District retailers who evade the city's stiff levy on cigarettes by selling cheaper products meant for overseas markets may soon get a visit from the tax man -- a visit that could cost them $5,000 and up to three years in jail.

Natwar M. Gandhi, the city's chief financial officer, has devoted three full-time employees to the effort and sent nearly 50 employees through training to help them identify stores and street vendors who may be concealing illegal sales. As many as 2,500 retailers have been notified of the impending crackdown, which won't take effect for at least 30 days. After that, enforcement will begin in earnest. The increased effort to track down "gray market" cigarettes follows the passage of legislation by the D.C. Council last fall. Cigarette makers and wholesalers had complained that illegal sales were cheating them -- and the city -- out of revenue. City officials said they could not quantify the extent of the problem, but a local representative of tobacco company Philip Morris estimated that at their peak a year ago, illegal sales were accounting for as much as 4 percent of total sales in the District. And while many are pleased with the new enforcement effort, the problem is already on the downswing, according to Rich Greenberg, president of District-based United Wholesalers. "Our customers could buy [gray market] cigarettes $3 per carton cheaper," said Greenberg, whose company provides products including candy, snack foods and cigarettes to vendors throughout the Washington region. "It was very tempting for a retailer or street vendor. But it has been cleaned up substantially. The city council came to the plate." Throughout the region, and across the nation, illegal cigarette sales have been a sore spot for tax officials, who contend that they lose millions in uncollected tax revenue each year. Virginia had been a hot spot for smugglers up and down the East Coast because its tax on cigarettes -- 2.5 cents a pack -- is so low compared with its neighbors'. The District collects 65 cents a pack, and Maryland charges 66 cents a pack. But on the issue of gray market cigarettes the jurisdictions agree: They don't like them. Neither do cigarette makers, because the cartons, clearly marked "Not for Sale in the U.S.," often contain cigarettes with a different blend of tobacco, resulting in a different taste -- a no-no for companies with loyal customers they want to keep. "They don't look or taste like the domestic product," said Carl Rowan Jr., a lobbyist for Philip Morris. "They also don't have the health warning." The biggest issue, though, is money. For honest retailers, the profit margin on cigarette sales is minimal. But everyone wants the price as low as possible to help rake in peripheral sales of snacks, sodas and household products. Local jurisdictions, however, stand to lose tax revenue and a portion of their tobacco settlement money, which is partly based on the number of packs sold legally. The theory: The more packs that are sold, the more money those governments will need to deal with health concerns and invest in anti-smoking campaigns. The District, for instance, is slated to receive $1.2 billion, to be paid in $48 million increments over the next 25 years. In hopes of protecting the District's share, city officials are embarking on enforcement of the gray market law passed in October. To achieve its goal, the city's Office of Tax and Revenue is working with law enforcement officials, who can immediately seize contraband cigarettes and prosecute offenders. "If we don't do something, we stand to lose $48 [million] to $50 million per year," said Herbert J. Huff, the District's deputy chief financial officer. Maryland has a similar crackdown underway. Last December, officials there intercepted a man carrying 43 cases of illegal cigarettes to Baltimore. The penalty for possession is $50 a carton, a felony record and up to two years in jail. Earl Fowlkes, the state's chief enforcement supervisor in the comptroller's office, has no sympathy. "What's occurring here is the honest retailer cannot compete with the illegal dealer," Fowlkes said. "And the state loses millions of dollars every year." © 2000 The Washington Post Company

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