Tax: Internet Sales Tax

USA

Internet Sales Tax and Cigarettes

Credit cards don’t have a press release out yet because they don’t know how to tell their customers that some of them are being discriminated against. They should be worried… this is going to lead to a lot of people switching over to bank debit cards and the loss of a lot of credit card interest money.

There are not that many people who buy cigs online to make this a national interest story. Pretty soon when they say no more X or Y or Z products sold online because of lost state taxes… then it will make the news. Hope it happens soon.

People have been buying thru the mail since Sears made their first catalog and sent it via the Pony Express. Then with the invention of the phone, you could call in your order. Now we have the internet.
So it took the states how many years to do something about all this state sales tax they were losing out on? No one questioned how you could buy a shirt online without tax? How many book and record clubs are trying to get me to become members? For decades I never paid sales tax on books or records.

Either allow free trade or stop ALL mail, phone, and internet options for all products. Why is one legal product special?

Blocking online cigarette sales threatens us all. By Otto Z. Stern. So, for all the Aunt Margarets out there, let’s fight for our right to smoke cheap cigarettes. The internet is the future.


From: “customerservicecenter” customerservicecenter@mastercard.com>
Sent: Friday, April 08, 2005 2:11 PM
Subject: Re:Other

Thank you for your inquiry to MasterCard International.

We understand your concerns. However, MasterCard prohibits the use of its
cards for any illegal purposes. We have been notified by both federal and
state law enforcement authorities that the internet sale and shipment of
cigarettes to or within the U.S. by certain internet merchants violates
numerous federal and state laws, and we are cooperating with the
authorities to ensure that MasterCard cards are not being used for illegal
purposes.

If you believe such transactions should be legal, we urge you to contact
your elected representatives to urge them to take action.

Best regards,
MasterCard International
Customer Service Center
ej


Internet cigarette sales take hit
Retailers on Cattaraugus Indian Reservation feeling impact as credit card companies stop participating in transactions

By LOU MICHEL
News Staff Reporter
4/4/2005

The nation’s biggest Internet cigarette sales industry is showing signs of decline following concerted pressure by several states to shut off tobacco customer access to credit cards.
Several retailers on the Cattaraugus Indian Reservation who operate Internet smoke shops selling tax-free cigarettes are laying off workers, closing or attempting to retool their operations.

The decline follows credit card companies’ decisions to cooperate with law enforcement authorities from across the nation. The credit card companies no longer are participating in Internet tobacco transactions, following a meeting last month with law enforcement officials who explained that Internet tobacco sales violate several laws.

In addition, Seneca sellers face a barrage of threatening letters and, in some cases, subpoenas aimed at recovering unpaid tax revenues.

Seneca Maxine Jimerson’s response was to sell her lucrative online business.

“They were harassing me. They sent me a subpoena asking me to forward all of my records, lists of employees, customers’ names and who owned the business,” Jimerson said of authorities in several states. “The letters kept getting more and more aggressive listing the laws we were breaking.”

She received the subpoena from Indiana and letters from tax officials in New York City, Pennsylvania and Washington State and has received many other notices in the past from tax officials around the country.

“I don’t feel I have to comply with them,” she said. “I’m on an Indian reservation, and they don’t have rights on the reservation.”

No exact figures

It is not easy to get exact figures on how many people were laid off or how many businesses closed, because many of these Internet businesses are mom-and-pop operations in homes with family members and a handful of employees.

But with the sale of Jimerson’s business to another Native American, it is estimated that as many as 80 workers lost their jobs, according to Gregg Prockton, who serves as Jimerson’s chief operating officer.

Jimerson, who still runs a smoke shop on the Allegany Reservation, was one of the biggest online merchants from the Seneca Nation, which comprises one of the largest blocs of Web cigarette sellers.

For years, New York State has gone back and forth on the issue of collecting taxes on Native American cigarette and gasoline sales to non-Indians.

In 1997, Gov. George E. Pataki backed away from attempts to collect taxes following violent Native American protests. Three times the State Legislature has adopted laws ordering the collection of taxes, including a new measure in the just-adopted state budget.

A lot of money is at stake.

More than 90 percent of the $347.5 million worth of cigarettes and other tobacco products sold by Senecas in 2003 was generated through telephone and Internet transactions.

Senecas have a huge price edge over non-Indian retailers when it comes to selling untaxed cigarettes for as low as $9 a carton – about $15 less than cigarettes sold off reservation lands.

Question of sovereignty

State governments claim that the Internet crackdown is about stopping sales of cigarettes to minors, halting the flow of black market cigarette profits to criminal enterprises and complying with laws governing the sale of tobacco products.

Senecas see different issues.

They say it is all about collecting billions of dollars in lost tax revenue that, if successful, will come at the expense of the Seneca Nation’s sovereignty, which they insist makes them immune to state taxes.

But Seneca President Barry E. Snyder Sr. has said the Internet sales dispute is outside the realm of native sovereignty rights – a stance that has upset the tribe’s online retailers.

By failing to take up their cause, the merchants say it is only a matter of time before state government once again attempts to force collection of sales taxes on tobacco and gasoline sales involving customers who drive onto Seneca reservations.

“We are a sovereign nation, and the nation has to back us up. It can’t say you guys are out on your own,” said Suzanne Smith, who works at a family-owned Internet smoke shop. “The nation has to draw the line.”

Snyder, at a Tribal Council meeting last week, said he plans to set up a meeting with State Attorney General Eliot L. Spitzer to discuss the credit card ban.

But if the state succeeds in shutting down Internet businesses, Smith says, it will destroy the economic progress Senecas have made in recent years and hurt the overall Western New York economy as Internet workers lose their jobs.

Senecas estimate their Internet tobacco businesses employ as many as 1,500 people, many of them non-Indians, though that number is now dropping because of the credit card prohibition. They note these jobs pay above minimum wage, sometimes as much as $10 or more an hour.

“Most of us are just small businesses trying to make a dollar, and New York State is coming in and telling us they want the business and we can’t have it,” said 22-year-old Joseph Campbell, a shipping clerk at an Internet smoke shop. “I’ll probably go to Tops or Wal-Mart looking for work.”

In the fight to stay in business, Irene and Gerald “Chief” Jimerson say they have diversified and now are selling pet food and bottled Native American water for walk-in sales at their shop on Richardson Road.

An older couple, they opened their business in 1999 to create an economic opportunity for their younger son, who had not gone to college.

“A small amount of our business comes over the Internet,” Irene Jimerson said. “We’re here in our shop seven days a week, 12 hours a day. It’s not an easy life. I don’t believe the government should be involved in anyone’s livelihood.”

A different strategy

Other Seneca Internet sellers say they are attempting to find ways around the credit card ban by making use of money orders and financial services that guarantee checks written by customers or verify that there is enough money in the customers’ checking accounts to cover the purchases.

But this strategy has generated concern among customers, according to Smith, who says some of her customers have expressed reluctance in switching over to checks and banks.

“Customers have asked if authorities could come in and see our business records. We tell them no one sees our records, and the reason we say that is we are a sovereign nation,” Smith said.

For buyers who switch over to money orders or checks, the state considers that an illegal practice as well, according to Marc Viollette, a spokesman for Spitzer.

“The payment mechanism is irrelevant. It’s an illegal act,” Viollette said. He declined to say what legal steps Spitzer is taking to ensure compliance of halting Internet tobacco sales.

And while some Native Americans believe they are being racially discriminated against, Viollette says the efforts against tobacco credit card sales by state attorneys general are not only nationwide, but also aimed at blocking cigarette bootleggers abroad.

“This extends beyond U.S. borders. In October we seized a planeload of cigarettes at (Kennedy) Airport that came in from Switzerland,” he said.

Attorney Joseph Crangle, who represents Seneca retailers on tax issues, said that the Seneca’s online businesses will ultimately “persevere and succeed.”

He blamed convenience store owners, in part, for the push to deprive Senecas of the Internet business they have built up in recent years.

When told that it appeared the credit card ban was shutting down Internet sales of cigarettes, James Calvin, president of the New York Association of Convenience Stores, welcomed the development.

“It’s encouraging that there is movement toward the level playing field we have been seeking all these years,” Calvin said. “American society simply won’t accept sales of cigarettes without proper taxation and age verification.”

Convenience store operators, Calvin added, want state law requiring collection of taxes at reservation stores enforced.

News Albany Bureau reporter Tom Precious contributed to this report.
e-mail: lmichel@buffnews.com
http://www.buffalonews.com/


Liberty, Up In Smoke

by Reginald Firehammer
When private enterprise becomes an arm of coercive government, the end of liberty is at hand. There is probably no industry that is more pervasive in terms of knowledge of both individual and industry business information than the credit card industry. This blatant control of the economy by the government, euphemistically called an agreement, is plain and simple, fascism, and the United States is no longer a republic.
Read the story:
http://usabig.com/autonomist/articles5/smoke.html


Credit Card Firms Stop Handling Internet Cigarette Sales

March 24, 2005
By: Melissa Campanelli
Senior Editor
melissa@dmnews.com

Credit card companies will cease handling Internet sales of cigarettes under a nationwide agreement they signed with several attorneys general and the Bureau of Alcohol, Tobacco, Firearms and Explosives.
The agreement, which was signed March 17 and took effect immediately, seeks to prevent the sale of cigarettes and other tobacco products over the Internet and is aimed at those who try to avoid sales taxes or who sell to underage customers.

Virtually all card companies, including Visa, MasterCard, American Express and Discover, no longer will process orders placed through Web sites nationwide and overseas that sell cigarettes and tobacco products.

Smokers will have to use checks, money orders or some other payment method. Tobacco products have never been a non-mailable substance in the United States, and they can be shipped by carriers including the U.S. Postal Service.

“We are taking a multifaceted, multi-jurisdictional approach to halting illegal Internet cigarette sales,” said William H. Sorrell, Vermont attorney general and president of the National Association of Attorneys General. “We believe this is the most effective and efficient strategy to enforce state and federal laws regulating online sales.”

Michael Bouchard, ATF assistant director for field operations, said “ATF investigations show that millions of dollars each year in illegal sales of cigarettes are diverted to fund terrorists and criminal organizations.”

Attorneys general offices in New York, California and Oregon led the negotiations with the credit card companies.

New York attorney general Eliot Spitzer began the initiative in August when he contacted credit card companies and requested that they stop processing transactions for Internet retailers selling cigarettes into New York. In January, 42 attorneys general sent a letter to each of the card companies, asking that they not allow their cards to be used for illegal Internet purchases.

Details regarding the initiative were discussed at a March 17 meeting in Washington, DC, that included the attorneys general of Colorado, Oregon, Pennsylvania and Vermont as well as representatives from the offices of the attorneys general of California, Idaho, Louisiana, Maryland, New York and Wisconsin. Other participants included members of the ATF and the major credit card companies.

All credit card companies have longstanding policies prohibiting the use of their cards for illegal transactions. At the meeting, the state and federal authorities outlined the many laws that are violated when cigarettes are sold online.

The long-unchecked practice of buying cigarettes and chewing tobacco over the Internet across state lines is illegal in many states, but enforcement has been difficult, according to news reports. Attorneys general said virtually all sales of cigarettes over the Internet are illegal because the sellers violate one or more state and federal laws, including:

* State age verification laws.

* The federal Jenkins Act, which requires that such sales be reported to state authorities.

* State laws prohibiting or regulating the direct shipment of cigarettes to consumers.

* State and federal tax laws.

* Federal mail and wire fraud statutes.

* The federal Racketeer Influenced and Corrupt Organizations Act (RICO), a law providing for extended penalties for criminal acts performed as part of an ongoing criminal organization.

Many of the sales made by foreign Web sites also violate federal smuggling, cigarette labeling, money laundering and contraband product laws, the attorneys general said.

Also, according to the attorneys general, cigarettes sold on the Internet are much cheaper than cigarettes sold by brick-and-mortar retailers because the Internet sellers falsely advertise that their cigarettes are tax-free.

And lower prices are offered on the Internet and in mail-order catalogs by tax-exempt Indian merchants and retailers in states with lower taxes.

The attorneys general added that while brick-and-mortar retailers check photo IDs to prevent children from buying cigarettes, the vast majority of Internet sellers have age-verification systems that are inadequate, often simply requiring the purchaser to click a button stating that he or she is 18 or older.

Along with adopting policies to prohibit the use of credit cards for the illegal sale of cigarettes over the Internet, the card companies also agreed to investigate and take action regarding any Internet sellers identified by law enforcement as using their cards for illegal online cigarette sales.
http://www.dmnews.com/


From Forces.org – March 22, 2005

Politics
March 22 – Unconstitutional power grab – Last week several states’ attorneys general announced that they had browbeaten credit card companies to join with them on their war on smokers. Visa, MasterCard and American Express will no longer process charges for cigarettes purchased from online vendors. This “agreement” affects everyone living in the United States.

Ever since the states partnered up with the Tobacco Control Industry, along with the cooperation of Big Tobacco, to shakedown the 50 million American Smokers, the attorneys general have become a wholly owned subsidiary of anti-tobacco. None of this is constitutional. Al Martinovic explains why.

***********

The States Cannot Collude With Each Other
March 24, 2005

Sutton, WV – Several state attorneys general along with the Bureau of Alcohol, Tobacco and Firearms have struck a deal with the major credit card companies to no longer process orders for most online cigarette retailers. Cigarettes can still be purchased online by check or money order at most places.

These same attorneys general have told UPS, FedEx and all other carriers of packages to consumers that they must turn over their customer lists in their respective states of whomever they deliver tobacco products to, or loose their license to deliver in the state. The attorneys general recently met with the USPS to force cooperation from them also.

So even if your retailer does not tell who you purchased your tobacco product from, the delivery company will turn over its’ customer list to the State the product was delivered into.

How is it that the states via the attorneys general can collude with each other without the consent of Congress? This is forbidden by the U.S. Constitution.

The Commerce and Compacts Clauses of the Constitution, Article I, section 10:

“No State shall enter into any Treaty, Alliance, or Confederation;”
and that “No State shall, without the Consent of Congress, …enter
into any Agreement or Compact with another State…”

The states cannot collude with each other without congressional approval. It’s the federal government’s job to represent the states. Only the federal government can regulate interstate commerce. Yet we have attorneys general usurping the ‘just supremacy’ of the United States. The clause was put in the Constitution for this very reason. So that no political entity can be created that is neither state nor federal in nature.

Congress should put an immediate stop to this illegal collusion among attorneys general and credit card companies which exceeds the power and authority of the states.

These same attorneys general are responsible for the 1998 Master Settlement Agreement (MSA) which is also an agreement among states, and is illegal, because it was again, done without Congressional approval.

The MSA created an illegal cartel among state attorneys general and tobacco manufacturers. MSA stifles competition, engages in price fixing, and creates a monopoly for Big Tobacco which are clearly antitrust violations. Big Tobacco is said to pay an estimated 246 billion over 25 years, yet in reality, the money comes out of smokers pockets as Big Tobacco increased their prices. Big Tobacco doesn’t pay under the MSA, smokers do. In effect, this money represents a national consumption tax, or a national tobacco tax if you will, that was illegally imposed on smokers.

We have representative government for a reason, so that if we don’t like the laws our legislators are passing, we can vote them out of office. But here we have an illegal cartel that bypasses representative government and creates a tax, through MSA, that was never approved by any state or federal legislators.

And now you see the danger when states collude with each other and why. The Commerce and Compacts Clauses of the Constitution was put into place, to prevent this very sort of thing from happening. Yet it IS happening today. Where is Congress in all of this?

This issue should concern smokers and non smokers alike, for it is an abuse of power. Congress should step in and disband the illegal cartels created with state attorneys general, credit card companies and Big Tobacco. Congress should also declare the MSA unconstitutional and render it null and void.

For Congress to do nothing or to support such activity would amount to dereliction of duty.

Write your Congressman in opposition to this illegality and feel free to use anything I have here in your letter. Go here to contact your Congressional Representatives: http://www.senate.gov or
http://www.house.gov

Maryetta Ables
PO Box 54
Sutton WV 26601
304-765-5394


To: National Desk

Contact: Ted Deeds of Law Enforcement Alliance of America, 703-847-2677

WASHINGTON, March 18 /U.S. Newswire/ — On the heels of an announcement by leading U.S. credit card companies that they no longer will process transactions for online cigarette sales in order to curb youth smoking, the Law Enforcement Alliance of America (LEAA) today asked credit card companies to extend their decision and end credit card sales of online alcohol, as well.

In an open letter to credit card companies, state attorneys general and the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives (BATFE), LEAA Executive Director James Fotis said, “If ending credit card transactions for online cigarette sales is necessary to protect America’s youth from illicit and unaccountable cigarette sales, such logic – and related actions announced today – must be extended to illicit Internet alcohol sales, as well. We support measures to help our Members protect and serve their local communities, yet illicit online alcohol sales occur out of sight and out of reach of local law enforcement officers.”

At the urging of state attorneys general and BATFE, credit card companies took the voluntary step of refusing to participate with Internet sites that sell cigarettes and other tobacco products to the public. The credit card companies also agreed to take the additional step of pursuing actions against Internet sellers that are shown to have violated state and federal laws regulating cigarette sales. The participating companies include: American Express, MasterCard, Visa, Discover, Diners Club and the web-based financial transaction service PayPal, owned by eBay.

Fotis added in the letter, “Law enforcement is all too aware of the risks associated with underage drinking and the extreme danger posed by underage drinkers who then drive drunk. It is indisputable that America’s youth is beginning to take advantage of the Internet to buy alcohol so they can avoid having their IDs checked. Several recent high -profile enforcement actions undertaken by state attorneys general against the growing roster of online alcohol sellers and overnight delivery companies that break state alcohol laws prove the dire threat we face.”

Fotis asked, “If the fear of long-term health implications and failure to collect taxes can spur ending online cigarette sales than why won’t you help America’s over-worked police end the much more dangerous and immediate threat: the needless death and carnage caused by underage drinking?”

LEAA takes the position that we shouldn’t sacrifice the lives of our youth for the sake of a company’s increased profits!

The Law Enforcement Alliance of America (LEAA) is the nation’s largest non-profit, non-partisan coalition of law enforcement professionals, crime victims, and concerned citizens united for justice. With a major focus on public education, LEAA is dedicated to providing hard facts and real-world insights into the world of law enforcement and the battle against violent crime. Through public education, LEAA fights at every level of government for legislation that reduces violent crime while preserving the rights of honest citizens, particularly the right of self-defense.
http://www.usnewswire.com/


Charging smokes over the Net? Not anymore
Major credit firms no longer handle online sales of cigarettes

March 17, 2005

ALBANY, N.Y. – Major credit card companies will no longer handle Internet sales of cigarettes under a nationwide agreement announced Thursday.

The move is aimed at illegal dealers that are trying to avoid sales taxes or sell to underage customers.

The thriving trade of Internet tobacco undercuts local businesses that sell cigarettes and often avoids sales tax for states and cities, allowing smokers to buy cigarettes considerably cheaper online.

The agreement among virtually all credit card companies, state officials from around the country, and the Bureau of Alcohol, Tobacco, Firearms and Explosives is effective immediately.

“The way the system works now, tobacco can get into the hands of minors,” said Bob Cooper, spokesman for the Idaho attorney general’s office. “And these sales are depriving the states of revenue.”

Smokers would still be able to buy cigarettes over the Internet, but they would not be allowed to use their credit cards, including Visa, MasterCard, American Express and Discover. Instead, they would have to use checks, money orders or some other payment system that would probably hold up delivery.
http://www.msnbc.msn.com


Internet Sales Tax and Cigarettes

Internet sales are booming. Items ordered over the Internet from another state are shipped on a daily basis.

The state lawmakers say nothing until it comes to cigarettes. Some states have overly taxed cigarettes, forcing adults to purchase online to save money. It is the American way to shop cheap. So, why are lawmakers focused solely on Internet sales of cigarettes? Why have they singled out tobacco products?

They drove smokers to buy cigarettes elsewhere, and now they are trying to persecute buyers for doing so.

Thousands of items are bought on Ebay everyday, yet the lawmakers overlook it. Napster just won a court case stating they do not have to disclose their customer list. Why should it be any different with cigarettes?

The Smoker’s Club, Inc.
New England Regional Director
Darlene Brennan
Email
Maine Smokers Rights


HOW STATE REGULATION OF THE INTERNET VIOLATES THE COMMERCE CLAUSE
http://www.cato.org/pubs/journal/cj17n2-2.html


Internet Cigarette Sales Spark Enforcement Meeting, Possible Crackdown
http://www.freerepublic.com/

MasterCard Urges Merchant Compliance with Rules Governing the Internet Sale of Tobacco
http://www.mastercardinternational.com


‘NET CIGS MASTER-BARRED

March 9, 2005
By KENNETH LOVETT

ALBANY — MasterCard yesterday became the first major credit-card company to warn financial institutions against processing payments to tax-free Internet cigarette companies.

MasterCard said such transactions should be approved only if there is documented evidence that Internet companies are complying with all federal, state and local laws, including the collection and payment of sales taxes.

“We put out the bulletin to remind our global membership that MasterCard does not tolerate illegal activities of any kind,” said MasterCard Senior Vice President Joshua Peirez.

State Attorney General Eliot Spitzer applauded the decision and urged other credit-card companies to follow suit.

The Post reported in January that Spitzer warned credit-card companies and their processors to block orders from tax-free online tobacco companies because many of them skirt state tax laws and do not check the age of customers.

At least two Web-based tobacco companies, Cigs4free.com and 00taxfree.com, have already begun restricting shipments to customers in New York.


IL: Sales Tax. State demand taxes on sales via Internet.

State (MI) pursues unpaid taxes on tobacco bought online pursues unpaid taxes on tobacco bought online

PA Feds, states get tough on Internet smoke sales states get tough on Internet smoke sales

NY: A Kick In The Ash. Smokers, beware: City Hall is coming for your wallets.

OR: Racketeering. Net’s top cigarette seller indicted on state charges.

USA: Wine Prohibitions Face Test. U.S. Supreme Court to rule in case questioning bans on direct shipments.

Kansas Dept. of Revenue http://www.ksrevenue.org/pdf/Notice0404.pdf
While several states have similar laws as in the above link pertaining to cigarette and other tobacco products tax collection, Kansas also includes sales taxes on tobacco products only… it seems you can order any other type of product to be shipped into Kansas and no sales tax is collected.


U.S. Supreme Court
WASHINGTON v. CONFEDERATED TRIBES, 447 U.S. 134 (1980)
447 U.S. 134
WASHINGTON ET AL. v. CONFEDERATED TRIBES OF THE COLVILLE INDIAN
RESERVATION ET AL.
APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF
WASHINGTON.
No. 78-630.
Argued October 9, 1979.
Decided June 10, 1980.
http://caselaw.lp.findlaw.com/


New York Hits Online Sellers of Cigarettes

February 12, 2005
By IAN URBINA

Concerned about the booming trade in online cigarette sales, New York state officials have begun using a variety of techniques to clamp down on the trade, saying New York City alone is losing more than $75 million a year in uncollected tax revenues because of the sales.

In recent weeks, Attorney General Eliot Spitzer has been pushing local postal officials and private carriers to stop delivering cigarettes bought online. His office has also recently begun negotiations with credit card companies to block transactions of online cigarettes.

These efforts were given added push recently as local officials from the federal Bureau of Alcohol, Tobacco, Firearms and Explosives met with credit card executives to alert them to the various ways in which these transactions are illegal.

“The tone was very cordial and unthreatening,” said a city official who participated in the presentation three weeks ago at the bureau’s office in Brooklyn. “But in the end they made it crystal clear that now that the credit card companies understood the law, they would be held accountable for processing these transactions.”

Mr. Spitzer emphasized that the effort has as much to do with health as money. “These sales present a significant threat to public health because they provide easy access to cheap cigarettes, which increases smoking rates, particularly among children,” he said. “These illegal sales also evade state tax requirements.”

Whatever their motivation, city and state officials are broadening their efforts to eradicate the business.

Two weeks ago, a judge ruled in one of the city’s four lawsuits against online sellers that the city can file a revised racketeering lawsuit against Internet cigarette sellers. The ruling was the first time a federal judge has indicated that Internet sellers can be charged under federal racketeering law, said Eric Proshansky, the city’s chief lawyer on the case.

After gleaning the names and the addresses from a Virginia lawsuit against one online cigarette company, the city began sending letters last month to more than 2,600 New Yorkers who officials say bought tax-free cigarettes. The letters, sent to those who bought cigarettes online from July 2002 to April 2004, give the alleged violators 30 days to pay or face interest and penalties of up to $200 a carton.

In November, local law enforcement seized 300,000 cartons of illegal cigarettes at Kennedy International Airport. Joseph G. Green, a spokesman for the A.T.F., said that the seizure was the culmination of a yearlong investigation jointly conducted by the Queens district attorney’s office; federal Bureau of Alcohol, Tobacco, Firearms and Explosives; postal inspectors; and city and state tax and finance officials.

Sam Miller, a spokesman for the city’s Department of Finance, said that the city loses more than $75 million a year as people duck local taxes by purchasing online. But the crackdown has drawn some criticism.

“New York is simply trying to engage in economic protectionism by limiting cigarette sales to brick-and-mortar sellers,” said James L. Bikoff, a lawyer who represents several Internet tobacco sellers. “Most of the folks who are in the online cigarette business are small outfits and they typically advise the consumer to check with their own city and state’s laws regarding tax rules.”

New York City smokers pay the highest cigarette taxes in the country, as the state charges a $1.50 tax per pack and the city adds an additional $1.50 tax per pack. A carton of cigarettes in the city costs about $70, including $33.30 in excise and sales taxes. Online, cigarettes cost as little as $15 a carton.

Thus far, the city and the state have met with mixed results in their efforts to control the online traffic in cigarettes.

Some banks that process MasterCard transactions have begun blocking sales from certain Internet tobacco sites to customers, said Joshua Peirez, a senior vice president at MasterCard. But other banks do not. American Express currently has no policy that blocks Internet cigarette sales, said Christine Elliott, a spokeswoman for the company.

After sending a letter to credit card executives in August, Mr. Spitzer joined several other state attorneys general to send another letter pressing credit card companies to stop the transactions.

Both letters cited several reasons for the failure of Internet tobacco sellers to comply with applicable laws, including that they make no effort to verify the age of their customers and fail to report shipment of cigarettes to the tobacco tax administrator of the state into which shipments are made.

While the United Parcel Service and other private carriers have been more open to the idea of blocking the delivery of these packages, postal officials have balked at pressure from Mr. Spitzer’s office, claiming that they do not have the legal authority to stop the shipments, according to city officials who have been part of the discussions. But Mr. Spitzer’s office contends that the postal service indeed has the authority under federal laws that prohibit mail fraud schemes, according to a letter sent by the office.

New York State passed a law that took effect in 2003 prohibiting online and mail-order sales of cigarettes to its residents. The law was largely intended to curb tax evasion and under-age smoking, since many online cigarette sites do virtually nothing to verify the age of customers.

Efforts to stop online sales are complicated, since Internet sites are sometimes based abroad and are therefore difficult to prosecute. City officials estimate that about 80 percent of the online cigarette sales come from sites that claim Indian affiliation, which for sovereignty reasons claim immunity from laws like the Jenkins Act.
http://www.nytimes.com


Catalog Legislation: The Use-Tax Man Cometh

Aug 1, 2003
Jerry Cerasale

A tax issue aimed at catalogers and other at-distance marketers will soon become a central topic in Washington: use taxes. As has become habit, use taxes have been tied to Internet-access taxes and now business-activity taxes, complicating discussions. Let’s look at the reasons for these bundled taxes more closely. ? In simplistic terms, use taxes are taxes on goods that will be used within the purchaser’s home state but that came from an out-of-state purchase or were bought from an out-of-state marketer. So if I bought a suit from a catalog or Web marketer not located in Virginia (my home state), I would owe Virginia a 4.5% use tax.

Most states have not enforced their use-tax laws on individual residents, but they would like to require remote sellers (read: nonvoters) to collect sales taxes on their behalf. Remote sellers have resisted, since they don’t necessarily have a physical presence in the state making the demand, are not represented in the state, and if they are nationwide sellers, would have to collect taxes for more than 7,600 jurisdictions with differing rates, differing definitions of goods, and differing applicability of sales taxes on goods.

The Supreme Court of the United States in its 1992 Quill v. North Dakota decision found that state laws requiring remote sellers that have no substantial nexus (physical presence) in the state to collect and remit taxes violate the Commerce Clause of the Constitution. Therefore, a state may not require out-of-state sellers to collect sales taxes on goods sold to the state’s residents. But — and this is a big but — Congress may give the states authority to require remote sellers to collect sales taxes from their citizens.

Another type of tax that has been the subject of arguments between the states and out-of-state businesses is business-activity taxes. These taxes are income taxes, gross receipts taxes, and other nontransaction taxes such as franchise fees and licenses.

Now let’s consider Internet-access taxes. As more households became connected to the Web, a few states saw taxes on the access fees charged by Internet service providers (such as AOL, Microsoft, and Earthlink) as a potential source of revenue. They passed laws taxing the Internet-access charges. Congress became concerned that a proliferation of these taxes would stifle the growth of the Internet and e-commerce. So Congress passed two Internet Access Tax Moratorium laws — the latest of which will expire Nov. 1 — that prevent states and localities from taxing Internet-access fees.

The mixing bowl

How did use taxes, business-activity taxes, and Web-access taxes become melded together in a Washington tax debate? It began with the Internet-access taxes. If Congress were to prevent states from collecting those taxes, states wanted something in return; in other words, let’s make a deal. The deal they sought was the ability to force out-of-state sellers to become their sales-tax collectors.

States are not the only group seeking mandatory collection of sales taxes for remote sales. Retailers and catalogers that collect in most if not all states believe that remote sellers have a competitive advantage if they do not collect sales taxes. Even though the consumer owes a use tax, states have not channeled resources into collection of taxes from their residents. Therefore, states argue that consumers do not pay the tax and can purchase “tax free” from remote sellers — even though the average cost of shipping and handling for most orders is higher than the average tax rate.

But those retailers have a stake in each state. Their employees can vote. They can take their case on taxes and enforcement to their representatives. Remote sellers can’t take their case to their representatives. They do not have representation in those states.

In addition, the burden on a marketer to collect more than 7,600 separate taxes, be subject to numerous audits, be subject to numerous definitions (are potato chips food or snack), and be subject to 7,600 tax returns is astronomical and expensive.

Think about a marketer receiving a check for an order. The check is for $109.56, but the consumer miscalculated the tax due by $2.00. Does the marketer refuse the sale for insufficient funds, bill the consumer for $2.00 and hold shipment, bill the consumer for $2.00 and ship immediately, or assume the $2.00 tax due and ship?

Finally, since the use-tax underpayment is caused by the failure of states to enforce their laws, marketers, if they are the solution, should be compensated for the expense of enforcing state laws — especially in states where they have no presence.

The states have tried to counter the burden arguments by establishing a Streamlined Sales and Use Tax Agreement (SSUTA). The goal here is to simplify the rules so that remote sellers could not complain about complexity.

But beware of a wolf in sheep’s clothing. Here is what the SSUTA has — or hasn’t — done:

Makes no reduction in the more than 7,600 state and local tax rates (in fact, states can increase the number of jurisdictions)
Provides no uniform definitions — only a requirement for “substantially the same language”
Offers no reduction in potential audits
Suggests that marketers should be compensated for tax collection but does not require adequate compensation
Relies on a computer model to determine the proper tax due. Sadly, there is no such model. Will states wait to collect until the model is ready?
Leaves it to the taxman to determine whether states are complying — talk about the fox in the hen house.

The business-activity taxes have been added to the equation as well. Will the states waive business-activity taxes for remote sellers? If not, once a state has a record of a marketer doing business in the state, will it begin to access income taxes, franchise fees, licensing fees, etc? The state just might.

In another twist, I understand that the European U nion is eagerly awaiting congressional action to allow states to force remote sellers to collect their taxes. Why? Because the EU wants to have U.S. companies selling to Europeans to collect taxes for them too. When I have raised these issues with state tax collectors, ironically their response is that the Congress would never allow U.S. companies to become tax collectors for foreign powers when the company does not have a physical presence in those countries.

Where things stand

The House of Representatives has held a mark-up on a bill to make the moratorium on Internet-access charges permanent. The House may pass this bill. On the Senate side, however, I do not foresee the passage of any bill making the moratorium permanent. The Senate would want to “give” the states some remote sales tax authority.

Some bill must become law by Nov. 1. Maybe another two-year extension will become law. In the meantime, do not be fooled by claims of simplification. Read the fine print. Once states have authority to tax, there will be no way out for remote sellers that have no constituents in the state.
——————————————————————————–

Jerry Cerasale is senior vice president for government affairs for the Direct Marketing Association.

What’s It Worth?

A University of Tennessee study estimated that by not collecting sales taxes on remote sales, states would miss out on $26.3 billion in tax revenue this year. That study, however, assumed an eye-popping 38% growth in Internet sales. Nor did it account for collections already occurring in b-to-b commerce or the added collections from multichannel marketers that have nexus in multiple states.

The Direct Marketing Association commissioned a study that found the true uncollected amount was one-tenth (or $2.5 billion) in sales taxes in 2003 — significantly less than states expected. This smaller sum wouldn’t enable any state to balance its budget on remote sales tax collection. This then raises a question of potential anger and mistrust of remote sellers by the tax collectors if mandated collections do not meet expectations.
— JC
http://catalogagemag.com/mag/marketing_usetax_man_cometh/


January 17, 2005

In case anyone missed the hard to miss front page of the NY Daily News on Thursday, or the same reported in other newspapers, the NYC (that’s CITY) Department of Finance, at the direction of Mayor Bloomberg, has embarked on an aggressive campaign to collect taxes not paid on cigarette purchases made over the internet.

As I describe the situation I hope I can offer some additional information that will clarify it for you and also maybe calm some, but not everybody’s, nerves. I had hoped to act on responding to this situation and providing information sooner but was delayed by doing the research necessary to give you the best report and assessment that I could.

I ask that you read the entire thing carefully before asking any questions.

Discussion Breakdown:

WHO IS AT RISK GEOGRAPHICALLY?
HOW DID THEY GET NAMES?
WHOSE NAMES DID THEY GET?
WILL THEY PURSUE MORE PEOPLE/RETAILERS IN THE FUTURE?
I RECEIVED A BILL. WHAT RECOURSE DO I HAVE?
WHAT CAN I DO TO PROTECT MYSELF IN THE FUTURE?
RELATED READING MATERIAL

WHO IS AT RISK GEOGRAPHICALLY?

Only those who live in the five boroughs of NYC.

HOW DID THEY GET NAMES?

It’s consistently reported that the names were obtained through lawsuits brought against online cigarette retailers(s) compelling them to hand over their customer list. It’s unclear which jurisdiction gets the ultimate credit for obtaining the list and/or how many retailers are involved:

NY Times: “Compiling names of customers from an [singular] online cigarette retailer…”

NY Newsday: “The city got the New Yorkers’ names from lawsuits brought by other jurisdictions that compelled online cigarette sellers to turn over their customer lists.”

NY Post: “The Finance Department said 2,300 letters demanding payment went out Monday to a list of city smokers obtained from Web sites sued by the federal government in Virginia. Another 1,800 letters went out yesterday to anyone who bought tobacco from another Internet company sued by the city.”

NY Daily News: “…the city began issuing harsh letters to 3,700 city smokers whose names popped up in lawsuits against three online cigarette sites.”

WHOSE NAMES DID THEY GET?

Only those who purchased cigarettes from the retailer(s) that was the subject of the lawsuit(s).

Some newspapers report that people receiving bills did business with Cigs4Cheap.com that operated (now defunct) out of Virginia. Those getting bills that contacted me did business with cigoutlet.com (also defunct) that also operated out of Virginia.

After an exhaustive search, even with a report that it was a “landmark” court ruling in Virginia against Cigs4Cheap.com, I found no court ruling or any other shred of information or documentation on Cigs4Cheap other than a dead link on sites that list tobacco retailers. Neither did I find anything that links the two.

However, even lacking the evidence, generally one company will operate under several names and web sites. Based on the puzzle pieces it can be reasonably concluded that cigoutlet.com was owned by the same company that operated Cigs4Cheap.com. Furthermore, based on information contained in a lawsuit carried out in California against several internet retailers, it names LLP Enterprises, Inc. and its president Adib Mograbi as the Virginia corporation doing business as Cigoutlet-The Tobacco Store, www.cigoutlet.com and www.affordablecigs.com.

(related link http://caag.state.ca.us/newsalerts/2003/03-039CigOutlet.pdf)

At this time, based on the cumulative information available, it appears that this is the ONLY company, operating under several web site names/addresses, whose customer list is the source of the names of NYC residents being targeted. Even though the California suit I cite doesn’t include Cigs4Cheap.com as one of the businesses operated by LLP Enterprises, there’s sufficient reason to conclude that it might be. Though I make no promises that it isn’t a separate company and that the city is possibly in possession of two company’s customer lists. It’s just that I doubt it.

If you did not do business with any of the sites operated by this company – or did, but not within the city’s targeted period of July 2002 through April 2004 — you can be more confident that you will not be receiving one of these letters this time around.

Although some of the reports state that more letters will be forthcoming shortly in a second wave it’s my OPINION that they will still be related to the web sites already identified. While the first wave might have been from cigoutlet.com’s customer list the second wave might be from affordablecig.com’s customer list. Again, no promises though that that is the case. Though by the numbers of letters reported to be in the second wave (1800) it sounds like it’s not more than from one other retailer’s customer list, whatever that one might be.

WILL THEY PURSUE MORE PEOPLE/RETAILERS IN THE FUTURE?

The NYC Dept. of Finance is working on it but it will depend on the success, or the degree of any success, of the lawsuits filed by the city on behalf of NYC DOF that the news reports correctly speak about.

In January 2003 the NYC Law Dept., in conjunction with the DOF, released a press release (http://www.nyc.gov/html/law/pressreleases/pr011703.pdf) regarding its commencement of a lawsuit against 14 cigarette retailer web sites.

The introduction of the press release: The City’s suit seeks treble or triple the amount of the taxes the City has lost by reason of the defendants’ unreported sales to New York City residents — which could amount to in excess of $15 million in recovery for the City — and an injunction that would require the defendants to file the federally mandated Jenkins Act reports [that alert state tax authorities to out-of-state cigarette purchases, so that the purchases can be taxed] and to desist from continuing to misrepresent the tax status of Internet purchases.

The sites named as defendants are:
1. cycocigs.com
2. aabakismokes.com
both operated under Cyco.net, Inc.
3. buydiscountcigarettes.com
4. cigarettespecials.com
5. FreeCigs4u.com
6. cybercigarettes.com
7. adobeCigarettes.com (notes on site it will not ship to NY)
all 5 operated under Hemi Group, LLC
8. dirtcheapcig.com (notes on site it will not ship to NY)
operated under Dirtcheap.com, Inc.
9. paylesscigs.com
operated under PaylessCigs
10. smokes-direct.com
11. cigsonline.com (currently unavailable – possibly defunct)
both operated under Hooray’s Inc.
12. bulkcigs.com (currently unavailable – possibly defunct)
13. S4L.com (reassigned to different product)
both operated under S4L Distributing, Inc.
14. discounttobaccostore.com
operated under Double B Distributing d/b/a Discount Tobacco Store

In October 2003 the NYC Law Dept. released another press release (http://www.nyc.gov/html/law/pressreleases/pr101703.pdf) regarding its expansion of its quest and filing a new lawsuit against another 7 cigarette retailer web sites.

The press release explanation is the same as the first but with the additional charge that the retailers are violating the new NYS law that prohibits shipment of cigarettes by retailers from any state (even NY) to New Yorkers. The law was effective (March 2003) prior to this second lawsuit but after the first.

The sites named as defendants are:
• cheapsmoke.com
• discountcigarettes.com
• dannystobacco.com (notes on site it will not ship to NY)
• nccigarettes.com
• keweenawbay.com
• cigoutlet.com (defunct)
• cigs4cheap.com (defunct)
(this time they do not note the operators but research indicates they are all operated by separate companies)

Though the two sites most discussed here (cigout.com and cigs4cheap.com) are included in the city’s latest lawsuit it still seems unlikely that it was this suit that was responsible for their ability to obtain those customer lists.

You’ll note that I added that even if successful in their suits there MIGHT be a degree to which they are successful. That could mean they reach a settlement whereby the retailers agree to pay all or a portion of the taxes owed and agree to stop shipping to NY or if for some reason they continue to ship (hardly unlikely but for the sake of argument…) will agree to file the customer names with the city from that day forward.

I present this scenario based on a study on Internet Cigarette Sales conducted by the United States General Accounting Office (http://www.gao.gov/new.items/d02743.pdf) that, among other things, found that “results were limited” when states have taken action to promote Jenkins Act compliance by internet cigarette vendors. Though none of the actions or results being reviewed were due to lawsuits. This report also includes the reactions of private citizens, that might interest you, to receiving back taxes bills and what they did or did not do.

The intent of this study was to conclude the best remedy to the “problem.” They concluded:

To improve the federal government’s efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, the Congress should consider providing ATF with primary jurisdiction to investigate violations of the Jenkins Act (15 U.S.C. ?375-378).

Well, the recognized “problem” (which did need Congress as a good fix) was handled another way when special interests got together and crafted the PACT Act (Prevent All Cigarette Trafficking Act). Rather than trying to enforce and recoup lost taxes the plan is to just make a federal law that prevents shipping of tobacco products. The U.S. Senate bill passed in January 2004. Since then the House has not acted on their version of the bill. I implore you to visit our action alert page at http://www.nycclash.com/alerts.html#FedSales, use the suggested letter, and follow the directions on how to contact your representative.

I RECEIVED A BILL. WHAT RECOURSE DO I HAVE?

First and foremost, the question that first leaps from everyone’s lips is, “Can they do this? It can’t be legal!”

They can and it’s legal. There are no constitutional violations occuring. Also, it does no good to point fingers at others who buy all sorts of other products over the internet and don’t report taxes. It’s tobacco and smokers who are demonized and persecuted and if this is the tax category they want to hound then that’s that.

That said, we strongly urge anyone who received a bill to demand to see the written proof showing the purchases before paying. Refuse to take their word for it.

Despite what the person handling the taxes at the DOF told one caller –that the only option was to pay — that is not the case:

The New York City Tax Appeals Tribunal (“The Tribunal”) is an independent agency created by the New York City Charter. The Tribunal has the responsibility of providing a fair, impartial, efficient, and knowledgeable forum in which to resolve disputes between taxpayers and the New York City Department of Finance (DOF).

http://nyc.gov/html/dof/html/tribunal.html

The only impediment to seeking relief through the tribunal is that you must appoint either a lawyer or CPA to represent you. The form is called “Power of Attorney” and can be found at http://nyc.gov/html/dof/html/tribunal.html#forms

I’m sorry I can’t offer any other legal suggestions. A large part of the time eaten up in researching the situation was to find a legitimate legal defense. Every angle I pursued ended with a door being slammed. Perhaps an attorney reading this could share some possible defense I was unable to find myself.

(see below for one other suggestion)

WHAT CAN I DO TO PROTECT MYSELF IN THE FUTURE?

1. I’ve waited till now to discuss the safety of tribal-run internet retailers.

It’s time to reflect on which web sites have so far been the source of the customer lists obtained by the city. They were not tribal-run.

Indian reservation retailers have insisted, and continue to insist, that they will never hand over their customer lists, not even if faced with a subpeona. They stand behind their sovereign nation status as being immune from government forcing them to do so or collect taxes from them.

Tribal-run retailers are the safest refuge. Though even with their commitment to shield their customers I want to emphasize the word “SAFEST.”

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