Where There's Smoke, There's Taxes

Mich. cracks down on web cigarette sales

LANSING, Mich. -- Thousands of Michigan smokers are failing in their attempts to avoid the state's $2-a-pack cigarette tax by ordering online, reported The Detroit News.

The state Treasury Department has sent letters to more than 2,800 residents ordering them to pay an average of $3,200, spokesperson Terry Stanton said. The crackdown, which started in February with about 500 letters, already has netted $2.5 million, the report said.

The state eventually could target thousands more Michigan smokersand taxes collected could grow [image-nocss] to tens of millions of dollarsas more vendors respond to subpoenas demanding information about online cigarette purchases made since 2001, it added.

Two websites, eSmokes.com and DirtCheapCig.com, gave up the names of 11,579 Michigan residents who bought 581,808 cartons, costing the state $8.5 million in taxes. A third site has started identifying customers, and the state subpoenaed United Parcel Service to get information about shipments from some of the 10 companies that have not responded, said the report.

The state, which the newspaper said is facing a revenue crunch due to the slumping economy, is prosecuting dozens of residents who bought more than 300 cartons online. Rewards of up to $5,000 are being offered to concerned taxpayers who tell authorities about tax-free cigarette purchases.

Smokers targeted by the crackdown were given 30 days to pay before the state tacked on a 500% penalty, said the report.

Michigan is one of at least 10 states that ban buying cigarettes in the mail or online unless the customer is a licensed distributor or the seller collects Michigan sales and cigarettes taxes. Violators can be punished by up to five years in prison.

For now, the state is more focused on informing people that such purchases are illegal and persuading them to stop rather than pursuing criminal charges, Stanton said. Officials are willing to set up payment plans for residents who cannot pay their entire bill right away, the report said.

Some online buyers have turned themselves in and paid up since the crackdown started, and Stanton urges others to do the same to avoid interest and penalties. We want to make sure people realize there's no such thing as a tax-free cigarette, Stanton said, so they don't fall victim to these online vendors.

Already some tobacco retailers, many of which have been hurting for customers since Michigan increased its cigarette tax 75 cents a pack last year, are seeing business increase as a result of the state's crackdown, the report said.

But while tax-free cigarette purchases are illegal, Stanton said, other online transactions are allowed as long as residents pay the sales tax when submitting their yearly income tax returns. Officials realize that few people do so. Plus, the state has no method to find out about most online purchases. With cigarettes, however, authorities have the power of a 1949 law known as the Jenkins Act, which requires tobacco retailers to report interstate sales.

Stanton said the state also has no means of identifying Michigan citizens who buy cigarettes in Ohio and Indiana, where taxes are about 55 cents a pack, although that is also illegal.

Steve Barger, who owns four Shell gas stations in Washtenaw and Monroe counties, told the paper that the disparity between cigarette taxes in neighboring states is more troublesome than online sales. Barger was frustrated to see a recent ad in Toledo's newspaper showing Michigan residents how much they can save on cigarettes at a store just south of the state line. They're coming after our residents, and I don't blame them, he said. I can't understand why our legislators have created such an unlevel playing field.

Mark Griffin, president of the Michigan Association of Convenience Stores, said he would appreciate the state's crackdown on cigarette tax scofflaws if more smokers are persuaded to follow the law and buy from stores here. But he doesn't think that will happen. It's the tax rate that's the problem here. We can try to say we'll do more enforcement, but retailers and customers will find ways around it, he told the paper. You turn people into common criminals in their desire to use an otherwise legal product.

Michigan, which has the nation's third-highest state cigarette tax, is not alone in its efforts to collect the unpaid taxes, the report said. Ohio, Illinois, Pennsylvania and Alaska have billed smokers in recent months, and New York City, which charges smokers an extra $3 a pack, has begun a similar crackdown. They are being helped by the fact that buying cigarettes online has become much more difficult. As reported in CSP Daily News, major credit card companies began declining transactions from web-based tobacco vendors earlier this year, and some delivery services, including FedEx, have stopped accepting tobacco shipments to homes.

Even some cigarette manufacturers oppose online sales. Philip Morris USA has sued several sites and supported legislation to make sure vendors follow all laws. We haven't found any Internet site out there that pays appropriate taxes and does proper age verification, PM USA spokesperson Dana Bolden told the Detroit News.

Several websites, including esmokes.com, now refuse orders to Michigan and 16 other states, the report said. Other sites, including two that Virginia prosecuted for cheating 46 states out of $2 million in taxes, are no longer operational. A message on DirtCheapCig.com said the site is being forced to go out of the Internet business and would stop taking online orders as of yesterday, although its stores in Kentucky and St. Louis will stay open.

Stanton would not identify other sites that have been subpoenaed. Officials have identified more than 450 online vendors as being active in Michigan and could seek information about their customers in the future.

Michigan collected $993 million in tobacco tax revenues in 2004, up from $892 million in 2003. Officials said they do not know how much they have lost to online purchases because they are not sure how many residents have been buying cigarettes that way.

Click here for the Michigan Department of Treasury tobacco purchases website.