[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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Washington, DC 20402-0001
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
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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
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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''.