Internet Cigarette Sales
Giving ATF Investigative Authority May Improve Reporting and Enforcement Gao ID: GAO-02-743 August 9, 2002State and federal officials are concerned that as Internet cigarette sales continue to grow and as states' cigarette taxes increase, so will the amount of lost state tax revenue due to noncompliance with the Jenkins Act. The act requires any person who sells and ships cigarettes across a state line to a buyer, other than a licensed distributor, to report the sale to the buyer's state tobacco tax administrator. The Department of Justice (DOJ) is responsible for enforcing the Jenkins Act, and the Federal Bureau of Investigation (FBI) is the primary investigative authority. However, GAO found that DOJ and FBI headquarters officials did not identify any actions taken to enforce the Jenkins Act with respect to Internet cigarette sales. Since 1997, the Bureau of Alcohol, Tobacco, and Firearms (ATF) has begun three investigations of Internet cigarette vendors for cigarette smuggling that included the investigation of potential Jenkins Act violations. Overall, seven of nine selected states have made some effort to promote Jenkins Act compliance by Internet cigarette vendors by contacting Internet vendors and U.S. Attorneys' Offices, but they produced few results. GAO's Internet search efforts identified 147 website addresses for Internet cigarette vendors based in the United States. None of the websites posted information indicating the vendors' compliance with the Jenkins Act. Conversely, information posted on 78 percent of the websites indicated the vendors do not comply with the act.
RecommendationsOur recommendations from this work are listed below with a Contact for more information. Status will change from "In process" to "Open," "Closed - implemented," or "Closed - not implemented" based on our follow up work.
Director: Team: Phone:GAO-02-743, Internet Cigarette Sales: Giving ATF Investigative Authority May Improve Reporting and Enforcement
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United States General Accounting Office:
GAO:
Report to Congressional Requesters:
August 2002:
Internet Cigarette Sales:
Giving ATF Investigative Authority May Improve Reporting and
Enforcement:
GAO-02-743:
Contents:
Results in Brief:
Background:
Limited Federal Involvement with the Jenkins Act and Internet Cigarette
Sales:
States Have Taken Action to Promote Jenkins Act Compliance by Internet
Cigarette Vendors, but Results Were Limited:
Most Internet Cigarette Vendors Do Not Comply with the Jenkins Act,
Notify Consumers of Their Responsibilities, or Provide Information on
Sales Volume:
Conclusions:
Matters for Congressional Consideration:
Agency Comments:
Appendix I: Scope and Methodology:
Appendix II: List of GAO-Identified Internet Cigarette Vendors‘ Web
site Addresses and Other Contact Information:
Appendix III: Comments from the Department of Justice:
Appendix IV: Comments from the Bureau of Alcohol, Tobacco and Firearms:
Tables:
Table 1: Summary of Six States‘ Efforts to Promote Jenkins Act
Compliance Since 1997:
Table 2: Web sites Indicating Internet Cigarette Vendors‘ Noncompliance
with the Jenkins Act:
Table 3: Results of Attempts to Interview 30 Internet Cigarette Vendor
Representatives:
Figure:
Figure 1: State Cigarette Excise Tax Rates, in Cents, Per Pack of 20
Cigarettes, as of January 1, 2002:
Abbreviations:
ATF: Bureau of Alcohol, Tobacco and Firearms:
CCTA: Contraband Cigarette Trafficking Act:
DOJ: Department of Justice:
FBI: Federal Bureau of Investigation:
FTA: Federation of Tax Administrators:
[End of section]
United States General Accounting Office:
Washington, DC 20548:
August 9, 2002:
The Honorable John Conyers:
Ranking Minority Member:
Committee on the Judiciary:
House of Representatives:
The Honorable Martin T. Meehan:
House of Representatives:
The Jenkins Act (15 U.S.C. §375-378) requires any person who sells and
ships cigarettes across a state line to a buyer, other than a licensed
distributor, to report the sale to the buyer‘s state tobacco tax
administrator. The act establishes misdemeanor penalties for violating
the act. Compliance with this federal law by cigarette sellers enables
states to collect cigarette excise taxes from consumers. [Footnote 1]
However, some state and federal officials are concerned that as
Internet cigarette sales continue to grow, particularly as states‘
cigarette taxes increase, so will the amount of lost state tax revenue
due to noncompliance with the Jenkins Act. One research firm estimated
that Internet tobacco sales in the United States will exceed $5 billion
in 2005 and that the states will lose about $1.4 billion in tax revenue
from these sales. [Footnote 2]
You expressed concern about the extent of compliance by Internet
cigarette vendors with the Jenkins Act. In response to your request,
this report describes:
* enforcement actions taken by the Department of Justice (DOJ) and the
Bureau of Alcohol, Tobacco and Firearms (ATF) and factors that have
affected the level and extent of such actions;
* efforts selected states have taken to promote compliance with the
Jenkins Act and estimates by these states of the impact of
noncompliance on their tax revenues; and;
* information on Internet cigarette vendors, including Web site
addresses and other contact information, whether they indicate
compliance with the act, whether they notify customers of their
reporting responsibilities and the customers‘ potential tax liability,
the average monthly volume of sales, and whether the vendors place a
maximum limit on orders.
To address these areas, we obtained information from DOJ and ATF
headquarters regarding federal Jenkins Act enforcement actions with
respect to Internet cigarette sales. We interviewed officials and
obtained documentation from nine selected states [Footnote 3] regarding
states‘ efforts to promote Jenkins Act compliance by Internet cigarette
vendors and estimates of the impact of noncompliance on tax revenues.
In addition, we reviewed 147 Internet cigarette vendor Web sites to
obtain needed information, and we interviewed representatives of five
Internet vendors.
Results in Brief:
The DOJ is responsible for enforcing the Jenkins Act, and the Federal
Bureau of Investigation (FBI) is the primary investigative authority.
However, DOJ and FBI headquarters officials did not identify any actions
taken to enforce the Jenkins Act with respect to Internet cigarette
sales.
ATF has ancillary authority to enforce the Jenkins Act. [Footnote 4]
Since 1997, ATF has initiated three investigations of Internet
cigarette vendors for cigarette smuggling, a felony offense, which
included the investigation of potential Jenkins Act violations. One
investigation is ongoing, another was referred to state authorities who
obtained Jenkins Act compliance by the vendor without prosecution, and
a third was not pursued by a grand jury. ATF is planning other actions
to promote compliance with the act and address the growing issue of
Internet cigarette sales. ATF officials said consideration should be
given to transferring primary jurisdiction for investigating Jenkins
Act violations from the FBI to ATF. According to the officials, having
primary jurisdiction would give ATF comprehensive authority to enforce
federal laws involving interstate cigarette distribution. The officials
said ATF would use resources to specifically conduct Jenkins Act
investigations, which should result in increased enforcement.
Overall, seven of nine selected states had made some effort to promote
Jenkins Act compliance by Internet cigarette vendors. These efforts
consisted of contacting Internet vendors and U.S. Attorneys‘ Offices,
but they produced few results. Six of the seven states, for example,
contacted Internet vendors to inform them of their Jenkins Act reporting
responsibilities. However, some vendors told state officials that they
did not have to comply with the Jenkins Act. For those Internet vendors
that did respond by reporting cigarette sales, the states generally
collected small amounts of cigarette taxes from consumers. In addition,
two of the seven states asked U.S. Attorneys to help promote Jenkins
Act compliance by sending letters to Internet cigarette vendors
informing them of the Jenkins Act reporting requirements. The U.S.
Attorneys, however, did not provide the requested assistance.
Officials in all nine states expressed concern that Internet cigarette
sales would continue to increase in the future, with a growing and
substantial negative effect on their tax revenues. Officials in one
state, California, estimated a tax loss of approximately $13 million
from May 1999 through September 2001 because of Internet cigarette
vendors not complying with the Jenkins Act. However, officials in each
of the states said that they lack the legal authority to successfully
address this problem on their own and that greater federal action is
needed to enforce the Jenkins Act. Officials in four of the states said
that they believe ATF should be the federal agency with primary
jurisdiction for enforcing the act.
Our Internet search efforts identified 147 Web site addresses for
Internet cigarette vendors based in the United States (see app. II).
None of the Web sites posted information that indicated the vendors
complied with the Jenkins Act. [Footnote 5] Conversely, information
posted on 78 percent of the Web sites indicated the vendors do not
comply with the act. For example, 31 percent of the Web sites stated
the vendors either do not report cigarette sales or do not comply with
the Jenkins Act. Sixteen percent of the Web sites and four vendor
representatives cited their Native American status, the Internet Tax
Freedom Act, and other laws as reasons for not complying with the act.
However, our review of the laws cited, as well as the Jenkins Act and
its legislative history, indicates that neither Native American status
nor any of the laws cited relieve Internet vendors of their Jenkins Act
responsibilities. Only 5 percent of the Web sites posted notices of the
vendors‘ reporting responsibilities under the Jenkins Act, and those
that did also indicated that the vendors do not comply. Twenty-one
percent of the Web sites contained statements notifying customers of
their potential state tax liability for cigarette purchases or the
customers‘ responsibility for complying with state cigarette laws.
We were able to obtain only limited information on the volume of
cigarette sales by Internet vendors. Few vendor Web sites stated that
the vendors have maximum limits on cigarette orders. Some vendor
representatives said that the reason they had limits was to ensure that
their cigarette sales are for personal use and/or to avoid violating
federal cigarette smuggling law.
To improve the federal government‘s efforts in enforcing the Jenkins Act
and promoting compliance with the act by Internet cigarette vendors,
which may lead to increased state tax revenues from cigarette sales, the
Congress should provide ATF with primary jurisdiction to investigate
violations of the act. Transferring primary investigative jurisdiction
is particularly appropriate at this time because of the FBI‘s new
challenges and priorities related to the threat of terrorism and the
FBI‘s increased counterterrorism efforts.
DOJ and ATF commented on a draft of this report. Both DOJ and ATF
suggested that if violations of the Jenkins Act were felonies instead of
misdemeanors, U.S. Attorneys‘ Offices might be less reluctant to
prosecute violations. ATF further noted that individuals might be
deterred from committing violations if they were felonies. ATF also
suggested that other legislative changes might assist states in the
collection of excise taxes on cigarettes sold over the Internet.
Although we are not in a position to offer our judgment on whether
violations of the Jenkins Act should be misdemeanors or felonies, or
whether states would benefit from the legislative changes suggested by
ATF, we believe this report provides information to help Congress make
those decisions.
Background:
Each state, and the District of Columbia, imposes an excise tax on the
sale of cigarettes, which vary from state to state. As of January 1,
2002, the state excise tax rates for a pack of 20 cigarettes ranged
from 2.5 cents in Virginia to $1.425 in Washington (see fig.1). The
liability for these taxes generally arises once the cigarettes enter
the jurisdiction of the state.
Figure 1: State Cigarette Excise Tax Rates, in Cents, Per Pack of 20
Cigarettes, as of January 1, 2002:
[See PDF for image]
This figure is a map of the United States depicting excise tax rates
for each state, as follows:
Alabama: 16.5;
Alaska: 100.0*;
Arizona: 58.0;
Arkansas: 31.5;
California: 87.0*;
Colorado: 20.0;
Connecticut: 50.0;
Delaware: 24.0;
District of Columbia: 65.0;
Florida: 33.9;
Georgia: 12.0;
Hawaii: 100.0*;
Idaho: 28.0;
Illinois: 58.0;
Indiana: 15.5;
Iowa: 36.0;
Kansas: 24.0;
Kentucky: 3.0;
Louisiana: 24.0;
Maine: 100.0*;
Maryland: 66.0;
Massachusetts: 76.0*;
Michigan: 75.0;
Minnesota: 48.0;
Mississippi: 18.0;
Missouri: 17.0;
Montana: 18.0;
Nebraska: 34.0;
Nevada: 35.0;
New Hampshire: 52.0;
New Jersey: 80.0*;
New Mexico: 21.0;
New York: 111.0*;
North Carolina: 5.0;
North Dakota: 44.0;
Ohio: 24.0;
Oklahoma: 23.0;
Oregon: 68.0;
Pennsylvania: 31.0;
Rhode Island: 100.0*;
South Carolina: 7.0;
South Dakota: 33.0;
Tennessee: 13.0;
Texas: 41.0;
Utah: 51.5;
Vermont: 44.0;
Virginia: 2.5;
Washington: 142.4*;
West Virginia: 17.0;
Wisconsin: 77.0*;
Wyoming: 12.0.
* The 10 states highlighted had cigarette excise tax rates that were
higher than the rates of the other 40 states and the District of
Columbia on January 1, 2002.
Source: Developed by GAO based on Federation of Tax Administrators‘
data.
[End of figure]
Many states have increased their cigarette excise taxes in recent years
with the intention of increasing tax revenue and discouraging people
from smoking. As a result, many smokers are seeking less costly
alternatives for purchasing cigarettes, including buying cigarettes
while traveling to a neighboring state with a lower cigarette excise
tax. The Internet is an alternative that offers consumers the option
and convenience of buying cigarettes from vendors in low-tax states
without having to physically travel there.
Consumers who use the Internet to buy cigarettes from vendors in other
states are liable for their own state‘s cigarette excise tax and, in
some cases, sales and/or use taxes. States can learn of such purchases
and the taxes due when vendors comply with the Jenkins Act. Under the
act, cigarette vendors who sell and ship cigarettes into another state
to anyone other than a licensed distributor must report (1) the name
and address of the persons to whom cigarette shipments were made, (2)
the brands of cigarettes shipped, and (3) the quantities of cigarettes
shipped. Reports must be filed with a state‘s tobacco tax administrator
no later than the 10th day of each calendar month covering each and
every cigarette shipment made to the state during the previous calendar
month. The sellers must also file a statement with the state‘s tobacco
tax administrator listing the seller‘s name, trade name (if any), and
address of all business locations. Failure to comply with the Jenkins
Act‘s reporting requirements is a misdemeanor offense, and violators
are to be fined not more than $1,000, or imprisoned not more than 6
months, or both. Although the Jenkins Act, enacted in 1949, clearly
predates and did not anticipate cigarette sales on the Internet,
vendors‘ compliance with the act could result in states collecting
taxes due on such sales. According to DOJ, the Jenkins Act itself does
not forbid Internet sales nor does it impose any taxes.
Limited Federal Involvement with the Jenkins Act and Internet Cigarette
Sales:
The federal government has had limited involvement with the Jenkins Act
concerning Internet cigarette sales. We identified three federal
investigations involving such potential violations, and none of these
had resulted in prosecution (one investigation was still ongoing at the
time of our work). No Internet cigarette vendors had been penalized for
violating the act, nor had any penalties been sought for violators.
FBI has Primary Investigative Jurisdiction:
The Attorney General of the United States is responsible for supervising
the enforcement of federal criminal laws, including the investigation
and prosecution of Jenkins Act violations. [Footnote 6] The FBI has
primary jurisdiction to investigate suspected violations of the Jenkins
Act. However, DOJ and FBI officials were unable to identify any
investigations of Internet cigarette vendors or other actions taken to
enforce the act‘s provisions regarding Internet cigarette sales.
According to DOJ, the FBI could not provide information on actions to
investigate Jenkins Act violations, either by itself or in connection
with other charges, because the FBI does not have a section or office
with responsibility for investigating Jenkins Act violations and does
not track such investigations. Also, DOJ said it does not maintain
statistical information on resources used to investigate and prosecute
Jenkins Act offenses.
In describing factors affecting the level and extent of FBI and DOJ
enforcement actions with respect to the Jenkins Act and Internet
cigarette sales, DOJ noted that the act creates misdemeanor penalties
for failures to report information to state authorities, and
appropriate referrals for suspected violations must be considered with
reference to existing enforcement priorities. In this regard, we
recognized that the FBI‘s priorities have changed. In June 2002
congressional testimony, [Footnote 7] the Comptroller General noted
that the FBI is at the front line of defending the public and our way
of life from a new and lethal threat, that of terrorism against
Americans. The Comptroller General testified that the FBI Director
recognized the need to refocus priorities to meet the demands of a
changing world and is now taking steps to realign resources to achieve
his objectives. In May 2002, the FBI Director unveiled the second phase
of a FBI reorganization, with proposed changes designed to build on
initial reorganization actions taken in December 2001. A key element of
the reorganization is to ’redirect FBI‘s agent workforce to ensure that
all available energies and resources are focused on the highest
priority threat to the nation, i.e., terrorism.“ In light of the events
of September 11, 2001, this shift is clearly not unexpected and is, in
fact, consistent with the FBI‘s 1998 Strategic Plan and the current DOJ
Strategic Plan. Since September 11, unprecedented levels of FBI
resources have been devoted to counterterrorism and intelligence
initiatives with widespread public approval. The Comptroller General
testified that enhancement of FBI resources for counterterrorism and
other planned actions seem to be rational steps to building agency
capacity to fight terrorism.
ATF has Ancillary Enforcement Authority:
ATF, which enforces federal excise tax and criminal laws and regulations
related to tobacco products, has ancillary authority to enforce the
Jenkins Act. ATF special agents investigate trafficking of contraband
tobacco products in violation of federal law and sections of the
Internal Revenue Code. For example, ATF enforces the Contraband
Cigarette Trafficking Act (CCTA), which makes it unlawful for any
person to ship, transport, receive, possess, sell, distribute, or
purchase more than 60,000 cigarettes that bear no evidence of state
cigarette tax payment in the state in which the cigarettes are found,
if such state requires a stamp or other indicia to be placed on
cigarette packages to demonstrate payment of taxes (18 U.S.C. 2342).
[Footnote 8] ATF is also responsible for the collection of federal
excise taxes on tobacco products and the qualification of applicants
for permits to manufacture tobacco products, operate export warehouses,
or import tobacco products. ATF inspections verify an applicant‘s
qualification information, check the security of the premise, and
ensure tax compliance.
To enforce the CCTA, ATF investigates cigarette smuggling across state
borders to evade state cigarette taxes, a felony offense. Internet
cigarette vendors that violate the CCTA, either directly or by aiding
and abetting others, can also be charged with violating the Jenkins Act
if they failed to comply with the act‘s reporting requirements. ATF can
refer Jenkins Act matters uncovered while investigating CCTA violations
to DOJ or the appropriate U.S. Attorney‘s Office for charges to be
filed. ATF officials identified three investigations since 1997 of
Internet vendors for cigarette smuggling in violation of the CCTA and
violating the Jenkins Act.
* In 1997, a special agent in ATF‘s Anchorage, Alaska, field office
noticed an advertisement by a Native American tribe in Washington that
sold cigarettes on the Internet. ATF determined from the Alaska
Department of Revenue that the vendor was not reporting cigarette
sales as required by the Jenkins Act, and its investigation with another
ATF office showed that the vendor was shipping cigarettes into Alaska.
After ATF discussed potential cigarette smuggling and Jenkins Act
violations with the U.S. Attorney‘s Office for the District of Alaska,
it was determined there was no violation of the CCTA. [Footnote 9] The
U.S. Attorney‘s Office did not want to pursue only a Jenkins Act
violation, a misdemeanor offense, [Footnote 10] and asked ATF to
determine whether there was evidence that other felony offenses had
been committed. Subsequently, ATF formed a temporary task force with
Postal Service inspectors and state of Alaska revenue agents, which
demonstrated to the satisfaction of the U.S. Attorney‘s Office that the
Internet cigarette vendor had committed mail fraud. The U.S. Attorney‘s
Office agreed to prosecute the case and sought a grand jury indictment
for mail fraud, but not for violating the Jenkins Act. The grand jury
denied the indictment. [Footnote 11] In a letter dated September 1998,
the U.S. Attorney‘s Office requested that the vendor either cease
selling cigarettes in Alaska and file the required Jenkins Act reports
for previous sales, or come into compliance with the act by filing all
past and future Jenkins Act reports. In another letter dated December
1998, the U.S. Attorney‘s Office instructed the vendor to immediately
comply with all requirements of the Jenkins Act. However, an official
at the Alaska Department of Revenue told us that the vendor never
complied. No further action has been taken.
* Another investigation, carried out in 1999, involved a Native American
tribe selling cigarettes on the Internet directly to consumers and other
tribes. The tribe was not paying state tobacco excise taxes or notifying
states of cigarette sales to other than wholesalers, as required by the
Jenkins Act. ATF referred the case to the state of Arizona, where it was
resolved with no criminal charges filed by obtaining the tribe‘s
agreement to comply with Jenkins Act requirements.
* A third ATF investigation of an Internet vendor for cigarette
smuggling and Jenkins Act violations was ongoing at the time of our
work.
On January 31, 2002, the Commissioner of the Connecticut Department of
Revenue Services sent a letter to the Director of ATF requesting
assistance in addressing the growing problem of Internet and mail order
cigarette sales without Jenkins Act compliance. The ATF Director
responded to the Commissioner by letter dated April 5, 2002. The ATF
Director expressed concern about growing Internet cigarette sales and
the impact on collection of state cigarette excise taxes. The Director
highlighted three initiatives ATF is planning to help address this
problem.
* ATF will solicit the cooperation of tobacco manufacturers and
determine who is selling cigarettes to Internet and mail order
companies. ATF believes the tobacco manufacturers will render support
and place their distributors on notice that some of their customers‘
business practices may be defrauding states of tax revenues. The
Director said ATF will remind the tobacco manufacturers of Jenkins Act
requirements and that sales involving Native Americans are not exempt.
* ATF will contact shippers/couriers to determine if they have any
prohibitions against the shipment of cigarettes. ATF will also inform
them of the likelihood that some of their customers are selling
cigarettes on the Internet and violating the Jenkins Act, as well as
potentially committing mail fraud, wire fraud, and money laundering
offenses. ATF will request that the common carriers be more vigilant
and conscientious regarding their customers and the laws they could
be violating.
* According to the Director, ATF will provide technical assistance to
the state of Connecticut or members of the U.S. Congress working with
Connecticut on a legislative response to address the issue of tobacco
sales on the Internet.
ATF officials said that because ATF does not have primary Jenkins Act
jurisdiction, it has not committed resources to investigating
violations of the act. However, the officials said strong consideration
should be given to transferring primary jurisdiction for investigating
Jenkins Act violations from the FBI to ATF. According to ATF, it is
responsible for, and has committed resources to, regulating the
distribution of tobacco products and investigating trafficking in
contraband tobacco products. A change in Jenkins Act jurisdiction would
give ATF comprehensive authority at the federal level to assist states
in preventing the interstate distribution of cigarettes resulting in
lost state cigarette taxes since ATF already has investigative
authority over the CCTA, according to the officials. The officials also
told us ATF has special agents and inspectors that obtain specialized
training in enforcing tax and criminal laws related to tobacco
products, and, with primary jurisdiction, ATF would have the
investigative authority and would use resources to specifically conduct
investigations to enforce the Jenkins Act, which should result in
greater enforcement of the act than in the past.
States Have Taken Action to Promote Jenkins Act Compliance by Internet
Cigarette Vendors, but Results Were Limited:
Officials in nine states that provided us information all expressed
concern about Internet cigarette vendors‘ noncompliance with the
Jenkins Act and the resulting loss of state tax revenues. For example,
California officials estimated that the state lost approximately $13
million in tax revenue from May 1999 through September 2001, due to
Internet cigarette vendors‘ noncompliance with the Jenkins Act.
Overall, the states‘ efforts to promote compliance with the act by
Internet vendors produced few results. Officials in the nine states
said that they lack the legal authority to successfully address this
problem on their own. They believe greater federal action is needed,
particularly because of their concern that Internet cigarette sales
will continue to increase with a growing and substantial negative
effect on tax revenues.
States‘ Efforts Produced Limited Results:
Starting in 1997, seven of the nine states had made some effort to
promote Jenkins Act compliance by Internet cigarette vendors. These
efforts involved contacting Internet vendors and U.S. Attorneys‘
Offices. Two states had not made any such efforts.
Six of the seven states tried to promote Jenkins Act compliance by
identifying and notifying Internet cigarette vendors that they are
required to report the sale of cigarettes shipped into those states.
Generally, officials in the six states learned of Internet vendors by
searching the Internet, noticing or being told of vendors‘
advertisements, and by state residents or others notifying them. Five
states sent letters to the identified vendors concerning their Jenkins
Act reporting responsibilities, and one state made telephone calls to
the vendors.
After contacting the Internet vendors, the states generally received
reports of cigarette sales from a small portion of the vendors
notified. [Footnote 12] The states then contacted the state residents
identified in the reports, and they collected taxes from most of the
residents contacted. When residents did not respond and pay the taxes
due, the states carried out various follow-up efforts, including
sending additional notices and bills, assessing penalties and interest,
and deducting amounts due from income tax refunds. Generally, the
efforts by the six states to promote Jenkins Act compliance were
carried out periodically and required few resources. For example, a
Massachusetts official said the state notified Internet cigarette
vendors on five occasions starting in July 2000, with one employee
working a total of about 3 months on the various activities involved in
the effort.
Table 1 summarizes the six states‘ efforts to identify and notify
Internet cigarette vendors about the Jenkins Act reporting requirements
and shows the results that were achieved. There was little response by
the Internet vendors notified. Some of the officials told us that they
encountered Internet vendors that refused to comply and report
cigarette sales after being contacted. For example, several officials
noted that Native Americans often refused to report cigarette sales,
with some Native American vendors citing their sovereign nation status
as exempting them from the Jenkins Act, and others refusing to accept a
state‘s certified notification letters. Also, an attorney for one
vendor informed the state of Washington that the vendor would not
report sales because the Internet Tax Freedom Act relieved the vendor
of Jenkins Act reporting requirements.
Table 1: Summary of Six States‘ Efforts to Promote Jenkins Act
Compliance Since 1997:
State: Alaska;
Number of Internet vendors identified and notified: 15 (B,C];
Number of Internet vendors that responded with reports of cigarette
sales: 2;
Number of residents identified and notified: 3;
Number of residents that responded: 1;
Amount of taxes, penalties, and interest collected[A]: $9,850.
State: California;
Number of Internet vendors identified and notified: 167
(approximately)[C,D];
Number of Internet vendors that responded with reports of cigarette
sales: 20 (approximately);
Number of residents identified and notified: 23,500 (approximately);
Number of residents that responded: 13,500 (approximately);
Amount of taxes, penalties, and interest collected[A]: $1.4 million
(approximately).
State: Massachusetts;
Number of Internet vendors identified and notified: 262;
Number of Internet vendors that responded with reports of cigarette
sales: 13;
Number of residents identified and notified: None[E];
Number of residents that responded: None;
Amount of taxes, penalties, and interest collected[A]: None.
State: Rhode Island;
Number of Internet vendors identified and notified: Number unknown;
Number of Internet vendors that responded with reports of cigarette
sales: None[F];
Number of residents identified and notified: None;
Number of residents that responded: None;
Amount of taxes, penalties, and interest collected[A]: None.
State: Washington;
Number of Internet vendors identified and notified: 186;
Number of Internet vendors that responded with reports of cigarette
sales: 8;
Number of residents identified and notified: 800 (approximately);
Number of residents that responded: 560 (approximately);
Amount of taxes, penalties, and interest collected[A]: $29,898.
State: Wisconsin;
Number of Internet vendors identified and notified: 21;
Number of Internet vendors that responded with reports of cigarette
sales: 6;
Number of residents identified and notified: 696;
Number of residents that responded: 696;
Amount of taxes, penalties, and interest collected[A]: $80,200.
Note: Massachusetts‘ data are as of May 2002, Washington and
Wisconsin‘s data are as of April 2002, Alaska‘s and Rhode Island‘s data
are as of March 2002, and California‘s data are through September 2001.
[A] Not all states collected penalties and interest, and some of the
amounts paid include sales and use taxes in addition to cigarette
excise taxes. Some of the amounts paid by residents were for more
cigarette purchases than the vendors reported to the state.
[B] Alaska identified 17 vendors, but did not know where 2 were located
and could not notify them.
[C] Alaska and California sent ATF a copy of each letter mailed to
Internet cigarette vendors notifying them of their Jenkins Act
reporting responsibilities.
[D] California started its Internet/Mail Order Program in May 1999.
Through September 2001, 196 vendors had been identified and notified,
of which about 85 percent, or approximately 167, were Internet vendors.
All 20 vendors that responded were Internet vendors.
[E] At the time of our work, Massachusetts had not notified the
residents identified in reports provided by the 13 vendors that
responded out of the 262 vendors notified because the state was in the
process of developing policy regarding Jenkins Act compliance and
reports of residents‘ Internet cigarette purchases.
[F] No Internet cigarette vendors reported cigarette sales in response
to Rhode Island notifying them of their Jenkins Act reporting
responsibilities.
Source: Developed by GAO from data provided by the above states.
[End of table]
Apart from the states‘ efforts to identify and notify Internet cigarette
vendors, state officials noted that some Internet vendors voluntarily
complied with the Jenkins Act and reported cigarette sales on their own.
The states subsequently contacted the residents identified in the
reports to collect taxes. For example, a Rhode Island official told us
there were three or four Internet vendors that voluntarily reported
cigarette sales to the state. Based on these reports, Rhode Island
notified about 400 residents they must pay state taxes on their
cigarette purchases and billed these residents over $76,000 (the Rhode
Island official that provided this information did not know the total
amount collected). Similarly, Massachusetts billed 21 residents for
cigarette taxes and collected $2,150 based on reports of cigarette
sales voluntarily sent to the state.
Three of the seven states that made an effort to promote Jenkins Act
compliance by Internet cigarette vendors contacted U.S. Attorneys and
requested assistance. The U.S. Attorneys, however, did not provide the
assistance requested. The states‘ requests and responses by the U.S.
Attorneys‘ Offices are summarized below.
* In March 2000, Iowa and Wisconsin officials wrote letters to three
U.S. Attorneys in their states requesting assistance. The state
officials asked the U.S. Attorneys to send letters to Internet vendors
the states had identified, informing the vendors of the Jenkins Act and
directing them to comply by reporting cigarette sales to the states.
The state officials provided a draft letter and offered to handle all
aspects of the mailings. The officials noted they were asking the U.S.
Attorneys to send the letters over their signatures because the Jenkins
Act is a federal law and a statement from a U.S. Attorney would have
more impact than from a state official. However, the U.S. Attorneys did
not provide the assistance requested. According to Iowa and Wisconsin
officials, two U.S. Attorneys‘ Offices said they were not interested in
helping, and one did not respond to the state‘s request. [Footnote 13]
* After contacting the FBI regarding an Internet vendor that refused to
report cigarette sales, saying that the Internet Tax Freedom Act
relieved the vendor of Jenkins Act reporting requirements, the state of
Washington acted on the FBI‘s recommendation and wrote a letter in
April 2001 requesting that the U.S. Attorney initiate an investigation.
According to a Washington official, the U.S. Attorney‘s Office did not
pursue this matter and noted that a civil remedy (i.e., lawsuit) should
be sought by the state before seeking a criminal action. [Footnote 14]
At the time of our work, the state was planning to seek a civil remedy.
* In July 2001, the state of Wisconsin wrote a letter referring a
potential Jenkins Act violation to the U.S. Attorney for prosecution.
According to a Wisconsin official, this case had strong evidence of
Jenkins Act noncompliance”there were controlled and supervised purchases
made on the Internet of a small number of cartons of cigarettes, and
the vendor had not reported the sales to Wisconsin. The U.S. Attorney‘s
Office declined to initiate an investigation, saying that it appeared
this issue would be best handled by the state ’administratively.“
[Footnote 15] The Wisconsin official told us, however, that Wisconsin
does not have administrative remedies for Jenkins Act violations, and,
in any case, the state cannot reach out across state lines to deal with
a vendor in another state.
States Concerned about Internet Vendors‘ Noncompliance and Believe
Greater Federal Action is Needed:
Officials in each of the nine states expressed concern about the impact
that Internet cigarette vendors‘ noncompliance with the Jenkins Act has
on state tax revenues. The officials said that Internet cigarette sales
will continue to grow in the future and are concerned that a much
greater and more substantial impact on tax revenues will result. One
state, California, estimated that its lost tax revenue due to
noncompliance with the Jenkins Act by Internet cigarette vendors was
approximately $13 million from May 1999 through September 2001.
[Footnote 16]
Officials in all nine states said that they are limited in what they can
accomplish on their own to address this situation and successfully
promote Jenkins Act compliance by Internet cigarette vendors. All of the
officials pointed out that their states lack the legal authority
necessary to enforce the act and penalize the vendors who violate it,
particularly with the vendors residing in other states. Officials in
three states told us that efforts to promote Jenkins Act compliance are
not worthwhile because of such limitations, or are not a priority
because of limited resources.
Officials in all nine states said that they believe greater federal
action is needed to enforce the Jenkins Act and promote compliance by
Internet cigarette vendors. Four state officials also said they believe
ATF should have primary jurisdiction to enforce the act. One official
pointed out that his organization sometimes dealt with ATF on tobacco
matters, but has never interacted with the FBI. Officials in the other
five states did not express an opinion regarding which federal agency
should have primary jurisdiction to enforce the act.
Most Internet Cigarette Vendors Do Not Comply with the Jenkins Act,
Notify Consumers of Their Responsibilities, or Provide Information
on Sales Volume:
Through our Internet search efforts (see app. I), we identified 147 Web
site addresses for Internet cigarette vendors based in the United
States and reviewed each Web site linked to these addresses. [Footnote
17] Our review of the Web sites found no information suggesting that
the vendors comply with the Jenkins Act. Some vendors cited reasons for
not complying that we could not substantiate. A few Web sites
specifically mentioned the vendors‘ Jenkins Act reporting
responsibilities, but these Web sites also indicated that the vendors
do not comply with the act. Some Web sites provided notice to consumers
of their potential state tax liability for Internet cigarette
purchases. We also found that information on vendor cigarette sales
volume is very limited, and few of the Web sites we reviewed posted
maximum limits for online cigarette orders.
Majority of Web sites Indicate that Vendors do Not Comply with the
Jenkins Act:
None of the 147 Web sites we reviewed stated that the vendor complies
with the Jenkins Act and reports cigarette sales to state tobacco tax
administrators. [Footnote 18] Conversely, as shown in table 2,
information posted on 114 (78 percent) of the Web sites indicated the
vendors‘ noncompliance with the act through a variety of statements
posted on the sites. Thirty-three Web sites (22 percent) provided no
indication about whether or not the vendors comply with the act.
Table 2: Web sites Indicating Internet Cigarette Vendors‘ Noncompliance
with the Jenkins Act:
Web site statement indicating noncompliance: Do not report sales to
state tax authorities;
Number: 44[A];
Percent: 30.
Web site statement indicating noncompliance: Do not comply with the
Jenkins Act;
Number: 1;
Percent: 1.
Web site statement indicating noncompliance: Keep customer information
private;
Number: 43;
Percent: 29.
Web site statement indicating noncompliance: Silent on reporting, but
claim cigarettes are tax-free;
Number: 26;
Percent: 18.
Web site statement indicating noncompliance: Total;
Number: 114;
Percent: 78.
[A] One Web site stated that it does not report to state tax
authorities and that it does not comply with the Jenkins Act. In
determining the number of Web sites indicating noncompliance with the
Jenkins Act, we counted this only as a statement that it does not
comply with the act.
Source: GAO‘s analysis of Web site data.
[End of table]
Reasons Cited for Noncompliance with the Jenkins Act:
Some Internet vendors cited specific reasons on their Web sites for not
reporting cigarette sales to state tax authorities as required by the
Jenkins Act. Seven of the Web sites reviewed (5 percent) posted
statements asserting that customer information is protected from
release to anyone, including state authorities, under privacy laws.
Seventeen Web sites (12 percent) state that they are not required to
report information to state tax authorities and/or are not subject to
the Jenkins Act reporting requirements. Fifteen of these 17 sites are
Native American, with 7 of the sites specifically indicating that they
are exempt from reporting to states either because they are Native
American businesses or because of their sovereign nation status. In
addition, 35 Native American Web sites (40 percent of all the Native
American sites we reviewed) indicate that their tobacco products are
available tax-free because they are Native American businesses.
[Footnote 19]
To supplement our review of the Web sites, we also attempted to contact
representatives of 30 Internet cigarette vendors, and we successfully
interviewed representatives of 5. [Footnote 20] One of the 5
representatives said that the vendor recently started to file Jenkins
Act sales reports with one state. [Footnote 21] However, the other 4
said that they do not comply with the act and provided us with
additional arguments for noncompliance. Their arguments included an
opinion that the act was not directed at personal use. An additional
argument was that the Internet Tax Freedom Act [Footnote 22] supercedes
the obligations laid out in the Jenkins Act.
Our review of the applicable statutes indicates that neither the
Internet Tax Freedom Act nor any privacy laws exempt Internet cigarette
vendors from Jenkins Act compliance. The Jenkins Act has not been
amended since minor additions and clarifications were made to its
provisions in 1953 and 1955; and neither the Internet Tax Freedom Act
nor any privacy laws amended the Jenkins Act‘s provisions to expressly
exempt Internet cigarette vendors from compliance. With regard to the
Internet Tax Freedom Act, the temporary ban that the act imposed on
certain types of taxes on e-commerce did not include the collection of
existing taxes, such as state excise, sales, and use taxes.
Additionally, nothing in the Jenkins Act or its legislative history
implies that cigarette sales for personal use, or Native American
cigarette sales, are exempt. In examining a statute, such as the
Jenkins Act, that is silent on its applicability to Native American
Indian tribes, courts have consistently applied a three-part analysis.
Under this analysis, if the act uses general terms that are broad
enough to include tribes, the statute will ordinarily apply unless (1)
the law touches ’exclusive rights of self-governance in purely
intramural matters;“ (2) the application of the law to the tribe would
abrogate rights guaranteed by Indian treaties; or (3) there is proof by
legislative history or some other means that Congress intended the law
not to apply to Indians on their reservations. Our review of the case
law did not locate any case law applying this analysis to the Jenkins
Act. DOJ said that it also could not locate any case law applying the
analysis to the Jenkins Act, and DOJ generally concluded that an Indian
tribe may be subject to the act‘s requirements. DOJ noted, however, that
considering the lack of case law on this issue, this conclusion is
somewhat speculative. ATF has said that sales or shipments of
cigarettes from Native American reservations are not exempt from the
requirements of the Jenkins Act. [Footnote 23]
Few Web sites Provide Notice of the Vendors‘ Reporting Responsibilities,
but Some Provide Notice of Customer Cigarette Tax Liability:
Only 8 (5 percent) of the 147 Web sites we reviewed notified customers
that the Jenkins Act requires the vendor to report cigarette sales to
state tax authorities, which could result in potential customer tax
liability. However, in each of these cases, the Web sites that provided
notices of Jenkins Act responsibilities also followed the notice with a
statement challenging the applicability of the act and indicating that
the vendor does not comply. Twenty-eight Web sites (19 percent) either
provided notice of potential customer tax liability for Internet
cigarette purchases or recommended that customers contact their state
tax authorities to determine if they are liable for taxes on such
purchases. Three other sites (2 percent) notified customers that they
are responsible for complying with cigarette laws in their state, but
did not specifically mention taxes. Of the 147 Web sites we reviewed,
108 (73 percent) did not provide notice of either the vendors‘ Jenkins
Act reporting responsibilities or the customers‘ responsibilities,
including potential tax liability, with regard to their states.
Minimal Information Available on Vendor Cigarette Sales Volume; Some
Vendors Post Maximum Limits on Orders on Their Web sites:
We attempted to collect average monthly sales volume data through our
interviews with representatives of Internet cigarette vendors. Two of
the five vendor representatives we interviewed provided us with
information on average monthly sales volume. One said that he sells
approximately 500 cartons a month. The other (who operates two Web
sites) referred us to information in his federal Securities and
Exchange Commission (SEC) filings. [Footnote 24] We reviewed a company
filing from February 2001 and found that it did not contain data on
monthly volume by carton. [Footnote 25] The information did, however,
indicate that the company‘s revenues from cigarette sales from both Web
sites averaged just over $196,000 a month in 2000. The remaining three
vendor representatives we interviewed declined to answer specific
questions on sales volume. Several of the representatives we spoke with
said that the majority of vendors process a low number of cartons each
month and that only a small number of companies sell any significant
volume.
Twenty-four (16 percent) of the Web sites we reviewed posted a maximum
limit on the number of cigarette cartons that can be ordered through the
sites. These limits ranged from a maximum of two cartons per person per
order to a maximum of 300 cartons per order. Two of the 24 Web sites
specified that the limits were per day and not per order (i.e., maximum
purchases of 49 and 149 cartons per day). Three of the vendor
representatives we interviewed, including one that does not post a
maximum limit on orders, said that they monitor the size of orders and
flag any order over a certain amount for manual review and processing.
Three vendor representatives said that the reason they have maximum
limits and/or monitoring procedures in place is to ensure that their
cigarettes are sold for personal use only and not for resale. One
representative told us that he believes the CCTA limits the amount of
cigarettes he can sell to 300 cartons per day. [Footnote 26]
Conclusions:
States are hampered in attempting to promote Jenkins Act compliance
because they lack authority to enforce the act. In addition, violation
of the act is a misdemeanor, and U.S. Attorneys‘ reluctance to pursue
misdemeanor violations could be contributing to limited enforcement.
Transferring primary investigative jurisdiction from the FBI to ATF
would give ATF comprehensive authority at the federal level to enforce
the Jenkins Act and should result in more enforcement. ATF‘s ability to
couple Jenkins Act and CCTA enforcement may increase the likelihood it
will detect and investigate violators and that U.S. Attorneys will
prosecute them. This could lead to improved reporting of interstate
cigarette sales, thereby helping to prevent the loss of state cigarette
tax revenues. Transferring primary investigative jurisdiction is also
appropriate at this time because of the FBI‘s new challenges and
priorities related to the threat of terrorism and the FBI‘s increased
counterterrorism efforts.
Matters for Congressional Consideration:
To improve the federal government‘s efforts in enforcing the Jenkins Act
and promoting compliance with the act by Internet cigarette vendors,
which may lead to increased state tax revenues from cigarette sales, the
Congress should consider providing ATF with primary jurisdiction to
investigate violations of the Jenkins Act (15 U.S.C. §375-378).
Agency Comments:
DOJ and ATF provided written comments on a draft of this report. The
agencies‘ comments are shown in appendixes III and IV, respectively.
Both DOJ and ATF suggested that if violations of the Jenkins Act were
felonies instead of misdemeanors, U.S. Attorneys‘ Offices might be less
reluctant to prosecute violations. ATF further noted that individuals
might be deterred from committing Jenkins Act violations if they were
felonies.
ATF also suggested that other legislative changes might assist states
in the collection of excise taxes on cigarettes sold over the Internet:
(1) amend the Jenkins Act to give states the authority to seek
injunctions in federal court to prevent businesses violating the act
from shipping cigarettes to their residents, similar to a recent
amendment to the Webb-Kenyon Act, 27 U.S.C. 122, giving states this
authority for alcohol shipments; (2) amend 18 U.S.C. 1716 (f) to
prohibit the mailing of cigarettes and other tobacco products through
the U.S. Postal Service as this law now does for alcoholic beverage
products; and (3) enact federal law establishing requirements for the
delivery of cigarettes by common carriers such as Federal Express and
UPS (e.g., notify states of shipments, require proof of age before
delivery) modeled after 18 U.S.C. Chapter 59 (Sections 1261, et. seq.),
which restricts how common carriers may ship alcohol.
Although we are not in a position to offer our judgment on whether
violations of the Jenkins Act should be misdemeanors or felonies, or
whether states would benefit from the legislative changes suggested by
ATF, we believe this report provides information to help Congress make
those decisions.
DOJ also provided technical comments on the draft report, which we have
incorporated into the report.
We are sending copies of this report to the Chairman, House Committee
on the Judiciary; the Attorney General; the Secretary of the Treasury;
and other interested parties. We will also make copies available to
others upon request. In addition, the report will be available at no
charge on GAO‘s Web site at [hyperlink, http://www.gao.gov].
If you or your staff have any questions about this report, please call
me at (202) 512-8777 or Darryl W. Dutton at (213) 830-1000. Other key
contributors to this report were Ronald G. Viereck, Sarah M. Prehoda,
Shirley A. Jones, and Evan B. Gilman.
Signed by:
Paul L. Jones:
Director, Justice Issues:
[End of section]
Appendix I: Scope and Methodology:
To determine actions taken by the Department of Justice (DOJ) and the
Bureau of Alcohol, Tobacco and Firearms (ATF) to enforce the Jenkins
Act with regard to Internet cigarette sales and factors that may have
affected the level and extent of such actions, we provided written
questions to DOJ and ATF headquarters requesting the needed
information. We interviewed ATF officials and obtained documentation to
clarify responses to some of our written questions and acquire
additional information.
To determine efforts taken by selected states to promote compliance with
the Jenkins Act by Internet cigarette vendors, we contacted tobacco tax
authorities in 11 states (Alaska, California, Hawaii, Iowa, Maine,
Massachusetts, New Jersey, New York, Rhode Island, Washington, and
Wisconsin) to obtain information. We selected the 10 states with the
highest cigarette excise tax rates on January 1, 2002, based on the
presumption these states would be among those most interested in
promoting Jenkins Act compliance to collect cigarette taxes, and we
selected one additional state (Iowa) that appeared, based on our
Internet research and information from state officials we interviewed
while planning our work, to have taken action to promote Jenkins Act
compliance by Internet cigarette vendors. Using an ATF circular listing
state tobacco tax contacts‘ telephone numbers for questions regarding
state cigarette taxes and reporting requirements, we contacted
officials at the Tax Division, Alaska Department of Revenue; Excise
Taxes Division, California State Board of Equalization; Department of
Taxation, State of Hawaii; Compliance Division, Iowa Department of
Revenue and Finance; Sales and Special Tax Division, Maine Revenue
Services; Excise Tax Unit (within the Processing Division) and Legal
Division, Massachusetts Department of Revenue; Office of Criminal
Investigation, New Jersey Division of Taxation; Transaction and
Transfer Tax Bureau, New York State Department of Taxation and Finance;
Excise Tax Section, Rhode Island Division of Taxation; Special Programs
Division and Legislation and Policy Division, Washington Department of
Revenue; and Alcohol and Tobacco Enforcement Section, Income, Sales and
Excise Tax Division, Wisconsin Department of Revenue.
After contacting these state agencies, we collected information from 9
of the 11 states (New Jersey and New York did not provide the
information we requested in time for it to be included in the report)
by interviewing officials and obtaining documentation. We collected
data on the states‘ efforts to contact Internet cigarette vendors,
including how they identified vendors and notified them of their
Jenkins Act responsibilities, and the results of these efforts in terms
of the level of response by vendors and the resulting collection of
cigarette excise taxes from consumers. We collected information on
contacts the states had with DOJ and ATF in carrying out efforts to
promote Jenkins Act compliance by Internet cigarette vendors and
reporting potential vendor noncompliance. We asked the states to
identify impediments to their efforts to promote compliance with the
act by Internet cigarette vendors. We also asked the states whether
greater federal action is needed to promote greater compliance by
Internet cigarette vendors. In addition, we asked for any estimates
made by these states of the impact on state tax revenues of
noncompliance with the Jenkins Act by Internet cigarette vendors. We did
not independently verify the accuracy and reliability of the data
provided to us by officials in the 9 states.
We also collected information regarding states from two other sources.
From the Federation of Tax Administrators (FTA) Internet Web site, we
obtained each state‘s cigarette excise tax rate that was in effect on
January 1, 2002. FTA is a national organization with a mission to
improve the quality of state tax administration by providing services
to state tax authorities and administrators. The principal tax
collection agencies of the 50 states, the District of Columbia, and New
York City are the members of FTA. We also contacted Forrester Research,
Inc., a private research firm, and obtained a copy of a research brief
discussing Internet tobacco sales (’Online Tobacco Sales Grow, States
Lose;“ April 27, 2001). This brief forecasts Internet tobacco sales in
the United States for each year from 2001 through 2005 and estimates
the total lost state tax revenue from such sales for each of those
years.
To determine readily identifiable Internet cigarette vendors, including
their Web site addresses and other contact information, we developed a
list of Web site addresses by conducting searches using two major
Internet search engines (Brint and Google).[Footnote 27] To conduct the
searches, we used the key words ’discount cigarettes,“ ’cheap
cigarettes,“ and ’online cigarette sales“ as if we were consumers. We
used the results of the two searches to compile a universe of 229 Web
site addresses for Internet cigarette vendors. [Footnote 28] We
reviewed each of the 229 Web sites using a data collection instrument
(DCI) we developed, and we collected contact information such as vendor
or company names, addresses, and telephone numbers. Upon completing
this review, we eliminated 82 Web sites from our universe: 35 Web sites
that either did not sell cigarettes or would not open and 47 Web sites
that were either located outside of the United States or represented
companies, warehouses, or ordering desks located outside the United
States. [Footnote 29] The remaining 147 Web site addresses make up our
universe of readily identifiable Internet cigarette vendors. [Footnote
30] This universe does not necessarily represent all Internet cigarette
vendors operating in the United States. Other researchers, state
officials, and industry representatives have used various different
methodologies and inclusion criteria to identify Internet cigarette
vendors and have produced estimates ranging from 88 to about 400
vendors.
To determine whether the 147 readily identifiable Internet cigarette
vendor Web sites (1) indicate that the vendors comply with the Jenkins
Act; (2) accurately notify potential customers of the vendors‘ reporting
responsibilities under the Jenkins Act and the customers‘ potential tax
liability; and (3) place a maximum limit on cigarette orders, we
reviewed each of the 147 Web sites using our DCI. We reviewed all Web
site statements and notices regarding matters such as vendor policies,
practices, privacy concerns, government requirements, vendor
responsibilities, vendor compliance with the act, customer
responsibilities, potential customer tax liability, as well as any
limits on cigarette orders. In doing so, we examined all the pages on
each of the Web sites, including the ordering screens, and proceeded as
far as possible in the ordering process without inputting any requested
personal information. We analyzed the DCIs to derive descriptive
statistics regarding the Web sites‘ statements and notices, and we
summarized reasons cited on the Web sites for vendors not complying
with the Jenkins Act.
To determine (1) whether readily identifiable Internet cigarette vendors
can provide evidence of compliance with the Jenkins Act, (2) the average
monthly volume of Internet cigarette sales reported by vendors, and
(3) whether vendors place a maximum limit on orders to prevent large-
scale tax evasion by purchasers who plan to resell cigarettes, we
attempted to conduct structured interviews on the telephone with
representatives of 30 of the 147 Internet cigarette vendors. We
judgmentally selected 13 of these vendors based on, and to ensure
diversity among, geographic location and whether or not the vendors were
owned by Native Americans or located on Native American lands. We used
information from our DCIs to randomly select another 17 vendors from
three categories: (1) those with Web sites silent on whether or not they
comply with the Jenkins Act, (2) those who placed maximum limits on
cigarette orders on their Web sites, and (3) all remaining Web sites.
Table 3 provides the results of our attempts to interview
representatives of the 30 vendors on the telephone.
Table 3: Results of Attempts to Interview 30 Internet Cigarette Vendor
Representatives:
Result of telephone calls: Successfully interviewed representative;
Number of vendors: 5.
Result of telephone calls: Refused to answer questions;
Number of vendors: 7.
Result of telephone calls: Did not return messages;
Number of vendors: 14.
Result of telephone calls: Inaccurate telephone number;
Number of vendors: 2.
Result of telephone calls: Constant busy signal;
Number of vendors: 2.
Result of telephone calls: Total;
Number of vendors: 30.
Source: Developed by GAO.
[End of table]
We conducted our work between December 2001 and May 2002 in
accordance with generally accepted government auditing standards.
[End of section]
Appendix II: List of GAO-Identified Internet Cigarette Vendors‘ Web
site Addresses and Other Contact Information:
[hyperlink, http://www.001cigarettes.com]:
001Cigarettes.com:
25 Church St:
Salamanca, NY 14779:
(800) 240-8501:
[hyperlink, http://www.0taxcigs.com]:
0TaxCigs.com:
[hyperlink, http://www.0taxsmokes.com]:
RJ‘s Tobacco Emporium:
200 West State St:
Salamanca, NY 14779:
(800) 720-0475:
[hyperlink, http://www.4cheapcigs.com]:
4 Cheap Cigs:
13967 Four Mile Level Rd:
Gowanda, NY 14070:
(800) 340-9098 or (716) 532-5941:
[hyperlink, http://www.a1cigs.com]:
A1Cigs.com:
PO Box 36837:
Albuquerque, NM 87176:
(866) 264-4060:
[hyperlink, http://www.a1discountcigarettes.com]:
A-1 Discount Cigarettes:
PO Box 457:
Big Stone Gap, VA 24219:
(888) 776-2099:
[hyperlink, http://www.a1discountsmokes.com]:
A1DiscountSmokes.com:
31 Church St Suite C:
Salamanca, NY 14779:
(866) 217-6653:
[hyperlink, http://www.aaasmokes.com]:
AAA Smokes:
PO Box 457:
Big Stone Gap, VA 24219:
(888) 776-2099:
[hyperlink, http://www.aabakismokes.com]:
AabakiSmokes.com:
4201 Yale Blvd NE Suite G:
Albuquerque, NM 87107:
(505) 344-9643:
[hyperlink, http://www.affordablecigs.com]:
Affordablecigs.com:
[hyperlink, http://www.americancigaretteshop.com]:
americancigaretteshop.com:
Winston-Salem, NC:
[hyperlink, http://www.arrowheadsmokes.com]:
ArrowHeadSmokes.com:
PO Box 217:
Collins, NY 14034:
(866) 532-0588:
[hyperlink, http://www.atozsmokeshop.com]:
AtoZSmokeShop.com:
6906 W Seltice Way:
Post Falls, ID:
(877) 292-0009:
[hyperlink, http://www.awesomesmokes.safeshopper.com]:
Awesomesmokes.com:
(866) 221-8423:
[hyperlink, http://www.barbisbutts.com]:
Barbi‘s Butts:
6648 Rt 417:
Kill Buck, NY 14748:
(888) 883-3433:
[hyperlink, http://www.bigbd.com]:
Big Bear‘s Sales:
(888) 491-8779:
[hyperlink, http://www.bigchiefcigarettes.com]:
BigChiefCigarettes.com:
PO Box 645:
Grundy, VA 24614:
(800) 658-3711:
[hyperlink, http://www.bigindian.com]:
Big Indian Smoke Shop:
1106 Rte 438:
Irving, NY 14081:
(800) 898-9040:
[hyperlink, http://www.bigsixsmokes.com]:
Big Six Smokes:
PO Box 457:
Big Stone Gap, VA 24219:
(888) 776-2099:
[hyperlink, http://www.blackpawtobacco.com]:
Black Paw Tobacco:
1375 Woodchuck Rd:
Irving, NY 14081:
(888) 860-3550 or (716) 549-7745:
[hyperlink, http://www.bucktowntrading.com]:
Bucktown Tobacco:
PO Box 207:
Irving, NY 14081:
(888) 802-9661:
[hyperlink, http://www.budgetcigarettes.com]:
BudgetCigarettes.com:
Ashland, KY:
(866) 840-7158:
[hyperlink, http://www.bulkcigs.com]:
BulkCigs.com:
VA:
[hyperlink, http://www.buydiscountcigarettes.com]:
BuyDiscountCigarettes.com:
250 Sheep Springs Circle:
Jemez Pueblo, NM 87024:
(888) 437-9797:
[hyperlink, http://www.carolinacigarettes.com]:
CarolinaCigarettes.com:
Winston-Salem, NC:
[hyperlink, http://www.cheapcigsrus.com:
Cheap Cigs R Us:
(888) 543-2447 or (631) 283-8047:
[hyperlink, http://www.cheapsmoke.com:
Cheap Smoke:
4340 Sanita Ct Suite F:
Louisville, KY 40213:
(877) 367-6653:
[hyperlink, http://www.cheapsmokesbymail.com]:
CheapSmokesbyMail.com:
PO Box 28:
Salamanca, NY 14779:
(888) 391-1199:
[hyperlink, http://www.cigsmoke1.com]:
CigSmoke1.com:
2287 S Ridgewood Ave:
South Dayton, FL 32119:
(386) 760-8684:
[hyperlink, http://www.cigarette-network.com]:
Cigarette Network.Com:
PO Box 224:
Silver Creek, NY 14136:
(716) 934-2627:
[hyperlink, http://www.cigarettesavers.com]:
CigaretteSavers.com:
(888) 388-1964:
[hyperlink, http://www.cigaretteshop.com]:
Nambe Tobacco Shop:
PO Box 3252 Pojoaque Station:
Santa Fe, NM 87501:
(505) 455-0437:
[hyperlink, http://www.cigarettespecials.com]:
CigaretteSpecials.com:
250 Sheep Springs Circle:
Jemez Pueblo, NM 87024:
(888) 437-9797:
[hyperlink, http://www.cigarettes4less.org]:
Cigarettes 4 Less:
(804) 402-2100:
[hyperlink, http://www.cigarettesamerica.com]:
CigarettesAmerica.com:
(888) 388-1964:
[hyperlink, http://www.cigarettesandtires.com]:
Cigarettes and Tires:
PO Box 336:
Salamanca, NY 14070:
(866) 887-5777:
[hyperlink, http://www.cigarettes-and-tobacco-online.com]:
Cigarettes-And-Tobacco-Online.com:
PO Box 376:
Salamanca, NY 14779:
(888) 438-8745:
[hyperlink, http://www.cigarettesbymail.com]:
eSmokes.com:
PO Box 998:
Lowell, NC 28098:
(877) 304-1808:
[hyperlink, http://www.cigarettesexpress.com]:
CigarettesExpress.com:
31 Church St:
Salamanca, NY 14779:
(800) 613-2447:
[hyperlink, http://www.cigarettesforcents.safeshopper.com]:
Cigarettes for Cents:
(866) 221-8423:
[hyperlink, http://www.cigarettes-outlet.net]:
Cigarettes-Outlet.net:
(888) 438-8745:
[hyperlink, http://www.cigarettesandmore.com]:
Cigarettes And More:
PO Box 15:
Versailles, NY 14168:
[hyperlink, http://www.cigarettesforless.com]:
CigarettesForLess.com:
Fulton, KY 42041:
(877) 865-9818:
[hyperlink, http://www.cigarettesonly.com]:
CigarettesOnly.com:
1525 Cayuga Rd:
Irving, NY 14081:
(888) 203-7604:
[hyperlink, http://www.cigarettessentdirect.com]:
Cigarettes S.E.N.T Direct:
PO Box 199:
Irving, NY 14081:
(800) 288-1416:
[hyperlink, http://www.cigarettewizard.com]:
CigaretteWizard.com:
25 Church St:
Salamanca, NY 14779:
(800) 488-8555:
[hyperlink, http://www.cigexpress.com]:
cigexpress.com:
PO Box 9936:
Richmond, VA 23228:
(804) 673-9825:
[hyperlink, http://www.cigmarket.com]:
CigMarket.com:
[hyperlink, http://www.cigoutlet.com]:
Cigoutlet.com:
1303 Grumman Dr:
Richmond, VA 23229:
(888) 901-8901:
[hyperlink, http://www.cigs4cheap.com]:
CIGS4CHEAP.com:
VA:
[hyperlink, http://www.cigs4free.com]:
Cigs4free.com:
PO Box 144:
Gowanda, NY 14070:
(866) 244-7373:
[hyperlink, http://www.cigsonline.com]:
CigsOnline:
Shelby, NC:
(704) 471-1005:
[hyperlink, http://www.cigtec.com]:
CigTec Tobacco:
303 Roxbury Industrial Ct:
Charles City, VA 23030:
(877) 965-6694:
[hyperlink, http://www.classacigarettes.com]:
ClassACigarettes.com:
PO Box 185:
Gibsonville, NC 27249:
(366) 449-6505 or (888) 989-3191:
[hyperlink, http://www.classactsmokes.com]:
Class Act Smokes:
27 Main St:
Salamanca, NY 14779:
(800) 660-7114:
[hyperlink, http://www.crsmokes.com]:
CR Smokes:
982 Route 438:
Irving, NY 14081:
(800) 603-3412 or (716) 549-5467:
[hyperlink, http://www.crazywolfsmokeshop.com]:
Crazy Wolf Smoke Shop:
PO Box 307:
Salamanca, NY 14779:
(888) 282-4959:
[hyperlink, http://www.crocodilelounge.com]:
The Crocodile Lounge:
PO Box 231:
Versailles, NY 14168:
(877) 532-1425:
[hyperlink, http://www.cybercigarettes.com]:
CigaretteSpecials.com:
250 Sheep Springs Circle:
Jemez Pueblo, NM 87024:
(888) 437-9797:
[hyperlink, http://www.cycocigs.com]:
Cycocigs.com:
4201 Yale Blvd NE Suite 6:
Albuquerque, NM 87107:
(505) 344-9643:
[hyperlink, http://www.dannystobacco.com]:
Danny‘s Tobacco.com:
(888) 792-1599:
[hyperlink, http://www.deerpathcigs.com]:
deerpathcigs.com:
(716) 945-1641:
[hyperlink, http://www.dirtcheapcig.com]:
dirtcheapcig.com:
900 McGuire Ave Suite C:
Paducah, KY 42001:
(888) 808-2447:
[hyperlink, http://www.discountcigarette.com]:
Discount Cigarette Outlet:
PO Box 2234:
Tifton, GA 31793:
[hyperlink, http://www.discountcigarettescenter.com]:
Discount Cigarettes Center:
Lexington, KY:
[hyperlink, http://www.discountcigarettes4u.com]:
DiscountCigarettes4U.com:
(866) 976-6546:
[hyperlink, http://www.discount-tobacco.com]:
Discount-Tobacco.com:
Fulton, KY 42041:
(877) 865-9818:
[hyperlink, http://www.discountedcigarettes.com]:
discountedcigarettes.com:
NC:
[hyperlink, http://www.drivethrusmokeshop.com]:
Drive Thru Smoke Shop:
PO Box 7:
Lewiston, NY 14092:
(866) 232-2932:
[hyperlink, http://www.dutyfreetaxfree.com]:
Dutyfreetaxfree:
PO Box 377:
Irving, NY 14081:
(877) 853-6645:
[hyperlink, http://www.ecig.com]:
ecig.com:
(877) 999-3244:
[hyperlink, http://www.ezsmokes.biz]:
EZSmokes.biz:
11125 Southwestern Blvd:
Irving, NY 14081:
(866) 766-5370 or (716) 549-1134:
[hyperlink, http://www.eztobacco.com]:
EZ Tobacco:
PO Box 613:
Grundy, VA 24614:
(866) 398-6222:
[hyperlink, http://www.highlandercigarettes.com]:
Highlander Discount Cigarettes:
370 Fair Oak St:
Salamanca, NY 14779:
(888) 849-9764:
[hyperlink, http://www.hootysapperticker.com]:
HootySapperTicker:
(866) 466-8928:
[hyperlink, http://www.hot-ent.com]:
Honor Our Treaties Enterprises:
PO Box 137:
Irving, NY 14081:
(888) 829-8643:
[hyperlink, http://www.indiansmokesonline.com]:
Indian Smokes Online:
Salamanca, NY:
(866) 840-4500:
[hyperlink, http://www.iroquoisconnection.com]:
Iroquois Connection:
1567 Hare Rd:
Irving, NY 14081:
(877) 674-8283:
[hyperlink, http://www.iroquoisdirect.com]:
Iroquois Tobacco Direct:
6665 Rt 219:
Kill Buck, NY 14748:
(888) 999-5509:
[hyperlink, http://www.joesmoke.com]:
JoeSmoke.com:
PO Box 11:
Lawtons, NY 14091:
(877) 874-5252:
[hyperlink, http://www.keweenawbay.com]:
Keweenaw Bay Trading Post:
PO Box 545:
Baraga, MI 49908:
(888) 438-8745 or (906) 524-2922:
[hyperlink, http://www.killbucktradingpost.com]:
Kill Buck Trading Post:
PO Box 294:
Kill Buck, NY 14748:
(800) 290-3788:
[hyperlink, http://lasmokeshop.com]:
Lou Ann‘s Smoke Shop:
PO Box 460:
Collins, NY 14034:
(716) 532-1181 or (877) 532-1181:
[hyperlink, http://www.lightupforless.safeshopper.com]:
LightUpForLess.com:
(888) 222-8423:
[hyperlink, http://www.lightem-up.com]:
Lightem-Up Smoke Shop:
(208) 237-7331:
[hyperlink, http://www.loneoak.net]:
Lone Oak.net:
PO Box 224:
Silver Creek, NY 14136:
(888) 842-0192:
[hyperlink, http://www.longtrailsmokes.com]:
Long Trail Smokes:
PO Box 1274:
Lewiston, NY 14092:
(877) 598-2447:
[hyperlink, http://www.lowcostcigarettes.com]:
lowcostcigarettes.com:
PO Box 391:
Salamanca, NY 14779:
(888) 245-8807:
[hyperlink, http://www.nativesale.com]:
Native Sale.com:
(800) 934-2293:
[hyperlink, http://www.nccigarettes.com]:
North Carolina Cigarettes & Tobacco Products:
178 Hood Swamp Rd:
Goldsboro, NC 27534:
(919) 778-1837:
[hyperlink, http://www.notaxsmokes.com:
no tax SMOKES.com:
68 Main St:
Salamanca, NY 14779:
(800) 532-6961:
[hyperlink, http://www.ojibwas.com]:
Ojibwas Trading Post:
1358 Cayuga Rd:
Irving, NY 14081:
(800) 490-7999:
[hyperlink, http://www.otdirect.com]:
OT Direct.com:
PO Box 246:
Brant, NY 14027:
(716) 337-0405:
[hyperlink, http://www.paiutesmokeshops.com]:
Las Vegas Paiute Smoke Shop:
1225 North Main St:
Las Vegas, NV 89101:
(702) 387-6433:
[hyperlink, http://www.paylesscigs.com]:
Pay Less Cigs.com:
717 West 33rd St:
Richmond, VA 23225:
(804) 232-3560 or (800) 828-9522:
[hyperlink, http://www.peacepipetobacco.com]:
Peace Pipe Tobacco Shoppe:
22 ½ Broad St:
Salamanca, NY 14779:
(877) 876-6536:
[hyperlink, http://www.poospatuksmokeshop.com]:
Poospatuk Smoke Shop:
NY:
(877) 234-6282:
[hyperlink, http://www.puffnstuffonline.com]:
Puff‘n Stuff Online:
NY:
[hyperlink, http://www.ranchresortsmokeshop.org]:
Ranch Resort Smoke Shop:
PO Box 92:
Wyandotte, OK 74340:
(877) 884-1444:
[hyperlink, http://www.rednationtobacco.com]:
Red Nation Tobacco Co:
888 ½ Broad St Ext:
Salamanca, NY 14779:
(877) 945-0704:
[hyperlink, http://www.reservationcigs.com]:
deerpathcigs.com:
(716) 945-1641:
[hyperlink, http://www.rezonline.com]:
The Rez Online Smoke Shop:
986 Bloomingdale Rd:
Basom, NY 14013:
(800) 468-8805:
[hyperlink, http://www.ronssmokeshop.com]:
Ron‘s Smoke Shop:
5001 W State St:
Allegany, NY 14706:
(888) 280-7100:
[hyperlink, http://www.salamancacigaretteoutlet.com]:
Salamanca Cigarette Outlet:
594 E State St:
Salamanca, NY 14779:
(888) 945-0203:
[hyperlink, http://www.salamancaoutlet.com]:
Salamanca Cigarette Outlet:
594 E State St:
Salamanca, NY 14779:
(888) 945-0203:
[hyperlink, http://www.saveoncigarettes.com]:
Save on Cigarettes:
PO Box 74035:
Richmond, VA 23236:
(877) 375-5987:
[hyperlink, http://www.senecahawk.com]:
Seneca Hawk Smoke Shop:
PO Box 278:
Irving, NY 14081:
(800) 580-7116:
[hyperlink, http://www.senecaselecttobacco.bigstep.com]:
Seneca Select Tobacco:
Salamanca, NY 14779:
(866) 393-8058:
[hyperlink, http://www.senecasmokes.com]:
Seneca Smokes:
5216 Chew Road:
Sanborn, NY 14132:
(877) 234-2447:
[hyperlink, http://www.senecasmokeshop.com]:
Seneca Smokeshop:
PO Box 30:
Irving, NY 14081:
(888) 876-1935:
[hyperlink, http://www.senecas.com]:
Senecas Trading Post:
1358 Cayuga Rd:
Irving, NY 14081:
(716) 549-8365:
[hyperlink, http://www.shopzmart.com]:
Shopzmart:
VA:
(877) 729-6949:
[hyperlink, http://www.smokesgalore.com]:
Smoke Signals:
PO Box 246:
Brant, NY 14027:
(800) 272-1743:
[hyperlink, http://www.smokestix.com]:
Lazy L Tobaccos.com:
NM:
(877) 782-3777:
[hyperlink, http://www.smokewithus.com]:
Smoke With Us:
357 Milestrip Rd:
Irving, NY 14081:
(800) 819-0885:
[hyperlink, http://www.smokemcheap.com]:
Smokemcheap.com:
PO Box 377:
Irving, NY 14081:
(877) 225-5201:
[hyperlink, http://www.smokemcheapcigs.com]:
SmokemCheapCigs.com:
PO Box 767:
Basom, NY 14013:
(866) 542-7141:
[hyperlink, http://www.smokerstation.com]:
Smoker Station:
PO Box 236:
Sanborn, NY 14132:
[hyperlink, http://www.smokersden.com]:
Smoker‘s Den:
9 Squaw Ln:
Mastic, NY 11950:
(631) 395-7941 or (877) 395-7473:
[hyperlink, http://www.smokersfirst.com]:
smokersfirst.com:
11937 Burning Springs Rd:
Perrysburg, NY 14129:
(800) 435-0450:
[hyperlink, http://www.smokesadvantage.com]:
Tobacco Advantage:
2227 Plantside Dr:
Louisville, KY 40299:
(877) 428-3244:
[hyperlink, http://www.smokes-direct.com]:
Smokes-direct.com:
12619 Shelbyville Rd:
Louisville, KY 40243:
(877) 297-2321 or (502) 254-9463:
[hyperlink, http://www.smokesoutletmall.com]:
SmokesOutletMall.com:
PO Box 71:
Versailles, NY 14168:
(877) 287-7726:
[hyperlink, http://www.smokes-spirits.com]:
Cheap Smokes:
501 W 11th St:
Newport, KY 41071:
(866) 247-2447:
[hyperlink, http://www.smokeysexpress.com]:
Smokey‘s Express:
44 ½ Jimmerson Ln:
Irving, NY 14081:
(800) 535-1489:
[hyperlink, http://www.smokin4less.com]:
Smokin 4 Less:
PO Box 457:
Big Stone Gap, VA 24219:
(888) 776-2099:
[hyperlink, http://www.smokinez.com]:
Smokin EZ:
NY:
(800) 304-8685:
[hyperlink, http://www.smokinturtle.com]:
Smokin Turtle:
PO Box 567:
Collins, NY 14034:
(877) 532-4414:
[hyperlink, http://www.stockuptobacco.com]:
Stock Up Tobacco:
PO Box 48:
Steamburg, NY 14783:
(888) 265-3405:
[hyperlink, http://www.sundancercigarettes.com]:
Sun Dancer Cigarettes:
1494 Cayuga Rd:
Irving, NY 14081:
(877) 436-0373:
[hyperlink, http://www.susiessmokeshop.com]:
Susie‘s Smoke Shop:
PO Box 73:
Paducah, KY 42002:
(270) 441-7632:
[hyperlink, http://www.taxfreecigarettes.com]:
Tax Free Cigarettes.com:
12160 Brant Reservation Rd:
Irving, NY 14081:
(716) 549-0490 or (888) 569-0410:
[hyperlink, http://www.threefeatherstobacco.com]:
Three Feathers Tobacco:
PO Box 43:
Brant, NY 14027:
(866) 549-7249:
[hyperlink, http://www.threesisterssmokes.com]:
Three Sisters Smoke:
PO Box 444:
Salamanca, NY 14779:
(877) 945-2861:
[hyperlink, http://www.tobaccobymail.com]:
Tobacco By Mail:
PO Box 0025:
Salamanca, NY 14779:
(800) 419-1907:
[hyperlink, http://www.tobaccojoe.com]:
A1Cigs.com:
PO Box 36837:
Albuquerque, NM 87176:
(866) 264-4060:
[hyperlink, http://www.tobaccosource.com]:
Allegany Trail Enterprises:
702 Broad St:
Salamanca, NY 14779:
(800) 427-9713 or (716) 945-6147:
[hyperlink, http://www.tobaccoxpress.com]:
TobaccoXpress:
25 Church St:
Salamanca, NY 14779:
(800) 634-9882:
[hyperlink, http://www.travelingsmoke.com]:
Traveling Smoke:
NY:
(888) 328-4043:
[hyperlink, http://www.turtlebacksmokeshop.com]:
Turtleback Smoke Shop:
NY:
(877) 831-5480:
[hyperlink, http://www.twowaysmokes.com]:
Two Way Smokes.com:
11326 Farnham Rd/Rt 20:
Irving, NY 14081:
(800) 588-2359 or (877) 889-6929:
[hyperlink, http://www.valuesmokes.com]:
ValueSmokes.com:
3350 Chadbury Dr:
Concord, NC 28027:
[hyperlink, http://www.warpathsmokeshop.com]:
Warpath Smoke Shop:
Nth 165 Hwy 95:
Plummer, ID 83851:
(208) 686-0217:
[hyperlink, http://www.wolfpacktobacco.com]:
WolfPackTobacco.com:
636 Wildwood Ave:
Salamanca, NY 14779:
(800) 316-7636:
[hyperlink, http://www.wolfdentobacco.com]:
Wolf‘s Den Tobacco:
PO Box 503:
Salamanca, NY 14779:
(866) 425-8182:
[hyperlink, http://www.wolfsrun.com]:
Wolf‘s Run:
1412 Rt 438:
Irving, NY 14081:
(888) 532-2001:
[hyperlink, http://www.w2r.com/quakertradingco]:
Quaker Trading Co:
Box 1 #1701, Route 280:
Steamburg, NY 14783:
(877) 945-3495:
[End of section]
Appendix III: Comments from the Department of Justice:
U.S. Department of Justice:
Washington, D.C. 20530:
July 22, 2002:
Paul L. Jones:
Director, Justice Issues:
U.S. General Accounting Office:
441 G Street, NW:
Washington, D.C.
Dear Mr. Jones:
On July 8, 2002, the General Accounting Office (GAO) provided the
Department of Justice (DOJ) copies of its draft report "Internet
Cigarette Sales: Giving ATF Investigative Authority May Improve
Reporting and Enforcement." The draft was reviewed by representatives
of the Criminal Division, the Executive Office for United States
Attorneys, and the Federal Bureau of Investigation. The DOJ is
providing the enclosed minor comments for your consideration and
understand that they will be incorporated as appropriate.
I hope the comments will be beneficial in completing the final
document. If you have any questions concerning the Department's
comments you may contact me on (202) 514-0469.
Sincerely,
Signed by:
Vickie L. Sloan:
Director, Audit Liaison Office:
Justice Management Division:
Enclosure:
Department Of Justice Comments:
on the General Accounting Office Draft Report "Internet Cigarette
Sales: Giving ATF Investigative Authority May Improve Reporting and
Enforcement"
1. Pages 3, 9, and 14. The report states that several United States
Attorneys Offices (USAOs) refused requests for assistance by state
authorities by declining to send letters informing internet vendors of
the Jenkins Act and directing their compliance with the statute.
Generally, Federal prosecutors do not issue advisory opinions about
prosecutive matters, as they may subsequently he presented with the
need to make an actual decision based on specific facts. The issuance
of such opinions might create the basis for a legal dispute, if a
subsequent prosecution were undertaken.
2. Pages 8 and 9. The report correctly notes that a Federal Grand Jury
in Alaska returned a "no true bill" declining to indict in a particular
case. While Rule 6(e) of the Federal Rules of Criminal Procedure bars
the DOJ from discussing matters before a Grand Jury, however as a
matter of public record, a Federal seizure of 1,371,000 cigarettes
arising from the same matter was upheld by the 9th Circuit after a
legal challenge by the seller. This seizure imposed a substantial loss
on the seller.
It is also important to note that Alaska, like other states, has a
state felony law similar to the Jenkins Act, but with a much heavier
penalty. While legal considerations and professional obligations
preclude the DOJ from discussing the determinative facts in a
particular case, a number of considerations apply to all such cases
where a criminal prosecution is proposed.
First, there must be sufficient admissible evidence to prove every
element of a particular Federal offense beyond a reasonable doubt.
Second, in cases where alternative means of enforcement exist, such as
a state prosecution or civil or administrative enforcement, the United
States Attorneys' office must consider both the most effective and
efficient enforcement approach as well as the governmental entity with
the greatest interest in enforcement. It must also consider competing
demands for resources. These considerations, as well as other factors
that must be taken into account in deciding to seek a Federal
prosecution, are more fully set out in The Principles of Federal
Prosecution found in section 9-27 of the United States Attorneys'
Manual. Additionally, United States Attorneys' offices must consider
what legal impediments and defenses might be raised in a proposed
prosecution. For instance, if the potential defendant is either an
Indian Tribe or the alleged violation occurred on a reservation, the
potential effect of a claim of sovereignty must be considered.
3. Page 20. The GAO mentions the reluctance of USAOs to pursue
misdemeanor Jenkins Act violations, but does not explore or suggest the
creation of a felony offense.
[End of section]
Appendix IV: Comments from the Bureau of Alcohol, Tobacco and Firearms:
Department Of The Treasury:
Bureau Of Alcohol, Tobacco And Firearms:
Washington, DC 20226:
[hyperlink, http://www.atf.treas.gov]:
July 19, 2002:
Mr. Paul L. Jones:
Director, Tax Administration and Justice:
United States General Accounting Office:
Washington, DC 20548:
Dear Mr. Jones:
This is in response to your letter dated July 8, 2002, to Secretary
Paul H. O'Neill. You forwarded a draft copy of a report entitled
Internet Cigarette Sales: Giving ATF Investigative Authority May
Improve Reporting and Enforcement (GAO-02-743).
The Bureau of Alcohol, Tobacco and Firearms (ATF) recommends that the
report include and emphasize the need for the penalty provision of the
Jenkins Act to be changed from a misdemeanor to a felony. These changes
are needed to address the seriousness of the violations and to ensure
that the cases are accepted for prosecution. The increased penalty
would deter individuals from violating the Jenkins Act requirements and
increase the likelihood of prosecution. While the report concludes that
a jurisdiction change from the Federal Bureau of Investigations to ATF
would result in increased enforcement of the Jenkins Act, without a
concurrent increase in the penalty, U.S. Attorneys may continue to
decline to prosecute the misdemeanor cases.
There are other legislative changes that might assist States in the
collection of their excise taxes on cigarettes sold over the Internet.
These legislative changes could parallel current laws governing or
restricting the shipment of alcohol beverage products:
* The Webb-Kenyon Act, 27 USC 122, was recently amended to give States
the authority to seek injunctions directly in the Federal District
Court to prevent businesses from shipping alcohol directly to their
residents. A similar provision to amend the Jenkins Act in 15 USC 378
to allow States to enjoin violations of this Act could allow States to
further prevent violations of the Act without having to rely on U.S.
Attorneys;
* Under 18 USC 1716(f), individuals may not send alcoholic beverage
products through the U.S. Postal Service. This provision could be
amended to also prohibit the mailing of cigarettes or other tobacco
products through the U.S. Postal Service; and;
* For other common carriers such as Federal Express or UPS, 18 USC
Chapter 59 (Sections 1261 et seq.) restricts how the carriers may ship
alcohol. For instance, these provisions require bills of lading to
accompany the shipment, delivery only to the consignee, and prohibit
cash on delivery shipments. Common carriers violating such provisions
are subject to a fine and/or imprisonment of not more than 1 year.
Legislative provisions modeled after this chapter to restrict the
delivery of cigarettes could include similar provisions, requirements
for common carriers to notify states of their shipments, or for common
carriers to obtain proof of age prior to delivery of the cigarettes.
We hope this information is helpful to you in responding to Mr. Jones.
Please let me know if we can be of further assistance.
Sincerely yours,
Signed by:
James A. Zammillo:
Chief, Policy and Planning Staff:
Office of Alcohol and Tobacco:
[End of section]
Footnotes:
[1] States may also collect applicable sales and/or use taxes.
[2] Online Tobacco Sales Grow, States Lose, Forrester Research, Inc.
(April 27, 2001). These estimates are for all tobacco products,
including cigarettes which make up the majority of tobacco sales; and
the tax loss estimate appears to include state cigarette excise taxes
and state and local sales and use taxes. However, we were unable to
assess the reliability of the estimates because the methodology used in
developing it, including key assumptions and data, is proprietary.
[3] As discussed in the Scope and Methodology section in app. I, we
contacted tobacco tax officials in 11 states to determine whether they
had undertaken efforts to promote compliance with the Jenkins Act by
Internet cigarette vendors and to ask related questions. Officials in 9
states provided us with information: Alaska, California, Hawaii, Iowa,
Maine, Massachusetts, Rhode Island, Washington, and Wisconsin.
Officials in New Jersey and New York did not provide the information we
requested in time for it to be included in the report. We selected the
10 states with the highest cigarette excise tax rates on January 1,
2002, based on the presumption these states would be among those most
interested in promoting Jenkins Act compliance to collect cigarette
taxes; and we selected one additional state that appeared, based on our
Internet research and information from state officials we interviewed
while planning our work, to have taken action to promote Jenkins Act
compliance by Internet cigarette vendors.
[4] With ancillary authority to enforce the Jenkins Act, if ATF
investigates a possible Contraband Cigarette Trafficking Act violation
(i.e., cigarette smuggling), for which it has primary jurisdiction, and
determines there is a possible Jenkins Act violation, then ATF may also
investigate the Jenkins Act violation and refer it to DOJ for
prosecution or injunctive relief.
[5] The Jenkins Act does not require cigarette sellers to notify
customers regarding whether or not they comply with the act‘s reporting
requirements.
[6] 28 U.S.C. §533 provides that the Attorney General of the United
States may appoint officials ’to detect and prosecute crimes against
the United States—“ except where investigative jurisdiction has
otherwise been assigned by law.
[7] U.S. General Accounting Office, FBI Reorganization: Initial Steps
Encouraging but Broad Transformation Needed, GAO-02-865T (Washington,
D.C.: June 21, 2002).
[8] Certain persons, including permit holders under the Internal
Revenue Code, common carriers with proper bills of lading, or
individuals licensed by the state where the cigarettes are found, may
possess these cigarettes (18 U.S.C. 2341).
[9] The U.S. Attorney‘s Office determined there was no CCTA violation
because the state of Alaska did not require that tax stamps be placed
on cigarette packages as evidence that state taxes were paid.
[10] According to DOJ, legal considerations and professional
obligations preclude DOJ from discussing the specific reasons for such
decisions by a U.S. Attorney‘s Office in a particular case.
[11] DOJ could not disclose the reason the indictment was denied
because, according to DOJ, Rule 6(e) of the Federal Rules of Criminal
Procedure bars DOJ from discussing matters occurring before a grand
jury.
[12] Cigarette vendors are not required to report to a state unless
they sell and ship cigarettes into the state. Consequently, the states
do not know if the Internet vendors that were notified but did not
respond had any cigarette sales to report.
[13] DOJ noted that federal prosecutors generally do not issue advisory
opinions about prosecutive matters, as they may subsequently be
presented with the need to make an actual decision based on specific
facts. The issuance of such an opinion might create the basis for a
legal dispute if a subsequent prosecution were undertaken.
[14] According to DOJ, legal considerations and professional
obligations preclude DOJ from discussing the specific reasons for such
decisions by a U.S. Attorney‘s Office in a particular case.
[15] According to DOJ, legal considerations and professional
obligations preclude DOJ from discussing the specific reasons for such
decisions by a U.S. Attorney‘s Office in a particular case.
[16] The Excise Taxes Division, California State Board of Equalization,
did not make an official analyses of lost revenue. The $12.75 million
estimate is a projection by the division based on the amount of state
excise and use taxes determined as due from cigarette sales reported by
out-of-state Internet vendors during the period of May 1999 through
September 2001.
[17] The 147 Web site addresses appear to represent 122 different
Internet cigarette vendors. We made this determination by comparing
information such as vendor names, company names, street addresses, P.O.
Box numbers, and telephone numbers. For example, some Web sites had the
same mailing address and telephone number, suggesting they were
separate Web sites being operated by one company. The vendors‘ Web site
addresses and other contact information is listed in appendix II.
[18] Two Web sites posted statements indicating that customer
information would be released if required; however, both sites also
stated that the information would not be given out without the
customers‘ permission. The Jenkins Act does not require cigarette
sellers to notify customers regarding whether or not they comply with
the act‘s reporting requirements.
[19] Fifty-nine percent, or 87, of the 147 Web site addresses reviewed
are either Native American-owned or located and/or operated on Native
American lands.
[20] We were either unable to reach representatives of the remaining 25
vendors we selected to conduct structured interviews, or they declined
to answer questions. Our methodology for interviewing vendor
representatives is discussed in appendix I.
[21] The vendor who said that he does comply with the Jenkins Act told
us that he recently started to file reports with the state of
Washington after receiving a notice from the state‘s Department of
Revenue. However, he said Washington is the only state he reports to,
and he declined to provide us with evidence of his compliance with the
act.
[22] P.L. 105-277, Div. C, Title XI, Oct. 21, 1998.
[23] Industry Circular, No. 99-2, Bureau of Alcohol, Tobacco and
Firearms, June 6, 1999.
[24] The SEC requires public companies to disclose meaningful financial
and other information to the public through a variety of forms and
filings.
[25] We reviewed the company‘s 10K-SB filing. This is the annual report
filed with the SEC by small business issuers. The report provides a
comprehensive overview of the company‘s business and must be filed
within 90 days after the end of the company‘s fiscal year.
[26] The CCTA does not limit the number of cartons that can be sold in
a day. As noted on page 8, the CCTA makes it unlawful for any person to
ship, transport, receive, possess, sell, distribute, or purchase more
than 60,000 cigarettes (i.e., more than 300 cartons containing packs of
20 cigarettes) that bear no evidence of state cigarette tax payment in
the state in which the cigarettes are found, if such state requires a
stamp or other indicia to be placed on cigarette packages to
demonstrate payment of taxes (18 U.S.C. 2342).
[27] We used Brint and Google Internet search engines because they
produced lists that consisted almost entirely of Internet cigarette
vendors. Other search engines we tried produced lists containing
cigarette vendors and thousands of other Web sites, such as cigarette
manufacturers, cigarette advocacy sites, and newspapers with articles on
cigarettes.
[28] One Web site that was on both the Brint and Google search lists
was a directory for online cigarette sales. This directory contained 10
Internet cigarette vendor Web sites that were not listed separately by
the Brint and Google search engines. We included these 10 Web sites in
our universe.
[29] We focused our review on U.S.-based Internet cigarette vendors
because it is unclear whether the Jenkins Act applies to foreign
vendors. Neither the law itself nor its legislative history directly
addresses its applicability to foreign vendors.
[30] The 147 Web site addresses appear to represent 122 different
Internet cigarette vendors. We made this determination by comparing
information such as vendor names, company names, street addresses, P.O.
Box numbers, and telephone numbers. For example, some Web sites had the
same mailing address and telephone number, suggesting they were
separate Web sites being operated by one company.
[End of section]
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