Less than two years after Minnesota raised its cigarette tax to one of the highest in the country, cigarette smuggling has become a growing business in the state. Now officials want more money to combat the problem.
Minnesota Department of Revenue officials seized or assessed untaxed tobacco products in more than 40 percent of the 374 retail inspections conducted through the first three quarters of last year. Before the cigarette tax jumped $1.60 per pack, or 130 percent, retail inspections found untaxed tobacco products only 8 percent of the time. The agency typically conducts 700 inspections a year.
State Patrol officers are also seizing a growing number of untaxed tobacco products as smugglers get caught hauling the goods across state lines, revenue officials said. "This is now obviously a more organized, or a more robust presence of smuggling," Revenue Commissioner Cynthia Bauerly said Tuesday.
Acting on the recommendations of a 2014 tobacco enforcement report, the agency said it needs $1 million annually for 11 new inspectors to crack down on cigarette smugglers and retailers selling untaxed tobacco products. Officials also want enhanced penalties for lawbreakers and a new state license for tobacco retailers that would give the tax agency authority to revoke permits.
"There's been an increase to the level that is concerning to us and we think is really harming other retailers that are abiding by the state tax law." Bauerly said.
Officials estimate smuggling will cost the state $2.6 million in lost tax revenue over the next two years, though Bauerly noted the problem is difficult to quantify. Meanwhile, tobacco retailers — particularly those in border cities — are reporting large drops in business as a result of the 2013 tax law, which is indexed to inflation. Last month the state tax rose from $2.83 a pack to $2.90 for this reason.
Frank Orton, who owns Ortons Convenience Stores, said two of his 15 stores are losing customers to his competitors across the state border. His Moorhead location is just one exit away on Interstate 94 from a North Dakota convenience store that also sells cigarettes. There, the state cigarette tax is only 44 cents.
Orton estimates that cigarette sales are down by about 40 percent at his Moorhead and East Grand Forks stores, though he declined to provide more specific sales figures.