[House Hearing, 108 Congress]
[From the U.S. Government Publishing Office]
YOUTH SMOKING PREVENTION AND
STATE REVENUE ENFORCEMENT ACT
=======================================================================
HEARING
BEFORE THE
SUBCOMMITTEE ON COURTS, THE INTERNET,
AND INTELLECTUAL PROPERTY
OF THE
COMMITTEE ON THE JUDICIARY
HOUSE OF REPRESENTATIVES
ONE HUNDRED EIGHTH CONGRESS
FIRST SESSION
ON
H.R. 1839
__________
MAY 1, 2003
__________
Serial No. 19
__________
Printed for the use of the Committee on the Judiciary
Available via the World Wide Web: http://www.house.gov/judiciary
U.S. GOVERNMENT PRINTING OFFICE
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COMMITTEE ON THE JUDICIARY
F. JAMES SENSENBRENNER, Jr., Wisconsin, Chairman
HENRY J. HYDE, Illinois JOHN CONYERS, Jr., Michigan
HOWARD COBLE, North Carolina HOWARD L. BERMAN, California
LAMAR SMITH, Texas RICK BOUCHER, Virginia
ELTON GALLEGLY, California JERROLD NADLER, New York
BOB GOODLATTE, Virginia ROBERT C. SCOTT, Virginia
STEVE CHABOT, Ohio MELVIN L. WATT, North Carolina
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
CHRIS CANNON, Utah SHEILA JACKSON LEE, Texas
SPENCER BACHUS, Alabama MAXINE WATERS, California
JOHN N. HOSTETTLER, Indiana MARTIN T. MEEHAN, Massachusetts
MARK GREEN, Wisconsin WILLIAM D. DELAHUNT, Massachusetts
RIC KELLER, Florida ROBERT WEXLER, Florida
MELISSA A. HART, Pennsylvania TAMMY BALDWIN, Wisconsin
JEFF FLAKE, Arizona ANTHONY D. WEINER, New York
MIKE PENCE, Indiana ADAM B. SCHIFF, California
J. RANDY FORBES, Virginia LINDA T. SANCHEZ, California
STEVE KING, Iowa
JOHN R. CARTER, Texas
TOM FEENEY, Florida
MARSHA BLACKBURN, Tennessee
Philip G. Kiko, Chief of Staff-General Counsel
Perry H. Apelbaum, Minority Chief Counsel
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Subcommittee on Courts, the Internet, and Intellectual Property
LAMAR SMITH, Texas, Chairman
HENRY J. HYDE, Illinois HOWARD L. BERMAN, California
ELTON GALLEGLY, California JOHN CONYERS, Jr., Michigan
BOB GOODLATTE, Virginia RICK BOUCHER, Virginia
WILLIAM L. JENKINS, Tennessee ZOE LOFGREN, California
SPENCER BACHUS, Alabama MAXINE WATERS, California
MARK GREEN, Wisconsin MARTIN T. MEEHAN, Massachusetts
RIC KELLER, Florida WILLIAM D. DELAHUNT, Massachusetts
MELISSA A. HART, Pennsylvania ROBERT WEXLER, Florida
MIKE PENCE, Indiana TAMMY BALDWIN, Wisconsin
J. RANDY FORBES, Virginia ANTHONY D. WEINER, New York
JOHN R. CARTER, Texas
Blaine Merritt, Chief Counsel
Debra Rose, Counsel
David Whitney, Counsel
Melissa L. McDonald, Full Committee Counsel
Alec French, Minority Counsel
C O N T E N T S
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MAY 1, 2003
OPENING STATEMENT
Page
The Honorable Lamar Smith, a Representative in Congress From the
State of Texas, and Chairman, Subcommittee on Courts, the
Internet, and Intellectual Property............................ 1
The Honorable Martin T. Meehan, a Representative in Congress From
the State of Massachusetts..................................... 2
The Honorable Mark Green, a Representative in Congress From the
State of Wisconsin............................................. 3
WITNESSES
Mr. Paul L. Jones, Director, Homeland Security and Justice,
General Accounting Office
Oral Testimony................................................. 6
Prepared Statement............................................. 8
Mr. Henry ``Hank'' O. Armour, Chairman of the Board, National
Association of Convenience Stores
Oral Testimony................................................. 17
Prepared Statement............................................. 19
Mr. Matthew Myers, President, National Center for Tobacco-Free
Kids
Oral Testimony................................................. 28
Prepared Statement............................................. 29
Mr. Patrick Fleenor, Chief Economist, Fiscal Economics
Oral Testimony................................................. 37
Prepared Statement............................................. 38
APPENDIX
Material Submitted for the Hearing Record
Letter to Paul L. Jones, Director, Homeland Security and Justice
from Rep. Lamar Smith.......................................... 55
Letter to Rep. Lamar Smith from Paul L. Jones, Director, Homeland
Security and Justice........................................... 57
GAO Report No. GA-02-743, Report to Congressional Requesters,
August 2002, Internet Cigarette Sales, Giving ATF Investigative
Authority May Improve Reporting and Enforcement................ 59
Prepared Statement of Ali Davoudi, President, Online Tobacco
Retailers Association (OLTRA).................................. 118
YOUTH SMOKING PREVENTION AND
STATE REVENUE ENFORCEMENT ACT
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THURSDAY, MAY 1, 2003
House of Representatives,
Subcommittee on Courts, the Internet,
and Intellectual Property,
Committee on the Judiciary,
Washington, DC.
The Subcommittee met, pursuant to call, at 10:04 a.m., in
Room 2141, Rayburn House Office Building, Hon. Lamar Smith
[Chairman of the Subcommittee] presiding.
Mr. Smith. The Subcommittee on Courts, the Internet, and
Intellectual Property will come to order. We have an
interesting hearing this morning. I will recognize myself and
the Ranking Member and also Representative Green for our
opening statements, and the entire opening statements of all
members will be made a part of the record without objection, as
well as the entire testimonies of all witnesses today.
Teenagers who make it through adolescence without having
smoked are nearly certain not to become regular smokers. Among
adults who smoke, most report having their first cigarette
before the age of 13. Governments at all levels have worked
with those in the public health community to enact policies
that discourage individuals from smoking cigarettes.
Two cornerstones of our effort have been, one, strictly
enforcing minimum age laws and, two, increasing the collection
of excise, sales and use taxes from consumers in an effort to
drive the price of smoking up and the demand down.
Due to their limited incomes, underage smokers are
especially sensitive to increases in cigarette prices. They are
also among the most proficient users of the Internet, and they
have a great incentive to seek anonymity for their purchases.
Regrettably, a new breed of remote sellers doing business by
mail order, the telephone, and the Internet now promise
cigarette consumers both discounted prices and anonymity.
With names such as zerotaxcigs.com and zerotaxsmokes.com,
and taxfreecigarettes.com, their activities are raising serious
questions about the ability of governments at all levels to
enforce their public health, youth access, and State tax
policies effectively. These remote sellers have made it easier
for customers to avoid paying taxes and for teenagers to avoid
minimum age laws.
The purpose of our hearing today is to consider H.R. 1839,
the ``Youth Smoking Prevention and State Revenue Enforcement
Act,'' which was introduced by Representative Mark Green of
Wisconsin. Representative Green's bill authorizes State
attorneys general to bring a civil action seeking injunctive
relief in an appropriate U.S. district court for violations of
the Jenkins Act.
Since enacting the Jenkins Act in 1949, our Federal policy
has been to support State and local efforts to tax and regulate
the sale of cigarettes in interstate commerce.
The Jenkins Act requires any person selling cigarettes for
profit in interstate commerce to report to State tobacco tax
administrators the name and address of the persons to whom the
cigarettes were shipped and the brands and quantities shipped.
The Act's purpose is to enable State authorities to have an
effective mechanism for recovering excise, sales and use taxes
from consumers who seek to avoid paying State taxes by
purchasing cigarettes from low-tax or no-tax jurisdictions.
One projection is that U.S. Internet tobacco sales will
exceed $5 billion in 2005 and that States will lose $1.4
billion in State tax revenues as a result. Representative
Green's legislation enables States to enforce compliance with
their public health, youth access, and cigarette tax policies,
thus both increasing States' revenue and reducing health care
risks and costs.
I would like the record to show and reflect that
representatives from two online tobacco retailers were asked to
testify, and it is no surprise perhaps that they declined to do
so, but we do look forward to hearing from the witnesses who
are here today.
I will now recognize the Ranking Member, Mr. Meehan of
Massachusetts, for his opening statement.
Mr. Meehan. Thank you, Mr. Chairman, and I want to thank
you for scheduling these hearings. As you know, I have been
working on Internet and mail order tobacco sales for 5 years. I
certainly appreciate the willingness to address this issue. I
also want to thank Congressman Green for offering to work
together on this issue. We have had some constructive
discussions about H.R. 1839, and I am convinced that he
understands the need for an effective solution to the problem
of tax avoidance in connection with remote sales of tobacco
products.
I would like to be able to support H.R. 1839, but I cannot
do so in its current form. I have drafted my own version of the
bill, but I have not introduced it because I didn't want to
preempt Mr. Green or this hearing. I hope that we will be able
to reach an agreement on a strong bipartisan bill.
My basic concern is that H.R. 1839 does not do enough to
strengthen the Jenkins Act, which already normally requires
cigarette distributors to comply with the tax laws of the
States where they send their products. If we don't close the
loopholes and strengthen the weaknesses that have made the
Jenkins Act completely ineffective, we will not be
accomplishing much but simply passing a new version of the law.
Coalition for Tobacco Free Kids will outline some of the
specific provisions that need to be addressed to make sure that
H.R. 1839 gets the job done, but I will highlight a few areas
that I think are particularly important. The first problem is
that H.R. 1839 contains no felony provision or increased fines.
In a report issued last year the GAO noted that prosecutions
under the Jenkins Act are extremely rare because U.S. attorneys
have little interest in prosecuting misdemeanors. Retailers who
rely on the Internet to generate sales are largely fly-by-night
operations. Injunctive relief is meaningless against these
sellers because they simply close up shop and then start over
under a new name. The idea of giving States the ability to
bring civil claims against other out-of-state sellers in
Federal court is a step in the right direction, but is unlikely
to have much practical effect when defendants have nothing at
risk but the tax money that they should have paid in the first
place. The credible threat of criminal prosecution, backed up
by meaningful penalties, including substantial fines and
imprisonment, is essential in order to make this bill work.
The second issue I want to point out is that H.R. 1839
covers only cigarettes. I do not think there is any logical
reason to leave a loophole for Internet mail order smokeless
tobacco such as chew and snuff.
The third concern or set of concerns I want to raise is
that H.R. 1839 includes a number of drafting problems that
appear minor and may have unintended consequences. I know that
Congressman Green has been working diligently to finish his
draft of the bill in time for this hearing, but these issues
will also need to be addressed.
For example, I think H.R. 1839 is intended to establish the
right of States to sue tobacco sellers and distributors for the
failure to obey State tax laws, but it is not entirely clear
from the language whether the States would be entitled to hold
a seller or distributor responsible for refusing to collect
taxes that they are owed by consumers, such as excise tax. If
States are forced to sue individual consumers for tax evasion,
the bill is simply not going to be effective.
I hope that we can rework some of these areas and
provisions in 1839 to make sure that it achieves its intended
goals. I am optimistic that together we will be able to produce
a strong bipartisan bill that could pass both Houses of
Congress and solve the problem.
Thank you, Mr. Chairman.
Mr. Smith. Thank you, Mr. Meehan. The gentleman from
Wisconsin, Mr. Green, is recognized for his opening statement.
Mr. Green. Thank you, Mr. Chairman. Thanks first for the
opportunity to have the Subcommittee consider this legislation.
This legislation addresses a growing problem in this country,
the largely unregulated sale of cigarettes by mail, telephone,
and the Internet. As you have already heard, these remote sales
usually occur across State lines and result in cigarettes being
delivered directly to someone's door while evading State laws,
sales to children and sales taxes.
I want to acknowledge my colleague and friend, Congressman
Meehan. He has been a leader on this subject and I admire his
work very much and I do want to work with him. I am hopeful
that we can produce soon a product that will be effective. My
bottom line is to get something done that will work.
This legislation will give State attorneys general the
tools they need to enforce their laws against habitual evasion
by remote sellers. My bill will allow attorneys general to
bring suit in Federal court against all remote sellers.
This is a problem that is getting out of hand. Anyone today
can get on the Internet, run a quick search for tax free
cigarettes or a variation of that phrase and find literally
hundreds of Web sites offering cigarettes for sale. In fact,
there is a special Internet search engine set up just for
Internet tobacco sites. With nothing more than a credit or
debit card our children can access these sites, buy cigarettes
and have their cigarettes delivered right to their door without
an ID. This will only get worse because, as we all know,
children are among the most frequent and proficient users of
the Internet.
States are largely powerless to stop those rampant
violations of the minimum age laws because the businesses
selling to their children are outside of their borders or
otherwise outside the reach of State law. The New York
Department of Consumer Affairs has managed to get traditional
retail sellers of cigarettes to an 85 percent compliance rate
with minimum age laws. But the department has found its efforts
literally gutted by the proliferation of remote sellers that it
cannot regulate.
At the same time, as has been mentioned, States are losing
taxes on these sales. One of our witnesses today, economist
Patrick Fleenor, will estimate that State governments will lose
over $552 million in sales and excise tax revenue this fiscal
year and this figure will grow to 1.2 billion by fiscal year
2005. My home State of Wisconsin is expected to lose 9 million
this year and over $26 million in 2005 at a time when my State,
like so many others, is suffering and is challenged in trying
to balance its books.
The Jenkins Act, which first became law in 1949, requires
remote sellers of cigarettes to report their sales to the
States so that States can collect the taxes. This is a great
idea. The problem is that remote sellers don't comply with the
law and no one has been able successfully to enforce it.
The United States General Accounting Office recently
reviewed 147 Internet sites that sell cigarettes and not a
single one of those sites complied with the Jenkins Act. In
fact, many of these sites openly promote their law breaking by
offering tax free cigarettes and say they, quote, don't report
sales. The Web addresses, as, Mr. Chairman, have you pointed
out, clearly reveal the sellers' intentions. These sites
include notaxcigarettes.com and zerotaxcigarettes among many
others.
In light of these open violations of the law, the GAO
looked at State efforts to enforce the Jenkins Act and they
didn't find very much. Why? Well, the GAO heard from nine
States on this and every one of them said that they did not
have the necessary legal authority. The GAO also looked at
Federal enforcement efforts and found that, quote, no Internet
cigarette vendors have been penalized for violating the act nor
had any penalties been sought for violators. These lost funds
again loom even larger now that so many States are laboring to
find ways to cut their budgets to make up for revenue
shortfalls.
Obviously the public health consequences are also very
important. Many States increase cigarette costs through State
excise taxes for the stated purpose of deterring smoking. We
lose those benefits of these taxes when we allow large volumes
of sales to evade those tax schemes.
Remote sales of cigarettes are also hurting local
economies. Local small businesses cannot compete with the legal
tax free sales by remote businesses.
Mr. Chairman, we should not allow the situation to
continue. The rampant evasion of State law is precisely the
type of issue that Congress should address, and the best way
for to us do this is to give States the tools they need to
effectively enforce their laws against all remote sellers.
This legislation will do this and do it the right way. It
will keep the authority to enforce State and local laws in the
hands of State law enforcement. It avoids creating an unfunded
mandate, avoids creating a new Federal bureaucracy and it
avoids interfering with or outlawing legitimate commerce.
Mr. Chairman, I hope you will agree with me that this is a
problem and these illegal cigarette sales to children is an
issue that we must take up as a Committee. Again, I do want to
work with some who are currently opposing this legislation. I
think there are some things that we can do. I think we all
agree that the bottom line is to pass something that will work
and work soon.
Mr. Chairman, thank you again for holding this hearing and
I appreciate the willingness of our witnesses to come and
testify today.
Mr. Smith. Let me thank other members who are here for
their attendance as well. Mr. Jenkins of Tennessee, Mr. Keller
of Florida, Mr. Forbes of Virginia and also Mr. Boucher of
Virginia as well. This Subcommittee consistently has interested
Members and good attendance. I am very pleased that that
continues.
Let me proceed now to introduce our witnesses. And our
first witness is Paul Jones, the Director of Homeland Security
and Justice at the U.S. General Accounting Office. Mr. Jones is
responsible for the management of programs and issues in the
U.S. Department of Justice and the Department of Homeland
Security. Mr. Jones graduated with honors from Elizabeth City
State University with a B.S. in mathematics and earned a
Master's Degree in public administration from George Washington
University.
The next witness is Hank Armour, President and Chief
Executive Officer of two corporations, West Star and Epoch,
with convenience stores in the Northwest. Dr. Armour founded
West Star in 1982 and Epoch in 1988. Mr. Armour earned a B.A.
and Ph.D. in economics and an MBA from Stanford. He also holds
a degree from the London School of Economics.
Our next witness is Matthew Myers, president and CEO of the
Campaign for Tobacco Free Kids, a non-profit organization
established to focus attention on reducing tobacco use among
minors. Mr. Myers formerly represented the Coalition on Smoking
and Health, which was comprised of the American Cancer Society,
the American Lung Association, and American Heart Association.
He holds a B.A. from Tufts and a J.D. from Michigan.
Our last witness is Patrick Fleenor, a Washington-based
economic consultant who specializes in taxation. Prior to
opening his own practice he was a senior economist with the
Joint Economic Committee. He has also served as Chief Economist
for the Tax Foundation, one of the nation's oldest think tanks.
Mr. Fleenor holds a B.A. from Albion College and an M.A. in
economics from George Mason, and an M.A. in political science
from American University.
Welcome to you all. As I mentioned to you a while ago, all
your complete statements will be made a part of the record, and
I will remind you that we would like for you to hold your
opening statements to 5 minutes so that we will have plenty of
time for questions.
I should also mention to members that are here that we are
expecting a vote on the House floor on the rule somewhere
around 11 to 11:15 and will hope to be finished with the
hearing by that time.
Also to the witnesses, I don't know whether to apologize or
just explain, but what is new to you is new to us as well. This
is the first time we have seen that screen in the front. Mr.
Myers, I am sorry that kind of blocks us. I can't see your name
tag there but we will make do. This is also new up here. I want
you to know this screen is off but I could be watching a
basketball game and I am not. And also new is the corner
arrangement over there. All good reasons for all these new
arrangements, but nevertheless still may take some getting used
to.
Thank you all for being here.
Mr. Jones, we will start with your testimony.
STATEMENT OF PAUL L. JONES, DIRECTOR, HOMELAND SECURITY AND
JUSTICE, GENERAL ACCOUNTING OFFICE
Mr. Jones. Thank you, Mr. Chairman. Mr. Chairman, Members
of the Subcommittee, I am pleased to be here today to discuss
our review--I forgot to press the button. New technology. I am
pleased to be here today to discuss our review of the state of
compliance by Internet cigarette vendors with the Jenkins Act.
The Internet offers consumers the option and convenience of
buying cigarettes from vendors in low tax States without having
to physically be there. The Jenkins Act requires any person who
sells and ships cigarettes across a State line to a buyer other
than a distributor to report the sale to the buyer's State tax
tobacco administrator. The act establishes misdemeanor
penalties for violations. Compliance with this Federal law by
cigarette sellers enables States to collect excise taxes.
My prepared statement discusses the results of our review
of Federal efforts to enforce compliance with the Jenkins Act.
I appreciate having my statement included for the record.
The results of our review were requested by Congressman
Meehan and Congressman Conyers. The results of that review was
reported in August of 2002.
In my oral statement I would briefly like to make three
points. First, we determine that most Internet vendors do not
comply with the Jenkins Act or notify their customers of their
responsibilities under the act. We identified 147 Web site
addresses for Internet cigarette vendors based in the United
States. None of these Web sites displayed information
suggesting that they comply with the act. Conversely, 78
percent of these Web sites indicated that the vendors do not
comply with the act. They posted such statements as we do not
comply with the Jenkins Act, we do not report sales to State
tax authority, and we keep customer information private.
Twenty-two percent provided no indication of whether they
complied with the act.
Internet vendors cited the Internet Tax Freedom Act and
privacy laws among reasons for not reporting cigarette sales to
State authorities. A number of native Americans claim exemption
from the act based on sovereign nation status. Our review
indicated neither the Internet Tax Freedom Act or privacy laws
exempt cigarette vendors from Jenkins Act compliance.
Additionally, nothing in the Jenkins Act or its legislative
history implies that Native American cigarette sales are
exempt.
Second, State and Federal officials are concerned that as
Internet sales continue to grow, particularly as State
cigarette taxes increase, so will the amount of lost State tax
revenue due to noncompliance. One research firm estimated that
Internet tobacco sales in the United States will exceed $5
billion in 2005 and that States will lose about $1.4 billion in
tax revenue from these sales. California recently estimated
that its tax loss revenue due to noncompliance with the Jenkins
Act is approximately $22 million annually.
And third, amid these growing concerns the Federal
Government enforcement of the Jenkins Act has been limited. The
Attorney General of the United States is responsible for
supervising the enforcement of Federal laws, including the
Jenkins Act. However, the Justice Department and the FBI were
unable to identified any investigations of Internet cigarette
vendors or other actions to enforce the act. The Bureau of
Alcohol, Tobacco and Firearms, which enforces Fed excise tax
and criminal laws and regulation related to tobacco products,
has ancillary authority to enforce the Jenkins Act. ATF
officials identified only three investigations since 1997 of
Internet vendors for cigarette smuggling and violating the
Jenkins Act.
States have taken action to promote Jenkins Act compliance
but results have been limited. We concluded that States are
hampered in their attempts to promote Jenkins Act compliance
because they lack authority to enforce the act.
Congressman Green's bill, H.R. 1839, gives States authority
to bring civil action against Jenkins Act violators. This could
lead to greater involvement of States in the enforcement of the
Jenkins Act. Hence, this could enhance States' effort to
collect excise taxes.
To improve the Federal Government's effort in enforcing the
Jenkins Act and to promote compliance with the act by Internet
vendors, we suggest in our report that Congress consider
providing ATF with primary jurisdiction to investigate
violations of the act. Since our report was issued, ATF was
transferred to the Department of Justice. Now it may be
possible for the Attorney General to administratively transfer
Jenkins Act enforcement authority from the FBI to ATF without
involving the Congress. We believe that this possibility
deserves further investigation on the part of the Department of
Justice.
This concludes my oral statement. I would be happy to
respond to questions from the Committee.
[The prepared statement of Mr. Jones follows:]
Prepared Statement of Paul L. Jones
I am pleased to be here today to discuss our work on the extent of
compliance by Internet cigarette vendors with the Jenkins Act.\1\ The
Jenkins Act requires any person who sells and ships cigarettes across a
state line to a buyer, other than a licensed distributor, to report the
sale to the buyer's state tobacco tax administrator. The act
establishes misdemeanor penalties for violating the act. Compliance
with this federal law by cigarette sellers enables states to collect
cigarette excise taxes from consumers.
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\1\ 5 U.S.C. Sec. 375-378.
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However, some state and federal officials are concerned that as
Internet cigarette sales continue to grow, particularly as states'
cigarette taxes increase, so will the amount of lost state tax revenue
due to noncompliance with the Jenkins Act. One research firm estimated
that Internet tobacco sales in the United States will exceed $5 billion
in 2005 and that the states will lose about $1.4 billion in tax revenue
from these sales.\2\
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\2\ Online Tobacco Sales Grow, States Lose, Forrester Research,
Inc. (Apr. 27, 2001). We were unable to assess the reliability of the
estimates because the methodology used in developing it, including key
assumptions and data, is proprietary.
---------------------------------------------------------------------------
My testimony today is based on the results of work that we
completed in August of 2002--namely, our report entitled Internet
Cigarette Sales: Giving ATF Investigative Authority May Improve
Reporting and Enforcement (GAO-02-743). Overall, we found that the
federal government has had limited involvement with the Jenkins Act
concerning Internet cigarette sales. We also noted that states have
taken action to promote Jenkins Act compliance by Internet cigarette
vendors, but results were limited.
We determined that most Internet cigarette vendors do not comply
with the Jenkins Act or notify their customers of their
responsibilities under the act. Vendors cited the Internet Tax Freedom
Act, privacy laws, and other reasons for noncompliance. A number of
Native Americans cited sovereign nation status. GAO's review indicated
that these claims are not valid and vendors are not exempt from the
Jenkins Act.
We concluded that states are hampered in attempting to promote
Jenkins Act compliance because they lack authority to enforce the act.
We suggested that to improve the federal government's efforts in
enforcing the Jenkins Act and promoting compliance with the act by
Internet cigarette vendors, which may lead to increased state tax
revenues from cigarette sales, the Bureau of Alcohol, Tobacco and
Firearms (ATF), instead of the Federal Bureau of Investigation (FBI),
should be provided with primary jurisdiction to investigate violations
of the act.\3\ We noted that transferring primary investigative
jurisdiction was particularly appropriate because of the FBI's new
challenges and priorities related to the threat of terrorism and the
FBI's increased counterterrorism efforts.
---------------------------------------------------------------------------
\3\ Since our report was issued, ATF was transferred from the
Department of the Treasury to the Department of Justice and is now
known as the Bureau of Alcohol, Tobacco, Firearms and Explosives.
---------------------------------------------------------------------------
To perform our work, we obtained information from the Department of
Justice (DOJ) and ATF headquarters regarding federal Jenkins Act
enforcement actions with respect to Internet cigarette sales. We
interviewed officials and obtained documentation from nine selected
states \4\ regarding states' efforts to promote Jenkins Act compliance
by Internet cigarette vendors and estimates of the impact of
noncompliance on tax revenues. In addition, we reviewed 147 Internet
cigarette vendor Web sites, and we interviewed representatives of five
Internet vendors.
---------------------------------------------------------------------------
\4\ We contacted tobacco tax officials in 11 states. Officials in 9
states provided us with information, and officials in 2 states did not
provide the information we requested in time for it to be included in
our report. We selected the 10 states with the highest cigarette excise
tax rates on January 1, 2002, based on the presumption that these
states would be among those most interested in promoting Jenkins Act
compliance to collect cigarette taxes. Also, we selected one additional
state that appeared to have taken action to promote Jenkins Act
compliance by Internet cigarette vendors.
---------------------------------------------------------------------------
background
Each state, and the District of Columbia, imposes an excise tax on
the sale of cigarettes, which vary from state to state. As of January
1, 2003, the state excise tax rates for a pack of 20 cigarettes ranged
from 2.5 cents in Virginia to $1.51 in Massachusetts (see fig.1). The
liability for these taxes generally arises once the cigarettes enter
the jurisdiction of the state.
Many states have increased their cigarette excise taxes in recent
years with the intention of increasing tax revenue and discouraging
people from smoking. As a result, many smokers are seeking less costly
alternatives for purchasing cigarettes, including buying cigarettes
while traveling to a neighboring state with a lower cigarette excise
tax. The Internet is an alternative that offers consumers the option
and convenience of buying cigarettes from vendors in low-tax states
without having to physically travel there.
Consumers who use the Internet to buy cigarettes from vendors in
other states are liable for their own state's cigarette excise tax and,
in some cases, sales and/or use taxes. States can learn of such
purchases and the taxes due when vendors comply with the Jenkins Act.
Under the act, cigarette vendors who sell and ship cigarettes into
another state to anyone other than a licensed distributor must report
(1) the name and address of the person(s) to whom cigarette shipments
were made, (2) the brands of cigarettes shipped, and (3) the quantities
of cigarettes shipped. Reports must be filed with a state's tobacco tax
administrator no later than the 10th day of each calendar month
covering each and every cigarette shipment made to the state during the
previous calendar month. The sellers must also file a statement with
the state's tobacco tax administrator listing the seller's name, trade
name (if any), and address of all business locations. Failure to comply
with the Jenkins Act's reporting requirements is a misdemeanor offense,
and violators are to be fined not more than $1,000, or imprisoned not
more than 6 months, or both. Although the Jenkins Act, enacted in 1949,
clearly predates and did not anticipate cigarette sales on the
Internet, vendors' compliance with the act could result in states
collecting taxes due on such sales. According to DOJ, the Jenkins Act
itself does not forbid Internet sales nor does it impose any taxes.
limited federal involvement with the jenkins act
and internet cigarette sales
The federal government has had limited involvement with the Jenkins
Act concerning Internet cigarette sales. We identified three federal
investigations involving such potential violations, and none of these
had resulted in prosecution (one investigation was still ongoing at the
time of our work). No Internet cigarette vendors had been penalized for
violating the act, nor had any penalties been sought for violators.
FBI Has Primary Investigative Jurisdiction
The Attorney General of the United States is responsible for
supervising the enforcement of federal criminal laws, including the
investigation and prosecution of Jenkins Act violations.\5\ The FBI has
primary jurisdiction to investigate suspected violations of the Jenkins
Act. However, DOJ and FBI officials were unable to identify any
investigations of Internet cigarette vendors or other actions taken to
enforce the act's provisions regarding Internet cigarette sales.
According to DOJ, the FBI could not provide information on actions to
investigate Jenkins Act violations, either by itself or in connection
with other charges, because the FBI does not have a section or office
with responsibility for investigating Jenkins Act violations and does
not track such investigations. Also, DOJ said it does not maintain
statistical information on resources used to investigate and prosecute
Jenkins Act offenses.
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\5\ 28 U.S.C. Sec. 533 provides that the Attorney General of the
United States may appoint officials ``to detect and prosecute crimes
against the United States . . .'' except where investigative
jurisdiction has otherwise been assigned by law.
---------------------------------------------------------------------------
In describing factors affecting the level and extent of FBI and DOJ
enforcement actions with respect to the Jenkins Act and Internet
cigarette sales, DOJ noted that the act creates misdemeanor penalties
for failures to report information to state authorities, and
appropriate referrals for suspected violations must be considered with
reference to existing enforcement priorities. Since September 11, 2001,
it is understood that the FBI's priorities have changed, as
unprecedented levels of FBI resources have been devoted to
counterterrorism and intelligence initiatives.
ATF Has Ancillary Enforcement Authority
ATF, which enforces federal excise tax and criminal laws and
regulations related to tobacco products, has ancillary authority to
enforce the Jenkins Act.\6\ ATF special agents investigate trafficking
of contraband tobacco products in violation of federal law and sections
of the Internal Revenue Code. For example, ATF enforces the Contraband
Cigarette Trafficking Act (CCTA), which makes it unlawful for any
person to ship, transport, receive, possess, sell, distribute, or
purchase more than 60,000 cigarettes that bear no evidence of state
cigarette tax payment in the state in which the cigarettes are found,
if such state requires a stamp or other indicia to be placed on
cigarette packages to demonstrate payment of taxes (18 U.S.C. 2342).\7\
ATF is also responsible for the collection of federal excise taxes on
tobacco products and the qualification of applicants for permits to
manufacture tobacco products, operate export warehouses, or import
tobacco products. ATF inspections verify an applicant's qualification
information, check the security of the premise, and ensure tax
compliance.
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\6\ With ancillary authority to enforce the Jenkins Act, if ATF
investigates a possible Contraband Cigarette Trafficking Act violation
(i.e., cigarette smuggling), for which it has primary jurisdiction, and
determines there is a possible Jenkins Act violation, then ATF may also
investigate the Jenkins Act violation and refer it to DOJ for
prosecution or injunctive relief.
\7\ Certain persons, including permit holders under the Internal
Revenue Code, common carriers with proper bills of lading, or
individuals licensed by the state where the cigarettes are found, may
possess these cigarettes (18 U.S.C. 2341).
---------------------------------------------------------------------------
To enforce the CCTA, ATF investigates cigarette smuggling across
state borders to evade state cigarette taxes, a felony offense.
Internet cigarette vendors that violate the CCTA, either directly or by
aiding and abetting others, can also be charged with violating the
Jenkins Act if they failed to comply with the act's reporting
requirements. ATF can refer Jenkins Act matters uncovered while
investigating CCTA violations to DOJ or the appropriate U.S. Attorney's
Office for charges to be filed. ATF officials identified three
investigations since 1997 of Internet vendors for cigarette smuggling
in violation of the CCTA and violating the Jenkins Act.
In 1997, a special agent in ATF's Anchorage, Alaska,
field office noticed an advertisement by a Native American
tribe in Washington that sold cigarettes on the Internet. ATF
determined from the Alaska Department of Revenue that the
vendor was not reporting cigarette sales as required by the
Jenkins Act, and its investigation with another ATF office
showed that the vendor was shipping cigarettes into Alaska.
After ATF discussed potential cigarette smuggling and Jenkins
Act violations with the U.S. Attorney's Office for the District
of Alaska, it was determined there was no violation of the
CCTA.\8\ The U.S. Attorney's Office did not want to pursue only
a Jenkins Act violation, a misdemeanor offense, and asked ATF
to determine whether there was evidence that other felony
offenses had been committed. Subsequently, ATF formed a
temporary task force with Postal Service inspectors and state
of Alaska revenue agents, which demonstrated to the
satisfaction of the U.S. Attorney's Office that the Internet
cigarette vendor had committed mail fraud. The U.S. Attorney's
Office agreed to prosecute the case and sought a grand jury
indictment for mail fraud, but not for violating the Jenkins
Act. The grand jury denied the indictment. In a letter dated
September 1998, the U.S. Attorney's Office requested that the
vendor either cease selling cigarettes in Alaska and file the
required Jenkins Act reports for previous sales, or come into
compliance with the act by filing all past and future Jenkins
Act reports. In another letter dated December 1998, the U.S.
Attorney's Office instructed the vendor to immediately comply
with all requirements of the Jenkins Act. However, an official
at the Alaska Department of Revenue told us that the vendor
never complied. No further action has been taken.
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\8\ The U.S. Attorney's Office determined there was no CCTA
violation because the state of Alaska did not require that tax stamps
be placed on cigarette packages as evidence that state taxes were paid.
Another investigation, carried out in 1999, involved
a Native American tribe selling cigarettes on the Internet
directly to consumers and other tribes. The tribe was not
paying state tobacco excise taxes or notifying states of
cigarette sales to other than wholesalers, as required by the
Jenkins Act. ATF referred the case to the state of Arizona,
where it was resolved with no criminal charges filed by
obtaining the tribe's agreement to comply with Jenkins Act
---------------------------------------------------------------------------
requirements.
A third ATF investigation of an Internet vendor for
cigarette smuggling and Jenkins Act violations was ongoing at
the time of our work.
ATF officials said that because ATF does not have primary Jenkins
Act jurisdiction, it has not committed resources to investigating
violations of the act. However, the officials said strong consideration
should be given to transferring primary jurisdiction for investigating
Jenkins Act violations from the FBI to ATF. According to ATF, it is
responsible for, and has committed resources to, regulating the
distribution of tobacco products and investigating trafficking in
contraband tobacco products. A change in Jenkins Act jurisdiction would
give ATF comprehensive authority at the federal level to assist states
in preventing the interstate distribution of cigarettes resulting in
lost state cigarette taxes since ATF already has investigative
authority over the CCTA, according to the officials. The officials also
told us ATF has special agents and inspectors that obtain specialized
training in enforcing tax and criminal laws related to tobacco
products, and, with primary jurisdiction, ATF would have the
investigative authority and would use resources to specifically conduct
investigations to enforce the Jenkins Act, which should result in
greater enforcement of the act than in the past.
states have taken action to promote jenkins act compliance by internet
cigarette vendors, but results were limited
Officials in nine states that provided us information all expressed
concern about Internet cigarette vendors' noncompliance with the
Jenkins Act and the resulting loss of state tax revenues. For example,
California officials estimated that the state lost approximately $13
million in tax revenue from May 1999 through September 2001, due to
Internet cigarette vendors' noncompliance with the Jenkins Act.
Overall, the states' efforts to promote compliance with the act by
Internet vendors produced few results. Officials in the nine states
said that they lack the legal authority to successfully address this
problem on their own. They believe greater federal action is needed,
particularly because of their concern that Internet cigarette sales
will continue to increase with a growing and substantial negative
effect on tax revenues.
States' Efforts Produced Limited Results
Starting in 1997, seven of the nine states had made some effort to
promote Jenkins Act compliance by Internet cigarette vendors. These
efforts involved contacting Internet vendors and U.S. Attorneys'
Offices. Two states had not made any such efforts.
Six of the seven states tried to promote Jenkins Act compliance by
identifying and notifying Internet cigarette vendors that they are
required to report the sale of cigarettes shipped into those states.
Generally, officials in the six states learned of Internet vendors by
searching the Internet, noticing or being told of vendors'
advertisements, and by state residents or others notifying them. Five
states sent letters to the identified vendors concerning their Jenkins
Act reporting responsibilities, and one state made telephone calls to
the vendors.
After contacting the Internet vendors, the states generally
received reports of cigarette sales from a small portion of the vendors
notified.\9\ The states then contacted the state residents identified
in the reports, and they collected taxes from most of the residents
contacted. When residents did not respond and pay the taxes due, the
states carried out various follow-up efforts, including sending
additional notices and bills, assessing penalties and interest, and
deducting amounts due from income tax refunds. Generally, the efforts
by the six states to promote Jenkins Act compliance were carried out
periodically and required few resources. For example, a Massachusetts
official said the state notified Internet cigarette vendors on five
occasions starting in July 2000, with one employee working a total of
about 3 months on the various activities involved in the effort.
---------------------------------------------------------------------------
\9\ Cigarette vendors are not required to report to a state unless
they sell and ship cigarettes into the state. Consequently, the states
do not know if the Internet vendors that were notified but did not
respond had any cigarette sales to report.
---------------------------------------------------------------------------
Table 1 summarizes the six states' efforts to identify and notify
Internet cigarette vendors about the Jenkins Act reporting requirements
and shows the results that were achieved. There was little response by
the Internet vendors notified. Some of the officials told us that they
encountered Internet vendors that refused to comply and report
cigarette sales after being contacted. For example, several officials
noted that Native Americans often refused to report cigarette sales,
with some Native American vendors citing their sovereign nation status
as exempting them from the Jenkins Act, and others refusing to accept a
state's certified notification letters. Also, an attorney for one
vendor informed the state of Washington that the vendor would not
report sales because the Internet Tax Freedom Act relieved the vendor
of Jenkins Act reporting requirements.
Apart from the states' efforts to identify and notify Internet
cigarette vendors, state officials noted that some Internet vendors
voluntarily complied with the Jenkins Act and reported cigarette sales
on their own. The states subsequently contacted the residents
identified in the reports to collect taxes. For example, a Rhode Island
official told us there were three or four Internet vendors that
voluntarily reported cigarette sales to the state. On the basis of
these reports, Rhode Island notified about 400 residents they must pay
state taxes on their cigarette purchases and billed these residents
over $76,000 (the Rhode Island official who provided this information
did not know the total amount collected). Similarly, Massachusetts
billed 21 residents for cigarette taxes and collected $2,150 based on
reports of cigarette sales voluntarily sent to the state.
Three of the seven states that made an effort to promote Jenkins
Act compliance by Internet cigarette vendors contacted U.S. Attorneys
and requested assistance. The U.S. Attorneys, however, did not provide
the assistance requested. The states' requests and responses by the
U.S. Attorneys' Offices are summarized below.
In March 2000, Iowa and Wisconsin officials wrote
letters to three U.S. Attorneys in their states requesting
assistance. The state officials asked the U.S. Attorneys to
send letters to Internet vendors the states had identified,
informing the vendors of the Jenkins Act and directing them to
comply by reporting cigarette sales to the states. The state
officials provided a draft letter and offered to handle all
aspects of the mailings. The officials noted they were asking
the U.S. Attorneys to send the letters over their signatures
because the Jenkins Act is a federal law and a statement from a
U.S. Attorney would have more impact than from a state
official. However, the U.S. Attorneys did not provide the
assistance requested. According to Iowa and Wisconsin
officials, two U.S. Attorneys' Offices said they were not
interested in helping, and one did not respond to the state's
request.\10\
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\10\ DOJ noted that federal prosecutors generally do not issue
advisory opinions about prosecutive matters, as they may subsequently
be presented with the need to make an actual decision based on specific
facts. The issuance of such an opinion might create the basis for a
legal dispute if a subsequent prosecution were undertaken.
After contacting the FBI regarding an Internet vendor
that refused to report cigarette sales, saying that the
Internet Tax Freedom Act relieved the vendor of Jenkins Act
reporting requirements, the state of Washington acted on the
FBI's recommendation and wrote a letter in April 2001
requesting that the U.S. Attorney initiate an investigation.
According to a Washington official, the U.S. Attorney's Office
did not pursue this matter and noted that a civil remedy (i.e.,
lawsuit) should be sought by the state before seeking a
criminal action. At the time of our work, the state was
---------------------------------------------------------------------------
planning to seek a civil remedy.
In July 2001, the state of Wisconsin wrote a letter
referring a potential Jenkins Act violation to the U.S.
Attorney for prosecution. According to a Wisconsin official,
this case had strong evidence of Jenkins Act noncompliance--
there were controlled and supervised purchases made on the
Internet of a small number of cartons of cigarettes, and the
vendor had not reported the sales to Wisconsin. The U.S.
Attorney's Office declined to initiate an investigation, saying
that it appeared this issue would be best handled by the state
``administratively.'' The Wisconsin official told us, however,
that Wisconsin does not have administrative remedies for
Jenkins Act violations, and, in any case, the state cannot
reach out across state lines to deal with a vendor in another
state.
States Concerned about Internet Vendors' Noncompliance and Believe
Greater Federal Action Is Needed
Officials in each of the nine states expressed concern about the
impact that Internet cigarette vendors' noncompliance with the Jenkins
Act has on state tax revenues. The officials said that Internet
cigarette sales will continue to grow in the future and are concerned
that a much greater and more substantial impact on tax revenues will
result. One state, California, estimated that its lost tax revenue due
to noncompliance with the Jenkins Act by Internet cigarette vendors was
approximately $13 million from May 1999 through September 2001.\11\
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\11\ The Excise Taxes Division, California State Board of
Equalization, did not make an official analyses of lost revenue. The
$13 million estimate is a projection by the division based on the
amount of state excise and use taxes determined as due from cigarette
sales reported by out-of-state Internet vendors during the period of
May 1999 through Sept. 2001.
---------------------------------------------------------------------------
Officials in all nine states said that they are limited in what
they can accomplish on their own to address this situation and
successfully promote Jenkins Act compliance by Internet cigarette
vendors. All of the officials pointed out that their states lack the
legal authority necessary to enforce the act and penalize the vendors
who violate it, particularly with the vendors residing in other states.
Officials in three states told us that efforts to promote Jenkins Act
compliance are not worthwhile because of such limitations, or are not a
priority because of limited resources.
Officials in all nine states said that they believe greater federal
action is needed to enforce the Jenkins Act and promote compliance by
Internet cigarette vendors. Four state officials also said they believe
ATF should have primary jurisdiction to enforce the act. One official
pointed out that his organization sometimes dealt with ATF on tobacco
matters, but has never interacted with the FBI. Officials in the other
five states did not express an opinion regarding which federal agency
should have primary jurisdiction to enforce the act.
most internet cigarette vendors do not comply with the jenkins act or
notify consumers of their responsibilities
Through our Internet search efforts, we identified 147 Web site
addresses for Internet cigarette vendors based in the United States and
reviewed each website linked to these addresses.\12\ Our review of the
Web sites found no information suggesting that the vendors comply with
the Jenkins Act. Some vendors cited reasons for not complying that we
could not substantiate. A few Web sites specifically mentioned the
vendors' Jenkins Act reporting responsibilities, but these Web sites
also indicated that the vendors do not comply with the act. Some Web
sites provided notice to consumers of their potential state tax
liability for Internet cigarette purchases.
---------------------------------------------------------------------------
\12\ The 147 Web site addresses appear to represent 122 different
Internet cigarette vendors. We made this determination by comparing
information such as vendor names, company names, street addresses, P.O.
box numbers, and telephone numbers. For example, some Web sites had the
same mailing address and telephone number, suggesting they were
separate Web sites being operated by one company.
---------------------------------------------------------------------------
Majority of Web sites Indicate that Vendors Do Not Comply with the
Jenkins Act
None of the 147 Web sites we reviewed stated that the vendor
complies with the Jenkins Act and reports cigarette sales to state
tobacco tax administrators.\13\ Conversely, as shown in table 2,
information posted on 114 (78 percent) of the Web sites indicated the
vendors' noncompliance with the act through a variety of statements
posted on the sites. Thirty-three Web sites (22 percent) provided no
indication about whether or not the vendors comply with the act.
---------------------------------------------------------------------------
\13\ Two Web sites posted statements indicating that customer
information would be released if required; however, both sites also
stated that the information would not be given out without the
customers' permission. The Jenkins Act does not require cigarette
sellers to notify customers regarding whether or not they comply with
the act's reporting requirements.
Reasons Cited for Noncompliance with the Jenkins Act
Some Internet vendors cited specific reasons on their Web sites for
not reporting cigarette sales to state tax authorities as required by
the Jenkins Act. Seven of the Web sites reviewed (5 percent) posted
statements asserting that customer information is protected from
release to anyone, including state authorities, under privacy laws.
Seventeen Web sites (12 percent) state that they are not required to
report information to state tax authorities and/or are not subject to
the Jenkins Act reporting requirements. Fifteen of these 17 sites are
Native American, with 7 of the sites specifically indicating that they
are exempt from reporting to states either because they are Native
American businesses or because of their sovereign nation status. In
addition, 35 Native American Web sites (40 percent of all the Native
American sites we reviewed) indicate that their tobacco products are
available tax-free because they are Native American businesses.\14\
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\14\ Fifty-nine percent, or 87, of the 147 Web site addresses
reviewed are either Native American-owned or located and/or operated on
Native American lands.
---------------------------------------------------------------------------
To supplement our review of the Web sites, we also attempted to
contact representatives of 30 Internet cigarette vendors, and we
successfully interviewed representatives of 5.\15\ One of the 5
representatives said that the vendor recently started to file Jenkins
Act sales reports with one state.\16\ However, the other 4 said that
they do not comply with the act and provided us with additional
arguments for noncompliance. Their arguments included an opinion that
the act was not directed at personal use. An additional argument was
that the Internet Tax Freedom Act \17\ supercedes the obligations laid
out in the Jenkins Act.
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\15\ We were either unable to reach representatives of the
remaining 25 vendors we selected to conduct structured interviews, or
they declined to answer questions.
\16\ The vendor who said that he does comply with the Jenkins Act
told us that he recently started to file reports with the state of
Washington after receiving a notice from the state's Department of
Revenue. However, he said Washington is the only state he reports to,
and he declined to provide us with evidence of his compliance with the
act.
\17\ P.L. 105-277, Div. C, Title XI, Oct. 21, 1998.
---------------------------------------------------------------------------
Our review of the applicable statutes indicates that neither the
Internet Tax Freedom Act nor any privacy laws exempt Internet cigarette
vendors from Jenkins Act compliance. The Jenkins Act has not been
amended since minor additions and clarifications were made to its
provisions in 1953 and 1955; and neither the Internet Tax Freedom Act
nor any privacy laws amended the Jenkins Act's provisions to expressly
exempt Internet cigarette vendors from compliance. With regard to the
Internet Tax Freedom Act, the temporary ban that the act imposed on
certain types of taxes on e-commerce did not include the collection of
existing taxes, such as state excise, sales, and use taxes.
Additionally, nothing in the Jenkins Act or its legislative history
implies that cigarette sales for personal use, or Native American
cigarette sales, are exempt. In examining a statute, such as the
Jenkins Act, that is silent on its applicability to Native American
Indian tribes, courts have consistently applied a three-part analysis.
Under this analysis, if the act uses general terms that are broad
enough to include tribes, the statute will ordinarily apply unless (1)
the law touches ``exclusive rights of self-governance in purely
intramural matters;'' (2) the application of the law to the tribe would
abrogate rights guaranteed by Indian treaties; or (3) there is proof by
legislative history or some other means that Congress intended the law
not to apply to Indians on their reservations. Our review of the case
law did not locate any case law applying this analysis to the Jenkins
Act. DOJ said that it also could not locate any case law applying the
analysis to the Jenkins Act, and DOJ generally concluded that an Indian
tribe may be subject to the act's requirements. DOJ noted, however,
that considering the lack of case law on this issue, this conclusion is
somewhat speculative. ATF has stated that sales or shipments of
cigarettes from Native American reservations are not exempt from the
requirements of the Jenkins Act.\18\
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\18\ Industry Circular, No. 99-2, Bureau of Alcohol, Tobacco and
Firearms, June 6, 1999.
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Few Web sites Provide Notice of the Vendors' Reporting
Responsibilities, but Some Provide Notice of Customer Cigarette
Tax Liability
Only 8 (5 percent) of the 147 Web sites we reviewed notified
customers that the Jenkins Act requires the vendor to report cigarette
sales to state tax authorities, which could result in potential
customer tax liability. However, in each of these cases, the Web sites
that provided notices of Jenkins Act responsibilities also followed the
notice with a statement challenging the applicability of the act and
indicating that the vendor does not comply. Twenty-eight Web sites (19
percent) either provided notice of potential customer tax liability for
Internet cigarette purchases or recommended that customers contact
their state tax authorities to determine if they are liable for taxes
on such purchases. Three other sites (2 percent) notified customers
that they are responsible for complying with cigarette laws in their
state, but did not specifically mention taxes. Of the 147 Web sites we
reviewed, 108 (73 percent) did not provide notice of either the
vendors' Jenkins Act reporting responsibilities or the customers'
responsibilities, including potential tax liability, with regard to
their states.
conclusions
Our report concluded that states are hampered in attempting to
promote Jenkins Act compliance because they lack authority to enforce
the act. In addition, violation of the act is a misdemeanor, and U.S.
Attorneys' reluctance to pursue misdemeanor violations could be
contributing to limited enforcement. Transferring primary investigative
jurisdiction from the FBI to ATF would give ATF comprehensive authority
at the federal level to enforce the Jenkins Act and should result in
more enforcement. ATF's ability to couple Jenkins Act and CCTA
enforcement may increase the likelihood it will detect and investigate
violators and that U.S. Attorneys will prosecute them. This could lead
to improved reporting of interstate cigarette sales, thereby helping to
prevent the loss of state cigarette tax revenues. Transferring primary
investigative jurisdiction is also appropriate at this time because of
the FBI's new challenges and priorities related to the threat of
terrorism and the FBI's increased counterterrorism efforts.
To improve the federal government's efforts in enforcing the
Jenkins Act and promoting compliance with the act by Internet cigarette
vendors, which may lead to increased state tax revenues from cigarette
sales, our report suggested that the Congress should consider providing
ATF with primary jurisdiction to investigate violations of the Jenkins
Act (15 U.S.C. Sec. 375-378). In view of the fact that ATF was recently
transferred from the Treasury Department to DOJ, it may now be possible
for the Attorney General to administratively transfer primary Jenkins
Act enforcement authority from the FBI to ATF without involving the
Congress in the matter. We believe that this possibility deserves
further investigation on the part of DOJ.
Mr. Smith. Thank you, Mr. Jones. Without objection, we will
also make the entire GAO report a part of the record as well.
Mr. Armour.
STATEMENT OF HENRY ``HANK'' O. ARMOUR, CHAIRMAN OF THE BOARD,
NATIONAL ASSOCIATION OF CONVENIENCE STORES
Mr. Armour. Good morning, Mr. Chairman. My name is Hank
Armour and I am a small businessman from Olympia, Washington.
As President and CEO of West Star Corporation, I own and
operate 24 retail facilities in Washington State and
California.
I would first like to thank Representative Green for
tackling such an important issue in this legislation, the Youth
Smoking Prevention and State Revenue Enforcement Act. I also
would like to thank Members of the Subcommittee for inviting me
to testify regarding this very important issue facing
retailers, States and children across this country. I am
testifying today on behalf of the National Association of
Convenience Stores, NACS, where I sit as chairman of the board.
I am a past president of the Washington Association of
Neighborhood Stores and currently serve on its executive
committee.
There are over 134,000 convenience stores operating in the
United States and the District of Columbia, and they employ
over 1.5 million Americans. Tobacco sales are highly important
components of the convenience store industry, and while
controversial tobacco is a legal product and one that is very
important to our economic viability.
The convenience store industry's position is that minors
should not consume tobacco and that no retailer should sell
tobacco to minors. That is why the convenience store operators
across the country have spent time and money trying to prevent
these illegal sales. My company has instituted strict measures
to ensure that no minor can purchase an age restricted product.
A detailed list is included in my submitted testimony, but I
want to take just a few minutes to review some of the measures
that we have instituted.
They include training sales associates in the ``We Card''
program on the very first day of employment. We recertify every
sales associate every 6 months. We prominently post ``We Card''
signs and decals in all of our stores. We conduct monthly
internal sting operations to ensure compliance with our age
restricted product sales policies. We have reprogrammed our
cash registers to prompt sales associates to check for ID every
time an age restricted product is scanned. And finally we have
a zero tolerance policy in which we immediately terminate a
sales associate if the sales associate sells cigarettes to a
minor.
As you can see, we take our responsibility very seriously.
While no system is perfect, through these training efforts
retailers have been able to significantly increase their
compliance rate with regard to age verification at point of
sale.
Brick and mortar retailers such as myself who have spent
time and money on these responsible tobacco retailing efforts
are at an unfair disadvantage to Internet, mail order, and
other remote retailers. I am not asking for a weakening of our
enforcement obligation, I am asking for our obligation to apply
equally to all tobacco retailers. In my view, these remote
retailers are frankly irresponsible. For many of these remote
sellers, especially Internet retailers, age verification is
simply a joke. As you can see from the Web sites I have
submitted with my testimony, all a child has to do is click on
a link verifying that he or she is over 18 years old, and the
child can buy cigarettes. This lackadaisical age verification
wouldn't fly in Washington State and I don't think any other
State would allow a convenience store owner to place a sign in
the store that says by asking for cigarettes you are verifying
that you are 18 years old.
According to Clara York, an employee of cigarette retailers
Seneca Cigarettes, the ultimate responsibility for making sure
teenagers do not purchase cigarettes lies with parents, who
should make an effort to police the Web sites their children
are visiting. Unlike Clara York, as a responsible tobacco
retailer I believe it is my responsibility and the
responsibility of my sales associates to ensure that kids don't
purchase cigarettes at my retail locations.
Beyond age verification remote sellers are evading tax
obligations. I operate stores in Washington State and
California. Both States have high excise taxes. Washington has
an excise tax of $14.25 per carton. Because they don't collect
State taxes remote sellers can offer their cigarettes for
almost $15 less per carton than what I can. When you add in
sales tax that amount approaches $20 per carton. And like many
other States, Washington is currently considering another $5
per carton increase in State excise taxes. As more and more
States raise their State excise taxes, smokers will be driven
to these remote sellers for cheaper cigarettes.
Mr. Green. [Presiding.] If you could summarize your
testimony. I know your light isn't operating there.
Mr. Armour. While the legislation being considered today
will not address every problem relating to cigarette sales, it
is a good place to start. We can make a big difference by
addressing the egregious violations committed every day by
Internet and other remote retailers. All tobacco retailers
should have to play by the same rules. And Mr. Green, your
legislation will accomplish this goal. This is a fair and
balanced approach to a growing problem in our society. I thank
you, Mr. Green, for introducing the Youth Smoking Prevention
and State Revenue Enforcement Act and would be happy to answer
any questions.
[The prepared statement of Mr. Armour follows:]
Prepared Statement of Henry O. Armour
Good morning, Mr. Chairman. My name is Hank Armour, and I am a
small businessman from Olympia, Washington. As president and CEO of
West Star Corporation, I own and operate twenty-four retail facilities
in Washington State and California.
I would first like to thank Representative Green for tackling such
an important issue in his legislation, the Youth Smoking Prevention and
State Revenue Enforcement Act. I also would like to thank members of
the subcommittee for inviting me to testify regarding this very
important issue facing retailers, states and children across this
country.
I am testifying today on behalf of the National Association of
Convenience Stores (``NACS''), where I sit as Chairman of the Board. I
am a Past President of the Washington Association of Neighborhood
Stores and currently serves on its Executive Committee.
There are over 134,000 convenience stores operating in the United
States and the District of Columbia that employ over 1.5 million
Americans. Tobacco sales are a highly important component of the
convenience store industry. Convenience stores sell more than half of
the single packs of tobacco sold in the United States in more than 20
million transactions per day. Such sales, on average, constituted
nearly 40 percent of the in-store sales at retail locations in 2001.
While controversial, tobacco is a legal product and one that is
important to the economic viability of the convenience store industry.
The convenience store industry's position is that minors should not
consume tobacco and that no retailer should sell tobacco to minors.
That is why convenience store operators across the country have spent
time and money trying to prevent tobacco these illegal sales. These
prevention efforts include employee training, signage, company-operated
stings, incentives for employees, and enforcement of company policies.
Some retailers have even installed electronic age verification (EAV)
devices to help eliminate these sales. My company has instituted the
following measures to ensure that no minor can purchase an age-
restricted product from my stores:
On the first day of employment a sales associate is
trained in the We Card program and is fully informed of our
zero tolerance policy towards the sale of cigarettes to minors.
Throughout the first two weeks of employment sales
associates complete computer based training modules on a daily
basis including one on the sales of age-restricted products.
Every six months sales associates complete a re-
certification computer based training module dealing with the
sales of age-restricted products.
We Card signs and decals are prominently posted in
all of our stores.
We conduct on a monthly basis internal sting
operations to insure that sales of age-restricted products are
been made appropriately.
We publicize appropriate ID checking during sting
operations in our monthly newsletter.
We have programmed our cash registered to prompt the
sales associate to check for ID every time an age restricted
product is scanned for sale.
And finally, as I mentioned earlier, we have a zero
tolerance policy towards the sale of age-restricted products to
minor in which we immediately terminate a sales associate if
they sell such products to a minor.
As you can see, we take our responsibility very seriously.
In order to assist in the elimination of tobacco sales to minors,
retailers, wholesalers and manufacturers formed in 1996 the Coalition
for Responsible Tobacco Retailing. This Coalition developed the ``We
Card'' training program, which provides education and training to help
retailers prevent underage tobacco sales. The program includes
development and disseminations of retailer best practices to tobacco
retailers across the country. The ``We Card'' training materials
include signage, training videos, training guides, posters, interactive
on-line training, and daily reminder calendars. Nearly 800,000 ``We
Card'' kits were distributed to retailers nationwide between 1996 and
2001. ``We Card'' offers on average 200 classroom training sessions
that train almost 10,000 retailers annually. From 1996 to 2001, nearly
60,000 retailers underwent ``We Card'' classroom training and they, in
turn, trained more than 700,000 employees. While no system is perfect
through these training efforts, retailers have been able to
significantly increase their compliance rates with regards to age
verification at point of sale.
Brick-and-mortar retailers, such as myself, who have spent time and
money on these responsible tobacco-retailing efforts are at an unfair
disadvantage to Internet, Mail order and other remote retailers. We pay
to train our employees, we get stung and have to pay fines if an
illegal sale is made, and these remote sellers have none of these
obligations. I am not asking for a weakening of our enforcement
obligation, I am asking for our obligations to apply equally to all
tobacco retailers. In my view, these remote retailers are frankly
irresponsible. A good majority do not have a consistent or reliable age
verification processes and should be made to conform with state tobacco
retailing regulations. For many of these remote sellers, especially
those Internet retailers, age verification is a joke. As you can see
from the websites I've submitted with my testimony, all a child has to
do is click on a link verifying and that he/she is over 18 years old
and the child can buy cigarettes. This lackadaisical age verification
wouldn't fly in Washington State, and I don't think any other state
would allow a convenience store owner to place a sign in the store that
states, ``By asking for cigarettes you are verifying that you are 18
years old.'' According to Clara York, an employee of cigarette e-tailer
Seneca Cigarettes, ``the ultimate responsibility for making sure
teenagers do not purchase cigarettes, lies with parents who should make
an effort to police the Web sites their children are visiting.'' As a
responsible tobacco retailer I believe it is my responsibility and the
responsibility of my sales associates to ensure kids don't purchase
cigarettes at my retail locations.
Beyond age verification, remote sellers are evading their tax
obligations. I operate stores in Washington State and California - two
states that have high excise taxes. Both states have excise taxes that
are close to $1.50 per pack. Because they don't collect states taxes,
remote sellers can offer their cigarettes for $15 less per carton than
I can. When you add in sales taxes that such sellers do not collect,
the amount approaches $20/carton. And Washington State, as are many
other states across the nation, is currently considering another $5/
carton increase in the state excise tax. As more and more states raise
their state excise taxes, smokers will be driven to these remote
sellers for cheaper cigarettes.
Retailers in the convenience store industry cannot compete with
remote sellers who are not complying with their tax obligations--many
of which flaunt their ``so called'' tax-free status. It simply is not a
level playing field. On its home page, Seneca Smokes states that it
does not report to any state taxation or tobacco department. Brand Name
Cigarettes' advertising tells smokers to stop paying high taxes and
start saving money today by purchasing tobacco products securely
online. Just look at some of the website names: NoCigaretteTaxes.com,
taxfreecigarettes.com, Cheapsmokesbymail.com, Cigs4free.com,
dirtcheapcig.com, and notaxsmokes.com. The problem is not solely with
Internet retailers, Big Indian Smoke Shop is buying advertisements in
papers highlighting their tax-free cigarettes - the one attached to my
testimony ran in a New York City paper right after the tobacco excise
tax was increased.
While the legislation being considered today will not address every
problem relating to cigarettes sales, it is a good place to start. We
can make a big difference by addressing the egregious violations
committed everyday by Internet and other remote retailers.
The convenience store industry is not asking for special treatment.
We want all tobacco retailers to have to play by the same rules, and
Mr. Green's legislation will help accomplish this goal. We want a level
playing field. This bill will allow attorneys general to go after those
remote sellers, including those that are out-of- state or run by Native
Americans, who are violating the law. This is a fair and balanced
approach to a growing problem in our society.
I thank Mr. Green for introducing the Youth Smoking Prevention and
State Revenue Enforcement Act, and would be happy to answer any
questions.
ATTACHMENT
Mr. Green. Thank you, Mr. Armour, for your testimony.
Mr. Myers, President for the National Center for Tobacco-
Free Kids. Welcome.
STATEMENT OF MATTHEW MYERS, PRESIDENT,
NATIONAL CENTER FOR TOBACCO-FREE KIDS
Mr. Myers. Thank you. I want to start out by thanking
Congressman Green for introducing this legislation and
prompting this important dialogue. I also want to thank
Congressman Meehan for his long time leadership on these issues
and his effort to find realistic solutions to a serious
problem. I am hoping that today's hearing can in fact be the
kickoff to a dialogue that will lead to the enactment of
legislation that will make a real difference. We ought to be
able to get there.
It is clear from the discussion this morning that we agree
on goals, that we need to do more to prevent youth access to
tobacco products over the Internet and that we need to do
something to give the State officials the tools to make sure
that State taxes on tobacco products are in fact collected,
both because if we fail to do so it undercuts efforts to reduce
youth tobacco use and at this time more than any time in our
recent past States need the funds if they are going to succeed.
That is critically important.
We agree on the problem.
We agree that State taxes are currently being evaded on a
rampant basis and that unless State officials are given new
tools that nothing they can do will make a significant
difference.
We agree on the need for action.
We agree that the twin problems of youth access and tax
evasion need to be addressed, preferably in one bill, but if
not in one bill, then in two bills with realistic solutions.
We agree that the Jenkins Act has been a failure, not that
it was not well intended, but it simply didn't give the Federal
and State officials the tools they need.
We agree that there is a desire not to create a new
bureaucracy, unfunded mandates or unnecessary burdensome
provisions.
We also agree that if we are going to pass legislation we
must give the State attorneys general the tools they actually
need to make a real difference.
In that area, our testimony is designed to focus on what we
think needs to be added to this bill so that the State
attorneys general will be able to do the jobs, so they will be
able to stop the hemorrhaging of State revenues.
Let me tick off in the limited time available the key areas
that we think need to be addressed.
First, it is essential that this bill deal with all tobacco
products. By leaving out some tobacco products we
unintentionally encourage the sale over the Internet of others.
We should create an even playing field. We are not talking
about adding new taxes, we are only talking about making sure
that people who sell tobacco products comply with the tax laws
that are already in existence.
Second, it is absolutely clear talking to law enforcement
officials around the country that unless the bill clearly and
unambiguously makes it the responsibility of the seller to
collect and pay the taxes, then enforcement efforts will
inevitably fail. We cannot go after every kid or person who
purchases a tobacco product. No law enforcement official in the
Nation has those kinds of resources. I believe it is the intent
of this bill to do so. But when you compare the provisions of
this bill with what is needed it is clear that there needs to
be an amendment. It is a simple process to make explicit that
it is the obligation of the seller to collect and remit those
taxes to the State officials prior to shipping the tobacco
products into the State if we are going to succeed. If we don't
include that kind of explicit language, everything else we do
is doomed to failure.
Third, we have to make sure that the State officials are
given the tools they need to enforce those provisions. What do
we mean? Record keeping provisions on the part of sellers, the
kind of things that the people in state, the bricks and mortar
people have to comply with. The authority of State officials to
block the shipment of cigarettes in from repeat offenders. It
won't be enough if you simply go after the taxes time and time
again. Just as you would with a repeat seller who violates the
law, you need the authority to prohibit those people from
selling tobacco products. And third, this bill already contains
a notice provision. What it needs to make clear is that out of
State sellers shouldn't be allowed to sell in State until they
have filed with the State, so that the State officials don't
have to go on a search for a needle in a haystack to figure out
who is violating the law.
Next, the enforcement provisions have to be adequate.
Otherwise State officials won't have the incentive to do so.
What that means is significant enough minimum penalties just as
retailers face so that people will have an incentive both to
obey the law and the law enforcement officials will have the
incentive to enforce the law. The bill I think unintentionally
strips the Federal officials of its Federal authority. We
should be adding to those.
Last, let me just add something that Congressman Meehan
said. We need to make sure that the criminal penalties here are
real and that they can be enforced both by Federal and State
officials. If we do those things, this is a law enforcement
bill that can have a significant public health impact on our
children and can help States prevent the continued hemorrhage
from the illegal sale of tobacco products.
Thank you. Congressman Green, we are very sincere in our
offer that we would like to work with you to have a bill that
can pass this Congress with bipartisan support in an
overwhelming vote.
[The prepared statement of Mr. Myers follows:]
Prepared Statement of Matthew Myers
Good morning Mr. Chairman, and members of the Committee. My name is
Matthew Myers. I am the President of the National Center for Tobacco-
Free Kids, a national organization created to protect children from
tobacco by raising awareness that tobacco use is a pediatric disease,
by changing public policies, and by actively countering the special
interest influence of the tobacco industry.
Mr. Chairman, I want to thank you for inviting me to testify on
draft legislation by Congressman Green. While we support the concept of
providing the State Attorneys General with authority to enforce
violations of this Act, regrettably, we must oppose the legislation as
drafted.
Current Internet sales of tobacco raise two serious issues:
uncontrolled sales to youth and evasion of state sales and tobacco
related excise taxes. The twin problems of youth access and tax evasion
need to both be addressed, preferably in one bill, but if not in one
bill in two bills that contain adequate provisions to make a real
difference. This bill as currently drafted does not deal with the
problem of sales to young people at all; and it is our assessment that
its limited proposal to address the problem of the evasion of state
sales and tobacco related excise taxes will be ineffective. If its
enactment prevents or forestalls the passage of legislation that
effectively addresses these problems, it will do more harm than good.
Even worse, it would undermine the longstanding, bipartisan efforts of
Congressman Meehan, former Congressman Hansen and others to enact a
comprehensive solution by giving the false impression that the problems
had been effectively addressed.
There are currently about 200 U.S. websites and 200 foreign-based
websites that sell cigarettes to U.S. smokers. Effective safeguards
against kids being able to purchase cigarettes via the Internet are
almost non-existent. While many Internet websites post notices that
sales to persons under 18 are illegal or not allowed, very few do
anything at all to make sure such sales do not occur.
Tax evasion via Internet sales of tobacco products is rampant.
Internet tobacco prices are much lower than those in regular bricks-
and-mortar retail outlets because Internet prices almost never include
the taxes charged by retail stores. These low prices make Internet
tobacco products attractive to both adult and underage smokers, and
help to boost overall smoking levels. In addition, states lose millions
of dollars each year in uncollected tax revenues. All of these problems
have been compounded by the inadequacy of the enforcement tools
available, the most serious of which is caused by the fact that under
current law responsibility for paying the state taxes is normally the
responsibility of the purchaser rather than the Internet seller.
We have been skeptical about whether these problems can be fully
resolved by any action short of a ban such as that imposed recently by
the State of New York, but we have endorsed H.R. 5724, the Meehan/
Hansen bill introduced in the last Congress. The Meehan/Hansen bill
offered a comprehensive solution to the problems arising from Internet
sales of tobacco products by addressing both parts of the problem:
youth access and tax evasion. The American Cancer Society, the American
Heart Association and the American Lung Association also endorsed H.R.
5724. To protect against Internet sales to youth, H.R. 5724 would have
required the verification of age and identity both at the time of sale
and the time and place of delivery.
We understand that this Committee wants to focus exclusively on
legislation within its jurisdiction that addresses the fact that states
are illegally losing millions of tax dollars. To accommodate that
desire, we undertook to provide Congressmen Green and Meehan with a
draft of such legislation. We strongly urge the Committee to adopt its
provisions.
I would now like to outline the seven specific areas in which the
legislation offered by Congressman Green fails to meet what we believe
are the minimum standards necessary for any effective legislation
dealing with Internet tobacco sales.
1. The legislation should apply to all tobacco products, not just
cigarettes.
If the legislation applies only to cigarettes it will do nothing to
reduce illegal sales and tax evasion over the Internet or through mail
order on other tobacco products. By focusing only on cigarettes, the
legislation could have the unintended consequence of encouraging use of
other tobacco products such as smokeless tobacco. There can be no
justification for the different treatment of different tobacco
products.
2. The legislation should explicitly impose the burden of either
paying or insuring that applicable state taxes are paid on the
Internet seller rather than on the purchaser.
State tobacco taxes on tobacco products sold at retail are
collected at the distributor level. The products arrive at the retail
outlet with a tax stamp already on them and the applicable tobacco
related taxes already paid. This enables law enforcement officials to
easily monitor compliance and insures that violations will involve a
sufficient amount of money to warrant enforcement.
At present Internet sellers based outside the United States and/or
on Indian lands pay no state taxes and Internet sellers based in low
tax states only pay the tax from the state in which they are based. The
responsibility for paying the tax on the tobacco products they sell
then falls to the individual consumer/purchaser, making enforcement
difficult and costly. Unless the responsibility for paying the tax is
clearly and unquestionably switched to the Internet seller, it doesn't
matter who is given the authority to enforce the law--it will not
happen.
Despite our requests that a provision be added that explicitly
switches the responsibility to the Internet seller, the bill before the
Committee does not do so. As written, the draft legislation offered by
Congressman Green in Sec. 2(a) only requires that the Internet seller
``comply with all the sales tax and use tax and other laws, applicable
to the distribution and sale of cigarettes.'' This could be interpreted
to give states only a federal right of action to enforce existing state
laws that apply to Internet sellers. Very few states have laws that
explicitly apply to Internet sellers.
Even a broader interpretation would be difficult to implement
because states have numerous ``sales and use tax and other laws
applicable to the sale of cigarettes.'' Some apply to manufacturers,
distributors, and wholesalers; others apply to retailers, vending
machine operators, etc. In most states, state laws place no tobacco tax
collection or payment obligations on retailers because these
responsibilities are placed on others. If the goal is to require the
Internet seller to pay the tax or to insure that it is paid, then the
legislation should be explicit on this point. If legislation is
ambiguous as to whether the burden to pay the tax falls on the Internet
seller or purchaser or some third party, then it will be wholly
ineffective in curtailing tax evasion.
3. The legislation should apply to all remote sales of tobacco
products.
As written, the legislation exempts sales that are not ``outside
the State or Indian lands where the order is processed.'' While the
impact is probably unintended, this could be read to exempt sales from
Indian lands to consumers outside the Indian reservation but within the
same state. This could be a substantial loophole in states with large
populations with in-state tribal Internet sellers.
4. The legislation should include an enforcement mechanism that will
assure that the states can actually enforce the legislation and
block Internet and mail-order sales of tobacco products for
which state taxes have not been paid.
Internet sellers are often based out of state, on Tribal lands, or
even offshore or overseas. Some are fly-by-night operations. Even if
this legislation gives states authority to bring civil actions against
any person who violates the Act, bringing state lawsuits against
distant vendors is an inevitably costly, cumbersome, complicated, and
ultimately uncertain enforcement procedure.
To be effective, legislation must require that Internet sellers
maintain records of their sales for several years, prohibit anyone from
shipping tobacco products into the state who has not registered and
give the state the authority to block the delivery of tobacco products
who have not complied with the law. The current draft does not
adequately include any of these tools.
5. The Civil Action section of the legislation should provide for
civil fines and give the federal government the right to seek
civil fines and civil damages.
As drafted, Sec. 3. entitled ``Civil Action'' says that a State
Attorney General may ``obtain appropriate relief, including money
damages,'' but does not provide for any specific or minimum penalties
or fines for violating the provisions of this Act, nor does it include
the authority to withdraw a repeat violator's right to sell tobacco
products into the state in the future.
We support the proposal to provide state Attorneys General with the
authority to bring civil actions to enforce violations of the law, but
it should not at the same time strip the federal government of
authority to bring a civil enforcement action and allow the federal
government only to seek criminal penalties. As drafted, the federal
government would not be allowed to seek any civil or monetary damages
or fines from Internet or mail order sellers who break the law. Federal
authorities have not to date exercised their current enforcement
authority, in part, because individual enforcement cases were deemed to
be too small to warrant the effort. If the law imposed the burden to
pay the taxes on the Internet seller, rather than the purchaser,
federal enforcement could potentially become an important complement to
any state enforcement prompted by the Act.
6. The criminal penalties should be increased beyond the inadequate
penalties established in the original Jenkins Act in 1949.
This legislation provides only a misdemeanor penalty with no
minimum fine and a maximum fine too small to have a deterrent effect,
along with up to 6 months in jail, or both. These penalties are
inadequate. The penalties in the original Jenkins Act failed to deter
violators or to encourage federal enforcement of the law and the
provisions in the bill now before the Committee will not correct this
problem. To be effective, the criminal penalty provisions should make
violations of the act a felony, provide for significant, minimum
criminal fines, and provide for larger criminal fines and possible
imprisonment for flagrant and repeated violations.
7. The legislation does not require Internet and mail-order sellers to
keep any records of their sales and deliveries into a state.
While the legislation, like the original Jenkin's Act, requires
Internet and mail-order sellers to register with state tax
administrators and make monthly sales reports to those officials, it
does not require them to keep their own records of these sales and
deliveries over time. This omission could be a major impediment to
enforcement efforts and to the calculation of monetary damages, such as
unpaid taxes. A provision should be added to the legislation requiring
sellers to maintain specific records for not less than five years.
______
In sum, this bill addresses a legitimate problem, but does not do
so effectively. If the goal is to insure that state tobacco taxes are
collected on Internet tobacco sales, the bill as drafted will not
accomplish its purpose. We in the public health community are prepared
to and would welcome the opportunity to work with the Committee to
produce effective legislation that would make a reality of our common
goal to reduce tax evasion and eliminate youth access to tobacco
products in remote sales of tobacco products.
ATTACHMENT
Mr. Green. I look forward to it. Thank you for your
testimony. The final witness today is Mr. Patrick Fleenor,
Chief Economist with Fiscal Economics. Welcome.
STATEMENT OF PATRICK FLEENOR, CHIEF ECONOMIST, FISCAL ECONOMICS
Mr. Fleenor. Mr. Chairman, Members of the Committee, as you
know, over the last 5 years the retail price of cigarettes in
the United States has soared. Buoyed by the rash of recent
State and local excise tax hikes as well as the implicit taxes
which were part of the Master Settlement Agreement, the average
retail price of cigarettes has risen nearly $4 per pack, almost
twice the level of just 5 years ago. In high tax jurisdictions
such as New York City cigarettes can cost more than $7.50 a
pack. Consumers have responded to the rising prices by
increasingly searching out low cost sources of cigarettes.
One source that has experienced considerable growth over
the last several years has been online tobacco retailers who
sell cigarettes acquired from low-tax jurisdictions. In the
year 2000 it was estimated that there were roughly 40 U.S.
based Web sites selling cigarettes. Today this figure has risen
to nearly 200. An equal number of foreign sites also sell
cigarettes into the U.S. market.
A September 2002 study by Prudential Securities estimated
that 2 percent of the cigarettes consumed in the United States,
or more than 400 million packs were purchased online. The
report projected this figure would triple by 2005. Another
study by Forrester Research forecast that Internet sales would
claim 14 percent of the market by 2005.
With State and local governments frequently collecting more
than $1 in excise and sales tax revenue on each pack of
cigarettes sold, Internet cigarette sales can have significant
fiscal effects. I estimated--using a sophisticated economic
model which first allocates Internet sales to the States and
then estimates their effect on State and local revenue. The
model basically applies State and local excise taxes as well as
sales taxes to the number of packs sold, during the current
fiscal year under the assumption that Internet sales would
supply about 2 percent of the market I estimated that Internet
sales would collectively cost State and local governments about
$552 million in excise and sales tax revenue. This impact,
however, will vary significantly by State. In New York, home of
the Nation's highest cigarette taxes, Internet sales will cost
State and local governments more than $150 million. It will
also be high in California and New Jersey and Michigan.
On the flip side, some States will experience very little
losses. Montana, for example, will lose about $41,000 this year
in sales tax as well as cigarette excise taxes. Losses will
also be relatively light in Wyoming, Delaware, and Colorado.
Even in the absence of additional State and local excise
tax hikes, many observers feel that the share of the U.S.
cigarette market supplied by Internet retailers will continue
to expand over the next several years unless the tax advantage
that online retailers enjoy over traditional brick and mortar
retailers is significantly narrowed.
Estimates of market penetration vary significantly, so I
estimated State and local revenue losses under two scenarios.
The first assumed the Internet retailers would capture about 6
percent of the market by 2005. In that scenario I estimated
that total excise and sales tax revenue losses by the States
would equal around $1.7 billion, again the impact varying
significantly by State. New York, I estimated would lose about
$435 million while other States would lose as little as about
$115,000.
In the second scenario I assumed Internet retailers would
capture about 14 percent of the market by 2005. In that case
you have losses of about $4 billion, again significant
variation among the States in terms of revenue loss. Some
States like New York will lose as much as a billion, others
will lose around $268,000.
Proponents of a larger role for State governments in the
enforcement of tobacco statutes, as we are talking about today,
frequently argue that in addition to the fact that State and
local governments have a greater incentive to collect their tax
revenue than do Federal authorities, the widely varying impact
that avoidance causes on the States calls for something more
than a one-size-fits-all approach. Therefore my research tends
to support the bill.
Thank you, Mr. Chairman and Members of the Committee, for
the opportunity to testify this morning. I will submit a copy
of my full statement for the record and be happy to take any
questions.
[The prepared statement of Mr. Fleenor follows:]
Prepared Statement of Patrick Fleenor
Mr. Chairman and Members of the Committee, my name is Patrick
Fleenor. I am the chief economist of Fiscal Economics, a consulting
firm specializing in the economic analysis of fiscal policy. Prior to
my current position I was a senior economist with the Joint Economic
Committee of the United States Congress. I have also served as chief
economist of the Tax Foundation, one of the nation's oldest and most
respected think tanks. It is an honor for me to appear before you today
to discuss the impact of Internet cigarette sales on state and local
government budgets.
introduction
Over the last 5 years, the retail price of cigarettes has soared.
Buoyed by the rash of recent state and local excise tax hikes as well
as the implicit tax hikes which are part of the Master Settlement
Agreement, the average retail price of a pack of cigarettes has risen
to nearly $4.00 per pack, almost twice the level just 5 years ago. In
high-tax jurisdictions such as New York City, cigarettes can cost as
much as $7.50 per pack.
Consumers have responded to these rising prices by increasingly
searching out low-cost sources of cigarettes. One source that has
experienced considerable growth over the last several years has been
online tobacco retailers who sell cigarettes acquired from low-tax
jurisdictions.
In 2000, it was estimated that there were roughly 40 U.S.-based
websites selling cigarettes on the Internet. Today, this figure has
risen to more than 200 with an equal number of foreign sites also
selling cigarettes in the U.S. market. A September 2002 study by
Prudential Securities estimated that 2 percent of the cigarettes
consumed in the U.S.--more than 400 million packs annually--were
purchased online.\1\ The report projected that this figure would triple
by 2005. Another study by Forrester Research forecast that Internet
cigarette sales would claim 14 percent of the U.S. market by 2005.\2\
---------------------------------------------------------------------------
\1\ Prudential Financial, Buying Cigarettes Over the Internet,
September 24, 2002.
\2\ Robert Rubin, Chris Charron, and Moria Doesey, Online Tobacco
Sales Grow, States Lose, Forrester Research, Inc., April 27, 2001.
---------------------------------------------------------------------------
estimating the effect of internet cigarette sales on state & local
sales and excise tax revenues by state
With state and local governments frequently collecting more than
$1.00 in excise and sales tax revenue on each pack of cigarettes sold,
Internet cigarette sales can have significant fiscal effects. It is
possible to calculate these effects by employing an economic model that
apportions Internet cigarette sales by state and then uses information
on sales and excise taxes as well as average price data to calculate
revenue losses by jurisdiction.
This type of analysis was used to prepare the estimates presented
in Table 1. Here it was assumed that Internet purchases accounted for
2.0 percent of total cigarette sales in FY 2003. Under this assumption,
which is generally consistent with the estimate made in the Prudential
Securities report, 413.9 million packs of cigarettes will be sold over
the Internet during the 2003 fiscal year.
The allocation module of the model uses population data, smoking
rates, sales and excise tax levels, and other information to calculate
the demand for cigarettes as well as incentive to purchase cigarettes
online. Consequently, states with similar populations can have widely
differing levels of Internet sales. Total Internet sales in New York,
for example, are estimated to be more than three times the level in
Texas even though smoking rates in the two states are similar. This
occurred in large part because the incentive to purchase cigarettes
online--i.e. sales and excise taxes levied on cigarettes--were, on
average, more than 3 times higher per pack in New York.
Once total Internet sales have been apportioned among the states
the model calculates state and local excise and sales tax revenue lost
as a result of Internet cigarette sales. The model estimates that in FY
2003 state and local governments in the U.S. will lose $552.4 million
due to online cigarette sales. The bulk of these funds, $399.4 million
or 72.3 percent of the total, will be due to lost excise tax
collections. The balance will result from lost sales taxes.
Tables 2 and 3 present projections of state and local government
revenue losses under current law for FY 2005 under two scenarios. The
analysis underlying Table 2 assumes that Internet sales will capture 6
percent of the U.S. cigarette market by FY 2005, a forecast similar to
that made by Prudential Securities. Under this scenario state and local
governments will lose $1.7 billion in excise and sales tax revenue
during that fiscal year.
The results of the analysis presented in Table 3 assume that
Internet cigarette sales climb to 14 percent of the market by FY 2005,
a forecast generally consistent with that made by Forrester Research.
Under this assumption, state and local governments would lose roughly
$4.0 billion in excise and sales tax revenue during FY 2005.
conclusion
The ability of Internet retailers to sell low-tax cigarettes at a
time of rapidly rising cigarette taxes has resulted in that sector
supplying an ever increasing share of the nation's cigarette market in
recent years. This has cost state and local governments billions of
dollars in lost excise and sales tax revenue at a time of widening
budget gaps. Even in the absence of additional tax hikes, many industry
observers feel that the Internet sector will continue to expand over
the next several years, with commensurate revenue losses for state and
local governments, unless the tax advantage Internet retailers
currently enjoy over traditional brick-and-mortar retailers is
significantly narrowed.
Mr. Green. Thank you for your testimony. I thank again all
the witnesses for testifying. I will begin with questions.
Mr. Jones, in your research you came across a large number
of Web sites that sell so-called tax free cigarettes. Did your
research show who the operators of those Web sites are?
Mr. Jones. For the most part it had indications of the
owners. We identified, as I say, 147 sites. The majority of
those sites were Native American sites, 87 out of the 147 were
Native Americans. Some of the others listed addresses and
names. It was for the most part Native Americans, 87 out of
147.
Mr. Green. Okay. Thank you. And if you will take a look, I
hope you have had a chance, as all the witnesses I know have
had a chance, to take a look at this color handout that we have
given here which shows just some of the Web sites that are
there. Mr. Jones, can you tell me as you look at those, was
that sort of characteristic of the Web sites that you
researched?
Mr. Jones. Yes. We searched terms such as cheap cigarettes,
free taxes, and so forth. And we also came up with a set of
Internet sites similar to the ones shown here. I think the
interesting thing is that when you search on these sites it
becomes very obvious that the selling point is the lack of
taxes and that is what draws the seller to those sites. I
think, too, that in some cases that the site also will lure you
on with buying one cigarette and then talk you into buying one
that they can make more money on such as a generic brand versus
premium brand. We found some of those cases also.
While we didn't specifically look at this in terms of the
issue of youth smoking, our review didn't specifically look at
that issue, but looking at some of the sites in terms of how
you would order cigarettes there were some indications that
youth could buy cigarettes with very little identification.
Although they asked for verification of age it would just
require certification in the statement that I am of age. And of
course if you want to buy a cigarette, you certify.
Mr. Green. Every high school student's dream.
Mr. Jones. My son had an ID card that had a false age, too.
So I think it is very easy if a youth wanted to falsify his age
via the Internet because as I said in my statement the Internet
is anonymous, you can use the Internet without being physically
there. So to an extent it is anonymous, it also makes it very
easy for people who might be ashamed to go to stores to buy
cigarettes because of the social issues, they also find its
another avenue to procure cigarettes over the Internet.
Mr. Green. Interesting. Mr. Armour, could you comment on or
expound upon the threat that these remote sellers present to
brick and mortar stores?
Mr. Armour. I think the largest one, going back to what I
said in my testimony, you look at Washington State. By not
collecting State excise and sales taxes it is $20 a carton.
That is an enormous price advantage. And while in Washington
State I can't quantify the instances of Internet or mail order
sales into the State because we have so many Indian
reservations in urban areas that already are siphoning off a
great deal of excise taxes, our State Department of Revenue
estimated 3 years ago that the loss of State excise taxes in
Washington State due to Indian reservation sales exceeded $130
million a year.
So I think that is indicative of the wide discrepancy in
prices that retailers that don't collect taxes have.
Mr. Green. Interesting.
Mr. Myers, what do you think is the best way that Internet
sales can verify age, Internet sellers can verify age? Do you
have any suggestions on how that might be accomplished?
Mr. Myers. We do. And Congressman Meehan's bill that he
introduced previously represents our thinking as well on that.
What you need to do is require a Government database checked
photo ID both at the time of the initial transaction over the
Internet and then second at the point of delivery. If you don't
do both, then you have opened up a path either way. If you do
do both, then you can get a real clamp on these issues.
We would be happy to work on the specific detailed
provisions about how to do that. But I think it is essential if
we are going to really put a clamp on illegal sales to children
all across the country.
Mr. Green. Thank you. Now the Chair recognizes Mr. Meehan
for his questions.
Mr. Meehan. Thank you, Mr. Chairman. Mr. Jones, thank you
for appearing at this hearing and also for an excellent GAO
report that both Congressman Conyers and I had requested. I may
be going over some of your testimony you have already
presented, but I want to make the Subcommittee record clear on
some points.
Mr. Jones, both the Department of Justice and the Bureau of
Alcohol, Tobacco and Firearms commented on your draft report,
is that correct?
Mr. Jones. That is correct.
Mr. Meehan. What did the Department of Justice state in
regards to the fact that the Jenkins Act only contained
misdemeanor penalties in terms of the U.S. attorney's
willingness to prosecute cases?
Mr. Jones. Both the Justice Department and the Treasury
Department commented on the draft report, suggested that felony
as a penalty would increased compliance with the Jenkins Act.
They also made some other suggestions in terms of getting more
enforcement by States, allowing States more authority to take
Jenkins Act enforcement to State courts and Federal district
courts. The concern with the----
Mr. Meehan. So that was the input that you got from the
Justice Department?
Mr. Jones. Yes. The concern was that by making it a felony
you would get more U.S. attorneys to take the cases to Federal
court. As you know, U.S. attorneys have a limited staff and
they can't take every Federal case to Federal court. They have
a certain--I guess it is pretty well known they have thresholds
that they use to take cases to Federal court, and they very
rarely take misdemeanors to a Federal court. And because these
are misdemeanors, very little attention is given to these cases
because Federal law enforcement knows that they won't be able
to get U.S. attorneys to take these cases to Federal court.
So I think the reason that the Federal Government doesn't
enforce the law; that is, the FBI and the ATF, is because they
can't get U.S. attorneys to take the cases to court.
Mr. Meehan. It is your testimony as well, you mention the
Treasury Department, the ATF, the agency that you recommend to
have jurisdiction over this matter, that now potentially we
could accomplish administratively. They made the same
representations in the comments?
Mr. Jones. Yes. And they went--ATF when a step further and
offered to take over the responsibility of enforcement. As you
know, ATF now enforces the Cigarette Contraband Trafficking
Act, which is a smuggling act, and it also carries a felony
penalty. So they feel by having the comprehensive authority to
enforce the Jenkins Act and CTA act that they will have the
whole issue in one court. And since ATF has been transferred
now from Treasury to the Justice Department, we think that
Justice can handle that issue and Congress doesn't need to
worry about that right now.
Mr. Meehan. Excellent.
Mr. Myers, your testimony mentioned the growing problem of
kids buying cigarettes over the Internet in the absence of
safeguards to prevent these types of sales. Massachusetts
Attorney General Tom Reilly and I actually conducted our own
sting operation on two separate occasions and we were astounded
at how easily it was for young children who participated in the
sting, how easy it was for them to buy cigarettes over the
Internet with the click of the mouse.
Do you think this new legislation addresses the growing
problem with youth access to tobacco over the Internet, and how
specifically can we better address this problem that I think it
is clear that we all agree it is, certainly Congressman Green
and I are in strong agreement on?
Mr. Myers. It is a vitally important problem. And State
attorney generals have done more to stop illegal sales at the
brick and mortar retailers. Then it becomes even more important
to address the issue here. There are a number of things we have
to do. First, strong enforcement of tax evasion is a component
of the issue. If the cigarettes aren't cheaper kids will be
less likely to buy them. But, second, we have to have a
meaningful set of provisions for age verification, as
Congressman Green and I discussed earlier. We need to make sure
it hits both at the point of sale and at the point of delivery.
We need to hold the people in that line of process accountable
for it. That includes adequate record keeping. So this bill by
itself does not solve that problem.
Mr. Meehan. Will giving States attorneys general the right
to bring a case to Federal court help reduce the problem with
youth access?
Mr. Myers. Giving State attorneys general the right to sue
along with the tools they need to do so will make a difference.
This bill needs to be beefed up to accomplish it. Unless it is
clear that it is the out-of-state sellers who have the
obligation to collect and pay the tax, unless the State
attorneys general have the authority to actually block sales by
a seller who is not living up to the law and to ban future
sales, and unless you have penalties that include felony
penalties, then you will not accomplish the goal that I think
we all agree upon.
Mr. Meehan. Thank you.
Mr. Green. I thank the gentleman. The Chair recognize Mr.
Keller, the gentleman from Florida.
Mr. Keller. Thank you very much, Mr. Green. Mr. Myers, let
me begin with you. And I want to thank you so much for coming
before our Committee today and taking time to educate us on
your issues. I know all of us share your concern about underage
children smoking. Let me just tell you one thing in the
interest of States, if I had somebody from the National Center
for Tougher Sentences for Child Abusers here before us and we
had a bill to make dramatically tougher sentences for child
abusers and they were saying they weren't supportive of it, I
would think to myself what in the hell are these people
thinking. I would think that they would be almost marginalizing
themselves by saying we are not going to support it unless you
make different changes that we uniquely would do.
So my question is now, faced with the situation where we
have a very real problem with underage children smoking because
these remote Web sites are failing to do adequate age
verifications and they are making it easier and cheaper for
kids to buy cigarettes and this bill would in fact ensure that
the age verification and tax collection would take place for
remote sales of cigarettes at least better than it is now, why
are you not supporting this legislation as written?
Mr. Myers. I am glad you asked that question. Because the
answer is straightforward. The Jenkins Act was passed with the
best of intentions and failed because it didn't have adequate
teeth. It doesn't have adequate enforcement provisions. Our
goal, like yours, is to come up with a piece of legislation
that will actually make a difference. We don't move our ball
forward if we don't give the State attorneys general the actual
tools they need. Based on a lot of conversations with a lot of
law enforcement officials, it has been our conclusion that
without making the changes we suggest, none of which are
radical, none of which are extraordinary, that you won't in
fact make the difference that both you and I want to see made.
This isn't a matter of the perfect being the enemy of the
good. It is a matter of making sure that you pass a piece of
legislation that will actually do what you and I want. As
drafted, we have been told by lots of people this bill won't
get us there. I am convinced that working with Congressman
Green and Congressman Meehan we can get there with a reasonable
bill.
Mr. Keller. Thank you for that. That is fair. I want to
give you your side of that. I would encourage reasonableness on
both sides.
Mr. Myers. That is why one of the things we first did was
in fact go out to the people who have to enforce the law and
ask them about the adequacy of these provisions. Will it make a
real difference because I know that is what you want? What we
were told is that unless you take a number of the steps that we
have described here, that all we are doing is kidding ourselves
and no one here intends to do that.
Mr. Keller. Mr. Jones, turning to you, does Native American
status as far as you know serve as a valid defense for
noncompliance with State laws regulating the sale and
distribution or possession of cigarettes? In other words, can
an Indian tribe by virtue of their own sovereignty say if I
want to sell to a 12-year-old I can sell to a 12-year-old; is
that legal on their part?
Mr. Jones. Our legal staff has found that is not true, that
Native Americans do not have automatic exemption from the
Jenkins Act. In fact, a search of the Jenkins Act itself and
its legislative history does not provide an exemption to Native
American sales of cigarettes.
Mr. Keller. It hasn't been raised in this hearing but I
read some people may take the opinion that the Internet Tax
Freedom Act provides some sort of legitimate basis for
noncompliance with the Jenkins Act or State laws relating to
the sale of cigarettes. Do you have a thought on that?
Mr. Jones. Yes. The Internet Tax Freedom Act was designed
to exempt new businesses from adding tax for operating over the
Internet. It did not exempt taxes that are already in effect.
So the Internet Tax Freedom Act was to prohibit taxes on new
products or new uses of the Internet, not for current.
Mr. Keller. It is a separate issue. What procedures do
remote sellers now employ, if any, to ensure compliance with
the Federal and State laws restricting cigarettes to underage
minors?
Mr. Jones. We found that some, as I said earlier, do have a
certification statement that the buyer has to certify that he
is of age to buy cigarettes. But that is a matter of just a
certification. And the certification is worth as much as
signing the note. Some also post you must be of age to purchase
cigarettes but they don't necessarily enforce those ads.
Mr. Keller. So some of them ask you how old you are and
some don't?
Mr. Jones. That is true.
Mr. Keller. Okay. Mr. Chairman, I will yield back the
balance of my time.
Mr. Smith. [Presiding.] Thank you, Mr. Keller. Let me
apologize to the witnesses. I had a vote come up in another
Committee. It was a close vote and I needed to excuse myself.
Mr. Myers, I am sorry that was in the middle of your testimony,
but I hope to catch up with you all now.
The gentleman from Virginia, Mr. Boucher, is recognized for
his questions.
Mr. Boucher. Thank you very much, Mr. Chairman. I want to
begin by commending our colleague Mr. Green for bringing this
matter before the Committee. I am sorry he is not here to hear
me say that.
Mr. Smith. He had to be on the House floor to speak on the
rule.
Mr. Boucher. That is an understandable need. So I do want
to commend him for bringing this matter before the Committee. I
find myself in basic agreement with his approach that the sales
and use taxes of the State of residence of the purchaser should
be honored with respect to interstate transactions in
cigarettes. But I note that the bill really is limited just to
cigarettes. Of course we know that there are other tobacco
products.
I would like to ask you, Mr. Jones, and you, Mr. Fleenor,
if in the course of your research with respect to the volume of
interstate sales of cigarettes you encountered data that would
reveal to you a comparison in terms of volume of cigarette
sales on the one hand and sales of other tobacco products,
smokeless and cigars and other kinds of things, on the other
hand.
Give us a sense, if you have this information, of the
volume of cigarette sales on an interstate basis as compared to
sales of these other products.
Mr. Fleenor. Well, I looked at it a bit, and the sales of
smokeless tobacco, chew, snuff, et cetera are relatively small
in comparison to cigarettes, about probably--only about four or
5 percent of--in terms of revenue that--I guess compared to
cigarettes.
Mr. Boucher. Of the total sales, cigarettes would be 96
percent, and other products would be about 4 percent?
Mr. Fleenor. Exactly.
Mr. Boucher. Mr. Jones, have you looked at that issue and
do you agree with those numbers?
Mr. Jones. Our review didn't focus on that but we did
notice a majority of the sales were cigarettes.
Mr. Boucher. I am sure that is true. Does anyone on the
program have a comment with respect to why this bill should be
limited just to cigarettes? I know Mr. Myers has advocated that
the other products be included. Does anyone have a view that is
contrary to that of Mr. Myers, or would anyone like to defend
the position of the bill that basically limits its application
just to cigarette sales? Let the record show there was silence.
Let me ask another question. Some have suggested that
this----
Mr. Armour. Just on that, a thought I have is, in many
States, cigarettes are tax stamped. Like in Washington State,
the cigarettes are tax stamped. So it is very easy for the
Liquor Control Board, who has enforcement, to identify that
this is a contraband product in our State by looking at it.
None of the other tobacco products in our State are required to
be tax stamped. So there may be some kind of enforcement issue
related----
Mr. Boucher. With respect to cigarettes. Well, I think the
Committee will need to consider this question as we give
further consideration to the bill.
Mr. Myers, you noted in your testimony, and perhaps in
answering one or more of the questions, that you questioned the
effectiveness of the provision which is found on Page 2
beginning at Line 9 of the bill, that basically says that the
sales and use taxes of the State of the residence of the
purchaser would have to be honored in the case of interstate
transactions.
This language looks pretty straightforward to me. I am
wondering what weakness you see in it, and why you think the
language, as it appears in the bill itself, is not effective in
terms of making sure that the residence--that the taxes of the
State of the residence of the purchaser be paid.
Mr. Myers. Let me answer that for you in two ways.
First, is what we have done is look at some of the State
laws, and some of them are very unclear as to their
applicability to out-of-State sellers. In fact, some of them,
because the States didn't think they had the authority here,
say that--actually provide an option, for either the out-of-
State seller to pay or for the purchaser to pay, and simply
applying those laws that were passed in a different
circumstance could lead to a situation where it is the
purchaser, not the seller, who is responsible. I don't think
that is the intention, which is why it has been our view that
we ought to be explicit about that.
Mr. Boucher. I am sorry. Let me just ask you.
This clearly says, each person who engages in the
interstate, sale or distribution. Now, that clearly would be
the seller. This is the person engaging in the interstate sale
or distribution, or at a minimum it is the seller. You might
also suggest that it is the purchaser, but it is clearly at
least the seller, shall comply with all of the sales and use
tax and other laws of the State in which the cigarettes are
delivered. I don't see how that----
Mr. Myers. Those laws don't apply, A, either to a
retailer--and often it is the wholesaler distributor further up
the line who does it in a normal in-state situation, and that
wouldn't be the case for the out of State seller, and it
certainly would be the case for an Indian reservation or
outside our borders--then you would have an open and ambiguous
question. Some of those people have been challenged before and
said those laws don't apply to them.
Second, the question I would pose back, since I think
everyone's intention is the same here, and that is to have
those sellers pay, and I think that is your intention as well.
Then there is really no down side to being explicit about it,
so that we don't force the State Attorney Generals to have to
go through 5, 10 years of litigation based on the vagaries of
State laws that were written for a different purpose. It is an
easy enough thing to insert, eliminate the ambiguity and then
allow the State Attorney Generals to have the tool to begin to
enforce it right away.
Mr. Boucher. Okay. Mr. Myers, thank you very much.
Thank you, Mr. Chairman. My time is up.
Mr. Smith. Thank you, Mr. Boucher. The gentleman from
Indiana, Mr. Pence is recognized for his questions.
Mr. Pence. Thank you, Mr. Chairman.
And I want to associate myself with comments on both sides
today, expressing appreciation for Mr. Green's leadership on
this legislation. I also want to associate myself a bit with
Mr. Keller's comments concerning a bit of befuddlement about
opposition from an organization dedicated to protecting
children from tobacco, finding itself as an opponent of
legislation that would make laws tougher, and I do--I don't
necessarily come to these hearings to put witnesses on the
spot, unless I am in an especially bad mood. So I will accept,
Mr. Myers, your comments and your testimony and your responses
to Mr. Keller about the sincerity of your purpose in coming
here and wanting to improve a piece of legislation, because
when I heard of the National Center for Tobacco-Free Kids'
opposition to Mr. Green's legislation, I was confused. You have
abated that a bit, but----
Mr. Myers. Congressman, could I just respond briefly?
Mr. Pence. I would welcome that.
Mr. Myers. We know we always take a risk when we take a
piece of legislation that is well-intended, whose goals we both
share, and then say it doesn't simply give enough tools to
actually accomplish its goal. That decision was not taken
lightly. It was based upon multiple conversations, frankly over
several years, where we have been working with State officials
about the kinds of tools they need to really make a difference.
And we have just been told by too many law enforcement
officials, that if you are going to give us this
responsibility, you have got to give us the tools. Otherwise,
we may file a lawsuit, but given the hundreds and hundreds of
Internet sellers out there, the fly-by-night of them, the cost
of enforcement is too great. We are not going to be able to do
the job.
All we are trying to say is, if we really want to take this
problem up and solve the problem that you and I agree on, then
we need to do it. So our goal is very simple, and that is to
make sure law enforcement officials have the tools to help
reduce tobacco use.
Mr. Pence. Reclaiming my time, then, I would like to then
give Mr. Jones an opportunity to speak from a GAO perspective.
There has been an assertion on the panel today that
essentially the Green legislation will not make a difference.
Your report states that jurisdictions, particularly State
jurisdictions, don't have sufficient legal authority today to
enforce the Jenkins Act. Is it accurate to say that the Green
legislation, as drafted, would help States better enforce the
law, Mr. Jones?
Mr. Jones. Mr. Congressman, you are correct.
Our report does state that States had a problem because
they lack enforcement authority in terms of the Jenkins Act,
and I think that Congressman Green's bill does provide some
support to States in terms of pursuing those violations of the
Jenkins Act that they can take to court, either at a State
level or in Federal district court. So it does provide some
remedy for them.
Mr. Pence. So it will improve the law?
Mr. Jones. It will improve States' involvement in enforcing
the law.
Mr. Pence. One question--pardon me, Mr. Jones.
Mr. Jones. As I understand. As I read the bill----
Mr. Pence. Mr. Armour, I wanted to thank you for your
testimony today. I grew up in the gas station business in
southern Indiana. It is called convenience stores now, but we
used to just sell food inside gas stations.
Your testimony indicated that your company particularly has
instituted tobacco retailing practices to ensure that minors
don't purchase tobacco products in your stores. How have your
compliance rates with State laws changed since instituting
these policies?
Mr. Armour. We have always taken our responsibility
seriously before there were the level of mandates today, but
just to give you an order of magnitude, last year we--in our
company we had over 2.6 million transactions that involved
cigarettes. There were two Liquor Control Board sting
operations in which sales associates of ours sold to minors,
and there were two internal sting operations that we performed,
as I said in my testimony, in which sales associates sold to
minors. So four out of 2.6 million transactions, I think with
appropriate steps and procedures that we have implemented
have--that is not zero. I am not happy that four took place,
but I think they can be very, very effective when implemented.
Mr. Pence. Well, I thank you for your testimony, and as a
parent, I thank you for your leadership.
As I do, Mr. Myers, and the leadership for the National
Center for Tobacco-Free Kids. I place myself, Mr. Chairman, to
be a constructive part of moving this legislation forward and
yield back.
Mr. Smith. Thank you, Mr. Pence.
The sometimes Ranking Member of the Subcommittee, Mr.
Berman of California, is recognized for his questions. If he
yields to the gentlelady from California, Ms. Waters for her
questions, okay.
The gentlelady is recognized.
Ms. Waters. Thank you very much, Mr. Chairman, and members.
It seems to me we have two distinct issues here. One that
has to do with the sale of cigarettes to minors on the Internet
and a failure to have any means by which to do age
verification, and, of course, the tax issue with the concerns,
I am sure raised by the brick and mortar retailers, and the
fact that they have to pay their taxes and others don't.
It is very difficult for me to understand, as you deal with
the Internet, how you single out any one product. It seems to
me that just as many of us are concerned about sale to youth of
cigarettes, aren't we concerned about the sale of youth--to
youth of alcohol products and other kinds of things? Is this an
isolated issue, or should we be looking at this issue in terms
of all of those laws that may be violated relative to age
verification, in particular maybe some other things. I don't
know. I don't know if there is any effective way to do age
verification. Maybe there is and I haven't heard it, and I will
ask Mr. Myers or any of the other--who are present here today,
is there--has anyone discovered any way to do age verification
on the Internet?
Mr. Myers. Well, the simplest way, of course, would be not
to permit sale of tobacco products over the Internet, and,
ultimately, that may be the best solution. We do think based
upon examining this, talking with a number of responsible
retailers and others, that by requiring the production of
Government-issued Ids at the critical junctures, holding the
people who deliver the product responsible, ensuring that it is
only delivered to an adult, that you can do a number of steps
that would dramatically cut down on youth sales under these
circumstances.
We also think that if you have effective tools to make sure
that State taxes are paid, you decrease the incentive. So there
is much that we can do. Can we solve it fully without a total
ban? Probably not, but there is much to be----
Ms. Waters. You know, I am not an attorney, but it seems to
me you could raise some equal protection questions about
banning one particular item on the Internet and not others
where age verification also is the law. How do you deal with
that?
Mr. Myers. There is more than a rational basis for
addressing that issue. That is not before the Committee today,
and Congressman Meehan's bill that seeks to both address youth
access and tax evasion issues steps well short of a total ban
and just ensures adequate age verification.
Congressman Meehan's bill might well be a good model for
other products. I have no expertise in those, so I don't want
to speak about it, but there is something we can do about this
product that would make a difference.
Mr. Watt. Mr. Myers, I am quite aware of what is before the
Committee. I thought because you were here with your expertise,
you may have given some creative thought to an issue that is so
dear to you, but thank you for your response.
Mr. Myers. Well, we have, and Congressman Meehan's original
bill, that deals with both youth access and tax evasion issues
is a solution that we think is both workable, complies with the
law, and would make a real difference.
Mr. Smith. The gentlewoman yields back her time. The
gentleman from California, Mr. Berman, is recognized for his
questions.
Mr. Berman. Thank you, Mr. Chairman, and I would like to
yield my time to Mr. Meehan.
Mr. Smith. Okay. The gentleman from Massachusetts is
recognized.
Mr. Meehan. Thank you, Mr. Berman. I want to clear up one
subject that my friend from Indiana had raised, and it is a
question of what the language of the bill ought to be.
From my perspective, I have been working with my staff the
last couple of days to try to have language that will
effectively result in States' Attorney Generals being able to
have not--as a practical matter being able to move against
these companies on the Internet that don't pay State taxes and
who sell to minors.
Specifically, yesterday I got on a plane after the last
vote, and I went up and had dinner with the Attorney General of
Massachusetts and the chief of his Public Protection Bureau,
and I talked about language. I talked about the issue, because
the Attorney General is nationally recognized for his efforts
regarding cigarettes and tobacco products. And what he
indicated to me was, if you just have civil penalties, it will
make it more difficult. I discussed language with him.
So what we are trying to do here is actually pass a law
that will have the intended effect, because oftentimes we pass
legislation around here, and also in legislatures across the
country that have unintended consequences. And it is not a
reflection on how someone feels about who drafted a bill or how
the bill was drafted, it simply has unintended consequences. It
doesn't do what the legislation intended it to do or the
authors of the legislation intended it to do. So what do you
do? You talk to law enforcement officials that have the
authority to actually enforce the law.
So I think that is what we are trying to do, get the best
possible language, and I know Congressman Green is committed to
doing that, because I have been working with him for the last
few days.
Mr. Myers, do you think that this bill gives the States the
incentive and support that they need to crack down on Internet
tobacco sellers that violate State law restrictions on
cigarette sales? And you have indicated specific language to
get the--to make sure the AGs have the tools that they need to
effectively crack down and prosecute these instances?
Mr. Myers. Not as currently drafted. I don't think the bill
will accomplish the goal that Congressman Meehan needs. The
criminal penalties are not sufficient. They need to be made
more severe. The civil penalties need to be made clearer and
more severe and include the right to block sellers who violate
the law.
Third, it needs to be made clear that you can go against
the seller, not just the consumer. Otherwise, you will never--
the State Attorney Generals will never be able to get a grip on
this problem or have the economic incentive to do so.
Mr. Meehan. The final point I wanted to make was relative
to my friend from California's comments relative--why this
product--this product is the leading preventable cause of death
in the United States of America. It is the only product on the
market if you use specifically as directed, it will kill you.
Two days ago, I had the unfortunate experience to be in a
hospital in Hathorne, Massachusetts where my wife's aunt is
dying and died at six o'clock this morning from lung cancer.
She smoked for 40 years. She started smoking when she was 14.
She had quit for the last 20 years or so, but the damage had
already been done. Over 450,000 people die in this country each
year because of tobacco use, and 90 percent of the people who
smoke in America, start smoking when they are children. This is
serious business. It affects the public health of this entire
country.
So why this product? There are a lot of damn good reasons
why this product. We need to make a commitment, and we are
making a bipartisan commitment today, I believe, with this
legislation to find a way to crack down on people that sell on
the Internet and don't verify the ages and don't pay State
taxes. And that is what we are about to do, and I hope that we
are able to work out what I consider to be minor differences on
language, and I know that Congressman Green is committed to
this. But this is important work, and it is important work for
the Congress.
Thank you, Mr. Chairman.
Mr. Smith. Thank you, Mr. Meehan, for a very good
statement, and I hope, as you do, that you and Mr. Green will
be able to resolve any differences and be able to produce a
bill that we all can support. Clearly there was bipartisan--
more than bipartisan. There was consensus this morning on the
need for such legislation.
We had a lot of good questions and a lot of good answers
today, and for that I thank the witnesses who are here. We may
have some additional questions to submit to you in writing. We
hope that you will be able to respond to those within 10 days,
but thank you for being a part of a very important hearing and
very constructive approach to trying to solve a very critical
problem. With that, the Subcommittee is adjourned.
[Whereupon, at 11:20 a.m., the Subcommittee was adjourned.]
A P P E N D I X
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Material Submitted for the Hearing Record
Prepared Statement of Ali Davoudi
Thank you, Mr. Chairman for providing me with an opportunity to
respond to the testimony presented at the Subcommittee hearing held
last Thursday, May 1, 2003, on HR 1839, the Youth Smoking Prevention
and State Revenue Enforcement Act.
I would like to thank Representative Green and Representative Pence
for taking the lead on this important issue, and the Subcommittee on
beginning the debate on the important issues of preventing sales of
tobacco products to minors and assuring that applicable taxes are paid
to the states on tobacco sales.
My statements are submitted for the record as the President of
OLTRA, Inc., the Online Tobacco Retailers Association. In 2001, OLTRA
was founded by a small, concerned group of Internet tobacco retailers
to bring standards of service through self-regulation to the domestic
Internet tobacco industry. Over the past two years, OLTRA has grown in
membership and implemented a number of policies designed to prevent the
sale of tobacco products to minors through online retailers. OLTRA is
committed to these measures, and to legal age verification. While OLTRA
members are, for the most part, small they are not ``fly-by night''
operations, as asserted by the Campaign For Tobacco Free Kids.
OLTRA members sell goods, including non-tobacco products, to over
one million consumers nationwide. OLTRA members actively market their
products to the estimated 20% of the U.S. adult population considered
to be regular smokers. We agree with NACS, that while controversial,
tobacco is a legal product that is important to the economic viability
of a large number of communities in the United States. OLTRA members
sell tobacco products solely to adults for personal use. To this end,
we employ the same precautions that are used for other age-restricted
products, such as wine and beer, sold directly to consumers over the
Internet.
OLTRA members are truly small businesses, embracing the
entrepreneurial spirit characteristic of the United States since its
foundation. OLTRA members, some of which also own local convenience
stores, employ approximately 1,500 people in ten states. A significant
number of OLTRA member Internet tobacco companies are businesses
operated by Native American tribes in New York State and New Mexico,
supporting communities on tribal land and providing jobs in communities
traditionally facing high levels of unemployment. Internet tobacco
retailers are also located in important tobacco-growing states such as
Virginia, Tennessee, Kentucky, and North Carolina.
The online tobacco industry realizes that a perception exists that
it sells tobacco to minors, fails to pay taxes, and sells contraband
and counterfeit cigarettes. This perception is not true of OLTRA's
members. In fact, OLTRA has worked to adopt responsible business
practices, including: secure online ordering, a clearly stated refund/
exchange policy, accurate product identification, clearly stated
company contact information, live customer support, posted business
hours, forbidding purchases made with the intent of resale, prohibiting
language on websites about cigarettes being tax free or duty free,
mandating a strict age verification system and imposing a requirement
of sale only to adults 21 years of age and older (imposing an
additional three years above the age of 18).
Because local convenience stores are bound by exclusive contracts
with ``Big Tobacco'' manufacturers, they cannot offer consumers the
same access to brands as can Internet tobacco retailers. OLTRA member
retailers provide consumers with access to a wide variety of products,
including those not available in local convenience stores. This gives
consumers greater choice among tobacco brands, including specialty and
boutique brands of tobacco products. Internet retailers also carry
other consumer goods, such as rolling papers, lighters, candles, air
filters, filter tips, fruit and candy, and dental products.
Internet tobacco retailers sell to a growing market of adult
consumers who seek greater choice, better customer service, the
convenience of direct delivery and lower prices.
the business model of online retailers
Like other Internet retailers, OLTRA's members have adopted a
business model in line with the U.S. Supreme Court's landmark decision
Quill v. North Dakota, 504 U.S. 298 (1992). Quill held that an out-of-
state seller of goods, whose only contacts with a state are by mail or
common carrier, lacks the physical presence required by the Commerce
Clause for the state to impose sales and use taxes upon the seller's
transactions with citizens of their states. The state's imposition of
such a use tax would place an unconstitutional burden on interstate
commerce.
Following the lead of other retailers of age-restricted products,
such as wine, and Internet businesses, like Amazon.com, eBay and
Yahoo!, OLTRA members pay applicable federal and state taxes in the
states in which they have a physical presence.
With over 7,600 individual taxing jurisdictions in existence, the
cost of complying with each jurisdiction's tax laws would put most
Internet retailers out of business. Quill's bright line rule allows
Internet retailers to remain in business and pay taxes to those states
in which they have a physical nexus. Excise taxes are included in this
bright-line rule. OLTRA members pay all federal excise taxes and
applicable taxes in the states in which they are located or have a
physical presence. Until the states are able to agree to simplify sales
and use taxes and ease the collection and remission of sales taxes by
out-of-state retailers, the rule set forth in Quill applies.
Requiring the retailers to collect and remit taxes to the states
would change the Quill standard for one particular type of product--
cigarettes. No other product, age-restricted or non-age-restricted,
would face the same change. Cigarettes should be treated like all other
products. Congress should not change the Quill standard for cigarettes
unless it also changes the standard for books, music, clothing, wine
and other legal products.
OLTRA members support a uniform nationwide system for all Internet,
telephone, and mail order retailers to collect and remit applicable
taxes directly to state taxing authorities. Such a uniform system,
currently being addressed by the Streamlined Sales Tax Project, would
be vastly more efficient as a means of tax collection than an ad hoc,
piecemeal approach targeting a single type of consumer product.
HR 1839 would not be uniform, efficient, or effective. It is not
uniform because it would exacerbate the disparate treatment of Internet
tobacco retailers. It would compel them, unlike all other interstate
retailers, to participate in the tax collection process. Giving
individual states the authority to bring actions against retailers
would lead to a patchwork of different enforcement decisions in each
state. There is no rational basis for this unequal treatment.
It would impose upon them the duplicative burden of filing reports
under the Jenkins Act, and would do so upon the heightened threat of
felony penalties. Such penalties are not imposed on other retailers.
The imposition of criminal penalties would be excessive, and sanctions
should be no greater than penalties for violation of FTC regulations
governing the sale of consumer goods.
It is difficult to conceive of a less efficient means of tax
collection than reporting sales in the hope that sums can later be
collected from consumers. Such an approach increases the costs of
collection, as each state, no matter how strained its budget, would
have to invest in person-by-person collection of taxes on a few cartons
of cigarettes at a time. Moreover, since no other sales of products
across state lines are subject to this reporting and collection
process, each state will have to hire ad hoc tax collectors to carry
out this cumbersome program. The efficiencies that come from point-of-
sale tax collection, and the attendant benefits to the States, would be
lost.
Turning over personal information to the states would raise
significant privacy concerns. The states do not store consumer
information in a secure or adequate manner. According to an article
published in the March 26, 2003 edition of The Washington Post, ``only
14 states, including Virginia, comply with federal mandates to help
ensure the protection of computer systems that hold confidential
information about millions of people.''
The penalties proposed by groups such as the Campaign for Tobacco
Free Kids would not stop the sale of tobacco products over the
Internet. It would end the sale of these products by responsible
retailers, like OLTRA's members, and leave the door open to ``fly-by
night Internet retailers,'' smuggling operations, foreign retailers and
organized crime. It should be apparent that a uniform nationwide system
for point-of-sale tax collection is a far better and more efficient
means of collecting taxes.
HR 1839 as drafted is also ineffective because it will not have the
effect of collecting more tax revenues for the states. The Act does
nothing to overcome the problems inherent in the outdated process of
reporting and collecting in each state. Increasing the penalties would
in fact be counterproductive, because it will have the effect of
banning the sale of tobacco products to adult consumers over the
Internet. In fact, it would drive consumers to seek out contraband and
illegitimate tobacco products, once responsible retailers are put out
of business. See Patrick Fleenor's Cato Institute Policy Analysis No.
468, ``Cigarette Taxes, Black Markets and Crime: Lessons From New
York's 50 Year Losing Battle,'' published February 6, 2003. Another
recent study, published by the Beacon Hill Institute at Suffolk
University, states clearly that New York City's tobacco tax increase
``will generate less than half the revenue projected by New York City
and will result in a net loss approaching $217 million.''
Therefore, considerations of equality, efficiency and effectiveness
warrant study and implementation of a point-of-sale means of tax
collection, applicable to all retailers under a uniform national system
mandated by Congress. Any effort to address this issue should be
consistent with such an approach.
efforts to prevent sales to minors
OLTRA agrees with NACS that minors should not have access to
tobacco and that no retailer should sell tobacco products to minors.
OLTRA believes, however, that it is much further along in its efforts
to prevent tobacco sales to minors than efforts by local convenience
stores. While Mr. Armour's stores may have adopted measures to prevent
sales to minors, there are 133,976 other convenience stores across the
country (and probably a large number of other stores that sell tobacco
products). A large percentage of these stores employ workers who more
often than not do not verify that a tobacco purchaser is at least 18
years of age.
One recent example of the ease with which minors can purchase
tobacco products from convenience stores occurred in Massachusetts. As
reported in the Boston Globe on May 1, 2003, ``the number of stores
illegally selling cigarettes to teenagers in Massachusetts more than
tripled in the past year, after budget cuts forced health boards across
the state to abandon their local inspection programs.''
The Massachusetts Association of Health Boards (www.mahb.org)
conducted an elaborate sting operation where minors, under adult
supervision, attempted to purchase cigarettes in local stores in 68
Massachusetts cities and towns. In 2002, the average rate of illegal
sales to minors in these towns was 9.3%. When these same locations were
checked in February-April 2003, the average rate of illegal sales more
than tripled to 29%. Teens visited 221 stores, and were able to
purchase a pack of Marlboros from 64 of those retailers. According to
Cheryl Sbarra, Director of the Tobacco Control Program for MAHB,
``Massachusetts has not seen the illegal sales to minors rate this high
since 1995. It is more than twice the national average.''
While Mr. Armour's stores may have only had 4 instances of sales to
minors out of several million transactions last year, these figures do
not demonstrate the number of minors that did not participate in a
sting sale or were not caught. His figures do not demonstrate that
local convenience stores are preventing the sale of tobacco products to
minors at a higher rate than OLTRA's members.
In contrast with the frequency of cigarette sales to minors by
local convenience stores, minors face a number of barriers if they make
similar attempts to purchase tobacco products from Internet retailers.
The effectiveness of such measures can be empirically demonstrated.
There is little evidence of minors purchasing tobacco products on the
Internet. This is due to cost of the product, the cost of shipping, the
required use of credit cards, the time taken for delivery, and the risk
of parental detection, all of which discourages minors from purchasing
from online sources. Minors tend to purchase tobacco products from
social sources or in local convenience stores in pack form, and not in
cartons from Internet retailers, who have minimum sale requirements of
one carton or more.
OLTRA has instituted a policy mandating that its members only sell
tobacco products to individuals 21 years of age or older, and that its
customers receive the products they purchase through either the United
Parcel Service age verification system or United States Postal Service
restricted delivery system.
Under the UPS system, a package cannot be delivered to a consumer
until an adult signature is received by a UPS driver. When this method
of shipment is used, UPS will not leave the package at the customer's
doorstep or with a neighbor. The UPS driver cannot release the package
or clear the delivery from his handheld monitor until he has verified
that the recipient is an adult. The UPS driver will ask to see a
government issued photo identification card, verifying that the
recipient is at least 21 years of age. UPS will not deliver a package
to anyone under the age of 21. Once the package is delivered, a
confirmation of delivery is sent to the retailer. This is the same
system used successfully by the Wine Industry.
When USPS Restricted Delivery is used, Postal delivery drivers must
check the recipient's identification before a package is tendered to a
recipient. The Postal delivery driver cannot leave the package at the
door of the customer or with a neighbor. A package sent by Restricted
Delivery can only be delivered to the customer whose name is on file
with the local Post Office (if a spouse is on file with the Post
Office, the spouse can sign for the package).
The Postal delivery driver must collect the signature of the
recipient. Once the package has been delivered, a confirmation is sent
to the retailer containing the name of the recipient. A retailer can
also request that a copy of the recipient's signature be sent to the
retailer by facsimile or e-mail.
While packages sent USPS Restricted Delivery can be delivered to
business addresses, packages can only be delivered and signed for by
the recipient or his authorized agent (described above). USPS will not
deliver a package to an individual who is not authorized to receive it.
This is done so that the Postal delivery driver can check the age and
identity of the recipient and verify that the recipient is of legal
age.
OLTRA has adopted the following measures to prevent the sale of
tobacco products to minors from member websites:
Requiring each purchaser to create an account to
purchase tobacco products.
On all new accounts, consumers must submit accurate
name, age, address, credit card, and billing information, along
with a copy of a government-issued photo ID.
Checking credit card information against an address
verification system to prevent fraud.
Publishing clear statements that the sale of tobacco
products to individuals 21 years of age or under is prohibited.
Selling only to adults 21 years of age or older.
Notifying purchasers that it is a crime for
individuals under the age of 18 to purchase cigarettes.
Notifying purchasers that their tobacco products are
for personal use only and not for resale.
Refusing to sell tobacco products to any purchaser
who does not provide accurate information.
Using the UPS Age Verification System for all first-
time deliveries on new accounts (or USPS restricted delivery).
UPS drivers must obtain an adult signature and the recipient
must present a photo ID to the driver proving that the
recipient is of legal age to accept tobacco products, if the
recipient appears to be under the age of 27. This is the same
system used to deliver other age-restricted products, including
wine.
Placing prominent disclaimers on all websites stating
that OLTRA members do not sell to minors.
Placing all required Federal warnings on member
websites.
Members have taken individual steps to employ further verification
tools through third-party software, which checks consumer information
against a variety of government, credit reporting, DMV and other
databases. Several members have also registered with NetNanny and
similar services, companies that produce software allowing parents to
select which websites should be blocked from the view of their minor
children on their own home computers.
There are retailers, both online and brick and mortar, that do not
verify the age of their purchasers. These retailers are not OLTRA
members. OLTRA reviews the websites of its members, and if a website is
not in compliance with the OLTRA standards, it will be removed from the
organization.
OLTRA believes that the only way to resolve age verification issues
on Internet sales of tobacco products is through the adoption of
national standards through federal legislation, not through a patchwork
of regulations by the individual states. OLTRA would support a federal
standard on age verification, similar to those currently utilized by
OLTRA members, to minimize the sale of tobacco products to minors, as
long as those procedures are economically viable and do not interfere
with the significant benefits of purchasing over the Internet (secure
ordering, better customer service, convenient and fast delivery and
greater consumer choice).
enforcement by state attorneys general
OLTRA opposes the provision in HR 1839 which would grant to State
Attorneys General the authority to bring actions against Internet
retailers in federal court for violations of state and federal law.
OLTRA is in favor of national standards and national enforcement.
Retaining enforcement with the federal government and not the states
ensures a consistent body of law. Enforcement authority should remain
with the federal government, rather than permit a variety of results
based on the application of conflicting laws that vary from state to
state.
application to native american retailers
A number of OLTRA members are Native American retailers located on
tribal land. These retailers provide jobs in their communities,
employing Native Americans, adding a technological infrastructure in
areas previously burdened with high unemployment and lacking in high
tech jobs.
Native American retailers make up the largest percentage of
Internet tobacco businesses. This statistic was evident in the GAO
Report, which listed 87 of the 147 Internet tobacco websites as being
on Native American land.
HR 1839 would end the sale of cigarettes from Native American
retailers to non-tribe members and the passage of HR 1839 would expose
Native American retailers to individual state laws, laws that do not
now apply to Native American retailers because they would violate their
sovereign rights, the Indian Commerce Clause and the Supremacy Clause
of the United States Constitution.
For example, as a sovereign Native American nation, the Seneca
Nation and its members are immune from suits brought by any state. New
York State has recognized that the Seneca Nation and its members have
sovereign immunity. In 1997, Governor Pataki stated, ``we respect your
sovereignty and, if the Legislature acts as I am requesting, you will
have the right to sell tax-free gasoline and cigarettes free from
interference from New York State'' (emphasis added). See Santa Fe
Natural Tobacco Co., Inc. v. Spitzer, Nos. 00 Civ. 7274 (LAP), 00 Civ.
7750 (LAP), 2001 U.S. Dist. LEXIS 7548, 2001 WL 636441 (S.D.N.Y. June
8, 2001). This is particularly troubling in New York State, where the
price of cigarettes has risen dramatically over the past year. As
recently as May 3, 2003, New York Governor George Pataki stated that
imposing state taxes on Native American retailers ``would be extremely
unrealistic.''
This Subcommittee should work closely with OLTRA to ensure that
tribal groups are able to have input into consideration of this bill,
which will have a significant impact on the economies of Native
American tribes that sell tobacco products over the Internet.
conflicts with other bills
HR 1839, and other bills that may be introduced to regulate the
sale of tobacco products over the Internet, may conflict with
legislation currently under consideration.
Four bills have been introduced on Internet tax issues, three would
make permanent the Internet Tax Freedom Act (``ITFA'') first passed in
1998 and extended in 2001. The IFTA expires on November 1, 2003.
HR 49, introduced by Representative Chris Cox, has
112 co-sponsors. On April 1, 2003, the House Subcommittee on
Commercial and Administrative Law held a hearing on the bill.
Testifying in support were: Hon. James Gilmore III, former
Governor of Virginia, former Senator Jack Kemp (Director of
Empower America), and Harris Miller, President of the
Information Technology Association of America (ITAA).
Gilmore, a supporter of the original Internet Tax
Moratorium passed in 1998, testified in support of federal
codification of a ``bright-line'' nexus standard in line with
the U.S. Supreme Court's Quill decision. According to Gilmore,
The cyber economy has blurred the application of many
legal nexus rules. American businesses need clear and uniform
tax rules. Therefore, Congress should codify nexus standards
for sales taxes in a way that adapts the law of nexus to the
New Economy and the new ``dot com'' business model.
Codification of nexus would serve several important policy
objectives: (1) provide businesses ``bright line'' rules in an
otherwise confusing system of state-by-state nexus rules; (2)
protect businesses, especially small businesses, from onerous
tax collection burdens; (3) reduce the amount of costly
litigation spurred by confusing nexus rules; (4) nurture the
full growth and development of electronic commerce; and (5)
give consumers and individual taxpayers who participate in
Internet commerce a tax break.
Kemp agreed with Gilmore, and also cited to the Quill
decision in his testimony before the House Subcommittee. Kemp
stated that ``The central issue in the Internet tax debate is
not `fairness' as the NGA and some others would have us
believe; it is taxation without representation. States have
been trying for more than three decades to tax people and
businesses that are located out-of-state because politicians
are acutely aware non-residents can't vote them out of
office.''
The final speaker, Harris Miller, testifed that ``The
Internet does not deserve carve outs or special treatment.
Neither does it deserve to become the tax pinata of 2003, hit
by every revenue starved taxing jurisdiction in the country.''
Miller discussed his support for the Quill decision, stating
that the ``ITAA believes that the states must simplify their
tax systems and provide bright line business activity tax nexus
standards before seeking the authority to require remote
sellers to collect sales tax on their behalf.''
S. 150, introduced by Senator George Allen of
Virginia and seven other co-sponsors. Senator Allen has been a
strong supporter of efforts to remove barriers to free trade
over the Internet.
S. 52, introduced by Senator Ron Wyden of Oregon and
two other co-sponsors. Senator Wyden was an original sponsor of
the Internet Tax Freedom Act in 1998.
HR 1481, introduced by Representative Zoe Lofgren of
California. This bill would extend the Internet tax moratorium
to 2008.
These bills, and their wide support in the House and Senate,
demonstrate that the jurisdictional issue should be addressed for the
sale of all products, not only tobacco.
HR 945, introduced by Representative Cliff Stearns, and four co-
sponsors, would exercise authority under the Commerce Clause to clearly
establish jurisdictional boundaries over the commercial transactions of
digital goods and services conducted through the Internet, and to
foster stability and certainty over the treatment of such transactions.
HR 945 would give the federal government, not the states, authority to
regulate commerce in digital goods and services. If the federal
government can assert authority over digital goods and services, why
not apply this same standard equally to all goods?
Finally, HR 1636, introduced by Representative Cliff Stearns and
twenty-two other co-sponsors, would protect and enhance consumer
privacy over the Internet. The bill would preempt ``any statutory law,
common law, rule, or regulation of a State, or a political subdivision
of a State, to the extent such law, rule, or regulation relates to or
affects the collection, use, sale, disclosure, retention, or
dissemination of personally identifiable information in commerce. No
State, or political subdivision of a State, may take any action to
enforce this title.'' This legislation could be interpreted as
superseding state laws calling for the submission of confidential
customer data to state taxing authorities.
summary
I look forward to working with the Subcommittee to craft a bill
that will deal reasonably with these vital issues.
OLTRA has adopted strict age verification policies and business
standards for its members. It supports efforts to prevent the sale of
tobacco products to minors. OLTRA supports the uniform enforcement of
federal law by federal agencies, rather than giving State Attorneys
General the power to bring an action in federal courts.
OLTRA's members in starting their businesses adopted a business
model in line with the Quill decision, paying all federal excise taxes
and applicable state taxes in the states in which member retailers are
located or have a presence. OLTRA's members, except for some of its
Native American members, support efforts that would establish uniform
standards for the collection and remission of applicable taxes to the
states on all products, not just tobacco.
I hope that these statements are helpful to the Subcommittee and I
stand ready to testify before the Committee if asked.
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