PACT Act Q&A
Why should Congress care about online cigarette sales?
Isn’t there already a federal law on this issue?
Who would bear the burdens of the PACT Act?
Is this a Native American issue?
Who would be subject to the PACT Act?
Does the PACT Act violate tribal sovereignty?
Will the PACT Act result in a reallocation of MSA payments from one state to another?
Won’t the PACT Act hurt jobs and economic opportunity in the areas that have Internet businesses?
As tobacco product excise taxes increase, so do the prices of tobacco products. Criminal organizations exploit these increases by selling contraband or counterfeit tobacco products for their own financial gain and without regard to youth access prevention laws. This illicit activity deprives governments of tax revenue and hurts law-abiding businesses. Law enforcement groups, trade associations, health care advocates and the states have been advocating for the passage of legislation to combat illegal Internet sales of cigarettes and smokeless tobacco a number of years.
The Senate is currently considering S.1147 – the Prevent All Cigarette Trafficking Act (“PACT Act”), which would impose new restrictions on Internet cigarette and smokeless tobacco sales. This legislation will help States recover revenues at a time when they need it most, ensure appropriate age verification, and restore a level competitive environment for the law-abiding wholesalers and retailers throughout the United States who pay their taxes and play by the rules. The PACT Act is an important step in addressing the larger issue of stopping the trade of contraband tobacco.
The PACT Act is strongly supported by a broad array of advocates. Earlier this year, the House passed the PACT Act by an overwhelming bipartisan vote of 397 to 11. Since 2002, both houses have passed the PACT Act on multiple occasions.
Opposition to the PACT Act arises mainly from a few owners and operators of cigarette Internet sites – the sites that engage in the very activity that has robbed states of hundreds of millions of dollars in excise taxes and that has taken enormous business from legitimate retailers and wholesalers.
Congress should reject these arguments, and do so based on a clear and accurate understanding of what the PACT Act will do for the states, for retailers and wholesalers, for law enforcement, and for the broad array of other stakeholders who strongly support it. Below are a series of questions and answers intended to clarify why the PACT Act should be enacted. [Top]
Why should Congress care about online cigarette sales?
Online cigarette websites are operations that engage in flagrant tax evasion, rob the States of enormous excise tax and tobacco settlement revenues, undermine state and local laws intended to prevent youth access to tobacco products, and divert business from legitimate retailers and wholesalers who play by the rules and pay their taxes. [Top]
Isn’t there already a federal law on this issue?
Yes, but it is very weak. The Jenkins Act became law in 1949 and has never been updated to address the explosion in online cigarette sales. The Act requires only that online sellers file reports with State tax administrators identifying the consumers buying cigarettes from them. Failure to file the report is merely a misdemeanor.
Not surprisingly, online cigarette sellers routinely violate this law. Furthermore, even when they do file these reports, it does nothing to enable a State to recover excise taxes from the online sellers themselves, who are typically located in other states, in some cases on Native American reservations. That leaves the States with few options – mainly to chase thousands of individual consumers to pay “use taxes” long after the consumers have purchased their cigarettes. This system is not working. [Top]
The PACT Act would significantly strengthen federal laws that apply to online cigarette sales. Among other things, the Act would:
- expressly require Internet sellers pay state and local taxes before they send tobacco products to consumers
- impose federal age verification requirements for online sales
- broaden the reporting requirements of the Jenkins Act and upgrade violations of the Jenkins Act from a misdemeanor to a felony
- empower federal prosecutors and the States to bring actions in federal court to prevent and restrain violations
- bar the U.S. Postal Service from serving as the delivery service for online cigarette and smokeless sellers. [Top]
Who would bear the burdens of the PACT Act?
A small handful of owners and operators of cigarette websites.
Today, virtually all internet cigarette sales are made by about ten websites. Eight of these are located on a single reservation in New York. These sites offer cigarettes to consumers with misrepresentations that the products are “tax free.” These sites have access to abundant supplies of untaxed cigarettes. Because of the enormous price advantage these outlets have over other retailers, they sell huge quantities of untaxed cigarettes to non-tribal consumers off of their reservation lands and throughout the United States.
This activity robs tax revenues from the States, which in turn can lead to higher taxes or reduced government services, and it hurts retailers and wholesalers who follow the law and carry products at prices reflecting the payment of state taxes. [Top]
Is this a Native American issue?
No. The vast majority of Native American outlets in the United States sell cigarettes through brick and mortar stores, where tobacco sales occur through face-to-face transactions with consumers. These Native American businesses sell tobacco products responsibly and within the requirements of the laws and compacts that govern their operations.
Furthermore, not all Internet outlets are associated with Native American reservations. Those that are associated with Native American tribes are located on only a few reservations – indeed, eight of the top ten websites are affiliated with a single reservation in New York State.
Online sales actually undermine the Native American retailers that sell products responsibly on reservation lands all over the country. Online cigarette sellers offer cigarettes without any tax at all, while products sold in reservation outlets in other locations typically bear the cost of tax or fees required by compact with the State. [Top]
Who would be subject to the PACT Act?
All “persons” as defined in the legislation. There is no exception in the bill for persons affiliated with a Native American tribe. [Top]
Does the PACT Act violate tribal sovereignty?
No. First, the U.S. Supreme Court has repeatedly held that tribal sovereignty does not prevent states from taxing cigarettes that non-tribal consumers buy from reservation sellers. Just as a State may tax products that enter its commerce from another state or another country, a State may assess and collect taxes on cigarettes sold into its commerce from a reservation. Second, there is no question that federally recognized tribes are notsovereign relative to the federal government or as to federal law. The PACT Act of course would be a federal requirement. The U.S. Supreme Court has long resolved this question, finding through a long line of cases that federal laws apply to all U.S. citizens, including Native Americans. [Top]
Are sales made by a tribal business to non-tribal consumers off of the reservation subject to State taxation?
Yes, of course. While federally recognized tribes are sovereign relative to the States, tribal sovereignty does not strip states of their power to collect tax on products that leave the reservation and enter into the states’ commerce. Just as a state may tax sales made into the state by a business located in a foreign country such as China, the states may tax sales made into the state by a business located on a reservation. The U.S. Supreme Court long ago rejected sovereignty arguments and reaffirmed the State’s power to collect tax on sales to non-tribal members off reservation lands. Department of Taxation and Finance of NY v. Milhelm Attea & Bros., Inc., 512 U.S.61, 64 (1994). [Top]
What impact will the PACT Act have on the states’ payments under the Master Settlement Agreement (MSA).
It will increase MSA payments.
Under the MSA, the States receive payments from participating manufacturers, not from the manufacturers that have never joined (so-called “NPMs”). These payments are based on the participating manufacturers’ national volume of their cigarettes. That means that the higher the participating manufacturers’ volume, the higher the payment; the lower the volume, the lower the payment.
Tax-evading Internet sites, however, heavily favor brands manufactured by entities that have never joined the MSA (“Non-Participating Manufacturers” or “NPMs”). NPM brands have about 6% share nationally. By contrast, on the Internet their share is as high as 67%. That means less volume for participating manufacturer brands, and lower MSA payments to the States.
This is one reason the PACT Act has long been supported by the National Association of Attorneys General, who administer and enforce the Master Settlement Agreement for the States. [Top]
Will the PACT Act result in a reallocation of MSA payments from one state to another?
Absolutely not. MSA payments are made annually on the basis of national volume of participating manufacturer brands. The MSA payment is then allocated to each State based on a fixed and predetermined percentage. The States’ respective share of the MSA payment does not change over time, and certainly does not change based on shifts in sales among the states. So, there is nothing about the enactment of the PACT Act that would result in any one state getting a higher share or any other state getting a lower share of MSA payments. [Top]
Won’t the PACT Act hurt jobs and economic opportunity in the areas that have Internet businesses?
If jobs and opportunity is the problem, illegal and tax-evading Internet sites are not the solution. A business model rooted in tax-evasion, that takes away more jobs than it creates, undermines the States’ tax revenues, and hurts far more retailers than it helps is not a sustainable solution to the economy of any region of the U.S.
What does make sense is to close this gap in federal law enforcement, and improve jobs and opportunity in the sectors of the economy that are paying tax and playing by the rules. [Top]
