Wednesday, August 08, 2007

Coffin Nails Fill State Coffers: Archive

Since my paper still only keeps articles online for two months, I've decided to use this blog as an archive for cut-and-pasted versions of some of my best stuff. I wish I'd thought of this earlier.

Thursday, August 2, 2007

Coffin Nails Fill State Coffers
Is taxing smokers fair?
By Jennifer Abel

Hey, smokers! You should inhale a nice, refreshing cigarette while you read this. Maybe two. The exact number doesn't matter; what's important is that you smoke cigarettes purchased instate from a licensed retailer in full compliance with all tax regulations.

Speaking of which, did you notice the price increase that went into effect on July 1? That's because the per-pack state tax went up again. Connecticut now gets two dollars for every pack you buy. That, in turn, explains why you need to keep smoking: according to the Campaign for Tobacco-Free Kids, the state expects to collect $400 million from tobacco this year. If every Nutmegger gave up nicotine tomorrow, we'd face a $400 million budgetary shortfall.

Not that anybody in the government's going to come right out and tell you to keep smoking. Nor are they likely to mention that non-smokers cost society far more money than smokers; a non-smoker will (statistically) live up to seven years longer, costing state or federal pension plans another seven years' worth of payment checks. The more people smoke, the richer the government gets.

That leads to a conundrum: Connecticut's one of the wealthiest states in the nation. The majority of smokers are low-income people. Why is a rich state balancing its budget on the backs of the poor?

"Since most people don't smoke, it's not hard to get majority support for an increase in cigarette taxes," said Jacob Sullum, a senior editor for Reason magazine (published by the nonprofit Reason Foundation). "The share of American adults who smoke is down to about 20 percent. As a group, they are less affluent and less politically influential than nonsmokers, and they are widely reviled for their unhealthy, disgusting habit. So when you ask people whether the government should take money from an unpopular minority ... I guess anything less than 80 percent support should be counted as a victory for fairness."

With 20 cigarettes in a standard pack, the state gets a dime for every cigarette smoked here. But some smokers, for whatever reason, want to avoid this tax. Doing this is quite simple (though illegal): just buy cigarettes from someplace with a tax rate lower than Connecticut's.

If you have friends in low-tax states, it's easy to have them buy cheap cigarettes and mail them to you. However, not everybody has connections in tobacco country. The most popular means of buying out-of-state smokes is to order them over the Internet, but smokers who avoided taxes this way got an unpleasant surprise last month.

"The Department of Revenue Services will begin sending notices ... to Connecticut residents who owe the state taxes," said a DRS press release. "The initiative is part of an effort by the agency to ensure taxpayer compliance with state cigarette laws."

Those laws, of course, basically boil down to "give the state a dime for every cigarette you smoke." And a federal law called the Jenkins Act makes it very easy for the state to find out who's been keeping that money for themselves.

"The Jenkins Act dates back to the 1940s," said Sarah Kaufman, a spokesman for the DRS. "It requires retailers who sell ? at the time it was mail order ? to individuals out of state" to give the state its customer lists, so revenuers will know where to send the tax bills.

Anyone who bought Internet cigarettes in 2005 or 2006 can expect to receive a DRS back-tax bill, Kaufman said. This is partially to help fill the state's coffers, and partially to make things fair for Connecticut cigarette sellers.

"If people buy over the Internet to avoid the taxes, that's hurting businesses that sell cigarettes here," Kaufman said. So does quitting smoking to avoid the taxes, but that's all right. "Our position is, if people quit, there's no tax. It's just, we are, by the nature of this agency, our mission is to uphold the tax laws of the state of Connecticut."

Not every Internet customer will get a bill for back taxes, though. While most mail-order companies are required by the Jenkins Act to hand their customer lists to the government, one subset of retailers is exempt: Indian tribes who sell tax-free cigarettes are technically sovereign nations where U.S. law doesn't apply.

"We argue that they are bound by the Jenkins Act; they argue they are not," Kaufman said. And so far "they" seem to be winning; Indian reservations have not yet turned their customer records over to the DRS.

Indian tribes in Connecticut make money from their casino monopoly, but one state over, in New York, (untaxed) cigarettes are the primary income source. is just one of many New York-based Indian cigarette sellers, this one run by the Seneca Indian Nation. The Advocate called to ask if the tribe turned its customer records over to state revenue departments. "We're exempt from that right now," said the woman who answered the phone (and preferred not to be named). "They're trying to get our information, but so far they haven't."

The key words here are "so far." Given America's shaky record of upholding treaty obligations with Indian tribes, it probably wouldn't be wise to put your faith in such treaties now. (Assuming you wanted to buy tax-free cigarettes in the first place, but you really shouldn't do that.)

Hypothetically, suppose you bought such cigarettes in person and paid with cash? There would be no record to trace. Such Indian tribes in New York aren't as common as those who make mail-order sales, but they do exist.

The nearest one seems to be the tribe running the Poospatuck Smoke Shop on Long Island (a 190-mile round trip from downtown Hartford, according to Google maps). Poospatuck "hasn't done mail-order [cigarette sales] for two years," said the woman who answered their toll-free number. So how do they sell cigarettes?

"It's like a store. You come in, you make your purchase and you leave. There's no [customer] records kept."

Sarah Kaufman of the DRS said that you can only bring one carton of out-of-state cigarettes home with you; any more than that and you're expected to pay the full $20 per carton tax. Considering gas prices these days, it's not worth $20 to drive all the way to Long Island and back just for a single carton of cigarettes. You'd need to buy at least four or five, which would be illegal.

Of course, the chance of getting caught is very low, unless the state decided to have drunk-driving-style checkpoints looking for untaxed Indian cigarettes.

"We're not going to have checkpoints," Kaufman said when asked about the possibility. "We're not the Gestapo."


Blogger Anj said...

I guess you could always buy bunches and mail them back to yourself so that you're not crossing the state line with them?

10:50 AM  
Anonymous A Moose said...

"We're not the Gestapo."

Yeah, that's it, and we'll go home to my wife...Morgan Fairchild...yeah..that's the ticket...

Aren't checkpoints all in vogue up there near the Bloomberg Republic?

I guess you could always buy bunches and mail them back to yourself so that you're not crossing the state line with them?

No, because then they'd come hunting for the sales tax via UPS records.

Best bet in my mind, have them sent to another name, paid for by anon postal money order, at a neighbor's address. That way, nobody involved paid for it traceably, and it was shipped to nobody involved, so it works well as long as there's no sig required on the box.

If that be the case, then you're better off smuggling. Or, call a guy in Merry Land, who might buy a few packs, and has a tendency to leave his passenger side car door unlocked when he goes on random drives in a northerly direction...

5:50 PM  
Blogger Anne O'Neimaus said...

To End subset of retailers is exempt: Indian tribes...

This is, itself, really a subset of a fairly large untaxable (by mere states) marketplace: Foreign countries.

Heck, if the taxes are onerous enough (and they sound like it), you could probably profit in providing a "solution": set up a business in the Bahamas or someplace similar to resell cigarettes to your friends at a markup of only $1 per pack, in carton-sized lots (minimum), of course (so the shipping costs don't eat your profits).

However, taxing cigarettes (and even more so, cigars) seems to be "all the rage" these days. Soon enough, Uncle Sam will join in (if He hasn't already) with excise taxes, too.

But, I notice that these taxes almost never seem to apply to tobacco itself - just to specific tobacco products, like cigarettes, cigars, and snuff. I speculate that this is basically the long arm and heavy weight of Big Tobacco in action.

Which, in turn, means that there is a huge, untapped market, for leaf-tobacco and special processing accoutrement.

Basically, the reason people don't just purchase low-cost leaf-tobacco is that it is a major inconvenience to store, carry, and use. Even more of a hassle than the once-trendy "roll-your-own" cigarette-paper and loose (ground) tobacco.

Ah... but what if producing cigarettes (or at least, small cigarellos) were significantly simplified?

I have in mind a small hand-cranked (or electric) "mill", that takes in leaf-tobacco (and possibly cigarette or cigar paper), does whatever the "right thing" is to the tobacco, and spits out production-quality (unfiltered, of course) cigarettes or cigarellos.
These can be conveniently carried in classy & retro cigarette cases (which you also sell, of course).

The annual savings in taxes for a pack-a-week is over $100. Pack-a-day addicts are REALLY hurting ($700+ annually). Thus, you should be able to soak almost every smoker in the state (probably even in the country) for several hundred dollars, and still save them money! Make a small profit on the hardware, but arrange with either the "big boys" (Phillip Morris, et. all), or some "local" (OK, probably not up north) tobacco farmer, to act as a distributor to small-quantity end-users of leaf-tobacco. Since most people won't want to buy an entire bale of tobacco (much less a truckload), and since they already have an established relationship with you (through selling them their cigarette mill), you'll basically have an almost-captive customer-base of addicts for your "real" product - agricultural produce.


I should point out that I don't smoke, never have, and have done absolutely no research into this. It is all pure speculation. It is almost inconceivable that somebody hasn't already invented a "cigarette mill" such as I envision. But, I personally have never heard of one...

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