Key Researchers
 

 

Key Results: Internet Cigarette Sales

Citations Listed in Key Results

  • In recent years, the number of English-language websites selling cigarettes has grown dramatically. The bulk of the increase comes from a rise in the number of overseas vendors. Most of the domestic sales come from tribal lands or tobacco-producing states.
    The number of Internet cigarette vendors has risen sharply from 88 in January 2000 to 772 in January 2006 (Ribisl, 2007). Likewise, the proportion of U.S. smokers purchasing their cigarettes online more than doubled from 0.6% to 1.3% between 2002 and 2003 (Hyland, 2006). Internet cigarette vendors are located both within and outside the United States. In recent years, much of the growth in Internet cigarette vendors has occurred among international vendors that market primarily to customers in the United States. In 2003, the first year in which international vendors were tracked, 10 percent of 338 vendors identified were based outside the United States. By 2005, 45 percent of the 664 vendors identified were based outside the United States (Ribisl, 2007). Most of these international vendors were located in Switzerland, Spain, the United Kingdom, and Indonesia. Among domestic vendors, 63 percent were Native American affiliated and about a quarter of vendors were located in Kentucky, North Carolina, and Virginia--all tobacco-producing states with low excise taxes. More than three-quarters of the Native American Internet cigarette sites were run by Seneca Indians located on two reservations near Buffalo, New York.
  • 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 state’s 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.
  • There are no specific federal laws requiring the collection of taxes from Internet vendors. However, an existing federal law requires cigarette vendors selling across state lines to report the transactions to state tax authorities. This law is widely ignored, however, by Internet vendors.
    The Jenkins Act (Title 15, Chapter 10A Sections 375-378) is a federal law from 1949 that requires tobacco vendors selling to customers out-of-state to register with the tax authorities in every state in which they have customers and submit monthly reports to those tax authorities including customer names, contact information, and purchase information so that the state tax authorities can collect any unpaid excise taxes from those customers. A 2002 investigation by the U.S. General Accounting Office (GAO) reported that most websites openly violate the Jenkins Act and that there have been no successful prosecutions of noncompliant Internet cigarette vendors (U.S. GAO, 2002). Although many Native American websites claim that they are not subject to the provisions of the Jenkins Act because they reside on sovereign lands, the GAO concluded that they are, in fact, obligated to comply, and the U.S. Supreme Court has ruled that the federal government can regulate Internet commerce, including tribal commerce that occurs across state lines. The issue of Jenkins Act enforcement is further complicated by the fact that this federal law does not specify whether states are authorized to enforce it. Nevertheless, after the release of the 2002 GAO report, the State of Washington successfully prosecuted a vendor for Jenkins Act violations (State of Washington v. www.dirtcheapcig.com, Inc., F. Supp. 2d 1048 (2003)), indicating that states can legitimately threaten to sue vendors for non-compliance with the Jenkins Act. However, as the issue of state authority to enforce the Jenkins Act is still unclear, a federal policy and enforcement plan is needed.

    The GAO report was based on the advertised sales practices of Internet cigarette vendors. A study conducted in 2003 assessed the actual rate of compliance with the Jenkins Act. After purchasing cigarettes from 101 Internet cigarette vendors, the researchers asked the state taxation authority, the California Board of Equalization, what proportion of the vendors filed the required reports. None of the 101 vendors included in the study filed a Jenkins Act report (Ribisl, Williams, & Feighery, unpublished data).

    In recent years, there have been several attempts at federal legislation to mandate the collection of taxes from Internet tobacco sales such as 2004’s Prevent All Contraband Tobacco Act (PACT ACT, S. 1177) and H.R. 2824. Unfortunately, concerns raised by common carriers such as UPS, kept this legislation from moving forward. With continuing opposition by common carriers and other political obstacles, no federal laws have been passed by Congress mandating the collection of taxes from Internet cigarette vendors (Lindblom, 2006).
  • Some states are beginning to take action. Several have passed laws regulating the collection and remittance of excise taxes, requiring customers to pay taxes from cigarettes purchased online. Others have altogether banned shipping/delivery of cigarettes to consumers, and state Attorneys General have worked to develop promising new strategies to address the threat of Internet cigarette sales.
    By the end of 2006, thirty-four states had enacted provisions aimed at preventing tax evasion from Internet cigarette sales, according to an analysis undertaken as part of the American Lung Association SLATI (State Legislated Actions On Tobacco Issues) program (Chriqui, in press). Thirty of the thirty-four states included provisions requiring vendor compliance with the Jenkins Act and/or state tax collection and reporting. Four states--New York, Arkansas, Maryland, and Connecticut--passed laws banning the shipping/delivery of cigarettes to consumers altogether. A handful of states (e.g., Michigan, Illinois, Connecticut, and Pennsylvania) are actively collecting unpaid taxes on Internet cigarette sales reported under the Jenkins Act (Hunter, 2005).

    In 2005, the Bureau of Alcohol, Firearms, Tobacco, and Explosives and several state Attorneys General worked together to alter the manner in which Internet cigarette vendors do business in a manner that previous regulatory approaches had been unable to accomplish. In March 2005, they reached a voluntary agreement with the major credit card companies and PayPal to cease processing transactions for Internet cigarette sales, effectively cutting vendors off from their primary form of processing payments, leaving them with few available payment options other than personal checks and money orders. In October 2005, they reached a voluntary agreement with UPS, which joined DHL and FedEx in refusing to ship cigarettes to retail consumers, leaving the U.S. Postal Service as the only viable shipping option for Internet cigarette vendors. The voluntary nature of these landmark agreements avoided the potential pitfalls of the legislative process that has prevented federal legislation from being enacted to date to serve the purposes of these two agreements. Furthermore, because these agreements are with the payment processors and shipping companies (not state and federal governments), they are not subject to the same jurisdiction issues experienced when attempting to enforce state and federal regulations with vendors located on Native American reservations and overseas.
  • Tax evasion from Internet cigarette sales can deprive government and public health programs of much-needed revenue. Cigarette excise taxes are used to fund government programs, including vital public health programs (e.g., cancer screening and tobacco prevention and control programs).
    There are no published, peer-reviewed estimates of the extent of tax revenue lost from Internet cigarette sales. Reports by industry analysts, which have not been subjected to scientific peer review, estimate that states could lose between $552.4 million and $4 billion in yearly state and local government tax revenue due to the sale of untaxed cigarettes on the Internet (U.S. GPO, 2003; Rubin, 2001). It is likely that the actual amount of lost revenue to states is lower than these industry estimates, but is still quite significant. This is lost revenue that could be used for funding state efforts to reduce cancer deaths in the 19 states that commit a portion of their excise tax revenues to cancer screening and tobacco prevention and control programs (NCI, 2004). Given the proven impact of cigarette excise taxes in generating revenue and reducing smoking, it is essential to keep the policies in place while finding ways to prevent tax evasion from Internet sales.
  • The availability of lower-cost, tax-free cigarettes online undermines the public health benefit of raising cigarette taxes to curb smoking rates. Smokers living in states and cities with high cigarette excise taxes are more likely to purchase cigarettes online than smokers in low tax jurisdictions.
    Decades of econometric studies have confirmed that raising cigarette prices effectively reduces smoking rates by motivating current smokers to quit, and deterring non-smokers from starting (U.S. DHHS, 2000; Zaza, 2005). The availability of lower-cost, tax-free cigarettes online undermines the public health benefit of raising cigarette taxes to curb smoking rates.

    Studies show that increasingly more adult smokers in the U.S. are purchasing cigarettes online, with the proportion buying their cigarettes online more than doubling from 0.6% to 1.3% between 2002 and 2003 (Hyland, 2006). Studies using data from the National Cancer Institute’s community intervention trial for smoking cessation (COMMIT) indicate that the percentage of people buying cigarettes online is higher in states with higher excise taxes (Hyland, Apr. 2005). In New Jersey, for example, rates increased from 1 percent in 2000 to almost 7 percent in 2002, most likely in response to New Jersey’s cigarette excise tax increase in 2001 (Hrywna, 2004). After that state’s 2002 cigarette excise tax hike, the prevalence of adult smokers reporting ever having bought cigarettes online increased by more than 500 percent, and the prevalence of adult smokers reporting usually purchasing their cigarettes online increased by nearly 300 percent (Hrywna, 2004).

    When cigarette prices increase, smokers who are not motivated to quit seek out cheaper prices. In the COMMIT study, 59 percent of smokers reported trying to avoid high cigarette prices. In a study of New York smokers, 68 percent who paid full price reported they had attempted to quit, compared to only 44 percent of smokers who paid lower-tax prices (Hyland, Jun. 2005). The International Tobacco Control Survey also found that purchasing cigarettes from low or untaxed sources decreases the likelihood of making a quit attempt (Hyland, 2006). Hrywna and colleagues (2003) found that smokers who buy cigarettes online are older, more addicted, and less likely to have attempted to quit in the past year. These studies confirm that Internet cigarette sales provide price-sensitive smokers with easy access to cheaper cigarettes. As a result, older, more addicted smokers who would benefit the most from quitting when prices increase, continue to smoke.
  • Internet cigarette vendors do a poor job of preventing cigarette sales to minors. Most Internet vendors will sell to underage youth without properly verifying their age.
    Age verification procedures employed by most Internet cigarette vendors do not adequately prevent minors from purchasing cigarettes online. For most youth, locating an ICV website would be as easy as turning on a computer. Jensen et al found that 96.7% of minors aged 15 to 16 were able to find an Internet cigarette vendor and place an order in less than 25 minutes, with most completing the order in seven minutes (Jensen, 2004). While 83 percent of vendors include minimum age warnings on their home pages, only 26 percent feature them at the top of the page where they can be viewed without scrolling, the prevailing standard for Web design (Ribisl, 2007). Therefore, many of these age warnings are likely missed by the users.

    Furthermore, there is no standard method of online age verification. Internet cigarette vendors most commonly use lax self-age verification methods. One study found 48.9 percent of Internet vendors asked users to confirm they were of legal age by merely checking a box or submitting their order, 14.8 percent asked customers to type in a birth date. In contrast, only 6.8 percent claimed to use more rigorous age verification methods, such as requiring submission of a photo ID at delivery (Ribisl, 2007). Some policy makers and vendors think that youth buying cigarettes online is not a major concern because youth generally don’t have access to credit cards for online purchases. However, in today’s online age, far more youth than ever before have access to credit cards and credit-card-like payment methods for online purchases. In addition to those youth whose parents allow them to use the parent’s credit card for online purchases or have their credit card company issue cards with the youth’s name on it, many youth have access to debit cards and/or prepaid debit cards such as VisaBuxx, intended for use by teens. The 2002 National Consumers League Teens and Financial Education survey found that 8% of teens have debit cards, and 20% have checking accounts (and could therefore get a debit card if desired) (National Consumers League, 2003). Nevertheless, we should note that given the recent Attorneys General agreement described earlier prohibits credit cards from being used to pay for cigarettes from Internet cigarette vendors.

    There is clear evidence from several studies that most Internet cigarette vendors will sell to buyers without verifying their age. In a 2001 purchase survey (Ribisl, 2003), youth ages 11-15 were successful in 76 of 83 attempts to purchase cigarettes from 55 Internet vendors in 12 states (that is a 92 percent overall success rate). A 2002 purchase survey found that college students were able to buy cigarettes from 20 of 32 (71 percent) Internet vendors without providing proof of age (Bryant, 2002). In a 2004 study, 29 of 30 youth ages 15-16 (97 percent) were able to find an Internet cigarette vendor and place an order on their own in under 20 minutes, and 23 of the youth (77 percent) successfully received their orders, with 91 percent of the packages delivered without requests for proof of age (Jensen, 2004). Most recently, a purchase survey assessing compliance with California’s law designed to prevent youth access to cigarettes from Internet vendors, found that none of the 101 vendors in the sample verified the age of the buyer in accordance with California’s law (Williams, 2006).
  • Although few youth are currently buying cigarettes online, their numbers are rising. As access to cigarettes becomes more restricted at retail stores, more teens may attempt to buy cigarettes online.
    Several studies have found that a growing number of youth are purchasing cigarettes online. A study conducted in 1999-2000 found that among current smokers under 18 years of age (n=1,689), 2 percent reported attempting to purchase cigarettes online (Unger, 2001). Those who attempted purchases were younger, smoked more frequently, and reported greater perceived difficulty in obtaining cigarettes from commercial and social sources. In the 2001 National Household Survey on Drug Abuse, more than 3 percent of teenage smokers ages 12-17 reported buying cigarettes from the Internet in the previous 30 days (SAMSHA, 2002).

    A 2001 study of 1,323 ninth grade smokers in three Western New York counties found that more than 2 percent reported ever having purchased cigarettes online, and nearly 9 percent intended to purchase cigarettes online in the next year (Abrams, 2003). Youth who had been refused cigarette sales at retail outlets in the previous month were more than three times more likely to purchase cigarettes online than youth who had successfully purchased cigarettes at a retail outlet in the past month. In a follow-up survey in 2005, the percent of ninth grade smokers reporting ever having purchased cigarettes online had risen to more than 6 percent, with more than 5 percent having purchased online in the past 30 days. Youth smokers were 2.6 times more likely to report having purchased cigarettes online in the previous 30 days in 2005 than in 2001 (Fix, 2006).

    Although few teens are currently buying cigarettes on the Internet, the rates are increasing, especially among youth who perceive greater difficulty in obtaining cigarettes from retail outlets. As youth access to cigarettes at retail stores is increasingly restricted, the Internet, with its lax age-verification offers an easy, low-cost option for youth interested in obtaining cigarettes. And since the evidence shows that youth are buying cigarettes online, there is clearly a need for better regulation of payment for and shipping of cigarettes for online sales, and the absence of federal legislation makes this issue problematic.
 
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