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March 11, 2014
States Tap Into Tobacco Vendors' Customer Lists to Pursue Back Taxes
by Henry J. Reske

Full Text Published by Tax Analysts®

For the past several years, the federal government has been quietly feeding state revenue departments customer lists from online tobacco vendors, and those customers have subsequently been receiving notices of delinquency -- sometimes for thousands of dollars -- for years-old tobacco purchases.

The information was gleaned from interviews and e-mail exchanges with state and federal officials conducted by Tax Analysts beginning February 21.

In the past, states have made sporadic efforts to collect cigarette taxes from those making online purchases. But those efforts were relatively small and hampered by a lack of information on purchasers.

But that's changed since federal enforcement efforts by the Bureau of Alcohol, Tobacco, Firearms, and Explosives (ATF) have pried loose lists of people who have been purchasing tobacco from online sellers that were not complying with tobacco tax requirements.

After many of those violations, the federal government enacted the Prevent All Cigarette Trafficking (PACT) Act in 2010, requiring the states and federal government to share lists of online tobacco vendors, but federal officials have also been sharing lists of customers who bought cigarettes from those vendors before the law was enacted, several states said.

The ATF would not acknowledge providing customer lists to the states, but Stephanie Collins, public affairs officer for the U.S. Attorney's Office for the Western District of Kentucky, told Tax Analysts that "prosecutions did result in the disclosure of customer lists."

"Since the acts of the customers represented potential tax evasion if they did not pay state or local taxes," she said, "ATF notified the states of [those] customers," she said.

Sean Laux, public information officer for the Arizona Department of Revenue, confirmed that his state was among those receiving such lists. He said his agency has sent out 17,000 notices in the last year to those who bought tobacco products online, and has collected nearly $2 million so far.

"The feds have been providing the states -- and I think Arizona is not unique in this -- with basically their customers and their transactions," he said. "These folks were not paying luxury tax, and the purchasers weren't paying use tax for those purchases."

"We had a full accounting of . . . taxpayers who are buying things on the Internet and evading the tax," Laux said. "We sent them assessments based on that information."

Some Arizona residents who bought cigarettes online before 2010 have received bills totaling thousands of dollars, and Laux said that such amounts were not atypical.

Pennsylvania Department of Revenue press secretary Elizabeth Brassell said the 1949 Jenkins Act required vendors to report sales of cigarettes that cross state lines. Although the law applied when cigarettes began being sold online, many vendors were not complying with the law, she added.

As a result of ATF enforcement of the Jenkins Act and the PACT Act, information on customers is periodically sent to the state in batches, Brassell said.

"As an investigation sort of concluded, the ATF and other agencies would give us an information dump," she said. "Then in turn, we at the Department of Revenue used that information to reach out to taxpayers to educate them about their tax obligations and ultimately request payment for the back due cigarette taxes."

As a result, the Pennsylvania DOR sent out 176 notices in 2013 and 1,200 in 2012.

A spokeswoman for the Tennessee DOR also confirmed that it has received such records from the ATF and has used them to send out assessments.

The Arizona DOR posted an FAQ on the collection letters addressing concerns from people whose purchases were made "a long time ago" and asked, "Why am I just now receiving this letter?"

According to the FAQ, the Arizona DOR periodically receives information from retailers, other state agencies, and the federal government. "This information is used to determine whether consumers are filing and paying the correct amount of state tax on cigarette purchases over the Internet or through mail order," the FAQ says.

The FAQ says that unstamped cigarettes purchased over the Internet are subject to luxury tax for purchases made before August 2, 2012, when Arizona banned online cigarette sales.

Daniel Mudd of Frost Brown Todd in Louisville, Ky., told Tax Analysts that since the PACT Act went into effect in 2010, states have been vigorously investigating the prior nationwide online sale of cigarettes that many companies used to avoid tobacco tax stamps and thereby gain a sizable sales price advantage.

"Arizona appears to be one of the most aggressive in the area of enforcing PACT Act-related laws, but has attempted, especially since enacting additional laws related to the PACT Act in 2012, to publicize/communicate with Arizona resident customers that they cannot purchase cigarettes online," Mudd added.

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