Cigarettes and Tobacco News

Jul 23, 2006 -- SACRAMENTO - California consumers and retailers who thought they had dodged sales and excise taxes when they bought cigarettes from out-of-state Internet and mail-order vendors are about to be smoked out.

As part of a sweeping effort to crack down on such purchases, the state Board of Equalization has obtained 450,000 invoices from out-of-state Internet tobacco sellers showing untaxed sales to California residents over the past three years.

It also has secured another 65,000 shipping records showing deliveries of 250,000 packages of untaxed cigarettes to Golden State residents and retailers.

Armed with that mountain of paper proof, state tax collectors soon will ask buyers to pay up.

For heavy smokers, the tax bills could be hefty.

Consider the hypothetical case of a Sacramento smoker who might have bought 40 cartons of untaxed cigarettes since 2003 for $21 each.

The smoker would have spent a total of $840 on cigarettes and now would owe $348 in California excise tax and $65.10 in use tax. (The excise tax is 87 cents per pack. The use tax is equivalent to the sales tax in the local area, which in Sacramento County is 7.75 percent.)

Hurt by sales lost to Web sellers located out of state, California tobacco retailers for years have urged state officials to level the playing field.

Masoom Sadiq, manager of Cigarettes City on Stockton Boulevard, welcomes the state crackdown, but he is not optimistic that it will discourage Web buying.

"It's good, but people buying online won't stop," Sadiq said Tuesday.

Board of Equalization spokeswoman Anita Gore said the enforcement effort aims to eliminate the advantage out-of-state Web retailers enjoy because they're not collecting taxes.

"This effort will help create a fairer business climate in California," she said. "It is the goal of the BOE to collect the appropriate taxes due, no more, no less."

The crackdown comes thanks to a $2.8 million infusion in the latest state budget, which allowed the agency to hire abut 20 clerks to enter invoice information into its computers.

That data will be used to calculate tax assessments for thousands of tobacco buyers -- individual and retailers -- statewide, Gore said. She estimated the effort will recover about $52 million in unpaid taxes.

"Those who would not collect or pay the appropriate taxes absolutely have an unfair business advantage over retailers in the state who play by the rules and consumers who follow the law," Gore said.

California's enforcement program is similar to recent efforts in Alaska, Oregon, Washington, Illinois, Pennsylvania and Rhode Island, she said.

Although only a handful of Web sites sold tobacco products in the 1990s, more than 400 sites now sell to consumers online.

Many not only fail to charge state taxes but also require none of the age checks aimed at preventing sales to minors.

The Board of Equalization obtained the sales and shipping documents with the help of Attorney General Bill Lockyer, whose attorneys took on several Internet sellers in court and won, forcing them to disclose their sales invoices.

Consumers or retailers who bought cigarettes and other kinds of tobacco or cigars untaxed from Web vendors will be scrutinized.

Sellers whose deals are being scrutinized by the tax agency include: smokingforless.com; eSmokes.com; LLP En terprises, which operates www.cigoutlet.net; and cyco.net, which quit the online tobacco business in July 2003, citing mounting legal bills incurred in battles with several state tax agencies.

The attorney general also obtained shipping invoices from major transportation companies after sending them subpoenas. Gore declined to name the shippers.

One page of a redacted shipping log obtained by The Bee shows multicarton untaxed cigarette purchases by residents of Citrus Heights, Fair Oaks and Redding, as well as San Francisco, Oakland and Alameda.

Beginning in 1999, the federal Jenkins Act gave states permission to go after online vendors' invoices.

The Board of Equalization initially collected $2.4 million in taxes using such invoices.

Gore said that flow of money stopped when the online cigarette and tobacco vendors stopped complying with the Jenkins Act, triggering the court battles.