Tax differences either side of international and state frontiers can cause smugglers’ havens to spring up along the line, Ben Walker reports.

Borders are history’s scars, and before 1995 Europe was full of them. These days, the Schengen Agreement makes it hard to notice when you drive from one nation to the next. But, before the mid-1990s, travel around the continent was punctuated by sometimes lengthy stops to cross frontiers at the Pyrenees, Alps or Rhine. Yet, even in those late 20th century days of border posts and roving guards, smuggling was rife, because tax differences made the risk worthwhile.

In the French Basque Country, locals – and tourists in the know – used to pick their way through woodlands and cross into Spain via a makeshift bridge across the babbling stream that marked the border. On the other side was a giant kiosk selling port, sherry and other fortified wines at a fraction of the cost of the same product in France. Differences in tax levels either side of the frontier had created a grey market for Iberian hooch. Anyone taking booze back over the bridge into France without declaring it was technically committing a crime – and risked a close encounter with the border guards who frequented the woods. But, it seems, people would do anything for a bargain.

Bad smuggling habit

They still do. At Harpers Ferry, which sits at the tripoint of the US states of Virginia, Maryland and West Virginia, it is cigarettes the bargain hunters seek. Virginia is a world centre of tobacco production and, as such, cigarette taxes are some of the lowest in the US. Here, tobacco smuggling is big business.

The Potomac River just east of Harpers Ferry marks the state line between Virginia and Maryland. The state of Virginia levies just ¢30 in tax on a packet of 20 cigarettes. The state of Maryland levies $2. Clinging to the south bank of the Potomac, just across the Sandy Hook bridge that joins the two states, is a series of cigarette shacks selling cartons of every brand under the sun. These are duty-paid cigarettes – but the taxes are so low in Virginia that they might as well be duty-free. Just by skipping over to Virginian territory, smokers – or smugglers – can save $17 on a carton of 200.

More adventurous types, willing to drive the fags north, can make even more. In a bid to curb smoking, the state of New York levies a cool $4.35 in tax on a packet of 20 cigarettes, while New York City takes an additional $1.50. Buying a kosher packet of cigarettes in Manhattan now costs you around $13. As a result, according to US think-tank the Tax Foundation, 57% of all cigarettes smoked in the Big Apple are smuggled – many of them from down the east coast in Virginia, where a pack costs just $5.25.

‘Public policies often have unintended consequences that outweigh their benefits,’ says the Tax Foundation’s Joseph Henchman. ‘One consequence of high state cigarette tax rates has been increased smuggling, as criminals procure discounted packs from low-tax states to sell in high-tax states. Growing cigarette tax differentials have made cigarette smuggling both a national problem and a lucrative criminal enterprise.’

The Foundation found evidence of niche criminality along the Virginian border, including a Maryland policeman running illicit cigarettes across the line; a Virginian man hiring a contract killer over a cigarette smuggling dispute; and prison guards caught running cheap fags into state jails.

Smugglers cause a stink

But this is far from just an American problem. All over the world, where high-tax locations sit close to low-tax jurisdictions, smuggling is common. The perfect smugglers’ good is something that can be sourced relatively easily in the place of purchase, and for which there is clear demand in the place of sale. Cigarettes and alcohol fit the bill. And, as any cook will know, so does garlic.

In 2013, Sweden issued international arrest warrants for two Britons accused of smuggling £8m worth of Chinese garlic into Sweden from Norway. Norway is in the Schengen region but not in the EU, and, as such, is not subject to the 9.6% import duty that the union levies on foreign bulbs. The two men were suspected of making millions by bringing the herb in from China, where it is grown easily and cheaply, then running it across the open Swedish border in lorries. And, in the UK, in late 2012, west Londoner Murugasan Natarajan was imprisoned for six years for failing to pay HMRC £2m in unpaid import taxes, after lying to customs officials that the merchandise was fresh ginger, which is not subject to duty. ‘One container of fresh garlic represents a potential risk of about £24,700 in terms of customs duties,’ the European Anti-Fraud Office’s Pavel Borkovec told BBC News.

Borders with benefits

Pretty much any good is game, where the right conditions exist. Smugglers relish big differentials in price, and unmanned, porous borders – like those between Norway and Sweden or Virginia and Maryland.

But sometimes borders can bring benefits. The international and currency border between Northern Ireland and the Irish Republic, for example, is, on some interpretations, a generator of economic development. The Republic of Ireland uses the euro, while Northern Ireland uses the pound. Taxes and the general cost of produce vary considerably in each: groceries are significantly cheaper in the north than the south. And, while the frontier is unmarked, the crowds of Irish nationals at Northern Irish supermarkets tell you that you are close to the line. In 2009, the small Northern Irish border town of Strabane was home to the sixth most-profitable Asda on Earth.

But flows of economic tourism change as prices on either side of the open border vary – proof in Ireland, as elsewhere, that taxes shape our world.

AAT Comment offers news and opinion on the world of business and finance from the Association of Accounting Technicians.