OLYMPIA Attorney General Christine Gregoire is trying to force an Internet cigarette dealer to cough up its list of Washington customers so the state can levy its steep tobacco tax on them.
The state Department of Revenue estimates that perhaps 40 percent of the cigarettes smoked in Washington are contraband smuggled in from out-of-state, bought at tax-exempt Indian smoke shops on reservations or purchased by mail or through the Internet.
"We estimate that contraband cigarettes maybe account for $250 million of lost revenue," Gregoire said. "It's lost taxes to the state of Washington, that goes without saying. It's also not fair to the brick-and-mortar store in Washington that's abiding by the law."
The lawsuit filed yesterday in Thurston County Superior Court seeks an injunction against dirtcheapcig.com, which sells cigarettes online from Kentucky, forcing the company to disclose its customers within Washington.
That would allow the state to track down the buyers and collect both the cigarette tax of $1.425 per pack and the 6.5 percent use tax the tax the state levies on out-of-state purchases by Washington residents in lieu of the sales tax.
The company bills itself as "The last refuge of the persecuted smoker."
A 10-pack carton of Marlboros sells for less than $30 on the site, compared with as much as $50 in Washington.
The lawsuit seeks to invoke the Jenkins Act, a decades-old federal law that requires dealers who ship cigarettes to customers in another state to provide that state's authorities with a list of customers every month. The law was designed to prevent large-scale tax evasion, and the state argues that it applies to Internet sales.
But Matthew Fairshter, the company's lawyer, argues that the law was designed to regulate the shipment of untaxed cigarettes from one state into another. The smokes sold by dirtcheapcigs.com are all duly taxed in Kentucky, he argues.
"They're not buying untaxed cigarettes, which is what the Jenkins Act is all about," Fairshter said. "The Jenkins Act does not regulate this issue."
Fairshter also argued that the state's lawsuit violates the Internet Tax Freedom Act, which protects online sales from taxation except where the transaction actually takes place.
"This company operates out of Paducah, Kentucky," Fairshter said. "It does no business in the state of Washington."
Mike Gowrylow, a spokesman for the Department of Revenue, said the Internet Tax Freedom Act was designed to prevent new and discriminatory taxes on Internet sales, not pre-empt existing laws such as the Jenkins Act and the use tax.
"This is neither new nor discriminatory," Gowrylow said.
In general, Internet and mail-order retailers can't be compelled to collect Washington taxes or provide customer lists unless they're physically located here.
That puts the burden of paying any taxes on the consumer, who typically doesn't show much interest in paying.
Enforcing the use tax is virtually impossible except on large items such as boats or cars that must be registered with the state.

JULY 23, 2003 -- WASHINGTON -- U.S. Reps. Mark Green (R-Wis.) and Marty Meehan (D-Mass.) will introduce legislation Thursday to strengthen federal regulations on tobacco sales over the Internet.

Green and Meehan will unveil their bill and discuss the measure at a news conference tomorrow at the Cannon House Office Building Terrace in Washington. They will be joined at the event by organizations supporting the legislation, which include the National Association of Convenience Stores (NACS). Two convenience store retailers will also participate in the event: Gary Krull, president of DePere, Wis.-based Country Express Auto/Truck Stop, and Lily Bentas, president and CEO of Canton, Mass.-based Cumberland Farms Inc.

"This legislation will address a significant loophole that negatively impacts the ability of the more than 132,000 convenience stores operating in the U.S. to compete on a level playing field," said Allison Shulman, director of government affairs for NACS.

As states continue to raise their excise taxes -- there have been three dozen state cigarette tax increases implemented since January 1, 2002, according to NACS -- smokers are flocking to remote sellers for tax-free cigarettes. Forrester Research estimates that 14 percent of all cigarette sales will be via the Internet by 2005 if loopholes are not addressed.

"The Green-Meehan bill ensures that the tax burdens are equal for all retailers of cigarettes and smokeless tobacco," Shulman said.