N.Y., eSmokes settle over online cigarette sales taxes

c/net news.com ^ | March 8, 2006 | Sewell Chan

[SheLion]

[SheLion]

[SheLion]

New York Mayor Michael Bloomberg yesterday announced a settlement with an online cigarette vendor that will allow the city to pursue residents for up to $33 million in unpaid excise taxes.

It was the largest such settlement, officials said, since the city sued dozens of companies and individuals in 2003 for illegally selling cigarettes over the Internet to city residents. A 2000 state law banned direct sales of cigarettes over the Internet and by telephone or mail. Tobacco companies challenged the ban, but a federal appellate court upheld it in February 2003. The state began enforcing the law that June.

Officials acknowledge, however, that online cigarette sales are still commonplace, and they say that when they occur, the state and city are unfairly cheated of tax revenues.

Even while the state ban was being challenged, the city began its own effort in January 2003 to pursue Internet cigarette vendors for failing to report sales and excise taxes. It has filed four lawsuits against about 35 companies and individuals, alleging that they had failed to file federal Jenkins Act reports, which are intended to alert state tax authorities to out-of-state cigarette purchases so that the purchases can be subject to local taxes.

The most recent settlement was filed last Wednesday in federal bankruptcy court in Tampa, Fla. The online cigarette vendor, eSmokes.com, agreed to give the city an electronic database of all its sales to addresses in New York state from 2000 to mid-2003. The company also agreed to stop selling cigarettes to customers in New York state. The company, which began operations in 1999, filed for bankruptcy protection last May.

Eric Proshansky, deputy chief of affirmative litigation for the city's Law Department, said eSmokes had turned over seven spreadsheets containing records of about 140,000 sales. However, many of the records may be duplicates.

The city's Department of Finance will sort the data and send tax bills to city residents. In the past, such collection efforts have yielded 65 percent of the taxes owed; efforts continue to collect the remainder.

In a separate effort, Bloomberg has urged the state to raise the city's share of the state cigarette tax to $2 from $1.50 per pack. Smokers also pay $1.50 in state tax.

[Cagey]

I was thinking of you this morning, SheLion.

On this morning's news there was a story which claimed cigarette sales in the United States is the lowest it's been since 1951. That's when I recalled some of your postings about people who "roll their own" and I wondered just how many people are doing that now and if that had something to do with these numbers.

I did meet some people from German not that long ago and in that group of five, four were making their own cigarettes.

[carlr]

It is my opinion that this has less to do with smoking and more to do with establishing a precedent for pursuing "lost" sales tax revenue from out of state purchases of any kind.

Smokers are an easy starting point as they have been branded as evil and the feeling is the general public will not have sympathy.

For the record,it was three years ago yesterday that I quit smoking.

[Cagey]

from German? At least I didn't write "some people from Hunger."

[SheLion]

On this morning's news there was a story which claimed cigarette sales in the United States is the lowest it's been since 1951. That's when I recalled some of your postings about people who "roll their own" and I wondered just how many people are doing that now and if that had something to do with these numbers.

I did meet some people from German not that long ago and in that group of five, four were making their own cigarettes.

Just announced on Fox as well.  The AG's are spreading more propaganda!  I just knew that when smokers rolled their own and/or went across borders to buy cigarette, and the state wasn't getting that revenue, then the AG would gleefully laugh and spew out "See?  Our war on cigarettes is winning!  People aren't smoking much anymore."

Lying bast*&ds.  Hate the creeps.

[SheLion]

from German? At least I didn't write "some people from Hunger."

Haha! That's ok.  Sometimes I go back and read what "I" wrote, and I just want to dig my eyes out.  ewwwwww

Oh well.  It's hard being human. 

[SheLion]

Smokers are an easy starting point as they have been branded as evil and the feeling is the general public will not have sympathy.

For the record,it was three years ago yesterday that I quit smoking.

Good for you!  I might reach that point someday.  I'm just not ready yet. My only vice and all that. :)

Officials acknowledge, however, that online cigarette sales are still commonplace, and they say that when they occur, the state and city are unfairly cheated of tax revenues.

Well, I know I do a lot of shopping over the Internet, and if the company doesn't have an outlet in Maine, then Maine isn't getting any taxes from my sale.  Maine isn't bellyaching about losing THESE taxes, just taxes on cigarettes.  Go figure.

[Nomorjer Kinov]

The tobacco companies really need to strike back. One company needs to take the bull by the horns and end distribution in the city of New York or even the State of New York. I know it would be a great loss of sales to that company. If other manufacturers could be persuaded to follow, the money drain on the state would make them howl and lay bare the state's reliance on dirty cigarettes.

The would have to raise taxes on nonsmokers to makeup for the loss from tobacco.

[Graybeard58]

unfairly cheated of tax revenues.

Nope, fairly cheated.

[from occupied ga]

The would have to raise taxes on nonsmokers to makeup for the loss from tobacco.

WRONG! They would simply have to spend less. Government spending isn't a fixed sum. If they don't have $65,000,000 then they can't spend it. If they do have it it will get squandered as fast as they can get their dirty hands on it. They always spend every penny they can get their greedy hands on and a lot more besides. All they have to do is curb their irresponsible squandering of other people's assets.

[from occupied ga]

the state and city are unfairly cheated of tax revenues.

This is about as "unfair" as your not telling a mugger who just stole your wallet that you have another couple of hundred hidden in your shoe. One could say that the mugger was unfairly cheated of his revenue too.

[SheLion]

Here is one article from awhile ago:

$200M lost to smokes smugglers

 

Yearly city, state tax shortfall from gang & Internet sales

 

By WILLIAM SHERMAN
DAILY NEWS STAFF WRITER

 

City investigator searches for black market cigarettes at Tony's Millennium grocery store in Brooklyn.

Freelance smugglers, organized crime and Internet sources are flooding New York's neighborhoods with cheap cigarettes that would bring the city and state upward of $200 million a year in taxes on the legitimate market.

With premium brands such as Marlboro going for $7.75 a pack in many stores throughout the five boroughs and cartons going for $70 and more, thousands of smokers have chosen to buy either smuggled smokes - or untaxed cigarettes from more than 144 Internet sites, which are legal but unregulated.

The boom in underground cigarettes was touched off by the July 2 increase in city taxes to $1.50 per pack from 8 cents apack and a bump in state taxes to the same $1.50 per pack from $1.11, according to government officials and tobacco wholesalers.

In July and August, 24.5 million fewer packs of legitimate cigarettes were sold in retail outlets throughout the city than in July and August last year, according to the city Finance Department. That's a drop of 41%.

Smuggling to the city from lower-tax states such as Virginia (2.5 cents a pack total) generates tremendous profits for ringleaders - up to $25,000 for a day's work involving a van loaded with 2,500 cartons, said Edgar Domenech, special agent in charge for the federal Bureau of Alcohol, Tobacco and Firearms' regional field division.

Untaxed cigarettes or cigarette packs with phony tax stamps are available in many neighborhood stores or on the street, where hawkers routinely peddle $50 cartons.

"When it comes to smuggling and counterfeit stamps, traditional organized crime is involved, terrorist groups are involved and street gangs are involved," said John Dugan, the ATF's area supervisor for industry operations.

"Now, the profit margin is tremendous," he said.

3 stores in 4 blocks

One morning last week, three stores in a four-block area in Bedford-Stuyvesant, Brooklyn, were busted by agents of the Finance Department's tax enforcement division for selling untaxed cigarettes.

The agents bought the cigarettes at Tony's Millennium grocery store, 269 Schenectady Ave.; the Peking restaurant, 249 Schenectady Ave., and Freddie's deli and grocery, four blocks away on St. Johns Place.

"I don't know where they're from, I don't [know] anything about it," said Antonio Blas, a clerk at Tony's Millennium. Hewas answering the investigators' questions as they searched his store.

Blas said that sales of cigarettes of any kind were "way down" because of street hawkers.

"They're right outside the store, up the block, selling out of their trunks, saying, 'Hey, man, $5, $5 a pack,' so people are not coming in here to buy," he said.

'I work here, not owner'

At Freddie's deli, Faiz Saleh Al-Qah, the clerk behind the counter, shook his head and in broken English told investigators he had no idea what they were talking about when they confronted him with the untaxed packs. "I work here, not owner," Al-Qah said.

And at the Peking restaurant, investigators arrested the owner after finding 10 cartons of untaxed cigarettes hidden in barrels and under counters.

City Finance Commissioner Martha Stark said her investigators are spot-checking stores on a continuing basis. "We are enforcing the regulations," she said.

City officials argued the tax increase was necessary to help close the $5 billion budget gap and to deter smoking.

"This tax increase is more about saving lives - mostly about saving young lives - than it is about revenues, for if we collect $100 million a year in cigarette tax revenues, that really is not significant considering that our estimate for total tax collections is $14 billion for the year," Stark said.

Even though fewer packs of cigarettes are being sold, she said, revenues have increased because of the tax hike. This July, cigarette revenues for the city were $12.3 million, Stark said, while in July 2001, the revenues were $2.3 million.

Wholesalers said that figure doesn't take into account the lost revenues to the city and state from other taxes, including $15 a carton in state taxes, and an additional $5.60 in taxes shared by the state and city.

"This new tax is negative revenue producing. The city and state will have a net loss of $250million a year," said Leonard Schwartz, president of Globe Wholesale Tobacco Co. and chairman of the Tobacco Association of the State of New York.

"Thirty-five million cartons were sold in the city last [fiscal] year; they're going to lose 18 million cartons," he said, predicting that legitimate cigarette sales would drop further in the coming months.

Whatever their differences over tax revenue collections, Schwartz, Stark and law enforcement agencies all agree on one point: The city is awash in black market cigarettes.

But the Finance Department has only 16 investigators to patrol 13,000 retail stores licensed to sell cigarettes in the city, and those investigators also enforce other tax regulations.

Additionally, enforcement of city, state and federal laws on cigarettes is spotty, at best, in part because the ATF and the FBI, which is also responsible for tobacco regulations, give the issue a low priority.

Locally, few black market cigarette and phony tax stamp cases have been prosecuted. So the smugglers have nearly free rein, inspired as well by maximum federal sentences of six months in jail and/or a $1,000 fine. They have to be caught with a minimum of 300 cartons in order to be prosecuted.

Web unregulated

As for the Internet sales, the Web is entirely unregulated.

A recent U.S. General Accounting Office report said untaxed Internet sales of cigarettes will reach $5 billion nationwide by 2005, and states "will lose about $1.4 billion from those sales."

Nearly all the 47 New York State Internet sales sites are run by Native Americans whose operations are not taxed under federal law, and who pass those savings on to consumers. Premium brands are available at $28 to $33 a carton.

In theory, the buyer is supposed to pay city and state sales taxes on purchases of more than two cartons.

"But nobody is enforcing that; it's impossible to enforce, although we'd like to," Stark said.

A law banning untaxed Internet cigarette sales in New York was declared unconstitutional after a challenge by Brown & Williamson Tobacco and Santa Fe Natural Tobacco Co., a Native American brand. A Manhattan federal judge ruled that only the federal government has the right to regulate interstate commerce.

[Graybeard58]

I just sent you a private reply by accident, there was nothing "private" about it, I am just not quite awake yet.

[SheLion]

Makes me sick to see how they still say that the money is coming from Big Tobacco, when it fact, it's the smokers who pay taxes on cigarettes.  Not Big Tobacco and not the state!  The SMOKERS!

U.S. states hold Big Tobacco to settlement payment
Wed Mar 8, 2006 6:20 PM ET
By Joan Gralla

NEW YORK, March 8 (Reuters) - U.S. cigarette sales last year fell to their lowest level since 1951, but this should not jeopardize the $206 billion settlement states reached with Big Tobacco, Iowa's attorney general said on Wednesday.
 
Cigarette-makers can cut their payments to states if their market share falls more than 2 percent a year due to the 1998 accord that aimed to make the companies reimburse states for the billions of dollars they spend treating ailing smokers.

Some companies want to withhold $1.2 billion of the $6.5 billion they owe the states on April 15, Tom Miller, Iowa's attorney general, told reporters in a conference call.

"But we believe we have a very good story to tell," he said, adding the states likely would win any court fights.

States, cities and counties have sold $31.5 billion in bonds backed by the tobacco payments, according to Fitch Ratings. And Nassau County, New York, and Michigan are preparing deals though concerns about a payment shortfall clipped the prices of outstanding tobacco bonds.

"We've seen about a five basis point shift, which is not a lot for tobacco bonds -- they can be very volatile. But yes, it has caused people to take a little step back," said Evan Rourke, municipal market strategist at Popular Securities.

Still, the tobacco settlement obliges states to collect escrow payments from companies that did not sign the accord, Iowa's attorney general said. Cigarette-makers can only win in court if they prove the states failed to do this, he added.

Non-signing companies, often discounters, grabbed 8 percentage points of market share between 1997, the year before the pact was sealed, and 2003, according to a tobacco company official who requested anonymity. Signing firms in 2003 only sold about 91 percent of all cigarettes in the United States.

This year's April 15 payment to the states is for 2003.

The next decision in the battle will be made by an arbitrator, who has preliminarily held that Big Tobacco did did lose more than 2 percent of its market share in 2003.

By March 27, the arbitrator should rule whether the settlement caused that drop in market share, Miller said.

If the states lose this round, most of them have already said they will take the cigarette-makers to court, he added.

However, the initial escrow requirements had a loophole. Non-signing companies could get back 96 percent of their money immediately instead of after 25 years, the tobacco company executive said. But Miller said the states met their obligation to diligently enforce the initial escrow requirements, and stiffened them, starting around 2003.

Michael Neese, a spokesman for Altria Group Inc.'s (MO.N: Quote, Profile, Research) Marlboro-maker Philip Morris, said: "Philip Morris has not threatened to withhold a portion of its upcoming Master Settlement Agreement payment to reflect the Master Settlement Agreement's non-participating manufacturer adjustment."

David Howard, a spokesman for Camel cigarette-maker Reynolds American Inc. (RAI.N: Quote, Profile, Research) confirmed the final market share analysis was expected by month-end.

Critics of the tobacco settlement charge that the states are addicted to tobacco's money. "Nothing could be further from the truth," Miller said, adding the states still spend much more caring for smokers than they get from tobacco companies.

The attorneys general celebrated the 4.2 percent drop in the number of cigarettes sold to 378 billion in 2005 from the previous year as one of the pact's biggest successes.

On a per capita basis, the number of smokers has fallen to levels last seen in the late 1930s, partly because the settlement drove up prices, they say. The dramatic drop also was due to "a broad array of restrictions on the advertising, marketing and promotion of cigarettes," Miller said.

But this data might be misleading as it is partly based on federal excise taxes. The numbers do not include illegal imports of cigarettes or those sold by Indian reservations. (Additional reporting by Amanda Cooper)

[Nomorjer Kinov]

WRONG! They would simply have to spend less.

Good thought. Not gonna happen. There is no such thing as unnecessary spending. There is no shortage of unmet needs. Governments do not shrink, they grow.

[wita]

The ultimate in shadenfreude. Bureaucrats and governmental entities enriching themselves on the weakness of humankind. I have said it once I'll say it a thousand more. Cities and states are going to find out just how far they can go before the public gets tired of all their labor going for the public good (relatively speaking), and very little for their own.

The laws of finance state that as the number of people paying taxes rise, the rates must fall or greed is the result. Is not working for the government considered by many to be the jobs with the greatest number of long term benefits?

The unfortunate part of that is, the more people working for governments, which produce nothing and consume prodigious quantities of money, the more people there are with ideas about what needs to be done with the results of your labor and mine.

[SheLion]

This is about as "unfair" as your not telling a mugger who just stole your wallet that you have another couple of hundred hidden in your shoe. One could say that the mugger was unfairly cheated of his revenue too.

What kills me is these taxes are OUR money! 

[SheLion]

The unfortunate part of that is, the more people working for governments, which produce nothing and consume prodigious quantities of money, the more people there are with ideas about what needs to be done with the results of your labor and mine.

Yes! And our tax dollars!  Seems we are to have no say over how they spend our tax dollars!