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Tax on internet tobacco sales
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plabonte Offline
#1 Posted: Tue, Oct 14 2003, 6:31 AM EST
Joined: 09-11-2000
Posts: 2,131
Has anyone (including people from cigarbid) heard of this?

I get a newsletter from GFOA (Government Finance Officers Association)with the following blurb:

BILL TO FORCE TAX COLLECTIONS ON INTERNET TOBACCO SALES

The Courts, the Internet and Intellectual Property Subcommittee of the House Judiciary Committee approved HR 2824 on October 2, which would allow states to collect excise taxes on tobacco products purchased over the Internet. These taxes are currently not collected and thus state governments lose out on collecting hundreds of millions of dollars. The Senate Judiciary passed a similar bill, S. 1177 in late July. The bill would allow state attorneys to impose fines on said retailers-$5,000 for the first violation, and $10,000 for each violation thereafter.
Robby Offline
#2 Posted: Tue, Oct 14 2003, 8:26 AM EST
Joined: 10-30-2002
Posts: 5,067
Looks like it's ciggarettes and smokeless.

http://thomas.loc.gov/cgi-bin/query/D?c108:1:./temp/~c108kY5Upy::
Steve*R Offline
#3 Posted: Fri, Oct 17 2003, 5:06 PM EST
Joined: 07-23-2001
Posts: 1,858
Ultimately, this will be across all tobacco sales. There is legislation in virtually every state legislature to apply sales tax to all mailorder and internet purchases, not just tobacco. Tobacco sticks out because of some state's heavy tobacco taxes.

Take a state that has a 37.5% tobacco tax and a 7.5% sales tax. A local retailer purchases a popular cigar from a local tobacco jobber. Because of the retailer's small size, he can't purchase sufficient quantity to buy direct from the manufacturer. The numbers look like this:
1. The jobber pays $50.00 for the box
2. The retailer pays the jobber $60.00
3. The retailer charges the consumer keystone mark up, about 50% (Retail minus cost divided by retail)
120 minus 60 = 60, 60 divided by 120 = 50% m.u
4. The consumer pays 120 + 120(37.5%+ 7.5%)= 120+54 or $174.00

When the consumer buys via mail order or the internet, from an out of state source, that state loses $54.00. The consumer, very likely, has been paying a 35% mark-up to his outstate source, so instead of paying $174.00, he's paying about $82.50.

There's a reason that the largest internet cigar vendor was sold to Altadis.
Tobasco Offline
#4 Posted: Fri, Oct 17 2003, 7:44 PM EST
Joined: 02-08-2003
Posts: 2,809

Hopefully if that ever happens, we will have plenty of notice. Dang, I'll pull a few grand out of the bank and go on a totally wild spending spree!!

Mag
0patience Offline
#5 Posted: Fri, Oct 17 2003, 8:06 PM EST
Joined: 07-20-2003
Posts: 1,023
I'm curious how they will do that tax.
Will the tax according to the state of the purchaser, the seller or a FET tax?
If they tax according to purchasing state, some folks may have their orders sent to other states. If they tax according to selling state, folks may look for the lowest taxable state to make purchase from.

We already see this with other internet sales. I see alot of sales, solely because there's no sales tax.
My busines is registered in a state [the one I linve in] with no sales tax, so I can sell without charging sales tax. That may be something like we will see should this follow.

The only other thing I can think of is a Federal tax and if they chose to do that, then they would have to restructure the way every state taxes for tobacco, I would think.
Steve*R Offline
#6 Posted: Sat, Oct 18 2003, 8:31 PM EST
Joined: 07-23-2001
Posts: 1,858
There are many proposals on the table on how to tax, based on the seller or the buyer. In all likelihood, it will be based on, and paid to the selling state.

And when that happens, those states who have no sales taxes will move to institute one for interstate sales. What state is going to pass up all that extra revenue?
penzt8 Offline
#7 Posted: Mon, Oct 20 2003, 6:05 AM EST
Joined: 06-05-2000
Posts: 1,771
It would not be in the interest of a "tax free" state to suddenly begin taxing internet sales. They will be quite happy if internet businesses move into their state because they will still collect corporate tax and income tax from the employee payrolls from the jobs that are created. Also it would probably prove to be unconstitutional for them to just tax internet sales and not the regular retail sales.

As the law is written today, it is the responsibility of the buyer to declare and pay the "use tax" and other applicable taxes to his/her home state (where the product is used or consumed). Some states have a line on their state income tax forms to report these taxes. The problem is, everyone ignores the current law and there is practically no way to enforce it. It's been ingnored by the state governments because the cost of enforcement was more than the potential revenue. Time are changing and internet, mail order, shop-at-home TV, and other direct marketing is growing.

Since this type of tax is a state issue, it really becomes a big problem and will likely be drawn out by years of litigation. The states that currently have no sales tax and don't want to be bothered with one will challenge any federal legislation that tries to impose the reporting or collection of taxes upon their citizens. One state cannot force another state to report sales or collect taxes on their behalf.

This would create the need for another federal government beaurocracy just to oversee all of this interstate commerce (which can only be regulated by the federal government). Just what we need, more federal government! So the taxes that were intended to go to the states will end up paying for a federal goverment agency set up to regulate interstate taxation. Sounds pretty stupid to me.
sketcha Offline
#8 Posted: Mon, Oct 20 2003, 10:19 AM EST
Joined: 03-26-2003
Posts: 3,238
Great! Just what I needed. Another excuse to buy a ton of cigars now.
rayder1 Offline
#9 Posted: Mon, Oct 20 2003, 2:54 PM EST
Joined: 06-02-2002
Posts: 2,226
One way around is to find a low or no tax state where you have friends. Get a PO box there for your cigar deliveries and have your buddy forward them.

Funny thing...here on CBid we probably have all the states covered. Maybe we can set up a network. Of course a transfer fee of a couple stogies would help grease the deal.

Sorry....I live in CA where the tax is one of the high ones. But it might be a thing to try until Big Brother zeroes in.
Steve*R Offline
#10 Posted: Mon, Oct 20 2003, 5:21 PM EST
Joined: 07-23-2001
Posts: 1,858
penzt8: I appreciate your well thought out post.

Let me clarify a few points, based on the current bills before the Congress and concurrently in many state legislatures. There is a clear and distinct difference between a use tax and a sales tax. Make no assumptions about this issue, based on the current situation of noncompliance. At issue is where the tax will reside upon payment, the selling state or the purchaser's state. That is the issue...period. The states and federal government, in consort, agree, in total, that all taxes which are legally applicable should be collected. This is not unique to tobacco.

The issue of tobacco sales has three forks: tobacco tax, sales tax, and sales to minors. States that have a high tobacco tax want the revenue that flows through its mailorder, catalog, web retailers to remain within the state. There is absolutely nothing to prohibit individual states from declaring that tobacco products may not be shipped within that state. New York is a hair's breath away from enforcing legislation that prohibits mail order cigarette sales and deliveries. If you cannot ship tobacco within a state, consumers are obligated to purchase locally and pay state taxes, and minors can no longer buy tobacco products via the web that they could not buy locally.

Logistically, the interstate collection of sales and tobacco taxes, contrary to what you commonly read, is a computer programmer's ten minute task. If the tax goes to the seller's state, it's the standard automatic percentage that will go directly from your credit card company to the state's coffers. If the tax is directed to the purchaser's state, the retailer's programmer will have to have his sales program written to automatically include each state's tax, and upon purchase, the tax will go directly to that state.

We live in an era where states are cash short, the Fed is sinking in a deficit, and sales taxes on luxury use items are an easy target.

Just because you don't like what's happening, don't presume for a moment that it won't happen.

My predictions: Within five years all mail order, including internet, tobacco sales will be prohibited by the federal government. We'll all be buying locally.

The states will reach a clear enforceable agreement on the collection of sales taxes on all items shipped interstate.
rayder1 Offline
#11 Posted: Mon, Oct 20 2003, 10:07 PM EST
Joined: 06-02-2002
Posts: 2,226
Unfortunately, because it rings true, I agree with SteveR. When it comes to that. I think the cigar import/ manufacturing industry will be severely impacted with massive sales losses.

I wouldn't doubt it for a second. Hopefully someone will step up to the plate and fight for the right of legitimate internet commerce.

The feds should be busy enough trying to solve the internet porn and child porn industry issues, than to try and ruin legitimate , above board , businesses.
penzt8 Offline
#12 Posted: Tue, Oct 21 2003, 8:41 AM EST
Joined: 06-05-2000
Posts: 1,771
From a previous discussion on this board:
Actually the term sales tax is incorrect when you are referring to the taxes that are suppose to be paid on out of state purchases. The proper term is "use tax". The US Supreme Court ruled in National Bellas Hess in 1967, that the Constitution prohibited merchants from collecting taxes on purchases made by out of state customers if their business had no physical presence in that state. Consumers are still required to report these purchases and pay the use tax.

In the case of tobacco products that also carry an excise tax, consumers are also suppose to report these. But, since the Supreme court ruled that retailers are prohibited from collecting the tax and later ruled that the retailers were not obligated to report the sales to the various states, enforcement is almost impossible. The internet tax freedom act didn't change any of this. It only prohibited the introduction of "new taxes" that the government feared would stifle the growth of internet e-commerce.

Many state govenments are pushing for a nationwide use tax program to recover these lost revenues but it will take congressional action since the states don't have the power individually to regulate interstate commerce. Some states were trying to get the US postal service and other delivery services to report deliveries. So far none of them have agreed.

Considering that internet sales have grown to about $15 billion per year and will probably hit $100 billion per year within the next ten years the individual states stand to lose 4 to 5 billion annually. These are revenues that are needed for public service such as education, law enforcement and fire protection. The money has to come from somewhere. If not from sales/use tax then they'll raise local taxes or property taxes to make up for the losses.
Steve*R Offline
#13 Posted: Tue, Oct 21 2003, 10:12 AM EST
Joined: 07-23-2001
Posts: 1,858
penzt8: The 1967 act, while not overturned, has been reinterpreted in many interstate compacts. Because of large chain stores having outlets in multiple states, it became necessary for retailers to collect sales taxes from consumers from other states than the state of purchase, because of the retailers presence in the purchaser's state. The issue of presence is open to interpretation by the courts. If a retailer only has stores in one state, but has stockholders in many states, and suppliers in others, what should be its status via interstate commerce and collection?

Ultimately, the taxes will be collected. The 1967 act was written prior to the proliferation of e-business and is clearly out-of-date. Health warnings on cigarette packages had only begun a few months earlier and we've seen how legislation has changed the marketing and sales of cigarettes.

As I wrote in another thread, there's more than one reason the largest catalog, internet seller of cigars was sold to Altadis.
Steve*R Offline
#14 Posted: Tue, Oct 21 2003, 11:58 AM EST
Joined: 07-23-2001
Posts: 1,858
Interesting note: I just heard that the State of Maine has prohibited the mailorder and internet sale and delivery of cigars within its borders.
Steve*R Offline
#15 Posted: Tue, Oct 21 2003, 12:07 PM EST
Joined: 07-23-2001
Posts: 1,858
Re: Maine. Here's a URL to the news story.

www.pressherald.com/news/state/031021smoking.shtml
rayder1 Offline
#16 Posted: Tue, Oct 21 2003, 6:58 PM EST
Joined: 06-02-2002
Posts: 2,226
When cigars are outlawed.......


......only outlaws will have cigars.
0patience Offline
#17 Posted: Tue, Oct 21 2003, 7:28 PM EST
Joined: 07-20-2003
Posts: 1,023
If the retailer needs a copy of a government-issued document that provides the buyer's name, current address, photograph and date of birth. Then why would this be an issue....
"Retailers must also get signed, written statements documenting that each buyer is of legal age - at least 18 - to purchase tobacco products in the state."

If a credit card on the internet is proof of age for most parts, then why would it be any different for cigars?

The funny part I laughed at was this.....
"It isn't right for people off the street to buy cigars cheaper than I pay."
Well, maybe he should rethink where he is purchasing from. It is called supply and demand and free trade.

The tool distributors I deal with know that if there is a place selling the same tools retail for what I buy wholesale, I may be buying from that place. Do I think it isn't right that someone can buy the same tools cheaper from a retailer on-line, than I can buy from my distributors? No, I just make a deal with THAT retailer to supply me certain tools. It is called good business.

Maybe I'm wrong.

I realize their bottom line is to stop youths from ever starting, but it is bad enough that they are passing laws to prevent individuals from doing what they want. Closing down cigar bars because they pass laws that you can't smoke in a bar. Now there is a smart one. Next they are going to want to make bars have healthy alcohol. ;)

penzt8 Offline
#18 Posted: Wed, Oct 22 2003, 4:50 AM EST
Joined: 06-05-2000
Posts: 1,771
OK, I'm no lawyer but here's my take on this. The Maine law will likely be struck down as unconstitutional if it is challenged. Here's the reason. States are prohibited from regulating interstate commerce. (Article I Section 8 of the US Constitution says so)

There is an exception to this rule that was granted by the 21st amendment. When phohibition was repealed, the amendment was worded in such a way that it gave states the right to regulate by law, the importation and transportation of intoxicting liquors.

Several states have law that's prohibit mail order wine/beer. When challenged in court, the states have won because of the 21st amendment. This right does not extend to any other product.

http://caselaw.lp.findlaw.com/data/constitution/amendment21/

Steve*R Offline
#19 Posted: Wed, Oct 22 2003, 5:24 AM EST
Joined: 07-23-2001
Posts: 1,858
The reality is that no tobacco vendor, manufacturer, retailer, etc. is going to attempt a constitutional challenge to restrictions on tobacco sales and transportation. The cigarette companies are paying billion$ in damages. The likelihood of any tobacco related business being successful in a state or federal court is miniscule.

It's simply the anti-tobacco era in which we live. Cigar manufacturers believe that brick and mortar stores are the foundation of their business and they aren't going to risk that business with a court challenge.

medemax Offline
#20 Posted: Wed, Oct 22 2003, 6:26 AM EST
Joined: 02-15-2002
Posts: 178
AHA! I KNEW there was a reason that I have a three-year supply of smokes! Note that the Maine law was passed due to support by cigarette companies and anti-smoking lobbies...you may attribute that to the tobacco lawsuits...if courts are going to treat tobacco like a controlled substance for the purpose of awarding damages, then so will the cigarette companies. I wonder how much it would cost to obtain a retail sales license in Maine..."Bob's Basement Sundries"...and then order smokes as a retailer?
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