Archive for Tuesday, January 18, 2005

Online cigarette sales are a drag for New Yorkers

January 18, 2005

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— About 3,700 New Yorkers who thought they had avoided a hefty $3-a-pack tax by buying their cigarettes online have found that the city has smoked them out.

New York City's Department of Finance has sent thousands of letters to New York customers of Internet cigarette vendors, asking for a total of $1.3 million in lost taxes. The city gleaned the names and addresses from a Virginia lawsuit against one site, cigs4cheap.com, which went out of business. Some people owe as much as $10,000.

"The law says you got to pay your taxes. The handful of people who don't are just stealing from the rest of us," Mayor Michael Bloomberg said Friday in his weekly radio address.

"If you have a bill for $10,000 for cigarette taxes, you're a dealer, you're not just smoking."

The letters, sent to those who bought cigarettes online between July 2002 and April 2004, give the alleged violators 30 days to pay or face interest and penalties of up to $200 a carton. By Friday morning, the department had received several phone calls asking to set up payment plans.

Andrew Hoffer, 37, a utility worker in New York, said he was stunned by the letter, which said that penalties could increase his $1,005 tax bill to more than $13,000 if he didn't pay within 30 days.

"I thought someone was pulling a prank on me," he said. "I didn't purchase online to intentionally evade the taxes. I smoke kind of an obscure brand called Broncos, and they're hard to find."

Hoffer said he was working overtime to come up with the tax money.

"I think we'll get it all," said Joanna Perlman, a finance department spokeswoman. "We're very good at collections. We have lots of tools we can use, including liens on people's bank accounts and houses."

'Level playing field'

Since the taxes raised the price of a pack to about $7 in July 2002, Perlman said the city had lost about $40 million a year in untaxed cigarettes. But on top of getting the city's money back, the letters also are meant to protect New York's retailers and stop young smokers, Perlman said.

"We sent out the letters to level the playing field for retailers here in New York City who are collecting the tax and losing business to online sites," she said. "We also did it to deter minors from starting smoking. We don't want them to get cheap cigarettes online and start up a habit."

One recipient of the letter, Peter Reiser, 42, isn't even a smoker. He bought a couple of cartons of Benson & Hedges Deluxe Ultralight from the Web site as a gift two years ago, and last Thursday, received a letter asking for $30 in unpaid taxes.

"Usually those official letters are quite polite, but this one is oddly belligerent," said Reiser, a New York City lawyer. "It's several pages long, it talks about vendors' false claims, and if you don't pay, we're going to get a judgment against you and you won't be able to get a credit card."

What it didn't have was any details about the transaction, which Reiser could hardly remember, leading him to joke it was "taxation without information."

"If I owe them money, I'll pay it," he said. "But it was very cryptic."

Suing Web sites

New York also has launched lawsuits against 30 other Web sites, hoping to recover lost revenue. But those customers won't be getting letters just yet. The lawsuits ask for buyers' names and their orders to calculate how much taxes to demand from the Internet companies, a city lawyer said. New York resorted to going after the buyers this time because cigs4cheap.com was bankrupt.

"We would prefer to collect the money from the companies," said Eric Proshansky, a litigator for the city. "It's rather inefficient to go after 5,000 people one at a time."

Many of the Web sites now have "legal notices" declaring that all sales taxes have been paid, but buyers should check with their local governments about whether they may owe further local taxes. Not many people do.

A half-dozen of the vendors under litigation did not return phone calls seeking comment.

New York's lawsuits invoke the Jenkins Act, a decades-old law written before the Internet era to prevent large-scale tax evasion. The law requires dealers who ship cigarettes to another state to inform that state's government who had purchased them. Sites owned by American Indian reservations often claim that the tax laws don't apply to them, because they are sovereign nations.

Those claims are false, New York argues.

"There's no such thing as a tax-free cigarette," Perlman said.

A bill pending in Congress would force the vendors to pay each state's excise tax before shipping the cigarettes, and would increase the penalty for noncompliance.

"That would put the Internet sites out of business," Proshansky said. "The reason they're so cheap is because they don't pay the taxes."

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