Internet Cigarette Sales:

Limited Compliance and Enforcement of the Jenkins Act Result in Loss of State Tax Revenue

GAO-03-714T: Published: May 1, 2003. Publicly Released: May 1, 2003.

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The Jenkins Act requires any person who sells and ships cigarettes across a state line to a buyer, other than a licensed distributor, to report the sale to the buyer's state tobacco tax administrator. The act establishes misdemeanor penalties for violating the act. Compliance with this federal law by cigarette sellers enables states to collect cigarette excise taxes from consumers. However, some state and federal officials are concerned that as Internet cigarette sales continue to grow, particularly as states' cigarette taxes increase, so will the amount of lost state tax revenue due to noncompliance with the Jenkins Act. One research firm estimated that Internet tobacco sales in the United States will exceed $5 billion in 2005 and that the states will lose about $1.4 billion in tax revenue from these sales.

Overall, we found that the federal government has had limited involvement with the Jenkins Act concerning Internet cigarette sales. We also noted that states have taken action to promote Jenkins Act compliance by Internet cigarette vendors, but results were limited. We determined that most Internet cigarette vendors do not comply with the Jenkins Act or notify their customers of their responsibilities under the act. Vendors cited the Internet Tax Freedom Act, privacy laws, and other reasons for noncompliance. A number of Native Americans cited sovereign nation status. GAO's review indicated that these claims are not valid and vendors are not exempt from the Jenkins Act. We concluded that states are hampered in attempting to promote Jenkins Act compliance because they lack authority to enforce the act. We suggested that to improve the federal government's efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, the Bureau of Alcohol, Tobacco and Firearms (ATF), instead of the Federal Bureau of Investigation (FBI), should be provided with primary jurisdiction to investigate violations of the act. We noted that transferring primary investigative jurisdiction was particularly appropriate because of the FBI's new challenges and priorities related to the threat of terrorism and the FBI's increased counterterrorism efforts.

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