DennisBeaverMarch 12, 2010 (Original publish date) • By Dennis Beaver

“We’ve got a situation which I’ll bet most people who buy things on-line have never heard of,” Holly’s e-mail began.

Readers are always welcome to drop by our office. One week later, Santa Maria residents Holly and her husband, Jim, placed a pack of Marlboro cigarettes on my desk, and with a broad smile, Jim said:

“We love our Marlboros. A few years ago we wanted to see if there was a way to buy cigarettes and legally avoid paying California taxes.”

For some reason the couple appeared a bit angry. I have since learned that thousands of Californians are in their precise situation — angry over something very costly, going back years and which seems unfair to them.

Tax-free smokes

“We looked online and found dealers who sold the brands we liked, but for much less, and tax free. These sites stated — and their employees verified — that, as sales were made outside of California, we did not owe any taxes.”

“We bought cartons of cigarettes for at least half of what was charged locally. We told our friends about these incredible prices — and soon were buying cigarettes for about 15 families, and this went on for years. We did not make money; it was not a business, just something we got into for our friends. This all began about eight years ago,” Holly said.

Greetings from the Board of Equalization

At that point in our discussion, the couple handed me a tax bill in the amount of $7,500 from the California Board of Equalization, Excise Tax Department. It represents the tax that my readers would have paid on the cigarettes, had they been purchased in California.

So, what happened to “tax free?”

I contacted the Board of Equalization in Sacramento, and spokeswoman Anita Gore set out what’s behind California’s major push to recover money it feels is owed on out-of-state cigarette sales.

“It’s all about revenue — money that California is owed and needs,” she stated, and explained why collection of these taxes is both “necessary and legal.”

“When you buy cigarettes locally you pay sales tax, but before they reached the retailer, a distributor paid the state’s 87 cents-per-pack excise tax. When you buy from an out-of-state seller who does not collect California taxes, the state is being shortchanged. In 1935 it was determined that a use tax (just like a sales tax) would be applied in situations where cigarettes or other items subject to sales and excise taxes were purchased out-of-state,” she explained.

When cigarettes are purchased from these out-of-state dealers two things happen: The customer pays less, which makes California retailers victims of unfair competition, as it is impossible to compete with someone who is selling so cheaply through what amounts to tax evasion.

How does California know who is buying these cigarettes?

“We bought these cigarettes from a number of Internet sellers over at least an eight-year period of time. How did California get our names?” my readers asked.

“We get that question all the time,” Anita Gore replied.

“The Jenkins Act of 1949 requires cigarette retailers who make out-of-state sales to disclose their customers and make that information available to their state’s Attorney General. It is the AG who is charged with enforcing the reporting aspects of the Jenkins Act.

“As we are talking about a great deal of potentially lost tax revenue, this is a seriously looked at area of commerce. Investigators will buy from out-of-state retailers who ship cartons of cigarettes into California to see if they are collecting taxes, and often conduct sting operations,” she pointed out.

Savings often an illusion

“We were charged pretty high shipping rates to get these cigarettes,” Jim said, “and now, if we have to pay all of this tax, it’s clear we would have been better off buying in California. But just how far back can they go?”

The answer is astonishing! It is one of the longest statutes of limitation in the area of tax collection in the country.

“Eight years — the state of California has the right to go back that far, look at invoices and collect taxes which would have been paid had the cigarettes been sold here. Payment of the tax is the customer’s obligation, regardless of what a seller states,” Gore answered.

Compromise possible

If you receive a notice from the state concerning taxes owed on out-of-state purchase of cigarettes, don’t ignore it. You could be sued. Instead, “contact us,” Gore advised.

Her department has a settlement program, and can compromise — accepting less than the full amount owed — just as any tax-collecting agencies do.

Dennis Beaver practices law in Bakersfield and enjoys hearing from his readers. Contact Dennis Beaver.