[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


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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
                                 ------                                

    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

                              ----------                              

                              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

                              ----------                              


                         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.
---------------------------------------------------------------------------
    \1\ 5 U.S.C. Sec. 375-378.
---------------------------------------------------------------------------
    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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \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.
---------------------------------------------------------------------------
    \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\
---------------------------------------------------------------------------
    \18\ Industry Circular, No. 99-2, Bureau of Alcohol, Tobacco and 
Firearms, June 6, 1999.
---------------------------------------------------------------------------
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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