Will Smoke Cloud States' Tax Vision?

Times Staff Writer

Cash-strapped states are looking to electronic commerce as a way to shore up gaping budgets, but efforts to tax cigarette sales made over the Internet demonstrate how difficult it will be to impose levies on a broad range of online purchases.

Online merchants have long maintained that it is logistically impossible to collect sales taxes on behalf of states because of the huge range of tax rates that localities impose. Eager for a piece of the $73.2 billion that U.S. consumers spent online last year, about 34 states have responded by forming the Streamlined Sales Tax Project, which is attempting to hammer out a plan to overcome merchant objections.

Collecting taxes on online cigarette sales already should be a streamlined process, thanks to a federal law enacted when the Internet was not even the stuff of science fiction. But the anonymous, diffuse nature of online commerce makes it tough for tax collectors to track down their marks.

"It is very difficult to keep people from breaking the law when they think there is a good chance they will get away with it," said Scott Peterson, co-chairman of the Streamlined Sales Tax Project. "Just ask your state police how many speeding tickets they give out compared to the number of people going faster than the speed limit."

In their push to tax tokers, states are relying on the Jenkins Act, which was passed in 1949 and requires cigarette sellers to report sales made across state lines. Along with the name and address of the buyer, the cigarette merchants must report the name of the brand and number of packs purchased.

Enforcement in California was relatively lax until 1999, when the state tobacco excise tax rose to 87 cents from 37 cents a pack. For a carton of cigarettes, that amounts to $8.70, and state sales taxes add at least $2.18 to the tax bill.

"Along with the increase, we knew the potential was going way up of people ordering from states with lower taxes," said Dennis Maciel, head of the excise taxes division of California's Bureau of Equalization.

His department searched the Internet to pinpoint about 200 major out-of-state Web sites that sold cigarettes. The state notified them of the requirement to send California monthly reports on sales to the state.

At first, about 10% of the merchants filed reports with the state, Maciel said. Then compliance slipped to single digits.

"Some of the people who got tax bills from us started complaining to those sites that they would never buy from them again if their sales were reported," Maciel said. And they didn't.

This week, state Sen. Debra Bowen (D-Marina del Rey) introduced a bill that would force shipping companies to report all deliveries of cigarettes in the state to the Board of Equalization.

"We have got to find a way that would allow the state attorney general and district attorneys to enforce these taxes," Bowen said. "We didn't create these taxes. They are already on the books."

State officials say they don't know how much tobacco tax they are missing, because they don't know the dollar value of cigarettes ordered online from California. But a study by Forrester Research estimates that by 2005, 14% of U.S. tobacco sales will occur online, sucking $1.4 billion out of state coffers.

Other states also are trying to collect cigarette taxes. In New Jersey, where excise taxes amount to $15 on a carton of cigarettes, officials sent out nearly 1,000 tax bills to residents based on reports it received from out-of-state tobacco sellers.

But a state official who asked not to be named acknowledged the difficulty of making distant sellers comply. In the last five years, New Jersey has collected only about $660,000 in taxes based on reports from the sellers.

"We would love to get everything owed to us," he said. "But I don't think we are going to be sending a New Jersey patrolman to knock on the door of a seller in Oregon."

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