Internet vendors sell cigarettes that are cheaper than retail outlets because they do not collect state and/or federal cigarette excise taxes or they are based in very low-tax jurisdictions. Vendors outside the United States and Native American vendors claim special exemption from charging taxes.
Up to 78 percent of Internet cigarette vendors advertise cigarettes that are tax-free, which appeals to price-sensitive smokers living in high-excise tax states (Ribisl, 2007). When tobacco is purchased from a low-tax state, most states require the resident to pay their home states excise tax minus any taxes already collected by the low-tax state; however, few customers voluntarily pay these taxes, and few states are actively seeking to collect them. A study of 52 Native American Internet vendors found that online cigarette prices were as low as one-fifth of those sold at grocery stores (Hodge, 2004). By purchasing cigarettes online, smokers residing in high cigarette excise tax states such as New York or New Jersey can evade taxes in excess of $400/year, according to a larger study comparing average online Marlboro prices in 2000 to average retail Marlboro prices obtained from AC Nielson grocery store scanner sales data (Kim, 2002). While no follow-up studies have been conducted to date, online savings have increased substantially for smokers residing in high excise states such as New Jersey, which has increased its cigarette excise taxes multiple times since 2000 (Kim, 2002).
The location of Internet cigarette vendors present regulatory and enforcement challenges. Native American vendors claim they can sell cigarettes at tax-free prices because of their sovereign status. Similarly, international vendors claim tax-free status as they are operating from duty-free zones and shipping from outside the United States. To effectively regulate Internet cigarette sales, policy makers will need to address these issues of tribal sovereignty, duty-free zones, and international customs/tax regulations.