Internet Cigarette Sales
Limited Compliance and Enforcement of the Jenkins Act Result in Loss of State Tax Revenue Gao ID: GAO-03-714T May 1, 2003The Jenkins 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 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. 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.
Overall, we found that the federal government has had limited involvement with the Jenkins Act concerning Internet cigarette sales. We also noted that states have taken action to promote Jenkins Act compliance by Internet cigarette vendors, but results were limited. We determined that most Internet cigarette vendors do not comply with the Jenkins Act or notify their customers of their responsibilities under the act. Vendors cited the Internet Tax Freedom Act, privacy laws, and other reasons for noncompliance. A number of Native Americans cited sovereign nation status. GAO's review indicated that these claims are not valid and vendors are not exempt from the Jenkins Act. We concluded that states are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. We suggested that 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 Bureau of Alcohol, Tobacco and Firearms (ATF), instead of the Federal Bureau of Investigation (FBI), should be provided with primary jurisdiction to investigate violations of the act. We noted that transferring primary investigative jurisdiction was particularly appropriate because of the FBI's new challenges and priorities related to the threat of terrorism and the FBI's increased counterterrorism efforts.
GAO-03-714T, Internet Cigarette Sales: Limited Compliance and Enforcement of the Jenkins Act Result in Loss of State Tax Revenue
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Testimony:
Before the Subcommittee on Courts, the Internet, and Intellectual
Property, Committee on the Judiciary,
House of Representatives:
United States General Accounting Office:
GAO:
For Release on Delivery Expected at 10:00 a.m. EST:
Thursday, May 1, 2003:
Internet Cigarette Sales:
Limited Compliance and Enforcement of the Jenkins Act Result in Loss of
State Tax Revenue:
Statement of Paul L. Jones, Director
Homeland Security and Justice:
GAO-03-714T:
Mr. Chairman and Members of the Subcommittee:
I am pleased to be here today to discuss our work on the extent of
compliance by Internet cigarette vendors with the Jenkins Act.[Footnote
1] The Jenkins 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 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.
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]
My testimony today is based on the results of work that we completed in
August of 2002--namely, our report entitled Internet Cigarette Sales:
Giving ATF Investigative Authority May Improve Reporting and
Enforcement (GAO-02-743). Overall, we found that the federal government
has had limited involvement with the Jenkins Act concerning Internet
cigarette sales. We also noted that states have taken action to promote
Jenkins Act compliance by Internet cigarette vendors, but results were
limited.
We determined that most Internet cigarette vendors do not comply with
the Jenkins Act or notify their customers of their responsibilities
under the act. Vendors cited the Internet Tax Freedom Act, privacy
laws, and other reasons for noncompliance. A number of Native Americans
cited sovereign nation status. GAO's review indicated that these claims
are not valid and vendors are not exempt from the Jenkins Act.
We concluded that states are hampered in attempting to promote Jenkins
Act compliance because they lack authority to enforce the act. We
suggested that 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 Bureau of Alcohol, Tobacco and Firearms (ATF),
instead of the Federal Bureau of Investigation (FBI), should be
provided with primary jurisdiction to investigate violations of the
act.[Footnote 3] We noted that transferring primary investigative
jurisdiction was particularly appropriate because of the FBI's new
challenges and priorities related to the threat of terrorism and the
FBI's increased counterterrorism efforts.
To perform our work, we obtained information from the Department of
Justice (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 4] 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, and we interviewed representatives of five
Internet vendors.
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,
2003, the state excise tax rates for a pack of 20 cigarettes ranged
from 2.5 cents in Virginia to $1.51 in Massachusetts (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, 2003:
[See PDF for image]
[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 person(s) 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 5]
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. Since September 11, 2001,
it is understood that the FBI's priorities have changed, as
unprecedented levels of FBI resources have been devoted to
counterterrorism and intelligence initiatives.
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.[Footnote 6] 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 7] 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 8] The
U.S. Attorney's Office did not want to pursue only a Jenkins Act
violation, a misdemeanor offense, 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. 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.
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 9] 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 (approx.) [C,D]; Number of Internet vendors that responded with
reports of cigarette sales: 20 (approx.); Number of residents
identified and notified: 23,500 (approx.); Number of residents that
responded: 13,500 (approx.); Amount of taxes, penalties, and interest
collected[A]: $1.4 million (approx.).
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
(approx.); Number of residents that responded: 560 (approx.); 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.
Source: Developed by GAO from states' data.
Note: Massachusetts' data are as of May 2002, Washington's 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.
[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. On the basis of
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 who 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 10]
* 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. 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." 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 11]
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 or
Notify Consumers of Their Responsibilities:
Through our Internet search efforts, we identified 147 Web site
addresses for Internet cigarette vendors based in the United States and
reviewed each website linked to these addresses.[Footnote 12] 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.
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 13] 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.
Source: GAO's analysis of Web site data.
[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.
[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 14]
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 15] One of the 5
representatives said that the vendor recently started to file Jenkins
Act sales reports with one state.[Footnote 16] 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 17] 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 stated that sales or shipments of
cigarettes from Native American reservations are not exempt from the
requirements of the Jenkins Act.[Footnote 18]
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.
Conclusions:
Our report concluded that 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.
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, our report suggested that the Congress should consider providing
ATF with primary jurisdiction to investigate violations of the Jenkins
Act (15 U.S.C. §375-378). In view of the fact that ATF was recently
transferred from the Treasury Department to DOJ, it may now be possible
for the Attorney General to administratively transfer primary Jenkins
Act enforcement authority from the FBI to ATF without involving the
Congress in the matter. We believe that this possibility deserves
further investigation on the part of DOJ.
Mr. Chairman, this completes my prepared statement. I would be happy to
respond to any questions you or other Members of the Subcommittee may
have at this time.
For further information, please call me at (202) 512-8777. Other key
contributors to this testimony were Darryl W. Dutton, Ronald G.
Viereck, Katherine M. Davis, and Shirley Jones.
FOOTNOTES
[1] 5 U.S.C. §375-378.
[2] Online Tobacco Sales Grow, States Lose, Forrester Research, Inc.
(Apr. 27, 2001). 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] Since our report was issued, ATF was transferred from the
Department of the Treasury to the Department of Justice and is now
known as the Bureau of Alcohol, Tobacco, Firearms and Explosives.
[4] We contacted tobacco tax officials in 11 states. Officials in 9
states provided us with information, and officials in 2 states did not
provide the information we requested in time for it to be included in
our report. We selected the 10 states with the highest cigarette excise
tax rates on January 1, 2002, based on the presumption that these
states would be among those most interested in promoting Jenkins Act
compliance to collect cigarette taxes. Also, we selected one additional
state that appeared to have taken action to promote Jenkins Act
compliance by Internet cigarette vendors.
[5] 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.
[6] 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.
[7] 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).
[8] 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.
[9] 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.
[10] 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.
[11] The Excise Taxes Division, California State Board of Equalization,
did not make an official analyses of lost revenue. The $13 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
Sept. 2001.
[12] 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.
[13] 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.
[14] 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.
[15] We were either unable to reach representatives of the remaining 25
vendors we selected to conduct structured interviews, or they declined
to answer questions.
[16] 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.
[17] P.L. 105-277, Div. C, Title XI, Oct. 21, 1998.
[18] Industry Circular, No. 99-2, Bureau of Alcohol, Tobacco and
Firearms, June 6, 1999.
