Smugglers still cashing in on Michigan can refund

Michigan lawmakers want to crack down on can and bottle smugglers they say are scamming Michigan for undeserved recycling refunds, corrupting a generous 10-cent per container payback policy once infamously portrayed in a "Seinfeld" episode and which beverage officials now claim costs the state millions of dollars annually.

"Seinfeld" characters Kramer and Newman failed miserably in their comedic attempt to cash in on the refund, when they loaded a mail truck full of cans and bottles in New York and attempted to drive them to Michigan. But lawmakers say it's a serious problem, especially in border counties, and they want to toughen penalties on people who try to return unmarked, out-of-state cans and bottles for refunds.

"If you are intending to defraud ... then you should be held accountable for it," said Republican Rep. Kenneth Kurtz of Coldwater. He recently introduced legislation aimed at cracking down on scammers who drive car and truck loads of cans from Indiana, Wisconsin and Ohio -- states that do not offer refunds -- to stores across the border in Michigan.

His legislation would make an attempt to return between 100 and 10,000 non-returnable containers punishable by up to 93 days in jail and a $1,000 fine. Current law sets penalties only for those who actually return fraudulent containers.

Michigan's 10 cent-per-container refund -- the highest in the country -- was enacted more than 30 years ago to encourage recycling. Many say it's worked. The state's recycling rate for cans and bottles was nearly 96 percent in 2011. By contrast, New York, one of nine states with nickel deposits on most containers, saw only a 66.8 percent redemption rate in 2007, the most recent figure available.

Despite measures Michigan lawmakers have taken over the years, including tougher penalties for bottle scammers and new machines that kick out fraudulent cans, store owners and distributors along the border say illegal returns persist.

Mike Hautala owns Hautala Distributing, which services Gogebic and Ontonagon counties in the western part of the Upper Peninsula near the Wisconsin border. He said for every case of beer his distributorship delivers to a store along the border, it picks up about seven more cases of empty cans.

The state loses $10 million to $13 million a year to fraudulent redemptions, according to most recent 2007 estimates from the Michigan Beer and Wine Wholesalers Association. Angela Madden, the association's director of governmental affairs, said that number has likely gone down slightly because of changes implemented since, but not by much.

Bill Nichols, store director at Harding's Friendly Market in Niles about three miles from the Indiana border, said the store takes in about $6,000 worth of cans a week. He said every week he kicks out people for trying to return large garbage bags full of cans from Indiana, a state that offers no refund.

"You can go into the parking lot and look at the license plates and see that it says Indiana," he said.

Distributors pick up the containers people drop off at stores and pay the store a dime for every container. If the distributor picks up more bottles and cans than it left -- the likely result of fraudulent redemption -- the distributor is left in the hole, Madden said. If the distributor picks up fewer cans than it dropped off, the money that does not go back to the store is sent to the state. Twenty five percent of that money is sent back to retailers and 75 percent is put in a fund that pays for things like environmental cleanup, she said.

Hautala said he lost about $25,000 last year picking up more returned containers than he delivered. He said his company will recover some of that money from distributors who sell more containers than they pick up.

In 2008, Michigan passed laws aimed at cracking down on bottle fraud. One of the primary components required manufacturers to place a special mark on Michigan cans and bottles and said those containers could only be sold in Michigan or other states that have deposit laws.

A report the Department of Treasury delivered to Michigan lawmakers last fall estimated that the technology may have helped reduce redemptions of out-of-state containers by nearly 4 percent. But that reduction could also come from decline in sales, the report said.

As containers were given Michigan-specific marks, vending machines used in stores to count the cans and bottles were formatted with new technology to read the mark and reject cans that come in from across the border.

But Madden told the committee that many retailers have not yet taken advantage of the technology. She said while the state has provided funding for business to pay for the $5,000 machine upgrade, many "just refuse." If a store has an older model machine, they might have to shell out big bucks for a brand new machine that is compatible with the new technology, she said.

Hautala said only four machines are in the two counties his company serves.

And the machines are not "100 percent fool-proof," Nichols said. If a person repeatedly puts an out-of-state can into the machine, it will often accept it, he said.

Michigan is not alone in its fight against bottle fraud. Mark Oldfield, spokesman for California's Department of Resources Recycling and Recovery, said the state, which gives a 5-cent refund for most containers and 10 cents for those more than 24 ounces, is losing about $30 million to $50 million a year from redeeming out-of-state cans. The state's redemption rate for the first six months of 2012 was 87 percent.

Oldfield said a new law in California this year requires people who bring in more than 25 pounds of aluminum or plastic, or more than 100 pounds of glass, to report the source and the destination of the material to the state. Border patrol stations along the major highways near the border also gather license plate numbers and information of vehicles seen bringing in cans and bottles.

Despite their best efforts to clamp down on fraudulent bottles, a federal lawsuit may shake things up even more. In 2012, a federal appeals court in Cincinnati struck down the Michigan law that makes beverage companies put a special mark on cans sold in the state. It said the Michigan law is illegally affecting interstate commerce by dictating where cans can be distributed.

Joy Yearout, spokeswoman for Michigan Attorney General Bill Schuette, said the office has requested a stay on the ruling and plans to file a petition with the U.S. Supreme Court in April.