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The Individual
"Apparently, in our democracy, taxation requires only the
implied consent of the populace - not its direct permission"

RYO Magazine, April/June 2001, 2nd Quarter , Why People Smoke
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   Part II

State Tobacco Taxes

 

Voting and Taxes

   Well, we left this page alone for the duration of the Jan/Mar 2001 issue just to see what comments the variations in individual tobacco taxation schedules would generate. And, to say the least, the reaction has been voluminous. Not only were most of our readers unaware of separate taxes on tobacco goods (other than per pack taxes on cigarettes), they were unanimously astounded at the wide range of variation in the amount of taxes each state levies. We did not put the per pack tax on cigarettes for each state on the maps because we feel it is (at least should be) a separate issue and we want to keep the distinction between packaged cigarettes and other tobacco products well defined. Remember it was and still is the big cigarette makers that have caused much of the problems all tobacco users now face (both politically and financially) and the Master Settlement Agreement was a punitive judgement (although it affords some protection for signers from further litigation) based on the questionable practices of the cigarette industry in its marketing and production techniques; techniques that have little or nothing to do with the way most good quality roll your own/make your own tobacco products are produced and marketed. Rolling tobacco has never been aimed at younger audiences although admittedly some smokeless brands have crossed that line as have certain cigarette paper manufacturers. But in most cases papers, rollers and other accessories are not included in the tax scheme and smokeless tobacco products are, for the most part, taxed identically to roll your own tobacco. Further, the Master Settlement Agreement is not part of the taxation scheme we are discussing here. It is a separate cost for operating as a manufacturer or, in some rare cases, a distributor of tobacco products and this cost is passed on to the consumer in addition to the extra and often excessive taxes that each state imposes.

   However what is more important about this particular taxation scheme is that it affects more people than might initially be apparent. Typically, tobacco products are brought into each state by distributors or manufacturers who must pay that state's tobacco tax. These taxes are passed directly on to the the retailer who in turn passes it on to the consumer. Let's use the state of Oregon as an example. The tobacco tax in Oregon is 65% which means that for every dollar a distributor pays for tobacco goods from the manufacturer, the distributor must make a payment of 65 cents to the state's department of revenue. To legally bring untaxed tobacco into the state for resale, one must have a tobacco distributors license issued by the state of Oregon. The license is free but obligates the distributor to make quarterly payments and file forms showing how much taxable goods have been imported. This licensed distributor is further obligated to report to the state any tobacco product he exports to distributors or retailers in other states.

   Technically this distributor is not allowed to ship untaxed goods into states in which he is not licensed except directly to consumers or to other licensed distributors - many of whom may also be retailers - who in turn must pay the appropriate taxes. (It is a bit confusing but in general the licensing is the key and ANYONE can get a tobacco distributors license in most states). The wait for form processing can be frustrating but in most cases the cost is low or none).

   There are literally hundreds of major tobacco product distributors in the US and many more minor ones of various sizes and scope. Only a few are licensed in the State of Oregon which means only they (the licensed ones) can sell their products directly to retailers who have nothing more than a business license. This business license is all that is necessary to sell any tobacco product including cigarettes in the state of Oregon as long as the retailer buys stock from a state-licensed distributor. Where regulation comes in is when a retailer wishes to buy from a non-state licensed distributor and in this case, the retailer must have also have a distributors license to buy from non-licensed distributors. Many tobacco retailers have such a distributors license so as they purchase tobacco products from non-licensed sources, the retailer is obligated to pay the 65% tax to the state in the same manner as any other licensed distributor.

   Now a can of tobacco that has a base wholesale price of say $10 will cost distributors in Oregon $16.50, $6.50 of which they would send to the state department of revenue. A small percentage (about 1.5% in Oregon) is held back by the retailer/distributor for forms processing and other reporting expenses. That same $10 can would cost distributors only $10.20 if purchased in a low tax state like North Carolina with a tax rate of only 2%. Now you no doubt begin to see the problem that retailers in high tax states have. In Oregon they are going to have to pay 63% more for tobacco products than a retailer in North Carolina. Now traditionally, these two retailers would not compete as they are so far apart geographically that they would not normally service the same customers. A problem occurs, however when bordering states have radically different tax rates which encourages citizens to cross borders for better tobacco deals. Even this situation is greatly mitigated by the fact that most resident don't live near enough a lower tax state's border to justify much driving. The Canadian border is probably the most annoying scenario (at least for the Canada Revenue Department) as close, careful and expensive monitoring is necessary at all crossing points between the US and Canada because taxes on tobacco in Canada are exorbitant. A significant black market also exists that services large metro areas like New York City with truck loads of lower priced smokes from other low-tax, east-coast states. And certainly, the traffic between Florida with a 25% tax rate and Georgia with 0% on tobacco (all states have some form of excise tax on packaged cigarettes) is certainly, tobacco-wise, a one-way proposition.

   But of greatest interest and concern to the high tax state's revenue departments is the internet or mail order tobacco outlets that can sell products at prices below the wholesale price that local merchants, in all but the lowest tax states, are forced to pay. For the time being, the resources of revenue departments nationwide are focused on packaged cigarettes whose sales account for nearly 95% of all tobacco sales. However as RYO and MYO smoking become more popular here, (in Europe it garners a full 50% of the tobacco market) states will begin to allocate resources for better enforcement of taxation on them as well.

   Generally, in most states, it is the obligation of the consumer to pay applicable taxes on tobacco products they acquire from sources from without their states borders (usually from dual role distributor/retailers who are licensed only in the states they occupy). These obligations basically rely on the consumer to obtain a tax form, fill it out and send in the corresponding excise tax on the out of state tobacco they have purchased. There aren't probably a dozen consumers in the US who have yet bothered to do it and the states would need to allocate a huge amount of human resource to police the private behavior of its citizens. The states do try to get mailing lists from online and mail order vendors but to date have had little success in coercing businesses to cooperate. Various laws have been proposed at the state and federal level to regulate interstate commerce but have found little support mainly because such policies are not popular with constituents (especially businesses) as new laws would require out of state online/mail order retailers to charge the sales tax due for the buyer at his state or local level rate. (There are literally thousands of different sales tax rates across the country. In many cases, every county and even cities within a county may have a different rate). While excise taxes on tobacco are generally consistent throughout a state, without the cooperation of the supplier, there is little a state can do without infringing on federal postal regulations and dealing with other rights to privacy issues.

   We are concerned, here at RYO Magazine, with two possible (both unpleasant) scenarios that are the logical assumptive conclusions of the impact that inequitable tobacco taxes may ultimately have. One, that the local retailer is driven out of business by online merchants who can sell products tax-free (leaving the tax obligation to the consumer (whom that state does not have information on) for lesser amounts. Second, that online businesses are somehow monitored and become tax collectors for the states into which they send their products.

   As to our first concern, that is, the varying impact that these taxes have on local retailers, (depending, of course, on the tobacco tax rate) who find it very difficult to compete with either lower tax states or more directly with internet based businesses who charge NO state tax, it is important to remember that even with the Internet's huge impact, most people still buy from their local merchants. While we really like the advantages Internet commerce provides to the consumer as well as the convenience (and admittedly we too use the internet and mail order frequently for everything from sound and video equipment, to computers, and yes, tobacco), the Internet is primarily useful when you are already sure of what you want and you are simply shopping for the best price or availability. On the other hand, not everyone knows what all the possibilities are for any given product category, especially tobacco. So local retailers even in high tax states, if they take the time and initiative to learn about all of the choices available to the RYO/MYO smoker, can provide service that outweighs the price advantage of on-line competition. They can encourage potential customers to sample the various tobacco blends and give them hands-on demonstrations of how each injector or roller works.

   Their customers can likewise try various tubes and papers until they arrive at that perfect combination that will ensure a successful migration from the habit-prone world of packaged cigarettes. Without that kind of service the local retailer is going to find it hard to compete.

   The second scenario, which is likely to directly effect consumers in some pretty frightening ways, is that in all states, consumers are required to pay the taxes due on tobacco even when they buy it tax-free out of state. With the exception of cigarettes, enforcement is practically non-existant but the second scenario may becomes of serious concern when the states figure out how to meter these excise taxes by finding out who is buying what and make sure that everyone pays the applicable taxes. If this comes to pass, certainly the online or mail order out of state retailer no longer would have such a marked advantage in pricing and the local shops would benefit. What is truly disturbing is that this course of action would ultimately affect all mail order, interstate commerce. In all cases so far pursued to conclusion, the taxes owed by the consumer were retroactive and in some instances the payments due were quite overwhelming.

   In the long run we feel it would be to the advantage of the RYO/MYO industry in general for more people to shop locally as long as comprehensive service and selection is provided. There is room for both types of businesses (online and local) but the idea that our government should regulate our interstate buying behavior in such an intrusive manner worries many people. A far simpler solution is available. High tax states are going to have to come to their senses concerning tax rates. For governments, who are funded solely by our tax dollars in various forms, a lower tax rate that is accepted by its citizens (and is therefore collectable) is logically preferable to no tax collection at all. Consumers in high tax states are not stupid and they buy out of state in increasingly larger amounts. In other words 20% of something is preferable to 65% of nothing. As soon as the states can internalize this basic logic and with the help of a more proactive citizenry, we feel that tobacco taxes at least will standardize at a much lower and collectable rate. Until then, brick and mortar tobacco shops in high tax states will need to sell online to out of state customers to level the playing field.

   At some point you can bet that the US Congress is going to try to put a stop to out of state commerce regarding tobacco sales but we doubt they will be successful without a real bloodbath that will forcefully be felt the next times the polls open. Keep in touch with your local, state and federal representatives on this issue. If you don't, you will be left out of the ultimate decisions that may seriously affect your personal behavior in ways that reach far beyond the tobacco issue. The Individual still has a huge amount of power when well informed and proactive.

 

   We repeat some interesting links so that you can keep abreast of vital issues that affect 50 million voting age citizens in the US.


 

 

 

If you have information regarding pending tobacco legislation in your local or state government, please share it with us and we will, in turn, share it with all in these pages. If you want to keep abreast of pending federal legislation, go to http://thomas.loc.gov for a listing of all bills before Congress. For tobacco-specific legislation, you will have to use their search engine. Look under the Legislation column, click on 106th under the Bill Summary and Status heading. Next, Search using Word/Phrase, and when the new page comes up, type the word "tobacco" in the Word/Phrase box. Here you will find all current tobacco legislation before Congress. Of special note is #25 HR 2579 - To impose restrictions on the sale of cigars.

Hope you'll join us again.
                 -The Editor

 

 

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EDITOR'S NOTE: These reviews are solely for the convenience of people of legal age who already smoke, are trying to cut down on smoking, wish to spend less money on their smoking, want to roll their own cigarettes from high quality tobacco, and, in general, wish to have a far more satisfying, and economical smoking experience when compared with smoking pre-manufactured cigarettes. We, in no way, encourage people to smoke. Further, we prescribe to a sane, more logical approach to smoking that involves common sense as to quantity coupled with a strong desire to manage the habit until it becomes an occasional, freely chosen, diversion, that can be fully enjoyed with minimal health risks. Finally, we strongly encourage those who do smoke to take it outdoors, or to appropriate environments where tobacco can be enjoyed away from those who do not smoke, most especially children.  We do not sell tobacco or related products from this site; We distribute information about our perceptions of the quality of what is available and where it can be obtained. If you are under 18,  it is illegal to buy tobacco and you should immediately exit this site. If you do not smoke, it would seem illogical to start.

 

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