Web Smokes May Skirt Tax
By Guillermo Contreras, San Antonio Express-News
Feb. 6–For $30, smokers in San Antonio can get a carton containing 10 Marlboro packages from some retailers in New York state and never pay the $1.41-per pack tax imposed by Texas.
In fact, the state of Texas may never even know about the sale.
Dozens of outfits offer cigarettes over the Internet at almost half what brick-and-mortar retailers in Texas charge, and some are based on American Indian reservations that use tribal sovereignty and compacts to shield themselves from state taxes.
Others — according to a government report and studies by observers of the tobacco industry — simply skirt the federal Jenkins Act, passed almost 60 years ago, that requires retailers to report to states information about their cigarette buyers and what smokes they buy so state governments can collect taxes from them.
Groups representing American Indian tribes claim they are not doing anything illegal and have lobbied Congress to ensure that legislation is not passed that would allow states to impose their regulatory and tax authority on tribal land. Blog Up in Smoke
Two Express-News staffers attempt to kick the habit … for good.
In the past three years, the National Congress of American Indians has argued that provisions in proposed legislation aimed at giving the Jenkins Act more teeth could allow state or municipal governments to sue tribes for violating the act.
“These provisions are a direct attack on tribal sovereignty and would set a precedent for further legislation in the future,” the organization said in a document that tells tribes to oppose the proposals.
Opposing the American Indian groups are convenience store associations that argue that the states are losing out on tax streams of millions to Internet cigarette sales.
It is an issue some observers say is likely to take center stage soon in Texas, which raised its cigarette tax by $1 per pack in January and is seeing some Internet sites advertising to smokers here.
Several reports or studies have tried to identify the number of Web sites that sell cigarettes, but the statistics vary. In 2002, for instance, Congress’ Government Accountability Office identified 147 Web site addresses for Internet cigarette vendors based in the United States, but the Campaign for Tobacco Free Kids pegged that number at 200.
Both noted the number continued to grow as consumers looked for ways to evade cigarette taxes.
Prudential Financial Research estimated that Internet tobacco sales in the United States were more than $5 billion in 2005 and that the states lost about $1.4 billion in tax revenue from those sales.
While some states have tried to use the Jenkins Act to collect taxes from consumers who buy tobacco over the Internet and mail order — Alaska, Illinois, Connecticut, Pennsylvania and Ohio have mailed cigarette buyers tax bills — Texas looks instead to the retailer.
Texas focuses on ensuring the retailers have paid for the cigarette tax and are registered for delivery sales before selling cigarettes through the Internet or mail order, according to R.J. DeSilva, spokesman for the Texas comptroller’s office.
At least two out-of-state, mail-order or Internet retailers that the San Antonio Express-News inquired about are not registered with the state. Because of this, officials acknowledge, Texas authorities have no records they can examine to see if tax has been paid on cigarettes sold to Texas smokers by those retailers.
Since Texas’ $1-per pack cigarette tax increase last month, ads for mail-order and Internet cigarette sales have appeared in Texas newspapers, including an ad insert in the San Antonio Express-News.
Federal authorities rarely enforce the Jenkins Act, the GAO report said, although at least nine states (Texas was not among them) have tried to use the law to pursue the taxes from the consumer. Those efforts also consisted of contacting Internet vendors directly and U.S. attorneys’ offices for help, but the efforts have produced few results and little tax revenue, the report said.
Texas officials said they need more information to determine the magnitude of the situation.
“While we do get some Jenkins Act reports, the state is focusing its resources on groups that sell in Texas through the Internet or direct mail,” DeSilva said. “While it may sometimes be difficult to track sales by unregistered retailers, we will be looking at statewide data like tax remittances and information like cigarette consumption. Once we start getting solid evidence, we will be able to compare numbers and see the scope of the issue.”
Two of the retailers who have been advertising in Texas include Post Smokes and a Web site called BuyCheapCigarettes.com. Both are based on the Seneca Nation in New York State.
Post Smokes did not return calls for comment, and in its ad, it tells consumers: “Post Smokes will never share your information with any state agency. Our sovereign status guarantees your privacy.”
Representatives of the Web site refused to forward a reporter to its administrative offices, or to provide any other information.
The site states federal law requires the operators to report all sales and shipments of cigarettes to the tax authority of the destination state. The same site states that it will not share buyers’ information with any third party. However, it also tells customers that it is their responsibility to contact the state to determine their tax obligation.
Neither of the two has permits or is registered with the Texas comptroller’s office.
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