The ins and outs of the online cigarette revolution
By Joanna Drozd
Andy Yeh reclines in a chair and takes a deep drag from a cigarette. "I smoke with a lot of my friends. It's a good way to talk and relax," he says. He has smoked about half-pack a day since he started college a little over two years ago. For students like Andy, smoking is an expensive habit to support. New York City smokers have been particularly burdened by state and local taxes of $3.00 per pack. With an insatiable craving for nicotine and a tight budget, what's a frugal smoker to do?
Smokers in New York and other states with steep tobacco taxes are faced with a choice: visit the corner store to purchase a tax laden $7.00 pack of cigarettes, or click over to one of a growing number of Internet cigarette retailers and buy a tax-free 10-pack carton of Camels for as little as $13.95. At least a hundred online vendors cater to the thrifty smoker looking for a good bargain. CigaretteNetwork.com claims to "sell the same cigarettes that you're buying at the store for OUTRAGEOUS PRICES at the lowest prices you'll find ANYWHERE!" Dirtcheapcig.com touts itself as "The Last Refuge of the Persecuted Smoker!" It's a tempting proposition, and if the growing number of online cigarette vendors is any evidence, more and more people are picking up a few cartons online.
Who are Online Cigarette Vendors?
Kurt M. Ribisl, an assistant professor in the Department of Health Behavior and Health Education at the University of North Carolina School of Public Health, led the first study that attempts to answer that question. The study, published in the journal Tobacco Control in October 2001, found 88 Internet cigarette vendors operating within the United States. His findings open up questions about the freedom of the Internet and the limits of government authority. Just 28.4 percent of the sites included in the study include the required U.S. Surgeon General's health warning. While most sites gave some warning about age requirements for purchasing tobacco, 16 of them did not. Online vendors may create more than just good deals for smokers. "I think [Internet cigarette vendors] have a major potential to undo almost all of the progress made on tobacco control over the past 10 years," Ribisl says.
Perhaps it is no surprise that Ribisl's study uncovered 43 online cigarette vendors doing business in New York, which has the highest cigarette taxes in the nation. Nearly all of these vendors are located on Native American reservations in the western part of the state. The federal government classifies reservations as sovereign territories, which are not subject to federal taxation. The legal territory gets murky, however, when reservations begin shipping tobacco products outside of their territory without taxing buyers. One online cigarette vendor, SalamancaOutlet.com, states on that as part of the Seneca Indian Nation, their business operates independently from United States government regulations. "We are a Sovereign Nation, therefore we do not pay state taxes on cigarettes, in which we pass the savings on to our customers by offering tax free cigarettes, tobacco and other products," reads a statement on their website. Another vendor, Honor Our Treaties Enterprises, says, "It is the responsibility of the buyer to ascertain and comply with any laws in regard to the purchase and use of any of our products."
Ribisl's study did not include the many Internet vendors located abroad, which may or may not ship to addresses within the United States. Some European sites, such as Smokefarm.com, says in bold, "WE DO NOT SELL TO THE U.S.A." Others embrace their position outside of American jurisdiction. LowPriceCigarettes.com says, "Due to the positive tax regime where the company is based in Europe, you are able to save a lot of money on your tobacco and avoid excessive taxation in your home country by buying your cigarettes through Low Price Cigarettes!"
Andy thinks the cigarettes he buys online come from Switzerland or the Philippines, but he can't say for sure. "The packaging is different from U.S. cigarettes. They also say U.S. blend on some of them as opposed to the Turkish blend you can buy here," he notes.
The Laws
Is this legal? The answer isn't clear, but several federal regulations concerning the tobacco trade and e-commerce may apply to Internet cigarette vendors. The Jenkins Act was created in 1949 to ensure that the proper excises were collected on cigarettes shipped between states by requiring mail order cigarette vendors to report all buyer info to the tax authority in each state to which they shipped. The states would then be able to collect local sales taxes from the buyers. However, Ribisl's study found that just 4.5 percent of the 88 sites included in his study inform visitors about the Jenkins Act on their website. He says, "If they do mention it, they say that there's almost no enforcement of it." Further, those sites who initially submit Jenkins reports often stop complying with the law. "I think it's because people complained to the Internet vendor that they bought from that their customer information had been shared, and the Internet vendor decided to stop reporting it," says Ribisl.
The Internet Tax Freedom Act may counter the Jenkins Act by creating tax structures for online businesses that differ from actual stores. The Act says, "It is the sense of Congress that no new Federal taxes...should be enacted with respect to the Internet and Internet access." E-businesses are therefore exempt from sales taxes. However, states wishing to collect taxes on cigarettes shipped to residents dispute the Act's applicability and argue that cigarettes fall into a category separate from other goods like clothing or consumer electronics.
For now, Andy says that the laws have no bearing on him and he assumes that the government will never come to collect taxes from him. He says, "I'm going to take my chances because it's saving me money right now."
What Happens Now?
Online retailers may still enjoy a degree of autonomy from government regulation, but injunctions against several sites may change the way they do business. State and federal agencies have filed suits against a number of Internet cigarette vendors for failure to provide adequate information about their customers for taxation purposes.
In October 2002, the Washington State Department of Revenue filed suit against DirtCheapCig.com for alleged violations of the Jenkins Act. The claim contends that DirtCheapCig has refused to provide the monthly reports stipulated in the Jenkins Act that would allow the state to collect taxes on cigarettes purchased over the Internet. Buyers could face up to $250 in fines if they are found in possession of cigarettes without the Washington State Tax stamp. In an Associated Press report, a lawyer for DirtCheapCig argued that their product is not subject to taxation in Washington because their business is located in Kentucky. Under the Internet Tax Freedom Act, online sales are only subject to taxation in the state of transaction. Authorities in Washington say they may pursue other retailers if their current suit is successful.
Pennsylvania authorities also began a crack down on Internet cigarette purchases but have targeted buyers rather than the vendors themselves. Pennsylvania residents can face up to 90 days in jail and a fine of $300 if they are found in possession of more than one carton of cigarettes without Pennsylvania tax stamps. According to a statement by Pennsylvania Secretary of Revenue Larry P. Williams, the "main goal in increasing Pennsylvania's tax on cigarettes was to discourage our children from smoking." State authorities claim that investigations have resulted in "a number of contraband cigarettes" being confiscated. Pennsylvania residents can avoid being targeted by filing a Consumer Cigarette Excise Tax Return for their online cigarette purchases.
Government regulators are not alone in their battle against online cigarette vendors. Philip Morris U.S.A., makers of Marlboro and other cigarette brands, filed eight lawsuits in September 2002 against thirteen online retailers for alleged violations of trademark and unfair competition laws. The suits state that these vendors wrongfully use Philip Morris trademarks to attract visitors to their sites. Philip Morris also alleges that the products sold on the websites "have been imported in violation of the Imported Cigarette Compliance Act of 2000." While these suits do not speak directly to state tax liabilities, they could affect the online cigarette marketplace by restricting brand access to consumers.
Andy still maintains that the pros outweigh the cons and will continue to purchase his cigarettes online. "I guess now, with the government [lawsuits] going on, I'm a little more scared, but I'm getting my cigarettes for $1.50 a pack. I can't complain."
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