In the six weeks after a large cigarette tax rate hike in New York, sales plunged at convenience stores statewide, mainly because smokers are making purchases at tax-free outlets, reports the New York Association of Convenience Stores (NYACS).

On July 1, the state increased the cigarette excise tax from $2.75 a pack to $4.35, the highest state tax rate in the country, and, according to the NYACS, smokers began shifting their purchases to tax-free tribal smoke shops, the black market and border states with lower tax rates.

The association reported that convenience stores have suffered an average drop of 25 percent to 35 percent in cigarette sales during July, but that those in closest proximity to tribal outlets and state borders experienced losses of up to 45 percent. Meanwhile, Indian reservation and border-state "tax havens" are flourishing, with sales up as much as 300 percent at some outlets.

"New York State has now increased its cigarette excise 691 percent in the past 10 years without closing off readily available channels for dodging that tax," said NYACS President James Calvin. "As a consequence, we're approaching the point where two-thirds of the cigarettes consumed in New York are purchased without collection of any New York State tax whatsoever. Law-abiding stores like ours lose enormous amounts of business, state and local governments lose hundreds of millions in tax revenue, and public health loses because the financial incentive to quit is easily and routinely circumvented."

The association urged New York Governor Paterson to follow through on the scheduled September 1 start of tax collection on Native American sales of cigarettes to non-Native customers.

The state law enacting the tobacco tax increases also set forth a plan to exercise New York's right to collect these taxes by requiring wholesale distributors, beginning September 1, to certify that they are prepaying the tax before delivering cigarettes, so that the tax is built into the price paid by customers at both Native and non-Native stores.

On August 1, the situation got even worse for New York convenience stores, which have traditionally relied on tobacco as a major product category. Dramatic increases in state excises taxes on other tobacco products, such as cigars and smokeless tobacco, took effect, chasing even more of their customers to no-tax or lower-tax venues.

The one-two tax punch threatens to cripple many C-stores – especially mom-and-pop independents and those closest to Indian reservations and the Pennsylvania border, says the association.

"It's not just the loss of sales revenue from cigarettes themselves," Calvin said. "It's fewer customers coming through the door to buy cigarettes and other merchandise. For example, many stores have seen a corresponding drop in lottery sales."