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Excerpts from: Sales have surged for cigarette retailers using the Internet

Source: Associated Press [9/16/02]

Two months ago, cigarette sales in New York City dropped dramatically as new sales taxes boosted the price to more than $7 per pack.

At the same time in Goldsboro, sales surged from about $15,000 a month to $25,000 at nccigarettes.com, said owner Scott Herring, who runs the year-and-a-half-old Internet tobacco shop from his house.

The reason is simple: He can pay North Carolina's nearly negligible 5-cent-a-pack tax and still sell cigarettes to New Yorkers for less than half what they pay at their corner store.

"Volume went w-a-a-ay up, no question about it," said Herring, adding that 50 percent to 60 percent of his customers are in New York and New Jersey. State taxes in both places rose to $1.50 this year, tying them for second in the nation behind Massachusetts' $1.51.

All told, 19 states, New York City and Puerto Rico either have raised cigarette taxes this year or have an increase scheduled. They are trying to raise revenue, but have also made this a heady year for Internet cigarette retailers.

Cyber cigarette sales are reportedly booming _ though no one is sure how much, because the refusal by most retailers and customers to report sales is the foundation of the business. That refusal keeps states where buyers live from collecting taxes from buyers.

The federal Jenkins Act requires online cigarette retailers to furnish purchase records to customers' home states so officials can collect state and local taxes. But the penalty is a misdemeanor and the law is unenforced, say anti-smoking advocates.

"It's just like the Wild West," said Eric Lindblom of the Campaign for Tobacco-Free Kids, a Washington advocacy group. "There's no marshal in town and these Web sites are flaunting the fact that they're ignoring the law."

Some Web sites plainly state that they won't collect information about customers. Researchers believe that fewer than 10 percent of Internet cigarette retailers are complying with the law, and states are losing millions in taxes.

According to a 2001 study by Massachusetts-based Forrester Research, online cigarette sales will top $1 billion this year and exceed $5 billion by 2005, accounting for 14 percent of total sales. At that point, states would be losing $1.4 billion a year in taxes.

In January 2000, researchers led by Kurt Ribisl, an assistant professor at the UNC-CH School of Public Health, found 88 cigarette retailers online. By January 2002, the number had soared to 195, according to a soon-to-be-published follow-up study.

Of those, 104 were in New York state, nearly all on Indian reservations, Ribisl said. That's due less to New York City's proximity than to the efforts of an early Internet tobacco vendor to help fellow Seneca Indians start their own operations.

The reservation-based operations pay no sales tax in their home states; many say that because they're on sovereign land, they don't have to comply with the federal reporting law.

The other large concentration of Web sites was based in the main tobacco-producing states, where taxes are low. Virginia had 16 sites, Kentucky 14 and North Carolina 9, Ribisl said. Their prices were essentially identical to sites on reservations.

In North Carolina, Internet vendors don't have to set up shop on reservations: They simply pay the state tax, 5 cents a pack.

"I could just go down to the convenience store on the corner, buy what I needed off the shelf and still sell it to a customer in New York for less than half of what they pay," Herring said.

While other states are losing millions in revenue, experts say North Carolina's coffers are probably getting a small boost from Internet cigarette sales, and perhaps from a rise in smuggling because the higher taxes have made that more profitable as well.

Tobacco tax collections here were up 20 percent in August from same month in 2001, to $3.6 million. At least some of that was due to natural fluctuations in sales, but it was an unusually large jump when compared with data for the past three years.