Michigan's Experience With Cigarette Taxes: The 1940's and 1950's

Michigan's first cigarette tax, Public Act 265, was enacted during the final hours of the legislative session in June 1947 for the purpose of paying soldier bonuses, and took effect on July 1 that same year.[35] The Legislature had previously passed a cigarette tax, but it was rejected by the voters. The 1947 rate was 3 cents per pack, and unlike every other cigarette-tax state except Massachusetts, Michigan did not require a tax stamp or meter impression as proof of payment. Tax stamps were rejected due to their cost and were not implemented until decades later, although they were briefly considered in the 1950s as a way to thwart crime.

Government officials were initially optimistic about cigarette tax compliance and seemed to view their biggest challenge as simply convincing the business owners who sold cigarettes to remit the tax. This quote, from a 1947 meeting of the National Tobacco Tax Association, shows just how optimistic the early days of cigarette taxes in Michigan were: "[T]he cooperation of the industry has been excellent ... I am hopeful that with this cooperation our non-stamp plan is going to work out satisfactorily. Possibly after another year's experience we may have some more troubles to bring to this conference, but at the present time things are running as smoothly as we can expect with a new tax program of this type."[36]

This pronouncement may have come back to haunt the speaker. The biggest challenge of the new tax program would come not from the mostly law-abiding cigarette retailers, but from the criminal element. Cigarette bootlegging began immediately after the tax took effect. Although this crime occurred on a relatively small scale during the 1940s and 1950s, it proved resistant to law enforcement efforts.

The government responded by amending the cigarette tax law twice, in 1949 and 1951. Under the 1951 law, violations that "involved importation, acquisition, or possession of cigarettes, the wholesale value of which was $50 or more" were made felonies.[37] The new statute also gave the Department of Revenue the "authority to seize the cigarettes and vehicles and vending machines when there was reasonable cause to believe that these cigarettes were being imported, transported, or possessed in violation of the law."[38] After the change in the statute, optimism again prevailed. The director of the Cigarette Tax Division of the state Department of Revenue stated, "[W]e think in Michigan ... that we are on top of the cigarette bootlegging situation."[39]

Another major change to the statute in 1951 was the addition of the transporter section. This section, which may have appeared to the layperson to be a simple licensing requirement, was actually designed solely to catch criminals and in fact had "absolutely no application to the legitimate trade practices."[40] A transporter was defined as "an individual who imports into Michigan from a source outside Michigan, or who transports in Michigan cigarettes obtained from a tax- free source which is not licensed under the cigarette tax statute."[41] The law now required a transporter to obtain a permit from the Department of Revenue containing information such as the origin of the cigarettes and the intended recipient. The transporter was also required to stop for inspection at the first Michigan State Police post in the state. Under this law, commercial smugglers could then be prosecuted simply for not having permits.[42]

In 1949, the federal government also enacted a measure meant to deter interstate smuggling. Known as the Jenkins Act, the law requires anyone transporting cigarettes for profit across state lines to report the details of the transaction to state tax administrators. The reports must be sent to each state's treasury or designated collector of taxes and include such data as "the name and address of the person to whom the shipment was made, the brand, and the quantity thereof."[43]

In December 1951 at the Indiana-Michigan border, authorities stopped a semi-trailer that was escorted by a car carrying a driver and three armed men. The truck was transporting 299 cases of cigarettes obtained in St. Louis and intended for resale in Detroit. The arrest led to a case that made its way to the state's Supreme Court after a lower court held that the transporter requirement placed an "undue burden on interstate commerce."[44] In 1953 the Michigan Supreme Court ruled that the license requirement did not in fact interfere with interstate commerce.

Law enforcement officials initially bemoaned the difficulty of obtaining convictions, despite making arrests and confiscating contraband cigarettes, vehicles and vending machines. These difficulties were due to the need to avoid violating both the U.S. Constitution's "commerce clause" and search-and-seizure rules.[45] Another difficulty was the complexity of the criminal operations involved. In 1953 the Supervisor of the Cigarette Tax Division of the Department of Revenue speculated that Detroit was dealing with syndicate operations using cigarettes that came primarily from the St. Louis area, rather than petty thieves.[46]

The frustration of law enforcement and revenue officials was described by Michigan Assistant Attorney General William B. Elmer:

By way of background, I should first point out that the smuggling of cigarettes is still a real problem, as many of you gentlemen know from personal experience. By the very nature of the business, of course, the problem of smuggling is always greater than it appears on the surface. We can only hazard a guess as to the numbers of truckloads that get through without our knowledge. I do not know that smuggling is going on. I do not know how much. [47]

Gradually law enforcement efforts started to pay off. In February 1953, after extensive preparation, police made "a number of arrests" in the Detroit area.[48] Fourteen people were brought to trial, resulting in seven convictions. And from May 1951, when the statute was changed, until early 1954, 20 of the 33 people tried on cigarette-related violations were convicted, and over 1,000 cases of cigarettes were confiscated.[49] In 1954, the deputy commissioner for the state's Revenue Department announced:

I said the tide turned, and it really did; when you get convictions of ringleaders sustained by the state supreme court and put them in the state penitentiary for from three to five years, when you confiscate trucks and other vehicles and cigarettes having a value of more than $125,000, you are making the bootlegging activity pretty unprofitable. Consequently, we are now able to say that there is no organized bootlegging on a large scale in Michigan, and neither has there been in the past year and a half.[50]

Many years later, it is clear that this view was overly optimistic, probably due to policymakers' inexperience with tax-induced smuggling. As Michigan's assistant attorney general had earlier admitted: "Michigan is relatively a young state insofar as the tax on cigarettes is concerned. We passed our act in 1947, and I freely admit that we are still experimenting."[51]

Also in 1954, the director of Cigarette and Miscellaneous Taxes in the Michigan Department of Revenue made this assessment of the department's role in fighting cigarette-related crime: "While the Michigan Department of Revenue remains primarily a tax collection agency, it has irrevocably become in its administration of the cigarette tax law a pseudo-police agency and a quasi-judicial body."[52]

[35] Roy Struble, "Tax Evasion - Current Developments," in Proceedings from the 26th Annual Meetings of the National Tobacco Tax Association, (Chicago: Federation of Tax Administrators, 1952), 6.

[36] Clarence W. Lock, "Comments From New Cigarette Tax States - Michigan," in Proceedings from the 21st Annual Meetings of the National Tobacco Tax Association, (Chicago: Federation of Tax Administrators, 1947), 31.

[37] Roy Struble, "Report of the Committee on Tax Evasion," in Proceedings from the 27th Annual Meetings of the National Tobacco Tax Association (Chicago: Federation of Tax Administrators, 1953), 21.

[38] Ibid.

[39] "Tax Evasion," 26th Annual Meeting, 7.

[40] Ibid.

[41] Ibid.

[42] Ibid.

[43] 15 U.S.C. § 376(a)2.

[44] "Tax Evasion," 26th Annual Meeting, 7-8.

[45] William B. Elmer, "Review of Recent Court Cases Involving Cigarette Tax Statutes," in Proceedings from the 27th Annual Meetings of the National Tobacco Tax Association (Chicago: Federation of Tax Administrators, 1953), 11.

[46] "Committee on Tax Evasion," 27th Annual Meeting, 4.

[47] "Review of Recent Court Cases," 27th Annual Meetings, 11.

[48] Roy Struble, "Criminal Penalties," in Proceedings from the 28th Annual Meetings of the National Tobacco Tax Association (Chicago: Federation of Tax Administrators, 1954), 7.

[49] Ibid.

[50] Clarence W. Lock, "Enforcement Policies of the Michigan Department of Revenue," in Proceedings from the 29th Annual Meetings of the National Tobacco Tax Association (Chicago: Federation of Tax Administrators, 1955), 2-3.

[51] "Court Cases-Cigarette Tax Statutes," 27th Annual Meeting, 11.

[52] "Criminal Penalties," 28th Annual Meeting, 6.