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Published: Saturday, 2/19/2005

Ohio eyes taxes for cigarettes from Web

BY CHRISTOPHER D. KIRKPATRICK
BLADE STAFF WRITER

The Ohio Department of Taxation wants to collect on thousands of dollars in unpaid cigarette taxes from Internet sales and plans to mail about 1,000 letters demanding payment from Ohio residents.

Under the federal Jenkins Act of 1949, which requires companies to supply lists of clients for tobacco taxing purposes, the state has compiled a tally, said Gary Gudmundson, spokesman for the agency.

"We are trying to collect tax due," he said. "Some of these figures represent years' worth of purchases."

The state has mailed out 25 letters asking for about $5,000 in taxes, Mr. Gudmundson said. He had no figure for the 1,000 letters about to be mailed.

The Michigan Treasury Department recently mailed its own letters, some tax demands in the thousands of dollars as some residents have tried to avoid a $2-per-pack tax, increased from $1.25 in July and three times since 1994.

Ohio Gov. Bob Taft just proposed an increase from 55 cents to $1 per pack, less than the $1.20 per pack health advocacy groups are pushing. The Ohio tax increased by 24 cents in 2002. Michigan's $2-per-pack tax is the third highest in the nation, behind New York City and New Jersey.

Ohio and Michigan cigarette purveyors are seeing profits go up in smoke as more and more customers turn to the Internet to avoid taxes.

Business has declined at Frenchtown Liquor Shoppe at 3616 North Dixie Hwy. in Frenchtown Township. Regular customers have been asking for cheaper rock-bottom-priced brands - some so obscure, clerk Mike Workes has never heard of them, he said.

"I know business has gone down. And they're not even asking about the generics, they want something less than Basics," he said.

Neil McGregor, owner of Port Royal Cigars in the Westgate Village Shopping Center, said he began losing customers when a 17 percent wholesale tax on cigars and pipe tobacco took effect in the 1990s. "It's been estimated that 30 to 40 percent of all cigar sales occur on the Internet," he said. "They are doing it to avoid the sales tax."

The tobacco sales tax dilemma points to the larger issue of how states and local governments can retain or recoup sales taxes increasingly lost to unregulated Internet sales.

Ohio's income tax form does offer a place to declare unpaid sales tax. It's an honor system some say is not working and must be changed.

Mr. Gudmundson estimates the collective loss for the state's 88 counties could be about $100 million for all Internet sales where tax is not collected. Michigan officials estimate their state will fail to capture more than $200 million this fiscal year.

The National Association of Convenience Stores estimates at the end of 2003, 350 companies sold 413.5 million packs of cigarettes online, about 2 percent of all sold in the country.

"According to market researcher Forrester Research Inc., online cigarette sales will reach $5 billion in 2005. Lost tax revenue from online cigarette sales is about $200 million a year now and could grow to $1.4 billion in Fiscal Year 2005," the association's Web site said.

A movement is afoot to standardize sales tax collection across much of the nation.

Under a tax law to take effect July 1, Ohio companies that deliver goods across state lines will charge the sales tax rate of the destination county, rather than count it as a local sale and keep the sales tax at home.

The change will help Ohio stay in compliance with an effort by more than 40 states and the District of Columbia to make sales taxes more uniform across lines. Ohio and the others hope their efforts will encourage out-of-state retailers, primarily selling through catalogs and the Internet, to collect their sales taxes, or secure federal legislation requiring them to do so.

Contact Christopher D. Kirkpatrick

at: ckirkpatrick@theblade.com

or 419-724-6077.



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