[Intl-tobacco] Online Tobacco Sales Ignite Fight Over Taxes (fwd)

[Robert Weissman]

This week old article from the Washington Post focuses on the United
States, but it highlights an issue that is going to be increasingly
serious on the international front.

Robert Weissman
Essential Information=09=09=09|   Internet:=09rob@essential.org

Online Tobacco Sales Ignite Fight Over Taxes
by David Streitfeld   / Washington Post Staff Writer     Tuesday, August   =
 29,=20
2000; Page A01=20
Source: The Washington Post, Tuesday, 8/29/00

SAN FRANCISCO =96=96 The ideal product to sell online would be easy to pack
and ship, be much cheaper than what's charged at the retail counter, and
be craved by tens of millions of people every day.

Cigarettes, the Internet was made for you.
 =20

As tobacco has come under ever-heavier pressure in the off-line world,
with massive lawsuits, bans in offices and restaurants, an increasing
social stigma, and a spiraling price per pack, the Internet has offered a
refuge. Here Marlboros and Camels can be acquired without encountering the
surgeon general's warning or a request for an ID. Best of all, the price
is about 30 percent lower than in the local supermarket.
=20

No wonder hundreds of cigarette Web sites have sprung up in the past year,
with some of the proprietors ambitiously estimating that the online world
will eventually gain as much as 20 percent of the $50 billion U.S. tobacco
business.
         =20

But tobacco's glory days on the Internet may be ending almost as soon as
they began. California and Washington state are using an obscure law to
get cigarette sites to hand over the names and addresses of customers, who
are then dunned for excise and use taxes. Wisconsin is setting up sting
operations against online retailers. And in New York, a new law
effectively outlaws Internet sales of cigarettes to individuals.
         =20

"This is definitely not typical for e-commerce," said Jeff Graham, an
entrepreneur who is unfazed enough to be launching Smokestore.com in
October.  "But if states and the federal government are making it
difficult for smokers off-line, which they are, it shouldn't be surprising
that they're also making it tough online."
         =20

Tougher, in fact. The Internet is generally a tax-free zone, where
retailers are deliberately shielded by Congress from the task of
collecting duty. It's also a place that has been largely self-regulated,
where few states have the expertise or the will to get involved. Local
merchants might complain that they are at a disadvantage against their Web
competitors, but they rarely get official support.
         =20

Tobacco reverses those dynamics. Part of the impetus for the current
regulatory actions comes from sliding sales of cigarettes at
bricks-and-mortar retail outlets, usually right after local taxes are
raised.
         =20

California, for instance, boosted its excise tax from 37 cents to 87 cents
per pack on Jan. 1, 1999. Over the next three months, sales of cigarettes
fell 34.7 percent from the previous year. Some smokers may have quit, but
authorities suspected that others started purchasing through unregulated
means, buying cigarettes from bootleggers or over the Internet.
         =20

Another regulatory spark was complaints by parents, who were upset that it
was so easy for kids to order cigarettes online. "A lot of people then
started looking," said M. Carter Mitchell, the Washington state official
in charge of tobacco tax enforcement. "They saw it was not a local
problem, a regional problem, but a national issue."
         =20

Much of the Internet cigarette market is shrouded in vagueness. Many of
the sites are run from Indian reservations, which are free to set their
own retail regulations, but some are not. Analysts say they have no idea
of the size of the total market or even what the biggest companies are.
"You get the feeling many of these are fly-by-night," said Preston Dodd,
an analyst with Jupiter Communications, a research firm specializing in
Internet commerce.
         =20

Gary Kirschner, the founder of Cigarettesbymail.com, has been the most
visible executive in this young industry and possibly one of the most
successful.  Formerly with Brown & Williamson Tobacco Corp. and its
parent, British American Tobacco PLC, Kirschner told one publication that
his site's revenue doubled every week for the first eight weeks.
         =20

Kirschner professes little concern about the regulatory efforts to snuff
out his business. "There are no statutes that regulate what we're doing,"
he said.  "California is using a law that in our opinion doesn't even
apply to what's going on today."
         =20

Before the Internet, smokers who made the voyage to either Indian
reservations or stores in tobacco-growing states got a bargain. If they
brought back more than two cartons, technically they had to pay an excise
tax in their own states. But as Dennis Maciel, chief of the excise tax
division of the California Board of Equalization, puts it: "Realistically,
how were we going to know?"
         =20

The Internet changed that. It put tax-free cigarettes within the reach of
anyone with a computer, and it also created a record of sales. So the
Board of Equalization did a little computer research and fired off a
letter to about 100 Web sites, pointing out that under the provisions of a
50-year-old federal law called the Jenkins Act they were legally bound to
file monthly reports to the state.
         =20

Originally designed to stop the shipments of cigarettes to anyone other
than a licensed distributor, the Jenkins Act requires shippers to list the
name and address of any recipients of cigarettes, as well as the brand and
quantity they bought.
         =20

The Indian sites responded that they were located in sovereign nations and
were not subject to the Jenkins Act. Other sites, such as
Cigarettesbymail.com, simply refused to provide lists. But a few sites
coughed up names and addresses.
         =20

Last year, the California tax authorities began writing those delinquent
citizens, asking for an excise tax payment of $8.70 a carton--even if they
had bought as little as one carton. This year the state also started
billing for a use tax, which is essentially a replacement for the
traditional sales tax the smokers would have paid had they bought the
cigarettes in a store.
         =20

The use tax in California varies by county but averages about 7.5 cents on
each dollar. Technically, everyone who buys goods from an out-of-state
Internet company should be paying a use tax. In practice, hardly anyone
does.
         =20

The letters caused a good deal of surprise and some consternation. "When
we sent out 3,000 tax returns, it's a safe estimate we received 3,000
phone calls asking 'What is this about?' " said tax administrator Maciel.
         =20

Many of those who were dunned by California readily paid up. Through the
first quarter of this year, 4,946 citizens were billed, and more than 78
percent have settled their accounts.
         =20

"Most people just want to pay and move on," Maciel said. "It's an
educational experience for them." More are already being educated: The
program more than doubled in size in the second quarter.
         =20

In Wisconsin, meanwhile, attempts to enforce the Jenkins Act are just
getting started. It's a poor weapon--the penalty for lawbreaking
businesses is a misdemeanor charge and a maximum fine of $1,000--but it's
the only one the state Department of Revenue has.
         =20

"Until someone at the federal level takes an interest in this, I don't
really think we're going to get anywhere," said Jim Jenkins, the state's
chief of alcohol and tobacco enforcement.
         =20

So he's trying to force the issue by ordering from tobacco sites. When the
shipments are received, the regulators will file a request for the
addresses of all the customers in the state. If they don't receive it,
they plan to inform federal prosecutors of the noncompliance.
         =20

New York has decided on a different approach. On March 1, New York raised
its tax on cigarettes from 56 cents a pack to $1.11. Sales fell 22 percent
by June.  In a law signed by Gov. George E. Pataki (R) earlier this month,
shipments of cigarettes in the state must be made to a licensed dealer.
Internet, mail and telephone orders sent directly to consumers are banned
by the measure, which goes into effect Jan. 1.
         =20

Enforcement of the law will focus on Web sites and any common carrier such
as Federal Express or United Parcel Service that transports tobacco to
state residents, said Marc Carey, a spokesman for the state Department of
Taxation and Finance.
         =20

Many of the Indian sites that sell cigarettes to New Yorkers and everyone
else are located in upstate New York. "I imagine there's going to be a
legal challenge to this," said Duane Ray, president of the Seneca Nation.
Even if there isn't, "we don't quite understand how the governor's going
to be enforcing this."
         =20

UPS, too, seems a little unsure. "There is an obligation by New York state
to make sure the enforcement of the law is feasible," said Tad Segal, a
spokesman for the carrier. At the moment, he added, "it's too early to
say" whether it is.
         =20

One possible scenario is that those shipping cigarettes to New Yorkers
start using the U.S. Postal Service, over which the state has no
jurisdiction. "That has the potential to be somewhat of a loophole,"
spokesman Carey conceded.
         =20

To smoking rights activists, the new law--which officials in other states
say will be closely watched and inevitably copied if it is successful--is
further evidence of unwarranted persecution.
         =20

"The Internet is being used to speed up the criminalization of smoking for
adults," said one such activist, Wanda Hamilton. "It makes it so much
easier to track and identify smokers. I find it all frightening."
         =20

Serenia Bodie, a 62-year-old retired caretaker in Tumwater, Wash., knows
all about how the Internet can get smokers in trouble. After seeing an
advertising circular for an Internet cigarette company in her local
newspaper early last year, she started ordering. In three months, she
bought 530 packs for herself and her children, also smokers.
         =20

Last August, Bodie received a bill from the state for $437.25 in taxes
due.  Living on Social Security payments of $649 a month, she couldn't
imagine paying it--and, after contacting the cigarette site, was
mistakenly told she didn't have to.
         =20

In November, Bodie got a new bill. This time it had a $10-a-pack penalty.
Her bill ballooned to $5,745.38. "I don't know what I'm going to do if I
have to pay this," she said. "I keep hoping they've forgotten, but I know
better."
         =20

The demand had another result. "This is the greatest deterrent I've ever
had in my life," Bodie said. After 46 years, she's quit smoking.
         =20

Staff researcher Richard Drezen contributed to this report.