Americans who buy cigarettes online may be doing more than just avoiding the ultra-high taxes levied by many states and municipalities on tobacco. They may also inadvertently be supporting terrorism, two senators say.
Such was the scenario laid out by Orrin Hatch (R-Utah) and Herb Kohl (D-Wis.) in a co-sponsored bill they introduced this week, the Prevent All Cigarette Trafficking Act of 2003. The bill seeks to increase penalties for cigarette vendors who don't properly account for out-of-state sales -- including online merchants.
Hatch said he proposed the legislation (PDF) out of "concern that contraband cigarettes contribute heavily to the profits of organized crime syndicates, especially global terrorist organizations."
The Internet, Hatch said, has "exacerbated" the problem, as crime syndicates purchase cigarettes in states with low tobacco taxes and sell them to customers in states with high ones.
The bill's introduction comes as smokers continue to buy online in droves because Web merchants typically don't require customers to pay state sales taxes on cigarettes. Most customers come from places where tobacco is most expensive -- like New York City, where state and city taxes add an additional $3 to the price of a pack.
While cities and states lament they lose tax revenue when residents buy smokes online or through mail-order catalogs, smokers say prices in many areas are simply too burdensome for people on a budget.
"I would suggest they lower the tax, otherwise forget it," said Ray Domkus, president of the California chapter of FORCES. "We are going to find places where we can buy cigarettes for less." FORCES is a smoker's rights group that says high cigarette taxes are particularly problematic for elderly smokers on fixed incomes.
Sales of contraband tobacco products are fueled by states charging vastly different prices for a pack of cigarettes. In a statement introducing the anti-trafficking bill, Kohl noted that in North Carolina and Virginia a pack of cigarettes is taxed at five cents and three cents, respectively. In California and the state of New York, taxes are 87 cents and $1.50, respectively.
Such vast price discrepancies create an easy money opportunity for smugglers, some of whom are alleged to have links to terrorist organizations, Kohl said. Last month, for example, federal officers arrested participants in a ring that smuggled at least $8 million worth of cigarettes from North Carolina to Michigan and allegedly sent the proceed to Hezbollah, the Islamic militant group.
Domkus admits that the business of selling tax-free smokes has attracted some elements of organized crime, but believes the states and cities created an opportunity for criminals.
"If taxes were lower, there would be no need to smuggle, and organized crime wouldn’t get involved because there’s no money there," he said.
That logic was echoed in a study completed earlier this year by economist Patrick Fleenor and published by the Cato Institute, a deregulation-oriented think tank. The study found that in the four-month period after New York City raised its tobacco taxes to the highest level in the country, sales of taxed cigarettes fell by more than 50 percent compared to the same period the prior year.
Fleenor believes it is unlikely that online cigarette merchants are fronts for terrorist organizations. Most organized crime activity in the tobacco contraband business involves old-fashioned "over-the-road bootleggers" who buy cigarettes in states with low taxes and drive them to places with high taxes.
It's possible, Fleenor said, that online merchants actually make it harder for bootleggers to flourish, since the Internet allows smokers to comparison shop for discount, tax-free cigarettes.
Still, there's a good reason why the growth of online cigarette sales is making state tax collectors antsy. A recent report published by the U.S. General Accounting Office, cited by Kohl, predicted states will lose about $1.5 billion in tax revenues by 2005 if Internet tobacco sales continue at current levels.
Currently, online cigarette merchants are supposed to adhere to the Jenkins Act, a law passed in 1949 that requires anyone who sells cigarettes across a state line to an individual or unlicensed distributor to report the transaction to the state's tobacco tax administrator.
To help states get their taxes, the Senate bill would strengthen reporting requirements for interstate cigarette sellers and raise the crime of not reporting to a felony. It also would lower the number of cigarettes to be treated as contraband from 60,000 to 10,000.
