As early as today the Senate is set to pass a bill to impose state and local sales tax on all internet purchases, including cigars. Named the “Marketplace Fairness Act” by its supporters, the bill would require internet and mail-order retailers to collect sales tax on all transactions.
Currently, such purchases include state sales tax if the retailer has a physical presence in the state where the customer resides, but a Supreme Court ruling prohibits a state or locality from requiring businesses in other jurisdictions to collect such taxes. Technically, consumers may be required to self-report such taxable items, but the reality is only a fraction of those taxes are actually collected.
The bill easily passed a procedural hurdle yesterday, and President Obama has issued a statement of support. The bill has moved through the usually slow-moving Senate at breakneck speed, as it was only introduced one week ago while the nation’s attention was focused on the tragic attack in Boston. It’s expected to pass the Senate as soon as today, although it’s not clear if it has the support of a majority of legislators in the House or, critically, Republican House leadership.
Critics suggest the bill is “a tax grab and a bureaucratic nightmare…an infringement on states’ rights and a federal encroachment on the almost-sacred ground of Internet commerce.” While that all may be true, the bill poses a special threat to cigars due to the fact that 48 out of 50 states tax cigars with an additional excise tax.
Bill Could Trigger State Cigar Tax Increases, Online and Off
Currently only Florida and Pennsylvania don’t have an additional excise tax on cigars (and New Hampshire doesn’t tax “premium cigars”), with over a dozen states taxing cigars at 50% or more of the wholesale or manufacturer price (pdf), which amount to a few dollars per cigar. Given the vast differences in excise taxes, it is no surprise that most of the largest online and catalog retailers are based in Pennsylvania or Florida, including Cigars International, Famous Smoke Shop, and Thompson Cigar.
One cigar industry expert I spoke with estimated that as much as 60% of all cigars are now sold either online or through mail order, and that states would quickly move to force online retailers to collect cigar excise taxes in addition to regular sales taxes. The issue has largely gone under the radar since cigars (as part of the “Other Tobacco Products” or OTP designation) are one of only a handful of products that are subject to state excise tax and are sold online. (Tires, through online retailers such as TireRack.com, and wine, depending on state shipping rules, are two other examples of goods subject to state excise taxes that are often sold online.)
While it’s not clear that online retailers would immediately be subject to excise tax in the same way that they would be for sales tax in the jurisdiction of the customer under the internet sales tax legislation, the bill does appear to clear the legal hurdle to doing so. Under one scenario, states could start demanding that out-of-state retailers begin collecting state tobacco taxes almost immediately, claiming that they are now authorized to do so. Under another scenario, if states faced resistance, it would not be difficult for legislatures to re-brand their excise taxes as a special sales tax.
That result would have implications beyond just online and catalog cigar purchases. Currently, one of the best reasons for not raising state OTP excise taxes is that a high tax rate is likely to drive sales online, eliminating tax revenues and pushing purchases away from local businesses. Without states worried about driving sales to untaxed, out-of-state businesses under the so-called “Marketplace Fairness Act,” OTP tobacco tax increases may soon multiply across the country as fiscally strained states look for more revenue.
Further, unlike across-the-board sales tax increases which anger wide swaths of voters, targeted tax increases on cigar smokers only affect a small percentage of voters, making them an especially easy target.