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It's been a long time coming, but on March 31, President Obama signed into law the Prevent All Cigarette Trafficking Act, or PACT Act, which will severely curtail the sale of cigarettes and smokeless tobacco products over the Internet.
This is a major victory for the industry and the states because the law, which goes into effect July 1, includes the following provisions:
Retailers selling cigarettes and smokeless tobacco products over the Internet must collect state cigarette taxes, smokeless tobacco taxes and sales taxes, and pay those taxes to the states where the customer who is purchasing the tobacco products resides.
Internet retailers must verify the age of the individual purchasing cigarettes and smokeless tobacco products to prevent underage youth from buying these products.
The U.S. Postal Service is prohibited from delivering cigarettes and smokeless tobacco products through the U.S. Mail to consumers.
These provisions close a number of loopholes in current federal law regulating Internet and mail order sales of cigarettes and smokeless tobacco products. Currently, Internet sellers typically sell untaxed or low-taxed cigarettes and smokeless tobacco products to consumers in higher-tax jurisdictions, without paying the taxes owed to the states. This results in states losing substantial excise tax and sales tax revenue, opens the door for underage youth purchases of tobacco products and reduces sales of tobacco products by law-abiding retailers.
With Internet sellers no longer able to sell cartons of cigarettes or smokeless tobacco products at a large price advantage over legitimate brick-and-mortar retailers, consumers will return to buying their tobacco products from local stores. Moreover, the PACT Act virtually guarantees this return to buying from local retailers because the U.S. Postal Service will be prohibited from delivering tobacco products. With mailing cigarettes and smokeless tobacco products being illegal, and companies including UPS, Federal Express and DHL no longer delivering tobacco products to customers, Internet sellers will be unable to transact business as usual.
This expected impact of higher cigarette and smokeless tobacco sales by retailers should begin to be seen shortly after July 1, and pick up as each month passes. This new law is the first piece of legislation to come out of Congress in some time that will directly benefit tobacco retailers and is a welcome relief from previous legislation such as the recent federal cigarette and tobacco tax increases.
Another benefit of the PACT Act is that every state will be the beneficiary of a tax windfall, either from state excise taxes and sales taxes being remitted by Internet sellers, or from consumers changing their buying habits and purchasing their tobacco products at local retail stores. According to U.S. Senator Herb Kohl (D-Wis.), the chief sponsor of the PACT Act, Internet tobacco sales alone cost state governments $1.4 billion annually in tobacco excise taxes and sales taxes.
The amount of the tax windfall will vary by state, and those states with high cigarette and other tobacco products (OTP) tax rates will most likely see the largest tax windfall because residents would have had a greater tendency to avoid paying excessive tax rates by purchasing tobacco products online. Whether the overall tax windfall impact will be small or large, the impact will be positive for each and every state.
Seizing on this newly enacted law, the National Association of Tobacco Outlets (NATO) has begun to educate state lawmakers about the tax windfall in those states where legislation is pending to increase cigarette and OTP taxes. With the windfall a virtual certainty for any given state, lawmakers may be able to avoid passing further cigarette and OTP tax increases or reduce the size of the increase to resolve budget deficits. This strategy has already been undertaken by NATO in Minnesota and New Hampshire. Lawmakers from additional states will soon receive NATO's letter informing them of the windfall tax dollars they can expect after the PACT Act takes effect July 1.
The PACT Act also includes provisions to require age verification of the person to whom cigarettes and smokeless tobacco products are delivered at a residence. This will ensure that underage youth do not accept packages of tobacco products when they are delivered. Moreover, the federal Bureau of Alcohol, Tobacco, Firearms and Explosives will have new authority to inspect records and inventories of Internet tobacco sellers to make certain Internet sellers comply with the new regulations. In addition, to add even more teeth to the law, violations of any provision of the PACT Act will now be a felony.
Passing the PACT Act into law was a group effort and NATO was a member of the Coalition to Stop Contraband Tobacco, a coalition of trade associations, businesses and individuals, which lobbied Congress to pass the legislation. This coalition included, among others, the American Wholesale Marketers Association (AWMA), NACS and the Society of Independent Gasoline Marketers of America (SIGMA).