Internet Cigarette Sales: Limited Compliance and Enforcement of  
the Jenkins Act Result in Loss of State Tax Revenue (01-MAY-03,  
GAO-03-714T).							 
                                                                 
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. 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.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-03-714T					        
    ACCNO:   A06787						        
  TITLE:     Internet Cigarette Sales: Limited Compliance and	      
Enforcement of the Jenkins Act Result in Loss of State Tax	 
Revenue 							 
     DATE:   05/01/2003 
  SUBJECT:   Internet						 
	     Investigations by federal agencies 		 
	     Law enforcement					 
	     Sales taxes					 
	     State taxes					 
	     Tobacco industry					 
	     Noncompliance					 
	     Interstate commerce				 

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GAO-03-714T

Testimony Before the Subcommittee on Courts, the Internet, and
Intellectual Property, Committee on the Judiciary, House of
Representatives

United States General Accounting Office

GAO For Release on Delivery Expected at 10: 00 a. m. EST Thursday, May 1,
2003 INTERNET CIGARETTE

SALES Limited Compliance and Enforcement of the Jenkins Act Result in Loss
of State Tax Revenue

Statement of Paul L. Jones, Director Homeland Security and Justice

GAO- 03- 714T

Page 1 GAO- 03- 714T Mr. Chairman and Members of the Subcommittee: 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.

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 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.

1 5 U. S. C. S:375- 378. 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.

Page 2 GAO- 03- 714T 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.

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.

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.

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. 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

Page 3 GAO- 03- 714T Figure 1: State Cigarette Excise Tax Rates, in Cents,
Per Pack of 20 Cigarettes, as of January 1, 2003

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, Alaska
100.0 Hawaii 120.0

Pa. 100.0 Ore.

128.0 Nev. 35.0

Idaho 28.0

Mont. 18.0

Wyo. 12.0

Utah 69.5

Ariz. 118.0 N. Mex.

21.0 Colo.

20.0 N. Dak.

44.0 S. Dak.

33.0 Nebr.

64.0 Tex . 41.0

Kans. 70.0

Okla. 23.0

Minn. 48.0

Iowa 36.0

Mo. 17.0

Ark. 34.0

La. 36.0

Ill. 98.0

Miss. 18.0

Ind. 55.5

Ky. 3.0

Tenn. 20.0 Ala. 16.5

Fla. 33.9 Ga.

12.0 S. C.

7.0 N. C.

5.0 Va.

2.5 Ohio

55.0 Vt. 93.0

N. H. 52.0 Mass. 151.0 R. I. 132.0 Conn. 111.0 N. J. 150.0 Del. 24.0 Md.
100.0 D. C. 100.0 W. Va. 17.0 Mich.

125.0 Calif.

87.0 Wash.

142.5 Wis. 77.0

N. Y. 150.0

Maine 100.0

Sources: Developed by GAO based on Federation of Tax Administrators* data,
CorelDraw (map).

Page 4 GAO- 03- 714T 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.

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.

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 5 28 U. S. C. S: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. Limited Federal

Involvement with the Jenkins Act and Internet Cigarette Sales

FBI Has Primary Investigative Jurisdiction

Page 5 GAO- 03- 714T 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.

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, 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). ATF Has Ancillary

Enforcement Authority

Page 6 GAO- 03- 714T 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.

Page 7 GAO- 03- 714T  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.

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 Have Taken

Action to Promote Jenkins Act Compliance by Internet Cigarette Vendors,
but Results Were Limited

Page 8 GAO- 03- 714T 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.

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

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. States* Efforts Produced Limited Results

Page 9 GAO- 03- 714T Washington that the vendor would not report sales
because the Internet Tax Freedom Act relieved the vendor of Jenkins Act
reporting

requirements.

Table 1: Summary of Six States* Efforts to Promote Jenkins Act Compliance
Since 1997 State

Number of Internet vendors identified and notified

Number of Internet vendors

that responded with reports of cigarette sales

Number of residents identified

and notified Number of

residents that responded

Amount of taxes, penalties, and interest collected a

Alaska 15 b, c 2 3 1 $9,850 California 167 (approx.) c, d 20 (approx.)
23,500 (approx.) 13,500 (approx.) $1.4 million (approx.) Massachusetts 262
13 None e None None Rhode Island Number unknown None f None None None
Washington 186 8 800 (approx.) 560 (approx.) $29,898 Wisconsin 21 6 696
696 $80,200 Source: Developed by GAO from states* data. Note:
Massachusetts* data are as of May 2002, Washington*s and Wisconsin*s data
are as of April

2002, Alaska*s and Rhode Island*s data are as of March 2002, and
California*s data are through September 2001. a Not all states collected
penalties and interest, and some of the amounts paid include sales and use

taxes in addition to cigarette excise taxes. Some of the amounts paid by
residents were for more cigarette purchases than the vendors reported to
the state. b Alaska identified 17 vendors, but did not know where 2 were
located and could not notify them.

c Alaska and California sent ATF a copy of each letter mailed to Internet
cigarette vendors notifying them of their Jenkins Act reporting
responsibilities. d California started its Internet/ Mail Order Program in
May 1999. Through September 2001, 196

vendors had been identified and notified, of which about 85 percent, or
approximately 167, were Internet vendors. All 20 vendors that responded
were Internet vendors. e At the time of our work, Massachusetts had not
notified the residents identified in reports provided

by the 13 vendors that responded out of the 262 vendors notified because
the state was in the process of developing policy regarding Jenkins Act
compliance and reports of residents* Internet cigarette purchases. f No
Internet cigarette vendors reported cigarette sales in response to Rhode
Island notifying them of

their Jenkins Act reporting responsibilities. 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

Page 10 GAO- 03- 714T 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  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

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.

Page 11 GAO- 03- 714T 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.

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 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.

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. States
Concerned about

Internet Vendors* Noncompliance and Believe Greater Federal Action Is
Needed

Page 12 GAO- 03- 714T 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.

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.
Thirtythree Web sites (22 percent) provided no indication about whether or
not the vendors comply with the act. 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.

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. Most Internet

Cigarette Vendors Do Not Comply with the Jenkins Act or Notify Consumers
of Their Responsibilities

Majority of Web sites Indicate that Vendors Do Not Comply with the Jenkins
Act

Page 13 GAO- 03- 714T Table 2: Web sites Indicating Internet Cigarette
Vendors* Noncompliance with the Jenkins Act

Web site statement indicating noncompliance Number Percent

Do not report sales to state tax authorities 44 a 30 Do not comply with
the Jenkins Act 1 1 Keep customer information private 43 29 Silent on
reporting, but claim cigarettes are tax- free 26 18

Total 114 78

Source: GAO*s analysis of Web site data. a One Web site stated that it
does not report to state tax authorities and that it does not comply with

the Jenkins Act. In determining the number of Web sites indicating
noncompliance with the Jenkins Act, we counted this only as a statement
that it does not comply with the 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 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

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. 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. Reasons Cited for

Noncompliance with the Jenkins Act

Page 14 GAO- 03- 714T 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. 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 selfgovernance 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 17 P. L. 105- 277, Div. C, Title XI, Oct. 21, 1998. 18
Industry Circular, No. 99- 2, Bureau of Alcohol, Tobacco and Firearms,
June 6, 1999.

Page 15 GAO- 03- 714T 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. 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.
S: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 Few
Web sites Provide

Notice of the Vendors* Reporting Responsibilities, but Some Provide Notice
of Customer Cigarette Tax Liability

Conclusions

Page 16 GAO- 03- 714T matter. We believe that this possibility deserves
further investigation on the part of DOJ.

Mr. Chairman, this completes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may have
at this time. For further information, please call me at (202) 512- 8777.
Other key contributors to this testimony were Darryl W. Dutton, Ronald G.
Viereck, Katherine M. Davis, and Shirley Jones.

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