Tax: MA Online cigarette vendor settles

Online cigarette buyers face state tax bills

By Bruce Mohl
Boston Globe Staff
June 2, 2006

The Massachusetts Department of Revenue is preparing to send surprise tax bills to 1,800 individuals who bought cigarettes on the Internet and probably thought they’d never get tagged for roughly $1.6 million in unpaid excise taxes.

With penalties and interest, the total bill comes to $2 million, or about $1,100 per smoker.

Timothy Connolly, a department spokesman, said some smokers will be sent bills this month for as much as $2,100. The state’s cigarette excise tax is $1.51 per pack.

The crackdown on Internet tobacco purchases is intensifying, with a number of online vendors now supplying the state with the names of their Massachusetts customers and their purchase data. Connolly said bills seeking more than $4 million in unpaid excise taxes, interest, and penalties will start going out this summer. He declined to identify the Internet vendors who are providing purchase data.

Many smokers shifted to the Internet in recent years to evade state taxes and to buy their cigarettes more cheaply, often for $7 to $10 a carton less. Cigarette websites, which tend to operate on Indian reservations and in states where excise taxes are low, often disclose that a customer’s purchase may be subject to state taxation, without telling the customer that purchase data is being passed along to state authorities.

Connolly said Massachusetts residents should not think that because they buy cigarettes on the Internet state taxes don’t have to be paid.

“The idea of no taxing on the Internet has to do with the use of the Internet, like taxing Internet providers,” he said. “But other taxes are collected. Taxes are being collected on the Internet every day.”

Massachusetts collects sales taxes directly from retailers that have operations in the state, or directly from the consumer if they don’t. But the consumer system is largely self-reported when you file your taxes. The Revenue Department has been pursuing cigarette taxes because the Legislature passed a law requiring more aggressive enforcement to crack down on websites set up to evade state taxation.

The $2 million in bills going out this month grew out of a court settlement Attorney General Thomas F. Reilly struck with eSmokes of Reston, Va., for selling cigarettes to minors. As part of the settlement, eSmokes and an affiliated website called Mycigarettes.com were required to turn over the names, addresses, and purchase information of all Massachusetts customers between November 2003 and February 2005. Both eSmokes and Mycigarettes have since gone out of business.

The Revenue Department has developed an automated billing process for unpaid cigarette excise taxes, which should speed up collections. Previously, bills were sent out by hand because there were few of them.

Over the past three years, the Revenue Department has recovered $331,000 in excise taxes and penalties from Internet cigarette buyers. That tab is expected to go up to as much as $6 million this year.

Overall, Connolly said, cigarette excise tax revenue is up about $10 million through the first 10 months of this fiscal year, the first increase in three years. The state collected $424 million in cigarette excise taxes in fiscal 2005, which was down about $2 million from fiscal 2004 and $25 million from fiscal 2003, when the $1.51-per-pack tax took effect.

Bruce Mohl can be reached at mohl@globe.com.

Online cigarette vendor settles
Mass. to get list of customers in tax crackdown

By Bruce Mohl, Globe Staff | October 11, 2005

The Massachusetts Department of Revenue has received what may be a $3 million break in its crackdown on smokers who buy cigarettes over the Internet to avoid paying state excise taxes.

As part of a court settlement with Attorney General Thomas F. Reilly, an online cigarette vendor called eSmokes of Reston, Va., has turned over to the state the names and addresses of Massachusetts residents who purchased more than 131,000 cartons of cigarettes between November 2003 and February of this year.

Revenue department officials estimate that eSmokes customers owe the state $1.98 million in excise taxes. With interest and penalties, the total could rise to $3 million, said Audrey Rushton, director of the Revenue Department’s disclosure and administrative law unit.

The eSmokes data is the first major breakthrough in the state’s pursuit of cigarette-tax evaders. Over the last three years, the revenue department has recovered $331,000 in excise taxes from Internet cigarette buyers who were tracked down through other means.

The data from eSmokes is so voluminous that Revenue Department officials say they will have to create an automated system for billing individual taxpayers. Currently, the state bills cigarette wholesalers for excise taxes. In its previous efforts to collect unpaid cigarette excise taxes directly from smokers, the agency mailed bills to residents.

The crackdown on eSmokes customers comes at a time when online cigarette vendors are reeling from regulatory efforts to curtail their sales. Reilly has sued some of them for selling to minors and failing to inform consumers that they might be liable for taxes.

In March, New York Attorney General Eliot Spitzer, working with the US Bureau of Alcohol, Tobacco, Firearms and Explosives and other state attorneys general, including Reilly, said the nation’s major credit card companies had agreed to prohibit the use of their cards for illegal sales of cigarettes online.

Several online cigarette vendors have shut down as a result of the credit card agreement and others are struggling. ESmokes stopped selling cigarettes to Massachusetts residents in March and in May filed for Chapter 11 bankruptcy protection.

The Revenue Department has been trying to stem the loss of cigarette-tax revenue for several years, but until now has had limited success. Only four Internet retailers voluntarily provide the agency with the names of their Massachusetts customers under a federal law called the Jenkins Act, which requires out-of-state vendors to disclose the sale of cigarettes to anyone other than licensed wholesalers.

Many Internet retailers, particularly those on Native American reservations, say the Jenkins Act doesn’t apply to them. Rushton declined to name the four vendors that are supplying the agency with customer information.

Smokers have flocked to the Internet because of low prices. In Massachusetts, retailers typically charge over $47 for a carton of Marlboros, while eSmokes and other online vendors charge $35 or less, including shipping.

Rushton said the state plans to file a legislative package this fall to help collect more unpaid cigarette excise taxes. She declined to provide details, but said, ”Some things might be a little controversial.”

The state collected $424 million in cigarette excise taxes in the fiscal year ended June 30. That was down close to $2 million from a year ago and more than $25 million from the year before that, when the $1.51-per-pack excise tax took effect.

When Massachusetts raised its cigarette excise tax to $1.51 a pack in July 2002, it was the highest rate in the nation. Since then, the state has fallen into a tie for sixth place as a number of other states have increased their taxes.

Rhode Island has the highest state cigarette tax in the nation at $2.46 a pack, followed by New Jersey ($2.40), Michigan ($2), Montana ($1.70), and Alaska ($1.60). New York State charges $1.50 a pack, and New York City tacks on another $1.50 for a total per-pack tax of $3.

Bruce Mohl can be reached at mohl@globe.com.