Tax Hike Drives Buyers To Go Out-of-State

BY MATTHEW SWEENEY

- New York’s $1.50 per pack cigarette tax has triggered a booming business in online tobacco sales — and that has some city officials fuming.

“We’ll have to tighten the laws,” said the city Department of Finance Commissioner Martha Stark. “The ATF [Bureau of Alcohol, Tobacco and Firearms] can do a lot more. The Department of Justice can do a lot more. It might be that we need some legislative changes.”

Cigarette sales are down by one-third from August of last year, but it’s impossible to tell how many people quit smoking — and how many are sprinting through a legal loophole that shortcuts local taxes.

One of an increasing number of uncounted smokers, Chris McMurtrey, 31, a copywriter at a Manhattan ad agency, went online.

He pays Manhattan cigarette prices only in between deliveries of cartons from a virtual store located on the Seneca Indian reservation upstate.

“I was fine with paying $5.50, that’s okay,” he said. “It’s about the same price everywhere else. But it went up two or three bucks overnight. Forget that.”

So once a month a box arrives at his apartment building with a few cartons of his favorite brand inside, the doorman signs for them. They cost $32 each, compared with the city price of $140. If he buys five cartons, the shipping is free. “It’s technically not illegal, that’s my understanding,” Mr. McMurtrey said.

Technically, the law’s not clear.

Online tobacco shopping was big business before the July 2 city tax that put prices over $7 per pack. A study conducted by the University of North Carolina found that by January 2002 there were at least 195 Internet cigarette retailers, more than double the number a year earlier.

And in December 2001, industry experts predicted that within a year, one-fifth of the U.S. $40 billion in cigarette sales would be made on-line. But once the July tax hit, the dam broke.

“Volume went w-a-a-a-y up, no question about it,” Scott Herring, owner of nccigarettes.com told the Associated Press. A little more than half of his customers live in New York and New Jersey, which added its own $1.50 tax this year. Herring’s sales leapt from $15,000 to $25,000 a month he told the AP.

But there is no means of tracking Internet tobacco sales. Which means there is no way of determining how much tax revenue is being lost.

“Nobody really knows how much is sold online in New York,” said Sam Miller, a department of finance spokesman.

Not that the city has been hurt financially by Internet sales. According to Mr. Miller, the city took in $16 million in tax revenue from cigarette sales in August 2002, compared with just $2.4 million in August 2001.

At the same time the number of packs sold has dropped by about one-third.

Still, Ms. Stark knows retailers are doing an end-run around the law. Federal law requires retailers to furnish customer information to their home states so taxes can be levied, but the laws are tough to enforce.

With cigarettes there is an exemption that allows the purchase of two cartons, untaxed, such as at a duty free store. But the law has no wording for Internet sales. Ms. Stark said they have to report all sales.

It will take another six months or more to determine how much revenue is being lost to on line sales and whether it is more than a short-term trend.

Add to the legal confusion the more than 100 Internet cigarette stores based on Indian reservations – most in New York State – that claim exemption from taxes as sovereign nations.

“If they are selling to non-tribal members they are supposed to provide us with a list,” Ms. Stark said. “There’s no question.”

-- Anonymous, September 17, 2002