Sales of Cigarettes Online Hit
Online sellers of cigarettes have been in an enviable position â€” until recently. As states steadily raised cigarette taxes in an effort to balance budgets and curb teenage smoking, more and more consumers turned to the Web, where cheap cigarettes abound
But such bargains may not be so easily found in the future, some analysts said, as states like New York prepare to outlaw online tobacco sales, while others crack down on cigarette buyers who do not pay taxes.
For now, the savings are significant. When a smoker in New York City, for instance, buys a carton of Marlboro Full Flavor Kings from a site like DirtCheapCig.com, the price is $35.18, including shipping. For the same carton in Manhattan, where customers pay an excise tax of $1.50 a pack to both the city and the state, taxes alone would amount to $30.
The reason the Internet is a smoker's haven, analysts and state government investigators said, is that DirtCheapCig and hundreds of other Internet sites do not meet their legal responsibilities to report customers' names to the state taxing authorities, so that states can collect excise taxes.
Executives at DirtCheapCig.com, based in Paducah, Ky., did not return calls seeking comment, but a customer service representative said the site did not report sales to a customer's state. Rather, he said, it charges the Kentucky excise tax of 3 cents a pack.
According to Forrester Research, online bargains will help Web sites sell $2.2 billion worth of cigarettes this year, up from $1.2 billion last year. Forrester projects sales of $5 billion in 2005.
But those rosy figures could be in jeopardy, given the states' growing distaste for online tobacco merchants. New York, for instance, passed a law in 2000 barring the online and mail-order sale of cigarettes to its residents. After the law was initially struck down by the Federal District Court in Manhattan in 2001, it was upheld by a federal appeals panel earlier this month, and is likely to go into effect in the coming days.
The law was largely intended to curb under-age smoking, since many online cigarette sites do little, if anything, to verify the age of customers. But skeptics point to legislation in other states to enforce online cigarette tax collection, and say the law's true intent is to protect state coffers, not coughers.
"We all know this isn't about public health," said Joseph F. Crangle, a lawyer with Colucci & Gallagher in Buffalo, who has represented online cigarette sellers from Indian reservations in upstate New York. Mr. Crangle, who declined to identify his clients' Web sites, said traditional merchants lobbied Albany to protect the economic interests of both the state and the merchants, who have lost substantial sales to the online retailers. The states with some of the highest cigarette taxes have been among the most aggressive in their pursuit of Internet tobacco merchants.
California, which has a tax of 87 cents a pack, enacted two laws this year aimed largely at online cigarette sellers. The first requires online retailers to verify that customers are 18 or older, by, among other things, matching names, addresses and dates of birth to government records. Online sellers must also accept only checks or credit cards, in part because other methods of payment, like money orders, are more accessible to teenagers.
Laura Kaplan, a deputy attorney general for California, said the state had yet to prosecute a Web site under the law. That could change, though. "This is a very hot topic right now," she said.
The second new California law is aimed at tax evaders. It requires Internet and mail-order tobacco sellers who do not collect the state's excise tax at the time of a California resident's purchase to include on the outside of the shipping container a notification that the merchant has told the state about the sale, and that the customer is liable for taxes.
Those who work with the online cigarette sellers differ on how much the new laws will affect business. Robert Rubin, a Forrester Research analyst, said online cigarette retailers were likely to flout the law. "States can get tougher with the regulations, but their ability to police is limited," Mr. Rubin said. "It's so hard to police because these sites can pop up and go away so quickly. The anonymity of the Internet is great for this."
Enforcement of cigarette-related laws has long been a problem. A report by the General Accounting Office last year noted that the Federal Bureau of Investigation and Justice Department were responsible for investigating and enforcing the Jenkins Act, the law requiring remote cigarette sellers to inform states when a purchase takes place.
But, the G.A.O. report said, neither the Justice Department nor the F.B.I. identified "any actions taken to enforce the Jenkins Act with respect to Internet cigarette sales." One problem, the report said, is that violations of the act are considered misdemeanors, and government investigators do not think such charges are worth pursuing.
Notably, at least 80 percent of online tobacco sellers are on American Indian reservations, according to Mr. Rubin, of Forrester. Although Internet sites on Indian reservations are exempt from state sales taxes, such sites must still comply with the Jenkins Act, as well as other laws on sales of cigarettes to minors. With 11 states now proposing laws to regulate the online sale of cigarettes, the profits of various merchants could be affected, said Mr. Crangle, who represents cigarette sellers on reservations in New York.
"To the best of my knowledge, my clients are complying" with laws requiring online tobacco merchants to verify their customers' age and to submit tax information to the states, Mr. Crangle said. But the New York law "will certainly hurt," he said, since his clients "get a significant amount of business from within the state."
Likewise, Mr. Crangle said, the tightening of various state restrictions on age verification will be burdensome, given the limited resources of the Web sites. "There are other ways to ensure people who are under age don't receive cigarettes," he said, adding that his clients commonly ask new buyers to fax a birth certificate or driver's license.
But other companies have shied away from online selling, in large part because they feel such measures are not enough. Take the Santa Fe Natural Tobacco Company, a cigarette maker with about $150 million in annual sales. Richard M. Sanders, Santa Fe's chief executive, said that the company had long relied on a mail-order business simply because it could not compete with major tobacco brands for retail shelf space. Santa Fe was acquired last year by R. J. Reynolds Tobacco Holdings, whose brands include Winston and Camel, but it is an independent subsidiary.
Although mail-order and Internet operations are nearly identical, Mr. Sanders said, his mail-order division is much better able to verify a customer's age because sales are handled over the phone. Santa Fe representatives request a copy of a government identification (with an address that matches the buyer's shipping address), and a signed form stating that the buyer is a smoker.
If the company made a similar request online, "it would make people very, very reluctant," Mr. Sanders said.
Mr. Sanders said he generally supported laws that require Internet sellers to verify the age of buyers and pass tax information to states â€” but not enough to forfeit his own rights to sell via mail order. Santa Fe is one of the plaintiffs in the lawsuit that was overturned this month by the appeals court panel, paving the way for the reinstatement of the New York law banning mail-order and Internet tobacco sales. Mr. Sanders said the company would take "whatever course of action" required to overturn the law, including a petition to the United States Supreme Court.