• Tobacco: Not so cheap, cheap
Tobacco: Not so cheap, cheap
In 1812, just seven years after Lewis and Clark returned to St. Louis, a German immigrant named Franz Teutenberg established a bakery downtown. The business prospered, evolving first into a chain of office cafeterias and, of late, into a business where Franz’s great-great-grandson co-stars with a giant chicken in local TV ads.
“Cheap, cheap, fun, fun,” chirps the Dirt Cheap Cigarettes, Beer and Liquor chicken. “That’s right, Chicken” says Fred W. Teutenberg IV. “And remember, the more she drinks, the better you look. We are the last refuge of the persecuted smoker, and we really are grateful for your business.”
Alas, times are tough for Fred and the Dirt Cheap Chicken. The feds tightened laws against reselling cigarettes made for foreign markets, eliminating a key source of cheap smokes. Discount cigarette merchants reacted in two ways. One, some – including Dirt Cheap, according to a federal lawsuit filed by Philip Morris USA last November – began selling counterfeit cigarettes. And two, nearly all of the discounters turned to the Internet.
Dirt Cheap set up an Internet sales operation in Paducah, Ky. There the company buys cigarettes and pays Kentucky’s 3 cents-a-pack excise tax, second only to Virginia’s 2.5 cents-a-pack tax as the lowest in the nation.
Dirt Cheap then sells the Kentucky cigarettes over the Internet in states with higher excise taxes, among them, Washington state which has a $1.425-a-pack tax. The price difference is almost $14 a carton – not chicken-feed.
A 1949 federal law called the Jenkins Act requires companies selling cigarettes across state lines to give their customer lists to state tax offices. But that law never contemplated the Internet. The General Accounting Office reported in 2002 that few Internet tobacco merchants were complying with the law. Some others claimed to be Native Americans, who are exempt from excise payments.
The Washington state Department of Revenue did the math and figured out it was losing $4 million a year in taxes. The state sued Dirt Cheap, which was singled out because it had advertised heavily in the state. In December, the chicken quietly capitulated, settling the suit and agreeing to give up the names of 40,000 online customers. The state has begun sending them letters demanding payment of state cigarette taxes. A two-pack-a-day smoker who has been buying for a year could get a tax bill of $1,040.
Overall, states may be losing as much as $1 billion a year to Internet cigarette operations. States with high excise taxes (like Illinois, with its 98 cents-a-pack tax) are losing more than low-tax states like Missouri (17 cents a pack). But high tax or low, there’s money to be collected, and state revenues are too scarce not to go after it aggressively. That last refuge of the persecuted smoker is going to feel like the Alamo.
St. Louis Post-Dispatch
