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86–786 PDF 2003

YOUTH SMOKING PREVENTION AND

STATE REVENUE ENFORCEMENT ACT

HEARING

BEFORE THE

SUBCOMMITTEE ON COURTS, THE INTERNET, 

AND INTELLECTUAL PROPERTY

OF THE

COMMITTEE ON THE JUDICIARY 

HOUSE OF REPRESENTATIVES

ONE HUNDRED EIGHTH CONGRESS

FIRST SESSION

ON

H.R. 1839

MAY 1, 2003

Serial No. 19

Printed for the use of the Committee on the Judiciary

(

Available via the World Wide Web: http://www.house.gov/judiciary 

(II)

COMMITTEE ON THE JUDICIARY 

F. JAMES SENSENBRENNER, JR., Wisconsin, Chairman 

HENRY J. HYDE, Illinois 

HOWARD COBLE, North Carolina 

LAMAR SMITH, Texas 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

STEVE CHABOT, Ohio 

WILLIAM L. JENKINS, Tennessee 

CHRIS CANNON, Utah 

SPENCER BACHUS, Alabama 

JOHN N. HOSTETTLER, Indiana 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

JEFF FLAKE, Arizona 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

STEVE KING, Iowa 

JOHN R. CARTER, Texas 

TOM FEENEY, Florida 

MARSHA BLACKBURN, Tennessee 

JOHN CONYERS, JR., Michigan 

HOWARD L. BERMAN, California 

RICK BOUCHER, Virginia 

JERROLD NADLER, New York 

ROBERT C. SCOTT, Virginia 

MELVIN L. WATT, North Carolina 

ZOE LOFGREN, California 

SHEILA JACKSON LEE, Texas 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York 

ADAM B. SCHIFF, California 

LINDA T. SA ́ NCHEZ, California

PHILIP G. KIKO, Chief of Staff-General Counsel 

PERRY H. APELBAUM, Minority Chief Counsel 

SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY

LAMAR SMITH, Texas, Chairman

HENRY J. HYDE, Illinois 

ELTON GALLEGLY, California 

BOB GOODLATTE, Virginia 

WILLIAM L. JENKINS, Tennessee 

SPENCER BACHUS, Alabama 

MARK GREEN, Wisconsin 

RIC KELLER, Florida 

MELISSA A. HART, Pennsylvania 

MIKE PENCE, Indiana 

J. RANDY FORBES, Virginia 

JOHN R. CARTER, Texas 

HOWARD L. BERMAN, California 

JOHN CONYERS, JR., Michigan 

RICK BOUCHER, Virginia 

ZOE LOFGREN, California 

MAXINE WATERS, California 

MARTIN T. MEEHAN, Massachusetts 

WILLIAM D. DELAHUNT, Massachusetts 

ROBERT WEXLER, Florida 

TAMMY BALDWIN, Wisconsin 

ANTHONY D. WEINER, New York

BLAINE MERRITT, Chief Counsel 

DEBRA ROSE, Counsel 

DAVID WHITNEY, Counsel 

MELISSA L. MCDONALD, Full Committee Counsel 

ALEC FRENCH, Minority Counsel 

(III)

C O N T E N T S 

MAY 1, 2003

OPENING STATEMENT 

Page 

The Honorable Lamar Smith, a Representative in Congress From the State 

of Texas, and Chairman, Subcommittee on Courts, the Internet, and Intellectual Property .................................................................................................... 1

The Honorable Martin T. Meehan, a Representative in Congress From the 

State of Massachusetts ........................................................................................ 2

The Honorable Mark Green, a Representative in Congress From the State 

of Wisconsin .......................................................................................................... 3

WITNESSES 

Mr. Paul L. Jones, Director, Homeland Security and Justice, General Accounting Office 

Oral Testimony ..................................................................................................... 6

Prepared Statement ............................................................................................. 8

Mr. Henry ‘‘Hank’’ O. Armour, Chairman of the Board, National Association 

of Convenience Stores 

Oral Testimony ..................................................................................................... 17

Prepared Statement ............................................................................................. 19

Mr. Matthew Myers, President, National Center for Tobacco-Free Kids 

Oral Testimony ..................................................................................................... 28

Prepared Statement ............................................................................................. 29

Mr. Patrick Fleenor, Chief Economist, Fiscal Economics 

Oral Testimony ..................................................................................................... 37

Prepared Statement ............................................................................................. 38

APPENDIX 

MATERIAL SUBMITTED FOR THE HEARING RECORD

Letter to Paul L. Jones, Director, Homeland Security and Justice from Rep. 

Lamar Smith ........................................................................................................ 55

Letter to Rep. Lamar Smith from Paul L. Jones, Director, Homeland Security 

and Justice ............................................................................................................ 57

GAO Report No. GA–02–743, Report to Congressional Requesters, August 

2002, Internet Cigarette Sales, Giving ATF Investigative Authority May 

Improve Reporting and Enforcement ................................................................. 59

Prepared Statement of Ali Davoudi, President, Online Tobacco Retailers Association (OLTRA) ................................................................................................... 118

(1)

YOUTH SMOKING PREVENTION AND

STATE REVENUE ENFORCEMENT ACT 

THURSDAY, MAY 1, 2003

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON COURTS, THE INTERNET, AND INTELLECTUAL PROPERTY, COMMITTEE ON THE JUDICIARY, Washington, DC.

The Subcommittee met, pursuant to call, at 10:04 a.m., in Room 

2141, Rayburn House Office Building, Hon. Lamar Smith [Chairman of the Subcommittee] presiding. 

Mr. SMITH. The Subcommittee on Courts, the Internet, and Intellectual Property will come to order. We have an interesting hearing 

this morning. I will recognize myself and the Ranking Member and 

also Representative Green for our opening statements, and the entire opening statements of all members will be made a part of the 

record without objection, as well as the entire testimonies of all 

witnesses today. 

Teenagers who make it through adolescence without having 

smoked are nearly certain not to become regular smokers. Among 

adults who smoke, most report having their first cigarette before 

the age of 13. Governments at all levels have worked with those 

in the public health community to enact policies that discourage individuals from smoking cigarettes. 

Two cornerstones of our effort have been, one, strictly enforcing 

minimum age laws and, two, increasing the collection of excise, 

sales and use taxes from consumers in an effort to drive the price 

of smoking up and the demand down. 

Due to their limited incomes, underage smokers are especially 

sensitive to increases in cigarette prices. They are also among the 

most proficient users of the Internet, and they have a great incentive to seek anonymity for their purchases. Regrettably, a new 

breed of remote sellers doing business by mail order, the telephone, 

and the Internet now promise cigarette consumers both discounted 

prices and anonymity. 

With names such as zerotaxcigs.com and zerotaxsmokes.com, and 

taxfreecigarettes.com, their activities are raising serious questions 

about the ability of governments at all levels to enforce their public 

health, youth access, and State tax policies effectively. These remote sellers have made it easier for customers to avoid paying 

taxes and for teenagers to avoid minimum age laws. 

The purpose of our hearing today is to consider H.R. 1839, the 

‘‘Youth Smoking Prevention and State Revenue Enforcement Act,’’

which was introduced by Representative Mark Green of Wisconsin. 

2

Representative Green’s bill authorizes State attorneys general to 

bring a civil action seeking injunctive relief in an appropriate U.S. 

district court for violations of the Jenkins Act. 

Since enacting the Jenkins Act in 1949, our Federal policy has 

been to support State and local efforts to tax and regulate the sale 

of cigarettes in interstate commerce. 

The Jenkins Act requires any person selling cigarettes for profit 

in interstate commerce to report to State tobacco tax administrators the name and address of the persons to whom the cigarettes 

were shipped and the brands and quantities shipped. 

The Act’s purpose is to enable State authorities to have an effective mechanism for recovering excise, sales and use taxes from consumers who seek to avoid paying State taxes by purchasing cigarettes from low-tax or no-tax jurisdictions. One projection is that U.S. Internet tobacco sales will exceed $5 billion in 2005 and that States will lose $1.4 billion in State tax 

revenues as a result. Representative Green’s legislation enables 

States to enforce compliance with their public health, youth access, 

and cigarette tax policies, thus both increasing States’ revenue and 

reducing health care risks and costs. 

I would like the record to show and reflect that representatives 

from two online tobacco retailers were asked to testify, and it is no 

surprise perhaps that they declined to do so, but we do look forward to hearing from the witnesses who are here today. 

I will now recognize the Ranking Member, Mr. Meehan of Massachusetts, for his opening statement. 

Mr. MEEHAN. Thank you, Mr. Chairman, and I want to thank 

you for scheduling these hearings. As you know, I have been working on Internet and mail order tobacco sales for 5 years. I certainly 

appreciate the willingness to address this issue. I also want to 

thank Congressman Green for offering to work together on this 

issue. We have had some constructive discussions about H.R. 1839, 

and I am convinced that he understands the need for an effective 

solution to the problem of tax avoidance in connection with remote 

sales of tobacco products. 

I would like to be able to support H.R. 1839, but I cannot do so 

in its current form. I have drafted my own version of the bill, but 

I have not introduced it because I didn’t want to preempt Mr. 

Green or this hearing. I hope that we will be able to reach an 

agreement on a strong bipartisan bill. 

My basic concern is that H.R. 1839 does not do enough to 

strengthen the Jenkins Act, which already normally requires cigarette distributors to comply with the tax laws of the States where 

they send their products. If we don’t close the loopholes and 

strengthen the weaknesses that have made the Jenkins Act completely ineffective, we will not be accomplishing much but simply 

passing a new version of the law. 

Coalition for Tobacco Free Kids will outline some of the specific 

provisions that need to be addressed to make sure that H.R. 1839 

gets the job done, but I will highlight a few areas that I think are 

particularly important. The first problem is that H.R. 1839 contains no felony provision or increased fines. In a report issued last 

year the GAO noted that prosecutions under the Jenkins Act are 

extremely rare because U.S. attorneys have little interest in prosVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00006 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
3

ecuting misdemeanors. Retailers who rely on the Internet to generate sales are largely fly-by-night operations. Injunctive relief is 

meaningless against these sellers because they simply close up 

shop and then start over under a new name. The idea of giving 

States the ability to bring civil claims against other out-of-state 

sellers in Federal court is a step in the right direction, but is unlikely to have much practical effect when defendants have nothing 

at risk but the tax money that they should have paid in the first 

place. The credible threat of criminal prosecution, backed up by 

meaningful penalties, including substantial fines and imprisonment, is essential in order to make this bill work. 

The second issue I want to point out is that H.R. 1839 covers 

only cigarettes. I do not think there is any logical reason to leave 

a loophole for Internet mail order smokeless tobacco such as chew 

and snuff. 

The third concern or set of concerns I want to raise is that H.R. 

1839 includes a number of drafting problems that appear minor 

and may have unintended consequences. I know that Congressman 

Green has been working diligently to finish his draft of the bill in 

time for this hearing, but these issues will also need to be addressed. 

For example, I think H.R. 1839 is intended to establish the right 

of States to sue tobacco sellers and distributors for the failure to 

obey State tax laws, but it is not entirely clear from the language 

whether the States would be entitled to hold a seller or distributor 

responsible for refusing to collect taxes that they are owed by consumers, such as excise tax. If States are forced to sue individual 

consumers for tax evasion, the bill is simply not going to be effective. 

I hope that we can rework some of these areas and provisions in 

1839 to make sure that it achieves its intended goals. I am optimistic that together we will be able to produce a strong bipartisan 

bill that could pass both Houses of Congress and solve the problem. 

Thank you, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Meehan. The gentleman from Wisconsin, Mr. Green, is recognized for his opening statement. 

Mr. GREEN. Thank you, Mr. Chairman. Thanks first for the opportunity to have the Subcommittee consider this legislation. This 

legislation addresses a growing problem in this country, the largely 

unregulated sale of cigarettes by mail, telephone, and the Internet. 

As you have already heard, these remote sales usually occur across 

State lines and result in cigarettes being delivered directly to someone’s door while evading State laws, sales to children and sales 

taxes. 

I want to acknowledge my colleague and friend, Congressman 

Meehan. He has been a leader on this subject and I admire his 

work very much and I do want to work with him. I am hopeful that 

we can produce soon a product that will be effective. My bottom 

line is to get something done that will work. 

This legislation will give State attorneys general the tools they 

need to enforce their laws against habitual evasion by remote sellers. My bill will allow attorneys general to bring suit in Federal 

court against all remote sellers. 

4

This is a problem that is getting out of hand. Anyone today can 

get on the Internet, run a quick search for tax free cigarettes or 

a variation of that phrase and find literally hundreds of Web sites 

offering cigarettes for sale. In fact, there is a special Internet 

search engine set up just for Internet tobacco sites. With nothing 

more than a credit or debit card our children can access these sites, 

buy cigarettes and have their cigarettes delivered right to their 

door without an ID. This will only get worse because, as we all 

know, children are among the most frequent and proficient users 

of the Internet. 

States are largely powerless to stop those rampant violations of 

the minimum age laws because the businesses selling to their children are outside of their borders or otherwise outside the reach of 

State law. The New York Department of Consumer Affairs has 

managed to get traditional retail sellers of cigarettes to an 85 percent compliance rate with minimum age laws. But the department 

has found its efforts literally gutted by the proliferation of remote 

sellers that it cannot regulate. 

At the same time, as has been mentioned, States are losing taxes 

on these sales. One of our witnesses today, economist Patrick 

Fleenor, will estimate that State governments will lose over $552 

million in sales and excise tax revenue this fiscal year and this figure will grow to 1.2 billion by fiscal year 2005. My home State of 

Wisconsin is expected to lose 9 million this year and over $26 million in 2005 at a time when my State, like so many others, is suffering and is challenged in trying to balance its books. 

The Jenkins Act, which first became law in 1949, requires remote sellers of cigarettes to report their sales to the States so that 

States can collect the taxes. This is a great idea. The problem is 

that remote sellers don’t comply with the law and no one has been 

able successfully to enforce it. 

The United States General Accounting Office recently reviewed 

147 Internet sites that sell cigarettes and not a single one of those 

sites complied with the Jenkins Act. In fact, many of these sites 

openly promote their law breaking by offering tax free cigarettes 

and say they, quote, don’t report sales. The Web addresses, as, Mr. 

Chairman, have you pointed out, clearly reveal the sellers’ intentions. These sites include notaxcigarettes.com and zerotaxcigarettes 

among many others. 

In light of these open violations of the law, the GAO looked at 

State efforts to enforce the Jenkins Act and they didn’t find very 

much. Why? Well, the GAO heard from nine States on this and 

every one of them said that they did not have the necessary legal 

authority. The GAO also looked at Federal enforcement efforts and 

found that, quote, no Internet cigarette vendors have been penalized for violating the act nor had any penalties been sought for violators. These lost funds again loom even larger now that so many 

States are laboring to find ways to cut their budgets to make up 

for revenue shortfalls. 

Obviously the public health consequences are also very important. Many States increase cigarette costs through State excise 

taxes for the stated purpose of deterring smoking. We lose those 

benefits of these taxes when we allow large volumes of sales to 

evade those tax schemes. 

5

Remote sales of cigarettes are also hurting local economies. Local 

small businesses cannot compete with the legal tax free sales by remote businesses. 

Mr. Chairman, we should not allow the situation to continue. 

The rampant evasion of State law is precisely the type of issue that 

Congress should address, and the best way for to us do this is to 

give States the tools they need to effectively enforce their laws 

against all remote sellers. 

This legislation will do this and do it the right way. It will keep 

the authority to enforce State and local laws in the hands of State 

law enforcement. It avoids creating an unfunded mandate, avoids 

creating a new Federal bureaucracy and it avoids interfering with 

or outlawing legitimate commerce. 

Mr. Chairman, I hope you will agree with me that this is a problem and these illegal cigarette sales to children is an issue that we 

must take up as a Committee. Again, I do want to work with some 

who are currently opposing this legislation. I think there are some 

things that we can do. I think we all agree that the bottom line 

is to pass something that will work and work soon. 

Mr. Chairman, thank you again for holding this hearing and I 

appreciate the willingness of our witnesses to come and testify 

today. 

Mr. SMITH. Let me thank other members who are here for their 

attendance as well. Mr. Jenkins of Tennessee, Mr. Keller of Florida, Mr. Forbes of Virginia and also Mr. Boucher of Virginia as 

well. This Subcommittee consistently has interested Members and 

good attendance. I am very pleased that that continues. 

Let me proceed now to introduce our witnesses. And our first 

witness is Paul Jones, the Director of Homeland Security and Justice at the U.S. General Accounting Office. Mr. Jones is responsible 

for the management of programs and issues in the U.S. Department of Justice and the Department of Homeland Security. Mr. 

Jones graduated with honors from Elizabeth City State University 

with a B.S. in mathematics and earned a Master’s Degree in public 

administration from George Washington University. 

The next witness is Hank Armour, President and Chief Executive 

Officer of two corporations, West Star and Epoch, with convenience 

stores in the Northwest. Dr. Armour founded West Star in 1982 

and Epoch in 1988. Mr. Armour earned a B.A. and Ph.D. in economics and an MBA from Stanford. He also holds a degree from 

the London School of Economics. 

Our next witness is Matthew Myers, president and CEO of the 

Campaign for Tobacco Free Kids, a non-profit organization established to focus attention on reducing tobacco use among minors. 

Mr. Myers formerly represented the Coalition on Smoking and 

Health, which was comprised of the American Cancer Society, the 

American Lung Association, and American Heart Association. He 

holds a B.A. from Tufts and a J.D. from Michigan. 

Our last witness is Patrick Fleenor, a Washington-based economic consultant who specializes in taxation. Prior to opening his 

own practice he was a senior economist with the Joint Economic 

Committee. He has also served as Chief Economist for the Tax 

Foundation, one of the nation’s oldest think tanks. Mr. Fleenor 

holds a B.A. from Albion College and an M.A. in economics from 

6

George Mason, and an M.A. in political science from American University. 

Welcome to you all. As I mentioned to you a while ago, all your 

complete statements will be made a part of the record, and I will 

remind you that we would like for you to hold your opening statements to 5 minutes so that we will have plenty of time for questions. 

I should also mention to members that are here that we are expecting a vote on the House floor on the rule somewhere around 

11 to 11:15 and will hope to be finished with the hearing by that 

time. 

Also to the witnesses, I don’t know whether to apologize or just 

explain, but what is new to you is new to us as well. This is the 

first time we have seen that screen in the front. Mr. Myers, I am 

sorry that kind of blocks us. I can’t see your name tag there but 

we will make do. This is also new up here. I want you to know this 

screen is off but I could be watching a basketball game and I am 

not. And also new is the corner arrangement over there. All good 

reasons for all these new arrangements, but nevertheless still may 

take some getting used to. 

Thank you all for being here. 

Mr. Jones, we will start with your testimony. 

STATEMENT OF PAUL L. JONES, DIRECTOR, HOMELAND 

SECURITY AND JUSTICE, GENERAL ACCOUNTING OFFICE 

Mr. JONES. Thank you, Mr. Chairman. Mr. Chairman, Members 

of the Subcommittee, I am pleased to be here today to discuss our 

review—I forgot to press the button. New technology. I am pleased 

to be here today to discuss our review of the state of compliance 

by Internet cigarette vendors with the Jenkins Act. 

The Internet offers consumers the option and convenience of buying cigarettes from vendors in low tax States without having to 

physically be there. The Jenkins Act requires any person who sells 

and ships cigarettes across a State line to a buyer other than a distributor to report the sale to the buyer’s State tax tobacco administrator. The act establishes misdemeanor penalties for violations. 

Compliance with this Federal law by cigarette sellers enables 

States to collect excise taxes. 

My prepared statement discusses the results of our review of 

Federal efforts to enforce compliance with the Jenkins Act. I appreciate having my statement included for the record. 

The results of our review were requested by Congressman Meehan and Congressman Conyers. The results of that review was reported in August of 2002. 

In my oral statement I would briefly like to make three points. 

First, we determine that most Internet vendors do not comply with 

the Jenkins Act or notify their customers of their responsibilities 

under the act. We identified 147 Web site addresses for Internet 

cigarette vendors based in the United States. None of these Web 

sites displayed information suggesting that they comply with the 

act. Conversely, 78 percent of these Web sites indicated that the 

vendors do not comply with the act. They posted such statements 

as we do not comply with the Jenkins Act, we do not report sales 

to State tax authority, and we keep customer information private. 

7

Twenty-two percent provided no indication of whether they complied with the act. 

Internet vendors cited the Internet Tax Freedom Act and privacy 

laws among reasons for not reporting cigarette sales to State authorities. A number of native Americans claim exemption from the 

act based on sovereign nation status. Our review indicated neither 

the Internet Tax Freedom Act or privacy laws exempt cigarette 

vendors from Jenkins Act compliance. Additionally, nothing in the 

Jenkins Act or its legislative history implies that Native American 

cigarette sales are exempt. 

Second, State and Federal officials are concerned that as Internet 

sales continue to grow, particularly as State cigarette taxes increase, so will the amount of lost State tax revenue due to noncompliance. One research firm estimated that Internet tobacco 

sales in the United States will exceed $5 billion in 2005 and that 

States will lose about $1.4 billion in tax revenue from these sales. 

California recently estimated that its tax loss revenue due to noncompliance with the Jenkins Act is approximately $22 million annually. 

And third, amid these growing concerns the Federal Government 

enforcement of the Jenkins Act has been limited. The Attorney 

General of the United States is responsible for supervising the enforcement of Federal laws, including the Jenkins Act. However, the 

Justice Department and the FBI were unable to identified any investigations of Internet cigarette vendors or other actions to enforce the act. The Bureau of Alcohol, Tobacco and Firearms, which 

enforces Fed excise tax and criminal laws and regulation related to 

tobacco products, has ancillary authority to enforce the Jenkins 

Act. ATF officials identified only three investigations since 1997 of 

Internet vendors for cigarette smuggling and violating the Jenkins 

Act. 

States have taken action to promote Jenkins Act compliance but 

results have been limited. We concluded that States are hampered 

in their attempts to promote Jenkins Act compliance because they 

lack authority to enforce the act. 

Congressman Green’s bill, H.R. 1839, gives States authority to 

bring civil action against Jenkins Act violators. This could lead to 

greater involvement of States in the enforcement of the Jenkins 

Act. Hence, this could enhance States’ effort to collect excise taxes. 

To improve the Federal Government’s effort in enforcing the Jenkins Act and to promote compliance with the act by Internet vendors, we suggest in our report that Congress consider providing 

ATF with primary jurisdiction to investigate violations of the act. 

Since our report was issued, ATF was transferred to the Department of Justice. Now it may be possible for the Attorney General 

to administratively transfer Jenkins Act enforcement authority 

from the FBI to ATF without involving the Congress. We believe 

that this possibility deserves further investigation on the part of 

the Department of Justice. 

This concludes my oral statement. I would be happy to respond 

to questions from the Committee. 

[The prepared statement of Mr. Jones follows:]

8

1 5 U.S.C. § 375–378. 2Online 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. 3Since 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. 4We 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. 

PREPARED STATEMENT OF PAUL L. JONES

I am pleased to be here today to discuss our work on the extent of compliance 

by Internet cigarette vendors with the Jenkins Act.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.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.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 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.

9


Jones1.eps
10

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. 6With 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. 

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.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.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 ConVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
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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). 8The 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.

traband 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).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.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 auVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00015 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
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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. 

thority 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.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.

13


Jones2.eps
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10DOJ 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. 11The 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 outof-state Internet vendors during the period of May 1999 through Sept. 2001. 

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.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 2001.11

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 

15

12The 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. 13Two 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.

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.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.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. 

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 reportVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00019 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786

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14Fifty-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. 15We were either unable to reach representatives of the remaining 25 vendors we selected 

to conduct structured interviews, or they declined to answer questions. 16The 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. 17P.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. 

ing 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.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 5.15 One of the 5 representatives said that the vendor recently started to file Jenkins Act sales reports with one state.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 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.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. 

17

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. SMITH. Thank you, Mr. Jones. Without objection, we will also 

make the entire GAO report a part of the record as well. 

Mr. Armour. 

STATEMENT OF HENRY ‘‘HANK’’ O. ARMOUR, CHAIRMAN OF 

THE BOARD, NATIONAL ASSOCIATION OF CONVENIENCE 

STORES 

Mr. ARMOUR. Good morning, Mr. Chairman. My name is Hank 

Armour and I am a small businessman from Olympia, Washington. 

As President and CEO of West Star Corporation, I own and operate 

24 retail facilities in Washington State and California. 

I would first like to thank Representative Green for tackling such 

an important issue in this legislation, the Youth Smoking Prevention and State Revenue Enforcement Act. I also would like to thank 

Members of the Subcommittee for inviting me to testify regarding 

this very important issue facing retailers, States and children 

across this country. I am testifying today on behalf of the National 

Association of Convenience Stores, NACS, where I sit as chairman 

of the board. I am a past president of the Washington Association 

of Neighborhood Stores and currently serve on its executive committee. 

There are over 134,000 convenience stores operating in the 

United States and the District of Columbia, and they employ over 

1.5 million Americans. Tobacco sales are highly important components of the convenience store industry, and while controversial tobacco is a legal product and one that is very important to our economic viability. 

The convenience store industry’s position is that minors should 

not consume tobacco and that no retailer should sell tobacco to minors. That is why the convenience store operators across the country have spent time and money trying to prevent these illegal sales. 

My company has instituted strict measures to ensure that no minor 

can purchase an age restricted product. A detailed list is included 

in my submitted testimony, but I want to take just a few minutes 

to review some of the measures that we have instituted. 

18

They include training sales associates in the ‘‘We Card’’ program 

on the very first day of employment. We recertify every sales associate every 6 months. We prominently post ‘‘We Card’’ signs and 

decals in all of our stores. We conduct monthly internal sting operations to ensure compliance with our age restricted product sales 

policies. We have reprogrammed our cash registers to prompt sales 

associates to check for ID every time an age restricted product is 

scanned. And finally we have a zero tolerance policy in which we 

immediately terminate a sales associate if the sales associate sells 

cigarettes to a minor. 

As you can see, we take our responsibility very seriously. While 

no system is perfect, through these training efforts retailers have 

been able to significantly increase their compliance rate with regard to age verification at point of sale. 

Brick and mortar retailers such as myself who have spent time 

and money on these responsible tobacco retailing efforts are at an 

unfair disadvantage to Internet, mail order, and other remote retailers. I am not asking for a weakening of our enforcement obligation, I am asking for our obligation to apply equally to all tobacco 

retailers. In my view, these remote retailers are frankly irresponsible. For many of these remote sellers, especially Internet retailers, age verification is simply a joke. As you can see from the Web 

sites I have submitted with my testimony, all a child has to do is 

click on a link verifying that he or she is over 18 years old, and 

the child can buy cigarettes. This lackadaisical age verification 

wouldn’t fly in Washington State and I don’t think any other State 

would allow a convenience store owner to place a sign in the store 

that says by asking for cigarettes you are verifying that you are 18 

years old. 

According to Clara York, an employee of cigarette retailers Seneca Cigarettes, the ultimate responsibility for making sure teenagers do not purchase cigarettes lies with parents, who should 

make an effort to police the Web sites their children are visiting. 

Unlike Clara York, as a responsible tobacco retailer I believe it is 

my responsibility and the responsibility of my sales associates to 

ensure that kids don’t purchase cigarettes at my retail locations. 

Beyond age verification remote sellers are evading tax obligations. I operate stores in Washington State and California. Both 

States have high excise taxes. Washington has an excise tax of 

$14.25 per carton. Because they don’t collect State taxes remote 

sellers can offer their cigarettes for almost $15 less per carton than 

what I can. When you add in sales tax that amount approaches $20 

per carton. And like many other States, Washington is currently 

considering another $5 per carton increase in State excise taxes. As 

more and more States raise their State excise taxes, smokers will 

be driven to these remote sellers for cheaper cigarettes. 

Mr. GREEN. [Presiding.] If you could summarize your testimony. 

I know your light isn’t operating there. 

Mr. ARMOUR. While the legislation being considered today will 

not address every problem relating to cigarette sales, it is a good 

place to start. We can make a big difference by addressing the 

egregious violations committed every day by Internet and other remote retailers. All tobacco retailers should have to play by the 

same rules. And Mr. Green, your legislation will accomplish this 

19

goal. This is a fair and balanced approach to a growing problem in 

our society. I thank you, Mr. Green, for introducing the Youth 

Smoking Prevention and State Revenue Enforcement Act and 

would be happy to answer any questions. 

[The prepared statement of Mr. Armour follows:]

PREPARED STATEMENT OF HENRY O. ARMOUR

Good morning, Mr. Chairman. My name is Hank Armour, and I am a small businessman from Olympia, Washington. As president and CEO of West Star Corporation, I own and operate twenty-four retail facilities in Washington State and California. 

I would first like to thank Representative Green for tackling such an important 

issue in his legislation, the Youth Smoking Prevention and State Revenue Enforcement Act. I also would like to thank members of the subcommittee for inviting me 

to testify regarding this very important issue facing retailers, states and children 

across this country. 

I am testifying today on behalf of the National Association of Convenience Stores 

(‘‘NACS’’), where I sit as Chairman of the Board. I am a Past President of the Washington Association of Neighborhood Stores and currently serves on its Executive 

Committee. 

There are over 134,000 convenience stores operating in the United States and the 

District of Columbia that employ over 1.5 million Americans. Tobacco sales are a 

highly important component of the convenience store industry. Convenience stores 

sell more than half of the single packs of tobacco sold in the United States in more 

than 20 million transactions per day. Such sales, on average, constituted nearly 40 

percent of the in-store sales at retail locations in 2001. While controversial, tobacco 

is a legal product and one that is important to the economic viability of the convenience store industry. 

The convenience store industry’s position is that minors should not consume tobacco and that no retailer should sell tobacco to minors. That is why convenience 

store operators across the country have spent time and money trying to prevent tobacco these illegal sales. These prevention efforts include employee training, signage, company-operated stings, incentives for employees, and enforcement of company policies. Some retailers have even installed electronic age verification (EAV) 

devices to help eliminate these sales. My company has instituted the following 

measures to ensure that no minor can purchase an age- restricted product from my 

stores:

• On the first day of employment a sales associate is trained in the We Card 

program and is fully informed of our zero tolerance policy towards the sale 

of cigarettes to minors.

• Throughout the first two weeks of employment sales associates complete computer based training modules on a daily basis including one on the sales of 

age-restricted products.

• Every six months sales associates complete a re-certification computer based 

training module dealing with the sales of age-restricted products.

• We Card signs and decals are prominently posted in all of our stores.

• We conduct on a monthly basis internal sting operations to insure that sales 

of age-restricted products are been made appropriately.

• We publicize appropriate ID checking during sting operations in our monthly 

newsletter.

• We have programmed our cash registered to prompt the sales associate to 

check for ID every time an age restricted product is scanned for sale.

• And finally, as I mentioned earlier, we have a zero tolerance policy towards 

the sale of age-restricted products to minor in which we immediately terminate a sales associate if they sell such products to a minor.

As you can see, we take our responsibility very seriously. 

In order to assist in the elimination of tobacco sales to minors, retailers, wholesalers and manufacturers formed in 1996 the Coalition for Responsible Tobacco Retailing. This Coalition developed the ‘‘We Card’’ training program, which provides 

education and training to help retailers prevent underage tobacco sales. The program includes development and disseminations of retailer best practices to tobacco 

retailers across the country. The ‘‘We Card’’ training materials include signage, 

training videos, training guides, posters, interactive on-line training, and daily reVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00023 Fmt 6633 Sfmt 6621 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
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minder calendars. Nearly 800,000 ‘‘We Card’’ kits were distributed to retailers nationwide between 1996 and 2001. ‘‘We Card’’ offers on average 200 classroom training sessions that train almost 10,000 retailers annually. From 1996 to 2001, nearly 

60,000 retailers underwent ‘‘We Card’’ classroom training and they, in turn, trained 

more than 700,000 employees. While no system is perfect through these training efforts, retailers have been able to significantly increase their compliance rates with 

regards to age verification at point of sale. 

Brick-and-mortar retailers, such as myself, who have spent time and money on 

these responsible tobacco-retailing efforts are at an unfair disadvantage to Internet, 

Mail order and other remote retailers. We pay to train our employees, we get stung 

and have to pay fines if an illegal sale is made, and these remote sellers have none 

of these obligations. I am not asking for a weakening of our enforcement obligation, 

I am asking for our obligations to apply equally to all tobacco retailers. In my view, 

these remote retailers are frankly irresponsible. A good majority do not have a consistent or reliable age verification processes and should be made to conform with 

state tobacco retailing regulations. For many of these remote sellers, especially 

those Internet retailers, age verification is a joke. As you can see from the websites 

I’ve submitted with my testimony, all a child has to do is click on a link verifying 

and that he/she is over 18 years old and the child can buy cigarettes. This lackadaisical age verification wouldn’t fly in Washington State, and I don’t think any other 

state would allow a convenience store owner to place a sign in the store that states, 

‘‘By asking for cigarettes you are verifying that you are 18 years old.’’ According to 

Clara York, an employee of cigarette e-tailer Seneca Cigarettes, ‘‘the ultimate responsibility for making sure teenagers do not purchase cigarettes, lies with parents 

who should make an effort to police the Web sites their children are visiting.’’ As 

a responsible tobacco retailer I believe it is my responsibility and the responsibility 

of my sales associates to ensure kids don’t purchase cigarettes at my retail locations. 

Beyond age verification, remote sellers are evading their tax obligations. I operate 

stores in Washington State and California - two states that have high excise taxes. 

Both states have excise taxes that are close to $1.50 per pack. Because they don’t 

collect states taxes, remote sellers can offer their cigarettes for $15 less per carton 

than I can. When you add in sales taxes that such sellers do not collect, the amount 

approaches $20/carton. And Washington State, as are many other states across the 

nation, is currently considering another $5/carton increase in the state excise tax. 

As more and more states raise their state excise taxes, smokers will be driven to 

these remote sellers for cheaper cigarettes. 

Retailers in the convenience store industry cannot compete with remote sellers 

who are not complying with their tax obligations—many of which flaunt their ‘‘so 

called’’ tax-free status. It simply is not a level playing field. On its home page, Seneca Smokes states that it does not report to any state taxation or tobacco department. Brand Name Cigarettes’ advertising tells smokers to stop paying high taxes 

and start saving money today by purchasing tobacco products securely online. Just 

look at some of the website names: NoCigaretteTaxes.com, taxfreecigarettes.com, 

Cheapsmokesbymail.com, Cigs4free.com, dirtcheapcig.com, and notaxsmokes.com. 

The problem is not solely with Internet retailers, Big Indian Smoke Shop is buying 

advertisements in papers highlighting their tax-free cigarettes - the one attached to 

my testimony ran in a New York City paper right after the tobacco excise tax was 

increased. 

While the legislation being considered today will not address every problem relating to cigarettes sales, it is a good place to start. We can make a big difference by 

addressing the egregious violations committed everyday by Internet and other remote retailers. 

The convenience store industry is not asking for special treatment. We want all 

tobacco retailers to have to play by the same rules, and Mr. Green’s legislation will 

help accomplish this goal. We want a level playing field. This bill will allow attorneys general to go after those remote sellers, including those that are out-of- state 

or run by Native Americans, who are violating the law. This is a fair and balanced 

approach to a growing problem in our society. 

I thank Mr. Green for introducing the Youth Smoking Prevention and State Revenue Enforcement Act, and would be happy to answer any questions.

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Mr. GREEN. Thank you, Mr. Armour, for your testimony. 

Mr. Myers, President for the National Center for Tobacco-Free 

Kids. Welcome. 

STATEMENT OF MATTHEW MYERS, PRESIDENT,

NATIONAL CENTER FOR TOBACCO-FREE KIDS 

Mr. MYERS. Thank you. I want to start out by thanking Congressman Green for introducing this legislation and prompting this 

important dialogue. I also want to thank Congressman Meehan for 

his long time leadership on these issues and his effort to find realistic solutions to a serious problem. I am hoping that today’s hearing can in fact be the kickoff to a dialogue that will lead to the enactment of legislation that will make a real difference. We ought 

to be able to get there. 

It is clear from the discussion this morning that we agree on 

goals, that we need to do more to prevent youth access to tobacco 

products over the Internet and that we need to do something to 

give the State officials the tools to make sure that State taxes on 

tobacco products are in fact collected, both because if we fail to do 

so it undercuts efforts to reduce youth tobacco use and at this time 

more than any time in our recent past States need the funds if 

they are going to succeed. 

That is critically important. 

We agree on the problem. 

We agree that State taxes are currently being evaded on a rampant basis and that unless State officials are given new tools that 

nothing they can do will make a significant difference. 

We agree on the need for action. 

We agree that the twin problems of youth access and tax evasion 

need to be addressed, preferably in one bill, but if not in one bill, 

then in two bills with realistic solutions. 

We agree that the Jenkins Act has been a failure, not that it was 

not well intended, but it simply didn’t give the Federal and State 

officials the tools they need. 

We agree that there is a desire not to create a new bureaucracy, 

unfunded mandates or unnecessary burdensome provisions. 

We also agree that if we are going to pass legislation we must 

give the State attorneys general the tools they actually need to 

make a real difference. 

In that area, our testimony is designed to focus on what we think 

needs to be added to this bill so that the State attorneys general 

will be able to do the jobs, so they will be able to stop the hemorrhaging of State revenues. 

Let me tick off in the limited time available the key areas that 

we think need to be addressed. 

First, it is essential that this bill deal with all tobacco products. 

By leaving out some tobacco products we unintentionally encourage 

the sale over the Internet of others. 

We should create an even playing field. We are not talking about 

adding new taxes, we are only talking about making sure that people who sell tobacco products comply with the tax laws that are already in existence. 

Second, it is absolutely clear talking to law enforcement officials 

around the country that unless the bill clearly and unambiguously 

29

makes it the responsibility of the seller to collect and pay the taxes, 

then enforcement efforts will inevitably fail. We cannot go after 

every kid or person who purchases a tobacco product. No law enforcement official in the Nation has those kinds of resources. I believe it is the intent of this bill to do so. But when you compare 

the provisions of this bill with what is needed it is clear that there 

needs to be an amendment. It is a simple process to make explicit 

that it is the obligation of the seller to collect and remit those taxes 

to the State officials prior to shipping the tobacco products into the 

State if we are going to succeed. If we don’t include that kind of 

explicit language, everything else we do is doomed to failure. 

Third, we have to make sure that the State officials are given the 

tools they need to enforce those provisions. What do we mean? 

Record keeping provisions on the part of sellers, the kind of things 

that the people in state, the bricks and mortar people have to comply with. The authority of State officials to block the shipment of 

cigarettes in from repeat offenders. It won’t be enough if you simply go after the taxes time and time again. Just as you would with 

a repeat seller who violates the law, you need the authority to prohibit those people from selling tobacco products. And third, this bill 

already contains a notice provision. What it needs to make clear is 

that out of State sellers shouldn’t be allowed to sell in State until 

they have filed with the State, so that the State officials don’t have 

to go on a search for a needle in a haystack to figure out who is 

violating the law. 

Next, the enforcement provisions have to be adequate. Otherwise 

State officials won’t have the incentive to do so. What that means 

is significant enough minimum penalties just as retailers face so 

that people will have an incentive both to obey the law and the law 

enforcement officials will have the incentive to enforce the law. The 

bill I think unintentionally strips the Federal officials of its Federal 

authority. We should be adding to those. 

Last, let me just add something that Congressman Meehan said. 

We need to make sure that the criminal penalties here are real and 

that they can be enforced both by Federal and State officials. If we 

do those things, this is a law enforcement bill that can have a significant public health impact on our children and can help States 

prevent the continued hemorrhage from the illegal sale of tobacco 

products. 

Thank you. Congressman Green, we are very sincere in our offer 

that we would like to work with you to have a bill that can pass 

this Congress with bipartisan support in an overwhelming vote. 

[The prepared statement of Mr. Myers follows:]

PREPARED STATEMENT OF MATTHEW MYERS

Good morning Mr. Chairman, and members of the Committee. My name is Matthew Myers. I am the President of the National Center for Tobacco-Free Kids, a national organization created to protect children from tobacco by raising awareness 

that tobacco use is a pediatric disease, by changing public policies, and by actively 

countering the special interest influence of the tobacco industry. 

Mr. Chairman, I want to thank you for inviting me to testify on draft legislation 

by Congressman Green. While we support the concept of providing the State Attorneys General with authority to enforce violations of this Act, regrettably, we must 

oppose the legislation as drafted. 

Current Internet sales of tobacco raise two serious issues: uncontrolled sales to 

youth and evasion of state sales and tobacco related excise taxes. The twin problems 

30

of youth access and tax evasion need to both be addressed, preferably in one bill, 

but if not in one bill in two bills that contain adequate provisions to make a real 

difference. This bill as currently drafted does not deal with the problem of sales to 

young people at all; and it is our assessment that its limited proposal to address 

the problem of the evasion of state sales and tobacco related excise taxes will be 

ineffective. If its enactment prevents or forestalls the passage of legislation that effectively addresses these problems, it will do more harm than good. Even worse, it 

would undermine the longstanding, bipartisan efforts of Congressman Meehan, 

former Congressman Hansen and others to enact a comprehensive solution by giving 

the false impression that the problems had been effectively addressed. 

There are currently about 200 U.S. websites and 200 foreign-based websites that 

sell cigarettes to U.S. smokers. Effective safeguards against kids being able to purchase cigarettes via the Internet are almost non-existent. While many Internet 

websites post notices that sales to persons under 18 are illegal or not allowed, very 

few do anything at all to make sure such sales do not occur. 

Tax evasion via Internet sales of tobacco products is rampant. Internet tobacco 

prices are much lower than those in regular bricks-and-mortar retail outlets because 

Internet prices almost never include the taxes charged by retail stores. These low 

prices make Internet tobacco products attractive to both adult and underage smokers, and help to boost overall smoking levels. In addition, states lose millions of dollars each year in uncollected tax revenues. All of these problems have been compounded by the inadequacy of the enforcement tools available, the most serious of 

which is caused by the fact that under current law responsibility for paying the 

state taxes is normally the responsibility of the purchaser rather than the Internet 

seller. 

We have been skeptical about whether these problems can be fully resolved by 

any action short of a ban such as that imposed recently by the State of New York, 

but we have endorsed H.R. 5724, the Meehan/Hansen bill introduced in the last 

Congress. The Meehan/Hansen bill offered a comprehensive solution to the problems 

arising from Internet sales of tobacco products by addressing both parts of the problem: youth access and tax evasion. The American Cancer Society, the American 

Heart Association and the American Lung Association also endorsed H.R. 5724. To 

protect against Internet sales to youth, H.R. 5724 would have required the 

verification of age and identity both at the time of sale and the time and place of 

delivery. 

We understand that this Committee wants to focus exclusively on legislation within its jurisdiction that addresses the fact that states are illegally losing millions of 

tax dollars. To accommodate that desire, we undertook to provide Congressmen 

Green and Meehan with a draft of such legislation. We strongly urge the Committee 

to adopt its provisions. 

I would now like to outline the seven specific areas in which the legislation offered 

by Congressman Green fails to meet what we believe are the minimum standards 

necessary for any effective legislation dealing with Internet tobacco sales. 

1. The legislation should apply to all tobacco products, not just cigarettes.

If the legislation applies only to cigarettes it will do nothing to reduce illegal sales 

and tax evasion over the Internet or through mail order on other tobacco products. 

By focusing only on cigarettes, the legislation could have the unintended consequence of encouraging use of other tobacco products such as smokeless tobacco. 

There can be no justification for the different treatment of different tobacco products. 

2. The legislation should explicitly impose the burden of either paying or insuring that applicable state taxes are paid on the Internet seller rather 

than on the purchaser.

State tobacco taxes on tobacco products sold at retail are collected at the distributor level. The products arrive at the retail outlet with a tax stamp already on 

them and the applicable tobacco related taxes already paid. This enables law enforcement officials to easily monitor compliance and insures that violations will involve a sufficient amount of money to warrant enforcement. 

At present Internet sellers based outside the United States and/or on Indian lands 

pay no state taxes and Internet sellers based in low tax states only pay the tax from 

the state in which they are based. The responsibility for paying the tax on the tobacco products they sell then falls to the individual consumer/purchaser, making enforcement difficult and costly. Unless the responsibility for paying the tax is clearly 

and unquestionably switched to the Internet seller, it doesn’t matter who is given 

the authority to enforce the law—it will not happen. 

31

Despite our requests that a provision be added that explicitly switches the responsibility to the Internet seller, the bill before the Committee does not do so. As written, the draft legislation offered by Congressman Green in Sec. 2(a) only requires 

that the Internet seller ‘‘comply with all the sales tax and use tax and other laws, 

applicable to the distribution and sale of cigarettes.’’ This could be interpreted to 

give states only a federal right of action to enforce existing state laws that apply 

to Internet sellers. Very few states have laws that explicitly apply to Internet sellers. Even a broader interpretation would be difficult to implement because states have numerous ‘‘sales and use tax and other laws applicable to the sale of cigarettes.’’ Some apply to manufacturers, distributors, and wholesalers; others apply to retailers, vending machine operators, etc. In most states, state laws place no tobacco tax 

collection or payment obligations on retailers because these responsibilities are 

placed on others. If the goal is to require the Internet seller to pay the tax or to 

insure that it is paid, then the legislation should be explicit on this point. If legislation is ambiguous as to whether the burden to pay the tax falls on the Internet seller or purchaser or some third party, then it will be wholly ineffective in curtailing 

tax evasion. 

3. The legislation should apply to all remote sales of tobacco products.

As written, the legislation exempts sales that are not ‘‘outside the State or Indian 

lands where the order is processed.’’ While the impact is probably unintended, this 

could be read to exempt sales from Indian lands to consumers outside the Indian 

reservation but within the same state. This could be a substantial loophole in states 

with large populations with in-state tribal Internet sellers. 

4. The legislation should include an enforcement mechanism that will assure that the states can actually enforce the legislation and block Internet and mail-order sales of tobacco products for which state taxes have 

not been paid.

Internet sellers are often based out of state, on Tribal lands, or even offshore or 

overseas. Some are fly-by-night operations. Even if this legislation gives states authority to bring civil actions against any person who violates the Act, bringing state 

lawsuits against distant vendors is an inevitably costly, cumbersome, complicated, 

and ultimately uncertain enforcement procedure. 

To be effective, legislation must require that Internet sellers maintain records of 

their sales for several years, prohibit anyone from shipping tobacco products into 

the state who has not registered and give the state the authority to block the delivery of tobacco products who have not complied with the law. The current draft does 

not adequately include any of these tools. 

5. The Civil Action section of the legislation should provide for civil fines 

and give the federal government the right to seek civil fines and civil 

damages.

As drafted, Sec. 3. entitled ‘‘Civil Action’’ says that a State Attorney General may 

‘‘obtain appropriate relief, including money damages,’’ but does not provide for any 

specific or minimum penalties or fines for violating the provisions of this Act, nor 

does it include the authority to withdraw a repeat violator’s right to sell tobacco 

products into the state in the future. 

We support the proposal to provide state Attorneys General with the authority to 

bring civil actions to enforce violations of the law, but it should not at the same time 

strip the federal government of authority to bring a civil enforcement action and 

allow the federal government only to seek criminal penalties. As drafted, the federal 

government would not be allowed to seek any civil or monetary damages or fines 

from Internet or mail order sellers who break the law. Federal authorities have not 

to date exercised their current enforcement authority, in part, because individual 

enforcement cases were deemed to be too small to warrant the effort. If the law imposed the burden to pay the taxes on the Internet seller, rather than the purchaser, 

federal enforcement could potentially become an important complement to any state 

enforcement prompted by the Act. 

6. The criminal penalties should be increased beyond the inadequate penalties established in the original Jenkins Act in 1949.

This legislation provides only a misdemeanor penalty with no minimum fine and 

a maximum fine too small to have a deterrent effect, along with up to 6 months 

in jail, or both. These penalties are inadequate. The penalties in the original Jenkins Act failed to deter violators or to encourage federal enforcement of the law and 

the provisions in the bill now before the Committee will not correct this problem. 

To be effective, the criminal penalty provisions should make violations of the act a 

32

felony, provide for significant, minimum criminal fines, and provide for larger criminal fines and possible imprisonment for flagrant and repeated violations. 

7. The legislation does not require Internet and mail-order sellers to keep 

any records of their sales and deliveries into a state.

While the legislation, like the original Jenkin’s Act, requires Internet and mailorder sellers to register with state tax administrators and make monthly sales reports to those officials, it does not require them to keep their own records of these 

sales and deliveries over time. This omission could be a major impediment to enforcement efforts and to the calculation of monetary damages, such as unpaid taxes. 

A provision should be added to the legislation requiring sellers to maintain specific 

records for not less than five years. 

In sum, this bill addresses a legitimate problem, but does not do so effectively. 

If the goal is to insure that state tobacco taxes are collected on Internet tobacco 

sales, the bill as drafted will not accomplish its purpose. We in the public health 

community are prepared to and would welcome the opportunity to work with the 

Committee to produce effective legislation that would make a reality of our common 

goal to reduce tax evasion and eliminate youth access to tobacco products in remote 

sales of tobacco products.

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Mr. GREEN. I look forward to it. Thank you for your testimony. 

The final witness today is Mr. Patrick Fleenor, Chief Economist 

with Fiscal Economics. Welcome. 

STATEMENT OF PATRICK FLEENOR, CHIEF ECONOMIST, 

FISCAL ECONOMICS 

Mr. FLEENOR. Mr. Chairman, Members of the Committee, as you 

know, over the last 5 years the retail price of cigarettes in the 

United States has soared. Buoyed by the rash of recent State and 

local excise tax hikes as well as the implicit taxes which were part 

of the Master Settlement Agreement, the average retail price of 

cigarettes has risen nearly $4 per pack, almost twice the level of 

just 5 years ago. In high tax jurisdictions such as New York City 

cigarettes can cost more than $7.50 a pack. Consumers have responded to the rising prices by increasingly searching out low cost 

sources of cigarettes. 

One source that has experienced considerable growth over the 

last several years has been online tobacco retailers who sell cigarettes acquired from low-tax jurisdictions. In the year 2000 it was 

estimated that there were roughly 40 U.S. based Web sites selling 

cigarettes. Today this figure has risen to nearly 200. An equal 

number of foreign sites also sell cigarettes into the U.S. market. 

A September 2002 study by Prudential Securities estimated that 

2 percent of the cigarettes consumed in the United States, or more 

than 400 million packs were purchased online. The report projected 

this figure would triple by 2005. Another study by Forrester Research forecast that Internet sales would claim 14 percent of the 

market by 2005. 

With State and local governments frequently collecting more 

than $1 in excise and sales tax revenue on each pack of cigarettes 

sold, Internet cigarette sales can have significant fiscal effects. I estimated—using a sophisticated economic model which first allocates Internet sales to the States and then estimates their effect 

on State and local revenue. The model basically applies State and 

local excise taxes as well as sales taxes to the number of packs 

sold, during the current fiscal year under the assumption that 

Internet sales would supply about 2 percent of the market I estimated that Internet sales would collectively cost State and local 

governments about $552 million in excise and sales tax revenue. 

This impact, however, will vary significantly by State. In New 

York, home of the Nation’s highest cigarette taxes, Internet sales 

will cost State and local governments more than $150 million. It 

will also be high in California and New Jersey and Michigan. 

On the flip side, some States will experience very little losses. 

Montana, for example, will lose about $41,000 this year in sales tax 

as well as cigarette excise taxes. Losses will also be relatively light 

in Wyoming, Delaware, and Colorado. 

Even in the absence of additional State and local excise tax 

hikes, many observers feel that the share of the U.S. cigarette market supplied by Internet retailers will continue to expand over the 

next several years unless the tax advantage that online retailers 

enjoy over traditional brick and mortar retailers is significantly 

narrowed. 

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1Prudential Financial, Buying Cigarettes Over the Internet, September 24, 2002. 

2 Robert Rubin, Chris Charron, and Moria Doesey, Online Tobacco Sales Grow, States Lose, 

Forrester Research, Inc., April 27, 2001. 

Estimates of market penetration vary significantly, so I estimated State and local revenue losses under two scenarios. The first 

assumed the Internet retailers would capture about 6 percent of 

the market by 2005. In that scenario I estimated that total excise 

and sales tax revenue losses by the States would equal around $1.7 

billion, again the impact varying significantly by State. New York, 

I estimated would lose about $435 million while other States would 

lose as little as about $115,000. 

In the second scenario I assumed Internet retailers would capture about 14 percent of the market by 2005. In that case you have 

losses of about $4 billion, again significant variation among the 

States in terms of revenue loss. Some States like New York will 

lose as much as a billion, others will lose around $268,000. 

Proponents of a larger role for State governments in the enforcement of tobacco statutes, as we are talking about today, frequently 

argue that in addition to the fact that State and local governments 

have a greater incentive to collect their tax revenue than do Federal authorities, the widely varying impact that avoidance causes 

on the States calls for something more than a one-size-fits-all approach. Therefore my research tends to support the bill. 

Thank you, Mr. Chairman and Members of the Committee, for 

the opportunity to testify this morning. I will submit a copy of my 

full statement for the record and be happy to take any questions. 

[The prepared statement of Mr. Fleenor follows:]

PREPARED STATEMENT OF PATRICK FLEENOR

Mr. Chairman and Members of the Committee, my name is Patrick Fleenor. I am 

the chief economist of Fiscal Economics, a consulting firm specializing in the economic analysis of fiscal policy. Prior to my current position I was a senior economist 

with the Joint Economic Committee of the United States Congress. I have also 

served as chief economist of the Tax Foundation, one of the nation’s oldest and most 

respected think tanks. It is an honor for me to appear before you today to discuss 

the impact of Internet cigarette sales on state and local government budgets. 

INTRODUCTION

Over the last 5 years, the retail price of cigarettes has soared. Buoyed by the rash 

of recent state and local excise tax hikes as well as the implicit tax hikes which are 

part of the Master Settlement Agreement, the average retail price of a pack of cigarettes has risen to nearly $4.00 per pack, almost twice the level just 5 years ago. 

In high-tax jurisdictions such as New York City, cigarettes can cost as much as 

$7.50 per pack. 

Consumers have responded to these rising prices by increasingly searching out 

low-cost sources of cigarettes. One source that has experienced considerable growth 

over the last several years has been online tobacco retailers who sell cigarettes acquired from low-tax jurisdictions. 

In 2000, it was estimated that there were roughly 40 U.S.-based websites selling 

cigarettes on the Internet. Today, this figure has risen to more than 200 with an 

equal number of foreign sites also selling cigarettes in the U.S. market. A September 2002 study by Prudential Securities estimated that 2 percent of the cigarettes consumed in the U.S.—more than 400 million packs annually—were purchased online.1 The report projected that this figure would triple by 2005. Another 

study by Forrester Research forecast that Internet cigarette sales would claim 14 

percent of the U.S. market by 2005.2

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ESTIMATING THE EFFECT OF INTERNET CIGARETTE SALES ON STATE & LOCAL SALES AND

EXCISE TAX REVENUES BY STATE

With state and local governments frequently collecting more than $1.00 in excise 

and sales tax revenue on each pack of cigarettes sold, Internet cigarette sales can 

have significant fiscal effects. It is possible to calculate these effects by employing 

an economic model that apportions Internet cigarette sales by state and then uses 

information on sales and excise taxes as well as average price data to calculate revenue losses by jurisdiction. 

This type of analysis was used to prepare the estimates presented in Table 1. 

Here it was assumed that Internet purchases accounted for 2.0 percent of total cigarette sales in FY 2003. Under this assumption, which is generally consistent with 

the estimate made in the Prudential Securities report, 413.9 million packs of cigarettes will be sold over the Internet during the 2003 fiscal year. 

The allocation module of the model uses population data, smoking rates, sales and 

excise tax levels, and other information to calculate the demand for cigarettes as 

well as incentive to purchase cigarettes online. Consequently, states with similar 

populations can have widely differing levels of Internet sales. Total Internet sales 

in New York, for example, are estimated to be more than three times the level in 

Texas even though smoking rates in the two states are similar. This occurred in 

large part because the incentive to purchase cigarettes online—i.e. sales and excise 

taxes levied on cigarettes—were, on average, more than 3 times higher per pack in 

New York. 

Once total Internet sales have been apportioned among the states the model calculates state and local excise and sales tax revenue lost as a result of Internet cigarette sales. The model estimates that in FY 2003 state and local governments in 

the U.S. will lose $552.4 million due to online cigarette sales. The bulk of these 

funds, $399.4 million or 72.3 percent of the total, will be due to lost excise tax collections. The balance will result from lost sales taxes. 

Tables 2 and 3 present projections of state and local government revenue losses 

under current law for FY 2005 under two scenarios. The analysis underlying Table 

2 assumes that Internet sales will capture 6 percent of the U.S. cigarette market 

by FY 2005, a forecast similar to that made by Prudential Securities. Under this 

scenario state and local governments will lose $1.7 billion in excise and sales tax 

revenue during that fiscal year. 

The results of the analysis presented in Table 3 assume that Internet cigarette 

sales climb to 14 percent of the market by FY 2005, a forecast generally consistent 

with that made by Forrester Research. Under this assumption, state and local governments would lose roughly $4.0 billion in excise and sales tax revenue during FY 

2005. 

CONCLUSION

The ability of Internet retailers to sell low-tax cigarettes at a time of rapidly rising cigarette taxes has resulted in that sector supplying an ever increasing share 

of the nation’s cigarette market in recent years. This has cost state and local governments billions of dollars in lost excise and sales tax revenue at a time of widening 

budget gaps. Even in the absence of additional tax hikes, many industry observers 

feel that the Internet sector will continue to expand over the next several years, 

with commensurate revenue losses for state and local governments, unless the tax 

advantage Internet retailers currently enjoy over traditional brick-and-mortar retailers is significantly narrowed.

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Mr. GREEN. Thank you for your testimony. I thank again all the 

witnesses for testifying. I will begin with questions. 

Mr. Jones, in your research you came across a large number of 

Web sites that sell so-called tax free cigarettes. Did your research 

show who the operators of those Web sites are? 

Mr. JONES. For the most part it had indications of the owners. 

We identified, as I say, 147 sites. The majority of those sites were 

Native American sites, 87 out of the 147 were Native Americans. 

Some of the others listed addresses and names. It was for the most 

part Native Americans, 87 out of 147. 

Mr. GREEN. Okay. Thank you. And if you will take a look, I hope 

you have had a chance, as all the witnesses I know have had a 

chance, to take a look at this color handout that we have given 

here which shows just some of the Web sites that are there. Mr. 

Jones, can you tell me as you look at those, was that sort of characteristic of the Web sites that you researched? 

Mr. JONES. Yes. We searched terms such as cheap cigarettes, free 

taxes, and so forth. And we also came up with a set of Internet 

sites similar to the ones shown here. I think the interesting thing 

is that when you search on these sites it becomes very obvious that 

the selling point is the lack of taxes and that is what draws the 

seller to those sites. I think, too, that in some cases that the site 

also will lure you on with buying one cigarette and then talk you 

into buying one that they can make more money on such as a generic brand versus premium brand. We found some of those cases 

also. 

While we didn’t specifically look at this in terms of the issue of 

youth smoking, our review didn’t specifically look at that issue, but 

looking at some of the sites in terms of how you would order cigarettes there were some indications that youth could buy cigarettes 

with very little identification. Although they asked for verification 

of age it would just require certification in the statement that I am 

of age. And of course if you want to buy a cigarette, you certify. 

Mr. GREEN. Every high school student’s dream. 

Mr. JONES. My son had an ID card that had a false age, too. So 

I think it is very easy if a youth wanted to falsify his age via the 

Internet because as I said in my statement the Internet is anonymous, you can use the Internet without being physically there. So 

to an extent it is anonymous, it also makes it very easy for people 

who might be ashamed to go to stores to buy cigarettes because of 

the social issues, they also find its another avenue to procure cigarettes over the Internet. 

Mr. GREEN. Interesting. Mr. Armour, could you comment on or 

expound upon the threat that these remote sellers present to brick 

and mortar stores? 

Mr. ARMOUR. I think the largest one, going back to what I said 

in my testimony, you look at Washington State. By not collecting 

State excise and sales taxes it is $20 a carton. That is an enormous 

price advantage. And while in Washington State I can’t quantify 

the instances of Internet or mail order sales into the State because 

we have so many Indian reservations in urban areas that already 

are siphoning off a great deal of excise taxes, our State Department 

of Revenue estimated 3 years ago that the loss of State excise taxes 

44

in Washington State due to Indian reservation sales exceeded $130 

million a year. 

So I think that is indicative of the wide discrepancy in prices 

that retailers that don’t collect taxes have. 

Mr. GREEN. Interesting. 

Mr. Myers, what do you think is the best way that Internet sales 

can verify age, Internet sellers can verify age? Do you have any 

suggestions on how that might be accomplished? 

Mr. MYERS. We do. And Congressman Meehan’s bill that he introduced previously represents our thinking as well on that. What 

you need to do is require a Government database checked photo ID 

both at the time of the initial transaction over the Internet and 

then second at the point of delivery. If you don’t do both, then you 

have opened up a path either way. If you do do both, then you can 

get a real clamp on these issues. 

We would be happy to work on the specific detailed provisions 

about how to do that. But I think it is essential if we are going to 

really put a clamp on illegal sales to children all across the country. 

Mr. GREEN. Thank you. Now the Chair recognizes Mr. Meehan 

for his questions. 

Mr. MEEHAN. Thank you, Mr. Chairman. Mr. Jones, thank you 

for appearing at this hearing and also for an excellent GAO report 

that both Congressman Conyers and I had requested. I may be 

going over some of your testimony you have already presented, but 

I want to make the Subcommittee record clear on some points. 

Mr. Jones, both the Department of Justice and the Bureau of Alcohol, Tobacco and Firearms commented on your draft report, is 

that correct? 

Mr. JONES. That is correct. 

Mr. MEEHAN. What did the Department of Justice state in regards to the fact that the Jenkins Act only contained misdemeanor 

penalties in terms of the U.S. attorney’s willingness to prosecute 

cases? 

Mr. JONES. Both the Justice Department and the Treasury Department commented on the draft report, suggested that felony as 

a penalty would increased compliance with the Jenkins Act. They 

also made some other suggestions in terms of getting more enforcement by States, allowing States more authority to take Jenkins Act 

enforcement to State courts and Federal district courts. The concern with the——

Mr. MEEHAN. So that was the input that you got from the Justice 

Department? 

Mr. JONES. Yes. The concern was that by making it a felony you 

would get more U.S. attorneys to take the cases to Federal court. 

As you know, U.S. attorneys have a limited staff and they can’t 

take every Federal case to Federal court. They have a certain—I 

guess it is pretty well known they have thresholds that they use 

to take cases to Federal court, and they very rarely take misdemeanors to a Federal court. And because these are misdemeanors, very little attention is given to these cases because 

Federal law enforcement knows that they won’t be able to get U.S. 

attorneys to take these cases to Federal court. 

45

So I think the reason that the Federal Government doesn’t enforce the law; that is, the FBI and the ATF, is because they can’t 

get U.S. attorneys to take the cases to court. 

Mr. MEEHAN. It is your testimony as well, you mention the 

Treasury Department, the ATF, the agency that you recommend to 

have jurisdiction over this matter, that now potentially we could 

accomplish administratively. They made the same representations 

in the comments? 

Mr. JONES. Yes. And they went—ATF when a step further and 

offered to take over the responsibility of enforcement. As you know, 

ATF now enforces the Cigarette Contraband Trafficking Act, which 

is a smuggling act, and it also carries a felony penalty. So they feel 

by having the comprehensive authority to enforce the Jenkins Act 

and CTA act that they will have the whole issue in one court. And 

since ATF has been transferred now from Treasury to the Justice 

Department, we think that Justice can handle that issue and Congress doesn’t need to worry about that right now. 

Mr. MEEHAN. Excellent. 

Mr. Myers, your testimony mentioned the growing problem of 

kids buying cigarettes over the Internet in the absence of safeguards to prevent these types of sales. Massachusetts Attorney 

General Tom Reilly and I actually conducted our own sting operation on two separate occasions and we were astounded at how easily it was for young children who participated in the sting, how 

easy it was for them to buy cigarettes over the Internet with the 

click of the mouse. 

Do you think this new legislation addresses the growing problem 

with youth access to tobacco over the Internet, and how specifically 

can we better address this problem that I think it is clear that we 

all agree it is, certainly Congressman Green and I are in strong 

agreement on? 

Mr. MYERS. It is a vitally important problem. And State attorney 

generals have done more to stop illegal sales at the brick and mortar retailers. Then it becomes even more important to address the 

issue here. There are a number of things we have to do. First, 

strong enforcement of tax evasion is a component of the issue. If 

the cigarettes aren’t cheaper kids will be less likely to buy them. 

But, second, we have to have a meaningful set of provisions for age 

verification, as Congressman Green and I discussed earlier. We 

need to make sure it hits both at the point of sale and at the point 

of delivery. We need to hold the people in that line of process accountable for it. That includes adequate record keeping. So this bill 

by itself does not solve that problem. 

Mr. MEEHAN. Will giving States attorneys general the right to 

bring a case to Federal court help reduce the problem with youth 

access? 

Mr. MYERS. Giving State attorneys general the right to sue along 

with the tools they need to do so will make a difference. This bill 

needs to be beefed up to accomplish it. Unless it is clear that it is 

the out-of-state sellers who have the obligation to collect and pay 

the tax, unless the State attorneys general have the authority to 

actually block sales by a seller who is not living up to the law and 

to ban future sales, and unless you have penalties that include felVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00049 Fmt 6633 Sfmt 6601 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
46

ony penalties, then you will not accomplish the goal that I think 

we all agree upon. 

Mr. MEEHAN. Thank you. 

Mr. GREEN. I thank the gentleman. The Chair recognize Mr. Keller, the gentleman from Florida. 

Mr. KELLER. Thank you very much, Mr. Green. Mr. Myers, let 

me begin with you. And I want to thank you so much for coming 

before our Committee today and taking time to educate us on your 

issues. I know all of us share your concern about underage children 

smoking. Let me just tell you one thing in the interest of States, 

if I had somebody from the National Center for Tougher Sentences 

for Child Abusers here before us and we had a bill to make dramatically tougher sentences for child abusers and they were saying 

they weren’t supportive of it, I would think to myself what in the 

hell are these people thinking. I would think that they would be 

almost marginalizing themselves by saying we are not going to 

support it unless you make different changes that we uniquely 

would do. 

So my question is now, faced with the situation where we have 

a very real problem with underage children smoking because these 

remote Web sites are failing to do adequate age verifications and 

they are making it easier and cheaper for kids to buy cigarettes 

and this bill would in fact ensure that the age verification and tax 

collection would take place for remote sales of cigarettes at least 

better than it is now, why are you not supporting this legislation 

as written? 

Mr. MYERS. I am glad you asked that question. Because the answer is straightforward. The Jenkins Act was passed with the best 

of intentions and failed because it didn’t have adequate teeth. It 

doesn’t have adequate enforcement provisions. Our goal, like yours, 

is to come up with a piece of legislation that will actually make a 

difference. We don’t move our ball forward if we don’t give the 

State attorneys general the actual tools they need. Based on a lot 

of conversations with a lot of law enforcement officials, it has been 

our conclusion that without making the changes we suggest, none 

of which are radical, none of which are extraordinary, that you 

won’t in fact make the difference that both you and I want to see 

made. 

This isn’t a matter of the perfect being the enemy of the good. 

It is a matter of making sure that you pass a piece of legislation 

that will actually do what you and I want. As drafted, we have 

been told by lots of people this bill won’t get us there. I am convinced that working with Congressman Green and Congressman 

Meehan we can get there with a reasonable bill. 

Mr. KELLER. Thank you for that. That is fair. I want to give you 

your side of that. I would encourage reasonableness on both sides. 

Mr. MYERS. That is why one of the things we first did was in fact 

go out to the people who have to enforce the law and ask them 

about the adequacy of these provisions. Will it make a real difference because I know that is what you want? What we were told 

is that unless you take a number of the steps that we have described here, that all we are doing is kidding ourselves and no one 

here intends to do that. 

47

Mr. KELLER. Mr. Jones, turning to you, does Native American 

status as far as you know serve as a valid defense for noncompliance with State laws regulating the sale and distribution or possession of cigarettes? In other words, can an Indian tribe by virtue of 

their own sovereignty say if I want to sell to a 12-year-old I can 

sell to a 12-year-old; is that legal on their part? 

Mr. JONES. Our legal staff has found that is not true, that Native 

Americans do not have automatic exemption from the Jenkins Act. 

In fact, a search of the Jenkins Act itself and its legislative history 

does not provide an exemption to Native American sales of cigarettes. 

Mr. KELLER. It hasn’t been raised in this hearing but I read some 

people may take the opinion that the Internet Tax Freedom Act 

provides some sort of legitimate basis for noncompliance with the 

Jenkins Act or State laws relating to the sale of cigarettes. Do you 

have a thought on that? 

Mr. JONES. Yes. The Internet Tax Freedom Act was designed to 

exempt new businesses from adding tax for operating over the 

Internet. It did not exempt taxes that are already in effect. So the 

Internet Tax Freedom Act was to prohibit taxes on new products 

or new uses of the Internet, not for current. 

Mr. KELLER. It is a separate issue. What procedures do remote 

sellers now employ, if any, to ensure compliance with the Federal 

and State laws restricting cigarettes to underage minors? 

Mr. JONES. We found that some, as I said earlier, do have a certification statement that the buyer has to certify that he is of age 

to buy cigarettes. But that is a matter of just a certification. And 

the certification is worth as much as signing the note. Some also 

post you must be of age to purchase cigarettes but they don’t necessarily enforce those ads. 

Mr. KELLER. So some of them ask you how old you are and some 

don’t? 

Mr. JONES. That is true. 

Mr. KELLER. Okay. Mr. Chairman, I will yield back the balance 

of my time. 

Mr. SMITH. [Presiding.] Thank you, Mr. Keller. Let me apologize 

to the witnesses. I had a vote come up in another Committee. It 

was a close vote and I needed to excuse myself. Mr. Myers, I am 

sorry that was in the middle of your testimony, but I hope to catch 

up with you all now. 

The gentleman from Virginia, Mr. Boucher, is recognized for his 

questions. 

Mr. BOUCHER. Thank you very much, Mr. Chairman. I want to 

begin by commending our colleague Mr. Green for bringing this 

matter before the Committee. I am sorry he is not here to hear me 

say that. 

Mr. SMITH. He had to be on the House floor to speak on the rule. 

Mr. BOUCHER. That is an understandable need. So I do want to 

commend him for bringing this matter before the Committee. I find 

myself in basic agreement with his approach that the sales and use 

taxes of the State of residence of the purchaser should be honored 

with respect to interstate transactions in cigarettes. But I note that 

the bill really is limited just to cigarettes. Of course we know that 

there are other tobacco products. 

48

I would like to ask you, Mr. Jones, and you, Mr. Fleenor, if in 

the course of your research with respect to the volume of interstate 

sales of cigarettes you encountered data that would reveal to you 

a comparison in terms of volume of cigarette sales on the one hand 

and sales of other tobacco products, smokeless and cigars and other 

kinds of things, on the other hand. 

Give us a sense, if you have this information, of the volume of 

cigarette sales on an interstate basis as compared to sales of these 

other products. 

Mr. FLEENOR. Well, I looked at it a bit, and the sales of smokeless tobacco, chew, snuff, et cetera are relatively small in comparison to cigarettes, about probably—only about four or 5 percent of— in terms of revenue that—I guess compared to cigarettes. 

Mr. BOUCHER. Of the total sales, cigarettes would be 96 percent, 

and other products would be about 4 percent? 

Mr. FLEENOR. Exactly. 

Mr. BOUCHER. Mr. Jones, have you looked at that issue and do 

you agree with those numbers? 

Mr. JONES. Our review didn’t focus on that but we did notice a 

majority of the sales were cigarettes. 

Mr. BOUCHER. I am sure that is true. Does anyone on the program have a comment with respect to why this bill should be limited just to cigarettes? I know Mr. Myers has advocated that the 

other products be included. Does anyone have a view that is contrary to that of Mr. Myers, or would anyone like to defend the position of the bill that basically limits its application just to cigarette 

sales? Let the record show there was silence. 

Let me ask another question. Some have suggested that this—— Mr. ARMOUR. Just on that, a thought I have is, in many States, 

cigarettes are tax stamped. Like in Washington State, the cigarettes are tax stamped. So it is very easy for the Liquor Control 

Board, who has enforcement, to identify that this is a contraband 

product in our State by looking at it. None of the other tobacco 

products in our State are required to be tax stamped. So there may 

be some kind of enforcement issue related—— Mr. BOUCHER. With respect to cigarettes. Well, I think the Committee will need to consider this question as we give further consideration to the bill. 

Mr. Myers, you noted in your testimony, and perhaps in answering one or more of the questions, that you questioned the effectiveness of the provision which is found on Page 2 beginning at Line 

9 of the bill, that basically says that the sales and use taxes of the 

State of the residence of the purchaser would have to be honored 

in the case of interstate transactions. 

This language looks pretty straightforward to me. I am wondering what weakness you see in it, and why you think the language, as it appears in the bill itself, is not effective in terms of 

making sure that the residence—that the taxes of the State of the 

residence of the purchaser be paid. 

Mr. MYERS. Let me answer that for you in two ways. 

First, is what we have done is look at some of the State laws, 

and some of them are very unclear as to their applicability to outof-State sellers. In fact, some of them, because the States didn’t 

think they had the authority here, say that—actually provide an 

49

option, for either the out-of-State seller to pay or for the purchaser 

to pay, and simply applying those laws that were passed in a different circumstance could lead to a situation where it is the purchaser, not the seller, who is responsible. I don’t think that is the 

intention, which is why it has been our view that we ought to be 

explicit about that. 

Mr. BOUCHER. I am sorry. Let me just ask you. 

This clearly says, each person who engages in the interstate, sale 

or distribution. Now, that clearly would be the seller. This is the 

person engaging in the interstate sale or distribution, or at a minimum it is the seller. You might also suggest that it is the purchaser, but it is clearly at least the seller, shall comply with all of 

the sales and use tax and other laws of the State in which the cigarettes are delivered. I don’t see how that—— Mr. MYERS. Those laws don’t apply, A, either to a retailer—and 

often it is the wholesaler distributor further up the line who does 

it in a normal in-state situation, and that wouldn’t be the case for 

the out of State seller, and it certainly would be the case for an 

Indian reservation or outside our borders—then you would have an 

open and ambiguous question. Some of those people have been 

challenged before and said those laws don’t apply to them. 

Second, the question I would pose back, since I think everyone’s 

intention is the same here, and that is to have those sellers pay, 

and I think that is your intention as well. Then there is really no 

down side to being explicit about it, so that we don’t force the State 

Attorney Generals to have to go through 5, 10 years of litigation 

based on the vagaries of State laws that were written for a different purpose. It is an easy enough thing to insert, eliminate the 

ambiguity and then allow the State Attorney Generals to have the 

tool to begin to enforce it right away. 

Mr. BOUCHER. Okay. Mr. Myers, thank you very much. 

Thank you, Mr. Chairman. My time is up. 

Mr. SMITH. Thank you, Mr. Boucher. The gentleman from Indiana, Mr. Pence is recognized for his questions. 

Mr. PENCE. Thank you, Mr. Chairman. 

And I want to associate myself with comments on both sides 

today, expressing appreciation for Mr. Green’s leadership on this 

legislation. I also want to associate myself a bit with Mr. Keller’s 

comments concerning a bit of befuddlement about opposition from 

an organization dedicated to protecting children from tobacco, finding itself as an opponent of legislation that would make laws 

tougher, and I do—I don’t necessarily come to these hearings to put 

witnesses on the spot, unless I am in an especially bad mood. So 

I will accept, Mr. Myers, your comments and your testimony and 

your responses to Mr. Keller about the sincerity of your purpose in 

coming here and wanting to improve a piece of legislation, because 

when I heard of the National Center for Tobacco-Free Kids’ opposition to Mr. Green’s legislation, I was confused. You have abated 

that a bit, but—— Mr. MYERS. Congressman, could I just respond briefly? 

Mr. PENCE. I would welcome that. 

Mr. MYERS. We know we always take a risk when we take a 

piece of legislation that is well-intended, whose goals we both 

share, and then say it doesn’t simply give enough tools to actually 

50

accomplish its goal. That decision was not taken lightly. It was 

based upon multiple conversations, frankly over several years, 

where we have been working with State officials about the kinds 

of tools they need to really make a difference. And we have just 

been told by too many law enforcement officials, that if you are 

going to give us this responsibility, you have got to give us the 

tools. Otherwise, we may file a lawsuit, but given the hundreds and 

hundreds of Internet sellers out there, the fly-by-night of them, the 

cost of enforcement is too great. We are not going to be able to do 

the job. 

All we are trying to say is, if we really want to take this problem 

up and solve the problem that you and I agree on, then we need 

to do it. So our goal is very simple, and that is to make sure law 

enforcement officials have the tools to help reduce tobacco use. 

Mr. PENCE. Reclaiming my time, then, I would like to then give 

Mr. Jones an opportunity to speak from a GAO perspective. 

There has been an assertion on the panel today that essentially 

the Green legislation will not make a difference. Your report states 

that jurisdictions, particularly State jurisdictions, don’t have sufficient legal authority today to enforce the Jenkins Act. Is it accurate 

to say that the Green legislation, as drafted, would help States better enforce the law, Mr. Jones? 

Mr. JONES. Mr. Congressman, you are correct. 

Our report does state that States had a problem because they 

lack enforcement authority in terms of the Jenkins Act, and I think 

that Congressman Green’s bill does provide some support to States 

in terms of pursuing those violations of the Jenkins Act that they 

can take to court, either at a State level or in Federal district 

court. So it does provide some remedy for them. 

Mr. PENCE. So it will improve the law? 

Mr. JONES. It will improve States’ involvement in enforcing the 

law. 

Mr. PENCE. One question—pardon me, Mr. Jones. 

Mr. JONES. As I understand. As I read the bill——

Mr. PENCE. Mr. Armour, I wanted to thank you for your testimony today. I grew up in the gas station business in southern Indiana. It is called convenience stores now, but we used to just sell 

food inside gas stations. 

Your testimony indicated that your company particularly has instituted tobacco retailing practices to ensure that minors don’t purchase tobacco products in your stores. How have your compliance 

rates with State laws changed since instituting these policies? 

Mr. ARMOUR. We have always taken our responsibility seriously 

before there were the level of mandates today, but just to give you 

an order of magnitude, last year we—in our company we had over 

2.6 million transactions that involved cigarettes. There were two 

Liquor Control Board sting operations in which sales associates of 

ours sold to minors, and there were two internal sting operations 

that we performed, as I said in my testimony, in which sales associates sold to minors. So four out of 2.6 million transactions, I 

think with appropriate steps and procedures that we have implemented have—that is not zero. I am not happy that four took place, 

but I think they can be very, very effective when implemented. 

51

Mr. PENCE. Well, I thank you for your testimony, and as a parent, I thank you for your leadership. 

As I do, Mr. Myers, and the leadership for the National Center 

for Tobacco-Free Kids. I place myself, Mr. Chairman, to be a constructive part of moving this legislation forward and yield back. 

Mr. SMITH. Thank you, Mr. Pence. 

The sometimes Ranking Member of the Subcommittee, Mr. Berman of California, is recognized for his questions. If he yields to the 

gentlelady from California, Ms. Waters for her questions, okay. 

The gentlelady is recognized. 

Ms. WATERS. Thank you very much, Mr. Chairman, and members. 

It seems to me we have two distinct issues here. One that has 

to do with the sale of cigarettes to minors on the Internet and a 

failure to have any means by which to do age verification, and, of 

course, the tax issue with the concerns, I am sure raised by the 

brick and mortar retailers, and the fact that they have to pay their 

taxes and others don’t. 

It is very difficult for me to understand, as you deal with the 

Internet, how you single out any one product. It seems to me that 

just as many of us are concerned about sale to youth of cigarettes, 

aren’t we concerned about the sale of youth—to youth of alcohol 

products and other kinds of things? Is this an isolated issue, or 

should we be looking at this issue in terms of all of those laws that 

may be violated relative to age verification, in particular maybe 

some other things. I don’t know. I don’t know if there is any effective way to do age verification. Maybe there is and I haven’t heard 

it, and I will ask Mr. Myers or any of the other—who are present 

here today, is there—has anyone discovered any way to do age 

verification on the Internet? 

Mr. MYERS. Well, the simplest way, of course, would be not to 

permit sale of tobacco products over the Internet, and, ultimately, 

that may be the best solution. We do think based upon examining 

this, talking with a number of responsible retailers and others, that 

by requiring the production of Government-issued Ids at the critical junctures, holding the people who deliver the product responsible, ensuring that it is only delivered to an adult, that you can 

do a number of steps that would dramatically cut down on youth 

sales under these circumstances. 

We also think that if you have effective tools to make sure that 

State taxes are paid, you decrease the incentive. So there is much 

that we can do. Can we solve it fully without a total ban? Probably 

not, but there is much to be——

Ms. WATERS. You know, I am not an attorney, but it seems to 

me you could raise some equal protection questions about banning 

one particular item on the Internet and not others where age 

verification also is the law. How do you deal with that? 

Mr. MYERS. There is more than a rational basis for addressing 

that issue. That is not before the Committee today, and Congressman Meehan’s bill that seeks to both address youth access and tax 

evasion issues steps well short of a total ban and just ensures adequate age verification. 

Congressman Meehan’s bill might well be a good model for other 

products. I have no expertise in those, so I don’t want to speak 

52

about it, but there is something we can do about this product that 

would make a difference. 

Mr. WATT. Mr. Myers, I am quite aware of what is before the 

Committee. I thought because you were here with your expertise, 

you may have given some creative thought to an issue that is so 

dear to you, but thank you for your response. 

Mr. MYERS. Well, we have, and Congressman Meehan’s original 

bill, that deals with both youth access and tax evasion issues is a 

solution that we think is both workable, complies with the law, and 

would make a real difference. 

Mr. SMITH. The gentlewoman yields back her time. The gentleman from California, Mr. Berman, is recognized for his questions. 

Mr. BERMAN. Thank you, Mr. Chairman, and I would like to 

yield my time to Mr. Meehan. 

Mr. SMITH. Okay. The gentleman from Massachusetts is recognized. 

Mr. MEEHAN. Thank you, Mr. Berman. I want to clear up one 

subject that my friend from Indiana had raised, and it is a question 

of what the language of the bill ought to be. 

From my perspective, I have been working with my staff the last 

couple of days to try to have language that will effectively result 

in States’ Attorney Generals being able to have not—as a practical 

matter being able to move against these companies on the Internet 

that don’t pay State taxes and who sell to minors. 

Specifically, yesterday I got on a plane after the last vote, and 

I went up and had dinner with the Attorney General of Massachusetts and the chief of his Public Protection Bureau, and I talked 

about language. I talked about the issue, because the Attorney 

General is nationally recognized for his efforts regarding cigarettes 

and tobacco products. And what he indicated to me was, if you just 

have civil penalties, it will make it more difficult. I discussed language with him. 

So what we are trying to do here is actually pass a law that will 

have the intended effect, because oftentimes we pass legislation 

around here, and also in legislatures across the country that have 

unintended consequences. And it is not a reflection on how someone feels about who drafted a bill or how the bill was drafted, it 

simply has unintended consequences. It doesn’t do what the legislation intended it to do or the authors of the legislation intended it 

to do. So what do you do? You talk to law enforcement officials that 

have the authority to actually enforce the law. 

So I think that is what we are trying to do, get the best possible 

language, and I know Congressman Green is committed to doing 

that, because I have been working with him for the last few days. 

Mr. Myers, do you think that this bill gives the States the incentive and support that they need to crack down on Internet tobacco 

sellers that violate State law restrictions on cigarette sales? And 

you have indicated specific language to get the—to make sure the 

AGs have the tools that they need to effectively crack down and 

prosecute these instances? 

Mr. MYERS. Not as currently drafted. I don’t think the bill will 

accomplish the goal that Congressman Meehan needs. The criminal 

penalties are not sufficient. They need to be made more severe. The 

53

civil penalties need to be made clearer and more severe and include 

the right to block sellers who violate the law. 

Third, it needs to be made clear that you can go against the seller, not just the consumer. Otherwise, you will never—the State Attorney Generals will never be able to get a grip on this problem or 

have the economic incentive to do so. 

Mr. MEEHAN. The final point I wanted to make was relative to 

my friend from California’s comments relative—why this product— this product is the leading preventable cause of death in the United 

States of America. It is the only product on the market if you use 

specifically as directed, it will kill you. 

Two days ago, I had the unfortunate experience to be in a hospital in Hathorne, Massachusetts where my wife’s aunt is dying 

and died at six o’clock this morning from lung cancer. She smoked 

for 40 years. She started smoking when she was 14. She had quit 

for the last 20 years or so, but the damage had already been done. 

Over 450,000 people die in this country each year because of tobacco use, and 90 percent of the people who smoke in America, 

start smoking when they are children. This is serious business. It 

affects the public health of this entire country. 

So why this product? There are a lot of damn good reasons why 

this product. We need to make a commitment, and we are making 

a bipartisan commitment today, I believe, with this legislation to 

find a way to crack down on people that sell on the Internet and 

don’t verify the ages and don’t pay State taxes. And that is what 

we are about to do, and I hope that we are able to work out what 

I consider to be minor differences on language, and I know that 

Congressman Green is committed to this. But this is important 

work, and it is important work for the Congress. 

Thank you, Mr. Chairman. 

Mr. SMITH. Thank you, Mr. Meehan, for a very good statement, 

and I hope, as you do, that you and Mr. Green will be able to resolve any differences and be able to produce a bill that we all can 

support. Clearly there was bipartisan—more than bipartisan. 

There was consensus this morning on the need for such legislation. 

We had a lot of good questions and a lot of good answers today, 

and for that I thank the witnesses who are here. We may have 

some additional questions to submit to you in writing. We hope 

that you will be able to respond to those within 10 days, but thank 

you for being a part of a very important hearing and very constructive approach to trying to solve a very critical problem. With that, 

the Subcommittee is adjourned. 

[Whereupon, at 11:20 a.m., the Subcommittee was adjourned.] 

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PREPARED STATEMENT OF ALI DAVOUDI

Thank you, Mr. Chairman for providing me with an opportunity to respond to the 

testimony presented at the Subcommittee hearing held last Thursday, May 1, 2003, 

on HR 1839, the Youth Smoking Prevention and State Revenue Enforcement Act. 

I would like to thank Representative Green and Representative Pence for taking 

the lead on this important issue, and the Subcommittee on beginning the debate on 

the important issues of preventing sales of tobacco products to minors and assuring 

that applicable taxes are paid to the states on tobacco sales. 

My statements are submitted for the record as the President of OLTRA, Inc., the 

Online Tobacco Retailers Association. In 2001, OLTRA was founded by a small, concerned group of Internet tobacco retailers to bring standards of service through selfregulation to the domestic Internet tobacco industry. Over the past two years, 

OLTRA has grown in membership and implemented a number of policies designed 

to prevent the sale of tobacco products to minors through online retailers. OLTRA 

is committed to these measures, and to legal age verification. While OLTRA members are, for the most part, small they are not ‘‘fly-by night’’ operations, as asserted 

by the Campaign For Tobacco Free Kids. 

OLTRA members sell goods, including non-tobacco products, to over one million 

consumers nationwide. OLTRA members actively market their products to the estimated 20% of the U.S. adult population considered to be regular smokers. We agree 

with NACS, that while controversial, tobacco is a legal product that is important 

to the economic viability of a large number of communities in the United States. 

OLTRA members sell tobacco products solely to adults for personal use. To this end, 

we employ the same precautions that are used for other age-restricted products, 

such as wine and beer, sold directly to consumers over the Internet. 

OLTRA members are truly small businesses, embracing the entrepreneurial spirit 

characteristic of the United States since its foundation. OLTRA members, some of 

which also own local convenience stores, employ approximately 1,500 people in ten 

states. A significant number of OLTRA member Internet tobacco companies are 

businesses operated by Native American tribes in New York State and New Mexico, 

supporting communities on tribal land and providing jobs in communities traditionally facing high levels of unemployment. Internet tobacco retailers are also located 

in important tobacco-growing states such as Virginia, Tennessee, Kentucky, and 

North Carolina. 

The online tobacco industry realizes that a perception exists that it sells tobacco 

to minors, fails to pay taxes, and sells contraband and counterfeit cigarettes. This 

perception is not true of OLTRA’s members. In fact, OLTRA has worked to adopt 

responsible business practices, including: secure online ordering, a clearly stated refund/exchange policy, accurate product identification, clearly stated company contact 

information, live customer support, posted business hours, forbidding purchases 

made with the intent of resale, prohibiting language on websites about cigarettes 

being tax free or duty free, mandating a strict age verification system and imposing 

a requirement of sale only to adults 21 years of age and older (imposing an additional three years above the age of 18). 

Because local convenience stores are bound by exclusive contracts with ‘‘Big Tobacco’’ manufacturers, they cannot offer consumers the same access to brands as can 

Internet tobacco retailers. OLTRA member retailers provide consumers with access 

to a wide variety of products, including those not available in local convenience 

stores. This gives consumers greater choice among tobacco brands, including specialty and boutique brands of tobacco products. Internet retailers also carry other 

consumer goods, such as rolling papers, lighters, candles, air filters, filter tips, fruit 

and candy, and dental products. 

Internet tobacco retailers sell to a growing market of adult consumers who seek 

greater choice, better customer service, the convenience of direct delivery and lower 

prices. 

THE BUSINESS MODEL OF ONLINE RETAILERS

Like other Internet retailers, OLTRA’s members have adopted a business model 

in line with the U.S. Supreme Court’s landmark decision Quill v. North Dakota, 504 

U.S. 298 (1992). Quill held that an out-of-state seller of goods, whose only contacts 

with a state are by mail or common carrier, lacks the physical presence required 

by the Commerce Clause for the state to impose sales and use taxes upon the seller’s transactions with citizens of their states. The state’s imposition of such a use 

tax would place an unconstitutional burden on interstate commerce. 

Following the lead of other retailers of age-restricted products, such as wine, and 

Internet businesses, like Amazon.com, eBay and Yahoo!, OLTRA members pay applicable federal and state taxes in the states in which they have a physical presence. 

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With over 7,600 individual taxing jurisdictions in existence, the cost of complying 

with each jurisdiction’s tax laws would put most Internet retailers out of business. 

Quill’s bright line rule allows Internet retailers to remain in business and pay taxes 

to those states in which they have a physical nexus. Excise taxes are included in 

this bright-line rule. OLTRA members pay all federal excise taxes and applicable 

taxes in the states in which they are located or have a physical presence. Until the 

states are able to agree to simplify sales and use taxes and ease the collection and 

remission of sales taxes by out-of-state retailers, the rule set forth in Quill applies. 

Requiring the retailers to collect and remit taxes to the states would change the 

Quill standard for one particular type of product—cigarettes. No other product, agerestricted or non-age-restricted, would face the same change. Cigarettes should be 

treated like all other products. Congress should not change the Quill standard for 

cigarettes unless it also changes the standard for books, music, clothing, wine and 

other legal products. 

OLTRA members support a uniform nationwide system for all Internet, telephone, 

and mail order retailers to collect and remit applicable taxes directly to state taxing 

authorities. Such a uniform system, currently being addressed by the Streamlined 

Sales Tax Project, would be vastly more efficient as a means of tax collection than 

an ad hoc, piecemeal approach targeting a single type of consumer product. 

HR 1839 would not be uniform, efficient, or effective. It is not uniform because 

it would exacerbate the disparate treatment of Internet tobacco retailers. It would 

compel them, unlike all other interstate retailers, to participate in the tax collection 

process. Giving individual states the authority to bring actions against retailers 

would lead to a patchwork of different enforcement decisions in each state. There 

is no rational basis for this unequal treatment. 

It would impose upon them the duplicative burden of filing reports under the Jenkins Act, and would do so upon the heightened threat of felony penalties. Such penalties are not imposed on other retailers. The imposition of criminal penalties would 

be excessive, and sanctions should be no greater than penalties for violation of FTC 

regulations governing the sale of consumer goods. 

It is difficult to conceive of a less efficient means of tax collection than reporting 

sales in the hope that sums can later be collected from consumers. Such an approach increases the costs of collection, as each state, no matter how strained its 

budget, would have to invest in person-by-person collection of taxes on a few cartons 

of cigarettes at a time. Moreover, since no other sales of products across state lines 

are subject to this reporting and collection process, each state will have to hire ad 

hoc tax collectors to carry out this cumbersome program. The efficiencies that come 

from point-of-sale tax collection, and the attendant benefits to the States, would be 

lost. 

Turning over personal information to the states would raise significant privacy 

concerns. The states do not store consumer information in a secure or adequate 

manner. According to an article published in the March 26, 2003 edition of The 

Washington Post, ‘‘only 14 states, including Virginia, comply with federal mandates 

to help ensure the protection of computer systems that hold confidential information 

about millions of people.’’

The penalties proposed by groups such as the Campaign for Tobacco Free Kids 

would not stop the sale of tobacco products over the Internet. It would end the sale 

of these products by responsible retailers, like OLTRA’s members, and leave the 

door open to ‘‘fly-by night Internet retailers,’’ smuggling operations, foreign retailers 

and organized crime. It should be apparent that a uniform nationwide system for 

point-of-sale tax collection is a far better and more efficient means of collecting 

taxes. 

HR 1839 as drafted is also ineffective because it will not have the effect of collecting more tax revenues for the states. The Act does nothing to overcome the problems inherent in the outdated process of reporting and collecting in each state. Increasing the penalties would in fact be counterproductive, because it will have the 

effect of banning the sale of tobacco products to adult consumers over the Internet. 

In fact, it would drive consumers to seek out contraband and illegitimate tobacco 

products, once responsible retailers are put out of business. See Patrick Fleenor’s 

Cato Institute Policy Analysis No. 468, ‘‘Cigarette Taxes, Black Markets and Crime: 

Lessons From New York’s 50 Year Losing Battle,’’ published February 6, 2003. Another recent study, published by the Beacon Hill Institute at Suffolk University, 

states clearly that New York City’s tobacco tax increase ‘‘will generate less than half 

the revenue projected by New York City and will result in a net loss approaching 

$217 million.’’

Therefore, considerations of equality, efficiency and effectiveness warrant study 

and implementation of a point-of-sale means of tax collection, applicable to all retailVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00123 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
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ers under a uniform national system mandated by Congress. Any effort to address 

this issue should be consistent with such an approach. 

EFFORTS TO PREVENT SALES TO MINORS

OLTRA agrees with NACS that minors should not have access to tobacco and that 

no retailer should sell tobacco products to minors. OLTRA believes, however, that 

it is much further along in its efforts to prevent tobacco sales to minors than efforts 

by local convenience stores. While Mr. Armour’s stores may have adopted measures 

to prevent sales to minors, there are 133,976 other convenience stores across the 

country (and probably a large number of other stores that sell tobacco products). A 

large percentage of these stores employ workers who more often than not do not 

verify that a tobacco purchaser is at least 18 years of age. 

One recent example of the ease with which minors can purchase tobacco products 

from convenience stores occurred in Massachusetts. As reported in the Boston Globe

on May 1, 2003, ‘‘the number of stores illegally selling cigarettes to teenagers in 

Massachusetts more than tripled in the past year, after budget cuts forced health 

boards across the state to abandon their local inspection programs.’’

The Massachusetts Association of Health Boards (www.mahb.org) conducted an 

elaborate sting operation where minors, under adult supervision, attempted to purchase cigarettes in local stores in 68 Massachusetts cities and towns. In 2002, the 

average rate of illegal sales to minors in these towns was 9.3%. When these same 

locations were checked in February-April 2003, the average rate of illegal sales more 

than tripled to 29%. Teens visited 221 stores, and were able to purchase a pack of 

Marlboros from 64 of those retailers. According to Cheryl Sbarra, Director of the Tobacco Control Program for MAHB, ‘‘Massachusetts has not seen the illegal sales to 

minors rate this high since 1995. It is more than twice the national average.’’

While Mr. Armour’s stores may have only had 4 instances of sales to minors out 

of several million transactions last year, these figures do not demonstrate the number of minors that did not participate in a sting sale or were not caught. His figures 

do not demonstrate that local convenience stores are preventing the sale of tobacco 

products to minors at a higher rate than OLTRA’s members. 

In contrast with the frequency of cigarette sales to minors by local convenience 

stores, minors face a number of barriers if they make similar attempts to purchase 

tobacco products from Internet retailers. 

The effectiveness of such measures can be empirically demonstrated. There is little evidence of minors purchasing tobacco products on the Internet. This is due to 

cost of the product, the cost of shipping, the required use of credit cards, the time 

taken for delivery, and the risk of parental detection, all of which discourages minors from purchasing from online sources. Minors tend to purchase tobacco products 

from social sources or in local convenience stores in pack form, and not in cartons 

from Internet retailers, who have minimum sale requirements of one carton or 

more. 

OLTRA has instituted a policy mandating that its members only sell tobacco products to individuals 21 years of age or older, and that its customers receive the products they purchase through either the United Parcel Service age verification system 

or United States Postal Service restricted delivery system. 

Under the UPS system, a package cannot be delivered to a consumer until an 

adult signature is received by a UPS driver. When this method of shipment is used, 

UPS will not leave the package at the customer’s doorstep or with a neighbor. The 

UPS driver cannot release the package or clear the delivery from his handheld monitor until he has verified that the recipient is an adult. The UPS driver will ask 

to see a government issued photo identification card, verifying that the recipient is 

at least 21 years of age. UPS will not deliver a package to anyone under the age 

of 21. Once the package is delivered, a confirmation of delivery is sent to the retailer. This is the same system used successfully by the Wine Industry. 

When USPS Restricted Delivery is used, Postal delivery drivers must check the 

recipient’s identification before a package is tendered to a recipient. The Postal delivery driver cannot leave the package at the door of the customer or with a neighbor. A package sent by Restricted Delivery can only be delivered to the customer 

whose name is on file with the local Post Office (if a spouse is on file with the Post 

Office, the spouse can sign for the package). 

The Postal delivery driver must collect the signature of the recipient. Once the 

package has been delivered, a confirmation is sent to the retailer containing the 

name of the recipient. A retailer can also request that a copy of the recipient’s signature be sent to the retailer by facsimile or e-mail. 

While packages sent USPS Restricted Delivery can be delivered to business addresses, packages can only be delivered and signed for by the recipient or his auVerDate 0ct 09 2002 10:59 Jun 17, 2003 Jkt 000000 PO 00000 Frm 00124 Fmt 6601 Sfmt 6621 G:\WORK\COURTS\050103\86786.000 HJUD1 PsN: 86786
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thorized agent (described above). USPS will not deliver a package to an individual 

who is not authorized to receive it. This is done so that the Postal delivery driver 

can check the age and identity of the recipient and verify that the recipient is of 

legal age. 

OLTRA has adopted the following measures to prevent the sale of tobacco products to minors from member websites:

• Requiring each purchaser to create an account to purchase tobacco products.

• On all new accounts, consumers must submit accurate name, age, address, 

credit card, and billing information, along with a copy of a government-issued 

photo ID.

• Checking credit card information against an address verification system to 

prevent fraud.

• Publishing clear statements that the sale of tobacco products to individuals 

21 years of age or under is prohibited.

• Selling only to adults 21 years of age or older.

• Notifying purchasers that it is a crime for individuals under the age of 18 to 

purchase cigarettes.

• Notifying purchasers that their tobacco products are for personal use only and 

not for resale.

• Refusing to sell tobacco products to any purchaser who does not provide accurate information.

• Using the UPS Age Verification System for all first-time deliveries on new accounts (or USPS restricted delivery). UPS drivers must obtain an adult signature and the recipient must present a photo ID to the driver proving that the 

recipient is of legal age to accept tobacco products, if the recipient appears 

to be under the age of 27. This is the same system used to deliver other agerestricted products, including wine.

• Placing prominent disclaimers on all websites stating that OLTRA members 

do not sell to minors.

• Placing all required Federal warnings on member websites.

Members have taken individual steps to employ further verification tools through 

third-party software, which checks consumer information against a variety of government, credit reporting, DMV and other databases. Several members have also 

registered with NetNanny and similar services, companies that produce software allowing parents to select which websites should be blocked from the view of their 

minor children on their own home computers. 

There are retailers, both online and brick and mortar, that do not verify the age 

of their purchasers. These retailers are not OLTRA members. OLTRA reviews the 

websites of its members, and if a website is not in compliance with the OLTRA 

standards, it will be removed from the organization. 

OLTRA believes that the only way to resolve age verification issues on Internet 

sales of tobacco products is through the adoption of national standards through federal legislation, not through a patchwork of regulations by the individual states. 

OLTRA would support a federal standard on age verification, similar to those currently utilized by OLTRA members, to minimize the sale of tobacco products to minors, as long as those procedures are economically viable and do not interfere with 

the significant benefits of purchasing over the Internet (secure ordering, better customer service, convenient and fast delivery and greater consumer choice). 

ENFORCEMENT BY STATE ATTORNEYS GENERAL

OLTRA opposes the provision in HR 1839 which would grant to State Attorneys 

General the authority to bring actions against Internet retailers in federal court for 

violations of state and federal law. OLTRA is in favor of national standards and national enforcement. Retaining enforcement with the federal government and not the 

states ensures a consistent body of law. Enforcement authority should remain with 

the federal government, rather than permit a variety of results based on the application of conflicting laws that vary from state to state. 

APPLICATION TO NATIVE AMERICAN RETAILERS

A number of OLTRA members are Native American retailers located on tribal 

land. These retailers provide jobs in their communities, employing Native Americans, adding a technological infrastructure in areas previously burdened with high 

unemployment and lacking in high tech jobs. 

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Native American retailers make up the largest percentage of Internet tobacco 

businesses. This statistic was evident in the GAO Report, which listed 87 of the 147 

Internet tobacco websites as being on Native American land. 

HR 1839 would end the sale of cigarettes from Native American retailers to nontribe members and the passage of HR 1839 would expose Native American retailers 

to individual state laws, laws that do not now apply to Native American retailers 

because they would violate their sovereign rights, the Indian Commerce Clause and 

the Supremacy Clause of the United States Constitution. 

For example, as a sovereign Native American nation, the Seneca Nation and its 

members are immune from suits brought by any state. New York State has recognized that the Seneca Nation and its members have sovereign immunity. In 1997, 

Governor Pataki stated, ‘‘we respect your sovereignty and, if the Legislature acts as 

I am requesting, you will have the right to sell tax-free gasoline and cigarettes free 

from interference from New York State’’ (emphasis added). See Santa Fe Natural Tobacco Co., Inc. v. Spitzer, Nos. 00 Civ. 7274 (LAP), 00 Civ. 7750 (LAP), 2001 U.S. 

Dist. LEXIS 7548, 2001 WL 636441 (S.D.N.Y. June 8, 2001). This is particularly 

troubling in New York State, where the price of cigarettes has risen dramatically 

over the past year. As recently as May 3, 2003, New York Governor George Pataki 

stated that imposing state taxes on Native American retailers ‘‘would be extremely 

unrealistic.’’

This Subcommittee should work closely with OLTRA to ensure that tribal groups 

are able to have input into consideration of this bill, which will have a significant 

impact on the economies of Native American tribes that sell tobacco products over 

the Internet. 

CONFLICTS WITH OTHER BILLS

HR 1839, and other bills that may be introduced to regulate the sale of tobacco 

products over the Internet, may conflict with legislation currently under consideration. 

Four bills have been introduced on Internet tax issues, three would make permanent the Internet Tax Freedom Act (‘‘ITFA’’) first passed in 1998 and extended in 

2001. The IFTA expires on November 1, 2003.

• HR 49, introduced by Representative Chris Cox, has 112 co-sponsors. On 

April 1, 2003, the House Subcommittee on Commercial and Administrative 

Law held a hearing on the bill. Testifying in support were: Hon. James Gilmore III, former Governor of Virginia, former Senator Jack Kemp (Director 

of Empower America), and Harris Miller, President of the Information Technology Association of America (ITAA). 

Gilmore, a supporter of the original Internet Tax Moratorium passed in 

1998, testified in support of federal codification of a ‘‘bright-line’’ nexus standard in line with the U.S. Supreme Court’s Quill decision. According to Gilmore,

The cyber economy has blurred the application of many legal nexus rules. 

American businesses need clear and uniform tax rules. Therefore, Congress should codify nexus standards for sales taxes in a way that adapts 

the law of nexus to the New Economy and the new ‘‘dot com’’ business 

model. Codification of nexus would serve several important policy objectives: (1) provide businesses ‘‘bright line’’ rules in an otherwise confusing 

system of state-by-state nexus rules; (2) protect businesses, especially 

small businesses, from onerous tax collection burdens; (3) reduce the 

amount of costly litigation spurred by confusing nexus rules; (4) nurture 

the full growth and development of electronic commerce; and (5) give consumers and individual taxpayers who participate in Internet commerce 

a tax break. 

Kemp agreed with Gilmore, and also cited to the Quill decision in his testimony before the House Subcommittee. Kemp stated that ‘‘The central issue 

in the Internet tax debate is not ‘fairness’ as the NGA and some others would 

have us believe; it is taxation without representation. States have been 

trying for more than three decades to tax people and businesses that are located out-of-state because politicians are acutely aware non-residents can’t 

vote them out of office.’’

The final speaker, Harris Miller, testifed that ‘‘The Internet does not deserve carve outs or special treatment. Neither does it deserve to become the 

tax pin ̃ ata of 2003, hit by every revenue starved taxing jurisdiction in the 

country.’’ Miller discussed his support for the Quill decision, stating that the 

‘‘ITAA believes that the states must simplify their tax systems and provide 

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bright line business activity tax nexus standards before seeking the authority 

to require remote sellers to collect sales tax on their behalf.’’

• S. 150, introduced by Senator George Allen of Virginia and seven other cosponsors. Senator Allen has been a strong supporter of efforts to remove barriers to free trade over the Internet.

• S. 52, introduced by Senator Ron Wyden of Oregon and two other co-sponsors. 

Senator Wyden was an original sponsor of the Internet Tax Freedom Act in 

1998.

• HR 1481, introduced by Representative Zoe Lofgren of California. This bill 

would extend the Internet tax moratorium to 2008.

These bills, and their wide support in the House and Senate, demonstrate that 

the jurisdictional issue should be addressed for the sale of all products, not only tobacco. 

HR 945, introduced by Representative Cliff Stearns, and four co-sponsors, would 

exercise authority under the Commerce Clause to clearly establish jurisdictional 

boundaries over the commercial transactions of digital goods and services conducted 

through the Internet, and to foster stability and certainty over the treatment of such 

transactions. HR 945 would give the federal government, not the states, authority 

to regulate commerce in digital goods and services. If the federal government can 

assert authority over digital goods and services, why not apply this same standard 

equally to all goods? 

Finally, HR 1636, introduced by Representative Cliff Stearns and twenty-two 

other co-sponsors, would protect and enhance consumer privacy over the Internet. 

The bill would preempt ‘‘any statutory law, common law, rule, or regulation of a 

State, or a political subdivision of a State, to the extent such law, rule, or regulation 

relates to or affects the collection, use, sale, disclosure, retention, or dissemination 

of personally identifiable information in commerce. No State, or political subdivision 

of a State, may take any action to enforce this title.’’ This legislation could be interpreted as superseding state laws calling for the submission of confidential customer 

data to state taxing authorities. 

SUMMARY

I look forward to working with the Subcommittee to craft a bill that will deal reasonably with these vital issues. 

OLTRA has adopted strict age verification policies and business standards for its 

members. It supports efforts to prevent the sale of tobacco products to minors. 

OLTRA supports the uniform enforcement of federal law by federal agencies, rather 

than giving State Attorneys General the power to bring an action in federal courts. 

OLTRA’s members in starting their businesses adopted a business model in line 

with the Quill decision, paying all federal excise taxes and applicable state taxes 

in the states in which member retailers are located or have a presence. OLTRA’s 

members, except for some of its Native American members, support efforts that 

would establish uniform standards for the collection and remission of applicable 

taxes to the states on all products, not just tobacco. 

I hope that these statements are helpful to the Subcommittee and I stand ready 

to testify before the Committee if asked.

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ATTACHMENT

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OLTRA.eps