Pasadena Star News


Internet Buyers Owe Taxes on Cigarettes

By Andy Samuelson, Staff Writer
January 20, 2000
Smokers who thought they were getting a bargain by buying cigarettes tax free through the Internet recently received a nasty surprise.

The state Board of Equalization sent 3186 Californians letters in the last two weeks, informing them they owe back taxes for out-of-state cigarettes they bought during the last several months of 1999.

"From what I'm hearing, many are surprised because the way the advertisements are going out ... is that they are tax-free cigarettes," said Allan Stuckey, a deputy director for the special taxes department of the Board of Equalization. "So folks don't know any better."

The people the board identified owe a total of about $350,000, said Dennis Maciel, the chief of the board's excise tax division. Instead of a bargain, each smoker will now have to pay an additional $110 on average.

The board will send another wave of letters for the first quarter of 2000, Stuckey said. "It's basically a state law," said Ron Roach, spokesman with California Taxpayers Association. "They are legal taxes, and they should be paid. It's another question if this is a fair tax, but that can't be part of the argument."

Smokers have been looking for ways to buy from unconventional retailers since Jan. 1, 1999, when the excise tax was increased by 50 cents to 87 cents per pack.

The levy has created a black market that Stuckey said costs the state $100 million a year in lost revenue. From Internet sales alone, California loses about $20 million a year from unreported cigarette purchases, Maciel said.

The Internet smoke shops are located in low-tax states, such as North Carolina and Virginia, and American Indian reservations. They are selling cigarettes for about $8 to $10 a carton cheaper than stores here.

Local tobacco store operators applauded the state's actions because they say Internet sales are hurting their business.

"People think, 'Why should I buy from you when I can buy from the Internet and not pay the taxes,' " said Julian Lu, who owns A1 Cigarette and Cigar in San Gabriel. "I have a lot of customers say that."

Officials admit this plan doesn't come close to stopping the flow of cigarette tax money that is seeping out of the state.

In its latest sweep, the state identified 175 companies that sold cigarettes to Californians through the Internet or mail-order catalogs, but only 5 percent gave them customers' names, Maciel said.

The state reached these consumers because the companies provided them with names, which is required under the federal Jenkins Act, Maciel said.

"Companies have to report their (out-of-state) customers," he said. "We would have never known the individual customers without this reporting requirement."

One potential problem is that many of the Internet companies are located on American Indian reservations, many of which do not believe they are subject to state laws.

Many tribes don't believe they have to disclose who their customers are, said Sam Richardson, the Webmaster for the Discount Cigarettes Shopping Guide.

If consumers feel the pinch of paying back taxes and stop using the Internet, American Indian reservations could stop reporting customers' names to regain their business, Maciel said.

Along with the letters, the state is going to pursue legal action against Internet sites that Maciel said are misleading consumers.

Many sites imply customers don't have to pay state taxes, Maciel said.

Board member John Chiang says, "They are misleading people and unfortunately, customers are paying the price."