Collect, No Don't Collect

Alaska, Wisconsin take differing approaches to chasing online cigarette taxes

Published in CSP Daily News

ANCHORAGE, Alaska -- The state of Alaska has notified more than 600 Alaskans that they must pay the state taxes they skirted by buying tax-free cigarettes online, said the Associated Press.

Letters were posted last week telling smokers they can avoid steep penalties as long as they pay the tax. Alaska law requires the tax to be paid on all cigarettes, even those purchased by mail order, phone order or over the Internet.

As required by law, 10 online vendors provided names of customers to state tax officials in recent months, said [image-nocss] Johanna Bales, head of the state Department of Revenue's tobacco tax unit. The names of about 635 people were provided by a single Internet vendor, www.esmokes.com, and the state is still working through lists from other vendors, Bales said.

In Alaska, people who import untaxed cigarettes need a $25 license, and the fine for failure to have one is 100% of the taxes owed, plus up to another 25% for failing to file the taxes. A person shipping untaxed cigarettes through the mail can be fined another $5,000.

Meanwhile, in Wisconsin, Governor Jim Doyle ordered the state Department of Revenue late last week to end an effort to collect back taxes and penalties from thousands of Wisconsin residents who bought cigarettes over the Internet.

Doyle's action came hours after he said he was troubled by the plan. The department in the last month had sent 1,000 letters ordering taxpayers to compute and pay their delinquent taxes for online cigarette purchases from September 1999 to the present. The letters startled many taxpayers who inundated the department with concerns over how they would pay. I'm troubled when the burden of this comes down on the backs of some person some place, the governor told reporters.

He directed the department to stop sending the letters and try to step up regulation of Internet cigarette companies instead. The department estimates the state lost more than $4 million due to unregulated Internet sales of cigarettes in 2004.

State tax collectors recently obtained lists of customers from five separate online cigarette companies with the help of the federal government, said Meredith Helgerson, spokesperson for the Wisconsin Department of Revenue. In all, the lists contain 6,000 names of Wisconsin customers, she said, declining to name the vendors.

The department had planned to contact all the taxpayers by fall as part of the effort, which could net the state more than $3 million in unpaid taxes and penalties, Helgerson said. So far, the department sent two batches of 500 letters each, one in June and one in July.

Doyle aide Dan Leistikow said taxpayers who have already paid the back taxes would not see refunds since they paid taxes they legitimately owed. He said others who have yet to respond or who have ordered cigarettes online can rest assured that the department is not going to come after them.

The focus needs to be on the sellers, not on going after a senior citizen out there who bought a few cigarettes on the Internet, Leistikow said.

A federal law makes it illegal for people to transport cigarette products across state lines unless they are licensed dealers, but online cigarette companies had allowed customers to flout that law. Buying smokes online allows customers to avoid the state's cigarette tax, which is 77 cents per pack, in addition to local sales taxes ranging from 5% to 5.6%.

In the letters, the Revenue Department asked customers to voluntarily report their purchases and provided worksheets to figure out their outstanding tax burden. For a smoker who bought one $15 carton online per month for three years, the outstanding taxes and penalties would amount to $420. The agency applied 18% interest for every year a customer did not pay taxes and a $20 late filing fee for each year the purchases were not reported, and warned that failure to respond promptly or accurately would net a penalty of $25 per carton.

Helgerson said allowing people to self-report their purchases was a better approach than other states that are immediately sending taxpayers a bill. She acknowledged that many curious, concerned, confused taxpayers were calling the department with inquiries and complaining they could not afford the back taxes.

Doyle called on the Legislature to ban Internet tobacco sales altogether, saying such companies sell smokes to minors in addition to allowing people to avoid taxes. He plans to sign a provision in the state budget Monday to require online cigarette sellers to register with the state.

Brandon Scholz, president of the Wisconsin Grocers Association, said it is only fair that customers who order their cigarettes online pay the same taxes as those who buy tobacco in grocery stores. From the state's economic perspective, it's better for the state that they are collecting the tax on this product, he said. If there's a tax we have to collect it.