City aims to stem fraud with new tobacco tax law

Nathaniel Herz

The Sullivan administration is moving to tighten enforcement of the city's tobacco tax law after a bust last summer revealed a group of eight sellers who allegedly evaded nearly $1.4 million of the payments.

Treasurer Dan Moore says the abuses, evidence of which was first unearthed more than two years ago, showed the potential for fraud under the city's current tax code -- and his department is responding with a new version that will be introduced at the Anchorage Assembly's meeting next week.

The law would toughen penalties for breaking the rules, and it would force the city's tobacco sellers to buy licenses and keep records of where they bought their cigarettes. Moore's office projects the changes would generate more than $1 million a year, bolstering what's already the city's third-largest revenue stream, worth $22 million in 2012.

"What it's about is to try to have much more comprehensive monitoring of the tobacco trade industry," Moore said in an interview. "And then, to have some significant consequences if abuse is detected."

The move comes after the eight tobacco sellers were charged in July with mail fraud, money laundering, and conspiracy -- though Moore's office had already begun working on its revisions to the law months earlier.

A federal indictment charged that the sellers had been buying cigarettes from Anchorage distributors, ostensibly to sell at stores owned by two of the defendants in Kenai and Sterling.

That meant the cigarettes weren't subject to Anchorage's $2.20-per-pack tax -- but in fact, they were being illegally resold in the city at a price that appeared to include the tax but didn't, allowing the sellers to make higher profits.

Moore said the problem stems from the ability of sellers on the Kenai Peninsula and elsewhere to buy cigarettes in the city without paying the tax -- and, potentially, colluding with unscrupulous retailers who then sell them in Anchorage.

His department plans to combat the problem by forcing any business that buys cigarettes in Anchorage to apply for a license and keep new records -- even if they don't plan to sell the cigarettes in the city.

"The businesses that are located outside of the municipality will now be held accountable," said Michael Mullane, the treasury department's principal administrative officer.

The sellers outside Anchorage will have to pay $100 for a license, while those in the city will be charged $75. Businesses with multiple locations will only have to pay an extra $10 after the first license, rather than the full price -- a change Moore said stemmed from industry feedback on an initial draft of the law.

The treasury department expects to license about 350 businesses in Anchorage, plus another 400 outside the city -- up from the 22 distributors it licenses now.

The fees will help pay the salary of a new auditor, the department says, which will bump the number of staff members enforcing the tobacco tax law from two to three.

Moore said that the new record-keeping requirements would establish a paper trail to help his staff see if the tax had been paid.

In developing the new law, his office consulted with officials at the Alaska Department of Revenue, who oversee the state's tobacco tax.

Johanna Bales, the department's deputy director, said that Anchorage's new approach would help stem abuses, and praised the efforts to regulate the sellers outside the city.

"If they're doing that licensing for people even on the Kenai, if they're buying their cigarettes here -- that would be a good first step," she said.

She added, however, that the most effective approach is a stamping system like the state's. Under that system, distributors have to mark each pack with a stamp purchased from the state signifying that the tobacco tax has been paid.

That's an option that the city explored "very thoroughly," according to Moore, and could consider in the future, but ultimately decided not to pursue now.

He said that the stamps would have been difficult to implement without giving up the tax's inflation adjustment, which would cost the city some $400,000 a year in revenues. The move also would have required a change to state law, Moore added.

His office is projecting that the new standards will net Anchorage $1.3 million a year -- which represents an estimated 5 percent of current tobacco revenues that the city says is not being captured. Moore said that this year's revenues are projected to have risen by a similar amount, which he views as retailers' caution after the summer bust.

The potential impact on distributors and sellers is unclear. Moore and Mullane said they had circulated an early draft of the new law to the industry, and visited "several dozen" local sellers earlier this year.

Moore maintained that the cost of the license, and complying with the record-keeping requirements, is "really quite minimal."

He did, however, acknowledge that some businesses may have to upgrade their cash registers, which could cost several hundred dollars. But he said that those that were already abiding by rules should welcome the changes.

"The vast majority should appreciate that it's going to make a fair playing field," he said.

Reach Nathaniel Herz at or 257-4311.