It's enough to take a smoker's breath away. After a July 1 tax hike, a single pack of cigarettes costs $8 in New York City, more than twice the national average of $3.75.
But outraged consumers are dodging these increases by shopping for cigarettes on the Web, paying half as much for cigarettes because online retailers don't add in taxes. Yet in doing so, shoppers evade state taxes and could ultimately be forced to pay up if caught.
Across the country, states have hiked cigarette excise taxes to encourage smokers to quit and to boost their own revenues, which have slumped because of the recession.
Along with New York, on July 1, the per-pack cigarette tax rose 70 cents in New Jersey, 49 cents in Vermont, 46 cents in Kansas, 40 cents in Indiana and Illinois, 31 cents in Ohio and 12 cents in Louisiana. On July 15, Pennsylvania's per-pack tax will increase by 69 cents.
"Cigarette taxes are not new. From the colonial period until the current day there have always been tobacco taxes to raise revenue," says Joanne Koldare, executive director of the New York City Coalition for a Smoke-Free City, an antismoking group. "But this is the first time it's been looked at as both a public health and budgetary move."
Click, Click, Boom
After the increase, New York and New Jersey both charge $1.50 in tax per pack, tied for the top spot in the country. With the median national excise tax just 41 cents a pack, many consumers have begun looking beyond state lines to buy cigarettes.
"Typically, when there's a tax increase, it takes a week or so to see what the impact is going to be on local stores," says James Calvin, president of the New York Association of Convenience Stores. "But in this case, the tax has been so dramatically increased that the impact has been immediate and severe. It has created a huge financial incentive for smokers to shop elsewhere."
Indeed, according to a 2001 study from Forrester Research, online cigarette sales will top $1 billion this year but account for only 3% of total cigarette sales. By 2005, Forrester expects online cigarette sales to exceed $5 billion, accounting for 14% of total cigarette sales.
After just one week with the new tax hikes, online retailers reported rising interest. "We're seeing a big increase," says Dan Colpetzer, manager of Seneca Smokes, an online tobacco retailer based in Lewiston, N.Y. "We're getting calls from all over the country, but especially New York City."
While buying online may be less convenient than a trip to the store, it is a lot cheaper. At eSmokes.com, a North Carolina-based cigarette retailer, a single carton of Camel Lights costs $32.84, or $3.28 a pack, after you factor in shipping costs. But in New York City, the same carton would cost at least $70, more than twice as much, and a single pack would cost $8, almost $5 more.
Prices are cheap online because Internet retailers don't add in state and local taxes. According to Forrester, more than two-thirds of online cigarette retailers are based on Indian reservations, which claim "sovereign nation" status and are exempt from a variety of state and local sales and excise taxes. Others are based in states such as North Carolina, which has a per-pack tax of just 5 cents.
A Butt in the Ashtray
However, just because online shoppers don't pay state excise tax doesn't mean they're not required to.
Under state laws, consumers are ultimately responsible for paying taxes on cigarettes once they're brought into the state. "If you buy them online, you're suppose to file a return with us and remit the excise tax of 98 cents a pack," says Mike Klemens, a spokesman with the Illinois Department of Revenue.
Tax evasion costs states dearly, but is especially painful now because they're strapped for cash. By 2005, Forrester estimates that states will lose $1.4 billion annually because of online cigarette sales, and that has spurred them to do something about it.
Using a 54-year-old law called the Jenkins Act, states are forcing retailers who sell cigarettes across state lines to report customer identities, addresses and amounts purchased on a monthly basis. State officials then use this list and send bills to recoup unpaid taxes.
"We've been using the Jenkins Act for two years," Klemens says. "And we've sent bills out to 2,900 taxpayers to recoup $117,000. We've heard from 2,300 of them and collected $90,000 so far. And we'll probably step it up again now that taxes increased from 58 cents to 98 cents on July 1."
Illinois and other states could recoup even more, but Native American cigarette retailers refuse to comply with the Jenkins Act, arguing that the law doesn't apply to them. "They're considered sovereign nations on some level," says Colpetzer, whose shop is located on the Tuscarora reservation. "They're not subject to taxes and won't be subjected to the rule of any state. We don't comply."
Government officials disagree. "From our reading, the Jenkins Act applies to Indian reservations," says Jerry Bowerman, spokesman with the Bureau of Alcohol, Tobacco and Firearms. "But it's a commerce act, and the major enforcement comes from the Department of Justice."
The Last Drag
While the jury remains out on the Jenkins Act, you can duck excise taxes for the time being by sticking to Web sites based on Indian reservations. But over the Internet, you can only buy smokes by the carton, not the pack, and you have to wait for them to arrive.
"Tobacco products are not living room furniture. They're an impulse buy," says Larry Downs, executive director of New Jersey Breathes, an antitobacco coalition. "People who buy packs aren't going to switch to cartons. It's not like you're buying milk or bread. People know they're bad."