Skip to comments.

Posted on 03/29/2004 4:26:06 PM PST by microgood

WASHINGTON - Up to 40,000 Washington residents should soon be receiving letters from the state asking them to pay back taxes on millions of dollars worth of cigarettes they bought through a Web site.

A settlement of a lawsuit filed by Washington state against online cigarette seller www.Dirtcheapcig. com Inc. of Missouri paved the way for the letters, which will be sent by the state Department of Revenue.

The settlement, signed Dec. 1 by U.S. District Judge Robert Lasnick in Tacoma, was little-noticed outside legal circles. But it's drawn quite a bit of attention from other cash-strapped states, which see it as helping to clear the way for them to start collecting more than $1 billion annually in taxes from Internet cigarette sales.

Lasnick's order asserted, for the first time, that Internet tobacco sales are taxable because they're covered by a federal law known as the Jenkins Act. It requires companies that engage in interstate cigarette sales to provide information on their customers to state tax administrators.

The U.S. Justice Department, the FBI and U.S. attorneys around the country have generally declined to apply the act to Internet tobacco sales.

With little regulation, hundreds of Web sites are expected to peddle more than $5 billion in tobacco products in 2005, avoiding state taxes that can top $2 a pack.

The issue has caught the attention of Congress, where two bills are pending, and has sent financial jitters through the convenience store industry. Cigarettes account for one-third of all sales at the nation's 130,000 convenience stores, and store owners fear smokers are increasingly turning to the Internet to buy their cigarettes.

Also looming is the sensitive question of tobacco sales by Web sites operated by members of Indian tribes. By some estimates, such Web sites account for more than 60 percent of Internet tobacco sales.

Reservation smoke shops have long been a sore point between tribes and the states, and Internet cigarette sales could further increase the tension.

The settlement approved by Lasnick required Dirtcheapcig.com to provide information on its sales to customers in Washington dating back to Jan. 1, 2001, and on future sales to state residents. And it reinforced the rights of the states to pursue civil lawsuits against Web sites that violate the Jenkins Act.

So far, Dirtcheapcig.com has supplied Washington state with the names and addresses of between 35,000 and 40,000 residents who bought cigarettes over the past three years, as well as details on how many packs and what brands were purchased.

State officials estimate the outstanding taxes at about $4 million.

"The numbers surprised us," said Scott Thronson, a program manager for the state Department of Revenue.

Those who purchased cigarettes from the Web site will be asked to voluntarily pay back taxes, Thronson said. Those who don't will face a 5 percent penalty, assessed interest on the outstanding balance and a penalty of $10 for each pack with a $200 minimum.

"It can get pricey real quick," Thronson said. "We are going to give everyone a chance to pay (voluntarily), at least initially."

Dirtcheapcig.com was singled out because it had advertised heavily in Washington state, Thronson said. The state is exploring the possibility of filing additional lawsuits against operators of other cigarette Web sites.

Washington state's $1.425-per-pack cigarette tax is the sixth-highest in the nation.

The National Association of Convenience Stores estimated Washington state will lose almost $184 million in revenue in fiscal 2005 because of Internet cigarette sales.

Thronson said that estimate sounded high, but he conceded millions of dollars are at stake.

The Justice Department and the FBI have primary responsibility for enforcing the Jenkins Act, violations of which are misdemeanors punishable by $1,000 fines and prison sentences of up to six months.

Congressional investigators said the Justice Department and FBI indicated they had neither the time nor the money to pursue misdemeanor cases.

Washington was among the states that had asked the local U.S. attorney to pursue a Jenkins Act case against Internet tobacco sellers. But the federal agencies suggested the state pursue a civil lawsuit.

"The feds basically said they wouldn't do it and we should do it ourselves," said Thronson.

The Bureau of Alcohol, Tobacco, Firearms might become involved.

"We are working some Internet cases," said Jerry Bowerman, chief of the ATF's Diversion Branch, which investigates tobacco and alcohol cases.

Bowerman said he couldn't discuss ongoing cases, but he added there were roughly 500 Web sites both domestically and internationally selling tobacco products, and there were concerns some of them might be linked to organized crime or terrorist organizations.

"It's a top priority for us," Bowerman said.

Competition from Internet tobacco sales are also a top priority for the nation's convenience stores, which employ more than 1.5 million people.

According to the National Association of Convenience Stores, the loss of just 80 customers a year buying cigarettes can make an average-profit convenience store unprofitable.

"Our guys can't compete," said Allison Schulman, the association's director of government affairs. Based on conservative estimates, 2 percent of all cigarettes purchased in 2003, or about 413.9 million packs, were sold over the Internet, she said.

Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.