GAO: States Need ATF Help to Collect Internet Cigarette Sales Taxes

States are losing millions of dollars in sales taxes on cigarettes sold online and need greater federal action to help them collect, according a report released yesterday by the U.S. General Accounting Office.

Under a federal law called the Jenkins Act, Internet cigarette vendors are supposed to supply customer names, addresses and purchase amounts on a monthly basis to state tax authorities, enabling them to collect sales taxes from the buyers, according to the GAO. However, Internet cigarette vendors are openly defying the law, the GAO contends.

The report lists 147 U.S.-based Internet vendors and claims that none of them post information indicating they comply with the Jenkins Act. Moreover, 31 percent of the sites have information posted on them indicating they do not report cigarette sales, or do not comply with the act, the GAO claims. Sixteen percent of the sites and four vendor representatives cited their Native American status, the Internet Tax Freedom Act and other laws as reasons not to comply with the Jenkins Act.

The GAO contends that neither Native American status nor the Internet Tax Freedom Act relieve the sites' owners from their responsibilities under the Jenkins Act, which was enacted in 1949.

The GAO used information from nine states to compile its report. So far, states' efforts to use the Jenkins Act to collect sales taxes have met with little success, the GAO said.

California reportedly has been the most successful by far at collecting the taxes. From May 1999 to September 2001, California contacted 167 Internet cigarette vendors in an attempt to get them to comply. About 20 merchants responded with the names of about 23,500 people whom California contacted. About 13,500 of the cigarette buyers contacted responded, resulting in $1.4 million in state tax revenue.

California estimates it lost $13 million in taxes for that period as a result of Internet cigarette vendors failing to comply with the Jenkins Act, the GAO said.

The report recommended transferring primary enforcement jurisdiction concerning the Jenkins Act from the Federal Bureau of Investigation to the Bureau of Alcohol, Tobacco and Firearms, mainly because of the FBI's current focus on terrorism. The report also indicated that if violations of the Jenkins Act were felonies rather than misdemeanors, federal law enforcers would be more apt to step in.

The report comes as state lawmakers increasingly eye cigarette taxes to make up for revenue shortfalls. Massachusetts recently approved a 75-cent increase on packs of cigarettes, and Illinois recently raised cigarette taxes by 40 cents to 98 cents a pack.

New Jersey and New York have the nation's highest cigarette taxes at $1.50 per pack. Washington state is third, at $1.425 per pack. Virginia is the lowest at 2.5 cents per pack.

The GAO also cited Forrester Research figures claiming that Internet tobacco sales will exceed $5 billion in 2005, and that states will lose $1.4 billion in tax revenue as a result.

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