Five Kentucky-based wholesalers and one based in Southern Indiana are suing the Kentucky Revenue Department, alleging that cigarettes they are distributing are being unfairly seized.
The wholesalers and their trade association, the Kentucky Tobacco & Candy Association, claim the state is taking packs on which the 30-cent tax was properly paid because machines that affix the tax stamps miss some packs.
The lawsuit filed in Franklin Circuit Court seeks, among other penalties, an injunction to block the state from seizing cigarettes under a law governing contraband.
The state has seized about 350,000 packs over the past eight months based on 215 inspections in 36 of Kentucky’s 120 counties, including Jefferson, said Jill Midkiff, a spokeswoman for the Finance and Administration Cabinet.
About 85 percent to 90 percent of the packs had no stamp, she said.
“They don’t seize anything that has at least 60 percent of the stamp and identifies the serial number, which would identify the wholesaler,” Midkiff said.
The enforcement followed the increase of the tax from 3 cents to 30 cents in 2005. With the tax increase, revenue officials saw increased irregularities with the stamps, Midkiff said.
Contraband is an issue in Kentucky because of the still relatively low tax rate and the high number of smokers, said Scott White, the attorney for the plaintiffs.
But the Revenue Department is arbitrary and ignores the good-faith efforts of wholesalers to attach the stamps using state-approved machines, the wholesalers say.
That harms the wholesalers, who operate on a slim profit margin, White said.
The wholesalers and state officials had several meetings to discuss a compromise, but White said the state wouldn’t budge, so his clients decided to proceed with the lawsuit.
The six Zyn poucheswholesalers collectively do about $420 million in annual sales, and five of them said in the lawsuit that cigarettes that they have stamped and sold have been deemed contraband and seized.
Chips to fish out the fake cigarettes
Every cigarette pack made in the UK will contain an electronic chip in future allowing Customs and other law enforcers to distinguish between legal and counterfeit cigarettes.
The main tobacco companies, British American Tobacco, Imperial Tobacco and Gallaher are paying for the initiative including providing hundreds of hand-held electronic readers to Customs.
The industry estimates that some two billion fake cigarettes were smuggled into the UK last year which deprived the Exchequer of nearly £500m of duty.
The new crackdown, announced in yesterday’s Budget, will initially target counterfeit cigarettes sold in small corner shops, which is a growing area of the illegal trade.
A spokesman for the Tobacco Manufacturers’ Association said: ‘Customs were becoming increasingly concerned that counterfeit cigarettes were entering the legitimate market after some retailers were found selling them.
‘While the vast majority of counterfeits change hands at car boot sales or in pubs, the authorities wanted to set a deterrent to stop shopkeepers being tempted into the market.’
Fake cigarettes are smuggled from illegal factories in China, the Far East and Eastern Europe. A Customs raid in Coventry last month confiscated more than 14 million cigarettes which would normally have accounted for £3m in duty.
Counterfeit cigarettes tend to be far more dangerous to health than the legitimate brands with tests proving that on average they contain 60% more tar, 80% more nicotine and 130% more carbon monoxide. Customs claim that most counterfeiting is linked to organised crime.
The TMA would not reveal how much the new initiative will cost the industry although the spokesman said it was ‘not inconsiderable’.
The first chips in packs are likely to start rolling off production lines within six months.
Christopher Ogden, director of the TMA said: ‘Covert features to be included in UK cigarette packs will allow Customs’ officers to instantly authenticate a genuine product through hand-held readers.’