NEW YORK—Small businesses in New York City are feeling the weight of the black market, the source of an estimated 60 percent of cigarettes. The work of businesses that follow city regulations on counterfeit and illegal cigarettes have been strained by the inequity.
In the end, the ones who benefit are those working outside the system.
Counterfeit and illegal cigarettes are a hot commodity in New York City, which has the highest cigarette taxes in the nation. People bring them in from lower tax zones out of state, or manufacture them illegally and slap on a fake label.
And for local buyers, this is with good reason—while legal cigarettes go for around $130 for a large carton, the same product can be found on a street corner for $25 or $30. Small businesses can’t compete.
“I cannot blame them—you pay only one fifth—so everybody goes to the black market,” said Sun Kim, President of The Small Business Congress, which represents 75 trade organizations in NYC.
Kim urged Bloomberg, in the last 200 days of his administration, to launch “a serious protracted war against the black market.”
“We really want the mayor to declare war,” he said.
There are around 13,000 cigarette retailers in the city, and the combined blitz of risky fines, high taxes, and a tough economy, and the competition from a large and lucrative black market, is putting them at risk of closing shop.
Legislation currently in the pipeline to curb cigarette sales has local businesses concerned. One will ban cigarettes from being displayed in shops—they’ll need to be kept in cabinets or drawers or under the counter—and another will raise the legal smoking age from 18 to 21.
Steven Barrison, spokesperson for The Small Business Congress, pointed out that the black market for cigarettes costs New York City an estimated $250,000 in lost revenue each year.
“Everybody is in agreement that smoking is no good, but when you only target the legal sellers and you’ve got the majority of the cigarettes being sold on the black market and you’re losing all that revenue, where’s the enforcement?” he said.
He said proposed legislation on cigarettes “is well intended, but wrong-headed. This is the wrong direction. It’s the wrong way to go.”
In 2003, New York City started the first indoor smoking ban in the nation, and the combined state and local taxes have driven prices up to around $11 per pack.
Despite this, however, the smoking rate of the city’s youth hasn’t changed much since 2007. An estimated 20,000 high school students, or 8.5 percent, smoke in New York City, according to City Health Commissioner Tom Farley.
The idea of raising the smoking age is meant to stop kids from getting addicted to cigarettes in the first place. When the legislation was announced in April, City Council Speaker Christine Quinn said it would be “targeting the age group at which the overwhelming majority of smokers start.”
An Illicit Market
The city isn’t just sitting around when it comes to fighting the black market for cigarettes, but a large portion of their efforts hit stores rather than people hustling illegal goods on the streets. This is partly due to investigators finding cigarette cartons with out-of-state stamps, or no stamps at all, when they conduct inspections.
Manufacturers of counterfeit cigarettes have also been hit. A bust in 2010 found 26 people with $4 million in counterfeit cigarettes and designer merchandise.
Following the bust, Queens County District Attorney Richard Brown stated in a press release that “Cigarette bootlegging is a multimillion dollar business that rips off the public both by flooding the market place with inferior products—containing dangerously high levels of tar and nicotine—while at the same time fueling an underground economy that does not pay much-needed state and local sales taxes.”
Last year, investigators under New York City Sheriff Edgar Domenech found 4,814 cartons of illegal cigarettes during their inspections. More than half of the 1,105 licensed tobacco retailers they inspected had black market cigarettes, reported AP.
The penalty for selling black market cigarettes is going up from around $150 per carton to $600 per carton. The New York City Council is also weighing legislation to create a $2,000 fine for selling untaxed cigarettes, and it will hit a second offender with a $5,000 fine and a revocation of their cigarette license.
Mike Nieves, representative of the Hispanic Association of Bodega Owners and a candidate for City Council in Brooklyn, said the problem is less pronounced in midtown Manhattan, but if you head to the outer boroughs, the market for black market is hard to miss.
“The biggest problem we have with the cigarettes is the sale of the cigarettes outside of the stores,” Nieves said. “If you go to the bodega closest to my home in Brooklyn, you have these guys congregating on the outside.”
He said if a minor wants to buy cigarettes, they need to go inside and show ID to get a pack. “Outside they don’t,” he said. “The guys are selling it for five dollars—no taxes, no stamp—and they’re picking it up.”
“The biggest concern that I’ve had is I’ve seen competing groups fighting each other,” he said, noting that turf wars often spring up over prime territory.
Nieves believes legislation that curbs legal sales of cigarettes needs to be coupled with a stronger push against illicit markets. He said if someone decides to buy their cigarettes outside the licensed shops, enforcement shifts from what City Hall is doing, and onto the backs of the New York City Police Department.
“There is no regulation on the outside,” he said. “But there is plenty of regulation that controls the store owners—and these guys are going out of business.”