Wednesday, August 24, 2005
Web Tobacco Buyers Beware: It's Taxable
Anthony Purificato was taken aback in June when the Minnesota Department of Revenue wrote to inform him that it knew he had purchased cigarettes from esmoke.com and that he'd better calculate the state taxes he owed and pay them. Purificato mistakenly thought that Internet sales were tax-free. A resident of St. Paul's East Side who bought smokes online every other month or so over the past few years -- and who actually quit smoking a year ago -- Purificato said he can't figure out how and why the state found out about his purchases, and isn't sure now that he can accurately determine how much he owes.
"I think it stinks," Purificato said. "The state of Minnesota never told [the seller] to stop delivering and they let it [the tax liability] build up. People who are now going on the Internet to buy tobacco should be prepared for what's going to happen." Indeed, Minnesota smokers getting their butts over the information highway now face a new hazard. The state of Minnesota is gearing up to choke off online tax avoidance, which is expected to increase with an additional 75-cent-per-pack state charge that went into effect Aug. 1. And the state has new legal tools at its disposal.
"Our activity has picked up," said George Hoyum, director of the Minnesota Revenue Department's Special Taxes Division. "Tax avoidance is why [Internet sellers] are in business. This not only deprives the state of revenue but it hurts our legitimate Minnesota businesses who are complying with the law."
In the past few months, the state sent letters to 1,100 buyers of Internet cigarettes, having obtained the names from the sellers or other sources. So far the state has collected about US$46,000 in back taxes, Hoyum said. Moreover, the department intends to work with the U.S. Postal Service and commercial transportation companies to monitor cigarette deliveries to residential addresses. Efforts by the Star Tribune to contact representatives of esmokes and other Internet cigarette Web sites were unsuccessful. State officials say the industry apparently has no national association or spokesperson.
The state can't force out-of-state sellers to collect and forward taxes. Its best enforcement tool is a 1949 federal law called the Jenkins Act. The act requires sellers of cigarettes to inform state governments of the names, addresses and purchases of customers, so that states can collect their taxes. The law has been widely ignored by Internet sellers and seldom enforced by state or national governments over the past few decades, a 2002 report by the General Accounting Office (GAO) report found. Most cigarette Web sites don't even hint that state taxes must be paid.
Violation of the law is only a misdemeanor and government prosecutors have focused mostly on bigger crimes.
Sherry Duval, a spokeswoman in St. Paul for the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, said Justice Department officials are more concerned about large-scale international smuggling operations or shipments of 60,000 cigarettes or more (300 cartons) between state lines. But as more and more states jack up tobacco taxes to shore up revenues and to discourage smoking, more are looking for their own ways to stop scofflaws. The GAO report predicted that by 2005, Internet cigarettes sales would climb to $5 billion nationally and that states would be losing about $1.4 billion in revenue. Tom Briant, executive director of the Minnesota Wholesale Marketers Association, estimated before a legislative committee this year that Minnesota was losing between $10 million and $25 million a year.
The 2005 Minnesota Legislature responded by tacking on its own version of a Jenkins Act, requiring that all out-of-state parties selling cigarettes provide all the information on buyers that is required in federal law, and also that they register with the department. State and federal officials acknowledge that some sellers, perhaps many, will continue to defy the law. The GAO reported a dismal response to its effort to investigate or interview representatives of Internet cigarette sellers. However, some states are having moderate success. Washington recently sued a New York Indian band that was selling large quantities of untaxed cigarettes, and the band agreed to disclose its customers in Washington.
High-tax California and New York have been leaders in enforcement. The esmokes Web site now has a notice at the top of its main page advising that it won't even deliver to California addresses.
State officials acknowledge that the scale of disclosure will vary widely. Hoyum said about six major Internet distributors are cooperating with the state currently. Briant, who also is executive director of the National Association for Tobacco Outlets, said a more effective curb might be state laws, including one in Minnesota, that require the U.S. Postal Service and private package delivery services to verify, with photo IDs, that recipients of tobacco products are adults. In some states, United Parcel Service and other carriers have quit delivering tobacco products to recipients other than licensed dealers or wholesalers, Briant said.
Brought to you by the Guardian eCommerce Privacy Seal Program.
"I think it stinks," Purificato said. "The state of Minnesota never told [the seller] to stop delivering and they let it [the tax liability] build up. People who are now going on the Internet to buy tobacco should be prepared for what's going to happen." Indeed, Minnesota smokers getting their butts over the information highway now face a new hazard. The state of Minnesota is gearing up to choke off online tax avoidance, which is expected to increase with an additional 75-cent-per-pack state charge that went into effect Aug. 1. And the state has new legal tools at its disposal.
"Our activity has picked up," said George Hoyum, director of the Minnesota Revenue Department's Special Taxes Division. "Tax avoidance is why [Internet sellers] are in business. This not only deprives the state of revenue but it hurts our legitimate Minnesota businesses who are complying with the law."
In the past few months, the state sent letters to 1,100 buyers of Internet cigarettes, having obtained the names from the sellers or other sources. So far the state has collected about US$46,000 in back taxes, Hoyum said. Moreover, the department intends to work with the U.S. Postal Service and commercial transportation companies to monitor cigarette deliveries to residential addresses. Efforts by the Star Tribune to contact representatives of esmokes and other Internet cigarette Web sites were unsuccessful. State officials say the industry apparently has no national association or spokesperson.
The state can't force out-of-state sellers to collect and forward taxes. Its best enforcement tool is a 1949 federal law called the Jenkins Act. The act requires sellers of cigarettes to inform state governments of the names, addresses and purchases of customers, so that states can collect their taxes. The law has been widely ignored by Internet sellers and seldom enforced by state or national governments over the past few decades, a 2002 report by the General Accounting Office (GAO) report found. Most cigarette Web sites don't even hint that state taxes must be paid.
Violation of the law is only a misdemeanor and government prosecutors have focused mostly on bigger crimes.
Sherry Duval, a spokeswoman in St. Paul for the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, said Justice Department officials are more concerned about large-scale international smuggling operations or shipments of 60,000 cigarettes or more (300 cartons) between state lines. But as more and more states jack up tobacco taxes to shore up revenues and to discourage smoking, more are looking for their own ways to stop scofflaws. The GAO report predicted that by 2005, Internet cigarettes sales would climb to $5 billion nationally and that states would be losing about $1.4 billion in revenue. Tom Briant, executive director of the Minnesota Wholesale Marketers Association, estimated before a legislative committee this year that Minnesota was losing between $10 million and $25 million a year.
The 2005 Minnesota Legislature responded by tacking on its own version of a Jenkins Act, requiring that all out-of-state parties selling cigarettes provide all the information on buyers that is required in federal law, and also that they register with the department. State and federal officials acknowledge that some sellers, perhaps many, will continue to defy the law. The GAO reported a dismal response to its effort to investigate or interview representatives of Internet cigarette sellers. However, some states are having moderate success. Washington recently sued a New York Indian band that was selling large quantities of untaxed cigarettes, and the band agreed to disclose its customers in Washington.
High-tax California and New York have been leaders in enforcement. The esmokes Web site now has a notice at the top of its main page advising that it won't even deliver to California addresses.
State officials acknowledge that the scale of disclosure will vary widely. Hoyum said about six major Internet distributors are cooperating with the state currently. Briant, who also is executive director of the National Association for Tobacco Outlets, said a more effective curb might be state laws, including one in Minnesota, that require the U.S. Postal Service and private package delivery services to verify, with photo IDs, that recipients of tobacco products are adults. In some states, United Parcel Service and other carriers have quit delivering tobacco products to recipients other than licensed dealers or wholesalers, Briant said.
Brought to you by the Guardian eCommerce Privacy Seal Program.
