Cig kickback scheme scorches little guy

RETAILERS throughout New York have been getting illegal kickbacks from some cigarette distributors desperate to pick up business in a tough market, sources tell me.

And investigators have the proof on tape, I’m told.

For months, a team of private, undercover investigators recorded some of the transactions and have turned the evidence over to the IRS — since illegal payments seldom get reported on taxes.

I’m told these “rebates” have been going on for years but only now are being looked into.

The funny part about all of this is that the probe is occurring at the same time as Mayor de Bla

sio’s campaign to get New Yorkers to quit smoking.

Last month, de Blasio announced that he wanted to raise the tax on cigarettes by 24 percent. In making his announce- ment, the mayor said, “When it comes to New Yorker’s health, Big Tobacco is public enemy No. 1 … and we can no longer sit by while the next generation becomes addicted.”

I applaud the sentiment. But there is a whole lot that de Blasio is missing.

For one thing, city officials think there are 900,000 smokers in New York. That would be 14.3 percent of the population.

But experts on the city’s cigarette trade say that as many as 80 percent of the cigarettes smoked in the city are bootlegged — smuggled into the state from places with far lower taxes.

Virginia is one of those lower-taxed states that’s a short drive from New York.

So without realizing it, de Blasio’s tax increase would be a boon to the smugglers because it would allow them to raise their selling price without having to increase their acquisition costs.

To ease the retail price shock — which could result in fewer packs of smokes sold — some larger, out-of-state distributors, who put the tax stamp on packs in New York and surrounding states, have been returning a minimum of $1 a carton to retailers who buy from them, the investigators have leaned.

This is about 20 percent of the distributor’s profit margin on a carton, sources said.

They are doing this to steal business from local, smaller distributors who can’t afford such rebates.

And the rebate is illegal because it violates a decades-old law that set wholesale and retail price minimums.

Twenty-six states have minimum price laws, to protect nonlocal distributors from stealing business, so this kickback scheme is likely to be going on in other states as well, according to my sources.

The biggest kick in the ass is that these distributors are being paid by the state and the city to collect the tax and put the stamp on cigarette packs.

And these distributors are allowed to hold the tax money for 30 days, which — in essence — gives them interest-free working capital.

“This is a huge amount of money. Hundreds of millions of dollars a year,” says a source familiar with the inner workings of the cigarette business. “That’s working capital for them.”

The undercover investigators, who I can’t identify, posed as people getting ready to open stores in New York City and Long Island that would sell cigarettes. And they secretly recorded their dealings with the distributors who were paying kickbacks.

Not all distributors were crooked. And I talked to several small distributors whose business is being hurt by the kickbacks. Retailers, naturally, would rather deal with the bigger distributors who are willing and able to pay under the table.

Most of the kickbacks were given by the firms that didd the biggest volume with the cigarette manufacturers and have the most customers.

These are the distributors that could best afford to take the cut to their profit margins. The result is that the smaller distributors compete.

One of the legit cigarette middlemen said, “Out-of-state distributors would come to New York and cut prices.” His business is being hurt, especially since he can’t afford to go along. “I’m one of the very few who never rebated.” Some smaller, legit distributors tried to keep up and had once offered rebates — but they got too expensive so they’ve stopped. And that leaves only some of the biggest distributors able to break the law. This kickback system has been going on for about 15 years, but it has grown so much lately that distributors can’t pay the kickbacks in cash because it would be caught by the IRS. “It would be tens of thousands of envelopes,” said my source, who asked not to be identified. So instead of cash, the crooked distributors would put the kickbacks on their books as credits against future sales. And sometimes those future sales weren’t just for cigarettes; sometimes they’d give credits for candy products that they also distributed. “They’d deliver boxes of candy — no charge,” said an honest distributor. From such a simple, straightforward business grows a tangled enterprise.