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    Ohio, Michigan Profiting From Tobacco

    Cigarette sales light up states' coffers despite increased taxes designed to reduce smoking.

    TOLEDO, Ohio -- In the gloomy cavern of Ohio's budget woes, there is a bright spot coming from the glowing end of a cigarette. Ohio and Michigan were among more than a dozen states that increased taxes on cigarettes last year to help their sputtering economies. Higher prices drove some people over state lines or into cyberspace, but most are inflating state revenues by buying smokes at the corner store.

    Cigarette tax revenue in Ohio exceeded estimates by $30 million for fiscal year 2003, state officials said. From July 1, 2002, through June 30, 2003, Ohio collected $574.2 million in taxes on about 998 million packs of cigarettes. Michigan expects to collect $867.9 million in cigarette taxes for this fiscal year, which runs through September. So far, Michigan stores are selling 57 million packs a month.

    For smokers in Ohio, the best deals are found in Kentucky, where the tax on a pack of cigarettes is 3 cents, as compared to about 55 cents in Ohio, Indiana, and West Virginia.

    Police in southern Ohio are now trained to inspect cigarette packages at local stores. Officials look for a stamp on cigarette packs that shows the state tax has been paid.

    Employees at Barney's Convenience Mart know all about customers looking to dodge taxes. Many of its customers are Michigan residents avoiding their state's $1.25 per pack tax on cigarettes. "Some people drive two hours from Michigan to get here," Karen Katona, a Barney's clerk, said. "On Wednesdays, we get our cigarettes in. They know that, and they come in and sometimes buy $500 worth and take them back to sell them or stock up."

    Other smokers turn to the Internet to get cigarettes at lower prices. A report from the General Accounting Office, the investigative arm of Congress, identified 147 Web sites that sell cigarettes in the United States. Internet cigarette retailers are required by law to report the names and addresses of their customers so states can charge taxes. The GAO report found that most Internet sites ignore the law.

    "Vendors cited the Internet Tax Freedom Act, privacy laws, and other reasons for noncompliance. A number of Native Americans cited sovereign nation status," Paul Jones, a GAO director, told Congress in May. "GAO's review indicated that these claims are not valid."

    New York state started enforcing a ban on Internet cigarette sales last month, and a Senate bill, introduced June 3 by Sen. Orrin Hatch of Utah, would tighten restrictions on Internet retailers to make sure they comply with tax collection laws.

    "We believe we are completely in compliance with current law," Ali Davoudi, president of the Online Tobacco Retailers Association, said. "Complying with 7,800 taxing jurisdictions would put any company out of business, let alone little guys like us."

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