US Internet Tobacco Sales Bypass Tax System

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

13 August 2002

A report released today by the US General Accounting Office (GAO) says that the volume of sales tobacco products over the Internet could reach US$5bn annually by 2005, which could cost states $1.4bn in lost tax revenue - because the sites concerned don't report the sales to the authorities, as they are supposed to.

The GAO says that of 147 web-sites it identified as belonging to Internet cigarette vendors in the US, none posted information saying they complied with the law, and d 78% said specifically that they don't comply - what buyers want to hear, of course.

Most states tax cigarette sales, at rates up to $1.50 a pack. In Massachusetts, for instance, the lowest price that can be legally charged for a carton of cigarettes (200) is $54.90 - but half price is available on the 'Net, with free delivery for bulk purchases.

If the Internet site is in a different state from the buyer, the cross-border sale would not be liable for sales taxes, even without the Internet tax moratorium. States try to claim 'use' taxes on such sales, but of course they have to find the buyers first. That's why Federal law requires Internet cigarette sellers to provide state revenue officials with names and addresses of their customers - the state itself would not have the power to do so. And if the site is located offshore, there is little or nothing that the Federal authorities can do about it.

The GAO report recommends shifting primary enforcement of the law from the FBI to the Bureau of Alcohol, Tobacco and Firearms, in part because of the FBI's heightened focus on terrorism, meaning that it lacks the resources to enforce legislation that could be regarded as relatively trivial.

The report was distributed to the media on Monday by Rep. Martin Meehan (D - Mass.) He says the study reveals a lack of oversight that lets children illegally buy cigarettes online.

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