taxpayers who fail to file cigarette and
tobacco products tax returns—or fail to
pay these taxes when they are due—can
also be subject to other penalties.
(a) Penalties for failure to file
This penalty is imposed at the rate of 5%
of the taxes due for each month (or
fraction of a month) that the return is
late. For example, if the May 2015 return
is filed on June 30, 2015, the return is 10
days late and the taxpayer is subject to a
penalty equal to 5% of the tax due on
that return. If this same return had not
been filed until July 23, 2015, the
taxpayer would be subject to a penalty
equal to 10% of the tax due on that
return.
(b) Penalties for failure to pay
This penalty is imposed at the rate of
0.5% of the taxes due for each month (or
fraction of a month) that the taxes are
late. For example, if the May 2015 return
is filed on June 30, 2015, the remittance
is 10 days late and the taxpayer is subject
to a penalty equal to 0.5% of the tax
shown as due on that return. If this same
return had not been filed until July 23,
2015, then the taxpayer would be subject
to a penalty equal to 1% of the taxes
shown as due on that return.
Illegal or "Gray Market" Cigarettes
In addition to contraband untaxed
cigarettes, it is also illegal to sell or
distribute “gray market cigarettes.” Gray
market cigarettes are those that are not
intended to be sold in the United States.
The packages may be labeled “For export
only,” “U.S. tax exempt,” or “For use
outside U.S.” Cigarette packages that do
not comply with federal labeling and
advertising requirements with regards to
labels, warnings, or other information are
also considered “gray market cigarettes.”
Anyone who sells or distributes “gray
market cigarettes” in violation of the state
law may be sentenced to a maximum three
years in jail and a $1,000 fine.
4
WITH APPLICABLE LICENSING AND
TAX-STAMPING OBLIGATIONS.17
All cigarette brands legal for sale within
South Carolina are listed on the current
Tobacco Directory published by the Office
of the South Carolina Attorney General.
This directory should be checked
constantly:
http://www.scag.gov/civil/tobacco.
2. Weight Requirements. The delivery
seller may not sell, offer for sale,
deliver or cause to be delivered in
any single sale or single delivery any
cigarettes or smokeless tobacco
weighing more than 10 pounds.18
FEDERAL LAWS
The PACT Act: Prevent All Cigarette
Trafficking Act
3. Age Verification Requirements. The
delivery seller must not sell to a
person under the legal age for sale
or purchase and must comply with
certain
age
verification
requirements established in the
law.19
The Prevent All Cigarette Trafficking Act
(PACT Act) was signed into federal law in
2010, amending the Jenkins Act of 1949.
Effective June 29, 2010, federal law requires
Internet and mail order sellers of
cigarettes—referred to as “delivery
sellers”16 under the law—to comply with
the following:
4. Recordkeeping Requirements. The
delivery seller must keep a record
of any delivery sale, including a
memorandum or a copy of each
and every invoice covering every
shipment into the state of
cigarettes and smokeless tobacco;
the name and address of the
person receiving the shipment; the
brand and quantity thereof; and the
name, address, and telephone
number of the person delivering
the shipment to the recipient on
behalf of the delivery seller. All
memo and invoice information
relating to specific customers must
be organized by city, town, or zip
code. The delivery seller must
retain records until the end of the
fourth full calendar year that begins
after the date of the delivery sale
and must make records available to
the tax agency of the state.20
1. Shipping requirements. The delivery
seller must include a statement on
the bill of lading (if any) and on the
same surface as the delivery
address. The statement must state:
CIGARETTES/SMOKELESS TOBACCO:
FEDERAL LAW REQUIRES THE
PAYMENT OF ALL APPLICABLE
EXCISE TAXES, AND COMPLIANCE
16
The term “delivery seller” means a person who
makes a delivery sale, and a “delivery sale” means any
sale of cigarettes or smokeless tobacco to a consumer
if (a) the consumer submits the order for the sale by
means of a telephone or other method of voice
transmission, the mails, or the Internet or other online
service, or the seller is otherwise not in the physical
presence of the buyer when the request for purchase
or order is made; or (b) the cigarettes or smokeless
tobacco are delivered to the buyer by common
carrier, private delivery service, or other method of
remote delivery, or the seller is not in the physical
presence of the buyer when the buyer obtains
possession of the cigarettes or smokeless tobacco. 15
U.S.C. § 375.
17
15 U.S.C. §§ 376a(a)(1) & 376a(b)(1).
15 U.S.C. § 376a(b)(3).
19
15 U.S.C. § 376a(b)(4).
20
15 U.S.C. §§ 376a(a)(2) & 376a(c); see also 15
U.S.C. § 376(A)(2).
18
5
5. State and Local Laws Applicable to
Sales of Cigarettes and Smokeless
Tobacco. The delivery seller must
comply with state and local laws
applicable to sales of cigarettes and
smokeless tobacco as if the delivery
sale occurred entirely within the
state
(or
local
jurisdiction),
including excise taxes, licensing,
and tax-stamping requirements,
restrictions on sales to minors, and
other
payment
and
legal
obligations.21
6. Tax Collection Requirements. The
delivery seller must not sell or
deliver to any consumer or
common carrier or other delivery
service any cigarettes or smokeless
tobacco unless in advance of the
sale, delivery or tender to the
common carrier or delivery service
(i) the excise tax imposed by the
state has been paid; (ii) the excise
tax imposed by a local government
has been paid; and (iii) any tax
stamps or other indicia that the
excise tax has been paid are
properly affixed or applied to the
cigarettes or smokeless tobacco.22
This requirement does not apply to
delivery sales of smokeless tobacco if the
state law (or local law for a local excise tax)
requires the delivery seller to collect the
excise tax from the consumer and remit
the excise tax to the state (or local law for
a local excise tax) and the delivery seller
complies with this requirement.23
A delivery seller must also file a statement
with the state tax agency setting forth
21
15 U.S.C. § 376a(a)(3).
15 U.S.C. §§ 376a(d). Note that South Carolina
does not require tax stamps or indicia to be placed
on cigarette packages. The cigarette tax in South
Carolina is paid via a monthly reporting method.
23
15 U.S.C. § 376a(d).
22
specific information as outlined in the
federal law.24
In addition, a delivery seller must file with
the state tax agency by the tenth day of
each calendar month a memorandum or a
copy of each and every invoice covering
every shipment of cigarettes and
smokeless tobacco made in the prior
month into the state. The memo or
invoice must include specific information
as outlined in the federal law.25
The CCTA: Contraband Cigarette
Trafficking Act, 18 U.S.C. § 2341 et seq.
Through the CCTA, the law also imposes
certain requirements and restrictions on
common carriers and other persons who
sell, transfer, or ship for profit cigarettes
in interstate commerce.
The CCTA provides that it is unlawful to
knowingly ship, transport, receive, possess,
sell, distribute, or purchase "contraband
cigarettes," defined as more than 10,000
cigarettes (50 cartons) found in a
jurisdiction without the cigarette tax paid as
required by law in that jurisdiction.26
Exempt from being deemed to have
contraband cigarettes are the following:
(A) a person holding a permit issued
pursuant to chapter 52 of the Internal
Revenue Code of 1986 as a manufacturer of
tobacco products or as an export
warehouse proprietor, or a person
operating a customs bonded warehouse
pursuant to section 311 or 555 of the Tariff
Act of 1930 (19 U.S.C. 1311 or 1555) or an
agent of such person;
24
15 U.S.C. § 376(a)(1).
15 U.S.C. § 376(a)(2).
26
18 U.S.C. §§ 2341(2) and 2342(a).
25
6
(B) a common or contract carrier
transporting the cigarettes involved under a
proper bill of lading or freight bill which
states the quantity, source, and destination
of such cigarettes;
or "distributes" cigarettes upon which taxes
have not been paid has engaged in
transactions with contraband cigarettes to
the extent the cigarettes do not remain in
the possession of a regulated entity at all
times.
(C) a person—
CONCLUSION
(i) who is licensed or
otherwise authorized by the State
where the cigarettes are found to
account for and pay cigarette taxes
imposed by such State; and
The most disconcerting and risky element of
contraband and illegal cigarettes is that mere
(ii) who has complied with
the accounting and payment
requirements relating to such
license or authorization with respect
to the cigarettes involved; or
(D) an officer, employee, or other
agent of the United States or a State, or any
department, agency, or instrumentality of
the United States or a State (including any
political subdivision of a State) having
possession of such cigarettes in connection
with the performance of official duties[.]27
possession can trigger penalties. The UPS
case is a good example. Another example is
if a convenience store changes owners, the
new owner can be liable for any contraband
cigarettes previously stored on the
premises by the old owner. In sum,
violation of state or federal law with regard
to cigarettes presents issues of complex and
technical laws the failure to understand
presents real risks for enormous penalties
and liability.
In February 2015, the Government of New
York sued United Parcel Service for $136
million for possessing and shipping
contraband cigarettes.28 Although, a
common carrier is usually exempt from the
CCTA, in the UPS case the Government
asserts that the statutory language of the
CCTA defines untaxed cigarettes as noncontraband only when "in the possession"
of a "regulated entity." Thus, the
Government asserts even a regulated entity
that "receives," "sells," "ships," "transports"
27
18 U.S.C. § 2341(2)
State of New York v. United Parcel Serv., Inc., civil
docket #: 1:15-cv-01136 (S.D.N.Y. filed 2/18/15).
28
7