WASHINGTON – Welcome to the smoking section of the future, discount cigarette and tobacco product Web sites that are making big bucks thanks to an explosion in cigarette tax hikes this year.
"We just keep adding staff. It has been phenomenal," said Dean Stresing, a spokesman for Smoke Signals Discount Tobacco, located on Seneca Indian territory in Brant, N.Y.
Like other Native American reservation-based operations, Smoke Signals offers smokes tax-free, a considerable discount over prices in many states that have recently upped cigarette taxes to pay for declining budget revenues.
And while such interstate commerce is likely to be challenged in court soon, proprietors are pleased with the booming online and mail-order business.
"Our Web sites get bogged down with a lot of traffic," said Stresing, adding that since the July 1 tax hikes went into effect, their online and mail-order business jumped 10 percent to account for nearly 20 percent of total sales.
The difference in price can't be beat, say smokers. Off the reservation, New Yorkers must pay $1.50 tax on each pack of cigarettes, raising the price of a pack to as high as $7.00. Smoke Signals' name-brand cartons sell for $28, roughly $2.80 a pack.
That discount has led to a surge in the number of online vendors — from an estimated 88 two years ago to a current 195, according to a University of North Carolina School of Public Health study released this month.
"We know there's been a steep increase," said Kurt Ribisl, the UNC professor who headed the study. Ribisl sees a direct correlation in the jump of online purchasing to the passage of new cigarette taxes.
Ribisl said the study suggests that while online cigarette sales make up somewhere between less than 1 percent and 5 percent of total cigarette sales a year, depending on the state, those numbers are destined to grow.
As a result, states that expected to bolster their bottomed-out fiscal budgets with the new taxes are now going to have to deal with millions of lost tax revenues through these online cigarette sales. The Bureau of Alcohol and Tobacco estimates that $1.5 billion has been lost to online sales, cigarette smuggling operations and mail-order purchases already.
"I can tell you that we can estimate our levels of lost revenues $15 million to $40 million," due to cigarette sales over the Internet and through the mail, said Dennis Maciel, chief of the Special Taxes Division of the California Board of Excise Taxes.
But buying cigarettes over the Internet isn't exactly duty-free. According to federal interstate commerce law, purchasers of products across state lines — whether it be through the mail or over the Net — are supposed to pay a "use tax" on such purchases when they file their annual state tax returns.
Less than 10 percent of people do, say experts, and virtually no enforcement mechanisms exist to force compliance. States also don't enforce rules on vendors, who are supposed to send the states annual lists of their customers and tax obligations.
"Right now, the law is pretty much being ignored," said Ribisl. "State tax authorities are just now trying to figure out how to handle the issue."
But Rick Lewis, a smoker who heads Fighting Ordinances and Restrictions to Control and Eliminate Smoking Connecticut Chapter, said smokers' rights groups and online discount cigarette vendors will continue to outpace government efforts as long as the government seeks to penalize smokers with higher taxes and punitive measures.
"The government has created a market for such a thing," said Lewis, whose home state of Connecticut, which just raised cigarette taxes 62 cents, has already lost $6.3 million in cigarette tax revenues this year.
In the end, Washington may weigh in on the issue in order to enforce interstate sales tax law. Though a moratorium currently exists on new taxes or enforcements on Internet sales, some lawmakers say concern over health risks related to smoking outweigh anti-tax sentiments.
"I'm very concerned about the selling of cigarettes online because of the ease that children can buy them," said Rep. Bob Goodlatte, R-Va., co-chair of the Congressional Internet Caucus. "That's an issue we need to address."