High taxes and limited enforcement have New York City awash in illegal booze and cigarettes
Bootlegging deprives New York state of at least $1.6 billion in annual tax revenue. It’s only growing
By Aaron Elstein
Anytime you order a cocktail or buy a bottle of liquor in New York, there’s a one in four chance that the booze has been smuggled in from out of state. If you buy a pack of smokes, there’s a roughly 50% chance that the cigarettes are bootlegged too. And it’s only getting worse.
Illegal smuggling deprives New York state of at least $1.6 billion in annual tax revenue, and the enterprise has grown exponentially since the city and state quadrupled tobacco taxes between 2001 and 2011. As nationwide liquor sales have jumped 106% since 2000, according to the Distilled Spirits Council of the United States, the state’s tax revenues on hard alcohol have risen by only 50%-without any significant changes in the tax rates. Those numbers suggest liquor bootlegging has cost New York about $1 billion in lost taxes in the past 15 years.
Prosecutors bring charges almost every week against smugglers who sneak in carloads of cigarettes, typically from Virginia, where state taxes are just 30 cents per pack, the second-lowest rate in the nation. New York levies $4.35, the highest in the country.
As nationwide liquor sales jumped 106% since 2000, the state’s tax revenues on hard alcohol have risen by only 50%-without any significant changes in the tax rates, suggesting bootlegging has cost the state dearly.
“New York is the cultural capital of the nation and the financial capital,” said Arthur Katz, executive director of the New York State Association of Wholesale Marketers and Distributors. “Now it has become the bootlegging capital, too.”
Minding the store
State officials are well aware of the scope of the illicit enterprise but are struggling over how to stop it. Alcohol-related tax evasion was described as a “serious problem” in a 2008 report from the state Division of the Budget, which revisited the issue three years later and found that New York “continues to suffer tax evasion through the bootlegging of liquor from other states.” But the agency’s most recent report described bootlegging as merely “an issue,” signaling a de-emphasis that some critics say reflects Gov. Andrew Cuomo’s dwindling commitment to tackling the problem head-on.
“Prior to Cuomo we were very active stopping smuggling,” said Emanuel Urzi, who served as chief excise tax investigator and in other senior positions at the state Department of Taxation and Finance before retiring in 2011 after 48 years. “It just hasn’t been a priority for the current governor.”
A tax department spokesman disagreed. “We take tax evasion very seriously,” he said. “From alcohol and cigarettes to sales tax and personal-income tax, we have dedicated enforcement programs to ensure that honest New Yorkers aren’t left footing the bill for a few bad apples.”
The state did create a “strike force” targeting cigarette smugglers two years ago, and arrests for alcohol, cigarette or tobacco smuggling doubled last year, to 133, the tax department spokesman said, and are on pace to increase again this year. But the underground economy is full of resourceful characters, and even with the state’s crackdown, a study published last year by the National Research Council estimated that 45% of cigarettes sold in the city are smuggled in. A Tax Foundation study pegged it at 58%.
25% of booze sold in the city was likely smuggled in
50% of cigarettes purchased in the five boroughs are also contraband
$1.6B in state and city tax revenue is lost each year due to smuggling
133 people were arrested for selling unlicensed cigarettes in city last ?year, double the number in 2014
Joseph Fucito, the sheriff of New York City, is doing what he can to stem the flow of illegal smokes. His little-known office, part of the city’s Department of Finance, has 150 deputies and detectives, who periodically check bodegas and other vendors for smuggled cigs. But some 10,000 stores in the city sell cigarettes, and Fucito has the resources to inspect only about 500 of them each year-in addition to tracking down deadbeat dads, deed fraudsters and synthetic-pot pushers.
“The truth is we have our hands full,” Fucito said.
Albany’s last meaningful attempt to curtail the flow of smuggled booze was in 2013, when the state Senate introduced a bill that would have forced distributors to store liquor and wine in New York for 24 hours before selling it. The plan was to give inspectors more time to ensure bottles carried the proper tax stamps. But smaller distributors typically use warehouses in New Jersey, beyond the jurisdiction of New York inspectors, and the bill never got out of committee as it became apparent that those distributors weren’t willing to pay additional rent for in-state storage space.
Enter the middlemen
In the 1930s, in a bid to weaken organized crime’s grip on the liquor business, New York passed a law requiring that breweries and distilleries sell their products to bars or retailers through a network of licensed distributors. In 1943, Antonio Magliocco took advantage of the regulatory regime by starting Peerless Importers. A year later, Charles Merinoff started what became known as the Charmer Sunbelt Group. Those two firms went on to dominate the New York liquor market, employing huge numbers of salespeople to sweet-talk bars, clubs and restaurants into carrying their brands of booze and wine. Top clients were routinely given generous discounts, cash rebates, free trips, golf clubs and other gifts. Such incentives violated the state’s alcohol control laws, yet between 2003 and 2005 alone, the city’s liquor distributors doled out more than $50 million in illegal perks, according to the New York attorney general’s office.
“For many people, the system worked really well,” said Charles Dorn, a former general manager at the Union Club on Park Avenue.
But Eliot Spitzer wasn’t having any of it. After cracking the whip on Wall Street, the crusading attorney general turned his attention to the liquor business. “For decades, pay-to-play practices were rampant in the state’s alcohol industry,” he declared in 2006 when he forced eight major distributors, including Magliocco’s and Merinoff’s, to pay $1.6 million in fines and change their sales practices. The distributors consented to a new system in which they had to publicly post prices for spirits, putting an end to the privately negotiated discounts that Spitzer said harmed smaller buyers.
Spitzer’s crackdown had unforeseen consequences, namely a sudden spike in traffic on the decades-old Maryland-to-New York liquor smuggling route. Excise taxes on liquor are $7.44 per gallon in New York, while Maryland’s are just $1.50. “If you can only sell Scotch at a particular published price, a logical thing would be to decide you’re going to try to buy it for less,” said Dorn, who is now an adjunct instructor at New York University’s School of Professional Studies. “It leads you to understand why bootlegging could happen.”
Federal authorities have estimated that nearly $200 million worth of booze has arrived in the city illegally, depriving New York of tens of millions of dollars in tax revenue. One Maryland liquor store owner said his sales soared to about 500 cases per week-up from 10-as more New Yorkers started showing up at his back door to pick up orders. “We do business every day with them,” the owner said.
A few weeks before Spitzer acted, John Magliocco and Charles Merinoff, who had each taken over their family businesses, decided to lay down arms after 62 years of spirited competition. The clans merged their New York interests to form Empire Merchants, splitting ownership 50-50.
Today Brooklyn-based Empire is appropriately named: Its 1,300 employees distribute 60% of the liquor and wine sold in the city and count 10,000 bars, restaurants, clubs and retailers as customers. Empire generates about $2 billion in annual revenue, according to research firm Impact, and is the city’s exclusive supplier of Johnnie Walker, Ketel One and other top brands.
But even after they became partners, Magliocco and Merinoff maintained their own interests. Earlier this year, Merinoff merged his Manhattan-based national distribution business Charmer Sunbelt with a Chicago-based competitor to create Breakthru Beverage Group, the nation’s second-largest liquor distributor. With $6 billion in annual revenue, Breakthru ranks sixth on Crain’s list of the city’s largest privately held companiesm. Merinoff was apparently happy to let Magliocco manage the competitive New York market under Empire’s aegis. “I really do not give a shit about New York,” Merinoff emailed a colleague in 2013. “We are going to make $90 million in other markets.”
But according to a September lawsuit, Merinoff cared enough about the Big Apple booze biz that he allegedly tried to undercut Magliocco by smuggling vast quantities of Maryland liquor into the city. The suit claims that as bootlegged booze flowed in, Empire would lose money, allowing Merinoff to buy out his partner on the cheap and fold the business into his own liquor empire. “The conduct here was egregious, pervasive and shocking,” said Magliocco’s attorney, Randy Mastro, a former deputy mayor whose clients include New Jersey Gov. Chris Christie. “Both Empire Merchants and New York state are victims of this scheme”
In a statement, Merinoff pointed to his long history of working with city and state regulators to fight illegal cross-border sales. “It is my sincere hope that the true legacy of this lawsuit is visibility into the wrongdoing of bad actors who steal from local businesses and state coffers,” he said. His attorney, Sean O’Shea, insists the “baseless” suit is driven by Magliocco’s resentment of Merinoff’s success. “Everyone in the beverage and alcohol industry recognizes this lawsuit as a ridiculous and desperate misuse of the legal system in an attempt to gain an improper business advantage,” he said.
But sour grapes aside, the suit does lay bare the methods some New York distributors use to smuggle in booze. In May, the U.S. attorney’s office in Baltimore unsealed a series of charges concerning a bootlegging operation virtually identical to the one described in Magliocco’s lawsuit. Although no criminal charges have been filed against Merinoff or his subsidiaries, eight other liquor merchants have pleaded guilty, including owners and agents of three New York liquor stores.
According to federal court documents, the smugglers included Bin Luo, who owned Sam Liquors in Flatbush, Brooklyn, and Bao Xiong Zheng, owner of Bao Liquors in Corona, Queens. In December 2014, Luo emailed a big order to a Maryland retailer. The next day, he and Zheng drove down in a Chevrolet Suburban and bought 62 cases of Smirnoff vodka and Jameson whiskey for $9,386 in cash, which is about $13 per bottle.
They covered the boxes with blankets and sheets, told a witness they’d be back the next month and headed north, likely taking the Commodore Barry Bridge across the Delaware River-which is not the most direct route to New York but one a federal agent said smugglers believe fewer police watch than the more trafficked Delaware Memorial Bridge. The transaction saved Luo and Zheng about $850 in city and state liquor taxes. Over 13 months ending in January 2015, they saved nearly $30,000. Both have pleaded guilty to wire fraud and await sentencing. Neither could be reached for comment, and their attorneys didn’t return calls.
Money to burn
As crimes go, alcohol smuggling isn’t especially lucrative. Sneaking 200 cases of booze into the city in a Ford Expedition brings a maximum profit of $2,432, according to last year’s National Research Council study. The big money is in cigarettes. Smugglers can make $13,308 per trip, mainly because many more cigarettes than liquor bottles can fit in an SUV.
That helps explain why cigarette smuggling is rampant in the city. In poor areas, such as the South Bronx, more than 80% of cigarettes are contraband, according to a study by the John Jay College of Criminal Justice. Demand comes from the fact that a legal pack of smokes runs about $13 in the five boroughs, while smuggled cigarettes at a bodega typically cost half as much.
That is what Sheriff Fucito is up against. His deputies conduct periodic sweeps, checking cigarettes for the distinctive tax stamp that signifies approval for sale in the city. They try to get shop owners and clerks to turn over names that lead to the big fish. At Fucito’s Long Island City office, there’s a pungent evidence room filled with boxes of seized cigarettes that eventually are taken to an incinerator. “I feel like we’re doing something,” he said. “You do the best you can with what you have.”
Marvin Gutlove, owner of distributor Amsterdam Tobacco, said bodega owners will buy a carton or two from him so they have a legitimate supply to show inspectors who come knocking.
Curbing smoking was a signature public health issue for Mayor Michael Bloomberg, who in 2002 banned smoking in bars and workplaces and hiked city cigarette taxes to $1.50 per pack from 8 cents. In 2011, the city banned smoking in parks, on beaches and in public plazas, and in 2013 it required that retailers hide their cigarette displays to keep them out of children’s view. Surveys show the tax increases and smoking restrictions worked: 14% of the adult population currently smokes, down from about 22% in 2002, according to the city Department of Health and Mental Hygiene. That rate has mostly held steady since 2010.
Yet while the number of smokers remains level, tobacco tax collections have fallen sharply in recent years. In fiscal 2016, the state collected $1.25 billion in cigarette and tobacco tax revenue, a 23% decline from the peak in 2012. Cigarette tax collections in Virginia rose slightly between 2011 and 2015, suggesting that many smokers are huffing on smuggled cigarettes as New York’s rightful tax revenue flows to other states.
“The truth is that we don’t know,” said Merlin Chowkwanyun, a professor at Columbia University’s Mailman School of Public Health. “And it’s a huge headache for the public health field.”
Paying the price
Leonard Schwartz is convinced that smugglers are taking over the cigarette business. They’ve certainly hurt his. Schwartz runs Global Wholesale Distributors, where staffers working in a former Sunset Park, Brooklyn, movie theater affix tax stamps to cigarette packs. Business has sunk by 85% in recent years, and he has cut his head count from 40 to 12. “It’s all because of bootleggers,” Schwartz lamented.
He said state and local cigarette taxes should be abolished and federal taxes increased substantially so that all packs cost the same no matter where in the U.S. they’re sold. He recognizes that lawmakers in tobacco-producing states oppose that idea but said that because some cigarette smugglers have been linked to terrorist organizations, public safety concerns must prevail.
Schwartz, a nonsmoker who has been a cigarette distributor for 70 of his 81 years, also has a suggestion for Fucito: Don’t destroy confiscated cigarettes. Instead, bring them to his warehouse so they can be stamped, returned to the legitimate market and produce some tax revenue. If seized cigarettes are stale, they should be returned to manufacturers, which Schwartz said don’t fight smuggling vigorously because discounted cigarettes help sales.
“The profit margin on a pack of cigarettes to somebody like Philip Morris is the same no matter how many taxes are piled on to the final price,” Schwartz said.
He wants law enforcement to arrest more shop owners and smugglers. But while that might generate headlines, it seems unlikely to deter bootleggers, because arrested smugglers usually get off relatively lightly. “You can get locked up if you’re a really big smuggler,” Fucito said, “but typically the crime gets treated as a tax offense, and most people pay a fine.”
Last month state tax officials charged a Bronx man with possessing 481 cartons of bootleg cigarettes and declared that he faced up to seven years in prison and about $300,000 in fines. But when the same individual pleaded guilty to selling untaxed cigarettes in 2010, he paid a bit more than $22,000 in restitution and was sent on his way.
“Getting caught,” First Deputy Sheriff Maureen Kokeas said, “is seen as a cost of doing business.