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House Panel Moves Against Web Tobacco Sites

A House Judiciary subcommittee approved legislation Thursday giving states additional tax enforcement powers against Internet tobacco retailers and other remote sellers of cigarettes. The legislation requires Web cigarette vendors, including Indian tribes, to report sales to state tobacco tax authorities each month.

Under the bill, state attorneys general will be able to sue tobacco vendors for civil and criminal penalties in federal court for failing to abide by state laws. A study by the General Accounting Office (GAO) last year found that of 147 cigarette-selling Web sites, none complied with requirements that it provide customer information that would permit the collection of state taxes on tobacco sales.

The legislation, approved on a voice vote by the House Subcommittee on Courts, the Internet, and Intellectual Property, is sponsored by Rep. Mark Green (R.-Wisc.). Similar legislation has been introduced in the Senate by Herb Kohl (R.-Wisc.) and Orrin Hatch (R-Utah).

"This legislation is about enforcing the law, and shutting the door on shady tobacco sellers who use the Internet to evade taxes and make cigarettes more available to kids," Green said. "Today's action puts us one step closer to forcing these unscrupulous vendors to follow the rules."

The bill gives states the authority to enforce the 1941 Jenkins Act, which requires cigarette vendors to report interstate sales. The law has been widely ignored by Internet and other remote sellers. Green said a loophole in the Jenkins Act, which never envisioned the Internet as a vehicle for selling tobacco products, has kept the states from prosecuting violators of the law.

"Those who defy the law cannot be permitted to hide behind the Internet," Green said when he introduced the legislation. "Our bill lifts the dark shroud of impunity that the Internet provides these lawbreakers and strengthens states' hands in dealing with those who flout their laws. If we succeed, the Internet will no longer be the best way for people of all ages to get easy access to the cheapest cigarettes around."

Rep. Lamar Smith, chairman of the subcommittee, said estimates of the amount of revenue states are poised to lose unless Congress acts to swiftly enforce the Jenkins Act range from nearly $900 million to $1.4 billion dollars annually, beginning in 2005.

At a May subcommittee hearing on the bill, known as the Internet Tobacco Sales Enforcement Act (H.R. 2824), the GAO testified that while none of the Internet sites selling cigarettes were paying taxes, 78 percent openly stated that they did not comply or said they were not subject to the Jenkins Act.

"With names such as zerotaxcigs.com, zerotaxsmokes.com, and taxfreecigarettes.com, it is clear that these companies promote their price advantage over traditional tobacco retailers, an advantage many believe exists solely because they provide consumers with a convenient means to evade taxes," Smith said.

Green added, "Online tobacco vendors cost state governments millions of dollars in lost tax revenue. Even worse, because they're not paying taxes, their cigarettes are cheaper and more accessible to children. It's time these folks started obeying the law, and this bill gives states the power to make sure they do."