Buying cheaper cigarettes online means huge tax bills later
(KRT) The one page greeting from the Michigan Department of Treasury came out of the mailbox, but to Julia Sidebottom it may as well have come from the moon. Tucked amid the legalese was the line that said her boyfriend owed the state $4,797.87 in unpaid cigarette taxes.
“I was totally flabbergasted,” Sidebottom said. “At first you don’t know what to think. … I thought it was some kind of a joke.”
Michigan and other states are giving smokers who buy cigarettes over the Internet a lot to think about, in the form of letters notifying them that they owe thousands of dollars in taxes on bargain priced smokes.
More than 530 Michigan residents received tax bills in the past two weeks, with the average individual liability $3,200.
In Illinois, about 1,300 people who bought cigarettes over the Internet are about to be notified that they must pay the state’s 98 cent per pack tax, an Illinois Department of Revenue spokeswoman said.
The collection effort is part of a stepped up campaign by states including Ohio, New York, Pennsylvania and Oregon to capture millions of dollars of unpaid cigarette tax revenue as much as $2 billion annually from hundreds of thousands of people who buy the cheap smokes over the Internet and avoid dramatically higher cigarette taxes in their home state.
In January, New York City’s Department of Finance notified about 3,700 New Yorkers that they had skirted the city’s $3 per pack tax by purchasing over the Internet. Some owed as much as $10,000 in unpaid taxes. Ohio has targeted 1,000 people for non payment of cigarette taxes.
In Michigan, where thousands more cigarette purchasers soon will be notified, treasury officials referred the names of 121 people to the Michigan State Police for criminal investigation because they bought more than 300 cartons of cigarettes over the Net tax free, presumably to resell them.
“We’re learning more about this, and we’re getting a little better sense of the operation,” said Michigan Treasury Department spokesman Terry Stanton, adding that investigators have targeted 13 Internet sites and are obtaining the sales records in pursuit of Michigan residents who avoided the state’s $2 per pack tax.
The collection of taxes for goods sold over the Internet is becoming increasingly problematic for state and local governments.
Recent studies project that they are losing tens of billions of dollars annually because many sales evade taxation. Tobacco sales are only a small part of the picture, but they are important because states increasingly rely on cigarette taxes to mend budget holes.
In recent years some states, such as California, tried to little effect to recover cigarette tax revenue, shut down Internet operations or prevent the smokes from being delivered.
Now, driven by the financial imperative of huge state budget deficits, 44 state attorneys general will meet in Washington this month to discuss the problem of tobacco sales over the Net and what they can do about the hundreds of Internet operations with such names as , and
By going after the buyers of cigarettes, said Jeff Cohen, assistant chief counsel for the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, the “word is getting out” about big tax liabilities.
“I think most people realize that something must be fishy if they buy something at a fraction of the cost,” Cohen said.
Sidebottom, who lives with her boyfriend in the northern Detroit suburb of Waterford, Mich., disputes that claim and said she thought the cigarettes were a low priced deal, as are many items sold on the Internet.
That doesn’t matter to Michigan treasury officials the tax is owed, they say. And they’re putting the muscle on cigarette buyers and using them as public examples in efforts to cripple the sale of tax free cigarettes.
The aggressive enforcement comes as more state legislatures are pushing even higher cigarette taxes to plug budget holes and pay for state programs such as public education and Medicaid.
Illinois Gov. Rod Blagojevich has proposed boosting the state’s 98 cent cigarette tax by 75 cents. Iowa lawmakers are weighing an 80 cent increase in the state tax, currently at 36 cents per pack.
Indiana lawmakers are considering a boost of as much as 40 cents in the state’s 55½ cent tax. In Ohio, the 55 cent tax could rise to $1.
Thirty four states have raised cigarette taxes since 2002 by as little as 8 cents to as much as 75 cents and as those levies have jumped, tobacco sales over the Internet have exploded, as have the number of online cigarette sites, estimated to number 800 to 1,000.
New York has estimated it loses $500 million to $600 million annually from cigarette sales through the Internet, toll free phone operations and American Indian reservations.
“As taxes go up, Internet sales go up,” said Dana Bolden, a spokesman for Philip Morris USA, the giant cigarette manufacturer.
One private study projected that online cigarette sales could make up 14 percent, or more than $5 billion, of total U.S. sales by the end of this year.
Austan Goolsbee, an economist at the University of the Chicago who co authored a study last fall on cigarette taxes and Internet sales, forecast that tobacco tax collections would be diluted by 25 percent to as much as 40 percent as a result of online competition.
Goolsbee said the “root of the problem for the states is that it is hard for them to enforce” a 1949 federal law that requires dealers who ship cigarettes across state lines to individuals to report the sale to the buyer’s home state.
State enforcement is further complicated because most Internet cigarette operations are based on American Indian reservations, where state jurisdiction often is unclear.
Federal responsibility remains scattered, although the General Accounting Office, in a 2003 report, recommended that jurisdiction for handling Internet cigarette operations be given to the Bureau of Alcohol, Tobacco, Firearms and Explosives, an arm of the U.S. Justice Department.
For now, though, a growing number of states are attacking the problem by subpoenaing the sales lists of Internet operations.
In that regard the effort resembles the moves of the recording industry’s fight several years ago against Napster, the former pirate music downloading service.
Sidebottom, who said her boyfriend is in the early stages of Alzheimer’s disease, said there was no warning from the state.
“When there was the big issue with Napster, at least there was some indication so you knew not to do it, so you stopped,” she said.
Stanton, the Michigan treasury spokesman, said the state issued warnings after it raised the cigarette tax to $2 a pack in 2002, telling people they were required to pay the state tax on sales over the Internet or any other outlet that did not collect the tax up front.
Sidebottom said smokers are being persecuted while billions of dollars of retail sales over the Internet legally go untaxed.
“It’s not politically correct for anyone to be a smoker right now, so they’ll come after us,” Sidebottom said.
“And this is just the tip of the iceberg. We’re only in the first wave. I know any number of people who have purchased (cigarettes) online, and I tell them to be prepared because they’re coming after you. They’re scared to death, scared to death.”
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2005, Distributed by Knight Ridder/Tribune Information Services
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