Online cigarette vendor settles

The Massachusetts Department of Revenue has received what may be a $3 million break in its crackdown on smokers who buy cigarettes over the Internet to avoid paying state excise taxes.

As part of a court settlement with Attorney General Thomas F. Reilly, an online cigarette vendor called eSmokes of Reston, Va., has turned over to the state the names and addresses of Massachusetts residents who purchased more than 131,000 cartons of cigarettes between November 2003 and February of this year.

Revenue department officials estimate that eSmokes customers owe the state $1.98 million in excise taxes. With interest and penalties, the total could rise to $3 million, said Audrey Rushton, director of the Revenue Department's disclosure and administrative law unit.

The eSmokes data is the first major breakthrough in the state's pursuit of cigarette-tax evaders. Over the last three years, the revenue department has recovered $331,000 in excise taxes from Internet cigarette buyers who were tracked down through other means.

The data from eSmokes is so voluminous that Revenue Department officials say they will have to create an automated system for billing individual taxpayers. Currently, the state bills cigarette wholesalers for excise taxes. In its previous efforts to collect unpaid cigarette excise taxes directly from smokers, the agency mailed bills to residents.

The crackdown on eSmokes customers comes at a time when online cigarette vendors are reeling from regulatory efforts to curtail their sales. Reilly has sued some of them for selling to minors and failing to inform consumers that they might be liable for taxes.

In March, New York Attorney General Eliot Spitzer, working with the US Bureau of Alcohol, Tobacco, Firearms and Explosives and other state attorneys general, including Reilly, said the nation's major credit card companies had agreed to prohibit the use of their cards for illegal sales of cigarettes online.

Several online cigarette vendors have shut down as a result of the credit card agreement and others are struggling. ESmokes stopped selling cigarettes to Massachusetts residents in March and in May filed for Chapter 11 bankruptcy protection.

The Revenue Department has been trying to stem the loss of cigarette-tax revenue for several years, but until now has had limited success. Only four Internet retailers voluntarily provide the agency with the names of their Massachusetts customers under a federal law called the Jenkins Act, which requires out-of-state vendors to disclose the sale of cigarettes to anyone other than licensed wholesalers.

Many Internet retailers, particularly those on Native American reservations, say the Jenkins Act doesn't apply to them. Rushton declined to name the four vendors that are supplying the agency with customer information.

Smokers have flocked to the Internet because of low prices. In Massachusetts, retailers typically charge over $47 for a carton of Marlboros, while eSmokes and other online vendors charge $35 or less, including shipping.

Rushton said the state plans to file a legislative package this fall to help collect more unpaid cigarette excise taxes. She declined to provide details, but said, ''Some things might be a little controversial."

The state collected $424 million in cigarette excise taxes in the fiscal year ended June 30. That was down close to $2 million from a year ago and more than $25 million from the year before that, when the $1.51-per-pack excise tax took effect.

When Massachusetts raised its cigarette excise tax to $1.51 a pack in July 2002, it was the highest rate in the nation. Since then, the state has fallen into a tie for sixth place as a number of other states have increased their taxes.

Rhode Island has the highest state cigarette tax in the nation at $2.46 a pack, followed by New Jersey ($2.40), Michigan ($2), Montana ($1.70), and Alaska ($1.60). New York State charges $1.50 a pack, and New York City tacks on another $1.50 for a total per-pack tax of $3.

Bruce Mohl can be reached at mohl@globe.com.