Minnesota says cigarette smuggling is a growing problem

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.

"I don't think all those people quit smoking." Orton, 33, said. "They just drive one exit over to Fargo and buy them for $3 less a pack."

Orton said he supports the effort to curb smuggling because it evens the playing field for businesses. But he says it is unfair for the state to raise the cigarette tax so high and then two years later ask tobacco retailers to pay a state license fee to fund enforcement efforts. Orton notes that during the debate on whether to raise the state's excise tax on tobacco, retailers warned it would hurt sales and lead to smuggling.

"We pointed this all out and it all fell on deaf ears," he said. "Now what we've told them would happen is occurring."

Though unpopular with tobacco wholesalers and retail outlets, the cigarette tax increase had broad public support in 2013, with 64 percent of Minnesotans siding with the higher rate according to a Star Tribune Minnesota Poll that year. Once the increase took effect that summer, Minnesota became the seventh most expensive state in which to buy cigarettes. Regionally, only Wisconsin's $2.52 excise tax on tobacco comes close to matching Minnesota's. Iowa's tax is $1.36 and South Dakota's is $1.53

The increased Minnesota tax has boosted revenue from the state's tobacco tax and fees to $575 million in the 2014 fiscal year, up from $369 million the year before.

While the law appears to have created a black market for untaxed cigarettes, it also has had its intended effect of reducing smoking rates, said Anne Mason, public affairs manager for ClearWay Minnesota, a leading anti-tobacco nonprofit group.

"Essentially, the tax has worked," she said, pointing to survey results published last month by a coalition of anti-tobacco groups and the state's Health Department.

The rate of Minnesotans who smoke fell to 14.4 percent last year, down from 16.1 percent in 2010, the results showed.

The rate of people ages 18-24 smoking fell more drastically during that time from 21.8 percent to 15.3 percent, likely because this age group is more sensitive to price changes, Mason said.

Mason said the benefits to public health justify the drop in sales after the tax increase.

"Does that mean selling fewer cigarettes for health's sake? Sure does," she said.

Ricardo Lopez • 651-925-5044