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Cigarette Tax

INTRO: New taxes on Cigarettes in Nevada have had an almost immediate impact reducing sales - that's one of the purposes, but the tax will also bring some unintended consequences as well. KNPR's Ky Plaskon reports.

SOUND: Tobacco shop.

PLASKON: The Paiute smoke shop in downtown Las Vegas does a brisk business with four checkers constantly ringing up basically nothing but cigarettes. Business is so good because this store's prices are stuck in the 1940's, when there was no tax on cigarettes in Nevada. Just inside the door, dollar and two dollar packs of cigarettes greet customers. This store doesn't include state tax because Native Americans aren't liable for it. But step outside and it's another story, cigarettes are twice as much off. Taxes were first implemented in Nevada at 2 cents a pack in the late 40s. They have since increased to 4 cents per cigarette last June. Nevada Tobacco Prevention Coalition Policy Director Kendaol Stagg lobbied for the most recent tax increase.

STAGG: Increasing the excise tax really is a win, win, win situation for states it's a public health win, saves millions of lives and always generates new tax revenue.

PLASKON: After the tax passed, state revenue in January doubled to nearly 10 million dollars per month from cigarettes alone. But within a couple of months of implementing the tax sales of tax stamps that must accompany every pack dropped 10 percent according to the Nevada Department of Taxation. Tobacco company sales representatives in the state say sales in urban areas are relatively unaffected by the tax, but for border towns the tax is anything but a win. Dan Laughlin is the purchasing manager at Riverside Resort in Laughlin. He says people from Californians and Arizona used to take advantage of Nevada's lower prices but not since taxes in Nevada made cigarettes match the price back home.

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LAUGHLIN: So it took out the incentive for people from California to buy 3 or 4 cartons. Sales have probably dropped 30 maybe 40 percent. It'll probably cost us 100 - thousand dollars a year in profits to our store.

PLASKON: But smokers in California, Arizona and now Nevada are still looking for cheap smokes and that's fueling a counterfeit cigarette industry. Heidi Petenger is a tax administrator for the State of Nevada.

PETENGER: A lot of times it is a bigger business than drugs. And we have also found that cigarette smuggling is linked to terrorist activities.

PLASKON: The Bureau of Alcohol Tobacco and Firearms has confirmed that, by capturing counterfeit cigarette transactions from Hesbolah a group with ties to terrorists. Kendaol Stagg of the Nevada Tobacco Prevention Coalition says illegal activity only accounts for 1 percent of cigarette sales, but that can mean huge losses in tax revenue. State and local governments loose 1.4 billion dollars a year in taxes to cigarette counterfeiters according to The Bureau of Alcohol Tobacco and Firearms. And now, counterfeit cigarettes outnumbers any other product seized at borders. 90 percent of those counterfeit cigarettes carry counterfeit tax stamps so to deal with the problem; California for instance is changing its stamp after realizing losses of 292 million dollars to counterfeiters. Farrell Dellman of the Tobacco Merchants Association says now that Nevada has raised taxes too increasing profit margins for counterfeiters, the state will have to change its stamps too.

DELLMAN: The bad guys will just step right in and I am understanding that the cigarette trade is number two for the mafia of all their activities so we are talking about big, bad business and it is unfortunate that the tax departments are only now waking up to the issue.

PLASKON: Trying to dissuade counterfeiters, the Nevada Department of Taxation hired its first northern investigator this month. It intends to hire a second for Southern Nevada by the end of this week. Merchants and tobacco companies are familiar with what the state is trying to do. In 2002 Phillip Morris started a Brand Integrity Division with undercover investigators patrolling every city looking for counterfeit cigarettes. Since then it has sued 28 hundred merchants nation-wide. But its difficult to convict merchants for selling counterfeits because they claim they only buying the cheapest product and can't tell the fakes from the genuine. According to the Tobacco Merchants Association, legislation in congress, the Prevent All Cigarette Trafficking Act, would solve the problem by requiring merchants to keep records of all deliveries and sales. That would make it easier for investigators to conduct audits. But until then, the two investigators for the State of Nevada will be fishing for counterfeiters like tobacco company investigators have been doing for years Dellman says.

DELLMAN: They don't even know where to target audits and a lot of legitimate players out there are being hassled for no reason while the bad guys get away.

PLASKON: The state's first investigator in Northern Nevada has been on the job less than a month and has already caught one violation of cigarette tax stamps. Now the department is grappling with whether this one instance was an honest mistake by the merchant or an intentional violation.

Ky Plaskon, News 88-9, KNPR

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Monday, April 26, 2004