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December 11th, 2002 Taylor Clark | News Stories
 

Smoke Signals

State officials target online cigarette buyers for their unpaid taxes.

     
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illustration by bwana spoons
Oregon's recent boost to its cigarette tax has sent thousands of agitated smokers scrambling to find a way around the law. Although much has been made of smokers' shopping trips across the Idaho border, where cigarette taxes are less than a quarter of what they are in Oregon, many have found an easier solution.

"Every time there's a tax increase, we notice a big jump in sales," says Mike Tome, who runs cheapsmokesbymail. com, one of an estimated 150 online smoke shops. Tome offers Marlboros for as little as $30.99 per carton, compared to $48.50 in downtown Portland, and even throws in free shipping. A carton of Salems runs for $32.20, as opposed to $41.99 in Portland.

How does he do it?

Like two-thirds of Internet tobacco vendors, Tome does business from a Native American reservation, in his case the Allegany Indian Reservation in western New York.

Because the U.S. government recognizes these reservations as sovereign nations, tribal members are exempt from state taxes, enabling them to sell at rock-bottom prices. (WW was unable to find any Oregon reservations selling tax-free cigarettes to non-tribal members.) Other online vendors operate from foreign nations, which don't impose U.S. taxes, or from states that have low taxes.

Tome wouldn't disclose how many of his orders come from Oregon, but he says that Oregonians have been buying like mad since the tax hike went into effect Nov. 1, thrilled to be kissing the state's $1.28-per-pack tax goodbye.

If this deal sounds too good to be true, that's because it is.

"Under absolutely no circumstances, through the Internet or otherwise, is it possible to get cigarettes in Oregon without paying taxes and not break the law," warns Kevin Neely, a spokesman for the attorney general's office.

The Internet tobacco industry has exploded over the past few years, but with its popularity has come increased scrutiny from the government. The U.S. General Accounting Office projects that online tobacco sales will exceed $5 billion by 2005 and that states will lose more than $1.4 billion in tax revenues as result.

Oregon could be losing as much as $40 million a year in tax revenue thanks to smugglers and online retailers. While it's hard to catch people who illegally bring caravans of Camels into Oregon from Idaho, law-enforcement officials know exactly who's hawking smokes online. "We have the Internet dealers in our cross hairs," says Neely.

Faced with dwindling cigarette-tax revenues and an enormous budget shortfall, state lawmakers in May put together a task force, which expects to recover about $4 million a year. Armed with a two-year, $2 million budget and agreements with state police detectives, revenue-department investigators and even FBI agents, Oregon's enforcement group is the most sophisticated of its kind in the nation, Neely says.

Its primary weapon is a 53-year-old federal law, known as the Jenkins Act, which requires any retailer who ships cigarettes across state lines to file a monthly report with the receiving state's tax administrator, including the names and addresses of every person who received a shipment, and the quantity of cigarettes received. Those customers who haven't paid taxes on their cigarettes get a bill in the mail, compliments of the state Department of Revenue.

Native American online retailers, who consider themselves citizens of a sovereign nation, don't believe that they need to heed federal law. "We have our own government," Tome asserts. "We don't answer to anyone."

Oregon Assistant Attorney General Matt McCauley, who is leading the task force, disagrees. "All Internet retailers, including Indian reservations, are required to do that filing," he says. "If they want to sell in the U.S., they have to comply with federal law."

So far, however, only a few online retailers have filed reports with the state of Oregon. The task force is still working with the attorney general's office drafting an official letter to online vendors requesting that they comply with the Jenkins Act.

Other states have had more luck getting retailers to file. As of September 2001, 20 Internet vendors had filed with the state of California, leading to $1.4 million in recovered taxes from consumers.

Oregon revenue officials would not disclose how many Oregon online buyers had been contacted, but they did say that more than half of those who received letters responded. The rest will be liable for interest on top of the taxes owed.

"If we can find them, we'll bill them," says McCauley.

 
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