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Revenue officials propose steeper penalties for illegal tobacco trade

The Massachusetts Department of Revenue is recommending increasing the penalties related to buying and selling tobacco that has not been properly taxed. For example, the penalty for selling cigarettes without a license would jump from a fine of US$50 to a maximum fine of US$50,000, with the potential for jail time.

The goal is to crack down on the black market, which is used to evade paying Massachusetts excise taxes.

“Over the past several months, the Illegal Tobacco Task Force has been working on a framework for collaboration and joint investigative and enforcement action by its member agencies,” said Nicole St. Peter Mac Dermott, a Department of Revenue spokeswoman. “The mission of the task force is to stem the flow of illegal tobacco products into Massachusetts and the resulting loss of state tax revenue.

“The task force will work with the governor and state Legislature to update and modernize the state’s tobacco tax laws to stiffen fines and penalties so that they act as an effective deterrent to unlawful activity and increase compliance.”

The task force includes representatives of the revenue department, the state police, the attorney general, the treasurer and the departments of public health and public safety. It is still discussing the recommendations, which will be part of a report due to the Legislature July 1. The recommendations could be considered by lawmakers next year.

“The task force is doing what we as wholesalers have been talking about for years. It’s to crack down on the illegal tobacco trade,” said Paul Caron, executive director of the Holyoke-based Northeast Association of Wholesale Distributors. “Whatever they do is going to be a tremendous help to legitimate wholesalers and retailers that are abiding by the rules, paying taxes and doing all the things we have to do to control the sale of tobacco.”

According to a 2013 report, Massachusetts loses between $74 million and $295 million a year due to people illegally avoiding paying taxes on cigarettes. Massachusetts’ excise tax of $3.51 per pack of cigarettes is one of the highest in the country, and that creates an incentive for people to buy cigarettes in lower-tax states and sell them illegally in Massachusetts. An illegal tobacco commission issued a report in 2014 that recommended ways to crack down on tax evasion. It did not recommend lowering the tax.

The state agency task force is an outgrowth of that earlier commission, and it provides a way for the agencies charged with collecting revenue and enforcing laws to coordinate efforts related to the illegal tobacco trade.

On Thursday, cooperation between state agencies resulted in the arrest of a Holyoke man, Pedro Perez, for running a multi-state illegal tobacco distribution network in Massachusetts, Connecticut and Rhode Island.

Pedro T. Perez, 53, of Holyoke, pleaded not guilty in Holyoke District Court on Thursday, May 12, 2016, to the tax-evasion and other charges related to accusations he ran a bootleg cigarette selling ring in Massachusetts, Connecticut and Rhode Island.

The Department of Revenue proposals would for the first time prohibit cash transactions between cigarette retailers and suppliers, and would require retailers to purchase cigarettes from a distributor who is licensed by the state. Out-of-state distributors can get a license to sell in Massachusetts.

These offenses would be punishable by a fine of up to $5,000 for a first offense and $25,000 for subsequent offenses, with the potential for up to five years in state prison or 2.5 years in a county jail.

The purpose of the new rules would be to create an electronic record of all sales and to eliminate cash sales on the black market.

Caron, who was a member of the original illegal tobacco commission, said this was one of the commission’s recommendations. Illegal cash sales from unlicensed sellers are a particular problem with smokeless tobacco, which has an extremely high excise tax, he said.

“Pennsylvania has no excise tax on smokeless tobacco, so people fill the trunk of their car and find retailers willing to buy smokeless tobacco cheaper,” Caron said. Retailers will then sell the illegal tobacco from under the counter, for cash, to customers they know.

The law would also clarify that there is a penalty for possessing and selling illegal tobacco products other than cigarettes, such as chewing tobacco or cigars, which fall under different regulations than cigarettes. The penalty can be as high as $100,000 or 10 years in state prison for someone possessing more than 30,000 untaxed tobacco products.

The penalties for several existing crimes would be enhanced. For example, the penalty for possessing a shipping case of cigarettes where the name and address of the person receiving the package from a manufacturer have been erased was punishable with a $25 to $100 fine and would now be punishable by up to a $500 fine per container and 2.5 years in jail.

State revenue officials say the current penalties are not steep enough to deter the illegal tobacco trade.

A number of other changes are being proposed to simplify and modernize tobacco laws. Some of the statutes have not been changed since the 1940s, and they reference outdated technology. The proposal simplifies laws related to the excise tax, which are now scattered in different places in the state’s general laws. It would not change the tax rate.

There are also proposed changes to licensing — for example, requiring tobacco retailers to renew their licenses yearly, instead of every two years, so state officials can better track which retailers have started or stopped selling tobacco.

Other changes would make the administrative procedures around tobacco forfeiture similar to those around narcotics offenses, and would use the money from forfeited tobacco to fund the illegal tobacco task force.

One change that was already made to tobacco laws as a result of the 2014 commission report is that retailers caught selling illegal tobacco can be stripped of their licenses to sell lottery tickets. This new law was included in the fiscal 2016 budget, although it has not yet gone into effect.

Caron said he is pleased to see the new proposals, although he cautioned that it will be more important to make sure the laws are enforced.

“It all comes down to enforcement,” Caron said. “You can have the strictest laws. If it’s not being enforced, it’s all for naught.”

Spokeswomen for Treasurer Deborah Goldberg and Healey, who both have representatives on the task force, declined to comment, saying both offices are still reviewing the proposals. The state police did not respond to a request for comment.

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