Philip Morris to Curb Online Cigarette Sales

In a move that could lead to a dramatic drop in online cigarette sales, Philip Morris said it reached an agreement with 37 state attorneys general to limit the availability of online tobacco products by shutting off distributors believed to have illegally sold the products in the past.

The agreement requires new protocols to be established to control sales of cigarettes on the Internet, by telephone or by fax.

Illegal Distributors

In the deal, Philip Morris agreed to suspend cigarette shipments to direct customers that a state determines have engaged in illegal remote sales, to reduce the volume of cigarettes it makes available for sale through remote channels and to lock out retailers that a state finds to have engaged in illegal remote sales.

“Our voluntary agreement with the state attorneys general builds on Philip Morris USA’s existing trade programs and policies intended to preserve the integrity of our brands and the legitimate trade channels through which they are sold,” said Denise Keane, Philip Morris USA executive vice president and general counsel. “It sets a framework for continued information sharing with law enforcement and support of their efforts to eliminate illegal sales of Philip Morris USA products.”

Deane said the company regularly pursues litigation against Internet sellers that infringe on the company’s intellectual property rights by selling brand-name cigarettes without authorization. In the past, such actions have led to 16 federal court judgments and permanent injunctions against operators of Internet companies accused of such sales.

Using the Web has been seen as a way of not only selling to those who would not be otherwise able to obtain cigarettes because of their age, but also as a way for some merchants to circumvent state taxes, which often add dollars per pack onto the prices of cigarettes.

Three-Pronged Approach

The settlement is the latest attempt by regulators to shut off the supply of cigarettes available for sale through online sites that do not require proof of age or that sell into jurisdictions that do not allow online tobacco sales.

Almost a year ago, several major credit card companies agreed to stop processing payments from certain Internet retailers for cigarette purchases. Later, DHL and UPS agreed to stop shipping packages from the same pool of vendors.

Squelching supply was a necessary element of the effort to curb sales to minors through the Web, said New York Attorney General Eliot Spitzer, who was among the leaders of the coalition of law enforcement officials who negotiated the deal.

“These illegal enterprises cannot remain in business without a steady supply of cigarettes, and thus restricting that supply can be very effective,” he said.

With Philip Morris accounting for nearly half of all cigarette sales in the U.S., the move could have a major impact on online sales, though merchants willing to operate outside the law may still find ways to obtain the product, as tax-free cigarettes can often still be obtained from overseas locations.

Holes in the Web

The agreement seemed to leave some unanswered questions, including whether Philip Morris agrees with the attorneys general that all online tobacco sales are essentially illegal because age cannot be verified and because of tax-collection loopholes.

In fact, that question has been one debated frequently since the dawn of e-commerce. In 2001, a Federal appeals court in New York threw out a state law banning online sales, saying the state had overstepped its jurisdiction by placing a limit on interstate commerce.

There are also financial implications, noted National Taxpayers Union policy analyst Elizabeth Terrell.

“A lot of states had been targeting online sales to collect the taxes that may have been avoided by buying through that channel,” she said. Some states had begun to use existing federal legislation in an attempt to force retailers to turn over the names of customers so that they could be billed by states for taxes that were not paid at the time of purchase.

“States were becoming much more aggressive about targeting those sales from the tax angle,” Terrell added.