Vice Squad
Sunday, September 26, 2004
Avoiding Cigarette Excise Taxes Via the Internet

Today's New York Times includes this front page story on cigarette sales over the internet, and in particular, on those sales conducted from Native American reservations. Purchasers of cigarettes over the internet are legally liable to pay the relevant excise tax for the state in which they reside -- but this liability is not well enforced. The obligation to pay the taxes applies to purchases from Indian-operated businesses, too, if the buyer is not a tribe member. But the enforcement of excise tax collections from American Indian businesses is even more problematic, owing to the partial sovereignty of the tribes on the reservations. Not surprisingly, given the growth of the internet and the substantial increases in cigarette excises in many states, effectively untaxed sales from Indian-operated websites have been growing rapidly. The Times story centers on tobacco sales from the Seneca tribe, located in New York:
Yet sales from Indian reservations, particularly from the Seneca lands, clearly account for a big portion of the growing business. A study commissioned by the Seneca tribal government found that Seneca cigarette sales totaled $347 million last year. About 95 percent were sold via the Internet or phone; the balance was accounted for by sales from the smoke shops that dot Seneca lands.
Generally, sin taxes can be a pretty potent element of vice policy, decreasing consumption while raising significant government revenue. But legislated vice taxes, like other taxes, have to be sensitive to the mechanisms of tax avoidance and evasion. The internet looks as if it has, for now at least, lowered the cost of evading cigarette taxes, which will make it hard for those jurisdictions with the highest excises to maintain their high rates. [Incidentally, a reminder that I am not a lawyer and you certainly should not rely upon any of the information or misinformation in Vice Squad. Further, purchases of untaxed cigarettes over the internet are not free of all risk that a tax collector will come calling. Some individuals, who perhaps did not even know that their low-priced internet cigarette purchases were officially taxable, have been rudely surprised upon receiving very hefty tax bills months later. A federal law requires that interstate sellers of cigarettes maintain a list of purchaser names and addresses, to facilitate tax collection.]

The Times article mentions a working paper on the internet as a mechanism for cigarette excise tax evasion, by economists Austan Goolsbee and Joel Slemrod. Their paper is available here.

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