State seeks tax share

July 14, 2006

DARRELL L. BREESE

Frontiersman

MAT-SU - The Alaska Department of Revenue announced Tuesday it plans to collect nearly $350,000 in unpaid taxes from consumers who purchased mail-order cigarettes.

The plan is part of a growing state effort to collect the Alaska excise tax on untaxed cigarettes ordered by consumers from out-of-state vendors. Letters were sent to more than 600 Alaskans who have purchased untaxed cigarettes, notifying them that they owe money.

Locals who receive the letter also might get one from the Mat-Su Borough, which is owed an estimated $35,000 to $40,000 in uncollected tobacco tax revenue.

&#8220We've seen an increased number of people attempting to skirt paying the local tobacco taxes by shopping online or through a mail-order outlet,” said Johanna Bales, state revenue audit supervisor. &#8220We've noticed that as tobacco taxes increased through the state, the number of smokers remained the same. That, combined with a decrease in the sales of tobacco, indicated that there was a number of smokers purchasing from other sources. So we began to investigate and found nearly 1,000 suspected purchasers from outside vendors.”

The state had a $1.60 per-pack tax on cigarettes in 2005, when the purchases were made. The per-pack tax increased to $1.80 on July 1.

According to Bales, Alaska law requires that the person who imports cigarettes into the state pay the tobacco excise tax. Either the wholesaler pays the tax before distributing the cigarettes to retailers, or the consumer pays directly when ordering from an outside source.

&#8220State law makes it clear that the tax must be collected equally,” Bales said. &#8220Whether the cigarettes are purchased at the corner gas station or from an out-of-state vendor over the Internet.”

Similar to the state, the Mat-Su Borough has a $1.018 tax on each pack of cigarettes. Based on the number of cases in the state, there are an estimated 70 to 75 cases of unpaid taxes in the borough, which could equal up to $40,000.

Despite knowing of violators who live within the borough, Bales said state confidentiality laws require that all tax information be kept confidential.

&#8220Our hands are tied on this one,” Bales said. &#8220Even though we know the borough is also owed taxes, we can't provide them with the list of those we know to have not paid the state tax.”

This makes it difficult for the borough to get its share.

&#8220As we get names of individuals and businesses selling cigarette without paying the tax, we pursue them,” said Cheyenne Heindel, revenue and budget manager for the borough. &#8220The hard part is finding out who the violators are so we can pursue them. The state keeps a pretty firm grip on their information, so we would basically have to track people down on our own.”

Mike Butler, who owns Up In Smoke 2.0 discount cigarettes, understands why people attempt to find cheaper cigarettes, but wouldn't excuse law-breakers.

&#8220If the people were unaware that they were breaking the law, then I feel sorry for them when they get their tax bill from the state,” Butler said. &#8220But for those who were knowingly trying to avoid the tax and thus breaking the law, I can't feel any sympathy for them.”

Butler went on to say that he understands what might have motivated people to shop outside Alaska.

&#8220When you combine the state tax and the borough tax on a pack, you're paying more in taxes than for the cigarettes,” Butler said. &#8220It's crazy how much in taxes is paid for smokes. But that is no excuse for breaking the law. That is never right.”

According to Bales, the state attorney general was able to determine who in Alaska had purchased cigarettes Outside, thanks to a federal law which requires vendors to report monthly to each state the names and addresses of residents who buy untaxed cigarettes.

Alaska's attorney general recently announced a joint public/private initiative to prevent the illegal sale of cigarettes over the Internet. Participants include attorneys general from across the country, the federal Bureau of Alcohol, Tobacco, Firearms and Explosives and credit card companies.

Credit card companies agreed to suspend the use of credit cards as a method of paying for Internet cigarettes unless the Internet seller proved it complied with all state and federal laws.

&#8220The credit card agreement has become a very useful enforcement tool,” said Bales. &#8220Since the agreement was reached, approximately 10 Internet companies have provided the Department of Revenue with the names of Alaskan individuals who have purchased cigarettes from their Web sites, and we continue to receive information every month. Most of the companies are based on Indian lands in New York state.”

Last year, the department sent out assessments to more than 600 Alaskans who purchased cigarettes over the Internet.

This year, the department has identified more than 600 additional Alaskans purchasing untaxed cigarettes. The state estimates it is owed approximately $347,000 in taxes for cigarettes ordered in 2005.

&#8220At this time, the department is exercising a certain amount of prosecutorial discretion in not enforcing penalties,” Bales said. &#8220If they pay the tax and interest within 45 days, we'll not charge the penalty. But if they wait beyond that, the penalties will be applied.”

The state isn't done with sending out letters. It is investigating another 500 suspected violators and could have another batch of tax bills ready to go out soon.

&#8220I recognize that sending out 1,000 letters to collect taxes isn't the most popular thing to do,” Bales said. &#8220But the state is required to collect the tax and interest and will continue to enforce the tax, interest and penalties against those who continue purchasing untaxed cigarettes without paying the tax.”

Contact Darrell L. Breese at 352-2267 or at darrell.breesefrontiersman.com.