Cigarette Taxes Drive Internet Tobacco Sales Boom

by Leroy James, Tax-News.com, New York

23 September 2002

Cash-strapped US states are turning to the tax-collector's traditional home in time of trouble: raise 'sin' taxes on cigarettes and booze. Trouble is, smokers now have a choice, and many of them are flocking to tax-free Internet sites to buy their supplies.

19 states have raised cigarette taxes this year, and the Internet sites, many of which blatantly advertise that they don't pay taxes or collect customer information, are booming. At $7 a pack, there's a big incentive to find a way around the tax.

Of course, what they are doing is illegal: under the federal Jenkins Act, they are supposed to report cross-border sales to customers' home state tax authorities so that they can collect 'use' taxes - but they don't do so, and the law is not actively enforced. Indeed, it's difficult to see how it could be in respect of customers, although agents could entrap sellers easily enough. But it's only a misdemeanour to break the Act.

Research reports say that the number of Internet tobacco sites is over 200, having more than doubled in just a year. Many of them are based in Indian reservations, where they argue that they are exempt from Federal reporting regulations, and there is no or very low local taxation. Others are in the tobacco-producing states. In North Carolina, for instance, the local tax is just five cents a pack, so that Internet vendors (or regular smugglers) can pay the tax and on-sell the cigarettes at less than half their price in New York or New Jersey.

"It's just like the Wild West," Eric Lindblom of the Campaign for Tobacco-Free Kids, a Washington advocacy group, told the Wall Street Journal. "There's no marshal in town and these Web sites are flaunting the fact that they're ignoring the law."

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