State Asks for ATF Help in Smoke Shop Tax Case

OKLAHOMA CITY — The Oklahoma Tax Commission has asked for federal intervention as the state agency continues to grapple with tribal smoke shops skirting a new tobacco tax.

The Tax Commission has asked for help from the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, according to records obtained through the state Open Records Act.

In a letter dated Aug. 27, the Tax Commission noted that it “has received reports that the lower-tax-rate smoke shops are selling contraband cigarettes to the higher-tax-rate smoke shops in massive quantities.”

In the letter, the Tax Commission notes that it does not have jurisdiction on “trust land” but states that Oklahoma believes the federal authorities could “investigate instances of trafficking of contraband cigarettes on trust land.”

The Tax Commission asked ATF for help in March and was denied, records show. The commission asked again in August but has not received a reply.

State Treasurer Scott Meacham says the cigarette tax problem already has cost the state $15 million, with the loss rising by nearly $2 million each succeeding month.

The new tobacco tax took effect Jan. 1.

Meacham is impatient with the Tax Commission, in charge of regulating wholesalers and collecting cigarette taxes.

“I am not satisfied with the pace at which we are getting this issue resolved,” Meacham said. “I understand that, like many entities in state government, the Oklahoma Tax Commission has limited resources, but it is frustrating that this can’t be done quicker.”

Tax commissioners broke their silence Friday on the issue. Commissioner Jerry Johnson said everything is being done that is possible to detect offenders, and the commission is getting “fairly close” to figuring out what wholesalers and tribal shops are doing.

Investigations by the Tulsa World show that numerous smoke shops in the Tulsa area are selling cigarettes carrying 6 cent tax stamps, which are intended for smoke shops next to the state border.

Smoke shop operators allege they are purchasing cigarettes with the cheap stamps from their border stores and reselling them in the Tulsa area.

Tax Commission records reveal that wholesalers may be selling cigarettes to the border stores with the cheap stamps affixed but delivering those cigarettes to nonborder stores in Tulsa and elsewhere.

“Our problem has arisen because some of the lowest-tax-rate smoke shops are selling cigarettes directly to the higest-tax-rate smoke shops in violation of their compacts,” according to a March 18 memo from Tax Commission employee Kay Burkhalter. “I have also received information that a wholesaler who sells to the tribal smoke shops is invoicing cigarettes to a lowest-tax-rate smoke shop but delivering those cigarettes to higher-tax-rate smoke shops.”

Gov. Brad Henry said Friday that he is working closely with the Tax Commission to see that wholesalers are complying with the law.

“We can crack down, and we will; in fact, we are in the process of doing that.”

Johnson confirmed that the Tax Commission is going back 21/2 years and auditing unnamed wholesalers’ records to see whether there has been an upsurge in sales to some border stores, but the cigarettes are possibly being delivered to nonborder stores.

The Tax Commission hopes to have results of its audit by early October, Johnson said.

“We’ve had investigators examining wholesalers (in the field) for a couple of months now,” he said.

Wholesalers can face a $1,000 fine for selling cigarettes with the wrong tax stamp.

Or the state could revoke a wholesaler’s license.

But a license revocation apparently has never occurred, at least not during the 20-year tenure of Paula Ross, spokeswoman for the Tax Commission.

Johnson said the commission is hesitant to revoke wholesalers licenses.

“Revoking somebody’s licenses is a very serious step because you are taking away their livelihood, as far as selling cigarettes.”

“But if we find evidence that warrants doing that, then we will.”

Meanwhile, Cherokee Nation officials have asked for a 30-day extension to further discuss renegotiating their compact with the state. The extension would delay the beginning of formal arbitration proceedings, said Cherokee Nation spokesman Mike Miller.

Miller said the tribe has also reviewed tax and revenue records of Cherokee smoke shops. Miller said it is against tribal law for smoke shops to funnel cheaper cigarettes to Tulsa-area stores requiring the higher tax stamp.

No Cherokee stores have been accused of this practice.

“We will continue to look at these records but it is clear that we want our licensees to follow letter and spirit of law,” Miller said.

Additionally, the Cherokee Nation Council rules committee has discussed increasing the tribal tax on cigarettes to capture revenues slipping away under the disputed compact with the state, Miller said.

Miller said the tribe is weighing its options as compact negotiations continue with the state.

“There has been some discussion on figuring out how to deal with the situation since we don’t have a workable compact in place with the state,” Miller said. “We have talked about an increase in tribal tax to ensure that we capture the revenue due the tribe since the compact is not doing that.”

Sen. Jay Gumm, chairman of Senate finance committee, said the tribes and the state should honor the current compact.

“I think that everyone involved needs to abide by the agreements that were struck by the tribes and the state,” Gumm said. “I have confidence that the tax commission will do its job and fulfill its statutory requirements.”

Mick Hinton (405) 528-2465

mick.hinton@tulsaworld.com

Omer Gillham 581-8301

omer.gillham@tulsaworld.com