New York Sued Over Net Cigarette Ban

Brown & Williamson Tobacco Corporation (B&W), the third largest cigarette manufacturer in the U.S., said Monday that it has filed suit in a Manhattan federal court to overturn a New York state law banning the sale of cigarettes on the Internet.

The suit alleges that the law — which makes it a crime to ship or transport cigarettes sold via mail order, telephone or the Internet to New York residents — is an “unconstitutional interference with commerce.” The statute, signed in August by Governor George Pataki, is the first of its kind in the United States.

“The Constitution prohibits any one state from regulating avenues of national commerce such as the Internet, the U.S. mails, and interstate shipping,” said David Remes, an attorney representing the Louisville, Kentucky-based maker of Kool and Lucky Strike brand cigarettes.

Remes added, “The future of e-commerce will be jeopardized if all 50 states can set their own rules for what can be sold over the Internet, or if they can ban out-of-state sales to protect state tax revenues or local merchants.”

B&W’s Web Plans

Just last week, B&W announced plans to sell cigarettes directly to consumers via mail order, telephone and, eventually, the Internet. The company said the plans were in response to limited shelf space at U.S. retailers that is driving retailers to carry only the most popular cigarette brands.

The tobacco maker intends to market its less popular brands — including Carlton, Tareyton and Raleigh — through a subsidiary called BWT Direct, LLC. B&W said its direct selling program would begin in California, Kentucky, Florida, Georgia, Michigan, North Carolina, Texas, Oregon and Massachusetts, and then expand to other states.

Although opponents of Internet cigarette sales argue that the Internet makes it easier for underage smokers to purchase cigarettes, B&W said it would use “rigorous procedures” to ensure that smokers were 21 or older.

“Our direct selling program includes numerous safeguards to ensure that products are shipped only to adult consumers,” said Karen Brotzge, BWT Direct’s executive vice president. The company said that all age-related information would be verified against information from public records such as drivers’ licenses, voter registration and other sources.

Tax Avoidance

In an effort to avoid taxes that can add as much as $10 (US$) to the price of a carton of cigarettes, many smokers are turning to the Internet for their nicotine fix. For instance, smokers in Illinois pay up to $30 for a premium carton of cigarettes; the same cigarettes can be purchased online from Dirtcheapcig.com for only $19.99.

Consumers can save even more money if they are willing to smoke non-premium cigarettes and order from sites operated on Native American reservations. Taxfreetobacco.com sells Native All Natural cigarettes for as low as $11 per carton, and promises customers that “taxfreetobacco.com DOES NOT report to ANY state taxation or tobacco department.”

B&W noted in its complaint that New York’s administration has said that it would not enforce the Internet sales ban against Native American retailers like Taxfreetobacco.com. Instead the state has vowed to take action against the private carriers who transport their cigarettes.

Tax Collection Efforts

Purchasing cigarettes from out of state does not officially exempt a consumer from taxes; the law requires that individual consumers report their purchases and pay the state directly. However, few consumers do so, and states have found themselves having to pursue individual consumers to collect the tax.

Earlier this year, the state of Washington informed past buyers of Internet cigarettes that they owe $8.25 in state taxes for each carton of cigarettes they purchased online. California has also warned its residents they must pay the state $8.70 for each carton of cigarettes purchased online or face taxes and penalties.

B&W said that it would collect and remit all necessary state and local taxes on cigarettes it sells directly to consumers.