It’s a crime that happens in plain sight, inside stores up and down the East Coast. The tobacco trail of smuggled cigarettes costs taxpayers millions of dollars and often starts right here in Northern Virginia.

Paul Carey is at the center of the battle. He’s chief of enforcement with the Northern Virginia Cigarette Tax Board. “It’s more profitable than heroin, drugs, methamphetamines. And the penalties are so low,” said Carey.

The News4 I-Team went undercover with Carey, along with a team of Alcohol Beverage Control officers, one morning in October as they prepared for a takedown in a quiet Fairfax neighborhood. “We've seen him load the product up from his home. Three hundred thousand dollars-worth of product he's sent out," explained Carey.

Carey told us the man they’ve been watching has sent close to two dozen separate shipments of Virginia cigarettes overseas where they're often sold for a premium. On this day, agents found 549 cartons in the man's van and even more inside his home. He was later found guilty of transporting untaxed cigarettes and still faces a felony charge next month. According to Carey, "This is one of the first cases we're working where it's being shipped out of the United States."

Until now, Carey said, most of the smuggled cigarettes ended up at mom and pop shops in other states. Virginia's low cigarette tax rate, 30 cents per pack, entices smugglers to buy cigarettes here and then sell them in cities with much higher rates, like D.C. and New York City, giving them a big profit.

Even though it’s against the law, the News4 I-Team easily found D.C. retailers selling cigarettes with Virginia tax stamps. That means they weren’t paying DC's tax. “It impacts everyone who lives in the District," said Bedell Terry, director of DC's Office of Tax and Revenue Compliance Administration. Terry sends inspectors out each week to check retail stores and almost always finds violators. The number of illegal cigarettes his office has confiscated increased from 335 packs in 2011 to more 3600 in 2012. And the fine for violators is pricey. "We seize them and the fine is 500 times the retail value, or $5,000, whatever is larger," said Terry.

Some D.C. stores are doing whatever it takes to hide the contraband, including hidden compartments or shelves to avoid fines. The News4 I-Team found the problem is even worse further up the I-95 corridor in New York City, where an estimated 60 percent of cigarette sales involve smuggled product. Our hidden cameras were rolling as we bought Virginia stamped cigarettes around the city from Brooklyn to the Bronx in just one afternoon.

New York City Sheriff Edgar Domenech spent the past two years cracking down on smuggling, now so profitable it's attracting organized criminals and even terrorist groups. "Forty-eight to 49 percent of the stores in New York City are selling inappropriately taxed cigarettes," Domenech told the News4 I-Team. Sheriff Domenech showed us the evidence room where confiscated cigarettes from the past six months are kept. Piles and piles of cigarettes reach from the floor to the ceiling; so many that they’ve had to find an overflow room. "A lot of our cigarettes, presently that we're seizing, have a Virginia tax stamp on them," said Domenech.

His office, so far, has issued more than $1.5 million in fines. The sheriff is hoping new legislation will give his department authority to go even further, actually closing down repeat offenders for up to 60 days. "We're going to take away the money that you're making," said Domenech.

To report tax fraud:

Northern Virginia:

703-802-0373

Northern Virginia Cigarette Tax Board Tip Line



Maryland:

800-638-2937 or 410-260-7980

Comptroller of Maryland

DC:

800-380-3495

Office of Tax and Revenue

To read more about how cigarettes are smuggled:

See how the tobacco industry is working with law enforcement to stop cigarette smuggling: