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Congress Moves to Extinguish Online Smoke Sales

Before adjourning for its annual August recess, the Senate Judiciary Committee approved legislation to empower states to prosecute vendors who are selling cigarettes over the Internet without paying required taxes.

Introduced by Orrin G. Hatch (R.-Utah) and Herb Kohl (D.-Wisc.), the Prevent All Cigarette Trafficking (PACT) Act, the bill strengthens the reporting requirements for interstate cigarette sellers, increases the criminal penalty for violating reporting requirements to a felony and substantially increases civil penalties.

A similar bill in the House of Representatives, the Internet Tobacco Sales Enforcement Act introduced in June by Mark Green (R.-Wisc.) and Marty Meehan (D.-Mass.), is expected to be expedited through the Judiciary Committee when the House returns from its August recess.

The Contraband Cigarette Trafficking Act (CCTA) currently makes it unlawful for any person to ship, transport, receive, possess, sell, distribute, or purchase contraband cigarettes. Under the CCTA, contraband cigarettes is defined as 60,000 cigarettes or more which bear no tax stamp.

The PACT Act aims to lower the threshold from 60,000 to 10,000 in order for smuggled cigarettes to be considered contraband, which will allow the ATF to open more investigations and seek more federal prosecutions of cigarette smugglers.

Green said a 2002 General Accounting Office study found that of 147 Web sites selling cigarettes, not one complied with requirements that it provide customer information that would permit the collection of state taxes on tobacco sales.

"The Internet is contributing to the smuggling problem because many Internet cigarette retailers are not paying the required taxes when shipments are sent to buyers in various states," Kohl said on the floor of the Senate in June. "It is impossible to know what happens to these ill-gotten gains. Currently, there are hundreds of tobacco retailers on the Internet claiming to sell tax-free cigarettes."

Meehan cited a report in a 2001 issue of Tobacco Reporter magazine, a tobacco industry trade journal, stating that Internet tobacco sales are expected to constitute about 20 percent of the U.S. market by 2006. In 2001, the U.S. Customs Service made 24 seizures of counterfeit cigarettes. Last year, they made 255 seizures. Phillip Morris estimates that 100 billion counterfeit cigarettes are produced in China alone.

"Several openly proclaim on their websites that they do not report Internet tobacco sales to any state's tax administrator," Kohl said. "This is a flagrant violation of the law in every state. A recent Government Accounting Office report advised that states will lose approximately $1.5 billion in tax revenues by the year 2005 if the current state of Internet tobacco sales continues. More than ever, state governments need these tax dollars. "

In addition to lost tax revenues, Kohl says cigarette smuggling contribute to the profits of organized crime and help fund terrorists.

"It is clear that cigarette trafficking is becoming a method of terrorist financing," Kohl said. "This legislation will comprehensively combat tobacco smuggling. In reducing cigarette smuggling, we will simultaneously help deny terrorists a needed source of funding and help our financially struggling states collect their revenue."