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Congress Told That Internet Tobacco Sellers Flaunt Illegality

by Mike Godfrey, Tax-News.com, New York

14 October 2002


Worried by the increasing loss of tax revenue to Internet cigarette sales, Congress asked the General Accounting Office to study whether on-line sales sites conformed with the Jenkins Act, which requires that vendors selling cigarette sales cross-border should provide the names of their customers to home state tax authorities, so that applicable excise and use taxes can be collected.

No prizes for guessing the result: out of 147 web-sites the GAO surveyed, not even one was in conformity with the Act. "Out of 147 vendors that we identified that had Internet sites, we found that, based upon information posted on those sites, none of the 147 complied," says the GAO.

In fact, many sites openly advertise that they don't report sales, although a few do advise the customer that they should report purchases to their home tax authorities.

The GAO also reports that federal agencies have done little or nothing to enforce the Act, and suggests that responsibility for enforcement should be transferred from the FBI to the ATF (Bureau for Alcohol, Tobacco and Firearms).

Congress has also previously toyed with the idea of making breach of the Jenkins Act into a felony rather than a misdemeanour, although it's too late to expect any action from the current legislature in its dying days.

It's estimated that Internet tobacco sales are already costing states in excess of $1.5bn lost tax, and this number can only rise as states raise taxes to try to fund large (and unlawful) deficits. Many of the sales sites are based in Indian reservations, which argue (possibly with some justice) that they are exempt from Federal reporting regulations, and there is no or very low local taxation.


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