The Problem
Illegal Internet Sales of Tobacco Products
Illegal Internet sales of cigarettes and smokeless tobacco facilitate contraband tobacco trafficking, undermine state and local laws intended to prevent youth access to tobacco products, and divert business from hundreds of thousands of legitimate retailers and wholesalers who follow the law, including by paying appropriate excise taxes.
According to an article in the July 20, 2009 Wall Street Journal, “Studies indicate states are losing about $5 billion annually in tax revenue because of illegal tobacco sales, said Phil Awe, who heads the tobacco-diversion division of the Bureau of Alcohol, Tobacco, Firearms and Explosives.”
Many Internet cigarette and smokeless tobacco sellers flagrantly violate the law. The most common violation is the failure to pay appropriate excise tax to the State to which it is due. This tax evasion creates an enormous – and illegitimate – competitive advantage for the remote sellers engaging in such illegal activity that unfairly robs legitimate tobacco retail stores of business and deprives the States of badly needed revenue.
In addition, many remote sellers have inadequate safeguards to prevent underage purchases of cigarettes and smokeless tobacco products which circumvent state and local laws intended to prevent youth access to tobacco products. Unlike at traditional retail stores, Internet sales do not occur in face-to-face transactions where age can be verified at the point-of-purchase. Without reliable age-verification procedures, the likelihood of underage purchases is greatly increased.
Finally, current interstate commerce of cigarette and smokeless tobacco is governed by the Jenkins Act, a law that was enacted in 1949 --long before the proliferation of remote sales via the Internet. The Jenkins 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, remote cigarette sellers routinely violate this law. Even when they do file these reports, it does little to enable a State to recover excise taxes from the remote sellers themselves, who are typically located in other states. 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 simply not working.
