Stateline Story

States Hunt Down Online Cigarette Buyers

Michigan resident Julia Sidebottom inhaled sharply when she opened her mailbox earlier this year and was greeted with an unexpected and unwelcome bill from the state for $4,753.89 in unpaid cigarette and sales taxes.

For several years, Sidebottom's boyfriend purchased cigarettes online at www.esmokes.com , one of 13 online cigarette retailers from which Michigan recently subpoenaed customer lists. She said the bill caught her completely off guard.

"It never even crossed our minds," said Sidebottom, whose 57-year-old boyfriend suffers from Alzheimer's and has granted her power of attorney. "I search the Web all the time for the best deals on everything. Never in a million years did I expect the state to come back and say we own them money."

Sidebottom is one of more than 1,500 Michigan residents who recently were mailed bills for the cigarette and sales taxes they had avoided by buying their smokes from online retailers. After 30 days, Sidebottom's letter informed her that a 100 percent penalty would be added to her existing debt.

Since February, the letters to online cigarette purchasers have garnered Michigan more than $2 million, said Terry Stanton, spokesman for the state treasury department.

Michigan is just one of the states looking to recoup revenue lost through sales of cigarettes on the Internet, where smokes often are cheaper precisely because the transactions almost never include cigarette and sales taxes owed to to the purchaser's state.

  • Alaska has already collected about $100,000 -- about one-fourth of the money officials estimate the state is owed -- after 1,000 letters were sent to online cigarette customers.
  • Illinois has sent 1,300 letters and expects to garner about $100,000.
  • In Connecticut, 141 people recently were mailed tax bills totaling $165,756.
  • Pennsylvania revenue officials estimate that the 63 people they notified by mail collectively owe the state $26,810.
  • Ohio has mailed about 245 letters to collect $20,000 in taxes owed to the state, and 3,000 more letters will go out in the coming weeks.
  • Arizona and North Dakota also plan to bill online cigarette buyers.

New York City, where smokers pay an extra $3 a pack, the highest cigarette tax in the country, recently billed 2,600 Big Apple residents. City officials say tax-free cigarettes purchased online contributed to an annual loss of $75 million in revenue for state and local governments.

Cigarette taxes aside, at least 10 states (Alaska, California, Connecticut, Illinois, Michigan, North Dakota, Oregon, Pennsylvania, Rhode Island and Washington) specifically outlaw online cigarette sales, and state law enforcement officials are cracking down on the virtual vendors.

The Virginia attorney general's office recently prosecuted two online cigarette companies ( www.cigoutlet.com and www.affordablecigs.com) and discovered purchases from those two sites cost 46 states $2 million in revenue. Virginia investigators shared the names of those sites' customers with officials in other states, prompting many of the letters.

In Washington state, the Department of Revenue recently filed a federal lawsuit against www.valuecigs.comin an effort to compel the company to turn over the names of its Washington customers. A 1949 federal law requires vendors who ship cigarettes across state lines to provide states with the names and addresses of purchasing residents, but the law has been poorly enforced.

States' efforts to snuff out online cigarette retailers got a boost in March when the major credit card companies announced that they would no longer accept payments for tobacco products bought online. The action cut off the payment method relied on by the vast majority of online cigarette retailers.

The credit card industry also is collaborating with the federal Bureau of Alcohol, Tobacco and Firearms and with 10 state attorneys general who also announced their intention to crack down on the online cigarette market.

The issue has caught officials' attention because in a growing number of cases, states are relying on revenue generated by smokers to balance their budgets. Since November 2001, 44 states have increased their tobacco taxes, according to the Health Policy Tracking Service, which estimates that the taxes account for 1.5 percent of all states' revenue.

In Michigan, for example, lawmakers last year raised the tax on cigarettes by 75 cents a pack; smokers now pay $2 in cigarette taxes on every pack they purchase in the Wolverine State.

Grover Norquist, who heads the anti-tax group Americans for Tax Reform, issued a statement decrying Michigan's efforts to collect taxes on cigarettes purchased online, saying state officials had resorted to "police state tactics to get their money."

"The big spenders in Michigan are so desperate for more money and more spending that they are willing to pry into their residents' online activity, harass them and threaten them, just to get their excessive pound of flesh from smokers," Norquist said.

However, the state governments learning the names of residents who had purchased smokes online argue that it isn't really analogous to officials identifying or cracking down on residents who make other types of online purchases.

According to the National Association of Attorneys General, virtually all Internet cigarette sales violate one or more state and federal laws. They include state age verification laws, state laws prohibiting the direct sale of cigarettes to consumers, federal mail fraud statutes and the federal RICO statute, designed to combat racketeering and organized crime.

Anti-tax groups say states are hoping for a one-time jump in revenue from cracking down on smokers who have escaped cigarette taxes by purchasing them online. Instead, states should be looking for ways to cut spending, they say.

But state revenue officials defend the payment campaign.

"We're in a state that's not raising taxes, and we're working our way out of a large deficit," said Geraldine Conrad, spokeswoman for the Illinois Department of Revenue. "So any owed receipt is an important receipt to us."

Tags: Economy