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THE IMPACT OF CIGARETTE BOOTLEGGING ON THE TOBACCO WIIOLESALERS', VENDING OPERATORS AND RETAILE'RS OF NEW'YORK STATE An Addiress Given Before the Eastern Regional Conference, National Tobacco Tax Association, New York, N'.Y'.,,, May 18, 1971. By Morris. Weintraub, Managing Director, The Wholesale Tobacco Distributors& of New York, Inc.,, and The Cigarette Merchandisers Association,, Inc. I cannot tell youihow much I appreciate the invitation to speak toiyou today. It is not only the opportunity to meet again my many friends among the New York State and New York City tax administrators. Nor that I can renew my acquaintanceship with tax administrators from our neighboring states of Connecticut and New Jersey., It is most of all, the fact that you have asked me to speak about cigarette bootlegg,ing., By your invitation and'r your choice of subject,, youlare giving recognition to the d'esperate plight our New York State tobacco industry faces today -- a plight, I am sorry to say, resulting,directl'y from our legislators' complete lack of'understanding of the destructive effects of cigarette taxation, and a just as complete lack of concern for our tobaccoindustry., I do not think anyone outs3:d our industry can comprehend what we have been enduring and!suffering,. Nothing I personally have experienced has been so frustrating as to try to tell state officials and state legislators what excessive taxation has done to our businesses and our employees., Everytime we have aittempted to explain, it has been like beating our head's against a wall. Time and.time again, we have been patronizingly O CrJ ~ told that we have been exaggerating the effects of bootlegging, that our complaints are unjustified', and our statistics distorted., C1T' C.~ C0

- 2' - Fortunately, there is now, at long last, a change in the climate. The press,, most of which had once rejected our views,, is now beginning to consider them. Recently The New York Times editorialized against cigarette tax increases and wrote a front page story on how cigarettee bootlegging, starts in Nortli Carolina. The New York Post, The Daily News and both wire services have also done major stories., In additioni, radio and television news have covered the problem. The legislators too are begi:nning, to change. Once turning a d'eaf'ear to our pleas, they now at least listen. And the state government is also beginning to move into action. As youiprobabl'y know,, just last month, Governor Rockefeller launched a statewide investigation of cigarette bootlegging. I amipl!eased to say -- and I think you will' be pleased' allso =- that IVew York's tax administrators, both in the state and.in the city, were among the first outside our industry to be sympathetic to our plight. And if any good could be said to come from cigarette bootliegging,, it is that this crisis has brought us,, the tobacco industry, closer to you, the tax administrators. Today I think it is recognized by both of us that it is a cornnon enemy we face in the cigarette bootlegger. And this fact -- that you are allied with us in this struggle -- is most reassuring to us. Since cigarette bootlegging affects your operations too, I can add little to your knowledge on the general subject. But„ in all immodesty,. I'can fill you in considerably on the specifics. I can show you how fromm nowhere bootlegging in New York State sprang up like a Frankenstei.in monster to create havoc in every corner of our industry. O 4J Actually, to call New York"s cigarette industry an industry is 4.~ today a misnomer. The reason is that there are actually two cigarette C1't' C.7 C!1 industries now operating in the state. One is the legitimate industry of

- 3 - whol'esalers,, vending operators, and!retailers. This is the industry that, once flourishing, has been hit hard by bootl'egging,, and~is now struggling to survive. The other cigarette industry in the state is the illegitimate industry. These are the bootleggers who are waxing rich and fat oniilllegali profits, earned at the expense of the legitimate industry and -- I may add -- the New York State and New York City tax departments. How come there are now two cigarette industries when before there was just one? To best see what happened, let us try to recal!1 the original industry as it was inithe years before 1965.. A survey of the national tobacco industry reveals that one of every 40 people in the UnitediStates is associated in some way withithe tobacco ' industry. Of course, onia national level, they are including tobacco' growers, who play no significant role in our state. ._They are also including those involved in manufacturi:ng. Thesepeopleto~oar&not involved in our bootlegging story, although four of the six leading,cigarette companies maintain their corporate headquarters in N'ew York City. But,, even taking,away these segments of the tobaccolindustry,, we still end up with hundreds of thousands of people in New'York State who work in or for the tobacco industry. There are the wholesalers,, also calledijobbers. There are the sub-jobbers. There are the vending operators. And, most important,, there are the retailers,, of which there are at least 100,000 in New York State. Small grocery stores, gasoline stations„ luncheonettes, independent drug stores -- these are just some of the 1001,,000 retailiers., And the most typical of' all is, or was, the small O C.~. ~ corner candy store which sold cigarettes along with candy, newspapers, QJ C11' film, kleenex, pencils,,cigars, paperback books, soda pop -- you name it. W U1 ~A

_ 4 - Most of these neighborhood'stores were the so-called'Ma and'Pa stores. They were operated by families who~worked long and hard'hours to eke out a decent living,. Because of the one-thousand-and-one different items they sold, they fulfilled a definite economic function in the neighborhood., They also played'a vital social role because they served as a neighborhood social center. They also were a deterrent to crime., By staying open late at night and'.attracting customers,, they discouraged the petty thieves and muggers who;rely on the dark. Strange as it may seem, cigarettes were the very foundati:on of the existence and viability of these stores. Take away the cig,arettes,, and half the traffic of these stores would disappear overnight., It was cigarettes that brought into thee store the customers who then purcha~sed everything else from a daily ~ newspaper to a greeting,card. In vending operations and wholesale operations, cigarettes play the very same role. They are the economic 1!ingua franca that binds the industry together. Again it is a dollars and cents factor. On cigarettes.,, the wholesaler,,for example, builds his entire distribution of other tobaccoo products, of candy, of chewing gum, of playing card's -- again,, you name them. But take away the cigarettes, and he can no longer distribute these other items at the same cost., The cigarette distribution channels are serving as the channels for everything,else. So, if there were no cigarettes to sell, the cost of a 7G pack of chewing gum might have to be raised' to 27~ per pack. It is this key role that makes any impairment of cigarette sales a disaster. Take away, or reduce, the flow of cigarettes, and the entire price structure of the tobacco industry -- retail, whoLesale, and!vending -- isd turned topsy-turvy.

- 5 - This is why the tobacco industry of New York State protested'so vehemently in,1965 when.the proposal was made in the State Legislature to double the state cigarette tax from 5o, to 104~ per pack. Our industry realized~that such aidrastic tax increase wouldlin effect hand'an engraved invitation to the underworld to start up bootlegging operations here., And we knew that as a result sales of legitimate cigarettes would be ad'versely affected -- and with them, the entire industry whose foundation restedi on cigarettes. To this day I will never understand why no one listened. Admittedly, the state needed add!itional' revenues, but with the introduction of bootl'egging, these revenues would not approachithe sums predicted by the proponents ofi the tax increase. And was a few millionidollars extra tax revenuess worth disrupting,an important state industry!' The argument used against us wa!s that bootlegging would not take hold' in New York State., But we knew differently. Our whole Americann free enterprise system is based on competiti:on„ and"this extends to~ the consumer level a~s well. A cigarette smoker'who spends $7 a week on his: cigarettes wouldljiump at the chance to buy them for $6' or $5, and he would not care in the slightest whether they were bootlegged or not. I think the eye-opener here was the recent disclosure that the order lists of two NorthiCaroliina cigarette ma3l-ordor firms were impounded,, and'.that on them were the names of 350,000 New Y'orkers who ordered' at least two cigarette cartons. Since these two firms were only two of over fifty that have been in existence in~the past five years, and since 350,000 0 represents 5 percent of New'York City's population,, I think we have ample C.: M ' ' W U1 lin ness to rchase ille al ci arettes. p p g p'u g g s wil proof of eo le' („) ~ Q.J

- 6 - But of course we did not have that proof'in 1965, and although we were sure that the public would not hesitate to purchase illegal cigarettes, the legislators remained unconvinced., S'omehow they considered' bootlegged cigarettes similar to those "Swiss watches" or umbrellas sold on street corners by unsavory-looking characters. They somehow thought of bootlegged cigarettes as like Prohibition whiskey where the. label said one thing, and the contents were another., But bootleggedicigarettes are uniquely different from these other types of bootlegged products.. No matter what cigarettes cost -- $2 a carton at a Post Exchange,, $2.35 a carton in North Carol.ina, or $5 a carton in New York City -- they are the same product and'h~ave the same quality. N'oo matter where one finds a pack of cigarettes -- around the corner,, in Europe, or at the North Pole -- it is still a pack of cigarettes., So, the onTy result of such altax increase, wouldibe to present a bonanza to organized crime. Just think -- and this isiwhat we told the legislators -- a bootlegger can legitimately purchase all the cigarettes he wants for $2.35 in North Carol:ina,, a state that then hadlno state cigarette tax., Th:en,, all he has~ to do is to transport the cigarettes to New York Ciity.where he can sell them for $3.35 a carton -- underselling any retailer and making a handsome profit in the bargain., But to no avail. The more we argued and plead'ed to our state legislators,, the more we were told there would be no bootlegging,, and that eveniif there were,, its effect on our industry would be negligible. Within weeks after this tax went,into effect, cigarette bootlegging began on a large scale. Down to North Carolina,, big trailer vans rumbled, w. 01 each one bringi:ng back into the state thousands of'd'ollars worth of W U1 Cj bootlegged cigarettes. CJii ~

C It was New York City that was hit hardest and first,, and wiithin months the bootlegging,had spread to the point that in some areas of the city, one could'not buy a legitimate pack of cigarettes. The Ma and Pa owners of neighborhood stores in these areas saw their sales dry up overnight,, their customers literallly evaporate. None of them could really blame their customers., After all,, shoulld' a~ man or woman be criticized for purchasing the same item cheaper elsewhere., Loyalty to a store where one has done business for years,, is fine., But the pocketbook is more important. The drop in legitimate cigarette sales that resulted from the spread of bootlegging showed1up almost immediately in the cigarette tax receipts. At this time -- it is the fiscal year of 1965-1966 we are talking about -- the sales of cigarettes on a national llevel rose slightly. B'ut in New. York State,, cigarette sales slumped an alarming 14.2 percent. Whereas in fiscal 1964,2.56 billion packs of cigarettes had'been sold! and stamped, in fiscal 1965„ only 2.2 billion were sold anditaxed. Th~e d'ifference of 365:million packs represented that sold by the underworld and'unrecordedi becau!se none of the packs had been taxed. Thus, the state hadipaid a price for the legislators' action in precipitously d'oubling, the sta~te cigarette tax. Because of the.bootlegging, O the state d'id' not get anything, like the 300 million dollars it anticipated. Instead it got only $260 mil,lion, the.underworld!being responsible for a C11 C] loss of'almost $401million annually for the past five years. (n C1T Andithis is just the beginning of what New York Iost in tax revenues. Since 1965, New York City which by this time also had its own 44~ per packk excise tax on cigarettes has lost $9 million annuallly. And there were ailso losses of several million dollars each year in sales tax revenues.

f - 8 - All these losses so far that I have enumerated'have been tax revenue losses. What of the losses to our industry? That first year of the 10~ state cigarette tax, our industry lost $182'million in ciagXette sales at the retail level alone,, and'this does not count the millions of dollars in losses of other items,, suffered as a result of alreductioniin store traffic.The devastationisuch losses wreakedlon individual companies can hardly be described. If you were operating,a marginal business basedion voTume,, how would you take a sudden loss of 1'5-20 percent? The retailers lost in other ways too. Nbt only didithe boot- leggers present new competiti'on„ but also the supermarket chains and discounts chains that were their normal competition. As you know, these of clobberedl ailready by the bootleggers, also sufferedl additional losses a~s alresult of these shifts., Againi, it was price that was causing,all the trouble. In order to compensate for losses andiflo stay in business, everyone in the industry -- the tobacco wholesa~lers, vendors and retailers -- had' to make adjust- ments., They tighteneditheir belts, lopped'.off empl'oyee payrolls, and raised prices to cover the increased costs. types of outlets often purchase direct from manufacturers in large quantities. As such, they circumvent the distribution channels we are talking about, and'can sell cigarettes at lower cost than can an independent retailer. Thus, whenithe price of cigarettes rose because. the iincreaseditax, they were abl'e to pick up cu!stomers who previously shoppediat the independent retail stores., Wholesalers and'vendors,

C - 9 - Bu!t when they raised prices,, they inevitably compounded' their problem, for this just drove more retail customers into the hands of'f either the bootleggers or the supermarket chains or discount houses. Ironically„ these price rises ended!up giving the bootleggers more profit and gave them more incentive to bootleg. By the end of 1966, they could deliver and sell cigarettes iniNew York for $11 less per carton than the cost of a legitimate carton -- and on these sales,, they could easily make a profit of 50cper carton. A profit far more than any legitimate retailer, wholesaler, or vendor could make. So, is it any wonder that after the first year of'the doubled state cigarette tax, the number of bootlegged cigarettes being sold in New York State totaledlapproximately 1 million packs per d'ay?' And that where no bootlegging,exi:sted before, you now had a new type of organizedd crime bringing in as muchias $2'0 million a year in illicit profits?' You would think at this point that our state legislature would realize the mistake it made and try to amend the 1965 mistake. By thi's time Governor Rockefeller had taken official notice of cigarette bootleggzng,, and in his budget message to the 1968 legislature noted it was cosring, the state $40 million iniuncoTlectedi tax revenues. But in the usual scurryingg for additional tax revenues,, the impact of bootlegging was forgotten. With extraordinary callousness and' lack of understanding, the legislature in 1968 took the incredible step of increasing the state cigarette tax another 2~, per pack. Once again the horrible destructive cycle started,. Our industry,. trying desperately to recover from the 1966 knock-down punch, was hit ~' CT9. again a vicious blow. Again, the wholesalers,, vendors, and'retailers C!T ~ tightened their belts. Again, with reluctance,, they raised their prices. V I

- 10 - The result was even worse than they hadlexpected'. In the year 1969-1970, legitimate cigarette sales dropped more than at any time inn state history. They were off almost 400 millionipacks from the previous year's level. Tax losses also j'lumped. The annual loss to the state in cigarettee tax revenues in 1969-19'7'0 increased to $47 million -- $10 million more than the year before., The loss to New York City in 1970 was $9.6 million as compared to $8.7 millionithe year before. As for our industry:,, its loss in 1969-1970 reached a new high of almost $200 million at the retail level. And, as before the underworld was continning,to profit. With cigarettes increased in price, the bootleggers were able to raise their prices and add aniadditional 25~ to their profit per carton. Even when North Carolina imposed a 2e per pack state tax, the bootleggers still made extra profit. S'o.the record after five years of excessive cigarette taxation andi increased bootlegging,, is a sorry one. All told, from 19651to 1970, there has been a decline inithe sale of legitimate cigarettes of 1.7 billlion packs. The total loss:to New York State in tax revenues has been approximately $'1831million. And to New York C'ity, $46 million. This does not even include the sales tax losses, whichiare estimated at another $40 million for the.five years. Total all these together,, andiyou get the staggering sum of $2691million. This is more than 1/5.of a billion dollars. Some loss,, it is, to pay for unenlightened legislation., O w. ~ And of course the damage to our industry is irreparable. 0ur losses, j'ust counting retail sales alone, have been approximately $848 . Q.~ Cl1 CT1 ~ million for those fiive years.