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Action on Smoking and Health
A National Legal-Action Antismoking Organization Entirely Supported by Tax-Deductible Contributions
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NY Times: Trouble for Online Cigarette Vendors [04/04-4]
Excerpts from: Trouble for Online Vendors of Cigarettes
By BOB TEDESCHI New York Times [04/04/05]
Not since the dot-com bust have so many sites gone south so quickly.
Two weeks after credit card companies announced they would no longer accept payment for tobacco products bought online, scores of Internet cigarette merchants have effectively lost the means to do business profitably, and are either limping along or have shut down their operations altogether.
Visa International, MasterCard International, American Express, eBay's PayPal service and others cut off the online tobacconists last month after being told by a coalition of states and representatives of the federal Bureau of Alcohol, Tobacco and Firearms that virtually all such sales were illegal. Government officials said that merchants had not done enough to comply with age verification practices or to register sales with governments to insure the collection of state taxes.
Now, most merchants are reduced to accepting electronic or paper checks, and fewer customers may be willing to wait for those checks to clear before their orders are shipped. Meanwhile, some online merchants say they have been wrongfully singled out by authorities.
Maxine Jimerson, owner Ron's Smoke Shop in Allegany, N.Y., recently shut down the online part of her business and laid off 120 of her 160 employees. As a member of the Seneca Nation Indian tribe, she is entitled to sell cigarettes free of state tax.
Ms. Jimerson said her company had gone to great lengths to verify customers' ages, contracting with a special vendor and requiring buyers to send in a copy of a government-issued picture ID, with age and signature, before a purchase could be made. Customer signatures at the time of delivery had to match the signatures on file.
But federal and state authorities said that online cigarette merchants did not do enough to insure the collection of taxes. In particular, they did not comply with the Jenkins Act, a federal law that requires sellers to register purchases in states where customers live. Like many other online sellers operating on Indian territory, Ron's Smoke Shop did not comply with such strictures because it argued that the law did not apply to it.
If there were online companies that complied with all state and federal regulations, "it's news to us," said Marc Violette, a spokesman for the office of Eliot Spitzer, the attorney general of New York, where all online cigarette sales are considered illegal.
"It's good public relations to say you're bending over backwards to comply with the law, but the fact is, they're engaged in an illegal industry, and on their face, these transactions are illegal," Mr. Violette said.
State officials had for years tried unsuccessfully to collect cigarette tax revenues from online merchants, and had redoubled such efforts as budget deficits skyrocketed in recent years. By using the credit card companies as leverage, though, they appear to have made progress in the fight.
The credit card company embargo "will significantly curtail cigarette sales over the Internet, to the advantage of the major cigarette manufacturers as well as state governments," wrote Robert T. Campagnino, an analyst with Prudential Equity Group, an investment firm, in a report late last month.
Mr. Campagnino estimated in his report that in 2004, $1 billion worth of cigarettes were sold online, or about 3.1 percent of the industry's total volume. Many of those sales were made to customers in states with particularly high cigarette taxes like New York, where offline merchants must charge $15 or more in taxes for each carton. New York bars direct shipment of tobacco products to its citizens, but many online merchants ignored that law.
In theory, at least, law-abiding online tobacco sellers could avoid the credit card embargo. Joshua Peirez, a senior vice president at MasterCard, said that banks that issue his company's brand of credit cards may provide MasterCard with documentation if they believe one of their merchant customers is selling tobacco online legally.
"But if there's any doubt, banks have the obligation not to contract," said Mr. Peirez, who estimated that his company has so far cut off about 100 of the biggest online tobacco sellers.
Some online cigarette sellers, who spoke on condition of anonymity, said they were exploring ways to create their own credit cards, perhaps in association with other online tobacco sellers. They would then battle government regulators in court to determine the legality of their practices.
Still other online sellers are engaged in more creative practices.
Because some Internet cigarette sellers continue to accept credit cards, this practice is possibly already being adopted. Mr. Peirez, of MasterCard, said the company's policy applied to any bank whose merchants sell to United States customers. "So no, we wouldn't allow them to process those transactions," he said.
Click here to view ASH Warns Parcel Delivery Companies Against Delivering Illegally Purchased Cigarettes
Click here to view ASH Warns Credit Card Companies About Internet Tobacco Sales
Click here to view ASH Urges Attorneys General to Go After Illegal Cigarette Sales Online
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