[House Hearing, 110 Congress]
[From the U.S. Government Publishing Office]


 
PREVENT ALL CIGARETTE TRAFFICKING ACT OF 2007, AND THE SMUGGLED TOBACCO 
                         PREVENTION ACT OF 2008 

=======================================================================

                                HEARING

                               BEFORE THE

                   SUBCOMMITTEE ON CRIME, TERRORISM,
                         AND HOMELAND SECURITY

                                 OF THE

                       COMMITTEE ON THE JUDICIARY
                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED TENTH CONGRESS

                             SECOND SESSION

                                   ON

                        H.R. 4081 and H.R. 3689

                               __________

                              MAY 1, 2008

                               __________

                           Serial No. 110-147

                               __________

         Printed for the use of the Committee on the Judiciary


      Available via the World Wide Web: http://judiciary.house.gov

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                       COMMITTEE ON THE JUDICIARY

                 JOHN CONYERS, Jr., Michigan, Chairman
HOWARD L. BERMAN, California         LAMAR SMITH, Texas
RICK BOUCHER, Virginia               F. JAMES SENSENBRENNER, Jr., 
JERROLD NADLER, New York                 Wisconsin
ROBERT C. ``BOBBY'' SCOTT, Virginia  HOWARD COBLE, North Carolina
MELVIN L. WATT, North Carolina       ELTON GALLEGLY, California
ZOE LOFGREN, California              BOB GOODLATTE, Virginia
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
MAXINE WATERS, California            DANIEL E. LUNGREN, California
WILLIAM D. DELAHUNT, Massachusetts   CHRIS CANNON, Utah
ROBERT WEXLER, Florida               RIC KELLER, Florida
LINDA T. SANCHEZ, California         DARRELL ISSA, California
STEVE COHEN, Tennessee               MIKE PENCE, Indiana
HANK JOHNSON, Georgia                J. RANDY FORBES, Virginia
BETTY SUTTON, Ohio                   STEVE KING, Iowa
LUIS V. GUTIERREZ, Illinois          TOM FEENEY, Florida
BRAD SHERMAN, California             TRENT FRANKS, Arizona
TAMMY BALDWIN, Wisconsin             LOUIE GOHMERT, Texas
ANTHONY D. WEINER, New York          JIM JORDAN, Ohio
ADAM B. SCHIFF, California
ARTUR DAVIS, Alabama
DEBBIE WASSERMAN SCHULTZ, Florida
KEITH ELLISON, Minnesota

            Perry Apelbaum, Staff Director and Chief Counsel
      Sean McLaughlin, Minority Chief of Staff and General Counsel
                                 ------                                

        Subcommittee on Crime, Terrorism, and Homeland Security

             ROBERT C. ``BOBBY'' SCOTT, Virginia, Chairman

MAXINE WATERS, California            LOUIE GOHMERT, Texas
WILLIAM D. DELAHUNT, Massachusetts   J. RANDY FORBES, Virginia
JERROLD NADLER, New York             F. JAMES SENSENBRENNER, Jr., 
HANK JOHNSON, Georgia                Wisconsin
ANTHONY D. WEINER, New York          HOWARD COBLE, North Carolina
SHEILA JACKSON LEE, Texas            STEVE CHABOT, Ohio
ARTUR DAVIS, Alabama                 DANIEL E. LUNGREN, California
TAMMY BALDWIN, Wisconsin
BETTY SUTTON, Ohio

                      Bobby Vassar, Chief Counsel

                    Michael Volkov, Minority Counsel
















                            C O N T E N T S

                              ----------                              

                              MAY 1, 2008

                                                                   Page

                           TEXT OF THE BILLS

H.R. 4081, the ``Prevent All Cigarette Trafficking Act of 2007,'' 
  or ``PACT Act''................................................   152
H.R. 5689, the ``Smuggled Tobacco Prevention Act of 2008''.......   165

                           OPENING STATEMENTS

The Honorable Robert C. ``Bobby'' Scott, a Representative in 
  Congress from the State of Virginia, and Chairman, Subcommittee 
  on Crime, Terrorism, and Homeland Security.....................     1

The Honorable John Conyers, Jr., a Representative in Congress 
  from the State of Michigan, and Chairman, Committee on the 
  Judiciary......................................................     4

The Honorable Lamar Smith, a Representative in Congress from the 
  State of Texas, and Ranking Member, Committee on the Judiciary.     5

The Honorable Howard Coble, a Representative in Congress from the 
  State of North Carolina, and Member, Subcommittee on Crime, 
  Terrorism, and Homeland Security...............................     6

                               WITNESSES

The Honorable Anthony Weiner, a Representative in Congress from 
  the State of New York
  Oral Testimony.................................................     7
  Prepared Statement.............................................    10

The Honorable Dale E. Kildee, a Representative in Congress from 
  the State of Michigan
  Oral Testimony.................................................    11
  Prepared Statement.............................................    13

Mr. William Hoover, Assistant Director, Office of Field 
  Operations, Bureau of Alcohol, Tobacco, Firearms and Explosives 
  (ATFE), U.S. Department of Justice, Washington, DC
  Oral Testimony.................................................    39
  Prepared Statement.............................................    41

Mr. Matthew L. Myers, President, Campaign for Tobacco-Free Kids, 
  Washington, DC
  Oral Testimony.................................................    50
  Prepared Statement.............................................    52

Mr. Steven Rosenthal, New York State Association of Wholesale 
  Marketers, New York
  Oral Testimony.................................................    56
  Prepared Statement.............................................    57

Mr. John W. Colledge, III, Independent Consultant, Sparks, NV
  Oral Testimony.................................................    62
  Prepared Statement.............................................    64

Mr. Arlan Melendez, Chairman, Reno-Sparks Indian Colony, Reno, NV
  Oral Testimony.................................................    69
  Prepared Statement.............................................    71
Mr. David S. Lapp, Chief Counsel, Tobacco Enforcement Unit, 
  Office of the Attorney General of Maryland, Baltimore, MD
  Oral Testimony.................................................    78
  Prepared Statement.............................................    80

          LETTERS, STATEMENTS, ETC., SUBMITTED FOR THE HEARING

Prepared Statement of the Honorable Louie Gohmert, a 
  Representative in Congress from the State of Texas, and Ranking 
  Member, Subcommittee on Crime, Terrorism, and Homeland Security     3
Prepared Statement of the Honorable John Conyers, Jr., a 
  Representative in Congress from the State of Michigan, and 
  Chairman, Committee on the Judiciary...........................     3
Prepared Statement of the Honorable Lloyd Doggett, a 
  Representative in Congress from the State of Texas.............    16
Report by Peter T. King, a Representative in Congress from the 
  State of New York, submitted by the Honorable Daniel E. 
  Lungren, a Representative in Congress from the State of 
  California.....................................................    22
Letter from Richard E. Nephew, Council Chairman and Co-Chair, 
  Foreign Relations Committee, submitted by the Honorable Louie 
  Gohmert, a Representative in Congress from the State of Texas, 
  and Ranking Member, Subcommittee on Crime, Terrorism, and 
  Homeland Security..............................................    84
Prepared Statement of Charles N. Whitaker, Vice President, 
  Compliance and Brand Integrity, Altria Client Services, 
  submitted on behalf of Philip Morris USA.......................    95

                                APPENDIX

Material Submitted for the Hearing Record........................   113


PREVENT ALL CIGARETTE TRAFFICKING ACT OF 2007, AND THE SMUGGLED TOBACCO 
                         PREVENTION ACT OF 2008

                              ----------                              


                         THURSDAY, MAY 8, 2008

              House of Representatives,    
              Subcommittee on Crime, Terrorism,    
                              and Homeland Security
                                Committee on the Judiciary,
                                                    Washington, DC.

    The Subcommittee met, pursuant to notice, at 10:02 a.m., in 
Room 2237, Rayburn House Office Building, the Honorable Robert 
C. (Bobby) Scott (Chairman of the Subcommittee) presiding.
    Present: Representatives Conyers, Scott, Johnson, Weiner, 
Jackson Lee, Smith, Gohmert, Sensenbrenner, Coble, Chabot, and 
Lungren.
    Staff present: Bobby Vassar, Majority Chief Counsel; Ameer 
Gopalani, Majority Counsel; Mario Dispenza (Fellow), ATF 
Detailee; Veronica Eligan, Majority Professional Staff Member; 
Carolyn Lynch, Minority Counsel; Kimani Little, Minority 
Counsel; and Kelsey Whitlock, Minority Staff Assistant.
    Mr. Scott. Good morning. The Subcommittee will now come to 
order. I am pleased to welcome you today to the hearing before 
the Subcommittee on Crime, Terrorism, and Homeland Security on 
H.R. 4081, the ``Prevent All Cigarette Trafficking Act of 
2007,'' and H.R. 5689, the ``Smuggled Tobacco Prevention Act of 
2008.''
    Tobacco smuggling is a global problem with some estimates 
of trafficking numbering 600 billion cigarettes worldwide. 
Tobacco smuggling contributes to the availability of cheap 
cigarettes and not only deprives governments of needed tax 
revenue, but also harms the health of our citizens.
    The lost revenue from smuggling ranges in the billions. For 
example, the tax loss to States from cigarette trafficking is 
estimated to be $1 billion per year. Those who engage in this 
trade use a number of deceitful and illegal practices for 
financial gain. For example, the trafficker buys a large volume 
of cigarettes in States where the cigarette tax is low and 
takes them to States with higher taxes, selling them without 
paying those taxes at a significant discount.
    Traditional tobacco smuggling can be prosecuted under 
current Federal laws, but we need to explore whether these laws 
are appropriately enforced and sufficient to address the 
problem. The Jenkins Act at 15 USC 375 requires cigarette 
vendors who sell and ship cigarettes to another State to anyone 
other than a licensed distributor to report the sale to the 
buyer's home State tobacco collection officials. The act 
prescribes misdemeanor penalties for violations.
    The Contraband Cigarette Trafficking Act at 18 USC 2342 was 
passed in 1978 and makes it illegal for any person to knowingly 
transport, receive, possess or purchase contraband cigarettes 
or smokeless tobacco. The act contains penalties of up to 5 
years in prison.
    The bills before us today attempt to close apparent gaps in 
the current law by using two different approaches. The bill 
introduced by the gentleman from New York, Mr. Weiner, the PACT 
Act, enhances State and Federal law enforcement authority to go 
after out-of-State sellers engaged in illicit behavior and 
cutting off their method of delivery. The bill increases 
criminal penalties under the Jenkins Act from a misdemeanor to 
a felony, and also makes tobacco non-mailable through the U.S. 
Postal Service and imposes shipping and recordkeeping 
requirements on delivery carriers of cigarettes and smokeless 
tobacco.
    Legislation introduced by the gentleman from Texas, Mr. 
Doggett, the STOP Act, focuses on labeling, tracing and 
recordkeeping requirements on manufacturers and wholesalers. 
The bill requires individual cigarette packages to be marked 
with a Federal high-tech stamp similar to the one currently 
used in California. This legislation then imposes a number of 
criminal penalties for failing to abide by the necessary 
labeling and recordkeeping requirements.
    Both bills, however, allow State actions in Federal court 
for the collection of State cigarette taxes. Although the bills 
sound clear-cut, there are many dimensions to the smuggling 
problem. For example, smuggling and tax evasion are prohibited 
under State law, but many States fail to enforce their own 
laws. Moreover, there are allegations that wholesalers and 
manufacturers either facilitate or are complicit in smuggling 
operations.
    Finally, there are concerns expressed by a number of groups 
to the approaches taken in the bills. Tribal governments 
question the authority of creating State enforcement actions in 
Indian Country and the necessity of such actions in light of 
existing State and tribal government agreements relating to 
taxation.
    A number of common carriers have indicated that the 
shipping and recordkeeping requirements in H.R. 4081 are 
extremely burdensome. They say that even if they could identify 
the bad actors and locate smuggled packages, they would have no 
way of knowing the contents of the individual package and 
whether the package contained cigarettes, without opening and 
inspecting each individual package.
    So I look forward to the witnesses and I hope this hearing 
will identify the nature of the problem and how we can 
effectively combat tobacco smuggling, while balancing the 
various interests at stake.
    I will now recognize the gentleman from California, Mr. 
Lungren, who is sitting in for our Ranking Member.
    Mr. Lungren. Thank you very much, Mr. Chairman. Thank you 
for holding these hearings.
    I have Mr. Gohmert's statement, and I stayed up all night 
practicing the delivery. Unfortunately, by this morning I 
realized I couldn't in any way duplicate Mr. Gohmert, so I 
would ask unanimous consent that his statement be considered a 
part of the record.
    Mr. Scott. Without objection, so ordered.
    [The prepared statement of Mr. Gohmert follows:]
Prepared Statement of the Honorable Louie Gohmert, a Representative in 
 Congress from the State of Texas, and Ranking Member, Subcommittee on 
                Crime, Terrorism, and Homeland Security
    Thank you, Chairman Scott. I thank you for holding this hearing 
today on the important issue of tobacco smuggling.
    Tobacco smuggling has become one of the most prevalent forms of 
smuggling in recent years. And its effects are felt not only here in 
America, but around the world. The World Health Organization estimates 
that illegal cigarettes account for 10.7 percent, or approximately 600 
billion cigarettes, of the more than 5.7 trillion cigarettes sold 
globally each year.
    According to a study by the World Bank, cigarettes are appealing to 
smugglers because taxes typically account for a large portion of the 
price, making it highly profitable to smuggle for resale at a reduced 
price.
    Tobacco smuggling traditionally involves the diversion of large 
quantities of cigarettes from wholesale distribution onto the black 
market. This typically occurs during transit of the cigarettes, thus 
allowing the smugglers to avoid most if not all of the taxes that will 
be imposed at retail.
    The profits from tobacco smuggling, like other forms of smuggling, 
can be and likely are used to finance other illegal activities such as 
organized crime and drug trafficking syndicates. In addition, the sale 
of smuggled tobacco on the black market deprives states of significant 
amounts of tax revenue each year.
    Over the last fifteen years, cigarette taxes have increased more 
than 65 percent across America. Yet, during this same time period, 
states' tax revenues increased by only 35 percent.
    I look forward to hearing from our witnesses today and I yield back 
the balance of my time.

    Mr. Scott. The Chairman of the full Committee, Mr. Conyers.
    Mr. Conyers. Thank you, Mr. Chairman. I ask unanimous 
consent to put my statement in the record.
    Mr. Scott. Without objection, so ordered.
    [The prepared statement of Mr. Conyers follows:]
Prepared Statement of the Honorable John Conyers, Jr., a Representative 
in Congress from the State of Michigan, and Chairman, Committee on the 
                               Judiciary
    Every year, tens of billions of cigarettes are trafficked 
throughout the world. This smuggling harms public health and tax 
policies, and is a deterrent to those smokers who otherwise might quit. 
This illicit smuggling also helps finance criminal groups and 
drastically reduces government tax revenue that is an important source 
for funding state public health programs.
    H.R. 4081, the ``Prevent All Cigarette Trafficking Act of 2007'' 
and H.R. 5689, the ``Smuggled Tobacco Prevention Act of 2008'' take 
different approaches to the problems caused by the sale of smuggled or 
counterfeit tobacco products. The bills are a good start and I hope any 
bill that we consider in this Committee addresses three main areas.
    First, tobacco smuggling legislation must address the bleeding of 
state revenue funds that smuggling causes. The amount of tax revenue 
lost is shocking. For example, smuggling, including the illegal sale of 
tobacco products over the internet, resulted in an estimated $3.8 
billion dollar loss of state and federal tax revenue in 2004. Losses 
from smuggling fall on our public health programs, not on tobacco 
manufacturers or wholesalers that control the distribution system. 
There is simply less money available to fund tobacco prevention 
programs and other public health initiatives.
    Second, we need to dedicate more resources to fighting this problem 
and to ensure that the criminal code has adequate penalties to punish 
smugglers. Our initiatives in this area must keep up with advancing 
technology. Illegal internet sales of cigarettes and other tobacco 
products are growing, particularly to underage buyers. The majority of 
internet tobacco product sellers do not require any age or ID 
verification.
    The PACT Act introduced by Representative Weiner focuses primarily 
on illegal internet sales of tobacco. The bill increases federal 
penalties for cigarette trafficking from a misdemeanor to a felony 
offense. The bill effectively places much needed restrictions on 
Internet sellers by making cigarettes and smokeless tobacco non-
malleable matter through the U.S. mails. The bill also establishes a 
system that would block illegal Internet sellers from using any other 
delivery service.
    Finally, any legislation on tobacco smuggling should carefully 
address the various allegations, facets and concerns expressed by 
different groups on this issue. For example, tribes have expressed 
concern that the legislative approaches before us today may infringe on 
tribal regulatory authority or existing state-tribal tobacco tax 
agreements. We should look examine the substance and nature of these 
concerns. Another concern comes with the role of cigarette 
manufacturers. If we find that cigarette companies have been involved 
in facilitating smuggling, we need to further explore the issue and 
legislation should be designed to require companies to firmly control 
smuggling of their cigarettes.
    The problem of tobacco smuggling and tax evasion will not go away. 
Cigarette smuggling is a multibillion dollar phenomenon and is getting 
worse. I look forward to hearing from the witnesses on how to 
effectively combat smugglers and I yield back.

    Mr. Conyers. I want to talk about the importance of this 
hearing not particularly from the legislative point of view. As 
a cosponsor, I usually go on anything Weiner and Kildee come up 
with, so I assume I am already on the bill. But what I am going 
to put in the record is two things. One is the health 
consequences of smoking. I just want to tell you that this is 
not just an American problem, and I hope some of our friends 
from the tobacco industry are here in the room that will want 
to work with me on this.
    This thing is killing people all around the world, this 
tobacco problem. It is a health problem. Fortunately, I happen 
to have a medical doctor on my staff, which kind of helps me 
get the thing down. If I started reading this medical thing, 
you would think I was going to school at night trying to get 
credit somewhere. So that is one part of it.
    The other part that I am putting in the record is the 
incredible lengths to which the tobacco industry has gone to 
conceal the fact or how damaging and destructive their product 
is. So you can see that I am for getting on top of this 
enforcement provision that our leaders in Congress are urging 
us to do to get a tighter grip on this thing.
    But I want to make it understood to everybody the 
incredible links over the years that the tobacco industry 
almost in total--and there are some that are very outstanding 
in this deception and the concealment and the liability that 
they have incurred--have gone to conceal this fact that they 
owe I think it is billions, but certainly safely millions of 
dollars are being paid to try to make up for this incredible 
harm that has been visited upon the American people. I describe 
that, and I will be available to talk about it more.
    Now, when you say, Chairman Scott, you want to balance the 
various interests of the parties, I am very anxious to know who 
these parties are you want to balance any interests for.
    Mr. Scott. If the gentleman would yield?
    Mr. Conyers. With pleasure.
    Mr. Scott. One of the interests was the common carriers who 
would have to inspect some of the packages so whether or not 
the bills that are presented to us can effectively work. That 
is what we are talking about.
    Mr. Conyers. Okay, the mechanical part of it, how we make 
this thing operate?
    Mr. Scott. Right.
    Mr. Conyers. Because some of these interests, and when you 
find out what they are doing, this may need another hearing in 
the Crime Committee, Chairman Scott. We might want to just 
listen and learn what this industry has been doing overseas. It 
is even less flattering than what goes on inside the United 
States. Those are the only comments I wanted to make to 
accompany my statement. Thank you very much.
    Mr. Scott. I thank the gentleman.
    I would point out that our jurisdiction is limited to the 
criminal code. The bills before us involve criminal sanctions 
against smuggling of cigarettes. Some of the health concerns I 
think would probably be the subject of jurisdiction in other 
Committees and Subcommittees.
    Mr. Conyers. I think you are right, but I think the crimes 
that may not have been revealed yet are within our 
jurisdiction. I don't mind us getting a little health 
information on the Crime Committee as we go along.
    Mr. Scott. I thank the gentleman.
    The Ranking Member of the full Committee, the gentleman 
from Texas, Mr. Smith.
    Mr. Smith. Thank you, Mr. Chairman.
    Mr. Chairman, on the basis of what I have heard so far, it 
seems to me that there is nearly unanimous agreement on the 
nature of the problem as ably described by our Chairman, Mr. 
Conyers. There may be some disagreement on their legislative 
vehicle that achieves the goals we want to achieve, but I think 
this is nice to see such a bipartisan agreement on the nature 
of the problem.
    I want to thank you for scheduling this hearing on efforts 
to combat cigarette trafficking, which of course is a growing 
problem in America. Taxes on cigarettes vary greatly from State 
to State. This difference in tax rates creates a market for 
criminals and organized criminal syndicates to purchase 
cigarettes in one State and smuggle them to another State to 
re-sell them below market value and without paying local taxes.
    Cigarette trafficking is an issue that the Committee and 
the manufacturers have worked together on in the past and 
continue to address today. Along with Mr. Weiner of New York, 
who is getting ready to testify momentarily, I am pleased to be 
a cosponsor of H.R. 4081, the ``Prevent All Cigarette 
Trafficking,'' or ``PACT Act,'' one of the bills we are 
considering today.
    This bipartisan legislation closes loopholes in current 
tobacco trafficking laws and provides law enforcement officials 
with new tools to combat the innovative methods being used by 
cigarette traffickers to distribute their products. A recent 
case demonstrates how criminal syndicates engage in the highly 
lucrative enterprise of cigarette smuggling and deprive Federal 
and State governments of millions in tax revenues.
    In 2005 in my home State of Texas, Jorge Abraham pleaded 
guilty to leading a cigarette smuggling organization that 
brought over 11,000 cases of contraband cigarettes into markets 
across the United States for illegal sale. According to the 
Federal prosecutor in this case, the sale of these smuggled and 
counterfeit cigarettes resulted in a loss of $9 million in tax 
revenue to the Federal Government and the State governments of 
New York, California and Texas.
    Illegal cigarette smuggling virtually impacts State 
revenues. California officials estimate that taxes are unpaid 
on about 15 percent of all tobacco sold in its markets at a 
cost of $276 million per year. In a recently released study, 
the State of New York put its losses at more than $576 million 
each year.
    A few months ago, Texas raised its cigarette taxes. This 
increase is expected to generate an additional $800 million in 
revenue for our State. This bill helps ensure that Texans will 
receive that revenue. First, the legislation strengthens the 
Jenkins Act, a longstanding law that requires vendors who sell 
cigarettes to out-of-State buyers to report those sales to the 
buyer State tobacco tax administrator. However, many Internet 
vendors do not report these sales.
    The PACT Act makes it a Federal felony for anyone who makes 
a sale via telephone, the mail or the Internet, and fails to 
comply with all relevant State tax laws. The PACT Act also 
requires Internet cigarette sellers to verify the purchaser's 
age and identity through easily accessible databases. This 
measure protects children and ensures that they cannot 
anonymously purchase cigarettes from the Internet.
    The PACT Act empowers the attorney general to compile a 
list of delivery sellers who fail to comply with State tax 
laws. Any seller who lands on that list will be prohibited from 
using the U.S. Postal Service or common carriers like FedEx or 
DHL to deliver their products.
    The PACT Act prevents, in summary, the loss of tax revenue, 
combats cigarette smuggling, and limits children's access to 
cigarettes. So I urge my colleagues to support this bill which, 
as I see it, does all kinds of good and no harm.
    I yield back. Thank you, Mr. Chairman.
    Mr. Scott. Thank you.
    The gentleman from North Carolina, do you have a statement, 
very briefly?
    Mr. Coble. Thank you, Mr. Chairman.
    Mr. Scott. Since everybody else has had an opportunity to 
speak.
    Mr. Coble. Thank you, Mr. Chairman. I will be brief.
    In 2003, Mr. Chairman, a group of operatives were convicted 
of buying cigarettes in my home State of North Carolina and 
then selling them in Michigan. They were using the proceeds, I 
am told, for this operation to fund the activities of 
Hezbollah. Lorillard Tobacco Company, Mr. Chairman, is 
headquartered in the heart of my district, and Lorillard does 
not participate in Internet sales, so they are largely 
unaffected by this bill.
    However, Lorillard does use the mail to ship their 
cigarettes to various facilities for testing. These shipments 
do not involve sales to consumers, and certainly not to 
children. I am curious to know if the prohibition would apply 
to the use of mails, particularly Mr. Weiner, that would 
exclusively reserve for testing purposes. If this prohibition 
would apply in that instance, I would hope that the bill would 
be amended to not apply to mail shipment as it applies to 
testing purposes only, Mr. Chairman. That is my concern.
    I yield back.
    Mr. Scott. Thank you.
    The gentleman from Georgia has joined us. Do you have a 
statement you want to put in the record? Okay. Thank you. I ask 
unanimous consent that your statement be placed in the record. 
Without objection, any statements will be placed in the record.
    Our first panel of witnesses is comprised of Members who 
have an interest in the legislation before us. The first 
witness is the gentleman from New York, the Honorable Anthony 
Weiner, sponsor of H.R. 4081. He is a Member of the Judiciary 
Committee, and also sits on the Energy and Commerce Committee, 
and is part of the Democratic leadership team. He is a graduate 
of State University of New York at Plattsburgh.
    The next witness will be the gentleman from Michigan, the 
Honorable Dale Kildee, who currently serves as a senior Member 
of the House Committee on Education and Labor. He is also a 
Member of the House Committee on Natural Resources, and was 
elected by his colleagues in 1997 to serve as co-chair of the 
Native American Caucus. He is a graduate of Sacred Heart 
Seminary.
    Gentlemen, your entire statements will be made part of the 
record in their entirety. We would ask you to summarize your 
testimony at this point.
    Mr. Weiner?

TESTIMONY OF THE HONORABLE ANTHONY D. WEINER, A REPRESENTATIVE 
             IN CONGRESS FROM THE STATE OF NEW YORK

    Mr. Weiner. Thank you, Mr. Chairman. I won't be presenting 
my formal testimony. I just want to give a summary of it, and 
then join you and answer some questions. I am honored to be 
here with Mr. Kildee and all of you.
    You know, this is pretty clear that the problem that we 
have here of a dramatic explosion in the amount of smuggling of 
tobacco products was created by the confluence of something 
that we did as governors and as policymakers, and something 
that the tobacco industry did.
    The thing that we did is have dramatic and different price 
structures for the product based on the amount that we were 
taxing them, with different taxes in different States. Taxes 
have been rising in some States, rising faster in some States 
than others. Forty-four States over the last several years have 
gone to the tobacco tax as a way to raise revenue. We in the 
Federal Government, we in the House of Representatives have tax 
increases in bills to do things like SCHIP and fund 
improvements at the FDA.
    As you have rising taxes that are disparate from State to 
State, you are going to have an incentive for people to become 
scofflaws to try to evade that tax. You have it in the most 
extreme case in places that have no tax, meaning Indian 
reservations, but you have it in places like North Carolina. So 
you have this disparity that creates the incentive for people 
to sometimes travel great distances or go on the Internet, or 
try to find ways to elude that tax.
    The second part was something that we didn't do, but 
frankly this product is addictive. People are going to try to 
get it. They are going to try to get it in large amounts. What 
we have had in the combination of those two things is that we 
have had a dramatic increase in the number of cigarettes that 
are being sold in ways that frankly amount to smuggling and 
contraband.
    It not only has an impact on our ability to raise taxes, 
which is most obvious. We are seeing something in New York 
City, for example, that is being seen around the country. We 
project use of cigarettes, how much we tax, and we come up with 
a number and we are finding every year, year after year, we are 
missing that number.
    Now, some people can cheer and say, well maybe less people 
are smoking or fewer people are smoking, when in fact what we 
are seeing is the number of cigarettes being shipped from the 
manufacturers is falling some, but not by that amount. So it is 
clear that people are getting them elsewhere and we are losing 
a great deal of the tax revenue.
    Obviously, this problem creates a deleterious impact on our 
health. We want to discourage smoking. One of the ways we do it 
is by charging higher cigarette tax to discourage the activity. 
One of the ways we fund health programs is with the tobacco 
tax, so the fact that we are losing it has an impact on health.
    But as mentioned by my colleague, Mr. Coble, we are also 
finding that there are such margins and such revenue to be 
gained from this activity that it is not only going to 
neighborhood scofflaws who are trying to sell a case or two to 
a bodega in a corner. It is also being used by international 
and national crime syndicates. The Government Accountability 
Office found that Hezbollah has profited from the sales of 
illegal tobacco.
    I always complain when my colleagues testify that the 
charts are illegible. Now, I have done it. North Carolina, the 
case that they followed was a case where North Carolina 
cigarettes were purchased, shipped to Michigan, sold in 
Michigan, cash money was made on the tax margin, that was then 
used to fund Hezbollah.
    So what is the solution? Well, Congressman Smith is exactly 
right. We have already structured a way to try to deal with 
this in something called the Jenkins Act. The Jenkins Act says 
that if you sell cigarettes to someone, if you ship them to 
someone, you have to document and report to the State who is 
getting them.
    So if someone orders 20 cases or 30 cases, whether it be by 
phone or the Internet, there is a requirement by anyone selling 
that product to report it to the State of Hawaii, to the State 
of Texas, to the State of South Carolina that this person 
received this, to alert the tax agencies to go and collect the 
taxes that are required, because the requirement is where the 
person buys the cigarettes, not where it was sent from.
    The problem is not that it is being followed rarely. It is 
never being followed. No one ever is doing that type of thing 
because it kind of undermines their business. So people are 
going on the business, buying it, and not paying taxes. What my 
bill would do is strengthen the Jenkins Act to say, you know, 
these are not misdemeanors. We are going to make them felonies.
    Now, U.S. attorneys, now ATF, now prosecutors are going to 
say, you know what? Maybe I will go after this case because it 
is really worth the while and not just a misdemeanor the person 
is going to plead to and leave. It will be a much more serious 
thing.
    We do a couple of other things. One, if you look at the 
mechanism by which this smuggling is happening, it is happening 
by the Internet, quite frankly. Something like 90 percent of 
all the smuggled cigarettes are shipped via 10 or 15 or 20 Web 
sites. You can go right now and find someone advertising tax-
free cigarettes, and you will be able to get them.
    So what we do is we don't say you can't advertise. We don't 
say you can't sell it. You just can't ship it the way that you 
can now. Now, I want to say that Mr. Scott, you correctly 
summed up some of the complications here, but I want to also 
point out that UPS, DHL, and FedEx have entered into agreements 
to do just the thing that some of them say they can't do now, 
which is they have agreed in an agreement with New York state 
that is now being followed throughout the country, they have 
agreed not to ship this tobacco product.
    Some companies, as Mr. Coble mentioned, have some concern. 
They have specialty brands that they sell, or they have 
testing. I am open to having conversations about carving 
exemptions for that. We are not looking to cut down on that. 
Some shippers have said, oh well, maybe we are going to have 
problems with this in the future. Let's see. Right now, the 
only one that is carrying it, ironically, is the United States 
Postal Service. So the only one who would actually be covered 
by this in a real practical sense is the United States Postal 
Service. Everyone else would already be following their status 
quo operations.
    The impact of this, and I think Congressman Smith put it 
best, there are a lot of challenges we are going to face. The 
States have to figure out how to deal with the Native American 
tribes that are in their districts. There is a problem with 
people pulling up to the Seneca Reservation, loading them in 
the back of a truck with tax-free cigarettes, and driving off 
into the night. Those are complicated issues.
    I want to make it clear to my colleagues, we do not try to 
litigate those issues in the context of my bill. What we 
basically say is take the existing laws, and Congressman Smith 
and I and others have said, listen, let's just merely give the 
ATF, who is going to testify here, give the U.S. attorneys the 
tools that they need.
    One final point I would make here is there are a couple of 
other little minor things that could have dramatic impacts. 
One, we allow the States attorneys general to go and bring 
civil actions. They might not be able to do it against the 
tribes because of sovereignty issues, but if an independent guy 
sets up in their State and says we are going to start 
operating, the States attorneys general, who now basically have 
to sit on their hands and hope the Federal Government comes in, 
they will be able to act.
    Also, we grant the ATF further authority in going and 
taking a look at the records of this. There are a lot of 
traditional bad guys here. For the most part, I would say to 
you, Mr. Conyers and others, the tobacco companies haven't been 
the bad guys. Most of them are supporting this legislation. A 
couple who have technical reasons are not.
    Most of the shippers have already agreed to stop this 
activity. Just about every State I can think of would wind up 
benefiting in their tax revenues. It is something that we can 
do on the incremental side that I believe in the era of pay-go, 
I believe, Mr. Scott, we will be able to say that this not only 
doesn't cost money, but it is going to wind up saving the 
treasury a great deal of money.
    I thank you for letting me go a little over time.
    [The prepared statement of Mr. Weiner follows:]
Prepared Statement of the Honorable Anthony D. Weiner, a Representative 
                 in Congress from the State of New York
    Mr. Chairman, thank you for calling this hearing on the Prevent All 
Cigarette Trafficking (or PACT) Act. I have introduced this legislation 
to correct a number of the deficiencies in current law that have 
allowed tobacco smuggling to become a multibillion annual industry in 
the United States. Cigarette smuggling offers criminals potential for 
high profits with little risk to get caught.
    Tobacco smuggling costs federal, state and local governments 
billions in lost tax revenue, puts law abiding businesses at a 
tremendous competitive disadvantage to those who flaunt the law, and 
literally puts cigarettes at the fingertips of American youth who can 
purchase them online. And most troubling, we know that many of the 
proceeds from these illegal transactions are being used to fund 
terrorist activities around the world.
    There is a dramatic difference between the price of legally taxed 
cigarettes and illegal cigarettes. For example, consumers can purchase 
a carton of Marlboro's on-line for $31.95. That same carton of 
cigarettes would sell for $70 in New York City. Over the last 12 
months, there were over 1.1 billion cigarettes sold on-line. This 
represents billions of dollars lost in state and local revenue. New 
York City has estimated that they lose at least $40 million each year 
due to cigarette smuggling.
    Since 2000, 44 states, the District of Columbia and New York City 
have increased their excise tax on cigarettes by an average of $.83. 
Just earlier this month, my home state of New York chose to increase 
the state excise tax by $1.25 to a total of $2.75 per pack. The 
national average is now $1.14 per pack.
    The PACT Act would address these devastating economic, health and 
security consequences of this illicit tobacco trade by taking the 
following steps:

          Strengthening the Jenkins Act by making violations of 
        the Act a felony rather than a misdemeanor, and making it a 
        federal offense for failure to comply with all state tax laws 
        governing the sale of cigarettes via telephone, the mails, or 
        the Internet.

          Furthermore, State Attorneys General and local 
        governments that have cigarette excise taxes can seek 
        injunctive relief and civil penalties against out-of-state 
        sellers.

          Prohibiting the shipment of cigarettes and smokeless 
        tobacco products through the U.S. Postal Service.

          Empowering the U.S. Attorney General to compile a 
        list of delivery sellers who fail to comply with act or states' 
        tax laws. Common carriers and the USPS would then be prohibited 
        from delivering for non-compliant sellers on the list.

          Granting ATF records inspection authority for 
        distributors of cigarettes, and creating a penalty for those 
        who refuse inspection.

          Requiring Internet and other remote sellers to verify 
        a purchaser's age and identity through easily accessible 
        databases.

    Mr. Chairman, you will hear from witnesses this morning on the need 
for this legislation, to help address the economic, health and security 
implications of tobacco smuggling in the United States.
    I would like to focus specifically on the link to terrorism, which 
we know to be real.

          The GAO has estimated that from 1996-2000 Hezbollah 
        alone profited $1.5 million from the sale of illegal tobacco in 
        the United States.

          The largest single case to date was in 1996, in which 
        millions of dollars of cigarettes were smuggled to Michigan 
        from North Carolina. Authorities seized cigarettes, property, 
        and currency worth $2 million, and found evidence of proceeds 
        being transferred to bank accounts in Beirut. Three defendants 
        were ultimately found guilty of providing material support to 
        Hezbollah.

          The infamous Lackawanna Seven received funding from 
        an individual named Aref Ahmed for their travel from Buffalo, 
        NY to Afghanistan to attend an al Qaeda training camp. Ahmed 
        was convicted in 2004 on charges of conspiracy to commit money 
        laundering and smuggling contraband cigarettes.

    I look forward to hearing from the witnesses today to hear their 
thoughts on the issue of cigarette smuggling and on the PACT Act.

    Mr. Scott. Thank you.
    The gentleman from Michigan.

TESTIMONY OF THE HONORABLE DALE E. KILDEE, A REPRESENTATIVE IN 
              CONGRESS FROM THE STATE OF MICHIGAN

    Mr. Kildee. Thank you very much, Mr. Chairman. Thank you 
for inviting me to testify on H.R. 4081 and H.R. 5689.
    While I do not oppose the primary goals and objectives of 
these bills, my goal in testifying today is to urge the 
Committee to give ample opportunity for input from tribal 
governments to safeguard State and tribal government agreements 
relating to State taxation in Indian Country, and to avoid 
unnecessary State enforcement action against tribal 
governments.
    The issue of State taxation authority on Indian land is a 
delicate matter. U.S. Supreme Court rulings relating to the 
collection of State tobacco taxes on sales by an Indian seller 
to a non-Indian or non-member Indian buyers are complex and 
often are the subject of interpretational differences of 
opinion.
    In general, tribal government sales of tobacco products to 
tribal members cannot be taxed by a State. However, a State may 
collect taxes on tobacco product sales to non-Indian and non-
member Indians subject to certain qualifications that I will 
examine here.
    A negative result of these rulings is that tribal 
governments are not inclined to implement their own tax systems 
because dual taxation would hinder their economic 
opportunities. Because Indian tribes are sovereign governments, 
and enjoy sovereign immunity, the U.S. Supreme Court in listing 
options for the collection of State tax, encourages 
intergovernmental agreements with tribal governments to avoid 
further disputes over State taxation authority and the 
enforcement of State taxes.
    Unfortunately, special interest groups that have long been 
attempting to undermine tribal self-government and erode the 
sovereign immunity of tribal governments use Federal 
legislation to undermine these State-tribe agreements. Previous 
measures considered by this Committee would have created 
unprecedented new State authorities by allowing State 
governments to enforce the Federal Jenkins Act against tribal 
governments.
    In addition, this provision would only serve to disrupt 
State-tribal agreements where enforcement is addressed. H.R. 
4081, which amends the Jenkins Act, does not include this type 
of provision. I prefer that approach in H.R. 4081.
    Mr. Chairman, I strongly oppose inclusion of this type of 
provision in any measure as it would reverse more than 200 
years of Federal-Indian policy designed to protect the 
government-to-government relationship between tribes and the 
Federal Government.
    I want to be clear that tribal governments are not asking 
to be exempted from application of the Jenkins Act. They simply 
assert that enforcement of Federal law should remain within the 
province of the Federal Government, and that Federal 
legislation should preserve existing agreements between a State 
and tribe. I believe that H.R. 4081 achieves those objectives.
    H.R. 5689 would establish a system for requiring codes on 
packages of tobacco products for the purpose of tracking the 
collection of taxes through distribution systems under the 
authority of the Treasury Secretary. Manufacturers would be 
required to print a unique serial number on all packages of 
tobacco. A specific provision of the bill would also require 
that each package of a tobacco product that is sold on Indian 
reservations shall be visibly and prominently labeled as such.
    Due to the varied taxation arrangements that State and 
tribal governments have established, a generally applied one-
size-fits-all approach to tracking the collection of taxes may 
have the unintended effect of undermining intergovernmental 
agreements as is the case in the State of Michigan.
    Presently, 8 out of the 12 federally recognized Indian 
tribes in Michigan have entered into a comprehensive tax 
agreement with the State of Michigan that among other things 
provides a clearer understanding of the application of Michigan 
taxes in Indian Country.
    Except for the land areas described for each tribe, these 
agreements are boilerplate and include six areas of State 
taxation: sales and use taxes, motor fuel taxes, income taxes, 
Michigan single business tax, and tobacco taxes. Each agreement 
describes in great detail the exemptions, enforcement, 
administration, and termination.
    With regard to tobacco products, a tribe chooses one of two 
systems to acquire tobacco products for tribal and tribal 
members' use. The tribe may choose a quota system or a refund 
system. Most tribes have opted for the quota system which 
requires a tribe and a State to agree on a cap or a quota of 
tobacco products that a tribe may purchase tax-free from a pre-
identified wholesaler. The refund method requires a tribe to 
pre-pay State taxes on tobacco and request a refund from the 
State.
    In general, implementation of the tax agreements in the 
State of Michigan imposes substantial administrative 
responsibilities on the tribe. The agreements require the tribe 
to stamp tobacco products for the purpose of using the quota 
method, maintain a record of sales, reporting and enforcement 
duties. The State has the right to inspect tribal facilities. 
Disputes are resolved by binding arbitration.
    I have oversimplified, perhaps, the tax agreements in 
Michigan, as they are quite complicated. But there is great 
good faith between the State of Michigan and the tribes. 
Another tribe now is in the process of entering an agreement 
with the State on these issues.
    I want to thank the Chairman for the willingness to ensure 
the participation of a tribal leader at this hearing. I commend 
you for supporting Federal policies designed to advance tribal 
self-determination and economic self-sufficiency. I look 
forward to working with you. I have on my own staff a Cherokee 
Indian, Kim Tehee, who is an attorney, and she would be most 
happy to share her great wisdom and history on this issue with 
you.
    I know Mr. Lungren has a great experience as former 
attorney general of the State of California. I and my staff are 
willing to work with you. I do think that the bill, H.R. 4081, 
is the better approach to addressing the problem that exists, 
without interfering with Indian sovereignty.
    I thank you very much for this opportunity to testify.
    [The prepared statement of Mr. Kildee follows:]
Prepared Statement of the Honorable Dale E. Kildee, a Representative in 
                  Congress from the State of Michigan
                            i. introduction
    MR. CHAIRMAN, THANK YOU FOR INVITING ME TO TESTIFY AT THE HEARING 
THIS MORNING. AS DEMOCRATIC CO-CHAIRMAN OF THE HOUSE NATIVE AMERICAN 
CAUCUS, I AM PLEASED TO EXPRESS MY VIEWS ON H.R. 4081, THE ``PREVENT 
ALL CIGARETTE TRAFFICKING ACT OF 2007 AND H.R. 5689, THE ``SMUGGLED 
TOBACCO PREVENTION ACT OF 2008.''
    WHILE I DO NOT OPPOSE THE PRIMARY GOALS AND OBJECTIVES OF THESE 
BILLS, MY GOAL IN TESTIFYING TODAY IS TO URGE THIS COMMITTEE, AS IT 
PROCEEDS IN CONSIDERING TOBACCO RELATED LEGISLATION, TO GIVE AMPLE 
OPPORTUNITY FOR INPUT FROM TRIBAL GOVERNMENTS, TO SAFEGUARD STATE AND 
TRIBAL GOVERNMENT AGREEMENTS RELATING TO STATE TAXATION IN INDIAN 
COUNTRY, AND TO AVOID UNNECESSARY STATE ENFORCEMENT ACTIONS AGAINST 
TRIBAL GOVERNMENTS.
  ii. broad overview of state taxation authority of tobacco products 
                          sold on indian land
    THE ISSUE OF STATE TAXATION AUTHORITY ON INDIAN LAND IS A DELICATE 
MATTER. U.S. SUPREME COURT RULINGS RELATING TO THE COLLECTION OF STATE 
TOBACCO TAXES ON SALES BY AN INDIAN SELLER TO NON-INDIAN OR NONMEMBER 
INDIAN BUYERS ARE COMPLEX AND OFTEN ARE THE SUBJECT OF INTERPRETATIONAL 
DIFFERENCES OF OPINION.
    IN GENERAL, TRIBAL GOVERNMENT SALES OF TOBACCO PRODUCTS TO TRIBAL 
MEMBERS CANNOT BE TAXED BY A STATE. HOWEVER, A STATE MAY COLLECT TAXES 
ON TOBACCO PRODUCT SALES TO NON-INDIAN AND NONMEMBER INDIANS, SUBJECT 
TO CERTAIN QUALIFICATIONS THAT I WILL NOT EXAMINE HERE. A NEGATIVE 
RESULT OF THESE RULINGS IS THAT TRIBAL GOVERNMENTS ARE NOT INCLINED TO 
IMPLEMENT THEIR OWN TAX SYSTEMS BECAUSE DUAL TAXATION WOULD HINDER 
THEIR ECONOMIC OPPORTUNITIES.
    BECAUSE INDIAN TRIBES ARE SOVEREIGN GOVERNMENTS AND ENJOY SOVEREIGN 
IMMUNITY, THE U.S. SUPREME COURT IN LISTING OPTIONS FOR THE COLLECTION 
OF THE STATE TAX ENCOURAGES INTERGOVERNMENTAL AGREEMENTS WITH TRIBAL 
GOVERNMENTS TO AVOID FURTHER DISPUTES OVER STATE TAXATION AUTHORITY AND 
ENFORCEMENT OF STATE TAXES.
    UNFORTUNATELY, SPECIAL INTEREST GROUPS THAT HAVE LONG BEEN 
ATTEMPTING TO UNDERMINE TRIBAL SELF-GOVERNMENT AND ERODE THE SOVEREIGN 
IMMUNITY OF TRIBAL GOVERNMENTS USE FEDERAL LEGISLATION TO UNDERMINE 
THOSE STATE-TRIBE AGREEMENTS.
    PREVIOUS MEASURES CONSIDERED BY THIS COMMITTEE WOULD HAVE CREATED 
UNPRECEDENTED NEW STATE AUTHORITIES BY ALLOWING STATE GOVERNMENTS TO 
ENFORCE THE FEDERAL JENKINS ACT AGAINST TRIBAL GOVERNMENTS. IN 
ADDITION, THIS PROVISION WOULD ONLY SERVE TO DISRUPT STATE/TRIBAL 
AGREEMENTS WHERE ENFORCEMENT IS ADDRESSED. H.R. 4081, WHICH AMENDS THE 
JENKINS ACT, DOES NOT INCLUDE THIS TYPE OF PROVISION.
    MR. CHAIRMAN, I STRONGLY OPPOSE INCLUSION OF THIS TYPE OF PROVISION 
IN ANY MEASURE AS IT WOULD REVERSE MORE THAN 200 YEARS OF FEDERAL 
INDIAN POLICY DESIGNED TO PROTECT THE GOVERNMENT-TO-GOVERNMENT 
RELATIONSHIP BETWEEN TRIBES AND THE FEDERAL GOVERNMENT. I WANT TO BE 
CLEAR THAT TRIBAL GOVERNMENTS ARE NOT ASKING TO BE EXEMPTED FROM 
APPLICATION OF THE JENKINS ACT; THEY SIMPLY ASSERT THAT ENFORCEMENT OF 
FEDERAL LAW SHOULD REMAIN WITHIN THE PROVINCE OF THE FEDERAL 
GOVERNMENT.
    AND, THAT FEDERAL LEGISLATION SHOULD PRESERVE EXISTING AGREEMENTS 
BETWEEN A STATE AND TRIBE. I BELIEVE THAT H.R. 4081 ACHIEVES THOSE 
OBJECTIVES.
    H.R. 5689 WOULD ESTABLISH A SYSTEM FOR REQUIRING CODES ON PACKAGES 
OF TOBACCO PRODUCTS FOR THE PURPOSE OF TRACKING THE COLLECTION OF TAXES 
THROUGH THE DISTRIBUTION SYSTEM UNDER THE AUTHORITY OF THE TREASURY 
SECRETARY. MANUFACTURERS WOULD BE REQUIRED TO PRINT A UNIQUE SERIAL 
NUMBER ON ALL PACKAGES OF TOBACCO. A SPECIFIC PROVISION OF THE BILL 
WOULD ALSO REQUIRE THAT ``EACH PACKAGE OF A TOBACCO PRODUCT THAT IS 
SOLD ON AN INDIAN RESERVATION . . . SHALL BE VISIBLY AND PROMINENTLY 
LABELED AS SUCH.''
    DUE TO THE VARYING TAXATION ARRANGEMENTS THAT STATE AND TRIBAL 
GOVERNMENTS HAVE ESTABLISHED, A GENERALLY APPLIED ``ONE SIZE FITS ALL'' 
APPROACH TO TRACKING THE COLLECTION OF TAXES MAY HAVE THE UNINTENDED 
EFFECT OF UNDERMINING INTERGOVERNMENTAL AGREEMENTS, AS THE CASE MAY BE 
IN THE STATE OF MICHIGAN.
                    iii. tax agreements in michigan
    PRESENTLY, 8 OUT OF THE 12 FEDERALLY RECOGNIZED INDIAN TRIBES IN 
MICHIGAN HAVE ENTERED INTO COMPREHENSIVE TAX AGREEMENTS WITH THE STATE 
OF MICHIGAN THAT, AMONG OTHER THINGS, PROVIDES A CLEAR UNDERSTANDING OF 
THE APPLICATION OF MICHIGAN TAXES IN INDIAN COUNTRY.
    EXCEPT FOR THE LAND AREAS DESCRIBED FOR EACH TRIBE, THESE 
AGREEMENTS ARE BOILERPLATE, AND INCLUDE SIX AREAS OF STATE TAXATION: 
SALES AND USE TAXES, MOTOR FUEL TAXES, INCOME TAXES, MICHIGAN SINGLE 
BUSINESS TAX, AND TOBACCO TAXES. EACH AGREEMENT DESCRIBES IN GREAT 
DETAIL THE EXEMPTIONS, ENFORCEMENT, ADMINISTRATION, AND TERMINATION.
    WITH REGARD TO TOBACCO PRODUCTS, A TRIBE CHOOSES ONE OF TWO SYSTEMS 
TO ACQUIRE TOBACCO PRODUCTS FOR TRIBAL AND TRIBAL MEMBER USE. THE TRIBE 
MAY CHOOSE A QUOTA SYSTEM OR A REFUND SYSTEM. MOST TRIBES HAVE OPTED 
FOR THE QUOTA SYSTEM WHICH REQUIRES A TRIBE AND STATE TO AGREE ON A CAP 
OR QUOTA OF TOBACCO PRODUCTS THAT A TRIBE MAY PURCHASE TAX FREE FROM A 
PRE-IDENTIFIED WHOLESALER. THE REFUND METHOD REQUIRES A TRIBE TO PREPAY 
STATE TAXES ON TOBACCO AND REQUEST A REFUND FROM THE STATE.
    IN GENERAL, IMPLEMENTATION OF THE TAX AGREEMENTS IN THE STATE OF 
MICHIGAN IMPOSES SUBSTANTIAL ADMINISTRATIVE RESPONSIBILITIES ON THE 
TRIBE. THE AGREEMENTS REQUIRE THE TRIBE TO STAMP TOBACCO PRODUCTS FOR 
THE PURPOSES OF USING THE QUOTA METHOD, MAINTAIN A RECORD OF SALES, 
REPORTING AND ENFORCEMENT DUTIES. THE STATE HAS THE RIGHT TO INSPECT 
TRIBAL FACILITIES. DISPUTES ARE RESOLVED BY BINDING ARBITRATION. THE 
AGREEMENTS ARE PERPETUAL, BUT MAY BE TERMINATED BY EITHER PARTY UPON 
NOTICE.
    I HAVE OVERSIMPLIFIED THE TAX AGREEMENTS IN MICHIGAN AS THEY ARE 
QUITE COMPLICATED. MY POINT, HOWEVER, IS TO EMPHASIZE THE IMPORTANCE OF 
PRESERVING INTERGOVERNMENTAL TAX AGREEMENTS.
                             iv. conclusion
    I WANT TO THANK THE CHAIRMAN FOR HIS WILLINGNESS TO ENSURE THE 
PARTICIPATION OF A TRIBAL LEADER AT THIS HEARING. I COMMEND YOU FOR 
SUPPORTING FEDERAL POLICIES DESIGNED TO ADVANCE TRIBAL SELF-
DETERMINATION AND ECONOMIC SELF-SUFFICIENCY.
    I LOOK FORWARD TO WORKING WITH THIS COMMITTEE TO ADDRESS CONCERNS 
OF TRIBAL GOVERNMENTS TO AVOID UNINTENDED IMPACTS ON INTERGOVERNMENTAL 
AGREEMENTS AND TO CLEAR UP ANY AMBIGUITY WITH RESPECT TO ENFORCEMENT.
    THANK YOU.

    Mr. Scott. Thank you very much.
    I thank both of our witnesses for testifying.
    Are there any burning questions from the Members? If not, 
we thank you for your testimony today.
    At this point, I ask unanimous consent to introduce for the 
record a statement from the gentleman from Texas, Mr. Doggett, 
who is the chief sponsor of H.R. 5689. The statement begins 
with, ``Only because of a broken leg am I submitting this 
written testimony instead of participating personally. H.R. 
5689, the ``Smuggled Tobacco Prevention Act of 2008,`` the STOP 
Act, is a sensible public health and law enforcement approach 
to preventing the smuggling of tobacco.''
    I would ask that the complete statement be made part of the 
record. Without objection, so ordered.
    [The prepared statement of Mr. Doggett follows:]
Prepared Statement of the Honorable Lloyd Doggett, a Representative in 
                    Congress from the State of Texas

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Scott. Our second panel, if the witnesses could come 
forward? I will begin the introductions as they come forward.
    The gentleman from California?
    Mr. Lungren. Mr. Chairman, I ask unanimous consent that a 
report by Mr. King of New York about tobacco and the connection 
with terrorist organizations might be made a part of the 
record, including a diagram describing the particular matter in 
the State of New York.
    Mr. Scott. Without objection, so ordered.
    [The information referred to follows:]
Report by Peter T. King, a Representative in Congress from the State of 
       New York, submitted by the Honorable Daniel E. Lungren, a 
        Representative in Congress from the State of California

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Lungren. Thank you.
    Mr. Scott. Thank you.
    Our first witness on the second panel will be William 
Hoover, the assistant director of the Bureau of Alcohol, 
Tobacco, Firearms and Explosives. His current duties include 
the oversight of all field operations comprising regulatory and 
criminal enforcement, which constitutes the majority of ATF's 
resources and workforce. He is a graduate of Shepherd College.
    The next witness will be Matthew Myers, president of the 
Campaign for Tobacco-Free Kids, a privately funded organization 
established to reduce tobacco use and its devastating 
consequences in the United States and around the world. Over 
the last 25 years, he has participated in virtually every major 
national tobacco-related legislative effort and has worked with 
State tobacco prevention advocates and officials around the 
country.
    Next will be Mr. Steve Rosenthal, a consultant to and past 
president of the New York State Association of Wholesale 
Marketers, whose members are New York's cigarette tax stamping 
agents. Mr. Rosenthal has been involved in the tobacco business 
for 37 years, during which time he owned one of the largest 
cigarette distribution companies in the Northeast.
    Next, we will have John Colledge, who is currently an 
independent consultant advising clients on matters such as 
international cigarette and liquor smuggling, trafficking, 
counterfeit merchandise, anti-laundering and other customs and 
law enforcement matters. He recently retired with more than 20 
years of service as a criminal investigator with the U.S. 
Customs Service and the Department of Homeland Security. He is 
a graduate of Arizona State University.
    I was about to say we hadn't gotten biographical 
information, but that is not the case right now. Just in time.
    Mr. Arlan Melendez is chairman of the Reno-Sparks Indian 
Colony of Nevada. He has been chairman for the past 17 years. 
He is chairman of the Taxation Committee of the National 
Congress of American Indians. He is a past president of the 
Intertribal Council of Nevada and the past Phoenix-area vice 
chairman of the National Congress of American Indians. Senator 
Reid appointed Mr. Melendez as a member of the United States 
Commission on Civil Rights. He is only the second American 
Indian to serve on that commission.
    Our final witness is the chief counsel of the Tobacco 
Enforcement Unit of the Office of the Attorney General of 
Maryland, Mr. David Lapp.
    We will begin with Mr. Hoover.
    Mr. Hoover. Thank you, Chairman Scott.
    Mr. Scott. Before you begin, there is a lighting device at 
your table which will start off green and go to yellow with 1 
minute left of the 5 minutes in your testimony, and red when 
the 5 minutes are up. So I would ask you to summarize your 
testimony in 5 minutes or less. Your entire written statement 
will be made part of the record in its entirety.
    Thank you. Excuse me, Mr. Hoover.

  TESTIMONY OF WILLIAM HOOVER, ASSISTANT DIRECTOR, OFFICE OF 
  FIELD OPERATIONS, BUREAU OF ALCOHOL, TOBACCO, FIREARMS AND 
 EXPLOSIVES (ATFE), U.S. DEPARTMENT OF JUSTICE, WASHINGTON, DC

    Mr. Hoover. Thank you, Chairman Scott and distinguished 
Members of the Subcommittee. I am William Hoover, assistant 
director for field operations of ATF. I have been an agent with 
ATF since 1987. In my current position, I oversee the 
operations of all of the bureau's field offices. ATF 
appreciates the interest of this Subcommittee and of 
Representatives Weiner and Doggett in addressing the growing 
problem of cigarette trafficking. We appreciate the opportunity 
to speak to this Committee on this important issue.
    ATF has the primary jurisdiction in the United States over 
the interstate trafficking of cigarettes, pursuant to the 
Contraband Cigarette Trafficking Act which was enacted in 1978. 
Its purpose is to prevent criminal networks from profiting by 
transporting and selling cigarettes in interstate commerce 
without first paying the applicable State excise tax.
    The CCTA makes it unlawful for any person to sell, possess 
or purchase more than 10,000 cigarettes which bear no evidence 
of State tax payment in the State in which the cigarettes are 
found, if that State requires a stamp or other indicia of 
evidence of payment of taxes. The maximum penalty for violating 
this statute is 5 years in prison.
    As the agency with primary jurisdiction over the CCTA, ATF 
has achieved great success in our contraband cigarette 
investigations. Trafficking in contraband cigarettes, as 
mentioned previously, is a global problem and it is believed 
that cigarettes are the number one illegally trafficked legal 
commodity in the world.
    Cigarette diversion schemes are growing on every continent. 
It has been estimated by some that the illicit worldwide trade 
in cigarettes accounts for approximately 11 percent of all 
cigarettes sold, or about 600 million cigarettes. Estimates of 
the worldwide tax loss to governments are between $40 billion 
and $50 billion each year.
    Illicit tobacco trafficking is primarily the result of tax 
disparities. Congressman Weiner, I, too, am guilty of maybe not 
making my chart large enough, but what you see on the chart 
that we have provided you today are the different tax 
structures from the States across the country.
    This pricing difference creates an opportunity for criminal 
networks to reap huge profits by avoiding Federal and/or State 
excise taxes. The large-scale trafficking in cigarettes 
involves a structured business model which mirrors the movement 
of cigarettes in legitimate markets, and this involves either 
genuine or counterfeit products. You must have a source, a 
warehousing system, a shipping network, and finally a retail 
outlet.
    A number of studies regarding the estimated tax loss to the 
United States have been conducted. For example, the GAO has 
cited studies that estimate in 2005 the tax loss to States from 
cigarette trafficking at $1 billion. I am also aware of 
estimates which indicate that New York state loses 
approximately $500 million and California loses approximately 
$100 million annually due to the diversion of cigarettes.
    Throughout the years, ATF has seen the development and 
advancement of this criminal activity due to the potential for 
enormous profits. Let me give you an example. The Federal 
excise tax on a carton of cigarettes amounts to $3.90, while 
State and local excise taxes can be as high as $30 per carton. 
Therefore, a person who avoids paying these expenses on 3,000 
cartons of contraband cigarettes, which is roughly a minivan 
full load, and sells them in New York City at the same price as 
a legal vendor could reap as much as $115,000 more dollars in 
profit than that legal vendor.
    In the simplest form, cigarette trafficking is an easy way 
for criminals to make money. It is therefore no surprise that 
criminal groups such as outlaw motorcycle gangs, organized 
crime and drug cartels have become involved in cigarette 
trafficking. These schemes include traditional State-to-State 
trafficking, elaborate counterfeiting of cigarettes and tax 
stamps, and the illicit manufacturing of cigarettes. 
Historically, ATF has seen these schemes conducted at the 
wholesale or stamping agent level, down to the retail outlets.
    Additionally, Federal law requires all cigarettes 
manufactured in the United States for export to bear a marking 
on the individual pack stating that it is tax exempt for sale 
outside of the United States. If the cigarettes are brought 
back into the U.S. for sale, they must go back to the 
manufacturer for re-packaging and the payment of the Federal 
excise tax.
    ATF has encountered numerous schemes where cigarettes are 
sent out to foreign trade zones, Customs warehouses, and 
foreign ports and then reintroduced into the United States 
without the payment of this Federal excise tax, and 
subsequently the applicable State tax. Criminals then illegally 
sell them with either the export-only stamp on the pack or 
repackaged without the stamp.
    Intelligence suggests that these criminal enterprises 
involved in these schemes build into their pricing model a 
figure which reflects that one in ten containers will be 
detected by Customs. To the best of our knowledge, counterfeit 
products that have been seized by domestic law enforcement have 
not been manufactured in the United States. Most counterfeit 
cigarettes are manufactured in clandestine labs and have been 
found to create a substantially higher health risk than the 
genuine product. ATF laboratory personnel have examined 
counterfeit cigarettes containing bird feces, bird feathers and 
plastic shavings.
    Now, in my long statement, there are examples of 
investigations that we have conducted that I would like to 
share with you, but I can see that I am out of time, so I will 
cut my statement at this point.
    [The prepared statement of Mr. Hoover follows:]
                  Prepared Statement of William Hoover

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]


    Mr. Scott. Thank you, Mr. Hoover.
    Mr. Myers?

           TESTIMONY OF MATTHEW L. MYERS, PRESIDENT, 
         CAMPAIGN FOR TOBACCO-FREE KIDS, WASHINGTON, DC

    Mr. Myers. Thank you, Mr. Chairman. It is a genuine 
pleasure to be here. It is also a genuine pleasure to be here 
on a Committee where the Chairman, Mr. Conyers, and the Ranking 
minority Member, Mr. Smith, demonstrate the bipartisan nature 
of both the problem and the solutions.
    I also want to very much commend Congressman Weiner for 
taking the lead on providing us with an opportunity to do 
something, and to do something we can do today that will make a 
fundamental difference in the health of our children.
    And Mr. Doggett for tackling the broader problem. I think 
all of us know that only a broken leg could have kept Mr. 
Doggett away from here today. His long-time commitment to this 
issue and finding practical solutions to this is 
extraordinarily important.
    The Campaign for Tobacco-Free Kids and all of the other 
major public health organizations in this nation strongly 
support both the PACT Act and the STOP Act. As the Members of 
this Committee are well aware, smuggling and tax evasion are 
criminal acts that reduce government revenue and hurt honest 
business. That should be reason enough to tackle these 
problems.
    But the reason we are here is because they also have a 
direct impact on the health of our nation and the health of our 
children. Counterfeit and smuggled cigarettes and other 
cigarettes sold free of applicable State and Federal taxes are 
sold at prices far lower than legally sold cigarettes. Cheap 
cigarettes mean more people smoking and more people smoking 
more. Most importantly, what they mean is more children smoking 
because children are most price-responsive.
    There is another reason for acting on these bills. Black 
market vendors and other illegal sellers are also much more 
likely to sell to underage buyers. The vast majority of 
Internet tobacco product sellers do not do any age or ID 
verification. A New York study found that in 2004 and 2005, 
more than 5 percent of the ninth-graders had bought cigarettes 
online.
    To make matters worse, some Internet sellers require 
minimum purchase sale, so kids who purchase cigarettes end up 
purchasing more of them and themselves become re-sellers.
    There is another reason to be concerned. The reduction in 
revenue hurts State revenue and the decrease in State revenue 
means there is less money to fund important public health 
prevention programs, including tobacco prevention programs. The 
problem also reduces State revenues in another way. The master 
settlement agreement entered into between 46 States and the 
tobacco industry gears those payments to legal tobacco sales. 
The greater the illegal sales, the less money the States have 
for legitimate and important public health purposes.
    Lastly, the tobacco industry uses the existence of illegal 
sales to argue against important tobacco tax increases, just as 
New York recently increased its tax by $1.25. When States 
increase their tobacco taxes as New York and Texas have done, 
what we see is decreased consumption, increased State revenue, 
and more money available for important public health programs. 
The tobacco industry uses the failure to have proper systems to 
implement these laws to fight these taxes.
    Let me briefly talk about the two bills, if I may do that. 
The PACT Act introduced by Representative Weiner focuses 
primarily on Internet sales as we know. It is the result of 
years of careful negotiation between all of the interested 
parties. At present, neither the Federal Government nor the 
State governments have the tools to address a problem that 
everybody agrees needs to be addressed. This bill represents an 
extraordinarily careful balance. It will help and protect 
honest businessmen. It will only impose a burden on those who 
are selling illegally.
    Trying to stop illegally operated Internet sellers through 
traditional enforcement lawsuits on a case-by-case basis simply 
doesn't work. While the States have entered into what I think 
are innovative agreements with the common carriers, (a) it 
doesn't necessarily apply to new common carriers who come on 
board; (b) it could be overturned any day; and (c) it is 
contingent upon New York state law. If New York state laws were 
challenged, there is a possibility that that voluntary 
agreement will no longer be in existence. The existence of the 
voluntary agreement, however, demonstrates that the common 
carriers can do precisely what this act asks them to do.
    Another key element here is the non-mailable matter 
provision. Recent surveys have shown that the mails are the 
primary means of transmitting illegally sold--and I want to 
underline the words ``illegally sold'' cigarettes. This bill 
would prevent that.
    There are two recommendations that we make with regard to 
changes that are needed that we believe. One is that section 
(j)(1)(B) currently reads that the notice to the attorney 
general impacts those businesses that are only primarily 
engaged in the sale of cigarettes. It should be ``regularly'' 
engaged in the sale of cigarettes. There are some very large 
sellers out there who also sell other products. There is no 
reason to exempt them.
    Similarly, the provision that is properly in the 
legislation to protect sales within Hawaii and Alaska contains 
the phrase ``or into,'' so they would allow interstate sales. 
That was I think unintentional and should also be addressed.
    On balance, the PACT Act is one of those pieces of 
legislation that has been carefully crafted to address I think 
all of the interests of the parties. I know that there have 
been extensive negotiations with the tribes in order to address 
those issues, and explicit provisions to guarantee the tribal 
sovereignty is honored in this. Hopefully, this is a piece of 
legislation that we can move quickly.
    The STOP Act is equally important. Let me just briefly 
address it. It contains vitally important provisions to deal 
with the problem of smuggled cigarettes. High-tech tax stamps, 
which are in existence, technically available, don't 
discriminate against any sellers, could make an enormous 
difference in the sale of the illegal cigarettes. It is 
something that we can do today. We can do it cheaply and it 
won't negatively impact anybody in the legal sale of tobacco 
products. It is incredibly important.
    It is also important to understand that while the STOP Act 
does not specifically speak in terms of tribal sovereignty, it 
is neutral and would not impinge on issues of tribal 
sovereignty. However, the issues that have been raised are very 
important, and I think everybody involved is prepared to talk 
about ways to affirmatively State in the legislation the 
importance of protecting tribal sovereignty, as is done in the 
PACT Act.
    Let me just briefly conclude by saying cigarette smuggling 
is a matter of honesty, fairness, criminal law, but it is also 
one of those issues that we have solutions that can not only 
raise government revenue, decrease illegal activity, protect 
honest businesses, and it will save lives.
    Thank you.
    [The prepared statement of Mr. Myers follows:]
                 Prepared Statement of Matthew L. Myers
    Mr. Chairman, Thank you for inviting me to testify today on the 
problem of tobacco product smuggling and tax evasion and, more 
particularly, on the Prevent All Cigarette Trafficking or PACT Act 
(H.R. 4081), introduced by Representative Weiner, and the Smuggled 
Tobacco Prevention Act (H.R. 5689), introduced by Representative 
Doggett.
    The Campaign for Tobacco-Free Kids and other public health 
organizations--such as the American Cancer Society, the American Lung 
Association, and the American Heart Association--strongly support the 
passage of both bills. Each is a carefully crafted piece of legislation 
that addresses different aspects of the problem caused by the sale of 
smuggled or counterfeit tobacco products or other tobacco products on 
which taxes have not been paid. Together, they offer an effective way 
to supplement and improve existing federal laws to prevent and reduce 
domestic and international aspects of tobacco product smuggling, tax 
evasion and illegal sales to youth.
    As the members of this Committee are well aware, smuggling and tax 
evasion are criminal activities that reduce government revenues and 
hurt honest businesses. That is reason enough to want to minimize the 
problem. But tobacco product smuggling and tax evasion also have 
serious public health consequences.
    Counterfeit and smuggled cigarettes and other cigarettes sold free 
of applicable federal or state taxes are offered to consumers at prices 
far lower than the prices charged by lawful tobacco product retailers. 
The sales of these illegally tax-free products undermine ongoing state 
and local efforts to reduce tobacco use by increasing tobacco tax 
rates. Studies show, for example, that every 10% increase in real 
cigarette prices will reduce overall use by approximately three or four 
percent and reduce the number of youth smokers by six or seven percent. 
The corollary has also been proven true--decreases in cigarette 
prices--in this case from illegal cigarettes--increase tobacco use. The 
availability of cheap cigarettes therefore increases overall tobacco 
use, thereby leading to higher levels of tobacco-caused disease, deaths 
and costs. By reducing the easy access to contraband tobacco products 
and other tobacco products on which taxes have not been paid, these 
bills will assist in the effort to reduce tobacco use and its harms, 
especially among youth and lower-income persons.
    Another key public health problem from contraband tobacco product 
trafficking is sales to kids. Black market vendors and other illegal 
sellers are much more likely to sell to underage buyers than legally 
operating retailers. This problem is especially clear with illegal 
Internet sales of cigarettes and other tobacco products.

          The vast majority of Internet tobacco product sellers 
        do not do any age or ID verification.

          Studies show that kids can easily buy--70 to 90 
        percent are successful with no ID checks.

          The last nationwide survey of the problem, in 2001, 
        showed that more than three percent of youth smokers aged 12 to 
        17 (more than 100,000 kids) had recently purchased cigarettes 
        from the Internet.

          Since then, a New York study found that in 2004 and 
        2005 more than 5% of just 9th graders (14 and 15 year olds) had 
        bought cigarettes online--more than three times as many as in 
        2001--and purchase rates are even higher among older kids.

    Since then, the problem has become even worse. Put simply, more 
kids are gaining access to computers and the Internet, more kids are 
getting their own credit cards and debit cards, and more kids are 
getting comfortable making purchases over the Internet. To make matters 
worse, some Internet sellers require minimum purchases of at least one 
or two cartons. So kids who buy over the Internet can become suppliers 
for their friends and classmates.
    The sale of contraband tobacco products and other tobacco products 
on which no taxes have been paid also hurts public health by reducing 
the amount of government tobacco tax revenues available to fund tobacco 
prevention programs and other public health initiatives.
    This problem is exacerbated by the fact that contraband cigarette 
trafficking can also reduce the annual tobacco settlement payments to 
the states. Those settlement payments are supposed to be adjusted 
downward based on U.S. cigarette consumption declines--but the MSA 
formulas are based solely on changes to legal cigarette sales. When 
smokers shift to illegal cigarettes, consumption does not actually 
decline, but payments to the states do.
    The illegal sale of tobacco products also opens the door to the 
sale of tobacco products that don't always have the required health 
warnings and may contain pesticide levels that exceed those permitted 
on legally grown domestic tobacco, a problem that will become more 
significant once the pending federal FDA tobacco legislation becomes 
law, even more so once FDA sets product standards for cigarettes.
    There is another public health reason to institute effective 
measures to minimize tobacco product smuggling and tax evasion. As 
mentioned earlier, tobacco tax rate increases are an especially 
effective way to increase tobacco product prices and, consequently, 
reduce tobacco use and its many harms and costs. But the tobacco 
industry and its allies regularly argue against any significant tobacco 
tax rate increases, claiming that they will drive more smokers to 
illegal cigarettes. The legislation before this Committee offers the 
proper response to this tobacco industry argument. Rather than just 
allow the criminal activity to continue--and forgo the important health 
and fiscal benefits from increasing the tobacco tax rates--these two 
bills would implement effective measures to minimize the problem of 
illegal tobacco product sales.
    For all these reasons, minimizing tobacco product smuggling and tax 
evasion is good fiscal policy and good for public health.
    These measures can be quickly implemented. They will stop criminals 
from profiting from contraband tobacco product trafficking. The 
provisions in H.R. 5689 and H.R. 4081 will protect honest businesses 
from illegal competition, increase revenues at all levels of 
government, and significantly improve public health.
    the prevent all cigarette trafficking act (pact act, h.r. 4081)
    The PACT Act introduced by Representative Weiner focuses primarily 
on one part of the tobacco product smuggling and tax evasion problem: 
illegal Internet and other mail-order sales.
    Illegal Internet sales take money away from all levels of 
government, and provide a distribution and sales network for sellers to 
who don't pay taxes and sell counterfeit cigarettes and other black 
market tobacco products. As I already noted, this makes it possible for 
illegal Internet sellers to charge lower prices than legal sellers, and 
cheaper cigarettes increase overall tobacco use. One recent study found 
that adult smokers who purchased cheaper cigarettes from the Internet 
significantly increased their consumption over time compared to smokers 
who reported paying full-price at traditional bricks-and-mortar retail 
stores.
    As mentioned before, tobacco products are also typically sold over 
the Internet without any effective safeguards against sales to kids. 
This means that minors who find it hard to purchase cigarettes from 
bricks and mortar retailers can simply go to the Internet instead.
    At present neither the federal government, nor the states have the 
tools to adequately address these problems. The only federal law 
available today to stop illegal Internet sales of tobacco products is 
the Jenkins Act, which was passed decades ago to stop mail order 
cigarette sales that evade state taxation. The Jenkins Act requires 
mail-order vendors to report their cigarette sales into a state to the 
state's tax administrator. Many don't do so.
    Only federal officials can enforce the Jenkins Act, and enforcing 
the Act is, to say the least, very difficult. Consequently, federal 
enforcement efforts have been minimal. In fact, a U.S. General 
Accounting Office report of a few years ago found that more than three-
quarters of all Internet-selling websites explicitly indicate that they 
do not comply with the Jenkins Act. The same report found that state 
efforts to prompt compliance by Internet sellers have not been 
successful.
    Without this legislation, state governments cannot address this 
problem adequately on their own. Trying to stop illegally operating 
Internet sellers through traditional enforcement lawsuits on a case-by-
case basis does not work because of the large number of illegal 
Internet sellers, with many based overseas or in other hard-to-reach 
jurisdictions, the ease with which new Internet sellers can appear, and 
the ability of illegal Internet sellers to evade enforcement by closing 
down and then re-opening at another location or website.
    States have entered into innovative settlement agreements with 
common carriers, credit card companies and others in an effort to 
interrupt the ability of illegal Internet sellers to sell and deliver 
their products. But the illegal Internet sellers can still largely 
evade compliance by using the U.S. mails over which states have no 
authority. In addition, all of these agreements are based on New York's 
law prohibiting deliveries of cigarettes to consumers in the state. If 
that law is found invalid or otherwise overturned, all the agreements 
terminate, a concern that is heightened by the recent U.S. Supreme 
Court ruling that federal law preempts state laws dealing with common 
carrier deliveries of tobacco products.
    Stopping illegal Internet tobacco product sales will require 
stronger and more sophisticated federal legislation--and that is what 
the PACT Act (H.R. 4081) offers.
    Because federal laws can reach further than state laws, the PACT 
Act would succeed where the states have failed. It not only places 
needed restrictions and requirements on Internet sellers but also 
provides for their quick and effective enforcement.
    A key element of the legislation is that it makes cigarettes and 
smokeless tobacco non-mailable matter and establishes a system that 
would block illegal Internet sellers from obtaining any other delivery 
services. Any effort to eliminate or curtail the non-mailable matter 
provision or the so-called common carrier list-enforcement mechanism 
would make the act unenforceable, and so should be rejected by the 
Committee.
    While the PACT Act is primarily directed at stopping contraband 
tobacco product trafficking and tax evasion via the Internet, it also 
contains constructive provisions to require age and ID verification 
before tobacco products are sold or delivered. These provisions can 
help to stop cigarette and smokeless tobacco sales to kids.
    The PACT Act has been continuously revised since 2003 to stop 
illegal Internet sales of cigarettes and smokeless tobacco much more 
effectively and efficiently. As a result, it is a carefully crafted 
piece of legislation that has benefited from the thoughtful input of 
state enforcement officials, Indian Tribes, common carriers, the U.S. 
Postal Service, and the Bureau of Alcohol, Tobacco, Firearms and 
Explosives (BATFE), as well as the public health community. Numerous 
substantive changes have been made to address the concerns of many 
groups and to eliminate any unnecessary burdens or complications--all 
without weakening the PACT Act's ability to address and reduce the 
problem of Internet-based contraband tobacco product trafficking.
    As a further step in that process, we would like to recommend to 
the Committee that the following changes be made to strengthen the 
nonmailable matter section:

          Revise Section (j)(1)(B) that reads ``primarily 
        engaged in the business of transmitting cigarettes or smokeless 
        tobacco made nonmailable by this section'' so that it reads 
        ``regularly engaged in the business . . .''. This change would 
        ensure that the bill reaches large-scale mailers of cigarettes 
        or smokeless products which also have other unrelated business 
        activities that are their primary business. Such businesses 
        would include bricks-and-mortar multi-product retailers that 
        also sell cigarettes by mail; Internet sellers that sell and 
        mail cigarettes but primarily sell other products; and foreign-
        based Internet sellers that use the mail for sales to the U.S. 
        but primarily use common carriers or other delivery services 
        for sales to other countries.

          Revise Section (j)(1)(D) to delete the text ``or 
        into.'' This change is necessary to stop mailings of cigarettes 
        or smokeless into Alaska or Hawaii from outside of those states 
        by illegal operating Internet sellers. The revised text will 
        still maintain an exception allowing mailings entirely within 
        Alaska or Hawaii by in-state grocery stores to consumers who 
        rely on the mails for supplies--which is the reason that has 
        been given for this exemption.
       the smuggled tobacco prevention act (stop act, h.r. 5689)
    While effectively addressing the problem of illegal Internet 
tobacco product sales would be extremely constructive by itself, more 
also needs to be done to address the many other aspects of the overall 
contraband tobacco product trafficking problem. Representative 
Doggett's bill--H.R. 5689--does just that.
    H.R. 5689 is the latest version of legislation that was introduced 
in prior Congresses and has undergone continuous improvement. Among 
other things, it takes full advantage of the lessons learned from 
growing efforts worldwide to address the problem of cigarette and other 
tobacco product smuggling that crosses international borders and the 
problem of counterfeit tobacco products and counterfeit tax stamps. At 
the same time, H.R. 5689 also offers effective measures to reduce the 
special characteristics of the smuggling and tax evasion problem within 
the United States.
    The common sense principles behind H.R. 5689 are simple and 
effective:

        1)  Make sure that it is difficult for illegal vendors to sell 
        counterfeit tobacco products or make or sell counterfeit tax 
        stamps and easy for enforcement officials and others to 
        distinguish legal from illegal tobacco products. H.R. 5689 does 
        that by requiring clear markings on tobacco product packages 
        that identify the manufacturer and show where the products may 
        be legally sold. The legislation requires new, readily 
        available high-tech tax stamps that establish legality and 
        cannot be effectively counterfeited, and it includes provisions 
        to keep tobacco product manufacturing and tax-stamping 
        machinery from getting into the hands of counterfeiters.

        2)  Make it easier to track and trace tobacco products as they 
        are transported from one business to another so that diversion 
        to illegal distribution channels is more difficult and easier 
        to spot. H.R. 5689 requires reasonable reporting and record-
        keeping requirements by businesses throughout the distribution 
        and delivery chain; adds tobacco product distributors into the 
        federal permit system that now applies to manufacturers, 
        exporters and importers (creating a closed system of authorized 
        legal businesses that can sell and deliver tobacco products to 
        each other); provides for encrypted information on the high-
        tech tax stamps to identify not only the entities applying the 
        tax stamp but also subsequent recipients; and establishes a 
        system of export bonds to ensure that the tobacco products 
        actually end up in legal markets where they are reportedly 
        destined.

        3)  Prohibit transactions that serve only to supply contraband 
        trafficking. H.R. 5689 blocks sales of tobacco products that 
        exceed the amount needed for personal use. For example, the 
        bill stops the sale of more than 5,000 cigarettes (250 packs) 
        to any single retail customer at any one time. Those kinds of 
        large retail sales are needed only by those engaged in illegal 
        smuggling and re-sales, and this bill would stop them.

        4)  Untie the hands of federal enforcement officials. To help 
        enforcement efforts, the legislation creates clearer and more 
        extensive federal jurisdiction over contraband trafficking. For 
        example, H.R. 5689 makes the definition of contraband tobacco 
        product clearer and more comprehensive. It includes all tobacco 
        products for the first time, and would also enable federal 
        enforcement officials to stop and prosecute any contraband 
        trafficking of more than 2,000 cigarettes (rather than the 
        current jurisdictional minimum of 10,000 cigarettes).

        5)  Protect citizens who report criminal trafficking acts. H.R. 
        5689 does that by providing new whistleblower protections for 
        civic minded workers who witness contraband trafficking 
        activity while on the job.

        6)  Establish strong new financial incentives for good behavior 
        and appropriately large financial disincentives for bad 
        behavior. Rep. Doggett's legislation establishes new export 
        bond requirements that would penalize exporters for allowing 
        their shipments to be diverted from the reported legal 
        destinations; provides clearer standards for proper behavior; 
        establishes clearer descriptions of wrongful acts, and subjects 
        lawbreakers to higher fines and penalties.

    These examples of some of the measures in H.R. 5689 provide a quick 
overview of this comprehensive and carefully thought-out legislation. 
Once passed into law, we believe it will operate effectively to reduce 
contraband trafficking both within the United States and across its 
borders. H.R. 5689--both by itself and particularly if supplemented by 
the PACT Act--offers a model that the world's nations could follow both 
in the current development of the Illicit Trade Protocol of the 
Framework Convention on Tobacco Control (FCTC) (which the United States 
has signed but not yet ratified) and in subsequent efforts by 
individual countries to comply with the FCTC international treaty by 
passing their own stronger and more comprehensive national laws.
    Mr. Chairman, passing the STOP Act and the PACT Act would not only 
cap current tobacco product smuggling and tax evasion preventing it 
from getting any larger in the United States, but would also make the 
problem much smaller. These measures would increase the costs and 
reduce the profits from smuggling and tobacco-product related tax 
evasion. They would also close down lucrative opportunities for 
criminal and terrorist organizations. They protect honest businesses 
from illegal competition and increase public revenues at all levels of 
government.
    For all the reasons I outlined at the beginning of my testimony, 
passing these two pieces of legislation would also work directly to 
improve public health by helping to reduce tobacco use and the horrible 
toll it takes on our country.
    Thank you, again, for this opportunity to testify before this 
Committee. I would, of course, be happy to answer any questions.

    Mr. Scott. Thank you, Mr. Myers.
    Mr. Rosenthal?

 TESTIMONY OF STEVEN ROSENTHAL, NEW YORK STATE ASSOCIATION OF 
                 WHOLESALE MARKETERS, NEW YORK

    Mr. Rosenthal. Thank you, Chairman Scott and Ranking Member 
Gohmert and the rest of the Committee.
    I have been a distributor. I have spent my whole life in 
distribution in New York. I understand the distribution 
business well. I would like to impart some of that knowledge 
today.
    There are basically two channels of distribution in New 
York, which has a major, major problem when it comes to 
counterfeit cigarettes. The first channel is the legitimate 
channel. The cigarette manufacturer sells cartons of cigarettes 
to licensed tax-stamping agents throughout the State. They in 
turn sell to retailers at minimum pricing by law and the 
consumer pays a minimum price for those cigarettes.
    The second channel is certain distributors have taken 
advantage of the fact that New York state, in spite of its 2006 
law, because of the fact that New York state does not enforce 
its laws regarding the sales of stamped cigarettes, certain 
distributors have chosen to sell unstamped cigarettes to 
reservation stores in New York to the tune of 30 million to 40 
million cartons a year.
    Now, all of the revenue that New York derives from taxed 
cigarettes only comes to about 55 million cartons a year. And 
yet, including cross-bordering and some Internet sties from out 
of State, practically one out of every two cigarettes in New 
York remains untaxed by New York, and that is in violation of 
New York law.
    In 1994, New York won the rights in the Supreme Court of 
the United States for its taxing plan to tax the non-Indian 
Indian sales to those who do not live on the reservation. That 
plan was put into effect and immediately through terrorism 
certain elements within the tribes closing the New York State 
Thruway and burning tires, the State decided to stop enforcing 
its laws and haven't to date. As a result of that, we now have 
30 million to 40 million cartons of cigarettes going through 
that channel.
    Now, there are only about 2,500 adult smokers in the Indian 
tribes throughout all of New York state. This amounts to less 
than 100,000 cartons a year, or less than 1 percent of that 
which is being purchased by the Indian reservation stores. 
These stores therefore are selling 99.44 percent of their 
product illegally to non-Indians, and they do it in several 
ways.
    The major way that it is happening is through the Internet. 
The association is very, very much in favor of Mr. Weiner's 
bill, which will stop the Internet because it will stop the 
U.S. mails from distributing this product. However, there 
remains an open door, and that open door is those terrorist 
organizations and those complicit retailers within those 
organizations that are purchasing the stamps in truckloads from 
the stores in the Indian reservations and then bringing them to 
counterfeit operations that we see all over the city of New 
York in particular, and distributing them not just in New York 
City, but interstate into Michigan and into New Jersey and into 
other high-tax jurisdictions.
    We maintain that the largest single source of counterfeit 
contraband cigarettes throughout the United States is New York 
state's Indian stores.
    Now, the sovereignty of American Natives and the treaties 
that we have in place are sacrosanct and should be respected as 
such. But let's understand that every population has its good 
guys and bad guys. No better example can be found than the saga 
of Rodney Morrison, the owner of the Peace Pipe Smoke Shop on 
the Poospatuck reservation on Long Island. Mr. Morrison, who 
married into the tribe, is on trial for a reign of terror 
including arson, extortion, murder and multiple violations of 
the Contraband Cigarette Trafficking Act.
    To understand the scope of Morrison's criminal operation 
from illegal cigarette sales, it is important to note that he 
offered $56 million in cash for bail. While this is a 
staggering figure for most criminals, it was a pittance when 
compared to the $35 million a month profits from the sales of 
contraband cigarettes.
    Now, Phillip Morris has stopped the distributors from 
selling their products to the Poospatuck reservation store. 
However, none of the other manufacturers have. And the biggest 
single product sold in New York City, particularly in the 
economically disadvantaged areas where the incidence of smoking 
is highest, happens to be Newport. Lorillard has not stopped 
selling to these stores, nor have any of the manufacturers 
stopped selling to any of the stores.
    With knowledge, what is happening is the manufacturer is 
allocating the cigarettes to the wholesaler. Every week the 
wholesaler is reporting exactly where these cartons are going 
per agreements. They go to the Indian reservations where 
everyone knows that less than 1 percent of them are being 
smoked legally by the Indians, and the other 99 percent of it 
is going to front terrorism and criminality and evasion of 
taxes, and youth smoking. And yet, nobody, nobody seems to want 
to stop that.
    I thank the Committee for allowing me to speak today, and I 
remain here to answer any questions.
    [The prepared statement of Mr. Rosenthal follows:]
                 Prepared Statement of Steven Rosenthal
    Thank you Chairman Scott and Ranking Member Gohmert for allowing me 
to appear today. My name is Steven Rosenthal and I am testifying on 
behalf of the New York Association of Wholesalers Marketers.
    I will begin by saying that the legislation before the subcommittee 
today is both essential and gratefully endorsed by the cigarette tax 
agents in New York.
    It is important to understand the channel of distribution of 
cigarettes and the aberrations that lead to contraband sales.
    The cigarette manufacturers are licensed federally and upon removal 
from their bonded warehouses, pay the US excise tax of $3.90 per 
carton.
    The state licensed tax stamping agent, (distributor) orders 
cigarettes from the manufacturer based upon an allocation.
    The distributor buys tax stamps from its state and applies the 
stamps to each pack of cigarettes. In New York this stamp includes pre-
collected sales tax as well as excise tax.
    The licensed retail dealers then purchase from the distributor and 
pay the required price per carton which includes their jurisdiction's 
taxes. In New York and 30 other states, the minimum pricing all the way 
to the consumer is determined by statute.
    As the accompanying chart illustrates, the pricing in New York City 
also includes the addition of New York City excise taxes.
    Contraband cigarettes arise in several different ways.
    The distributor may sell to a retail establishment in a low taxed 
jurisdiction that engages in advertising internet sales into highly 
taxed jurisdictions causing local taxes to be avoided.
    The distributor, based on its state laws, may sell to a Native 
American store unstamped cigarettes and therefore at profit margins of 
$1 or less.
    The internet establishment may buy cigarettes illegally from 
untaxed Native American stores or through foreign smuggling.
    The Native American or smuggling operations may be counterfeiters 
and apply phony tax stamps and sell this contraband through to 
complicit retailers, internet sellers or street merchants. Usually 
however, the criminal or terrorist operatives are separate 
organizations buying from these untaxed sources.
    Using New York City as an example:

        The legitimate licensed retailer pays $62 for a carton of 
        cigarettes.

        The consumer pays $67.

        The smuggler pays $30 + $1 for counterfeit stamps = $31

        The complicit retailer pays $45.00 and sells to the 
        unsuspecting consumer for $67.

        Terrorists are able to make $14 ($45 - $31) per carton.

    The internet buyer pays $30 vs. $67 buying directly from untaxed 
sites.
    The sovereignty of our Native American and the treaties that we 
have in place are sacrosanct and must be respected as such. But let's 
understand that every population has its good guys and bad guys and 
those treaties are being corrupted by the vast fortunes that are 
profiteered by a few illegal sellers, providing only insignificant 
support to the tribes, while instead, funding criminals and terrorists 
while they accumulate vast, untaxed fortunes.
    New York's Native American retailers sell over 30 million cartons 
of untaxed cigarettes annually. Current law allows states to impose 
taxes on all sales of cigarettes and other products sold by a tribe 
that are to non-Native Americans. Yet, it is estimated that there are 
just 2,500 adult Native American smokers, so clearly the vast majority 
of cigarettes are being untaxed.
    As a result, the largest source of contraband in the Northeast is 
supplied by New York's Native American stores, often owned by multi 
millionaires. No better example can be found than the saga of Rodney 
Morrison, the owner of the Peace Pipe smoke shop on the Poospatuck 
reservation on Long Island. Mr. Morrison who married into the Unkechaug 
Nation tribe is on trial for 'a reign of terror', including arson, 
extortion, murder and multiple violations of the Contraband Cigarette 
Trafficking Act. To understand the scope of Morrison's criminal 
operation from illegal cigarette sales, it is important to note that he 
offered $56 million in cash for bail. While this is a staggering figure 
for most criminals, it was a pittance when compared to his $35 million 
per month profits from the sales of contraband cigarettes.
    Phillip Morris has discontinued the allotments of all of its brands 
of cigarettes to any distributor that sells to the Peace Pipe smoke 
shop. However, none of the other major manufacturers have stopped those 
sales and all the cigarette manufacturers still continue to allocate 
the tens of millions of cartons that go to New York's other Native 
stores.
    The major cigarette manufacturers require that each of their 
distributors report all of their sales by customer, brand and packing 
each week. But curiously, they continue to ship these irrational 
quantities to Native Americans with that knowledge.
    There are basically three methods to these sales:

        1.  Face to face sales at their locations with consumers.

        2.  Internet/mail orders with consumers and complicit 
        retailers, both in New York State and throughout the US and 
        Canada. Because of their advertised low untaxed pricing, these 
        sales are a major contributor to the incidence of both adult 
        and youth smoking.

    (In 2005, a group of upstate New York teenagers in collaboration 
with law enforcement conducted an experiment to see if they could get 
cigarettes over the Internet. Half of their orders were successfully 
delivered and 90 percent of those were delivered by the United States 
Postal Service.)

        3.  Bulk sales to illegal re-sellers. This is a major source of 
        contraband that goes to counterfeit stamping operations and 
        terrorist organizations.

    The single driving force behind each of these sales is 'the 
differential'. For example, including the latest excise tax increase, a 
legitimately taxed pack of cigarettes in a licensed New York City store 
will cost about $9.00 and if purchased untaxed, (in two or more carton 
quantities), will come to $3.00 per pack! For the average smoker, this 
is a yearly saving of $3,000 per person.
    Although some transactions are directly with consumers, that 
quantity can be dwarfed by the truck loads of product that are 
purchased by smugglers and redistributed to counterfeit stamping 
operations, street merchants and school yard pushers. Many of the 
criminals that have been apprehended have ties to terrorist 
organizations. Earlier this month, the largest seizure in New York 
history of counterfeit stamps and product occurred in Brooklyn and 
Rafea Al-Nablisi, a Jordanian, was indicted.
    Counterfeit stamps serve no purpose without the untaxed/unstamped 
cartons of cigarettes that easily come from the Native American stores 
in manageable quantities for illegal affixing. It is much more 
difficult to obtain and distribute a container load of 50,000 cartons 
of foreign product. Foreign product is therefore best used for blending 
within established large scale networks such as our Native American 
outlets. A Native American store in Western New York was found guilty 
of such illegal selling after apprehension by the Bureau of Alcohol, 
Tobacco, Firearms and Explosives.
                                pact act
    The Prevent All Cigarette Trafficking Act (HR 4081) is a common-
sense approach at eliminating the ability of Internet sites to sell 
cigarettes and we wholeheartedly support the bill and urge that it be 
enacted. Some of the key provisions include:

          Strengthening penalties under the Jenkins Act from a 
        misdemeanor to a felony;

          Making tobacco non-mailable through the US Postal 
        Service;

          Empowering each state to enforce federal law against 
        out-of-state sellers who are shipping cigarettes into the 
        state.

    In particular, we feel that making tobacco products non-mailable 
will have a tremendous affect on cigarette smuggling. Currently, common 
carriers, such as UPS and DHL, have agreed to not ship cigarettes 
through an agreement with the New York State Attorney General's office. 
As a result, tobacco sales over the Internet will cease to exist once 
the PACT Act is passed, since there will be no means of shipping 
cigarettes to consumers.
                                stop act
    The Smuggled Tobacco Prevention Act of 2008 Act (STOP Act) will 
create a needed audit trail that will assist cigarette manufacturers 
and law enforcement in the interdiction of foreign contraband and 
thereby, add to both federal and local taxation while nourishing our 
economy.
Other recommendation
    When the PACT Act becomes law and tobacco is prohibited through the 
US Postal Service, I believe that there will be an increase in the 
demand for cheaper cigarettes. These sales sometimes involve 
counterfeit tax stamps and are distributed through street merchants and 
complicit retail outlets.
    If the cigarettes going to all New York outlets were tax stamped as 
New York law requires and the Native Americans given access to 
legitimate quantities of untaxed product for reservation consumption, 
this main source of cigarette funding for terrorism would cease. The 
1994 Supreme Court ruling has upheld New York's right to this very 
taxing plan.
    We therefore believe that the Contraband Cigarette Trafficking Act 
needs to be amended to require states taxing cigarettes to identify 
that taxes have been paid with tax stamps applied to every pack. This 
requirement will greatly assist law enforcement in controlling cross-
bordering activities, illicit interstate commerce, and internet sales 
in violation of PACT.
    It is ironic that the Federal Government is called upon to increase 
state funding for anti-terrorism programs while New York State passes 
up one billion dollars annually in excise, sales and ancillary taxes 
with the unintended consequences of funding terrorists; adding to the 
very costs of these efforts. If highway funding can be withheld for a 
state's failure to enforce speed limits and minimum age drinking, 
(South Dakota v. Dole) then why cannot homeland security funding be 
withheld to the extent of these costs?
    In conclusion, I would like to thank Chairman Scott, Ranking Member 
Gohmert, and the rest of the committee for allowing me to appear before 
you today on behalf of NYSAWM. In summary, the association would like 
to express its strong support for both measures and urge their 
adoption. I would be happy to answer any questions that you may have. 
Thank you for your important efforts.

                               ATTACHMENT

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Scott. Thank you very much.
    Mr. Colledge?

              TESTIMONY OF JOHN W. COLLEDGE, III, 
               INDEPENDENT CONSULTANT, SPARKS, NV

    Mr. Colledge. Chairman Scott and Representative Gohmert, it 
is a pleasure to appear before you today to express my support 
for Representative Doggett's Smuggled Tobacco Prevention Act of 
2008. Tobacco smuggling is criminal. It is often racketeering 
activity and it is a funding source for international terrorist 
organizations. I would like to provide the Committee with some 
background on tobacco smuggling in the United States and how I 
believe the Doggett bill will greatly reduce the illicit trade 
in tobacco as it relates to the United States.
    My opinions are my own and based upon more than 33 years of 
law enforcement and specifically more than 20 years of 
experience at enforcing U.S. Customs laws, with 14 of those 
years enforcing and studying matters directly related to 
cigarette smuggling and transnational organized crime. I will 
address some of the specific provisions of the Doggett bill.
    By way of background, transnational criminal groups and 
international terrorists recognize the advantages of shared 
land borders, disputed territories, failed States, ethnicity, 
inadequate law enforcement resources, wavering political 
leadership, corruption, transport infrastructure, free or 
foreign trade zones, weak transit systems, tax disparities, and 
the active and knowing participation of elements of the 
business community.
    The lack of understanding of the scope and the impact of 
international tobacco smuggling continues to aid transnational 
groups and international terrorist in their pursuits of these 
lucrative economic crimes.
    Tobacco is but one commodity smuggled by transnational 
criminal groups. These groups are as diversified as many 
legitimate multinational corporations. They often smuggle 
drugs, weapons, humans, counterfeit and other merchandise of 
every description. Tobacco smuggling is market-driven. 
Cigarette smokers are brand- or blend-loyal, meaning that 
particular brands or tobacco blends are targeted directly at 
given countries and sometimes even sub-groups within those 
countries.
    The criminal groups engaged in the illicit tobacco trade 
study markets, supply, national, State or provincial and local 
laws and regulations, and make their business decisions based 
upon these factors. The increased legal market in other tobacco 
products, particularly smokeless tobacco, is rapidly creating a 
parallel contraband smuggling trade in the United States.
    The United States has been a source and transshipment 
country for contraband cigarettes for approximately 50 years. 
In my written testimony, I cited former United States Customs 
Commissioner Raymond W. Kelly's prepared testimony before the 
Senate Appropriations Committee in March, 2000, which contained 
several important points.
    International cigarette smuggling is big business and it is 
very profitable. International cigarette smuggling has been 
linked to transnational organized crime and international 
terrorism. The United States is an important source and 
transshipment country for contraband cigarettes. Financial 
institutions in the United States have been involved and may 
still be involved in the laundering of proceeds of cigarette 
smuggling.
    Since March, 2000, interstate trafficking in all forms of 
contraband tobacco products has increased dramatically in the 
United States. These products include those smuggled into the 
United States and those manufactured domestically. Several 
groups of the Italian mafia, Russian and Asian organized 
criminal groups, and Colombian narco traffickers are or have 
been involved in tobacco smuggling in Europe, Asia, North and 
Latin America.
    Nontraditional organized criminal groups operating between 
the United States and Canada are currently involved in the 
contraband trade in tobacco, including illicit manufacturing, 
smuggling, and money laundering.
    In addition to producing counterfeit cigarettes, illegally 
manufactured other cigarettes, and trafficking in contraband 
cigarettes, criminal organizations have used cigarettes as a 
commodity to launder the proceeds of other criminal activity 
and to facilitate various international trade fraud schemes. 
These organized crime groups operate through corruption and 
intimidation and are not afraid to use violence to further 
their business goals.
    The terrorist organizations referred to in Mr. Kelly's 
testimony were the Real Irish Republican Army and the Kurdistan 
Workers Party, also known as the PKK. The Real IRA and other 
factions of the IRA have smuggled cigarettes and other 
commercial products to fund terrorist activity in Northern 
Ireland and the United Kingdom for decades. In the United 
States, we saw people in North Carolina linked to Hezbollah 
convicted of offenses related to trafficking in contraband 
cigarettes in schemes to provide material support to terrorism. 
The PKK was linked to cigarette smuggling into Iraq that 
benefited the family of Saddam Hussein. The Real IRA, Hezbollah 
and the PKK are internationally recognized as terrorist 
organizations.
    Mr. Hoover already covered the sources of illicit tobacco, 
so I will move on to the unique serial numbers and other marks.
    We recognize that currency has value, but it also has 
serial numbers. Yet a commodity that is a recognized substitute 
for currency in correctional facilities and in various 
international trade fraud schemes is virtually untraceable. 
Historically, law enforcement has lacked the ability to trace 
contraband tobacco products. Invoices frequently describe 
container shipments of cigarettes simply as American-made 
without identifying the brand. The shipments were sold several 
times while the cigarettes were in transit. The invoices were 
faxed or otherwise transmitted many times, resulting in 
critical data blurred in transition or possibly altered between 
transmissions.
    The export bonds are covered in Mr. Doggett's bill. For 
nearly 50 years cigarettes manufactured in the United States 
have been exported to brokers who introduced these cigarettes 
into the black market. The export bonds I believe would reduce 
some of that illegal export.
    The wholesale permits; it is important that all 
manufacturers, wholesalers and importers and export warehouse 
proprietors have an appropriate permit to conduct business 
related to tobacco products. It is a reasonable expectation 
that those businesses engaged in the tobacco trade be law-
abiding. The conditions listed in the Doggett bill for granting 
a permit bring the most important requirements necessary to 
combat the illicit trade in tobacco into one statute. The 
permits are important in ensuring due diligence in the supply 
chain.
    Touching on the manufacturing equipment, illegal 
manufacturing has increased in the past 8 years in the United 
States and throughout the world. That loophole needs to be 
closed to control the illicit manufacturing.
    Recordkeeping, again the requirements in the Doggett bill 
are not requiring anything that most businesses are not doing 
at the present time.
    The creation of a right of action for State tax 
administrators simply provides State tax administrators the 
opportunity to enter U.S. District Court and pursue what is an 
interstate and international business.
    Thank you very much.
    [The prepared statement of Mr. Colledge follows:]
              Prepared Statement of John W. Colledge, III
                              introduction
    Chairman Scott, it is a pleasure to submit these remarks in support 
of the proposed ``Smuggled Tobacco Prevention Act of 2008.'' I would 
like to provide the Committee with some background on tobacco smuggling 
in the United States and how, I believe, this Act will greatly reduce 
the illicit trade in tobacco as it relates to the United States. My 
opinions are my own, and based upon more than 33 years in law 
enforcement and specifically, more than 20 years experience in 
enforcing U.S. customs laws, with 14 of those years enforcing and 
studying matters directly related to cigarette smuggling and 
transnational organized crime. I will discuss some of the specifics of 
this proposed legislation and provide some background on the illicit 
trade in tobacco.
                               background
    The United States has been a source and transshipment country for 
contraband cigarettes for approximately 50 years. I would like to quote 
from the prepared remarks that were submitted to the Senate 
Appropriations Committee in March 2000, by then U.S. Customs 
Commissioner Raymond W. Kelly:
    International cigarette smuggling has grown to a multi-billion 
dollar a year illegal enterprise linked to transnational organized 
crime and international terrorism. Profits from cigarette smuggling 
rival those of narcotic trafficking. The United States plays an 
important role as a source and transshipment country. Additionally, 
large sums of money related to cigarette smuggling flow through U.S. 
financial institutions.\1\
---------------------------------------------------------------------------
    \1\ U.S. Congress, Senate, 2001, Committee on Appropriations, 
Subcommittee on Treasury and General Government, 106th Congress, 2nd 
Session, 30 March 2000, Internet, http://frwebgate.access.gpo.gov/cgi-
bin/getdoc.cgi?dbname=2001_sapp_tre_1&docid=f:62810.wais, accessed: 17 
March 2008.
---------------------------------------------------------------------------
    Since March 2000, the illicit trade in all tobacco products has 
increased dramatically in the United States. The contraband products 
include those smuggled into the United States, those legally 
manufactured domestically and diverted to the illicit market, and those 
illegally manufactured in the United States.
                          cigarette packaging
    Please allow me to briefly describe tobacco packaging so everyone 
can understand the issues:

          Pack = 20 cigarettes (internationally 5, 10, 25 
        cigarette packs exist).

          Carton = 10 Packs, 200 cigarettes.

          Master Case = 10,000 cigarettes (internationally 
        12,000 cigarettes).

          40 Foot Container = 1,000 master cases, 10 million 
        cigarettes.

                       sources of illicit tobacco
    Tobacco is a legal commodity that is traded throughout the world, 
but price differences between nations and domestically, between states 
and provinces, have created a demand for contraband tobacco products. 
These cigarettes fall into several categories:

          Cigarettes purchased in nations, states, or provinces 
        with low tax rates and smuggled into nations, states, or 
        provinces with higher tax rates.

          Counterfeit cigarettes.

          Illicitly manufactured cigarettes.

          Cigarettes fraudulently diverted from Export 
        Warehouses, Customs Bonded Warehouses, Foreign and Free Trade 
        Zones.

          Stolen cigarettes, ranging from store burglaries to 
        thefts of container-sized shipments in foreign, interstate or 
        interprovincial commerce.
                       tobacco smuggling overview
    Several groups of the Italian Mafia, Russian and Asian Organized 
criminal groups, Colombian narco-traffickers are or have been involved 
in tobacco smuggling in Europe, Asia, North and Latin America. Non-
traditional organized criminal groups operating between the United 
States and Canada are currently involved in the contraband trade in 
tobacco, including illicit manufacturing, smuggling, and money 
laundering.
    In addition to producing counterfeit cigarettes, illegally 
manufacturing other cigarettes, and trafficking in contraband 
cigarettes, criminal organizations have used cigarettes as a commodity 
to launder the proceeds of other criminal activity and to facilitate 
various international trade fraud schemes. In Europe, some of these 
trade fraud schemes are known as Value Added Tax (VAT) Carousel 
Fraud.\2\ Cigarettes have been used to launder large cocaine and other 
drug smuggling proceeds in what is known as the Black Market Peso 
Exchange.\3\ Trade Based Money Laundering was described in detail in a 
Financial Action Task Force report that was published in June 2006.\4\ 
These organized crime groups operate through corruption and 
intimidation and are not afraid to use violence to further their 
business goals.
---------------------------------------------------------------------------
    \2\ Europa, Press Room, Press Releases, EU coherent strategy 
against fiscal fraud--Frequently Asked Questions Brussels, 31 May 2006, 
Internet, available from: http://europa.eu/rapid/
pressReleasesAction.do?reference=MEMO/06/221, accessed 28 April 2008.
    \3\ FinCEN, Advisory Issue 12, June 1999, Internet, available from: 
http://www.fincen.gov/advis12.html, accessed: 28 April 2008.
    \4\ Financial Action Task Force on Money Laundering, TRADE BASED 
MONEY LAUNDERING, 23 June 2006, Internet, http://www.fatf-gafi.org/
dataoec/60/25/ 37038272.pdf, accessed 12 November 2007.
---------------------------------------------------------------------------
    The terrorist organizations referred to in Mr. Kelly's testimony 
were the Real Irish Republican Army (IRA), and the Kurdistan Workers 
Party (PKK). The Real IRA and other factions of the IRA have smuggled 
cigarettes and other commercial products to fund terrorist activity in 
Northern Ireland and the United Kingdom for decades. In the United 
States, we have seen persons linked to Hezbollah convicted of offenses 
related to trafficking in contraband cigarettes in schemes to provide 
material support to terrorism. The PKK was linked to cigarette 
smuggling into Iraq that benefited the family of Saddam Hussein. The 
Real IRA, Hezbollah, and the PKK are internationally recognized as 
terrorist organizations.
    Here are some examples of ongoing or long-term smuggling of tobacco 
products that directly impacted or are currently affecting the United 
States:
Case Studies--North America
    The Saint Regis--Mohawk Reservation or Reserve, also known as the 
Akwasasne, straddles the international border between the United States 
and Canada. In 1997, an organized smuggling group with links to Italian 
and Russian organized crime that operated on the Akwasasne smuggled 
large volumes of cigarettes and liquor into Canada from the United 
States in violation of the laws of both countries. The money laundering 
case was the largest ever in the Northern District of New York and 
involved criminal transactions that totaled more than $687 million.\5\ 
This case resulted in the first guilty plea from a major tobacco 
manufacturer when Northern Brands International, a subsidiary of RJ 
Reynolds Company, pled guilty to violating Customs laws and forfeited 
$10 million and paid a fine of $5 million.\6\
---------------------------------------------------------------------------
    \5\ U.S. Department of Justice, Distinguished Service Commemorative 
Presented to John Colledge United States Customs Service, re: United 
States v. Miller et. al., Syracuse, New York, 30 November 2000.
    \6\ Ibid.
---------------------------------------------------------------------------
    The smuggling activity continued along the border between the 
United States and Canada. The Criminal Intelligence Service Canada 
(CISC), 2005 Annual Report on Organized Crime in Canada, was the most 
recent CISC report to specially address the illicit tobacco trade and 
the role of organized crime in that trade.\7\ The report made reference 
to tobacco products manufactured illegally in the United States, 
packaged in plastic bags, and smuggled to Canada for sale.\8\ The 
plastic bag packaging is a growing trend worldwide, which makes 
tracking and tracing cigarettes even more difficult. The 2004 report 
specifically linked the Hells Angels motorcycle gang and Asian 
Organized Crime to commodity smuggling conducted by organized crime 
groups operating along the international border between Canada and the 
United States.\9\ The 2003 report listed the origins of illicit tobacco 
products as the United States, South America, Asia and the Middle 
East.\10\
---------------------------------------------------------------------------
    \7\ The Criminal Intelligence Service Canada, 2005 Annual Report on 
Organized Crime in Canada, Ottawa, 20-21, available from: http://
www.cisc.gc.ca/annual_reports/ annual_report2005/ document/
annual_report_2005_e.pdf, Internet, accessed: 15 January 2008.
    \8\ Ibid.
    \9\ The Criminal Intelligence Service Canada, 2004 Annual Report on 
Organized Crime in Canada, Ottawa, 21, available from: http://
www.cisc.gc.ca/annua_reports/annual_report2004/ document/
cisc_2004_annual_report.pdf, Internet, accessed: 15 January 2008.
    \10\ The Criminal Intelligence Service Canada, 2003 Annual Report 
on Organized Crime in Canada, Ottawa, 19, available from: http://
www.cisc.gc.ca/annual_reports/annual_report2003/Document/
cisc_annual_report_2003.pdf, accessed: 15 January 2008.
---------------------------------------------------------------------------
    In 2002, a criminal investigation led by U.S. Immigration and 
Customs Enforcement resulted in criminal charges of several people in 
Texas, New York, and California. The group was charged with 
distributing 2,313 master cases of counterfeit cigarettes with a retail 
value of approximately $5.4 million.\11\ The indictment also alleged 
that 5,616 master cases of cigarettes were shipped by the organization 
with a total lose of revenue to the federal and state governments of 
approximately $9.2 million.\12\ The following excerpt from the press 
release from the U.S. Attorney's Office for the Western District of 
Texas described the scheme: \13\
---------------------------------------------------------------------------
    \11\ U.S. Department of Justice, U.S. Attorney's Office, Western 
District of Texas, Press Release, 11 April 2005, Internet, available 
from: www.usdoj.gov/usao/txw/press_releases/2005/Abraham.sen.pdf, 
accessed: 28 April 2008.
    \12\ Ibid.
    \13\ Ibid.

        The Organization employed different techniques to smuggle and 
        introduce into the commerce of the United States contraband and 
        counterfeit cigarettes. These included, but were not limited 
        to, the manipulation of the Customs in-bond system. The 
        defendants attempted to achieve this by making false and 
        fraudulent material statements and representations to U.S. 
        Customs authorities by presenting altered and falsified 
        documents and by submitting fraudulent ``pedimentos'', Mexican 
---------------------------------------------------------------------------
        Customs documents.

        These pedimentos reflected that the contraband cigarettes had 
        been exported from the United States to Mexico when, in truth, 
        the contraband cigarettes had been smuggled and introduced into 
        the commerce of the United States. The various documents used 
        by the defendants were intended to convince anyone who 
        inspected these documents that taxes and duties were not due 
        and owing to U.S. Customs authorities, and/or the states of 
        Texas, California and New York, on any cigarettes associated 
        with these documents. The Organization modified and adapted its 
        smuggling techniques in direct response to any measurable 
        success by law enforcement in curtailing its illegal 
        activities.

        The investigation revealed that the counterfeit cigarettes were 
        shipped in containers on international waters from Asia to the 
        United States. It is known that at least two containers of 
        counterfeit cigarettes arrived at the port of entry in Long 
        Beach, California. To prevent detection by U.S. Customs 
        authorities, the defendants caused the shipments of counterfeit 
        cigarettes to be manifested as other merchandise, for example 
        ``toys'' and ``plastic goods.'' When the counterfeit cigarettes 
        arrived at the port of entry, the members of the organization 
        attempted to unload, smuggle and distribute the counterfeit 
        cigarettes in the United States.

    Some of the elements in the Doggett bill would have greatly 
assisted in the investigation and prosecution of this and other cases. 
The export bonds, wholesaler's permits, and more uniform record keeping 
may well have prevented this scheme.
Case Study--Europe
    In 1961 the free port in Tangiers, Morocco was closed and the 
cigarette smuggling operations that operated there for a decade were 
moved to the former Yugoslavia and Albania.\14\ This relocation greatly 
benefited the Camorra, an Italian organized crime group from the Naples 
area.\15\ When those states failed in the early 1990s, the Camorra and 
other criminal groups quickly took advantage of the instability in the 
region and again expanded their criminal enterprises in the region.
---------------------------------------------------------------------------
    \14\ Behan, Tom. The Camorra, 43-44, London: Routledge, 1996.
    \15\ Ibid.
---------------------------------------------------------------------------
    In 1999, a report issued by the Italian Anti Mafia Commission, 
identified Albania as major transshipment point for cigarettes smuggled 
to Italy and various countries in the Middle East.\16\ Reports from 
multiple sources stated that the Prime Minster of Montenegro at that 
time, Milo Djukanovic, granted smuggling rights to several people in 
exchange for substantial bribes. Djukanovic was implicated in cigarette 
smuggling in testimony in an Italian court by a leading figure in 
Italian cigarette smuggling with links to the Camorra who claimed that 
he personally negotiated cigarette smuggling rights from Montenegro 
with Djukanovic.\17\ Milo Djukanovic was recently re-elected as the 
Prime Minister of Montenegro.
---------------------------------------------------------------------------
    \16\ Center for Public Integrity. Tobacco Companies Linked to 
Criminal Organizations in Cigarette Smuggling, Italy. available from: 
http://www.publicintegrity.org/report.aspx?aid=354; Internet; accessed 
14 January 2008.
    \17\ Ibid.
---------------------------------------------------------------------------
    The Balkans region remains deeply involved in cigarette smuggling 
and criminal investigations into illicit activities dating back into 
the 1990s. In June 2007, a story in the SE Times reported that Italian 
prosecutors were about to charge Milo Djukanovic and others for their 
participation in a criminal enterprise involved cigarette smuggling and 
money laundering from 1994 to 2002.\18\ Also in June 2007, it was 
reported that Serbia's special organized crime prosecutor announced 
that they began an investigation of Mira Markovic, Slobadan Milosevic's 
widow, and her son, Marko Milosevic, for cigarette smuggling between 
1996 and 2001 that reportedly earned them tens of millions of 
Euros.\19\
---------------------------------------------------------------------------
    \18\ SE Times, Italian prosecutors to charge former Montenegrin 
officials with cigarette smuggling, 24 June 2007, Internet, http://
www.balkantimes.com/ocoon/setimes/xhtml/en_GB/features/setimes/
newsbriefs/2007/06/24/nb-04, accessed 10 January 2008.
    \19\ Reuters, Milosevic widow, son in cigarette smuggling probe, 11 
June 2007, Internet, http://www.reuters.com/article/worldNews/
idUSL1181733220070611, accessed 10 January 2008.
---------------------------------------------------------------------------
    The situation in the Balkans impacted not only Europe, but also the 
United States. Some of the smuggled cigarettes were manufactured in the 
United States and proceeds from the illicit activity were laundered in 
the United States. High level government corruption and failed states 
are a cause for concern of all nations.
                 unique serial numbers and other marks
    Historically, law enforcement has lacked the ability to trace 
contraband tobacco products. Invoices frequently described container 
shipments of cigarettes simply as: ``American Made,'' without 
identifying the brand. The shipments were sold several times while the 
cigarettes were in transit, the invoices were faxed or otherwise 
transmitted many times, resulting in critical data being blurred in 
transmission or possibly altered between transmissions. The cigarette 
packages and cartons lacked unique serial numbers that were readable by 
law enforcement authorities. The unique numbers found on master cases 
were often removed by traffickers to hinder law enforcement efforts to 
trace the cigarettes. The requirement of the Doggett bill to mark 
individual packages with unique serial numbers and markings will make 
it easier to distinguish diverted or stolen cigarettes from those 
legally introduced into commerce.
    The unique serial numbers and high tech stamp described in the 
Doggett bill will significantly aid law enforcement authorities in the 
United States and our international partners to track and trace 
cigarettes that originated in the United States. The State of 
California and the countries of Brazil, Malaysia, and Turkey have 
introduced marking regimes similar to those described in the Doggett 
bill. Canada recently contracted for a comparable system. California 
has publicly reported a reduction in contraband trafficking and 
increased revenue collection with a high tech stamping system, which 
has paid for itself. The loss of revenue to the United States, state 
and local governments (depending on the state and locality) for one 40 
foot container of cigarettes can easily exceed one million dollars.
                              export bonds
    For nearly 50 years cigarettes manufactured in the United States 
have been exported to brokers who introduced these cigarettes into the 
black market. The lack of enforcement and financial accountability by 
the exporters fueled this illicit trade. The export bonds required by 
the Doggett bill would force exporters to exercise more due diligence 
in ensuring their products are not smuggled back into the United States 
or into another country.
                           wholesale permits
    It is important that all manufacturers, wholesalers, importers, and 
export warehouse proprietors have an appropriate permit to conduct 
business related to tobacco products. The permits are important in 
ensuring due diligence in the supply chain. A permit system would aid 
law enforcement agencies in their efforts to identify criminal elements 
in the tobacco trade who might seek a permit in the United States to 
smuggle tobacco products into, through or from the United States. The 
information sharing provisions in the Doggett bill would allow the 
exchange of this data with international regulatory and law enforcement 
partners, thus enhancing law enforcement efforts directed at 
transnational organized crime groups.
                   control of manufacturing equipment
    Increasingly sophisticated equipment is being used in illicit 
cigarette manufacturing in the United States and throughout the world. 
The equipment is used to produce counterfeit and other tobacco 
products. The mechanisms to control the equipment utilized in the 
manufacturing and application of cigarette tax stamps would be an 
important tool in suppressing both the counterfeiting and illicit 
manufacturing of tobacco products and will make it more difficult to 
illicitly manufacture cigarettes. The Doggett bill is not intended to 
control devices that an individual would use to make cigarettes for 
their personal use, but rather that equipment, which has commercial 
applications.
                             record keeping
    The Doggett bill does not call for businesses engaged in the 
tobacco trade to maintain records that they currently do no maintain 
for federal, state, and local governments. What the bill requires is 
more specificity in their record keeping. In my experience, if the 
businesses maintained records; they contained the vague or non-existent 
references as to country of origin, false or inappropriate harmonized 
tariff schedule classifications, and incomplete information as to the 
parties in the transactions. Given the fraud that has historically been 
associated with the tobacco trade, I do not believe it is not 
unreasonable for the government to mandate accurate record keeping.
     creation of right of action for state tobacco administrators 
                         for failure to report
    State tobacco administrators have the primary responsibility for 
the collection of tobacco taxes and in some instances, state sales 
taxes. The changes proposed in the Doggett bill would provide a legal 
remedy for the states to take action in the U.S. District Courts. Given 
the interstate and international nature of the tobacco trade, this is 
often the best venue. In addition, the states have been active, and in 
some cases assumed in leading role in the pursuit of criminal 
organizations involved in the illicit tobacco trade. The Doggett bill 
does not delegate any authority to the states, nor does it infringe on 
tribal sovereignty.
                               conclusion
    The overview if the tobacco smuggling schemes in North America and 
the Balkans described in these remarks illustrated three of many long-
term tobacco smuggling scenarios that involved or involve organized 
criminal groups, allegations of high level corruption of national 
governments in the Balkans, issues that directly affect or affected the 
security and the commerce of the United States and our closest friends 
and allies. The criminal activity associated with tobacco smuggling is 
not benign. The criminal and terrorists groups involved in this 
activity are doing so for personal enrichment, funding or laundering 
the proceeds of other criminal activities, or to finance terrorist 
acts.
    Generally speaking, law enforcement in the United States, several 
states and many other nations has been inadequately funded, trained, 
networked with domestic and international partners, conflicted with 
ever-changing priorities, or lack the legal framework to adequately 
address the illicit tobacco trade. Many offenses associated with the 
illicit tobacco trade lack severe penalties associated with drug or 
arms trafficking. Enforcement in the United States and other nations 
did not receive high priority because the crime was looked upon as 
``the other guy's problem'' or the trans-shipment locations were 
profiting from foreign or free trade zone activity, freight handling, 
and associated financial transactions. Transnational organized crime, 
in any form is not ``the other guy's problem,'' it is the 
responsibility of all nations.
    The ``Smuggled Tobacco Prevention Act of 2008'' will eliminate many 
of these short-comings in the United States. Thank you for opportunity 
to appear before the Committee on this important matter.

    Mr. Scott. Thank you, Mr. Colledge.
    Mr. Melendez?

            TESTIMONY OF ARLAN MELENDEZ, CHAIRMAN, 
              RENO-SPARKS INDIAN COLONY, RENO, NV

    Mr. Melendez. Good morning, Mr. Chairman and honorable 
Members of the Committee. Thank you for the opportunity to 
testify here this morning. My name is Arlen Melendez, for the 
record. I am the chairman of the Reno-Sparks Indian Colony, 
Washoe, Paiute and Shoshone Tribes located in the city of Reno, 
Nevada. I have submitted a more detailed statement for the 
record.
    Indian reservations are subject to a form of dual taxation 
that no other government in the country faces. This is the 
reason that Indian reservations suffer from the lack of basic 
infrastructure and services. It is also a major disincentive 
for businesses to locate on reservation lands. Dual taxation is 
where the collection of a State tax prevents the tribal 
government from collecting a tax because the double tax would 
drive customers away.
    On most reservations, tribal members must go off-
reservation to purchase goods and services. The State gets all 
those taxes. When a non-Indian comes on the reservation, the 
State gets that tax as well. It is a heads-I-win and tails-you-
lose situation, unless the State agrees to something else.
    I have the honor of serving on the U.S. Commission on Civil 
Rights. Hopefully, when we get the commission straightened out 
one of these days, we can address the issue of discrimination 
concerning dual taxation. It has for too long contributed to 
poverty on most Indian reservations.
    My tribe, the Reno-Sparks Indian Colony, is located in 
Nevada where gaming is not an option for tribes. My tribe's 
source of revenue is generated primarily from sales taxes. In 
1983, the State of Nevada legislature passed a law that State 
sales taxes do not apply on Indian reservations if the tribal 
government collects a tax, that is equal to the State tax. This 
applies to any product, whether it is a gallon of milk, a loaf 
of bread, or a pack of cigarettes.
    My tribe has used its taxing authority to create a tax 
base. Recently, we completed the construction of a new health 
center that provides services to all people in the Reno-Sparks 
area. We financed the health clinic through issuance of bonds 
backed by our tax revenues. I believe more tribes should have 
this opportunity.
    The tax agreements in the Nevada are a win-win for all 
parties. Tribal governments get a tax base. The State resolves 
its tax issues. Other retailers get a more level playing field, 
and the tribal governments can contribute to services and 
economic growth in their region.
    However, tribal-State tax agreements are not based only on 
good will, but also on the current state of Federal law. Our 
primary concerns relate to H.R. 5689 because it appears to have 
been drafted without recognition of tribal tax authority. We 
are particularly concerned that section 201 of the bill would 
make it a Federal crime to possess more than 10 cartons of 
cigarettes without a State's license. State licensing is not 
applicable on Indian reservations and therefore not applicable 
at tribally owned tobacco retail stores.
    Section 201 of the bill would also make it a Federal crime 
to possess more than 10 cartons of cigarettes that do not have 
a State tax stamp. Consistent with our agreement with Nevada, 
we have a tribal tax stamp, but there is no reference to tribal 
tax stamps in the legislation.
    Section 102 contains the only reference to Indian tribes 
and would require special labeling for every package of tobacco 
sold on an Indian reservation. Nevada and most other States and 
tribes have already developed tax stamp and labeling 
requirements within the tribal-State compacts. This would add a 
burdensome requirement that would conflict with the compacts.
    These provisions need to be addressed, and I strongly urge 
that a comprehensive savings clause be added to protect tribal 
jurisdiction. However, I am equally concerned about the overall 
bill. The goal of this legislation is to create an electronic 
tax collection network where the only source of tobacco will be 
through large distributors under strict electronic surveillance 
by the State governments. In short, tribal retailers will have 
no source of inventory not already taxed by the State.
    The tax agreements are not written in stone, and some 
States will be tempted to use this new power as leverage to 
force revenue concessions from the tribes. It would reignite 
litigation where we currently have peace. I would urge the 
Committee to consult with tribal governments about the 
developing Federal law that would use the Nevada statute as a 
model to eliminate dual taxation where there is a comparable 
tribal taxation framework in place. This would ensure that 
tribes can use tax revenues to provide services on the 
reservation.
    The Campaign for Tobacco-Free Kids has supported this type 
of legislation. I would suggest that Congress consider a level 
of tribal taxes at 80 percent of State tobacco taxes. This 
should not be a solution forced on the tribes, but as an option 
for tribes, and as an incentive for both States and tribes to 
resolve any remaining disputes over tobacco taxes.
    On the Prevent All Cigarette Trafficking Act, I have few 
remarks. In 2004, tribes worked with Congress to address our 
concerns and the result is found throughout the bill. The 
legislation has changed since 2004 and some modifications may 
be needed to bring the tribal provisions up to date.
    In conclusion, I very much appreciate your consideration of 
the tribal views on this topic. We look forward to working with 
you. Thank you.
    [The prepared statement of Mr. Melendez follows:]
                  Prepared Statement of Arlan Melendez

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Scott. Thank you.
    Mr. Lapp?

TESTIMONY OF DAVID S. LAPP, CHIEF COUNSEL, TOBACCO ENFORCEMENT 
UNIT, OFFICE OF THE ATTORNEY GENERAL OF MARYLAND, BALTIMORE, MD

    Mr. Lapp. Good morning, Mr. Chairman and Members of the 
Committee. I appreciate the opportunity to testify today in 
support of the Prevent All Cigarette Trafficking Act. The State 
attorneys general, working jointly through the National 
Association of Attorneys General, NAAG, are acutely aware of 
the increasing problems caused by illegal tobacco product sales 
accomplished through the Internet, mail order and other remote 
purchases. We applaud congressional efforts to correct these 
significant problems through comprehensive legislation.
    The PACT Act furthers the important policy of improving 
accountability for and control of cigarettes and smokeless 
tobacco products shipped in interstate commerce. The act will 
enable States to more effectively protect their citizens from 
the economic and public health problems associated with 
Internet tobacco sales. Such sales allow easy youth access to 
tobacco and cause States to lose significant revenues through 
tax avoidance.
    There are six aspects of PACT of particular importance to 
the States. First, PACT designates most cigarettes and 
smokeless tobacco as non-mailable and therefore undeliverable 
by the U.S. Postal Service.
    Second, PACT requires Internet sellers to comply with all 
State laws regarding the collection of State and local taxes on 
cigarettes and prohibits the distribution of such products 
unless all applicable tobacco excise taxes have been collected 
and paid.
    Third, PACT requires Internet sellers to use a delivery 
method that allows for age verification to help prevent easy 
access by youth to tobacco.
    Fourth, PACT makes it a felony to sell or cause to be 
delivered products of a tobacco manufacturer that are not in 
compliance with State laws enacted to complement the master 
settlement agreement.
    Fifth, PACT grants States authority to collect in Federal 
court lost State tax revenues resulting from unlawful Internet 
sales and to enforce the Jenkins Act, the current Federal law 
which is hardly enforced or followed today.
    Sixth, PACT increases from a misdemeanor to a felony 
violations of the Jenkins Act.
    PACT is critical to State efforts to deny youth access to 
tobacco. Cigarettes are highly addictive and profoundly deadly. 
At greatest risk of addiction are young people who lack the 
judgment necessary to resist tobacco marketers and to protect 
themselves. In Maryland, the Office of Attorney General works 
to limit youth access to cigarettes through our program to 
reduce youth access to tobacco. This program involves working 
with State and local law enforcement agencies to enforce laws 
denying youth access to cigarettes and with retailers who want 
to adopt policies and practices to reduce sales to youth.
    These efforts by Maryland, similar to those of other States 
to deny youth access to tobacco, are impeded by cigarettes that 
are sold through hundreds of Internet sites. This problem was 
recently acknowledged by the Supreme Court. Justice Ginsberg in 
her concurring opinion in Rowe v. New Hampshire Motor 
Transport, said, ``State measures to prevent youth access to 
tobacco are increasingly thwarted by the ease with which 
tobacco products can be purchased through the Internet.''
    Internet sites are a highly attractive means for youth to 
purchase tobacco products since most Web sites fail to use 
adequate age verification procedures and most all avoid payment 
of State excise taxes, making cigarettes cheaply available. 
Indeed, studies show that Internet sales of tobacco to youth 
are increasing at an alarming rate. As States work to enforce 
their retail age verification laws and increase their cigarette 
excise taxes, as Maryland recently did by going from a $1 to a 
$2 excise tax, Internet sales will continue to rise.
    Accordingly, a focus of our efforts in Maryland to limit 
youth access to tobacco has been to try and stop Internet 
sales, which are prohibited in Maryland and in four other 
States. Along with other State attorneys general, we have 
attained agreements with retailers, the major credit card 
companies, and the major delivery companies, including UPS, 
FedEx and DHL, all to stop Internet sales of cigarettes.
    Thus, we have curbed deliveries by all the major carriers 
except one: the U.S. Postal Service, which asserts it has no 
legal authority to refuse cigarette shipments. In Maryland, our 
Internet stings show that the U.S. Postal Service continues 
unabated in delivering cigarettes to Maryland consumers in 
violation of Maryland law.
    Moreover, some State laws governing delivery of cigarettes 
may be challenged in the wake of the Supreme Court's recent 
Rowe decision which struck down Maine's tobacco delivery law as 
preempted by Federal law.
    In sum, comprehensive Federal legislation over Internet and 
mail-order cigarette and smokeless tobacco sales is sorely 
needed to enable States to address the problems of tobacco 
sales to youth and to address State excise tax avoidance. As 
noted by Justice Ginsberg, Roe leaves a large regulatory gap, 
perhaps overlooked by Congress, and illustrates the urgent need 
for the national legislature to fill that gap.
    The PACT Act fills this gap. On behalf of the National 
Association of Attorneys General, I strongly encourage you to 
support its enactment. Thank you.
    [The prepared statement of Mr. Lapp follows:]
                  Prepared Statement of David S. Lapp

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Scott. Thank you.
    I thank all of our witnesses for their testimony. We will 
now have questions for the panel. I will recognize myself for 5 
minutes.
    Mr. Hoover, is your budget sufficient to do what you think 
is needed to enforce the laws that are on the books?
    Mr. Hoover. Sir, I can tell you that in our 2008 
appropriations, we received 90 FTEs and approximately $19.6 
million. In our 2009 appropriations, we are looking at 90 FTEs 
and $20.5 million to conduct trafficking investigations 
regarding contraband cigarettes.
    Mr. Scott. If you had additional money for enforcement, 
would the tax revenues go up to offset it?
    Mr. Hoover. We believe we could have a significant impact 
if we receive more resources in this area, sir.
    Mr. Scott. Do you have any evidence that the cigarette 
industry is involved in any trafficking or tax evasion?
    Mr. Hoover. No, sir.
    Mr. Scott. I don't know who should answer this, but several 
have indicated problems with the labeling of individual 
cigarette packages, and some others have suggested that is 
going on in California now. Is it feasible to require each 
cigarette pack to have an individual serial number? Mr. Myers?
    Mr. Myers. Yes, the technology exists right now to be able 
to do that. There are jurisdictions that do that. You have 
testimony that has been presented in written form by companies 
that are capable of producing such tax stamps. In that 
testimony, it references a number of jurisdictions that already 
do it.
    Let's be candid here.
    Mr. Scott. What is the cost?
    Mr. Myers. The cost is actually fairly reasonable. These 
new high-tech tax stamps are not difficult to put on. They are 
not significantly more expensive than tax stamps that exist 
today, and they will return investment. In California, when 
they put the high-tech tax stamp on, they saw tax revenues 
increase, and their estimate was $100 million. Whether that is 
plus or minus a little bit doesn't really make much difference. 
What the evidence shows is that they captured an enormous part 
of a market that was literally an underground market simply by 
having a tax stamp.
    The technology has emerged a great deal over the last 
decade. We now have the capability of doing it. Let's be 
honest. The tobacco industry already tracks where their 
products go. They know it. The only people who don't know it 
are the government officials who are trying to collect the 
taxes on it.
    Mr. Scott. You mentioned it could be done at a reasonable 
price. Do you have a number?
    Mr. Myers. I don't, but the written testimony by one of the 
companies that makes it, they deal with that issue and we can 
get that for you.
    Mr. Scott. And could you, Mr. Myers, state what the status 
quo is on shipping cigarettes and what difference these bills 
will make?
    Mr. Myers. I think these bills will make an enormous 
difference. Let's separate them out pretty quickly if we can. A 
good deal of the domestic tax evasion problem occurs over the 
Internet. We could in a rapid form by making tobacco products 
non-mailable and by ensuring that the common carriers who 
already have agreements are no longer delivering illegally sold 
cigarettes. It would cut that in a very dramatic way, very 
quickly, at a very low cost.
    This is one of those win-wins. It will produce more revenue 
for States. It will produce more revenue for the Federal 
Government. And for those of us who spend every waking moment 
trying to figure out how we can reduce the number of kids who 
start smoking and the number of people who die, it can make a 
dramatic difference in that in a relatively short period of 
time.
    Mr. Scott. How does the carrier know what is in the 
package?
    Mr. Myers. The PACT Act is very carefully done and after 
years of negotiations it provides provisions to ensure that it 
has a labeling requirement on it. The list provision ensures 
that the carrier will know which sellers are authorized and 
which sellers have not registered.
    Mr. Scott. But what if you have an unauthorized seller, how 
do you know that he is shipping his tobacco product?
    Mr. Myers. The list provision that is provided in the PACT 
Act, and Mr. Weiner perhaps can address this as well, is done 
in such a way so that the carrier has easy access to 
information about which sellers have been registered and which 
the attorney general has designated as not registered. If they 
simply use the information that is made easily available to 
them, his does not impose a burden on them to become law 
enforcement officers. That is one of the balances that has been 
drawn here now.
    In fact, the carriers are really already doing that, but 
without the assistance of this. By complying with their 
agreements with the New York attorney general, they already 
have a greater burden than they would if this act was enacted 
because this enactment would put in a nationwide system for 
listing which retailers are not authorized. All they would have 
to do is check that system. The system imposes a legal 
obligation on legal sellers to list which packages they are 
selling are cigarettes and which ones are not.
    If a carrier complied with those fairly easy rules and 
regulations, they would be living up to the law. So in a very 
real respect, enactment of the PACT Act will ease the carriers' 
responsibility, not increase it.
    Mr. Scott. Well, we will be hearing from the carriers. We 
hope we hear the same thing.
    The gentleman from Texas, the Ranking Member, Mr. Gohmert.
    Mr. Gohmert. Thank you, Mr. Chairman. This is an 
interesting topic. It was not at the top of my radar screen as 
far as pressing issues to deal with, but obviously there are a 
great deal of problems that have arisen around it.
    Mr. Chairman, I ask unanimous consent to enter a letter 
response from the Seneca Nation of Indians. I don't know this 
gentleman. It is a response to you and me about some of the 
allegations. I don't vouch for the contents, but it is a 
response from the Seneca Nation and I would ask unanimous 
consent to enter it in the record.
    Mr. Scott. Without objection, it will be received with the 
spirit with which it is introduced. [Laughter.]
    [The information referred to follows:]
 Letter from Richard E. Nephew, Council Chairman and Co-Chair, Foreign 
   Relations Committee, submitted by the Honorable Louie Gohmert, a 
Representative in Congress from the State of Texas, and Ranking Member, 
        Subcommittee on Crime, Terrorism, and Homeland Security

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Gohmert. Thank you.
    Mr. Scott. I am sure this is a respected organization. I 
don't want to diminish the significance of it. We will receive 
it.
    Mr. Gohmert. And there have been allegations made about 
them and, going back to my judicial background, they deserve a 
chance to be heard to address those.
    I do have some questions. Mr. Myers, you mentioned the 
study regarding adult smokers whose consumption increased with 
illegal cigarette purchases. How was that study conducted?
    Mr. Myers. We would be happy to provide the Committee with 
a copy of the study.
    Mr. Gohmert. Does it go into exactly how it was conducted?
    Mr. Myers. Yes, it does. The methodology is right in there. 
So the easiest way to give it to you in detail would be to 
provide you a copy of the study. We would be happy to do that 
if the record is left open for us to have the opportunity to do 
so.
    Mr. Gohmert. Here again, with a judicial background, 
credibility is very important, and how you go about doing 
studies.
    Mr. Myers. I couldn't agree with you more. The study 
results aren't surprising because there is an enormous amount 
of research that shows that there is a great deal of price 
elasticity with regard to tobacco products. Increases in prices 
decrease consumptions. There have been an equal number of 
studies that show decreases in prices will increase 
consumption.
    What we have seen is that where cheap cigarettes become 
available, you in fact see increased consumption. So the 
results of the study aren't surprising. I would be happy to 
provide you not only that study, but the other studies that 
talk to the same point so that you can take a close look at 
them as well.
    Mr. Gohmert. Some of these same arguments are things that 
we have heard for years over the debate on whether or not to 
legalize certain drugs. Well, heck, if you just legalized the 
drug, or make it easier to get, then it takes the criminal 
aspect out of it, and makes it better for our society.
    Mr. Myers. This is a really quite different discussion than 
that one. What this is is a discussion----
    Mr. Gohmert. I understand that, but there are some 
elements.
    Mr. Myers. Well, the only thing that is critically 
important here is the United States Surgeon General and 
virtually every credible organization, including the National 
Cancer Institute, the Institute of Medicine of the National 
Academy of Sciences, have studied the issue and found a direct 
correlation between pricing increases and consumption, 
especially among youth, and price decreases and consumption.
    So it is not surprising that a study that looks at any 
isolated component of that, and in this case we know that those 
cigarettes are sold much cheaper because they are not paying 
taxes on them, would in fact, if they were sold to a 
concentrated geographic area, would result in a change in 
consumption.
    Mr. Gohmert. I throw this out for anybody's comment, an 
observation about the great irony. We have governmental 
entities who are paying for health care services by high taxes 
on cigarettes because they want to help people who can't afford 
health care, which means that the governmental entities taxing 
cigarettes in order to receive revenue to fund things to help 
people with their health, needs people to smoke.
    The more the better because then that means more revenue, 
and then that means we can take care of people. And yet we 
also, the information is pretty undeniable that cigarette 
smoking causes health problems. So it is one of the great 
ironies that I see in our government.
    Mr. Myers. In practical terms, the irony isn't as great as 
you think. Because what we have seen is that States that 
increase tobacco taxes both dramatically decrease the number of 
people who smoke, and therefore help the long-term health 
issue, and because of price elasticity see increased revenues.
    I think we have seen a pretty steady pattern among State 
officials that they see tobacco tax increases not as 
hypocritical, but as a win-win. It is a way to reduce health 
care costs, reduce tobacco-related disease, even while raising 
revenue. It is one of the very few revenue measures that both 
promotes public health and increases revenue.
    One of the nice things about the PACT Act and the STOP Act 
is they will simply assist State officials, as well as Federal 
officials, to accomplish those non-mutually exclusive goals.
    Mr. Gohmert. I see my time has expired. I have also seen 
numbers from rather cold, heartless, seemingly uncaring studies 
that say, well actually if people smoke, then they get cancer 
and they die earlier and therefore the health care costs are 
reduced. I am not an advocate of that plan or proposal, but it 
just illustrates the kind of information that we are fed in 
trying to deal with these issues.
    Mr. Myers. Fortunately, we do have an independent arbiter 
even on those issues in that the government when it has looked 
at that issue finds that the increased health care costs 
because of the diseases caused by smoking is so extraordinary 
that this is one of those cases that prolonging life actually 
saves our nation substantial amounts of money going forward.
    So again, you do hear our people argue, gee, wouldn't it be 
great if we could just kill everybody off before they were old 
enough to collect Social Security, but in this case there is 
substantial independent objective documentation that the 
increased health care costs caused by tobacco is an enormous 
economic burden on our society.
    Mr. Gohmert. I am telling you, your independence is subject 
to interpretation by other people who say they are just as 
independent.
    Mr. Myers. I am not asking you to believe me. It is the 
surgeon general, the National Academy of Sciences--groups that 
I hope are deemed to be fair and objective in our society.
    Mr. Scott. The gentleman's time has expired.
    The gentleman from New York, Mr. Weiner.
    Mr. Weiner. Thank you. Perhaps in future hearings we can 
look at the death stories, Mr. Gohmert, and see if we can 
address that in some way.
    Mr. Gohmert. You will be on your own on that one.
    Mr. Weiner. I just want to say that in the context of 
working on this bill, I found the tobacco industry for the most 
part to be cooperative. Mr. Scott, who represents a State that 
is heavily dependent on it, has been very cooperative.
    I just do want to revisit a brief question that you touched 
on in Mr. Scott's questioning when you said are the tobacco 
companies involved with this problem. I should point out, and 
Mr. Rosenthal touched on it in his testimony, when you have the 
tobacco companies know they are sending to the Native American 
tribes X number of cigarettes with absolute certitude they know 
the exact count. And they should be able with a prima facie 
look at it figure out that, hmm, something is wrong here.
    For example, in New York state, 360,145,380 packs of 
cigarettes were sent to Native American tribes. If you do the 
math based on the United States Census about how many residents 
there are on New York state reservations, every adult would 
have to, if they were consuming them on the reservation, have 
to smoke an average of 44 cigarettes an hour in order to 
consume that many cigarettes.
    So to some degree, Mr. Rosenthal is correct. The tobacco 
industry knows what is going on. I am curious, if you went to 
them and said, let me have this data, let me show you as a 
member of the ATF how many members are on there, and asked 
their counsel, well, is there some reasonable expectation that 
you should have that this is going to be smuggled based on this 
data? I think they would probably say, it is going somewhere.
    So to say that I think we should be careful about not 
making it seem as if they have been completely helpful here, 
they could do things and say, look, you guys represent X; we 
know the average smoker consumes Y; we will give you a premium 
of two-times-Y and then we are going to stop sending you these 
cigarettes. So they could do more.
    But if you could explain the shortcomings in the law right 
now. Attorney General Lapp did a sting in his home State--and I 
am going to summarize--goes on the Internet, orders it, and 
then tries to find out if the data is reported to the State. 
Why doesn't the ATF do that? Why don't you go and do what I and 
any citizens can do, Google tax-free cigarettes, get a bunch of 
Web sites, most are dominated by the first few, order 50 or 60 
or 80 cartons, and send it to yourself. And then go wait by the 
mailbox or by the phone at your local taxation agency and see 
what happens. And you will learn that it never got reported. 
You go to the company and say you violated the laws, here are 
your handcuffs, we are going to charge you with this.
    Tell me, practically speaking, if this is already illegal 
to some degree that they would be violating the Jenkins Act by 
not reporting that data? What is the hindrance that you face or 
that other law enforcement agencies, the U.S. attorneys face in 
going out and prosecuting that crime since it is going on in 
broad daylight to a large degree?
    Mr. Hoover. We do conduct some Internet sales trafficking 
investigations. The issue for us is resources and priorities. 
Along with violent crime, the issues along the southwest 
border, and protecting the public from terrorism as it goes to 
our explosives jurisdiction. We set these priorities in what we 
do, and we also utilize the resources that we have.
    In the past 5 years, we have opened almost 700 tobacco 
trafficking investigations. We have seized $61 million and more 
in assets, and we have received 441 convictions out of those--
--
    Mr. Weiner. How much of that was Internet-based?
    Mr. Hoover. I don't have that information, but we can get 
that for you.
    Mr. Weiner. Just so I can get to the crux of it, are the 
reporting requirements of the Jenkins Act, which my bill goes 
to, are they being followed? I know David Lapp addressed this, 
but are they being followed or are they basically being 
ignored? And if they are being ignored, can you explain why 
there aren't more prosecutions?
    Mr. Hoover. Number one, it is a misdemeanor. Number two, it 
is very difficult for us to track that.
    Mr. Weiner. Gotcha. Is it legal to mail explosives through 
the mail?
    Mr. Hoover. No, sir.
    Mr. Weiner. Is it legal to mail a handgun through the mail?
    Mr. Hoover. No, sir.
    Mr. Weiner. It is legal to mail a poisonous snake through 
the mail?
    Mr. Hoover. I cannot answer that, sir. I would think not. 
[Laughter.]
    Mr. Weiner. Now, with the exception of the poisonous snake, 
which I am sure makes some kind of poisonous-snake-sounding 
sound, there are already ways that you have under your 
jurisdiction and the carriers have to make some determination 
about what is going on inside the packages that they have, 
because it is already the law, is it not?
    Mr. Hoover. Yes, sir. That is correct.
    Mr. Weiner. Are you aware of the agreement that has been 
entered into by the--actually perhaps Attorney General Lapp can 
speak to this--are you aware of the agreement that has been 
entered into by DHL, UPS, FedEx to agree not to deliver 
cigarettes? Has it been a success? Has it been something? Has 
it brought commerce in this country to a standstill? Or is it 
basically being followed to your knowledge? Is it having some 
impact?
    Mr. Lapp. To our knowledge, it has been followed. In our 
experience, we do Internet stings and our experience since 
those agreements have been entered into is that, I am not sure 
if it is 100 percent, but it is close, are being delivered by 
the U.S. Postal Service.
    Mr. Weiner. Thank you.
    Chairman Melendez, do you have an Internet site that sells 
cigarettes?
    Mr. Melendez. No, we don't. Actually, it is just the tribe 
itself that operates retail tobacco stores, not individuals, so 
we don't really----
    Mr. Weiner. So you are in competition with tribes that have 
a more sophisticated Internet operation. If there is someone 
down the street in Reno that goes onto the Internet and wants 
to avoid your agreed-upon tax rate--yours, the one you have 
agreed with the State on--and wanted to save a few bucks that 
way, you would be in competition with tribes around the country 
that have Internet delivery systems. Is that right?
    Mr. Melendez. If we were dealing with the Internet. I know 
that right now we are----
    Mr. Weiner. No. I am saying since you are not, you would be 
competing with someone who wants to mail order, say, from your 
neighborhood there in Reno, you are competing with people who 
do have an Internet presence, are you not?
    Mr. Melendez. Yes, I imagine we were, but just a comment. 
We are working with the State streamline sales tax initiative, 
and the tribes are at the table with the State legislature to 
try to resolve the Internet sales in general.
    Mr. Weiner. Well, I would say, Mr. Chairman, good luck with 
that because unless we here in Congress act, you have very 
little ability to do anything more than govern, and this is the 
problem that Attorney General Lapp has, you are under very 
little ability to govern anything more than a website that 
operates within Nevada, and even then you are going to have a 
difficult time doing it.
    What we are trying to get at, and I just want to say for 
the record, the Native American tribes as a group have been 
helpful here in crafting the PACT Act. There are a lot of 
issues that Mr. Rosenthal, Mr. Myers, and Mr. Colledge talk 
about, and these are tough issues in how you deal with someone 
who pulls up at the Seneca reservation on Long Island with a 
truck, buys cases and cases, and drives to neighborhood bodegas 
and sells them tax-free. These are tough issues.
    The State of New York and the State of Maryland are going 
to have to figure out how we deal with them, and I don't 
believe that my bill is the be-all and end-all, but as far as 
you are concerned, I believe this legislation protects you as 
well, because if you go out and work out a tax structure with 
Nevada, it is completely obviated by what is going on on the 
Internet. So I just want to point that out.
    Thank you, Mr. Chairman.
    Mr. Scott. Thank you. The gentleman's time has expired.
    The gentleman from Ohio, Mr. Chabot.
    Mr. Chabot. Mr. Chairman, I just want to know for the 
record that I am the Ranking Member of the Small Business 
Committee and we just finished up on our hearing. That is why I 
wasn't here earlier. I will review the written testimony of the 
witnesses. We appreciate their time.
    I am tempted to yield my time to the gentleman from New 
York to find out what items we are not allowed to mail through 
the mail, in addition to poisonous snakes and things, but I 
will refrain from that. [Laughter.]
    Mr. Weiner. Don't worry, Mr. Chabot. We are not cutting 
into any of your hobbies. Don't worry. [Laughter.]
    Mr. Chabot. Thanks for that.
    I yield back.
    Mr. Scott. Thank you.
    The gentleman from Georgia, Mr. Johnson.
    Mr. Johnson. Thank you, Mr. Chairman. Thank you for holding 
this hearing. This is a very important issue for the health of 
the citizens of this nation, particularly the children and for 
the criminal part of this which funds a lot of activities that 
negatively impact life as we know it. So I am supportive in 
principle, particularly of the PACT Act.
    I want to ask, however, what is the fundamental difference 
between cigarettes, smokeless or chewing tobacco, if you will, 
and cigars, which are not regulated under H.R. 4081?
    Mr. Rosenthal. The fundamental difference, I believe, is 
that many, many cigars go stale very, very quickly and they are 
a very high-priced item. They are not generally used for 
terrorist funding or smoked by children. On the other hand, 
many cigar manufacturers in an effort to get their product to 
market fresh, cannot count on delivering them to warehouses and 
having those warehouses store them and having those warehouses 
eventually sell them to retail outlets, and having them put 
them in humidors, and eventually selling them through to the 
public.
    Because of the high-priced inventory and the shelf life, 
many cigar manufacturers use the mails as their only effective 
means of dealing with those rare high-quality cigars. To 
preclude them from using the mails would probably greatly 
impact their business, while having very, very little impact on 
what it is that Mr. Weiner is trying to accomplish.
    Mr. Johnson. You have some high-quality cigars and then you 
also have a substantial number of low-quality cigars. Isn't 
that correct?
    Mr. Rosenthal. Yes, it is.
    Mr. Johnson. A lot of cigars are sold in the convenience 
stores. Correct?
    Mr. Rosenthal. That is correct.
    Mr. Johnson. Probably a major part of the cigar market is 
the low-end cigars. Correct?
    Mr. Rosenthal. Especially in New York City, we have a big, 
big problem with low-priced cigars that turn over quickly 
coming into our marketplace and being sold in competition with 
legitimate storekeepers untaxed. You are absolutely right, Mr. 
Johnson.
    Mr. Johnson. And now, I will note also that part of the 
delivery system of marijuana for our young people who partake 
in it, I have heard that----
    Mr. Rosenthal. Some older people do, too.
    Mr. Johnson. True, but I think the older people like to 
kind of get the old types, kind of one-point-fives or something 
and roll them up themselves, but younger people like the--that 
is what I have heard anyway. [Laughter.]
    Younger people like to unroll the cheap cigars and put the 
marijuana in the cigar wrapper and put a little cheap cigar 
tobacco in there and roll it up and smoke that. And that is a 
big part of the cheap tobacco market, I would submit. But is 
there a problem with the trafficking of cheap cigars?
    Mr. Rosenthal. There is a very, very large problem with it. 
The OTP tax, the other tobacco products tax in New York is 37.5 
percent. It is even higher in New Jersey and several other 
States. Because of that and the high volume of cigars being 
used primarily for that which you refer to, we have a 
tremendous amount of tax avoidance and it is a big, big 
problem.
    There are vans running all around New York City with cigars 
that they have picked up elsewhere and brought into New York 
and are selling through to small storekeepers who, in turn, are 
selling them to children who use the wrappers in order to make 
spoofs.
    Mr. Johnson. Is there any reason why we should exempt 
cigars from H.R. 4081 or H.R. 5689?
    Mr. Rosenthal. Personally, I would be very, very happy if 
it were not excluded. However, it is a question now of the 
effect that it would have on premium cigars. That is a 
decision, of course, I can't make.
    Mr. Johnson. Certainly. I know that we are considering 
giving tax breaks to thoroughbred racing horse owners, as 
opposed to quarter horse----
    Mr. Weiner. It is because they all smoke cigars.
    Mr. Johnson. High-end cigars. [Laughter.]
    But now, let me ask also H.R. 4081 would ban the delivery 
of cigarettes and chewing tobacco through the mail. Is that 
correct? And you are nodding your heads affirmatively. Does 
that mean yes?
    Mr. Rosenthal. Yes.
    Mr. Johnson. Okay. Well, let me ask this. What about 
through UPS or FedEx or some other common carrier? Would a 
shipper resort to that kind of shipping process as opposed to 
the mail?
    Mr. Myers. What it does is it will curtail the illegal 
shipment of cigarettes and smokeless tobacco products, both in 
terms of----
    Mr. Johnson. Through the mail?
    Mr. Myers. Through the mail, it would ban it altogether. 
There is really a very practical reason for that. As Mr. Weiner 
said, given the limitations on what the mail service is capable 
of doing, it is really the only way to effectively address that 
issue. It is not precedent-setting because we do it for a whole 
host of issues nowhere near as exciting as poisonous snakes.
    But through the common carriers, through UPS and FedEx, 
what this would do is cut out the sale of cigarettes that are 
being sold basically illegally, where taxes haven't been paid, 
or where inadequate protections are not in place to protect 
sales to youth. The net result of that will in all probability 
be that they simply won't deliver it, as they are doing right 
now, which would be an enormous net gain for our society.
    Mr. Johnson. All right. Thank you.
    I yield back.
    Mr. Scott. Thank you. The gentleman's time has expired.
    Do any of the Members have additional questions? The 
gentleman from Texas?
    Mr. Gohmert. I appreciate everybody being here and 
providing your testimony and insight. This is obviously a 
problem that we need to deal with, and that was really brought 
home to me by Mr. Weiner being gracious enough to take the time 
to visit with me about the issues. It was obvious to me that he 
had given this a great deal of thought, tried to look at it 
from all sides.
    I remember Mr. Weiner saying something, but I am curious. I 
know you have thought about this, but if I could ask the 
gentleman from New York, on the issue of cigars being sent 
through the mail, what were your thoughts on that and how that 
may be affected?
    Mr. Weiner. Well, the fundamental arrow in our quiver that 
we have to deal with this on a State-by-State administrative 
level is in the Jenkins Act. The Jenkins Act requires reporting 
when cigarettes are sold to individual citizens so that the 
States can then go collect the taxes. We don't have a similar 
requirement for cigars. So what we would have to then go do is 
not just expand the reach of the Jenkins Act with cigarettes, 
but we would have to go reach into cigars and other things as 
well.
    Look, there are a lot of legitimate concerns about how you 
go about this problem. What we tried to do to the greatest 
extent possible is cut with a scalpel here, to avoid the 
difficult issues of Native Americans, to deal with the issues 
of allowing States to do what they can. Basically, what we are 
seeing overwhelmingly, the smuggling that is going on, is a 
handful of Web sites that are Native American tribes, which now 
the ATF with higher sanctions and the U.S. attorneys with 
higher sanctions will be able to go after, and the Postal 
Service won't be able to ship anymore, cut them off from that.
    If smaller ones pop up and arise, they are going to be 
State-based. So we are also giving the States' attorneys 
general the ability to go after the smaller ones which are 
parochial to individual States.
    I would just say to my colleagues who are concerned about 
cigars, I am interested in trying to figure out a way to work 
with it, but the beauty of the PACT Act is that it takes 
something we have already kind of pre-vetted, which is the 
Jenkins Act as the model. We are just making the sanctions in 
the Jenkins Act not misdemeanors, but felonies. But if we want 
to add other things to the Jenkins Act to be covered under it, 
I am open to those ideas.
    I think what we need to do to get this passed quickly is to 
narrow our scope of conflict going right at the actual problem 
and be careful not to get drawn in. But that is a political 
decision that I am open to your counsel on.
    Mr. Gohmert. I don't want to have a dog in the cigar fight. 
I kicked the habit of smoking when I was 10. [Laughter.]
    I smoked twice and decided that was it for me and haven't 
since. But anyway, I appreciate the gentleman's thoughtful 
analysis and consideration. Thank you.
    Mr. Scott. Thank you.
    The gentleman from Ohio?
    The gentleman from Georgia?
    Okay.
    Mr. Weiner. Mr. Chairman, I just have a unanimous consent 
request. Can I be yielded to for that purpose?
    Mr. Scott. The gentleman from New York?
    Mr. Weiner. I request unanimous consent that statements in 
support of the PACT Act submitted by the City of New York, 
which has a great deal of tax loss as a result of this, be 
accepted in the record; similar testimony in support by the 
president of the American Wholesale Marketers Association; 
testimony in support by the vice president of compliance and 
brand integrity of Altria Client Services on behalf of Phillip 
Morris; also, Altria has an independent statement; and the 
National Association of Convenience and Petroleum Retailers.
    I ask unanimous consent that all of them be accepted in the 
record.
    Mr. Scott. Without objection, so ordered.
    [The information referred to follows:]
 Prepared Statement of Charles N. Whitaker, Vice President, Compliance 
  and Brand Integrity, Altria Client Services, submitted on behalf of 
                           Philip Morris USA

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

    Mr. Scott. The gentleman from New York, I didn't ask you if 
you had any other questions.
    Mr. Weiner. No, thank you, Mr. Chairman. I appreciate your 
forbearance.
    Mr. Scott. I thank all of our witnesses for their testimony 
today. Members may have additional written questions for our 
witnesses which we would forward to you and ask that you answer 
as promptly as you can so they may be made part of the record.
    Without objection, the hearing record will remain open for 
1 week for submission of additional materials.
    Without objection, the Subcommittee stands adjourned.
    [Whereupon, at 11:53 a.m., the Subcommittee was adjourned.]



















                            A P P E N D I X

                              ----------                              


               Material Submitted for the Hearing Record

       Prepared Statement of the Honorable Sheila Jackson Lee, a 
    Representative in Congress from the State of Texas, and Member, 
        Subcommittee on Crime, Terrorism, and Homeland Security
    Mr. Chairman, thank you for your leadership in convening today's 
very important hearing legislative proposals before the 110th Congress 
to amend federal restitution laws. I would also like to thank the 
ranking member, the Honorable Louie Gohmert. Welcome to our 
distinguished panelists.
    During this hearing, the Subcommittee will examine two major 
issues. First, the Subcommittee will examine reports of states losing 
tax revenue due to tobacco and cigarette trafficking. Second, the 
Subcommittee will also examine arguments in favor and against 
legislation that would enhance law enforcement's ability to pursue 
tobacco smugglers.
    Every year tens of billions of cigarettes disappear into a 
lucrative black market for tobacco products and are trafficked 
throughout the world. Smuggling harms public health and minors by 
undermining tobacco tax policies. Smuggling also makes tax-free 
cigarettes available to minors who might otherwise quit smoking. It is 
reported that cigarette smuggling also helps finance criminal activity 
and terrorist organizations.
    By diverting cigarettes while they are in the wholesale 
distribution chain, large-scale smugglers generally avoid all taxes. 
Increasingly, cigarette smuggling is on the rise throughout the United 
States. The U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives 
(ATF) has reported that the number of ATF tobacco smuggling 
investigations has increased from 10 in 1998 to 425 in 2005. Some of 
these investigations and convictions have occurred in Texas.
    Currently, the Jenkins Act, 15 USC 375, requires any person who 
sells and ships cigarettes across a state line to a buyer, other than a 
licensed distributor, to report the sale to the buyer's state tobacco 
collection officials. Compliance allows states to collect a cigarette 
excise tax. There are misdemeanor penalties for violation. Smugglers 
are circumventing the Jenkins Act by virtue of internet-based tobacco 
sales. Sales of tobacco through the internet has resulted in the loss 
of billions of dollars in tax revenue.
    The Contraband Cigarette Trafficking Act, 18 USC 2342, makes it 
illegal for persons to knowingly ship, transport, receive, possess, 
sell, distribute, or purchase contraband cigarettes or contraband 
smokeless tobacco. It also prohibits a person from knowingly making any 
false statement or representation with respect to information required 
by law to be kept in the records of any person who ships, sells, 
distributes cigarettes in excess of 10,000 in a single transaction.
    Cigarette smuggling is on the rise due to the internet and sales to 
and between Native American tribes and others. The PACT Act introduced 
by the Honorable Anthony Weiner was introduced in November 2007. H.R. 
4081 makes it a federal offense for any seller to fail to comply with 
all state excise tax, sales tax licensing, and tax stamping laws. H.R. 
4081 also increases the Jenkins Act's existing penalties from a 
misdemeanor to a felony. It further empowers states to enforce the 
Jenkins Act against out of state sellers sending delivery sales into 
its territory by giving the Attorney General the power to seek 
injunctive relief and civil penalties. The Act prohibits the shipment 
of cigarettes and tobacco through the US Postal Service and provides 
the ATF with the ability to inspect a distributor's business. Refusal 
to submit to inspection results in additional penalties. Internet 
sellers are required to verify a seller's age and identity through 
databases and the person accepting delivery must verify age and 
identity when signing for delivery.
    The other proposal, HR 5589, Smuggled Tobacco Prevention Act of 
2008 STOP Act), which requires that all cigarette packages are clearly 
labeled for export to prevent illegal re-entry to the U.S. H.R. 5589 
prohibits retaliation against whistleblowers, raises the penalties for 
violation to $10,000 and allows the State to bring civil action for 
collection of State cigarette tax, and allows agreements between the US 
and foreign countries to enter into information exchange agreements to 
combat the threat of cigarette trafficking. The Act also requires 
packaging to be marked with high tech stamp to expand record keeping in 
the chain of distribution. The bill would add additional criminal 
offenses for trafficking in tobacco products, including up to five 
years imprisonment.
    These bills demonstrate good fiscal policy and good public health 
policy. I would like to work with the sponsors to ensure passage of 
these bills.
    I welcome today's hearing and I look forward to hearing from 
today's panelists. Thank you. Mr. Chairman, I yield the remainder of my 
time.

                                

     Prepared Statement of The American Trucking Associations, Inc.
    The American Trucking Associations, Inc. (``ATA'') is a trade 
association of motor carriers, state trucking associations, and 
national trucking conferences created to promote and protect the 
interests of the trucking industry. Directly, and through its 
affiliated organizations, the ATA represents over 30,000 companies and 
every type and class of motor carrier operation in the United States, 
including parcel delivery companies.
    The ATA supports Congress in its endeavor to prevent tobacco 
smuggling, ensure the collection of tobacco taxes, and keep cigarettes 
out of the hands of minors. The ATA's members have demonstrated their 
support of these important goals by implementing policies that prohibit 
shipments of cigarettes to consumers. Testimony before this 
Subcommittee demonstrates that the carriers' efforts have been 
successful. The testimony demonstrates that tobacco smugglers do not 
ship contraband via carriers and instead have taken advantage of a 
loophole in existing law by shipping via the U.S. Postal Service, 
premised on the Postal Service's lack of legal authority to refuse 
cigarette shipments. The provision in Section 3 of the Prevent All 
Cigarette Trafficking Act of 2007 (``PACT Act'') to make cigarettes and 
smokeless tobacco nonmailable matter will close this loophole. In 
addition, provisions of the PACT Act that make violations of the 
Jenkins Act felonies, rather than misdemeanors, and that allow state 
and local governments to bring actions in United States district courts 
will strengthen the Jenkins Act by providing meaningful enforcement 
tools for federal, state, and tribal governments, including by 
providing the means for state attorneys general to pursue penalties and 
injunctive relief from out-of-state tobacco sellers.
    The ATA believes that the provisions in the PACT Act that treat 
cigarettes and smokeless tobacco as nonmailable matter and strengthen 
enforcement tools against tobacco smugglers serve the stated purpose of 
the Act and will effectively address existing problems in preventing 
tobacco smuggling. In contrast, provisions of the Act that are directed 
to common carriers are unwarranted and will create unnecessary burdens 
and inefficiencies in the transportation of goods. The national 
trucking industry is of massive size and scope and is an essential 
pillar of the American economy and lifestyle. The U.S. Department of 
Transportation's Federal Motor Carrier Safety Administration 
(``FMCSA'') estimates that there are almost 685,000 motor carriers 
operating in interstate commerce.\1\ In 2002, nearly eight billion tons 
of freight (over \2/3\ of domestic tonnage shipped) with a value of 
over $6 trillion moved by truck.\2\ Every segment of our economy 
depends on reliable commercial carriers' transportation and delivery 
services to deliver packages that have unyielding, time-critical 
deadlines. The successful development of a national cargo 
transportation industry that can handle this massive volume of 
shipments is due in large part to Congress's mandate to eliminate 
burdensome and inefficient regulation of carriers' services. Cargo 
carriers rely on that mandate to implement extensive, integrated 
transportation and package-handling networks that use uniform 
procedures and processes that allow carriers to focus on what they do 
best--moving billions of packages each year across the country to their 
ultimate destinations.
---------------------------------------------------------------------------
    \1\ U.S. Dep't of Transp., FMCSA, FY2008 Budget Estimates at 4A-9, 
available at http://www.fmcsa.dot.gov/?documents?/about/?FMCSA?-FY-08-
Budget-Est.pdf.
    \2\ U.S. Census Bureau, 2002 Economic Census, 2002 Commodity Flow 
Survey, tbl.1a (Dec. 2004), available at http://www.census?.?gov?/prod/
ec02/ec02tcf-us.pdf.
---------------------------------------------------------------------------
    The proposed regulations of common carriers in the PACT Act are 
inconsistent with and threaten the efficiencies created by existing 
federal laws that have deregulated motor carriers' transportation of 
property. Accordingly, the ATA urges amendment of H.R. 4081 to remove 
proposed regulation of common carriers and to ensure that existing 
preemption of state laws regulating motor carriers' price, route, or 
service is unaffected by the PACT Act.
regulation of carriers is not necessary to achieve the pact act's goals 
               and places unwarranted burdens on carriers
    Consistent with the spirit of the PACT Act, the trucking industry 
already has taken reasonable measures to address the problems sought to 
be addressed in the Act. Carriers uniformly have policies that require 
shippers to comply with all applicable laws for their shipments. The 
three major package-delivery companies--UPS, Federal Express 
(``FedEx''), and DHL--all prohibit customers from using their services 
to ship cigarettes to consumers. Carriers also have a history of 
cooperation with law enforcement officials (with appropriate legal 
process) to supply information about shipments and deliveries.
    Notably, the major carriers chose to prohibit all shipments of 
cigarettes to consumers even though many such shipments are lawful, 
including shipments from state-licensed retailers. Carriers chose to 
implement uniform nationwide policies to avoid the burdens and 
inefficiencies of having to check lists of authorized or unauthorized 
shippers or recipients that would require them to make determinations 
about whether a particular package could be delivered.
    The evidence before the Subcommittee is that carriers are not the 
source of the problems sought to be addressed in the PACT Act. The 
Honorable Anthony Weiner, a co-sponsor of the Act, stated during the 
May 1, 2008 hearing on the PACT Act and the Smuggled Tobacco Prevention 
Act of 2008: ``Right now, the only one that is carrying it [smuggled 
cigarettes], ironically, is the United States Postal Service.'' This 
testimony was confirmed by David S. Lapp, Chief Counsel, Tobacco 
Enforcement Unit, Office of the Attorney General of Maryland, who 
testified during the same hearing that in regards to shipping 
cigarettes to consumers: ``In our experience, we do Internet stings and 
our experience since those agreements [with carriers not to deliver 
cigarettes to consumers] is that, I am not sure if it is 100 percent, 
but it is close, are being delivered by the U.S. Postal Service.'' Mr. 
Lapp's written testimony is to the same effect: ``[W]e have curbed 
deliveries by all the major carriers except one--the U.S. Postal 
Service, which asserts that it has no legal authority to refuse 
cigarette shipments.''
    Carriers have achieved this remarkable degree of success in curbing 
deliveries of cigarettes to consumers through notifying customers of 
their policies, making reasonable efforts to intercept packages that 
appear to be in violation of their policies, and disciplining shippers 
determined to be in violation of their policies. Due to the volume of 
packages being delivered on a daily basis, however, carriers do not and 
cannot determine the contents of each package.
    Notwithstanding the evidence establishing that carriers are not the 
problem, the PACT Act would impose requirements on carriers that go far 
beyond their current efforts to enforce their policies to prohibit 
shipments of cigarettes to consumers. In particular, the Act would 
create Section 2A(e)(2) of the Jenkins Act, making it unlawful for 
carriers to knowingly deliver any package from any person whose name 
and address appears on a list compiled by the Attorney General of the 
United States (the ``List'') unless (1) the carrier had a good faith 
belief that the package does not contain cigarettes or smokeless 
tobacco, (2) the delivery was made to a person lawfully engaged in the 
business of manufacturing, distributing, or selling such tobacco, or 
(3) the package weighs more than 100 pounds and the carrier does not 
know or have reason to believe that it contains such tobacco. As 
explained in more detail below, attempting to comply with this 
prohibition would require extensive efforts from carriers to provide 
special handling for all packages tendered by anyone on the List and 
face the threat of civil and criminal sanctions if they failed to 
identify and intercept a package shipped in violation of the PACT Act's 
requirements and the carriers' own policies. These added burdens and 
requirements are inconsistent with Congress's successful implementation 
of deregulation of the motor carrier industry, which to date, has 
enabled the development of an efficient transportation network that is 
essential to the Nation's economy.
     the prohibition against deliveries from anyone on the list of 
 unregistered or noncompliant delivery sellers would be unworkable for 
                                carriers
    The prohibition against delivering packages from those who the 
Attorney General places on a list of unregistered or noncompliant 
delivery sellers would impose extensive burdens on carriers.
    Carriers rely on uniform procedures to process and transport 
packages. The major carriers rely on technology and highly-automated 
procedures to sort packages based on delivery destinations; they do not 
treat packages differently depending on who shipped the package. These 
uniform procedures are the lifeblood of carriers and essential to their 
ability to handle the overwhelming number of packages they deliver each 
day. Requiring carriers to give special handling to packages that may 
be tendered from someone on the Attorney General's list will create 
inefficiencies that can delay not only packages shipped by persons on 
the list but all packages in the carrier's network.
    First, carriers do not have a viable way to identify all packages 
shipped by a person on the List when the list provides only name and 
addresses. Once a package enters a carrier's system, the carrier can 
identify and track that package based only on the shipping account 
number or tracking number used to ship the package. A shipping account 
number may be used for many different addresses and a person at a given 
address may use different account numbers. Thus, even though carriers 
have technology that can track packages in their systems, carriers 
cannot track or locate packages based on the criteria used on the List: 
the name and address of the shipper of the package.
    Second, given their inability to identify all packages in their 
systems based on the name and address of the shipper, the only 
conceivable way that carriers could attempt to identify packages 
shipped by someone on the List would be to identify the packages at the 
point that they were picked up from a shipper. To attempt to do so, 
carriers would have to design systems to keep track of the names and 
addresses on the List and to give special handling to all packages 
tendered from persons whose names and addresses are on the List. This 
would require carriers to train each and every driver who might pick up 
packages from an address on the List as to what special procedures to 
use in picking up packages. Regardless of what procedures were 
implemented, drivers would have to use judgment in making 
determinations about how to treat packages shipped by someone whose 
name was similar but not identical to the name on the list (e.g., 
``John Jones Ltd.'' vs. ``John Jones''). Once packages were picked up, 
the carriers would have to segregate all packages from any shipper 
whose name was on the List so that the carrier could attempt to 
determine whether or not it believed in good faith that the package 
contained cigarettes or smokeless tobacco and, if so, whether the 
recipient of the package was lawfully engaged in the manufacture or 
sale of tobacco (and thus that the package could be delivered). The 
carrier also would have to design and implement systems to deal with 
packages that it determined could not be delivered in compliance with 
the Act.
    Third, carriers could not simply abandon all pick-ups from a 
specified address as they are under an obligation to provide their 
services ``on reasonable request.'' 49 U.S.C. Sec. 14101(a). It would 
be inconsistent with existing federal policy for carriers to refuse to 
provide all service from any address based on the fact that some 
packages tendered from the address may contain cigarettes or smokeless 
tobacco that was shipped to an unauthorized recipient.
    Fourth, even if carriers designed and implemented systems to give 
special handling to all packages picked up from persons whose names and 
addresses appeared on the List, carriers still could not identify all 
packages shipped by such persons. Packages can be introduced into 
carriers' transportation networks not only when picked up by a driver 
but also through means such as unstaffed drop boxes, pack-and-ship 
stores, or even by handing a package to a driver. As a result, it would 
be impossible for carriers to identify and intercept all packages 
shipped by any person on the List.
    Fifth, carriers also would have to look for markings on packages to 
determine if they might contain cigarettes or smokeless tobacco and 
give special handling to all such packages to determine whether they 
were shipped by someone on the List and, if so, to ensure that they are 
not delivered to an unauthorized recipient.
 the prohibition against deliveries of unmarked packages that carriers 
   ``should know'' contain cigarettes or smokeless tobacco would be 
                        unworkable for carriers
    As amended by the PACT Act, Section 2A(b)(2) of the Jenkins Act 
would require carriers to treat as ``undeliverable matter'' any package 
that the carrier ``knows or should know'' contains cigarettes or 
smokeless tobacco, if the package is not labeled with the statement 
required by the Act. Complying with this provision would require 
carriers to design and implement procedures to give special handling to 
identify packages with any markings that could give rise to an 
inference that the carrier ``should know'' that the package contains 
cigarettes or smokeless tobacco; evaluate whether the package has the 
precise markings required by the Act; and then prevent delivery of the 
package if the markings did not comply with the Act.
the burdens of attempted compliance with prohibitions against delivery 
                    would cause gross inefficiencies
    Individually and cumulatively, the steps described above would 
cause dramatic inefficiencies for the nationwide transportation of 
property. The special handling required to attempt to identify and 
intercept packages that may have been shipped by someone on the List or 
that do not have the required markings would require extensive efforts 
that would affect all aspects of carriers' transportation networks. 
Creating exceptions and special handling for packages that might 
violate the PACT Act would necessarily interfere with the uniform 
procedures on which carriers rely and risk creating delays and bottle-
necks for deliveries. Carriers would have to devote significant 
resources to attempt to comply with the law to avoid potential civil 
and criminal penalties if they failed to intercept a package tendered 
by a shipper determined to thwart the carriers' efforts.
       the requirements and penalties of the act are overly broad
    Attempted compliance with the prohibitions against delivery would 
effectively restrict carriers from delivering any package from persons 
on the List. Thus, if a person is named on the List because of a 
failure to register or pay taxes in one state, a carrier would be 
prohibited from making deliveries from the person in any state. And if 
a person on the List cures whatever default had caused it to be added 
to the List, it may take as long as four months for updates to the List 
to be created and distributed. Carriers would be prohibited from making 
any deliveries from the person until the updated List was received.
    In addition, as amended by the PACT Act, Section 2A(e)(3)(B) of the 
Jenkins Act would require carriers to maintain for a period of five 
years ``any records kept in the ordinary course of business relating to 
any deliveries interrupted'' under the Act (emphasis added). Carriers 
have varying types of records for each of the millions of packages they 
deliver each day, across numerous data systems. It would be 
extraordinarily burdensome to isolate and place a hold on all such 
``ordinary course'' records across all data systems that happen to 
relate to intercepted packages and to maintain such records for a five-
year period. At most, the record requirement should extend to 
information sufficient to identify any intercepted package and its 
delivery shipper, and the hold should be only for one year.
    Finally, as amended by the PACT Act, Section 3(a)(2)(B)(i) of the 
Jenkins Act would subject a common carrier and its employees to 
criminal penalties for any violation of the Jenkins Act (e.g. by making 
a delivery from someone on the List) if the violation were committed 
``as consideration for'' the receipt of or promise to pay ``anything of 
pecuniary value.'' Private carriers deliver goods for compensation and 
their employees are paid for the work they do in transporting and 
delivering property. Thus, every violation could be considered to have 
been performed for pecuniary value and every violation could subject 
carriers and their employees to criminal penalties. The same is true 
for civil violations, which also may be imposed against carriers or 
their employees who act in consideration of ``anything of pecuniary 
value'' (adding Section 3(b)(3)(i) of the Jenkins Act).
     the preemption clause threatens to weaken existing preemption 
                        protections for carriers
    Through the Federal Aviation Administration Authorization Act of 
1994, Congress has expressly barred states from enforcing laws 
``related to a price, route, or service of any motor carrier . . . with 
respect to the transportation of property.'' 49 U.S.C. 14501(c)(1). The 
Supreme Court recently confirmed the broad scope of that preemption. 
See Rowe v. NH Motor Transport Ass'n, 128 S. Ct. 989 (2008). The 
addition of Section 2A(e)(4)(A) and (C) of the Jenkins Act would 
undermine FAAAA preemption by suggesting that the FAAAA does not 
preempt state laws regulating carriers' deliveries and inviting state 
regulation of carriers' deliveries. These provisions should be deleted 
so that the PACT Act does not undermine the broad and effective scope 
of preemption.
                               conclusion
    Common carriers have already proven to be successful in preventing 
the shipment of cigarettes to consumers. The ATA believes that the PACT 
Act can effectively strengthen ongoing efforts to combat tobacco 
smuggling by making cigarettes and smokeless tobacco non-mailable, by 
increasing the penalties of the Jenkins Act, and by allowing states to 
bring actions for injunctive relief and penalties for violation of the 
Jenkins Act in federal courts. In contrast, those provisions of the 
PACT Act that would impose burdens on carriers and subject carriers and 
their employees to civil and criminal penalties are unnecessary and 
would create dramatic inefficiencies in the motor carrier industry. By 
eliminating the provisions regulating common carriers, the PACT Act 
will be able to accomplish its goals without adversely affecting the 
transportation of goods that is so vital to our economy.

                                

 Prepared Statement of Scott Ramminger, President, American Wholesale 
                         Marketers Association
    Thank you for providing the opportunity to testify in support of HR 
4081, legislation that would address the widespread problem of illegal 
Internet sales of cigarettes. My name is Scott Ramminger and I am the 
President of the American Wholesale Marketers Association (AWMA). AWMA 
represents more than 600 member companies in the supply channel--
distributors, manufacturers, suppliers, brokers and retailers, all 
working together to get products to the consumer. Our industry 
represents product sales of over $85 billion annually nationwide. The 
products they distribute include tobacco, candy, foodservice, general 
merchandise, snacks and health and beauty care to name just a few.
    We thank the Members of the Committee for holding this hearing and 
for introducing legislation to address the serious problem of illegal 
Internet sales of cigarettes. In this statement, I will summarize 
AWMA's concerns over this issue and express our support for HR 4081, 
the bill now before the Committee.
    AWMA has cited illegal Internet sales of tobacco as one of the most 
pressing problems facing our industry. In 2005, our Association 
undertook a study to determine just how widespread this problem was and 
whether various efforts to combat these illegal sales were effective. 
As you know, an agreement was reached between major credit card 
companies, states attorneys general, and the Bureau of Alcohol, Tobacco 
and Firearms to halt the use of credit cards for Internet cigarette 
sales, and a voluntary effort was also made by various carriers--UPS 
and FedEx included--to end delivery of these products, all in an 
attempt to crack down on these illegal sales. Unfortunately, the 
results of our own study were very troubling and indicate that despite 
these--and other--efforts to end these transactions, the illegal sale 
of these products continues to flourish.
    As a sampling of what our study found, AWMA easily used a credit 
card to purchase 14 cartons of cigarettes--eight cartons were within 
the U.S. and six were from foreign countries. Of the 30 random sites 
used to purchase cigarettes, 53% allowed the use of a credit card--
Visa, Diners, Mastercard, and/or American Express. And none of the 
cigarettes purchased had any U.S. state tax stamps and in no case were 
taxes collected at the time of purchase. It should be noted, that the 
AWMA notified the Virginia Department of Taxation of the tax stamp 
omission and paid the appropriate amount of tax to comply with the law. 
Even more troubling, age verification was virtually nonexistent. Most 
sites simply had a statement on the home page indicating that a 
purchaser had to be of a certain age to buy cigarettes but nothing 
beyond to prevent an underage person from buying the cigarettes. Some 
asked for a simple check off that the buyer was over 18.
    It was clear from our informal study that efforts to restrict the 
illegal cigarette sales via the Internet are falling short of the mark. 
We believe that federal legislation is needed to address this issue and 
we are supporting HR 4081.
    From our industry's perspective, every sale of an illegal tobacco 
product over the Internet translates into a loss for responsible, 
legitimate, law-abiding distributors and retailers across the country. 
And, it's not just our industry that's impacted--states are losing 
millions of dollars each year in unpaid excise taxes and enforcement 
expenses. And, more important, many of the cigarettes sold over the 
Internet are ending up in the hands of under-age smokers because of the 
lack of safeguards inherent in these types of remote sales.
    I commend the Committee for its efforts on behalf of HR 4081 and 
for its recognition as to the need for federal legislation to address 
this serious problem. I urge the Committee to approve HR 4081 and I 
appreciate the opportunity to submit this testimony on behalf of the 
American Wholesale Marketers Association.

[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]

 Text of the bill, H.R. 4081, the ``Prevent All Cigarette Trafficking 
                     Act of 2007,'' or ``PACT Act''

-----------------------------------------------------------------------
110th CONGRESS                                                         I
  2D Session                    H. R. 4081

To prevent tobacco smuggling, to ensure the collection of all tobacco 
    taxes, and for other purposes.
                               __________

                    IN THE HOUSE OF REPRESENTATIVES
                            November 5, 2007

Mr. Weiner introduced the following bill; which was referred to the 
    Committee on the Judiciary
                               __________

                                 A BILL

To prevent tobacco smuggling, to ensure the collection of all tobacco 
    taxes, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE; FINDINGS; PURPOSES.

    (a) Short Title.--This Act may be cited as the ``Prevent All 
Cigarette Trafficking Act of 2007'' or ``PACT Act''.
    (b) Findings.--Congress finds that--
            (1) the sale of illegal cigarettes and smokeless tobacco 
        products significantly reduces Federal, State, and local 
        government revenues, with Internet sales alone accounting for 
        billions of dollars of lost Federal, State, and local tobacco 
        tax revenue each year;
            (2) Hezbollah, Hamas, al Qaeda, and other terrorist 
        organizations have profited from trafficking in illegal 
        cigarettes or counterfeit cigarette tax stamps;
            (3) terrorist involvement in illicit cigarette trafficking 
        will continue to grow because of the large profits such 
        organizations can earn;
            (4) the sale of illegal cigarettes and smokeless tobacco 
        over the Internet, and through mail, fax, or phone orders, make 
        it cheaper and easier for children to obtain tobacco products;
            (5) the majority of Internet and other remote sales of 
        cigarettes and smokeless tobacco are being made without 
        adequate precautions to protect against sales to children, 
        without the payment of applicable taxes, and without complying 
        with the nominal registration and reporting requirements in 
        existing Federal law;
            (6) unfair competition from illegal sales of cigarettes and 
        smokeless tobacco is taking billions of dollars of sales away 
        from law-abiding retailers throughout the United States;
            (7) with rising State and local tobacco tax rates, the 
        incentives for the illegal sale of cigarettes and smokeless 
        tobacco have increased;
            (8) the number of active tobacco investigations being 
        conducted by the Bureau of Alcohol, Tobacco, Firearms, and 
        Explosives rose to 452 in 2005;
            (9) the number of Internet vendors in the United States and 
        in foreign countries that sell cigarettes and smokeless tobacco 
        to buyers in the United States has increased from only about 40 
        in 2000 to more than 500 in 2005; and
            (10) the intrastate sale of illegal cigarettes and 
        smokeless tobacco over the Internet has a substantial effect on 
        interstate commerce.
    (c) Purposes.--It is the purpose of this Act to--
            (1) require Internet and other remote sellers of cigarettes 
        and smokeless tobacco to comply with the same laws that apply 
        to law-abiding tobacco retailers;
            (2) create strong disincentives to illegal smuggling of 
        tobacco products;
            (3) provide government enforcement officials with more 
        effective enforcement tools to combat tobacco smuggling;
            (4) make it more difficult for cigarette and smokeless 
        tobacco traffickers to engage in and profit from their illegal 
        activities;
            (5) increase collections of Federal, State, and local 
        excise taxes on cigarettes and smokeless tobacco; and
            (6) prevent and reduce youth access to inexpensive 
        cigarettes and smokeless tobacco through illegal Internet or 
        contraband sales.

SEC. 2. COLLECTION OF STATE CIGARETTE AND SMOKELESS TOBACCO TAXES.

    (a) Definitions.--The Act of October 19, 1949 (15 U.S.C. 375 et 
seq.; commonly referred to as the ``Jenkins Act'') (referred to in this 
Act as the ``Jenkins Act''), is amended by striking the first section 
and inserting the following:

``SEC. 1. DEFINITIONS.

    ``As used in this Act, the following definitions apply:
            ``(1) Attorney general.--The term `attorney general', with 
        respect to a State, means the attorney general or other chief 
        law enforcement officer of the State, or the designee of that 
        officer.
            ``(2) Cigarette.--
                    ``(A) In general.--For purposes of this Act, the 
                term `cigarette' shall--
                            ``(i) have the same meaning given that term 
                        in section 2341 of title 18, United States 
                        Code; and
                            ``(ii) include `roll-your-own tobacco' (as 
                        that term is defined in section 5702 of the 
                        Internal Revenue Code of 1986).
                    ``(B) Exception.--For purposes of this Act, the 
                term `cigarette' does not include a `cigar,' as that 
                term is defined in section 5702 of the Internal Revenue 
                Code of 1986.
            ``(3) Common carrier.--The term `common carrier' means any 
        person (other than a local messenger service or the United 
        States Postal Service) that holds itself out to the general 
        public as a provider for hire of the transportation by water, 
        land, or air of merchandise, whether or not the person actually 
        operates the vessel, vehicle, or aircraft by which the 
        transportation is provided, between a port or place and a port 
        or place in the United States.
            ``(4) Consumer.--The term `consumer' means any person that 
        purchases cigarettes or smokeless tobacco, but does not include 
        any person lawfully operating as a manufacturer, distributor, 
        wholesaler, or retailer of cigarettes or smokeless tobacco.
            ``(5) Delivery sale.--The term `delivery sale' means any 
        sale of cigarettes or smokeless tobacco to a consumer if--
                    ``(A) the consumer submits the order for such sale 
                by means of a telephone or other method of voice 
                transmission, the mails, or the Internet or other 
                online service, or the seller is otherwise not in the 
                physical presence of the buyer when the request for 
                purchase or order is made; or
                    ``(B) the cigarettes or smokeless tobacco are 
                delivered by use of a common carrier, private delivery 
                service, or the mails, or the seller is not in the 
                physical presence of the buyer when the buyer obtains 
                possession of the cigarettes or smokeless tobacco.
            ``(6) Delivery seller.--The term `delivery seller' means a 
        person who makes a delivery sale.
            ``(7) Indian country.--The term `Indian country' has the 
        meaning given that term in section 1151 of title 18, United 
        States Code, except that within the State of Alaska that term 
        applies only to the Metlakatla Indian Community, Annette Island 
        Reserve.
            ``(8) Indian tribe.--The term `Indian tribe', `tribe', or 
        `tribal' refers to an Indian tribe as defined in section 4(e) 
        of the Indian Self-Determination and Education Assistance Act 
        (25 U.S.C. 450b(e)) or as listed pursuant to section 104 of the 
        Federally Recognized Indian Tribe List Act of 1994 (25 U.S.C. 
        479a-1).
            ``(9) Interstate commerce.--The term `interstate commerce' 
        means commerce between a State and any place outside the State, 
        commerce between a State and any Indian country in the State, 
        or commerce between points in the same State but through any 
        place outside the State or through any Indian country.
            ``(10) Person.--The term `person' means an individual, 
        corporation, company, association, firm, partnership, society, 
        State government, local government, Indian tribal government, 
        governmental organization of such government, or joint stock 
        company.
            ``(11) State.--The term `State' means each of the several 
        States of the United States, the District of Columbia, the 
        Commonwealth of Puerto Rico, or any territory or possession of 
        the United States.
            ``(12) Smokeless tobacco.--The term `smokeless tobacco' 
        means any finely cut, ground, powdered, or leaf tobacco, or 
        other product containing tobacco, that is intended to be placed 
        in the oral or nasal cavity or otherwise consumed without being 
        combusted.
            ``(13) Tobacco tax administrator.--The term `tobacco tax 
        administrator' means the State, local, or tribal official duly 
        authorized to collect the tobacco tax or administer the tax law 
        of a State, locality, or tribe, respectively.
            ``(14) Use.--The term `use', in addition to its ordinary 
        meaning, means the consumption, storage, handling, or disposal 
        of cigarettes or smokeless tobacco.''.
    (b) Reports to State Tobacco Tax Administrators.--Section 2 of the 
Jenkins Act (15 U.S.C. 376) is amended--
            (1) by striking ``cigarettes'' each place it appears and 
        inserting ``cigarettes or smokeless tobacco'';
            (2) in subsection (a)--
                    (A) in the matter preceding paragraph (1)--
                            (i) by inserting ``Contents.--''after 
                        ``(a)''
                            (ii) by striking ``or transfers'' and 
                        inserting ``, transfers, or ships'';
                            (iii) by inserting ``, locality, or Indian 
                        country of an Indian tribe'' after ``a State'';
                            (iv) by striking ``to other than a 
                        distributor licensed by or located in such 
                        State,''; and
                            (v) by striking ``or transfer and 
                        shipment'' and inserting ``, transfer, or 
                        shipment'';
                    (B) in paragraph (1)--
                            (i) by striking ``with the tobacco tax 
                        administrator of the State'' and inserting 
                        ``with the Attorney General of the United 
                        States and with the tobacco tax administrators 
                        of the State and place''; and
                            (ii) by striking ``; and'' and inserting 
                        the following: ``, as well as telephone numbers 
                        for each place of business, a principal 
                        electronic mail address, any website addresses, 
                        and the name, address, and telephone number of 
                        an agent in the State authorized to accept 
                        service on behalf of such person;'';
                    (C) in paragraph (2), by striking ``and the 
                quantity thereof.'' and inserting ``the quantity 
                thereof, and the name, address, and phone number of the 
                person delivering the shipment to the recipient on 
                behalf of the delivery seller, with all invoice or 
                memoranda information relating to specific customers to 
                be organized by city or town and by zip code; and''; 
                and
                    (D) by adding at the end the following:
            ``(3) with respect to each memorandum or invoice filed with 
        a State under paragraph (2), also file copies of such 
        memorandum or invoice with the tobacco tax administrators and 
        chief law enforcement officers of the local governments and 
        Indian tribes operating within the borders of the State that 
        apply their own local or tribal taxes on cigarettes or 
        smokeless tobacco.'';
            (3) in subsection (b)--
                    (A) by inserting ``Presumptive Evidence.--'' after 
                ``(b)'';
                    (B) by striking ``(1) that'' and inserting 
                ``that''; and
                    (C) by striking ``, and (2)'' and all that follows 
                and inserting a period; and
            (4) by adding at the end the following:
    ``(c) Use of Information.--A tobacco tax administrator or chief law 
enforcement officer who receives a memorandum or invoice under 
paragraph (2) or (3) of subsection (a) shall use such memorandum or 
invoice solely for the purposes of the enforcement of this Act and the 
collection of any taxes owed on related sales of cigarettes and 
smokeless tobacco, and shall keep confidential any personal information 
in such memorandum or invoice not otherwise required for such 
purposes.''.
    (c) Requirements for Delivery Sales.--The Jenkins Act is amended by 
inserting after section 2 the following:

``SEC. 2A. DELIVERY SALES.

    ``(a) In General.--With respect to delivery sales into a specific 
State and place, each delivery seller shall comply with--
            ``(1) the shipping requirements set forth in subsection 
        (b);
            ``(2) the recordkeeping requirements set forth in 
        subsection (c);
            ``(3) all State, local, tribal, and other laws generally 
        applicable to sales of cigarettes or smokeless tobacco as if 
        such delivery sales occurred entirely within the specific State 
        and place, including laws imposing--
                    ``(A) excise taxes;
                    ``(B) licensing and tax-stamping requirements;
                    ``(C) restrictions on sales to minors; and
                    ``(D) other payment obligations or legal 
                requirements relating to the sale, distribution, or 
                delivery of cigarettes or smokeless tobacco; and
            ``(4) the tax collection requirements set forth in 
        subsection (d).
    ``(b) Shipping and Packaging.--
            ``(1) Required statement.--For any shipping package 
        containing cigarettes or smokeless tobacco, the delivery seller 
        shall include on the bill of lading, if any, and on the outside 
        of the shipping package, on the same surface as the delivery 
        address, a clear and conspicuous statement providing as 
        follows: `CIGARETTES/SMOKELESS TOBACCO: FEDERAL LAW REQUIRES 
        THE PAYMENT OF ALL APPLICABLE EXCISE TAXES, AND COMPLIANCE WITH 
        APPLICABLE LICENSING AND TAX-STAMPING OBLIGATIONS'.
            ``(2) Failure to label.--Any shipping package described in 
        paragraph (1) that is not labeled in accordance with that 
        paragraph shall be treated as nondeliverable matter by a common 
        carrier or other delivery service, if the common carrier or 
        other delivery service knows or should know the package 
        contains cigarettes or smokeless tobacco. If a common carrier 
        or other delivery service believes a package is being submitted 
        for delivery in violation of paragraph (1), it may require the 
        person submitting the package for delivery to establish that it 
        is not being sent in violation of paragraph (1) before 
        accepting the package for delivery. Nothing in this paragraph 
        shall require the common carrier or other delivery service to 
        open any package to determine its contents.
            ``(3) Weight restriction.--A delivery seller shall not 
        sell, offer for sale, deliver, or cause to be delivered in any 
        single sale or single delivery any cigarettes or smokeless 
        tobacco weighing more than 10 pounds.
            ``(4) Age verification.--
                    ``(A) In general.--Notwithstanding any other 
                provision of law, a delivery seller who mails or ships 
                tobacco products--
                            ``(i) shall not sell, deliver, or cause to 
                        be delivered any tobacco products to a person 
                        under the minimum age required for the legal 
                        sale or purchase of tobacco products, as 
                        determined by the applicable law at the place 
                        of delivery;
                            ``(ii) shall use a method of mailing or 
                        shipping that requires--
                                    ``(I) the purchaser placing the 
                                delivery sale order, or an adult who is 
                                at least the minimum age required for 
                                the legal sale or purchase of tobacco 
                                products, as determined by the 
                                applicable law at the place of 
                                delivery, to sign to accept delivery of 
                                the shipping container at the delivery 
                                address; and
                                    ``(II) the person who signs to 
                                accept delivery of the shipping 
                                container to provide proof, in the form 
                                of a valid, government-issued 
                                identification bearing a photograph of 
                                the individual, that the person is at 
                                least the minimum age required for the 
                                legal sale or purchase of tobacco 
                                products, as determined by the 
                                applicable law at the place of 
                                delivery; and
                            ``(iii) shall not accept a delivery sale 
                        order from a person without--
                                    ``(I) obtaining the full name, 
                                birth date, and residential address of 
                                that person; and
                                    ``(II) verifying the information 
                                provided in subclause (I), through the 
                                use of a commercially available 
                                database or aggregate of databases, 
                                consisting primarily of data from 
                                government sources, that are regularly 
                                used by government and businesses for 
                                the purpose of age and identity 
                                verification and authentication, to 
                                ensure that the purchaser is at least 
                                the minimum age required for the legal 
                                sale or purchase of tobacco products, 
                                as determined by the applicable law at 
                                the place of delivery.
                    ``(B) Limitation.--No database being used for age 
                and identity verification under subparagraph (A)(iii) 
                shall be in the possession or under the control of the 
                delivery seller, or be subject to any changes or 
                supplementation by the delivery seller.
    ``(c) Records.--
            ``(1) In general.--Each delivery seller shall keep a record 
        of any delivery sale, including all of the information 
        described in section 2(a)(2), organized by the State, and 
        within such State, by the city or town and by zip code, into 
        which such delivery sale is so made.
            ``(2) Record retention.--Records of a delivery sale shall 
        be kept as described in paragraph (1) in the year in which the 
        delivery sale is made and for the next 4 years.
            ``(3) Access for officials.--Records kept under paragraph 
        (1) shall be made available to tobacco tax administrators of 
        the States, to local governments and Indian tribes that apply 
        their own local or tribal taxes on cigarettes or smokeless 
        tobacco, to the attorneys general of the States, to the chief 
        law enforcement officers of such local governments and Indian 
        tribes, and to the Attorney General of the United States in 
        order to ensure the compliance of persons making delivery sales 
        with the requirements of this Act.
    ``(d) Delivery.--
            ``(1) In general.--Except as provided in paragraph (2), no 
        delivery seller may sell or deliver to any consumer, or tender 
        to any common carrier or other delivery service, any cigarettes 
        or smokeless tobacco pursuant to a delivery sale unless, in 
        advance of the sale, delivery, or tender--
                    ``(A) any cigarette or smokeless tobacco excise tax 
                that is imposed by the State in which the cigarettes or 
                smokeless tobacco are to be delivered has been paid to 
                the State;
                    ``(B) any cigarette or smokeless tobacco excise tax 
                that is imposed by the local government of the place in 
                which the cigarettes or smokeless tobacco are to be 
                delivered has been paid to the local government; and
                    ``(C) any required stamps or other indicia that 
                such excise tax has been paid are properly affixed or 
                applied to the cigarettes or smokeless tobacco.
            ``(2) Exception.--Paragraph (1) does not apply to a 
        delivery sale of smokeless tobacco if the law of the State or 
        local government of the place where the smokeless tobacco is to 
        be delivered requires or otherwise provides that delivery 
        sellers collect the excise tax from the consumer and remit the 
        excise tax to the State or local government, and the delivery 
        seller complies with the requirement.
    ``(e) List of Unregistered or Noncompliant Delivery Sellers.--
            ``(1) In general.--
                    ``(A) Initial list.--Not later than 90 days after 
                this subsection goes into effect under the Prevent All 
                Cigarette Trafficking Act of 2007, the Attorney General 
                of the United States shall compile a list of delivery 
                sellers of cigarettes or smokeless tobacco that have 
                not registered with the Attorney General, pursuant to 
                section 2(a) or that are otherwise not in compliance 
                with this Act, and--
                            ``(i) distribute the list to--
                                    ``(I) the attorney general and tax 
                                administrator of every State;
                                    ``(II) common carriers and other 
                                persons that deliver small packages to 
                                consumers in interstate commerce, 
                                including the United States Postal 
                                Service; and
                                    ``(III) at the discretion of the 
                                Attorney General of the United States, 
                                to any other persons; and
                            ``(ii) publicize and make the list 
                        available to any other person engaged in the 
                        business of interstate deliveries or who 
                        delivers cigarettes or smokeless tobacco in or 
                        into any State.
                    ``(B) List contents.--To the extent known, the 
                Attorney General of the United States shall include, 
                for each delivery seller on the list described in 
                subparagraph (A)--
                            ``(i) all names the delivery seller uses in 
                        the transaction of its business or on packages 
                        delivered to customers;
                            ``(ii) all addresses from which the 
                        delivery seller does business or ships 
                        cigarettes or smokeless tobacco;
                            ``(iii) the website addresses, primary e-
                        mail address, and phone number of the delivery 
                        seller; and
                            ``(iv) any other information that the 
                        Attorney General determines would facilitate 
                        compliance with this subsection by recipients 
                        of the list.
                    ``(C) Updating.--The Attorney General of the United 
                States shall update and distribute the list at least 
                once every 4 months, and may distribute the list and 
                any updates by regular mail, electronic mail, or any 
                other reasonable means, or by providing recipients with 
                access to the list through a nonpublic website that the 
                Attorney General of the United States regularly 
                updates.
                    ``(D) State, local, or tribal additions.--The 
                Attorney General of the United States shall include in 
                the list under subparagraph (A) any noncomplying 
                delivery sellers identified by any State, local, or 
                tribal government under paragraph (5), and shall 
                distribute the list to the attorney general or chief 
                law enforcement official and the tax administrator of 
                any government submitting any such information and to 
                any common carriers or other persons who deliver small 
                packages to consumers identified by any government 
                pursuant to paragraph (5).
                    ``(E) Confidentiality.--The list distributed 
                pursuant to subparagraph (A) shall be confidential, and 
                any person receiving the list shall maintain the 
                confidentiality of the list but may deliver the list, 
                for enforcement purposes, to any government official or 
                to any common carrier or other person that delivers 
                tobacco products or small packages to consumers. 
                Nothing in this section shall prohibit a common 
                carrier, the United States Postal Service, or any other 
                person receiving the list from discussing with the 
                listed delivery sellers the delivery sellers' inclusion 
                on the list and the resulting effects on any services 
                requested by such listed delivery seller.
            ``(2) Prohibition on delivery.--
                    ``(A) In general.--Commencing on the date that is 
                60 days after the date of the initial distribution or 
                availability of the list under paragraph (1)(A), no 
                person who receives the list under paragraph (1), and 
                no person who delivers cigarettes or smokeless tobacco 
                to consumers, shall knowingly complete, cause to be 
                completed, or complete its portion of a delivery of any 
                package for any person whose name and address are on 
                the list, unless--
                            ``(i) the person making the delivery knows 
                        or believes in good faith that the item does 
                        not include cigarettes or smokeless tobacco;
                            ``(ii) the delivery is made to a person 
                        lawfully engaged in the business of 
                        manufacturing, distributing, or selling 
                        cigarettes or smokeless tobacco; or
                            ``(iii) the package being delivered weighs 
                        more than 100 pounds and the person making the 
                        delivery does not know or have reasonable cause 
                        to believe that the package contains cigarettes 
                        or smokeless tobacco.
                    ``(B) Implementation of updates.--Commencing on the 
                date that is 30 days after the date of the distribution 
                or availability of any updates or corrections to the 
                list under paragraph (1), all recipients and all common 
                carriers or other persons that deliver cigarettes or 
                smokeless tobacco to consumers shall be subject to 
                subparagraph (A) in regard to such corrections or 
                updates.
            ``(3) Shipments from persons on list.--
                    ``(A) In general.--In the event that a common 
                carrier or other delivery service delays or interrupts 
                the delivery of a package it has in its possession 
                because it determines or has reason to believe that the 
                person ordering the delivery is on a list distributed 
                under paragraph (1)--
                            ``(i) the person ordering the delivery 
                        shall be obligated to pay--
                                    ``(I) the common carrier or other 
                                delivery service as if the delivery of 
                                the package had been timely completed; 
                                and
                                    ``(II) if the package is not 
                                deliverable, any reasonable additional 
                                fee or charge levied by the common 
                                carrier or other delivery service to 
                                cover its extra costs and inconvenience 
                                and to serve as a disincentive against 
                                such noncomplying delivery orders; and
                            ``(ii) if the package is determined not to 
                        be deliverable, the common carrier or other 
                        delivery service shall, in its discretion, 
                        either provide the package and its contents to 
                        a Federal, State, or local law enforcement 
                        agency or destroy the package and its contents.
                    ``(B) Records.--A common carrier or other delivery 
                service shall maintain, for a period of 5 years, any 
                records kept in the ordinary course of business 
                relating to any deliveries interrupted pursuant to this 
                paragraph and provide that information, upon request, 
                to the Attorney General of the United States or to the 
                attorney general or chief law enforcement official or 
                tax administrator of any State, local, or tribal 
                government.
                    ``(C) Confidentiality.--Any person receiving 
                records under subparagraph (B) shall use such records 
                solely for the purposes of the enforcement of this Act 
                and the collection of any taxes owed on related sales 
                of cigarettes and smokeless tobacco, and the person 
                receiving records under subparagraph (B) shall keep 
                confidential any personal information in such records 
                not otherwise required for such purposes.
            ``(4) Preemption.--
                    ``(A) In general.--No State, local, or tribal 
                government, nor any political authority of 2 or more 
                State, local, or tribal governments, may enact or 
                enforce any law or regulation relating to delivery 
                sales that restricts deliveries of cigarettes or 
                smokeless tobacco to consumers by common carriers or 
                other delivery services on behalf of delivery sellers 
                by--
                            ``(i) requiring that the common carrier or 
                        other delivery service verify the age or 
                        identity of the consumer accepting the delivery 
                        by requiring the person who signs to accept 
                        delivery of the shipping container to provide 
                        proof, in the form of a valid, government-
                        issued identification bearing a photograph of 
                        the individual, that such person is at least 
                        the minimum age required for the legal sale or 
                        purchase of tobacco products, as determined by 
                        either State or local law at the place of 
                        delivery;
                            ``(ii) requiring that the common carrier or 
                        other delivery service obtain a signature from 
                        the consumer accepting the delivery;
                            ``(iii) requiring that the common carrier 
                        or other delivery service verify that all 
                        applicable taxes have been paid;
                            ``(iv) requiring that packages delivered by 
                        the common carrier or other delivery service 
                        contain any particular labels, notice, or 
                        markings; or
                            ``(v) prohibiting common carriers or other 
                        delivery services from making deliveries on the 
                        basis of whether the delivery seller is or is 
                        not identified on any list of delivery sellers 
                        maintained and distributed by any entity other 
                        than the Federal Government.
                    ``(B) Relationship to other laws.--Nothing in this 
                paragraph shall be construed to prohibit, expand, 
                restrict, or otherwise amend or modify--
                            ``(i) section 14501(c)(1) or 41713(b)(4) of 
                        title 49, United States Code;
                            ``(ii) any other restrictions in Federal 
                        law on the ability of State, local, or tribal 
                        governments to regulate common carriers; or
                            ``(iii) any provision of State, local, or 
                        tribal law regulating common carriers that 
                        falls within the provisions of chapter 49 of 
                        the United States Code, sections 14501(c)(2) or 
                        41713(b)(4)(B).
                    ``(C) State laws prohibiting delivery sales.--
                Nothing in the Prevent All Cigarette Trafficking Act of 
                2007, or the amendments made by that Act, may be 
                construed to preempt or supersede State laws 
                prohibiting the delivery sale, or the shipment or 
                delivery pursuant to a delivery sale, of cigarettes or 
                smokeless tobacco to individual consumers.
            ``(5) State, local, and tribal additions.--
                    ``(A) In general.--Any State, local, or tribal 
                government shall provide the Attorney General of the 
                United States with--
                            ``(i) all known names, addresses, website 
                        addresses, and other primary contact 
                        information of any delivery seller that offers 
                        for sale or makes sales of cigarettes or 
                        smokeless tobacco in or into the State, 
                        locality, or tribal land but has failed to 
                        register with or make reports to the respective 
                        tax administrator, as required by this Act, or 
                        that has been found in a legal proceeding to 
                        have otherwise failed to comply with this Act; 
                        and
                            ``(ii) a list of common carriers and other 
                        persons who make deliveries of cigarettes or 
                        smokeless tobacco in or into the State, 
                        locality, or tribal lands.
                    ``(B) Updates.--Any government providing a list to 
                the Attorney General of the United States under 
                subparagraph (A) shall also provide updates and 
                corrections every 4 months until such time as such 
                government notifies the Attorney General of the United 
                States in writing that such government no longer 
                desires to submit such information to supplement the 
                list maintained and distributed by the Attorney General 
                of the United States under paragraph (1).
                    ``(C) Removal after withdrawal.--Upon receiving 
                written notice that a government no longer desires to 
                submit information under subparagraph (A), the Attorney 
                General of the United States shall remove from the list 
                under paragraph (1) any persons that are on the list 
                solely because of such government's prior submissions 
                of its list of noncomplying delivery sellers of 
                cigarettes or smokeless tobacco or its subsequent 
                updates and corrections.
            ``(6) Deadline to incorporate additions.--The Attorney 
        General of the United States shall--
                    ``(A) include any delivery seller identified and 
                submitted by a State, local, or tribal government under 
                paragraph (5) in any list or update that is distributed 
                or made available under paragraph (1) on or after the 
                date that is 30 days after the date on which the 
                information is received by the Attorney General of the 
                United States; and
                    ``(B) distribute any such list or update to any 
                common carrier or other person who makes deliveries of 
                cigarettes or smokeless tobacco that has been 
                identified and submitted by another government, 
                pursuant to paragraph (5).
            ``(7) Notice to delivery sellers.--Not later than 14 days 
        prior to including any delivery seller on the initial list 
        distributed or made available under paragraph (1), or on any 
        subsequent list or update for the first time, the Attorney 
        General of the United States shall make a reasonable attempt to 
        send notice to the delivery seller by letter, electronic mail, 
        or other means that the delivery seller is being placed on such 
        list or update, with that notice citing the relevant provisions 
        of this Act.
            ``(8) Limitations.--
                    ``(A) In general.--Any common carrier or other 
                person making a delivery subject to this subsection 
                shall not be required or otherwise obligated to--
                            ``(i) determine whether any list 
                        distributed or made available under paragraph 
                        (1) is complete, accurate, or up-to-date;
                            ``(ii) determine whether a person ordering 
                        a delivery is in compliance with this Act; or
                            ``(iii) open or inspect, pursuant to this 
                        Act, any package being delivered to determine 
                        its contents.
                    ``(B) Alternate names.--Any common carrier or other 
                person making a delivery subject to this subsection 
                shall not be required or otherwise obligated to make 
                any inquiries or otherwise determine whether a person 
                ordering a delivery is a delivery seller on the list 
                under paragraph (1) who is using a different name or 
                address in order to evade the related delivery 
                restrictions, but shall not knowingly deliver any 
                packages to consumers for any such delivery seller who 
                the common carrier or other delivery service knows is a 
                delivery seller who is on the list under paragraph (1) 
                but is using a different name or address to evade the 
                delivery restrictions of paragraph (2).
                    ``(C) Penalties.--Any common carrier or person in 
                the business of delivering packages on behalf of other 
                persons shall not be subject to any penalty under 
                section 14101(a) of title 49, United States Code, or 
                any other provision of law for--
                            ``(i) not making any specific delivery, or 
                        any deliveries at all, on behalf of any person 
                        on the list under paragraph (1);
                            ``(ii) not, as a matter of regular practice 
                        and procedure, making any deliveries, or any 
                        deliveries in certain States, of any cigarettes 
                        or smokeless tobacco for any person or for any 
                        person not in the business of manufacturing, 
                        distributing, or selling cigarettes or 
                        smokeless tobacco; or
                            ``(iii) delaying or not making a delivery 
                        for any person because of reasonable efforts to 
                        comply with this Act.
                    ``(D) Other limits.--Section 2 and subsections (a), 
                (b), (c), and (d) of this section shall not be 
                interpreted to impose any responsibilities, 
                requirements, or liability on common carriers.
    ``(f) Presumption.--For purposes of this Act, a delivery sale shall 
be deemed to have occurred in the State and place where the buyer 
obtains personal possession of the cigarettes or smokeless tobacco, and 
a delivery pursuant to a delivery sale is deemed to have been initiated 
or ordered by the delivery seller.''.
    (d) Penalties.--The Jenkins Act is amended by striking section 3 
and inserting the following:

``SEC. 3. PENALTIES.

    ``(a) Criminal Penalties.--
            ``(1) In general.--Except as provided in paragraph (2), 
        whoever violates any provision of this Act shall be guilty of a 
        felony and shall be imprisoned not more than 3 years, fined 
        under title 18, United States Code, or both.
            ``(2) Exceptions.--
                    ``(A) Governments.--Paragraph (1) shall not apply 
                to a State, local, or tribal government.
                    ``(B) Delivery violations.--A common carrier or 
                independent delivery service, or employee of a common 
                carrier or independent delivery service, shall be 
                subject to criminal penalties under paragraph (1) for a 
                violation of section 2A(e) only if the violation is 
                committed intentionally--
                            ``(i) as consideration for the receipt of, 
                        or as consideration for a promise or agreement 
                        to pay, anything of pecuniary value; or
                            ``(ii) for the purpose of assisting a 
                        delivery seller to violate, or otherwise 
                        evading compliance with, section 2A.
    ``(b) Civil Penalties.--
            ``(1) In general.--Except as provided in paragraph (3), 
        whoever violates any provision of this Act shall be subject to 
        a civil penalty in an amount not to exceed--
                    ``(A) in the case of a delivery seller, the greater 
                of--
                            ``(i) $5,000 in the case of the first 
                        violation, or $10,000 for any other violation; 
                        or
                            ``(ii) for any violation, 2 percent of the 
                        gross sales of cigarettes or smokeless tobacco 
                        of such person during the 1-year period ending 
                        on the date of the violation.
                    ``(B) in the case of a common carrier or other 
                delivery service, $2,500 in the case of a first 
                violation, or $5,000 for any violation within 1 year of 
                a prior violation.
            ``(2) Relation to other penalties.--A civil penalty under 
        paragraph (1) for a violation of this Act shall be imposed in 
        addition to any criminal penalty under subsection (a) and any 
        other damages, equitable relief, or injunctive relief awarded 
        by the court, including the payment of any unpaid taxes to the 
        appropriate Federal, State, local, or tribal governments.
            ``(3) Exceptions.--
                    ``(A) Delivery violations.--An employee of a common 
                carrier or independent delivery service shall be 
                subject to civil penalties under paragraph (1) for a 
                violation of section 2A(e) only if the violation is 
                committed intentionally--
                            ``(i) as consideration for the receipt of, 
                        or as consideration for a promise or agreement 
                        to pay, anything of pecuniary value; or
                            ``(ii) for the purpose of assisting a 
                        delivery seller to violate, or otherwise 
                        evading compliance with, section 2A.
                    ``(B) Other limitations.--No common carrier or 
                independent delivery service shall be subject to civil 
                penalties under paragraph (1) for a violation of 
                section 2A(e) if--
                            ``(i) the common carrier or independent 
                        delivery service has implemented and enforces 
                        effective policies and practices for complying 
                        with that section; or
                            ``(ii) an employee of the common carrier or 
                        independent delivery service who physically 
                        receives and processes orders, picks up 
                        packages, processes packages, or makes 
                        deliveries, takes actions that are outside the 
                        scope of employment of the employee in the 
                        course of the violation, or that violate the 
                        implemented and enforced policies of the common 
                        carrier or independent delivery service 
                        described in clause (i).''.
    (e) Enforcement.--The Jenkins Act is amended by striking section 4 
and inserting the following:

``SEC. 4. ENFORCEMENT.

    ``(a) In General.--The United States district courts shall have 
jurisdiction to prevent and restrain violations of this Act and to 
provide other appropriate injunctive or equitable relief, including 
money damages, for such violations.
    ``(b) Authority of the Attorney General.--The Attorney General of 
the United States shall administer and enforce the provisions of this 
Act.
    ``(c) State, Local, and Tribal Enforcement.--
            ``(1) In general.--
                    ``(A) Standing.--A State, through its attorney 
                general (or a designee thereof), or a local government 
                or Indian tribe that levies a tax subject to section 
                2A(a)(3), through its chief law enforcement officer (or 
                a designee thereof), may bring an action in a United 
                States district court to prevent and restrain 
                violations of this Act by any person (or by any person 
                controlling such person) or to obtain any other 
                appropriate relief from any person (or from any person 
                controlling such person) for violations of this Act, 
                including civil penalties, money damages, and 
                injunctive or other equitable relief.
                    ``(B) Sovereign immunity.--Nothing in this Act 
                shall be deemed to abrogate or constitute a waiver of 
                any sovereign immunity of a State or local government 
                or Indian tribe against any unconsented lawsuit under 
                this Act, or otherwise to restrict, expand, or modify 
                any sovereign immunity of a State or local government 
                or Indian tribe.
            ``(2) Provision of information.--A State, through its 
        attorney general, or a local government or Indian tribe that 
        levies a tax subject to section 2A(a)(3), through its chief law 
        enforcement officer (or a designee thereof), may provide 
        evidence of a violation of this Act by any person not subject 
        to State, local, or tribal government enforcement actions for 
        violations of this Act to the Attorney General of the United 
        States or a United States attorney, who shall take appropriate 
        actions to enforce the provisions of this Act.
            ``(3) Use of penalties collected.--
                    ``(A) In general.--There is established a separate 
                account in the Treasury known as the `PACT Anti-
                Trafficking Fund'. Notwithstanding any other provision 
                of law and subject to subparagraph (B), an amount equal 
                to 50 percent of any criminal and civil penalties 
                collected by the United States Government in enforcing 
                the provisions of this Act shall be transferred into 
                the PACT Anti-Trafficking Fund and shall be available 
                to the Attorney General of the United States for 
                purposes of enforcing the provisions of this Act and 
                other laws relating to contraband tobacco products.
                    ``(B) Allocation of funds.--Of the amount available 
                to the Attorney General under subparagraph (A), not 
                less than 50 percent shall be made available only to 
                the agencies and offices within the Department of 
                Justice that were responsible for the enforcement 
                actions in which the penalties concerned were imposed 
                or for any underlying investigations.
            ``(4) Nonexclusivity of remedy.--
                    ``(A) In general.--The remedies available under 
                this section and section 3 are in addition to any other 
                remedies available under Federal, State, local, tribal, 
                or other law.
                    ``(B) State court proceedings.--Nothing in this Act 
                shall be construed to expand, restrict, or otherwise 
                modify any right of an authorized State official to 
                proceed in State court, or take other enforcement 
                actions, on the basis of an alleged violation of State 
                or other law.
                    ``(C) Tribal court proceedings.--Nothing in this 
                Act shall be construed to expand, restrict, or 
                otherwise modify any right of an authorized Indian 
                tribal government official to proceed in tribal court, 
                or take other enforcement actions, on the basis of an 
                alleged violation of tribal law.
                    ``(D) Local government enforcement.--Nothing in 
                this Act shall be construed to expand, restrict, or 
                otherwise modify any right of an authorized local 
                government official to proceed in State court, or take 
                other enforcement actions, on the basis of an alleged 
                violation of local or other law.
    ``(d) Persons Dealing in Tobacco Products.--Any person who holds a 
permit under section 5712 of the Internal Revenue Code of 1986 
(regarding permitting of manufacturers and importers of tobacco 
products and export warehouse proprietors) may bring an action in a 
United States district court to prevent and restrain violations of this 
Act by any person (or by any person controlling such person) other than 
a State, local, or tribal government.
    ``(e) Notice.--
            ``(1) Persons dealing in tobacco products.--Any person who 
        commences a civil action under subsection (d) shall inform the 
        Attorney General of the United States of the action.
            ``(2) State, local, and tribal actions.--It is the sense of 
        Congress that the attorney general of any State, or chief law 
        enforcement officer of any locality or tribe, that commences a 
        civil action under this section should inform the Attorney 
        General of the United States of the action.
    ``(f) Public Notice.--
            ``(1) In general.--The Attorney General of the United 
        States shall make available to the public, by posting such 
        information on the Internet and by other appropriate means, 
        information regarding all enforcement actions undertaken by the 
        Attorney General or United States attorneys, or reported to the 
        Attorney General, under this section, including information 
        regarding the resolution of such actions and how the Attorney 
        General and the United States attorney have responded to 
        referrals of evidence of violations pursuant to subsection 
        (c)(2).
            ``(2) Reports to congress.--The Attorney General shall 
        submit to Congress each year a report containing the 
        information described in paragraph (1).''.

SEC. 3. TREATMENT OF CIGARETTES AND SMOKELESS TOBACCO AS NONMAILABLE 
                    MATTER.

    Section 1716 of title 18, United States Code, is amended--
            (1) by redesignating subsections (j) and (k) as subsections 
        (k) and (l), respectively; and
            (2) by inserting after subsection (i) the following:
    ``(j) Tobacco Products.--
            ``(1) Prohibition.--
                    ``(A) In general.--Except as provided in 
                subparagraphs (C) and (D), all cigarettes (as that term 
                is defined in section 1(2) of the Act of October 19, 
                1949 (15 U.S.C. 375; commonly referred to as the 
                `Jenkins Act')) and smokeless tobacco (as that term is 
                defined in section 1(12) of that Act), are nonmailable 
                and shall not be deposited in or carried through the 
                mails. The United States Postal Service shall not 
                accept for delivery or transmit through the mails any 
                package that it knows or has reasonable cause to 
                believe contains any cigarettes or smokeless tobacco 
                made nonmailable by this subsection.
                    ``(B) Reasonable cause to believe.--For purposes of 
                this section, notification to the United States Postal 
                Service by the Attorney General, a United States 
                attorney, or a State Attorney General that an 
                individual or entity is primarily engaged in the 
                business of transmitting cigarettes or smokeless 
                tobacco made nonmailable by this section shall 
                constitute reasonable cause to believe that any 
                packages presented to the United States Postal Service 
                by such individual or entity contain nonmailable 
                cigarettes or smokeless tobacco.
                    ``(C) Cigars.--Subparagraph (A) shall not apply to 
                cigars (as that term is defined in section 5702(a) of 
                the Internal Revenue Code of 1986).
                    ``(D) Geographic exception.--Subparagraph (A) shall 
                not apply to mailings within or into any State that is 
                not contiguous with at least 1 other State of the 
                United States. For purposes of this paragraph, `State' 
                means any of the 50 States or the District of Columbia.
            ``(2) Packaging exceptions inapplicable.--Subsection (b) 
        shall not apply to any tobacco product made nonmailable by this 
        subsection.
            ``(3) Seizure and forfeiture.--Any cigarettes or smokeless 
        tobacco made nonmailable by this subsection that are deposited 
        in the mails shall be subject to seizure and forfeiture, and 
        any tobacco products so seized and forfeited shall either be 
        destroyed or retained by Government officials for the detection 
        or prosecution of crimes or related investigations and then 
        destroyed.
            ``(4) Additional penalties.--In addition to any other fines 
        and penalties imposed by this chapter for violations of this 
        section, any person violating this subsection shall be subject 
        to an additional penalty in the amount of 10 times the retail 
        value of the nonmailable cigarettes or smokeless tobacco, 
        including all Federal, State, and local taxes.
            ``(5) Use of penalties.--There is established a separate 
        account in the Treasury known as the `PACT Postal Service 
        Fund'. Notwithstanding any other provision of law, an amount 
        equal to 50 percent of any criminal and civil fines or monetary 
        penalties collected by the United States Government in 
        enforcing the provisions of this subsection shall be 
        transferred into the PACT Postal Service Fund and shall be 
        available to the Postmaster General for the purpose of 
        enforcing the provisions of this subsection.''.

SEC. 4. COMPLIANCE WITH MODEL STATUTE OR QUALIFYING STATUTE.

    (a) In General.--A Tobacco Product Manufacturer or importer may not 
sell in, deliver to, or place for delivery sale, or cause to be sold 
in, delivered to, or placed for delivery sale in a State that is a 
party to the Master Settlement Agreement, any cigarette manufactured by 
a Tobacco Product Manufacturer that is not in full compliance with the 
terms of the Model Statute or Qualifying Statute enacted by such State 
requiring funds to be placed into a qualified escrow account under 
specified conditions, or any regulations promulgated pursuant to such 
statute.
    (b) Jurisdiction To Prevent and Restrain Violations.--
            (1) In general.--The United States district courts shall 
        have jurisdiction to prevent and restrain violations of 
        subsection (a) in accordance with this subsection.
            (2) Initiation of action.--A State, through its attorney 
        general, may bring an action in the United States district 
        courts to prevent and restrain violations of subsection (a) by 
        any person (or by any person controlling such person).
            (3) Attorney fees.--In any action under paragraph (2), a 
        State, through its attorney general, shall be entitled to 
        reasonable attorney fees from a person found to have willfully 
        and knowingly violated subsection (a).
            (4) Nonexclusivity of remedies.--The remedy available under 
        paragraph (2) is in addition to any other remedies available 
        under Federal, State, or other law. No provision of this Act or 
        any other Federal law shall be held or construed to prohibit or 
        preempt the Master Settlement Agreement, the Model Statute (as 
        defined in the Master Settlement Agreement), any legislation 
        amending or complementary to the Model Statute in effect as of 
        June 1, 2006, or any legislation substantially similar to such 
        existing, amending, or complementary legislation hereinafter 
        enacted.
            (5) Other enforcement actions.--Nothing in this subsection 
        shall be construed to prohibit an authorized State official 
        from proceeding in State court or taking other enforcement 
        actions on the basis of an alleged violation of State or other 
        law.
            (6) Authority of the attorney general.--The Attorney 
        General of the United States may administer and enforce 
        subsection (a).
    (c) Definitions.--In this section the following definitions apply:
            (1) Delivery sale.--The term ``delivery sale'' means any 
        sale of cigarettes or smokeless tobacco to a consumer if--
                    (A) the consumer submits the order for such sale by 
                means of a telephone or other method of voice 
                transmission, the mails, or the Internet or other 
                online service, or the seller is otherwise not in the 
                physical presence of the buyer when the request for 
                purchase or order is made; or
                    (B) the cigarettes or smokeless tobacco are 
                delivered by use of a common carrier, private delivery 
                service, or the mails, or the seller is not in the 
                physical presence of the buyer when the buyer obtains 
                possession of the cigarettes or smokeless tobacco.
            (2) Importer.--The term ``importer'' means each of the 
        following:
                    (A) Shipping or consigning.--Any person in the 
                United States to whom nontaxpaid tobacco products 
                manufactured in a foreign country, Puerto Rico, the 
                Virgin Islands, or a possession of the United States 
                are shipped or consigned.
                    (B) Manufacturing warehouses.--Any person who 
                removes cigars or cigarettes for sale or consumption in 
                the United States from a customs-bonded manufacturing 
                warehouse.
                    (C) Unlawful importing.--Any person who smuggles or 
                otherwise unlawfully brings tobacco products into the 
                United States.
            (3) Master settlement agreement.--The term ``Master 
        Settlement Agreement'' means the agreement executed November 
        23, 1998, between the attorneys general of 46 States, the 
        District of Columbia, the Commonwealth of Puerto Rico, and 4 
        territories of the United States and certain tobacco 
        manufacturers.
            (4) Model statute; qualifying statute.--The terms ``Model 
        Statute'' and ``Qualifying Statute'' means a statute as defined 
        in section IX(d)(2)(e) of the Master Settlement Agreement.
            (5) Tobacco product manufacturer.--The term ``Tobacco 
        Product Manufacturer'' has the meaning given that term in 
        section II(uu) of the Master Settlement Agreement.

SEC. 5. INSPECTION BY BUREAU OF ALCOHOL, TOBACCO, FIREARMS, AND 
                    EXPLOSIVES OF RECORDS OF CERTAIN CIGARETTE AND 
                    SMOKELESS TOBACCO SELLERS.

    (a) In General.--Any officer of the Bureau of Alcohol, Tobacco, 
Firearms, and Explosives may, during normal business hours, enter the 
premises of any person described in subsection (b) for the purposes of 
inspecting--
            (1) any records or information required to be maintained by 
        such person under the provisions of law referred to in 
        subsection (d); or
            (2) any cigarettes or smokeless tobacco kept or stored by 
        such person at such premises.
    (b) Covered Persons.--Subsection (a) applies to any person who 
engages in a delivery sale, and who ships, sells, distributes, or 
receives any quantity in excess of 10,000 cigarettes, or any quantity 
in excess of 500 single-unit consumer-sized cans or packages of 
smokeless tobacco, within a single month.
    (c) Relief.--
            (1) In general.--The district courts of the United States 
        shall have the authority in a civil action under this 
        subsection to compel inspections authorized by subsection (a).
            (2) Violations.--Whoever violates subsection (a) or an 
        order issued pursuant to paragraph (1) shall be subject to a 
        civil penalty in an amount not to exceed $10,000 for each 
        violation.
    (d) Covered Provisions of Law.--The provisions of law referred to 
in this subsection are--
            (1) the Act of October 19, 1949 (15 U.S.C. 375; commonly 
        referred to as the ``Jenkins Act'');
            (2) chapter 114 of title 18, United States Code; and
            (3) this Act.
    (e) Delivery Sale Defined.--In this section, the term ``delivery 
sale'' has the meaning given that term in 2343(e) of title 18, United 
States Code, as amended by this Act.

SEC. 6. EXCLUSIONS REGARDING INDIAN TRIBES AND TRIBAL MATTERS.

    (a) In General.--Nothing in this Act or the amendments made by this 
Act is intended nor shall be construed to affect, amend, or modify--
            (1) any agreements, compacts, or other intergovernmental 
        arrangements between any State or local government and any 
        government of an Indian tribe (as that term is defined in 
        section 4(e) of the Indian Self-Determination and Education 
        Assistance Act (25 U.S.C. 450b(e)) relating to the collection 
        of taxes on cigarettes or smokeless tobacco sold in Indian 
        country (as that term is defined in section 1151 of title 18, 
        United States Code);
            (2) any State laws that authorize or otherwise pertain to 
        any such intergovernmental arrangements or create special rules 
        or procedures for the collection of State, local, or tribal 
        taxes on cigarettes or smokeless tobacco sold in Indian 
        country;
            (3) any limitations under existing Federal law, including 
        Federal common law and treaties, on State, local, and tribal 
        tax and regulatory authority with respect to the sale, use, or 
        distribution of cigarettes and smokeless tobacco by or to 
        Indian tribes or tribal members or in Indian country;
            (4) any existing Federal law, including Federal common law 
        and treaties, regarding State jurisdiction, or lack thereof, 
        over any tribe, tribal members, or tribal reservations; and
            (5) any existing State or local government authority to 
        bring enforcement actions against persons located in Indian 
        country.
    (b) Coordination of Law Enforcement.--Nothing in this Act or the 
amendments made by this Act shall be construed to inhibit or otherwise 
affect any coordinated law enforcement effort by 1 or more States or 
other jurisdictions, including Indian tribes, through interstate 
compact or otherwise, that--
            (1) provides for the administration of tobacco product laws 
        or laws pertaining to interstate sales or other sales of 
        tobacco products;
            (2) provides for the seizure of tobacco products or other 
        property related to a violation of such laws; or
            (3) establishes cooperative programs for the administration 
        of such laws.
    (c) Treatment of State and Local Governments.--Nothing in this Act 
or the amendments made by this Act is intended, and shall not be 
construed to, authorize, deputize, or commission States or local 
governments as instrumentalities of the United States.
    (d) Enforcement Within Indian Country.--Nothing in this Act or the 
amendments made by this Act is intended to prohibit, limit, or restrict 
enforcement by the Attorney General of the United States of the 
provisions herein within Indian country.
    (e) Ambiguity.--Any ambiguity between the language of this section 
or its application and any other provision of this Act shall be 
resolved in favor of this section.

SEC. 7. EFFECTIVE DATE.

    (a) In General.--Except as provided in subsection (b), this Act 
shall take effect on the date that is 90 days after the date of 
enactment of this Act.
    (b) BATFE Authority.--Section 5 shall take effect on the date of 
enactment of this Act.

SEC. 8. SEVERABILITY.

    If any provision of this, or an amendment made by this Act or the 
application thereof to any person or circumstance is held invalid, the 
remainder of the Act and the application of it to any other person or 
circumstance shall not be affected thereby.

                                 

 Text of the bill, H.R. 5689, the ``Smuggled Tobacco Prevention Act of 
                                 2008''

_______________________________________________________________________
                                                                      I
110th CONGRESS
  2d Session                 H. R. 5689


To amend the Internal Revenue Code of 1986 and title 18, United States 
    Code, to deter the smuggling of tobacco products into the United 
    States, and for other purposes.
                               __________
                    IN THE HOUSE OF REPRESENTATIVES
                             April 3, 2008
Mr. Doggett (for himself, Mr. Abercrombie, Mr. Ackerman, Mr. Allen, Mr. 
    Andrews, Mr. Arcuri, Ms. Baldwin, Mr. Becerra, Mr. Berman, Mr. 
    Blumenauer, Mr. Braley of Iowa, Ms. Ginny Brown-Waite of Florida, 
    Mrs. Capps, Mr. Capuano, Ms. Clarke, Mr. Cummings, Mr. Davis of 
    Illinois, Mrs. Davis of California, Mr. DeFazio, Ms. DeGette, Mr. 
    Delahunt, Ms. DeLauro, Mr. Ellison, Mr. Emanuel, Ms. Eshoo, Mr. 
    Farr, Mr. Filner, Mr. Frank of Massachusetts, Mr. Gene Green of 
    Texas, Mr. Grijalva, Mr. Hare, Mr. Hinchey, Mr. Hinojosa, Ms. 
    Hirono, Mr. Holt, Mr. Honda, Ms. Hooley, Mr. Israel, Mr. Jackson of 
    Illinois, Ms. Jackson-Lee of Texas, Ms. Eddie Bernice Johnson of 
    Texas, Ms. Kaptur, Mr. Kennedy, Mr. Kind, Mr. Kucinich, Mr. 
    Langevin, Ms. Lee, Mr. Levin, Mr. Lewis of Georgia, Mr. Lipinski, 
    Mr. Loebsack, Ms. Zoe Lofgren of California, Mrs. Lowey, Mr. Lynch, 
    Mrs. Maloney of New York, Mr. Markey, Mr. Matheson, Ms. Matsui, 
    Mrs. McCarthy of New York, Mr. McDermott, Mr. McGovern, Mr. 
    McNulty, Mr. Meeks of New York, Mr. George Miller of California, 
    Mr. Nadler, Mrs. Napolitano, Mr. Neal of Massachusetts, Mr. 
    Oberstar, Mr. Olver, Mr. Pallone, Mr. Pascrell, Mr. Payne, Mr. 
    Platts, Ms. Richardson, Mr. Rothman, Ms. Roybal-Allard, Mr. Rush, 
    Mr. Ryan of Ohio, Ms. Linda T. Sanchez of California, Ms. Loretta 
    Sanchez of California, Mr. Sarbanes, Ms. Schakowsky, Mr. Serrano, 
    Mr. Sestak, Mr. Sherman, Ms. Slaughter, Mr. Smith of Washington, 
    Mr. Snyder, Ms. Solis, Mr. Stark, Ms. Sutton, Mrs. Tauscher, Mr. 
    Thompson of California, Mr. Tierney, Ms. Tsongas, Mr. Udall of New 
    Mexico, Mr. Van Hollen, Mr. Walz of Minnesota, Ms. Waters, Ms. 
    Watson, Mr. Waxman, Mr. Weiner, Mr. Welch of Vermont, Ms. Woolsey, 
    and Mr. Wu) introduced the following bill; which was referred to 
    the Committee on Ways and Means, and in addition to the Committee 
    on the Judiciary, for a period to be subsequently determined by the 
    Speaker, in each case for consideration of such provisions as fall 
    within the jurisdiction of the committee concerned
                               __________

                                 A BILL

To amend the Internal Revenue Code of 1986 and title 18, United States 
    Code, to deter the smuggling of tobacco products into the United 
    States, and for other purposes.

    Be it enacted by the Senate and House of Representatives of the 
United States of America in Congress assembled,

SECTION 1. SHORT TITLE AND TABLE OF CONTENTS.

    (a) Short Title.--This Act may be cited as the ``Smuggled Tobacco 
Prevention Act of 2008''.
    (b) Table of Contents.--The table of contents of this Act is as 
follows:

    Sec. 1. Short title and table of contents.

          TITLE I--AMENDMENTS TO INTERNAL REVENUE CODE OF 1986

    Sec. 101. Amendment of 1986 code.
    Sec. 102. Improved marking and labeling; export bonds.
    Sec. 103. Wholesalers required to have permit.
    Sec. 104. Conditions of permit.
    Sec. 105. Records to be maintained.
    Sec. 106. Reports.
    Sec. 107. Fraudulent offenses.
    Sec. 108. Civil penalties.
    Sec. 109. Definitions.
    Sec. 110. Effective date.

   TITLE II--AMENDMENTS RELATING TO CONTRABAND CIGARETTE TRAFFICKING

    Sec. 201. Expanding scope of penal provisions relating to 
trafficking in contraband tobacco products.
    Sec. 202. Creating right of action for State tobacco tax 
administrator for failure to report.

             TITLE III--WHISTLEBLOWER PROTECTION PROVISIONS

    Sec. 301. Whistleblower protection.

          TITLE I--AMENDMENTS TO INTERNAL REVENUE CODE OF 1986

SEC. 101. AMENDMENT OF 1986 CODE.

    Except as otherwise expressly provided, whenever in this title an 
amendment or repeal is expressed in terms of an amendment to, or repeal 
of, a section or other provision, the reference shall be considered to 
be made to a section or other provision of the Internal Revenue Code of 
1986.

SEC. 102. IMPROVED MARKING AND LABELING; EXPORT BONDS.

    (a) In General.--
            (1) Section 5723 (relating to marks, labels, and notices) 
        is amended--
                    (A) by striking ``, if any,'' in subsection (b),
                    (B) by adding at the end of subsection (b) the 
                following: ``Such marks, labels, and notices shall 
                include marks and notices relating to the following:
            ``(1) Identification.--Each person who is a manufacturer or 
        importer of tobacco products shall (in accordance with 
        regulations prescribed by the Secretary) legibly print a unique 
        serial number on all packages of tobacco products manufactured 
        or imported by such person for sale or distribution. Such 
        serial number shall be designed to enable the Secretary to 
        identify the manufacturer of the product (and, in the case of 
        importation, the manufacturer and importer of the product), the 
        location and date of manufacture (and, if imported, the 
        location and date of importation), and any other information 
        the Secretary determines necessary or appropriate for the 
        proper administration of the chapter. The Secretary shall 
        determine the size and location of the serial number.
            ``(2) Marking requirements for exports.--Each package of a 
        tobacco product that is exported, or sold for export, shall be 
        marked for export from the United States and shall be marked as 
        to the foreign country which is to be the final destination of 
        such product. Such marking shall be visible and prominent and 
        shall be in English and in the primary language of such foreign 
        country. The Secretary shall promulgate regulations to 
        determine the size and location of the mark.
            ``(3) Additional methods of identification or marking.--The 
        Secretary may by regulation authorize such additional secure 
        methods of identification or marking as may be, taking into 
        account available technology, necessary or appropriate to carry 
        out the purposes of this subsection.'', and
                    (C) by adding at the end the following new 
                subsection:
    ``(f) Additional Marks.--
            ``(1) In general.--Not later than 180 days after the date 
        of the enactment of the Smuggled Tobacco Prevention Act of 
        2008, the Secretary shall prescribe a system of tobacco tax 
        stamps, meter impressions, or other Federal tax-payment indicia 
        to be affixed by manufacturers and importers of tobacco 
        products on all tobacco products subject to tax under this 
        chapter.
            ``(2) System specifications.--
                    ``(A) The Secretary shall design such system to 
                coordinate and avoid interference with State and local 
                tax stamps or markings, facilitate collection of the 
                tax under this chapter, impede contraband tobacco 
                trafficking, minimize counterfeit stamping or meter 
                impressions, allow for more effective tracking and 
                tracing of tobacco products, facilitate the enforcement 
                of related Federal laws, and utilize such available 
                technology as may promote the purposes of this chapter.
                    ``(B) The Secretary shall prescribe the method and 
                manner in which such stamps, meter impressions, or 
                indicia are to be distributed, purchased, and affixed 
                to tobacco product packages, and may provide for the 
                cancellation of such stamps, meter impressions, or 
                indicia.
                    ``(C) Any such tax stamp, meter impression, or 
                indicia must provide the following information:
                            ``(i) The denominated value of the stamp, 
                        meter impression, or indicia.
                            ``(ii) A unique serial number or tracking 
                        code.
                            ``(iii) The name and address of the person 
                        purchasing (and, if different, of the person 
                        affixing) the stamp, meter impression, or 
                        indicia.
                            ``(iv) The date the stamp, meter 
                        impression, or indicia was purchased and when 
                        it was affixed.
                            ``(v) The name and address of the person 
                        purchasing or otherwise receiving the tobacco 
                        product from the person who affixes the tax 
                        stamp, meter impression, or indicia, and the 
                        date of such purchase or transfer.
                            ``(vi) Such other information as the 
                        Secretary may prescribe to carry out the 
                        purposes of this chapter.
                    ``(D) The information described in subparagraph (C) 
                shall, to the extent practicable, be cryptographically 
                encrypted and readable by a portable scanning device 
                (or similar device) at the time and place of 
                inspection, and shall otherwise be accessible remotely 
                by such a device at such time and place.
                    ``(E) The Secretary may establish different stamps, 
                meter impressions, or indicia for the same type of 
                tobacco product to correspond to different 
                jurisdictions of manufacture, distribution, or sale.
                    ``(F) The Secretary may by regulation authorize 
                such additional secure methods of identification or 
                marking as may be, taking into account available 
                technology, necessary or appropriate to carry out the 
                purposes of this subsection.
                    ``(G) No tobacco product may be sold, distributed, 
                or otherwise delivered to any consumer in the United 
                States unless the tax stamp, meter impression, or 
                indicia required under regulations prescribed pursuant 
                to this section is affixed to the tobacco product 
                packaging in accordance with such regulations.''.
    (b) Sales on Indian Reservations; Package Defined.--Section 5723, 
as amended by subsection (a), is amended by adding at the end the 
following new subsections:
    ``(g) Sales on Indian Reservations.--Each package of a tobacco 
product that is sold on an Indian reservation (as defined in section 
403(9) of the Indian Child Protection and Family Violence Prevention 
Act (25 U.S.C. 3202(9)) shall be visibly and prominently labeled as 
such. The Secretary, in consultation with the Secretary of the 
Interior, shall promulgate regulations with respect to such labeling, 
including requirements for the size and location of the label.
    ``(h) Definition of Package.--For purposes of this section, the 
term `package' means the innermost sealed container visible from the 
outside of the individual container irrespective of the material from 
which such container is made, in which a tobacco product is placed by 
the manufacturer and in which such tobacco product is offered for sale 
to a member of the general public.''.
    (c) Requirements for Tracking of Tobacco Products.--
            (1) In general.--Subchapter B of chapter 52 is amended by 
        adding at the end the following new section:

``SEC. 5714. EXPORT BONDS.

    ``(a) Posting of Bond.--
            ``(1) In general.--It shall be unlawful for any person to 
        export any tobacco product unless such person--
                    ``(A) has posted with the Secretary a tobacco 
                product bond in accordance with this section for such 
                product that contains a disclosure of the country to 
                which such product will be exported; and
                    ``(B) receives a written statement from the 
                recipient of the tobacco products involved that such 
                person--
                            ``(i) will not knowingly and willfully 
                        violate or cause to be violated any law or 
                        regulation of such country, the United States, 
                        any State, the District of Columbia, or any 
                        possession of the United States with respect to 
                        such products; and
                            ``(ii) has never been convicted of any 
                        offense with respect to tobacco products.
            ``(2) Regulations.--The Secretary shall promulgate 
        regulations that determine the frequency and the amount of each 
        bond that must be posted under paragraph (1), but in no case 
        shall such amount be less than an amount equal to the tax 
        imposed under this chapter on the value of the shipment of the 
        products involved if such products were consumed within the 
        United States.
            ``(3) Export.--For purposes of this subsection, property 
        shall be treated as exported if it is shipped to a foreign 
        country, Puerto Rico, the Virgin Islands, or a possession of 
        the United States, or for consumption beyond the jurisdiction 
        of the internal revenue laws of the United States.
    ``(b) Return of Bond.--The Secretary shall return a bond posted 
under subsection (a)--
            ``(1) upon a determination by the Secretary (based on 
        documentation provided by the person who posted the bond in 
        accordance with regulations promulgated by the Secretary) that 
        the items to which the bond applies have been received in the 
        country of final destination as designated in the bond, or
            ``(2) under such other circumstance as the Secretary may 
        specify which is consistent with the purposes of this 
        chapter.''.
            (2) Clerical amendment.--The table of sections for such 
        subchapter B is amended by adding at the end the following new 
        item:

    ``Sec. 5714. Export bonds.''.

SEC. 103. WHOLESALERS REQUIRED TO HAVE PERMIT.

    Section 5712 (relating to application for permit) is amended by 
inserting ``, wholesaler,'' after ``manufacturer''.

SEC. 104. CONDITIONS OF PERMIT.

    Subsection (a) of section 5713 (relating to issuance of permit) is 
amended to read as follows:
    ``(a) Issuance.--
            ``(1) In general.--A person shall not engage in business as 
        a manufacturer, wholesaler, or importer of tobacco products or 
        as an export warehouse proprietor without a permit to engage in 
        such business. Such permit shall be issued in such form and in 
        such manner as the Secretary shall by regulation prescribe, to 
        every person properly qualified under sections 5711 and 5712. A 
        new permit may be required at such other time as the Secretary 
        shall by regulation prescribe.
            ``(2) Conditions.--The issuance of a permit under this 
        section shall be conditioned upon the compliance with the 
        requirements of--
                    ``(A) this chapter,
                    ``(B) chapter 114 of title 18, United States Code,
                    ``(C) the Act of October 19, 1949 (15 U.S.C. 375 et 
                seq.),
                    ``(D) any regulations issued pursuant to such 
                statutes, and
                    ``(E) any other federal laws or regulations 
                relating to the taxation, manufacture, distribution, 
                marketing, sale, or transportation of tobacco 
                products.''.

SEC. 105. RECORDS TO BE MAINTAINED.

    Section 5741 (relating to records to be maintained) is amended--
            (1) by inserting ``(a) In General.--'' before ``Every 
        manufacturer'',
            (2) by inserting ``every wholesaler,'' after ``every 
        importer,'',
            (3) by striking ``such records'' and inserting ``records 
        concerning the chain of custody of the tobacco products 
        (including the foreign country of final destination for 
        packages marked for export) and such other records'', and
            (4) by adding at the end the following new subsection:
    ``(b) Retailers.--Retailers shall maintain records of receipt of 
tobacco products, and such records shall be available to the Secretary 
for inspection and audit. An ordinary commercial record or invoice 
shall satisfy the requirements of this subsection if such record shows 
the date of receipt, from whom tobacco products were received, and the 
quantity of tobacco products received. The preceding provisions of this 
subsection shall not be construed to limit or preclude other 
recordkeeping requirements imposed on any retailer.''.

SEC. 106. REPORTS.

    Section 5722 (relating to reports) is amended--
            (1) by inserting ``(a) In General.--'' before ``Every 
        manufacturer'', and
            (2) by adding at the end the following new subsection:
    ``(b) Reports by Export Warehouse Proprietors.--
            ``(1) In general.--Prior to exportation of tobacco products 
        from the United States, the export warehouse proprietor shall 
        submit a report (in such manner and form as the Secretary may 
        by regulation prescribe) to enable the Secretary to identify 
        the shipment and assure that it reaches its intended 
        destination.
            ``(2) Agreements with foreign governments.--Notwithstanding 
        section 6103 of this title, the Secretary is authorized to 
        enter into agreements with foreign governments to exchange or 
        share information contained in reports received from export 
        warehouse proprietors of tobacco products if--
                    ``(A) the Secretary believes that such agreement 
                will assist in--
                            ``(i) ensuring compliance with the 
                        provisions of this chapter or regulations 
                        promulgated thereunder, or
                            ``(ii) preventing or detecting violations 
                        of the provisions of this chapter or 
                        regulations promulgated thereunder, and
                    ``(B) the Secretary obtains assurances from such 
                government that the information will be held in 
                confidence and used only for the purposes specified in 
                clauses (i) and (ii) of subparagraph (A).
        No information may be exchanged or shared with any government 
        that has violated such assurances.''.

SEC. 107. FRAUDULENT OFFENSES.

    (a) In General.--Subsection (a) of section 5762 (relating to 
fraudulent offenses) is amended by striking paragraph (1) and 
redesignating paragraphs (2) through (6) as paragraphs (1) through (5), 
respectively.
    (b) Offenses Relating to Distribution of Tobacco Products.--Section 
5762 is amended--
            (1) by redesignating subsection (b) as subsection (c),
            (2) in subsection (c) (as so redesignated), by inserting 
        ``or (b)'' after ``(a)'', and
            (3) by inserting after subsection (a) the following new 
        subsection:
    ``(b) Offenses Relating to Distribution of Tobacco Products.--It 
shall be unlawful--
            ``(1) for any person to engage in the business as a 
        manufacturer or importer of tobacco products or cigarette 
        papers and tubes, or to engage in the business as a wholesaler 
        or an export warehouse proprietor, without filing the bond and 
        obtaining the permit where required by this chapter or 
        regulations thereunder;
            ``(2) for a manufacturer, importer, or wholesaler permitted 
        under this chapter intentionally to ship, transport, deliver, 
        or receive any tobacco products from or to any person other 
        than a person permitted under this chapter or a retailer, 
        except a permitted importer may receive foreign tobacco 
        products from a foreign manufacturer or a foreign distributor 
        that have not previously entered the United States;
            ``(3) for any person (other than the original manufacturer 
        of such tobacco products or an export warehouse proprietor 
        authorized to receive any tobacco products that have previously 
        been exported and returned to the United States) to receive any 
        tobacco products that have previously been exported and 
        returned to the United States;
            ``(4) for any export warehouse proprietor intentionally to 
        ship, transport, sell, or deliver for sale any tobacco products 
        to any person other than the original manufacturer of such 
        tobacco products, another export warehouse proprietor, or a 
        foreign purchaser;
            ``(5) for any person (other than a manufacturer or an 
        export warehouse proprietor permitted under this chapter) 
        intentionally to ship, transport, receive, or possess, for 
        purposes of resale, any tobacco product in packages marked 
        pursuant to regulations issued under section 5723, other than 
        for direct return to a manufacturer for repacking or for re-
        exportation or to an export warehouse proprietor for re-
        exportation;
            ``(6) for any manufacturer, importer, export warehouse 
        proprietor, or wholesaler permitted under this chapter to make 
        intentionally any false entry in, to fail willfully to make 
        appropriate entry in, or to fail willfully to maintain properly 
        any record or report that such person is required to keep as 
        required by this chapter or the regulations promulgated 
        thereunder;
            ``(7) for any person to alter, mutilate, destroy, 
        obliterate, or remove any mark or label required under this 
        chapter upon a tobacco product held for sale, except pursuant 
        to regulations of the Secretary authorizing relabeling for 
        purposes of compliance with the requirements of this section or 
        of State law, or to create, possess, or apply on any tobacco 
        product or its packaging any counterfeit versions of any such 
        marks or labels; and
            ``(8) for any person to sell at retail more than 5,000 
        cigarettes in a single transaction or in a series of related 
        transactions, or, in the case of other tobacco products, an 
        equivalent quantity as determined by regulation.
Any person violating any of the provisions of this subsection shall, 
upon conviction, be fined as provided in section 3571 of title 18, 
United States Code, or imprisoned for not more than 5 years, or 
both.''.
    (c) Intentionally Defined.--Section 5762 is amended by adding at 
the end the following:
    ``(d) Definition of Intentionally.--For purposes of this section 
and section 5761, the term `intentionally' means doing an act, or 
omitting to do an act, deliberately, and not due to accident, 
inadvertence, or mistake, regardless of whether the person knew that 
the act or omission constituted an offense.''.

SEC. 108. CIVIL PENALTIES.

    Subsection (a) of section 5761 (relating to civil penalties) is 
amended--
            (1) by striking ``willfully'' and inserting 
        ``intentionally'', and
            (2) by striking ``$1,000'' and inserting ``$10,000''.

SEC. 109. DEFINITIONS.

    (a) Export Warehouse Proprietor.--Subsection (i) of section 5702 
(relating to definition of export warehouse proprietor) is amended by 
inserting before the period the following: ``or any person engaged in 
the business of exporting tobacco products from the United States for 
purposes of sale or distribution. Any duty free store that sells, 
offers for sale, or otherwise distributes to any person in any single 
transaction more than 30 packages of cigarettes, or its equivalent for 
other tobacco products as the Secretary shall by regulation prescribe, 
shall be deemed an export warehouse proprietor under this chapter''.
    (b) Retailer; Wholesaler.--Section 5702 is amended by adding at the 
end the following new subsections:
    ``(p) Retailer.--The term `retailer' means any dealer who sells, or 
offers for sale, any tobacco product at retail. The term `retailer' 
includes any duty free store that sells, offers for sale, or otherwise 
distributes at retail in any single transaction 30 or fewer packages of 
cigarettes or its equivalent for other tobacco products.
    ``(q) Wholesaler.--The term `wholesaler' means any person engaged 
in the business of purchasing tobacco products for resale at wholesale, 
or any person acting as an agent or broker for any person engaged in 
the business of purchasing tobacco products for resale at wholesale.''.

SEC. 110. EFFECTIVE DATE.

    (a) In General.--Except as provided in subsection (b), the 
amendments made by this title shall take effect on January 1, 2009.
    (b) Additional Tobacco Mark System.--The amendments made by 
subparagraph (C) of section 102(a)(1) of this Act shall take effect on 
the date of the enactment of this Act.

   TITLE II--AMENDMENTS RELATING TO CONTRABAND CIGARETTE TRAFFICKING

SEC. 201. EXPANDING SCOPE OF PENAL PROVISIONS RELATING TO TRAFFICKING 
                    IN CONTRABAND TOBACCO PRODUCTS.

    (a) Provisions Relating to Definition of Tobacco Products.--
            (1) In general.--Paragraphs (1) and (2) of section 2341 of 
        title 18, United States Code, are amended to read as follows:
            ``(1) the term `tobacco product' has the meaning given to 
        such term by section 5702 of the Internal Revenue Code of 1986;
            ``(2) the term `contraband tobacco product' means any 
        tobacco product if--
                    ``(A)(i) in the case of cigarettes, such cigarettes 
                are in a quantity in excess of 2,000 cigarettes; or
                    ``(ii) in the case of a tobacco product other than 
                a cigarette, such product is in a quantity in excess of 
                the equivalent of 2,000 cigarettes as determined under 
                rules made by the Attorney General;
                    ``(B) such tobacco product is not marked with a 
                Federal tax stamp, meter impression, or other Federal 
                tax-payment indicia as required by law;
                    ``(C) such tobacco product is marked with a 
                counterfeit, stolen, or unauthorized Federal or State 
                tax stamp, meter impression, or other tax-payment 
                indicia;
                    ``(D) such tobacco product is a counterfeit tobacco 
                product, including tobacco products having any 
                counterfeit markings, labels, or packaging or bearing 
                any unauthorized trademarks;
                    ``(E) such tobacco product has been brought into 
                the United States illegally;
                    ``(F)(i) if the State or other jurisdiction in 
                which such tobacco product is found requires a stamp, 
                impression, or other indication to be placed on 
                packages or other containers of product to evidence 
                payment of tobacco taxes, such tobacco product bears no 
                evidence of such payment; or
                    ``(ii) if such State or other such jurisdiction has 
                no such requirement, applicable tobacco taxes are found 
                to be not paid; and
                    ``(G) such tobacco product is in the possession of 
                any person other than--
                            ``(i) a person holding a permit issued 
                        pursuant to chapter 52 of the Internal Revenue 
                        Code of 1986 as a manufacturer or importer of 
                        tobacco products or as an export warehouse 
                        proprietor, or a person operating a customs 
                        bonded warehouse pursuant to section 311 or 555 
                        of the Tariff Act of 1930 (19 U.S.C. 1311 or 
                        1555) or an agent of such person;
                            ``(ii) a common or contract carrier 
                        transporting the tobacco product involved under 
                        a proper bill of lading or freight bill which 
                        states the quantity, source, and destination of 
                        such product;
                            ``(iii) a person--
                                    ``(I) who is licensed or otherwise 
                                authorized by the State where the 
                                tobacco product is found to account for 
                                and pay tobacco taxes imposed by such 
                                State; and
                                    ``(II) who has complied with the 
                                accounting and payment requirements 
                                relating to such license or 
                                authorization with respect to the 
                                tobacco product involved; or
                            ``(iv) an officer, employee, or other agent 
                        of the United States or a State, or any 
                        department, agency, or instrumentality of the 
                        United States or a State (including any 
                        political subdivision of a State) having 
                        possession of such tobacco product in 
                        connection with the performance of official 
                        duties;''.
            (2) Cigarettes.--Section 2341 of title 18, United States 
        Code, is amended by adding at the end the following new 
        paragraph:
            ``(8) the term `cigarette' has the meaning given such term 
        by section 5702 of the Internal Revenue Code of 1986.''.
            (3) Conforming amendments.--Section 2341 of title 18, 
        United States Code, as amended by paragraph (2), is amended--
                    (A) by inserting ``and'' at the end of paragraph 
                (5);
                    (B) by striking paragraphs (6) and (7); and
                    (C) by redesignating paragraph (8) as paragraph 
                (6).
    (b) Provisions Relating to Unlawful Acts.--Section 2342 of title 
18, United States Code, is amended to read as follows:

``Sec. 2342. Unlawful acts

    ``(a) It shall be unlawful for any person knowingly to ship, 
transport, receive, possess, sell, distribute, or purchase contraband 
tobacco products.
    ``(b) It shall be unlawful for any person knowingly--
            ``(1) to make any false statement or representation with 
        respect to the information required by this chapter to be kept 
        in the records or reports of any person who ships, sells, or 
        distributes (in a single transaction or in a series of related 
        transactions) any quantity of tobacco product in excess of the 
        quantity specified in or pursuant to section 2341(2)(A) with 
        respect to such product; or
            ``(2) to fail to maintain records or reports, alter or 
        obliterate required markings, or interfere with any inspection, 
        required under this chapter, with respect to such quantity of 
        tobacco product.
    ``(c) It shall be unlawful for any person knowingly to transport 
tobacco products under a false bill of lading or without any bill of 
lading.''.
    (c) Provisions Relating to Recordkeeping, Reporting, and Inspection 
Requirements.--
            (1) In general.--Section 2343 of title 18, United States 
        Code, is amended--
                    (A) in subsection (a), by striking ``any quantity 
                of cigarettes in excess of 10,000, or'' and all that 
                follows through ``cans or packages, in a single 
                transaction'' and inserting ``(in a single transaction 
                or in a series of related transactions) any quantity of 
                tobacco product in excess of the quantity specified in 
                or pursuant to section 2341(2)(A) with respect to such 
                product'';
                    (B) in subsection (b), by striking ``any quantity 
                in excess of 10,000 cigarettes, or'' and all that 
                follows through ``smokeless tobacco, or their 
                equivalent'' and inserting ``any quantity of tobacco 
                product in excess of the quantity specified in or 
                pursuant to section 2341(2)(A) with respect to such 
                product''; and
                    (C) in subsection (c), by striking ``any quantity 
                of cigarettes in excess of 10,000 in a single 
                transaction'' and inserting ``(in a single transaction 
                or in a series of related transactions) any quantity of 
                tobacco product in excess of the quantity specified in 
                or pursuant to section 2341(2)(A) with respect to such 
                product''.
            (2) Conforming amendments.--Section 2343 of title 18, 
        United States Code, as amended by paragraph (1) of this 
        subsection, is amended--
                    (A) in paragraph (2) of subsection (e), by striking 
                ``are'' and inserting ``is''; and
                    (B) by striking--
                            (i) ``cigarettes'' each place it appears in 
                        subsections (a) and (c);
                            (ii) ``cigarettes and cans or packages of 
                        smokeless tobacco'' each place it appears in 
                        subsection (b); and
                            (iii) ``cigarettes or smokeless tobacco'' 
                        each place it appears in subsection (e);
                and inserting ``tobacco product''.
    (d) Provisions Relating to Machines Used To Manufacture or Package 
Cigarettes or Other Tobacco Products.--Chapter 114 of title 18, United 
State Code, is amended by inserting after section 2343 the following:

``Sec. 2343A. Machines used to manufacture or package cigarettes or 
                    other tobacco products

    ``(a) Any machine used to manufacture or package tobacco products 
shall be sold, leased, or delivered only to persons lawfully engaged in 
the sale, lease, or delivery of such machines or lawfully engaged in 
the manufacture of tobacco products, and that have all permits or 
licenses required to engage in such activities by the laws of the 
country and other jurisdictions where the person is located.
    ``(b) Any machine used to apply or affix tax stamps, meter 
impressions, or other tax-payment indicia to packages of tobacco 
products shall be sold, leased, or delivered only to persons lawfully 
engaged in the sale, lease, or delivery of such machines or lawfully 
engaged in the application of such stamps, meter impressions or other 
tax-payment indicia onto tobacco product packages, and that have all 
permits or licenses required to engage in such activities by the laws 
of the country and other jurisdictions where the person is located.
    ``(c) No machine used in the manufacture or packaging of tobacco 
products or in the application of tax stamps, meter impressions, or 
other tax-payment indicia to packages of tobacco products shall 
knowingly be manufactured for or be sold, leased, delivered, directly 
or indirectly, or otherwise made available to any person engaged in the 
manufacture, distribution or sale of counterfeit or contraband tobacco 
products or counterfeit tax stamps, meter impressions, or other tax-
payment indicia.
    ``(d) Any machine used to manufacture or package tobacco products 
or to apply or affix tax stamps, meter impressions, or other tax-
payment indicia to packages of tobacco products that is no longer being 
used or offered for that purpose shall be made irreparably inoperable 
for those purposes before being disposed of or put to any other use. 
This paragraph shall not apply to any such machines being kept solely 
for display or for historical purposes.
    ``(e) Any person manufacturing, selling, leasing, delivering, or 
disposing of a machine used to manufacture or package tobacco products 
or to apply or affix tax stamps, meter impressions, or other tax-
payment indicia to packages of tobacco products shall maintain and keep 
records relating to any transfers of deliveries of the machine, 
including the name, address, and other contact information of any 
person ordering, buying, leasing, or receiving delivery of the machine. 
Such reports shall be made available to the Secretary and other federal 
and state government law enforcement officials for inspection and audit 
upon request. An ordinary commercial record or invoice shall satisfy 
the requirements of this subsection if such record describes the 
transaction and the related machine and provides the date of the 
transaction and the name and contact information of all persons parties 
to the transaction or acting as agents for those parties in regard to 
the transaction.
    ``(f) This section shall not apply to machines meant and expected 
for use only by individual consumers of tobacco products for personal 
use.''.
    (e) Provisions Relating to Penalties.--Section 2344 of title 18, 
United States Code, is amended--
            (1) in subsection (a), by inserting ``or subsection (a), 
        (b), or (c) of section 2343A'' after ``section 2342(a)'', and
            (2) in subsection (b), by striking ``section 2342(b)'' and 
        inserting ``subsection (b) or (c) of section 2342 or subsection 
        (d) or (e) of section 2343A''.
    (f) Provisions Relating to Effect on State and Local Law.--Section 
2345 of title 18, United States Code, is amended--
            (1) by striking ``cigarette tax laws'' each place it 
        appears and inserting ``tobacco product tax laws''; and
            (2) by striking ``cigarettes or smokeless tobacco'' and 
        inserting ``tobacco products''.
    (g) Clerical Amendments.--(1) The heading for chapter 114 of title 
18, United States Code, is amended to read as follows:

      ``CHAPTER 114--TRAFFICKING IN CONTRABAND TOBACCO PRODUCTS''.

    (2) The table of chapters at the beginning of part I of title 18, 
United States Code, is amended by striking the item relating to section 
114 and inserting the following new item:

                      ``114. Trafficking in contraband tobacco products
                                                    2341''.
    (3) The table of sections for chapter 114 of title 18, United 
States Code, is amended by inserting after the item relating to section 
2343 the following new item:

    ``2343A. Machines used to manufacture or package cigarettes or 
other tobacco products.''.

SEC. 202. CREATING RIGHT OF ACTION FOR STATE TOBACCO TAX ADMINISTRATOR 
                    FOR FAILURE TO REPORT.

    (a) In General.--(1) Section 4 of the Act of October 19, 1949 (15 
U.S.C. 378) is amended by adding at the end the following: ``A State 
tobacco tax administrator may commence a civil action to obtain 
appropriate relief with respect to a violation of this Act.''.
    (2) Section 1 of such Act is amended by striking paragraph (2) and 
inserting following new paragraph:
            ``(2) The term `tobacco product' has the meaning given to 
        such term by section 5702 of the Internal Revenue Code of 
        1986.''.
    (b) Conforming Amendment.--Such Act is further amended by striking 
``cigarette'' and ``cigarettes'' each place either appears and 
inserting ``tobacco product'' and ``tobacco products'', respectively.

             TITLE III--WHISTLEBLOWER PROTECTION PROVISIONS

SEC. 301. WHISTLEBLOWER PROTECTION.

    (a) In General.--Chapter 73 of title 18, United States Code, is 
amended by inserting after section 1514A the following:

``Sec. 1514B. Civil action to protect against retaliation in contraband 
                    tobacco cases

    ``(a) Whistleblower Protection for Contraband Tobacco.--No person 
may discharge, demote, suspend, threaten, harass, or in any other 
manner discriminate against an employee in the terms and conditions of 
employment because of any lawful act done by the employee--
            ``(1) to provide information, cause information to be 
        provided, or otherwise assist in an investigation regarding any 
        conduct which the employee reasonably believes constitutes a 
        violation of section 2342 or any other provision of Federal law 
        relating to contraband tobacco, when the information or 
        assistance is provided to or the investigation is conducted 
        by--
                    ``(A) a Federal regulatory or law enforcement 
                agency;
                    ``(B) any Member of Congress or any committee of 
                Congress; or
                    ``(C) a person with supervisory authority over the 
                employee (or such other person working for the employer 
                who has the authority to investigate, discover, or 
                terminate misconduct); or
            ``(2) to file, cause to be filed, testify, participate in, 
        or otherwise assist in a proceeding filed or about to be filed 
        (with any knowledge of the employer) relating to an alleged 
        violation of section 2342, or any provision of Federal law 
        relating to contraband tobacco.
    ``(b) Enforcement Action.--
            ``(1) In general.--A person who alleges discharge or other 
        discrimination by any person in violation of subsection (a) may 
        seek relief under subsection (c), by--
                    ``(A) filing a complaint with the Secretary of 
                Labor; or
                    ``(B) if the Secretary has not issued a final 
                decision within 180 days of the filing of the complaint 
                and there is no showing that such delay is due to the 
                bad faith of the claimant, bringing an action at law or 
                equity for de novo review in the appropriate district 
                court of the United States, which shall have 
                jurisdiction over such an action without regard to the 
                amount in controversy.
            ``(2) Procedure.--
                    ``(A) In general.--An action under paragraph (1)(A) 
                shall be governed under the rules and procedures set 
                forth in section 42121(b) of title 49, United States 
                Code.
                    ``(B) Exception.--Notification made under section 
                42121(b)(1) of title 49, United States Code, shall be 
                made to the person named in the complaint and to the 
                employer.
                    ``(C) Burdens of proof.--An action brought under 
                paragraph (1)(B) shall be governed by the legal burdens 
                of proof set forth in section 42121(b) of title 49, 
                United States Code.
                    ``(D) Statute of limitations.--An action under 
                paragraph (1) shall be commenced not later than 90 days 
                after the date on which the violation occurs.
    ``(c) Remedies.--
            ``(1) In general.--An employee prevailing in any action 
        under subsection (b)(1) shall be entitled to all relief 
        necessary to make the employee whole.
            ``(2) Compensatory damages.--Relief for any action under 
        paragraph (1) shall include--
                    ``(A) reinstatement with the same seniority status 
                that the employee would have had, but for the 
                discrimination;
                    ``(B) the amount of back pay, with interest; and
                    ``(C) compensation for any special damages 
                sustained as a result of the discrimination, including 
                litigation costs, expert witness fees, and reasonable 
                attorney fees.
    ``(d) Rights Retained by Employee.--Nothing in this section shall 
be deemed to diminish the rights, privileges, or remedies of any 
employee under any Federal or State law, or under any collective 
bargaining agreement.''.
    (b) Clerical Amendment.--The table of sections at the beginning of 
chapter 73 of title 18, United States Code, is amended by inserting 
after the item relating to section 1514A the following new item:

    ``1514B. Civil action to protect against retaliation in contraband 
tobacco cases''.

                                 
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