Tax: MI Internet Tax Update

IPCPR Claims Michigan Legislators Have Love/Hate Relationship with Tobacco
LANSING, Michigan March 18, 2009 – Michigan legislators may be having a love-hate relationship when it comes to tobacco, suggests the International Premium Cigar & Pipe Retailers Association whose majority of more than 2,000 members are mom-and-pop smoke shop owners and small-business manufacturers and distributors of premium cigars, pipes, fine tobaccos and accessories.
Earlier this year, President Barack Obama signed the Children’s Health Insurance Program Reauthorization Act of 2009. The federal program is exclusively funded by taxes on tobacco products. For example, those tax increases took cigarette taxes up more than $10 per carton and roll-your-own tobacco from about $1.10 per pound to $24.78 per pound – a 2,253 percent increase.
Some Michigan legislators now want to add to those increased taxes by doubling the state’s excise tax rate on other tobacco products – from 32 percent of the manufacturer’s wholesale price to 64 percent.? At the same time, other Michigan lawmakers are seeking to ban smoking throughout the state following a contentious battle over such bans in last year’s legislative session.
“It is incomprehensible how some Michigan legislators can love and hate one product so much that they propose some 22 percent of their constituents should suffer by paying more for those products while having fewer places to enjoy them,” said Chris McCalla, legislative director of the IPCPR. Most recent industry statistics indicate that 22 percent of the adult population of Michigan are smokers.
?McCalla pointed out that thousands of jobs are at stake as are hundreds of small businesses like cigar stores, bars and restaurants and that secondhand smoke is not the problem that anti-smoking forces make it out to be.
“The Federal Reserve Bank used Bureau of Labor Statistics data to prove that jobs are lost and businesses suffer under legislated smoking bans. In addition, the safe levels of secondhand smoke established for businesses by the Occupational Safety & Health Administration – OSHA – are far above the air quality generally found in Michigan restaurants and bars,” McCalla said.
McCalla’s advice to Michigan legislators is to further cut the state budget or find new tax money elsewhere while turning down efforts to force a statewide smoking ban.
“It should be left up to individual business owners to decide whether or not they allow smoking on their premises. Their employees and customers can then decide whether or not to work there or patronize them. The bottom line is that, although nothing happens to anyone if he or she gets an incidental whiff of secondhand smoke, if you don’t want to smell smoke, don’t go into an establishment that allows smoking.”
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Contact:
Tony Tortorici
678/493-0313
tony@tortoricipr.com

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Cigarette tax singes poor, old
State slaps 3,500 more smokers with bills for buying cartons online.

June 6, 2006
Sarah Ryley / The Detroit News

MOUNT CLEMENS — When Marilyn Mostek, a senior living in a subsidized apartment, heard she could save $20 on a carton of cigarettes by ordering from an out-of-state Indian reservation, she thought she had found a clever way to save money.

Those savings went up in smoke on May 19 when she received a bill from the state of Michigan for $511 in unpaid cigarette taxes — nearly half of her fixed monthly income. Her neighbor, Robert Stutsman, received a bill the same day for $744.

Mostek, 69, and Stutsman, 75, are among 11,000 Michigan residents who over the past year and a half have felt the pinch of a state crackdown on people who have avoided Michigan’s cigarette tax by buying from out-of-state vendors online.

The bills, averaging $1,787, have hit the elderly and poor particularly hard.

To pay the debt, some have taken the state’s payment plan option. Others have used credit cards or taken out bank loans. A number of people are just refusing to pay, hoping the problem will go away.

Higher rates of smoking among the poor only increase the likelihood that the tax is hurting them more than others. A 2004 state survey showed 35.7 percent of those making $20,000 a year are smokers, versus 14.3 percent of those earning more than $75,000.

Attached to Mostek’s and Stutsman’s bills were letters that told them to pay up by June 19 or face a 500 percent penalty.

“Now I’m going to have to borrow from the bank; I have no other way of paying it,” Mostek said. Stutsman said he will get the money by postponing the purchase of an air conditioner for his one-bedroom apartment.

Within the past few weeks, 3,500 new bills have been mailed. The state’s take since launching the effort in February 2005: nearly $8 million.

State officials aren’t giving anyone a break. Even those on the installment plan must pay interest (the prime rate plus 1 percentage point).

The state decided to target scofflaw smokers after the cigarette tax jumped from $1.25 to $2 a pack in June 2004, sparking a huge increase in the number of people buying from out-of-state vendors, Department of Treasury spokesman Terry Stanton said.

The increase made Michigan’s cigarette tax the fourth-highest in the nation. Other states have started similar pay-up programs.

Some refuse to pay

Some people are refusing to pay the back taxes, either because they think it’s unfair or because they can’t afford the tab.

“They’re going to have to throw me in jail before they get any money from me,” said John Pearson, 51, of Livonia.

He and his wife, Michele, 45, received bills for roughly $8,000 each last year for purchases made as far back as 2002, when they were buying eight cartons a week from DirtCheapCigs.com. Some of those cartons were for the couples’ two children, also smokers, who lived at home.

John Pearson throws out — unopened — any new letters that come from the state, and he won’t sign for letters that come by certified mail. So he has no idea how much their bills have grown.

“We never looked at it as illegal or cheaper because we weren’t paying the taxes,” he said. “We thought they were cheaper because they were from Kentucky, where cigarettes come from.

“I wouldn’t have had a problem with them saying it was illegal, we would have just stopped. But going back to 2002 kind of ticked me off.”

Mostek and Stutsman said they would pay their tab on time, but they are doing so begrudgingly because their one-month deadline doesn’t give them enough time to get legal assistance. “We’re putting ‘paying in protest’ in the memo line,” Mostek said.

State can force them to pay

Besides piling on fines, the state has other tools it can use to force smokers to pay. It can garnish wages, deduct the money from income tax refunds, or place liens on property. Stanton wouldn’t say if the state has used any of those tools.

The state also could slap nonpayers with a misdemeanor or felony, depending on the number of cartons bought, but hasn’t yet, Stanton said.

But officials won’t back off, he pledged, saying the Department of Treasury is willing to pursue “any and all actions available to us to ensure payment.”

Stanton doesn’t buy the I-didn’t-know-it-was-illegal argument.

He said he has personally sent out numerous press releases and given hundreds of interviews on the subject since it became illegal to buy unstamped, and therefore untaxed, cigarettes in 1998. He said it is ultimately the customer’s responsibility to know the law.

“I would certainly hope the light bulb would go off over your head that would say, ‘Wait a minute, aren’t I still responsible for paying these taxes?’ ” Stanton said.

She didn’t know it’s illegal

For her part, Mostek, of Mount Clemens, swears she didn’t know she was breaking the law.

“I just don’t think it’s right that they can go back that far, especially when we didn’t even know what we were doing is illegal,” said Mostek, who was billed for taxes on 24 cartons of Basic Ultra 100s that she bought from BuyCheapCigarettes.com starting in 2005.

“We just assumed that if there were taxes, they’d appear on the bill,” said Marge Roehl, 61, who purchased four cartons from BuyCheap, but stopped when they would no longer take credit cards for payment. The state is likely to spare her a bill.

Stanton said there is a minimum purchase required before the state will send out a bill. He wouldn’t disclose what that minimum was, “given that there could be some inference that purchasing less than the threshold is OK in some way.”

The state’s crackdown is far from over.

So far, only four of 13 out-of-state companies that were subpoenaed have given up their customer lists. Other companies have voluntarily complied with the state’s request. Stanton wouldn’t divulge which companies have complied and which haven’t, saying that information is confidential.

The state also is contacting delivery companies, such as UPS, to get the addresses of online cigarette vendors, “because it is difficult to subpoena a Web site.”

State aggressive in pursuit

Cigarette vendors haven’t exactly rushed to let their customers know that state taxes aren’t included in their prices and that states are aggressively pursuing collection of those taxes.

BuyCheapCigarettes.com, formerly Ron’s Smoke Shop, just recently started noting on its mailers, in small print, that buyers are responsible for paying all taxes, and there is a link to each state’s Web page in the company’s “About Us” section.Other companies, like Cheap-Cig2.com in Europe, still claim that taxes are already included in the purchase price.

Representatives from each company did not return telephone calls.

Now that she’s paying the full freight for cigarettes again, Mostek is trying to quit. Getting residents to kick the habit was one of the goals of the state’s 2004 tax increase.

So far, though, she’s been unsuccessful, still puffing a pack and half to two a day. “They call me the chimney,” she said as she lit up another.

You can reach Sarah Ryley at (313) 222-2300 or sryley@detnews.com.

January 25, 2006

Discovery and Tax Enforcement
Michigan Department of Treasury
Angela Witt, Auditor
P.O. Box 30140
Lansing, MI 48909

Ref: Case #DIRTXXXX SECOND REQUEST

Freedom of Information Act request

Dear Ms. Witt:

I hereby request under the Michigan Freedom of Information Act copies of all documents held by your department in connection with your claim that I owe the state of Michigan taxes due to the alleged internet purchases of tobacco products. Specifically, I once again demand copies of all purchase orders, credit card receipt payments, delivery receipts and anything else the Michigan Department of Treasury has in its possession relevant to their claim.

Given the fact that Enron finally folded by inflating sales and receipts, there is no reason to believe that the information obtained by the State of Michigan from the internet tobacco site Dirtcheap wasn’t fabricated information also in an effort to create the appearance of site reliability. Furthermore, since this site was closed down due to alleged violation of interstate laws, there is no reason to believe that any information garnered from them is reliable.

Until I have the opportunity to review the requested documentation, there will be no request for informal conference with the Treasury Hearing Department.

Sincerely…………
(A Newsletter Reader)

Cc: Alan Sanborn, State Representative
Michael Cox, Attorney General
Candice Miller, U.S. Congress

************************
Sent: Sunday, February 12, 2006 11:05 AM

My guess in all this is that the state only obtained Excel spreadsheet info indicating purchasers name, shipping address and quantities ordered.

When I talked with “Angie” on Thursday, she said she could not provide me with the info I requested as my info was lumped in with other people’s info and if she made copies she would be providing me with priviledged info on the other people. That is why I believe is it only excel spreadsheet info.

Considering the business Dirtcheap did over a 3 year period, I have to believe that there is literally tons of paperwork stashed at their location. Paperwork that it is unlikely that the state of Michigan has in its posession. I may be wrong but that is my guess.

Depending how all this pans out, I am ultimately prepared to pay the extorting bastards the $1200 they claim I owe them. However, before I do, I intend to force them to use up every cent of it in salary costs involved in proving their case.

Then if they try to enforce the penalty costs, I will take my case to the individuals that are CC’d. Specifically, my state rep., my U.S. Congresswoman Candice Miller who thank God is a terrific conservative Republican then ultimately the state Attorney General who also is a Republican.

State tracks down smokers skirting cigarette tax

September 12, 2005
By Peter Luke
Lansing Bureau

LANSING — After getting their cigarettes in the mail, another 1,660 Michigan smokers two weeks ago received something else — nasty tax bills from the Michigan Department of Treasury.

Since the 2005 tobacco tax crackdown began last winter, the state has assessed nearly $5 million in back tobacco and sales taxes from nearly 6,000 cigarette purchasers. About $3.6 million has been collected; the rest is owed.

The names of those owing taxes were culled from two online cigarette retailers. The state is awaiting the names of customers of more than a dozen other Web sites.

Michigan is one of the most aggressive states in the nation when it comes to collection.

The tax assessments may boosting the sale of taxed cigarettes in Michigan, estimated to have dropped some 15 percent since Gov. Jennifer Granholm and lawmakers boosted cigarette taxes to the second-highest level in the nation — $2 a pack as of July 1, 2004.

After the first letters went out last winter, cigarette tax collections were 28 percent higher in February than the year before. August tax revenue suggests that collections will be up 35 percent from August 2003, when the tax rate was $1.25 a pack.

Another factor is that in March, major credit card companies agreed to stop processing orders through online cigarette retailers. Buying untaxed cigarettes through an online retailer can save a smoker $23 a carton.

For a while, anyway.

Terry Stanton, Treasury Department spokesman, said another 1,664 assessments were mailed on Aug. 29 seeking collection of unpaid cigarette taxes purchased on two Web sites, eSmokes.com and dirtcheapcigs.com, between August 2002 and February 2005.

A half-century-old federal law prohibits retailers from delivering cigarettes across state lines without a distribution license. It’s being used to compel online retailers to disclose their customer lists and sales records.

Various court actions have made the names and addresses of online smoke shop customers available to the states. Stanton said additional assessments against Michigan smokers “will be forthcoming as information is received.”

Polly Reber, a lobbyist for Michigan cigarette wholesalers who are losing business to online retailers and border states like Ohio and Indiana where the tax is lower, said Michigan has no choice but to be aggressive given the amount of revenue cigarettes generate.

Tobacco taxes are estimated to generate more than $1.1 billion in fiscal year 2005. K-12 public schools and Medicaid, the state’s health care system for the poor, will divide 80 percent of the proceeds, about $470 million apiece. The general fund, the main checkbook for discretionary state funding, will receive nearly $120 million.

“Michigan is becoming one of the more active states in enforcement and they are getting results in terms of revenue lost to illegal activity,” Reber said. The state, she added, “can’t afford to lose the revenue.”

Stanton said not all the cigarette purchasers being dunned for back taxes are casual smokers. Those assessed include 128 tax violators who each owe $5,000 or more in back taxes. Some purchasers, moreover, are buying dozens of cartons in a single order.

Other states are worried that casual smokers, many low income or retirees, are unfairly getting caught in the collection net. Wisconsin Gov. Jim Doyle in July suspended his state’s tax collection effort that he said was being done “on the backs of older people.”

Liz Boyd, Granholm’s spokeswoman, said Michigan is targeting tax “scofflaws” who have been buying online cigarettes in significant volumes that suggest more than personal use.

At the eSmokes.com Web site, smokers are warned that determining tax liability is the purchaser’s responsibility.

“In order to determine the applicable limits on purchases or taxing responsibilities, if any, imposed by your particular state, the consumer may want to contact their state authorities,” the site warns.

Still, Michigan’s tax collection effort is offsetting a fraction of the impact declining sales of legal cigarettes have had on tax collections.

While the cigarette tax rate was increased 60 percent last year, from $1.25 per pack to $2, tax receipts on a monthly basis are up about 30 percent.

Jack McHugh, a policy analyst with the Mackinac Center of Public Policy, a free-market think tank in Midland, said that’s the problem with excise taxes in particular and all taxes in general.

“People do change their behavior in response to changes in tax laws,” he said. “Whatever activity that is taxed, you get less of it.”

Michael Sarafa, who runs the statewide organization representing convenience stores, said Michigan retailers are losing sales because smokers are going online or across the border. Also, smokers may not be kicking the habit so much as curbing their daily intake.

“I’ve heard from retailers that their customers didn’t quit smoking, they just cut back,” he said.

Contact Peter Luke at (517) 487-8888 or e-mail him at pluke@boothnewspapers.com.