Report says states losing millions in taxes as more people buy cigarettes online

Tuesday, August 13th 2002, 12:00 am

By: News On 6

BOSTON (AP) _ States are losing millions in taxes as more people buy cigarettes from Internet vendors who routinely ignore a federal law requiring them to report sales to local regulators, according to a new report.

The trend could undercut efforts by cash-strapped states to raise revenues by hiking cigarette taxes.

New Jersey and New York state both have a $1.50 per pack tax, the nation's highest. Washington state is third, at $1.425. In Massachusetts, lawmakers recently approved a 75-cent hike, a move officials hope will bring in an extra $190 million annually.

Federal law requires Internet cigarette sellers to provide state revenue officials with names and addresses of their customers. The officials can then pursue the buyers to make sure they pay local sales taxes.

But Internet cigarette vendors are ignoring the law, according to the report, to be released Tuesday by the General Accounting Office. Of 147 Web sites identified as belonging to Internet cigarette vendors in the United States, none posted information saying they complied with the law _ and 78 percent indicated they do not comply, the report said.

Calls to several Internet cigarette vendors advertising ``tax free cigarettes'' were not returned to The Associated Press on Monday. One Web site promised buyers: ``We do not report to tax authorities in ANY state. 100% confidential.''

By 2005, Internet tobacco sales in the United States could exceed $5 billion and states could lose about $1.4 billion in revenues, according to the report. California alone has estimated a tax loss of approximately $13 million from May 1999 through September 2001 because of the failure of online vendors to comply with the law.

The savings for buyers online can be significant.

The lowest amount that can be legally charged for a carton of cigarettes in Massachusetts is $54.90. At least one Web site advertised a carton of Marlboro cigarettes for as little as $26.99, and free delivery for those who bought in bulk.

The GAO report recommends shifting primary enforcement of the law from the FBI to the Bureau of Alcohol, Tobacco and Firearms, in part because of the FBI's heightened focus on terrorism.

Rep. Martin Meehan, D-Mass., requested the report and distributed it Monday to media outlets. He said the study reveals a burgeoning market of online cigarette sales and a lack of oversight that lets children illegally buy cigarettes online.