When I was a kid in small-town Ontario, buying tax-free cigarettes was a lot like buying marijuana - you went to the guy who was known to sell them, who was usually hanging around the high school, and he hooked you up.

In my day the cigarettes were name brands, sold to low-tax American states and then smuggled back into Canada through Indian reservations - you couldn't tell you were smoking smuggled cigarettes by looking at the butts. Now Indian reservations manufacture their own untaxed cigarettes - which is completely legal, when bought and smoked on the reservation. However, they're also illegally sold off the reservation.

In Ontario at least, it's against the law to buy these cigarettes off the reservation. The penalty is a fine. Enforcement, for the individual buyers, is pretty much non-existent.

Tax-free cigarettes are available for sale in "smoke shacks" in native territories. By law, they can be sold tax-free only to Status Indians, but illegal sales to those that do not have the status are rampant. So essentially it is a contraband, only within a country.

Interestingly, some provinces place weekly or monthly limits on the purchase of tax-exempt smokes in order to combat this. However, their method of synchronizing the limits with retailers is laughably outdated and insecure (one province transmits drivers' license numbers and home addresses in plaintext using plain FTP or dial-up). Because of this, some retailers are able to forge the necessary ID to obtain limitless tax-exempt cigarettes which are then sold to non-Indians.

Source: I worked as a network technician for several retailers across Canada who were later penalized for fraud of this sort. Yikes.

Yes very much against the law.

The cigarettes would have to have been smuggled into the province and being a tax department worker for the federal government it makes it far worse.