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cause retail prices to the consumer to be at least 50 percent higher than necessary.
These two primary factors are (1) the present method of collecting at the source the $2 Federal excise tax and the present existing import duties due on foreign spirituous liquors sold in the United States; (2) the use of strip stamps as sole evidence that all taxes and import duties have been paid on any bottle to which a strip stamp has been affixed.
Let us consider the first factor. Because taxes are collected at the source before spirituous liquors have been put into distributive channels, there results a pyramiding of overhead and profit, not only on the manufacturer's cost of the merchandise, but more importantly, there is additional pyramiding on the tax and duty which each successive distributor automatically considers part of his base cost upon which he computes his operating mark-up. Hence, each successive handler adds his operating profit, not only to the manufacturing value of the goods, but additionally he adds his normal percentage of profit to the taxes and duties as well. The net result of this pyramiding practice is that for each dollar of tax or duty collected by the Federal Government, the consumer pays approximately $2.
Thus, a high tax-paid market is created which allows the large margin necessary for bootleggers, rum runners, and all other illicit sellers to continue their operations on a highly profitable basis; it deprives the Federal and State governments of millions of dollars of needed revenue now provided by law; it places unnecessary price burden upon the consumer with no compensating advantages; but most important of all, it encourages the continuation of a disregard for law and order, and, as in the past, provides the principal source of financing for bootleggers, racketeers, kidnappers, and all other elements of the underworld.
Let us now consider the second factor. If the Treasury continued to evidence all tax payments solely with strip stamps, then no matter how efficiently administered the present method cannot ever work because it is a method which is an outgrowth of a system more than 50 years old, designed to collect taxes when the major portion of spirituous liquor was sold in barrels and not in bottles, as is the legally required method of today.
Up to the time of national prohibition perhaps 80 percent of all spirituous liquor sold by distillers, rectifiers, and importers was transferred to the point of actual consumer sale in barrels. Onpremise consumption licensees, such as restaurants, hotels, and clubs, could buy barreled whisky for bar use; wholesalers and chain retailers bought barreled whisky and bottled it for local consumer trade, mostly under private labels.
Today Federal law prohibits the sale in bulk. Whisky must be sold in bottles by the distiller to a wholesaler, who in turn sells to the off- and on-sale premise licensee. No sales are made direct from distiller to retailer except in the case of State monopolies, where the monopoly is both wholesaler and retailer.
Previously, as a barrel was taken out of bond, the imposition of the tax upon the contents of the barrel did not lend itself to the pyramiding which is compelled by the present system of distribution,
because sales could be made direct to the retailer; also the tax was lower and the cost of the whisky lower, so that the final retail price was low. Low retail prices offer no inducement to illicit distillers. But as long as initial prices are high, as long as distillers and importers must sell through wholesalers, as long as sales are permitted only in bottles, and as long as taxes and import duties are collected at the source, this pyramiding must continue.
Furthermore, under the old distributing set-up, there was little opportunity for tax evasion. The amount of tax on each barrel was evidenced by a canceled revenue stamp which, immediately previous to the World War, amounted to $55. Hence the initial bookkeeping record required to trace and control a barrel of liquor was a unit involving $55 and covered 50 gallons of tax-paid liquors.
Today, however, the primary bookkeeping record, which would have to be used were the same system of control to be followed, is one pint of liquor, as more pints are sold than any other unit. This involves a tax payment to the Government of 25 cents. Even so, this tax payment is not evidenced by a 25-cent Federal tax stamp being pasted on the pint bottle and canceled, but by what is known as a strip stamp which costs 1 cent. These strip stamps have been readily obtainable not only by the legitimate distiller, rectifier, or importer, but also in large quantities by the illicit operator. Furthermore, counterfeits are available, also in large quantities.
In other words, whereas previous to prohibition one stamp had to be paid for, used, and recorded, which covered 200 pints and cost $55, today 200 individual records, each involving 1 cent, would have to be kept in order that the same amount of control might be exercised. Mathematically, therefore, records would have to be kept on perhaps 1,000,000,000 units of sale annually, whereas the number of units of sale before prohibition on which proper records were to be kept, would not have exceeded 2,000,000 to cover the barrel sales, which represented 80 percent of the total traffic.
For these reasons, we contend that the present method of tax collection can never result in the elimination of illicit selling, even if the apropriations for strict enforcement are greatly increased; the actual mechanical check-up would be too complicated.
Furthermore, we contend that high retail prices to the consumer under the present method of tax collection cannot be substantially reduced regardless of any concessions made by distillers, wholesalers, or retailers unless excise taxes and import duties are deferred until time of retail sale as provided by the Copeland amendment.
Moreover, the plan proposed by the Copeland amendment offers a legal weapon which will probably be the largest contributing factor in stamping out illicit distilling. The Copeland amendment provides a legal instrumentality by which a buyer, who willfully and knowingly purchases non-tax-paid liquor, becomes a party to a conspiracy with the seller to defraud the United States Government of its lawful taxes and therefore the Attoreny General, may prosecute all parties in liquor violation cases not as tax evaders but as conspirators engaged in an effort to defraud the United States Government. The Copeland amendment therefore offers, for the first time, a method to prosecute the buyer as well as the seller.
This interpretation of the Copeland amendment first advanced by Paul Shipman Andrews, dean of the law school of Syracuse Uni
versity, has elicited the concurrence of a large group of eminent jurists and lawyers.
Here is the basis of Dean Andrews' reasoning:
A Federal tax on spirituous liquor of $20 per gallon is due on every gallon of liquor manufactured in the country.
If the Copeland amendment is adopted, an individual, willfully and knowingly buying liquor without each bottle having affixed to it the proper canceled tax stamps, by that purchase, enters into a conspiracy with the seller to defraud the United States Government.
A retailer purchasing liquor from a bootlegger for the refilling of previously used bottles, likewise, by such purchase enters into a conspiracy with the seller to defraud the United States Government, because he is refilling a bottle bearing canceled or counterfeited Federal stamps.
The retailer selling for off-premise consumption would be unlikely to sell individual bottles without canceled stamps thereon because such sales would be proof conclusive of conspiracy to evade payment of taxes, making both buyer and seller liable.
Obviously then, because of the risk involved and the severe penalties which existing laws require to be imposed, the public and all retail-liquor dealers would refrain from purchasing liquor from illicit sources. This should automatically disable the bootlegger, because bootleggers, like other businessmen, cannot exist if they have no customers.
In July 1935 Senator Harrison sent a copy of the Copeland amendment to the Secretary of the Treasury for comment. The Secretary's reply contained the following:
Experience has demonstrated that it is more economical to collect taxes on such commodities, as intoxicating liquors from the manufacturers or importers of whom there are relatively few and whose operations can with comparative ease be supervised by Government officers for the purposes of accounting for the liquors produced or imported and otherwise insuring the payment of the tax.
Our general answer to this is that the Secretary can, as he says, with comparative ease, collect the taxes he now gets from manufacturers and importers because those taxes which he succeeds in collecting are only a part of what he is entitled to collect.
If there were no enforcement division, no supervision, no storekeeper gagers at distilleries and rectifying plants, and no customs officials, bonded warehouses, or coast guards—still the Secretary would collect some revenue on liquor, because the taxes due have been imposed by law. There are some people in the liquor business, as in other businesses, who would pay taxes when due regardless of any Treasury Department activity.
But it must be remembered that about the time this letter was written last year the Secretary appeared before the House Ways and Means Committee and asked for passage of the antismuggling bill to protect the revenue because the present method of tax collection did not succeed in collecting the taxes and duties due. Here, in part, is his testimony of March 8, 1935:
Prior to prohibition this country was not troubled much with smuggling. During the 14 years of prohibition the business of smuggling liquor into the United States from all parts of the world developed to very serious and troublesome proportions.
It was generally expected that with the repeal of prohibition liquor-smuggling operation and frauds on our revenues would be materially reduced. How widespread this opinion was may be evidenced by the fact that the appropriations for the Coast Guard, the first line of defense against the rum runners, was reduced from $25,772,950 for the fiscal year of 1934 to $18,046,400 for 1935. This drastic reduction resulted from a belief that repeal would largely relieve the Coast Guard of those portions of its law-enforcement activities which were directed against smuggling. For a time after repeal such proved to be the case, but, commencing with the spring of 1934, liquor smugglers again appeared along our coasts, and their operations have now increased to alarming proportions. Thus, in March 1934 only 20 smuggling vessels were observed off_the coast, but by February of this year this number had increased to 22. Thirty-nine foreign vessels are presently known to the Coast Guard to be regularly engaged in the illicit liquor traffic. Inasmuch as those vessels are hovering beyond our customs waters, they are not subject to seizure under existing laws, and hence they carry on their smuggling operations almost with impunity.
Alcohol constitutes almost the entire cargo of these vessels. This is due to several things. It is very cheap. It can be produced abroad at costs ranging from 20 to 50 cents a gallon. It is highly concentrated. Two and one-half gallons of whisky can be made from a gallon of alcohol. It enjoys a large price differential due to the customs duties and internal-revenue taxes, which amount to $13.10 on a gallon of 190 proof.
A summary of the movements of known alcohol smugglers for the last 4 months of 1934 indicates an outward movement from the principal ports of supply to the coast of the United States of over three-quarters of a million gallons of alcohol. At this rate there would be an annual movement of over 244 million gallons. The annual internal-revenue loss on this amount of alcohol, at $3.80 per gallon, would be almost $9,000,000; the loss in customs duties, at $9.50 per gallon, would be over $21,000,000, making a total loss of over $30,000,000.
The principal enforcement agencies engaged in the prevention of smuggling are the Coast Guard and the Bureau of Customs. The appropriations for the Coast Guard for 1935 are $18,346,400; those for the Bureau of Customs (omitting the refund and draw-back figures) are $18,500,000. It is estimated that of these appropriations about 20 percent, or between 7 and 8 million dollars, is properly chargeable to our efforts to prevent smuggling.
The practical difficulties in checking smuggling can hardly be exaggerated. Our 10,000-mile coast line, with the many opportunities it affords for concealment; our comparatively small Coast Guard force of about 10,000 men; the seamanship and daring of the rum runners; and the highly efficient and wellfinanced smuggling organizations that have grown up since the event of prohibition, all are prime factors in making the smuggling problem one difficult of solution. Another, and not the least important factor, is the inadequacy of existing antismuggling legislation. The ineffective legislative weapons at present at our disposal for this work have time and time again permitted the escape from punishment of vessels which were violating every principle behind our customs enforcement laws, vessels, in fact, which had never earned an honest dollar in their entire seagoing lives, but had been designed, built, and used exclusively for smuggling into the United States.
This statement by the Secretary was not the only one which was quoted by the public press. During the 18 months following repeal, the press of the country had been, almost daily, carrying numerous accounts of the enormity of the bootlegging, rum running, and other illicit liquor traffic. Most of these statements originated with Secretáry Morgenthau, former Under Secretary Coolidge, the then F. A. C. A. Administrator Choate, and others in high authority. Here are some of these statements [reading]: We now have facts from which the reasonable inference is
that bootleg production continues on so huge a scale as to constrain us to the conclusion that our people must now be consuming greater quantities of spirits than they did in pre-prohibition days.
The Government is losing more taxes than it gets. A colossal criminal industry, necessarily highly organized, still exists.
If any progress is ever made in either control or temperance, if ever the expected revenue is to be realized, this criminal industry must be destroyed.—Joseph Choate, Jr., in the public press on April 29, 1934.
In the National Capital bootleggers are delivering liquor in case lots to hotel rooms. During the discussions with distillers and bottle makers, it was disclosed that 90 percent of the business in one well-known type of rum was bootlegged; that only 15 percent of the business of one popular brand of rye was legitimate.-Secretary of the Treasury Morgenthau at a press conference, June 21, 1934.
Thomas Jefferson Coolidge, Acting Secretary of the Treasury, stated that despite repeal there appears to be an increase in liquorc smuggling along the Northeastern coast. Mr. Coolidge said, “The Department had been informed of at least 14 smuggling vessels along the seaboard from Delaware to Maine.New York Herald Tribune, July 24, 1934. The Treasury's revenue policy carried on vigorously toilay
Report showed 2,110 persons arrested in what was probably the underworld In about 24 hours 900 moonshine stills, with a daily capacity of 219,866 gallons, were gathered in by the Alcohol Tax Unit.- New York Times, March 17, 1935. (The annual capacity of these stills exceeds last year's total tax-paid production.)
Obviously, as the first 2 years were passing, conditions were getting worse, not better. In April 1934, Mr. "Choate “feared” that seizure of illicit plants for the first 3 months indicated that the year's total would amount to 7,952 illicit plants, with a combined annual capacity of 271,623,080 gallons. Actually the year's total, as reported by Secretary Morgenthau in his year's report, was 10,947, almost 3,000 more than the incredible potential.
According to the Secretary before the House Ways and Means Committee, “in March 1934 only two smuggling vessels were observed off the coast.
Yet less than a year later Secretary Morgenthau, before the House Ways and Means Committee, reported 39 vessels carrying on their smuggling operations almost with impunity. Apparently smuggling was increasing even more rapidly than illicit distillation.
But almost immediately after the F. A. A. bill was passed by both Houses of Congress last August, without the inclusion of the Copeland amendment, practically all information regarding still seizures by the Enforcement Division, rum runners by the Coast Guard, and other enforcement activity of the Treasury ceased to find its way into the public press. While numerous bills were before the Congress in the last session dealing with strengthening liquor control, the press of the country continuously carried accounts of the enormity of the bootlegging and rum-running traffic, most of which emanated from officials of the Treasury Department and the F. A. C. A. However, as soon as these new control measures were passed, a different type of statement found its way into the press definitely suggesting that the bootlegger is on the run, his day is almost over, and within a short time there will be no longer any illicit traffic.
This, Mr. Chairman, is far from the truth.
The bootlegger is resourceful. In the last 2 years, he has merely adapted himself to the new conditions. Large groups of illicit operators own distilleries, import concerns, rectifying plants, wholesale houses, retail package stores, and restaurants and bars—all protected by licenses through which the product which evades taxes passes from point of distribution to point of consumption-operated efficiently and highly profitable. The entire system is well organized. The product is made to appear tax paid and legitimate because strip stamps, legitimate or counterfeit, are attached to all the bottles.
So that you may appreciate the enormity of this traffic, and that you may follow it step by step, it is perhaps advisable first to explain to you just how this traffic today operates.