State nails smokers who didn't pay taxes for online CIGS

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State nails smokers who didn't pay taxes

BY CHRIS CHRISTOFF and TAMARA AUDI
FREE PRESS STAFF WRITERS

February 18, 2005

Smokers who have bought cigarettes online are starting to get notices from the state to pay up the $2-per-pack cigarette tax they avoided.

TAX FACTS
# It is illegal for anyone except licensed sellers to bring untaxed cigarettes into Michigan.

# Tobacco sales, mostly from cigarettes, in 2004 generated $993 million in Michigan taxes.

# Michigan's $2-per-pack tax is the third-highest in the nation.

# The tax has been raised three times since 1994, most recently by 75 cents per pack in July.

?Internet and mail-order cigarette sales nationwide will have jumped from $750 million in 2001 to a projected $5 billion in 2005, according to one study's estimates. That will cost states $1.4 billion in taxes this year.

A Canton woman who got a state bill last weekend for $2,500 in back cigarette taxes is among the bulk cigarette buyers learning that avoiding taxes -- the state can go back up to four years -- can be expensive in the long run.

The state's lost tax dollars were estimated at $1.7 million from just one of 13 online cigarette retailers.

In a bold push to catch tax scofflaws, the state Treasury Department has subpoenaed the online retailers in other states to get the names, addresses and purchase records of Michiganders who bought cigarettes from them. In virtually all cases, such sales do not include the cigarette tax that must be paid to the state, regardless of who the seller is or how much is purchased.

So far, the sweep has resulted in letters sent to 533 people the state says bought from just the one online seller.

The collection of purchasers' names is allowed by a 1949 federal law called the Jenkins Act, according to Terry Stanton, spokesman for the Department of Treasury.

The explosion of Internet cigarette sales prompted Treasury officials to step up enforcement of the tax law, Stanton said. Although there is no hard evidence, officials say they believe Michigan's 75-cent-perpack increase in the cigarette tax last year spurred more smokers to find cheaper smokes.

Michigan has the third-highest cigarette tax in the United States, behind New York City and New Jersey.

It is illegal to bring any cigarettes into Michigan from other states unless by licensed sellers who pay the appropriate tax. People who bring less than $50 in cigarettes don't face penalties. Michigan requires that cigarettes sold in the state have a stamp attached to the pack to signify the payment of taxes.

State Treasury officials said they had no way to know whether the Internet purchasers had illegally resold the untaxed cigarettes, though large orders suggest a possible intent to resell.

Stanton said those smokers dunned for Internet purchases will face only back taxes, not criminal charges for smuggling.

Diane Germain of Canton said she opened mail with the $2,500 bill last weekend for purchases she made during 20 months from the online retailer www.esmokes.com.

"My reaction was shock and 'Oh my God, I cannot believe Jennifer Granholm is doing this to everybody,' " Germain said.

She said she heard about purchasing cigarettes over the Internet from friends who are smokers. They told her it was cheap and easy and that they did it, too.

From early 2003 until August 2004, Germain, 37, who smokes a pack a day, bought about six to eight cartons a time at a cost of about $15 a carton.

The Michigan tax alone on a carton is $20.

"It was very simple to do. They came right to your doorstep," Germain said of the cigarettes' delivery.

The legal information page of esmokes.com tells customers, "Federal legislation permits the purchase of cigarette products for personal consumption from out-of-state."

Germain said she was surprised the Web site turned over private information to the state and wonders why the state waited so long to contact her with a bill, which continued to pile up. She said she doesn't know of any friends that received similar notices, but she said they are worried.

Germain plans to pay her bill by the state's March 14 deadline with a zero-interest credit card. She estimated that she saved a few thousand dollars buying cartons of cigarettes over the Internet.

"I probably saved right around what they're billing me," she said.

She added, "I guess a part of me knew doing this was probably wrong because I was going around the taxes in Michigan, but another part of me really didn't think it was wrong because it was available on the Internet.

"I figured if it was really such a big deal, the state would have put out a few warnings to Internet buyers saying what you're doing is illegal."

Although Michigan has collected more revenue since the cigarette tax increased in July, sales are down. In fiscal year 2004, the state collected $993 million -- about $100 million more than in 2003.

As cigarette prices rise, it's expected that more smokers try to kick the habit because of the cost. In fact, state officials have said that's one goal of higher tobacco prices.

Tobacco retailers and wholesalers complain that the tax increase -- the third since 1994 -- has hurt business, and they blame Internet sales in part. They welcome the state's crackdown.

"It's about time," said Polly Reber, president of the Michigan Distributors and Vendors Association, which represents cigarette wholesalers. "The proliferation of Internet sites that sell cigarettes has been amazing."

Low-price competition -- made worse by Internet sales -- has prompted some store owners to drop cigarettes altogether, said Mike Sarafa, president of the Associated Food Dealers of Michigan.

Sarafa said he hopes the Treasury Department makes examples of online buyers to squelch the illegal sales.

"People are cheating the system. They are hurting Michigan small businesses, and they're very open about it," Sarafa said. "People tell store owners they're buying a pack of cigarettes only because they're waiting for their next shipment to come in."

Michigan isn't the first state to pursue online tax evaders. New York City recently sent letters to more than 2,600 city residents who bought cigarettes online, demanding that they pay back taxes or face interest and penalties up to $200 per carton.

New York state also began squeezing local post offices and private mail carriers to stop delivering cigarettes purchased online.

MasterCard recently started prohibiting purchases from some Internet tobacco sites to customers in New York and California and is reviewing whether it can do the same in other states.

[pornstar2pac]

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[tungsten]

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