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3 Participants in the Illicit Tobacco Market
Pages 55-76

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From page 55...
... Users of illicit tobacco products, often enabled in their addiction to nicotine by the availability of cheap cigarettes, prolong tobacco use and, thus, are likely to suffer the adverse health consequences of addiction and tobacco-related diseases. This chapter explores what is known about the key participants in the illicit tobacco market, including the major supply-side actors in the illicit trade, the characteristics of users of illicit tobacco, and youth with access to illicit tobacco.
From page 56...
... There are numerous examples of non-Native American consumers purchasing tax-free cigarettes from Native American tribal lands.1 The purchase of cheap cigarettes from Native American tribal lands was originally a problem for states in the western part of the country; the center of the tribal cigarette business shifted over the course of the 1980s and 1990s to reservations located in New York State (von Lampe et al., 2014)
From page 57...
... For example, in 1994, Smokin Joe was the first Native American-owned and -operated producer to receive a tobacco manufacturer's license. In 2008, the Oneida purchased Sovereign Tobacco and moved the operation to tribal lands in an attempt to avoid paying state cigarette excise taxes.
From page 58...
... from wholesalers to Native American tribes. As a result of these developments in recent years, tribes have to either ­ pay all applicable state taxes or get cigarettes from low-tax states,3 and there has been a dramatic drop in sales of cigarettes to tribal stores in New York State.
From page 59...
... In Germany, for example, the illicit tobacco market has not been subject to cartelization or monopolization, and most cigarette smugglers operate within self-sufficient, small-sized enterprise structures (von Lampe, 2002, 2005, 2007)
From page 60...
... . Evidence from Belgium, the Netherlands, and Germany also suggests that those involved in all segments of the distribution phase of the illicit tobacco trade generally do not have extensive criminal records (van Duyne, 2003; von Lampe, 2005; Vander Beken et al., 2008)
From page 61...
... Similar research approaches have not been undertaken in the United States. One other aspect of the relationship of criminal networks to the illicit tobacco trade about which little in known, in either the United States or Europe, is the market mechanisms that affect the ease with which the illicit trade is financed.
From page 62...
... The Tobacco Industry8 Studies of internal industry documents, along with legal investigations and agreements, have shown that tobacco companies at a global level have promoted and facilitated the smuggling of legally manufactured cigarettes in order to circumvent import bans, high tax rates, and duty fees on legal imports; gain a competitive advantage over other cigarette companies; and create pressure on governments to reduce cigarette taxes and duty fees or to not increase them (Campaign for Tobacco-Free Kids, 2000, pp.
From page 63...
... presence) .9 Although there may be a lag in detection, there is no evidence that the tobacco industry presently contributes to the domestic illicit trade, and enforcement officials from Virginia and New York City told the committee that tobacco companies had been helpful in providing training and other assistance to combat the illicit trade.10 In the case of counterfeit products, cigarette companies lose financially and with respect to infringement of trademarks and other intellectual property, and major tobacco firms have taken direct legal action against U.S.
From page 64...
... . Another commonly provided example of the relationship between the illicit tobacco trade and terrorism is that of the gas station owner in the Lackawanna area of New York who was convicted of cigarette smuggling in 2005 and is alleged to have provided $14,000 to the "Lackawanna Six" to travel to Al Qaeda's Al Farooq Terrorist Training Camp in the summer of 2001 (Bureau of Alcohol, Tobacco, Firearms and Explosives, 2014; see also Virginia State Crime Commission, 2013a, p.
From page 65...
... . However, these accounts do not provide systematic information regarding either the absolute or relative importance of the illicit tobacco trade for financing terrorist activity.
From page 66...
... These surveys usually collect individual responses on use of different tobacco products, quitting attempts, risk perception, social and health influences, media exposure, and other indicators useful for measuring progress on tobacco control. Some surveys have collected recently purchased cigarette packs from respondents as part of the data collec­ tion and analysis.
From page 67...
... In the studies of low-income communities discussed above, most current smokers were not only aware of a growing illegal cigarette market, but also admitted to buying illicit cigarettes to avoid higher prices. Consistent
From page 68...
... . Proximity to a state, Native American reservation, or country with lower cigarette excise taxes has been associated with higher rates of illicit tobacco use.
From page 69...
... Those purchases may make up a substantial portion of the illicit trade in some areas. Microgeographic evidence based on studies of littered cigarette packages provides support for economic and proximity factors in the use of illicit tobacco, particularly tobacco purchased on the illicit market, although it does not provide individual-level information about purchasers.
From page 70...
... to avoid high taxes on cigarette purchases. This highlights the importance of distinguishing between tax evasion, which tends to be tied to local purchases of illicit cigarettes, and tax avoidance, which typically involves travel and other related price minimization strategies.
From page 71...
... However, because the scope of this study is limited to instances where youths engage in the same sorts of illicit transactions as do adults, the provision of cigarettes to youths from social sources (friends, family) falls outside the scope of this study, as do minimum-age violations by vendors selling cigarettes that have been appropriately taxed.16 To document the sources of cigarettes to minors in the United States, the committee used data from the National Youth Tobacco Survey (NYTS)
From page 72...
... This share of the illicit market, while not known directly, is unlikely to be of much importance to the revenues or BOX 3-2 Underage Cigarette Sales as a Share of the Overall Market Based on self-report data from the National Youth Tobacco Survey (NYTS) , imputing the midpoint to ranges of reported consumption and assuming 25 ciga­ rettes per day for those who smoked more than a pack, youths ages 12-17 smoked 2,032 million cigarettes in 2012.
From page 73...
... TABLE 3-1  Likelihood that Smokers Ages 12-17 Purchased from Commercial Source, 2012 Nondaily Age and Source Smokers Daily Smokers All Smokers Ages 12-14 Number who reported 104 36 143 purchasing cigarettes commercially Number of respondents 389 47 436 Percentage 26.7 77.0 32.7 Ages 15-17 Number who reported 446 219 666 purchasing cigarettes commercially Number of respondents 1,059 283 1,342 Percentage 42.1 77.4 49.7 NOTE: See text for details. SOURCE: Data from the 2012 National Youth Tobacco Survey.
From page 74...
... The "other" category in Table 3-2 may include most of such purchases, but it may also include some legitimate sellers. The increase in the prevalence of "other" sources is intriguing: illicit commercial vendors may be playing a growing role in supplying youths, but there are no systematic data on that possibility for the United States.18 SUMMARY AND RECOMMENDATIONS In the United States, Native American reservations, along with low-tax states, have been a major source of bootlegged cigarettes.
From page 75...
... Although sales of counterfeit and illicit white cigarettes do not financially benefit the major tobacco companies, the tobacco industry benefits from other aspects of the illicit tobacco trade: the smuggling of legally manufactured cigarettes is a way of introducing the industry's products into new markets or to lower the price, thus expanding its share in existing markets. Although the tobacco industry has been involved in the illicit trade at a global level, there is no evidence to date that the tobacco industry has been directly involved in the United States.
From page 76...
... This difference highlights the importance of distinguishing between tax evasion, which tends to be tied to local purchases of illicit cigarettes, and tax avoidance, which typically involves travel and other related price minimization strategies. On balance, the evidence also suggests that heavier smokers and those less interested in quitting are more likely to engage in tax avoidance/evasion.


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