The Arizona Department of Revenue says smokers owe the state more than $20 for each carton they purchased after 2006 through online companies that offered discounts by sidestepping state use and luxury taxes.
Smokers who thought they had saved more half off the retail price of cigarettes are receiving letters from the state demanding immediate payment for the unpaid taxes, plus penalties and interest.
Annette Borden of Chandler got a $4,299.20 payment demand last week for cigarettes she purchased online between 2007 and 2009.
“I’m kind of baffled by the fact that they are coming after me,” Borden said, adding that she knew nothing about the taxes until she received a phone call last week from the state. “You’re contacting me seven years later and saying we owe this money. We never received a notice or we would have filed taxes.”
But Borden said she is more concerned the state might not stop at cigarettes. If the Department of Revenue can come after residents for unpaid taxes on cigarettes, she asked, what’s to stop officials from demanding taxes for other online purchases?
The state’s answer: Theoretically, nothing. However, unlike with online-cigarette sales, state officials currently have no way of tracking individual online purchases for items bought on sites such as eBay, where state sales taxes are often not charged or collected.
“Nothing you buy over the Internet is tax-free,” said Sean Laux, Department of Revenue spokesman. “People were buying (cigarettes) thinking they were getting a deal, no tax was applied. That didn’t mean no taxes were due.”
In 2012, federal law made online cigarette sales illegal. Companies were forced to give customer lists and purchase data to the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, which distributed it to states.
Laux said the department began notifying taxpayers in 2013 they must pay a use tax of 5.6 percent to 6.6 percent on every pack of cigarettes purchased online. They also have to pay a luxury tax of 10 cents a cigarette, or $20 a carton. Notices went out with specific details about individual cigarette purchases and offered taxpayers an opportunity to avoid penalty interest charges in exchange for immediate payments.
Borden said the state offered to knock down her bill to $2,800, a savings of about $1,500.
“It is a lot of money,” she said. “That’s my property taxes for a year.”
The state is taking the position there is no statute of limitations on the unpaid cigarette taxes, and officials can pursue cases indefinitely. In many cases, laws limit the number of years a state can audit an individual income-tax return. Typically it can go back no more than four years.
Laux said the limitations are lifted if a taxpayer committed fraud or never filed taxes. In those cases, the state can go back as far as it wants.
He said unpaid cigarette taxes are akin to not filing taxes.
“This is no different to us than someone who doesn’t file income tax,’ he said.
A carton of Marlboro Reds in Phoenix today costs about $71. Customers who bought cigarettes online paid about half of the retail price.
Laux said most of the online sales occurred in Arizona from 2006 to 2011. He said bills for unpaid taxes range from hundreds of dollars to several thousand. He said he is unaware of any tax bills that top $10,000.
Borden said she purchased cigarettes online for the convenience factor, not to try to avoid paying taxes.
“It’s shocking,” she said of the state’s effort to collect back taxes. “I’m not going to lie. I bought the cigarettes.”
Borden said the tax bill won’t make her quit smoking. But she is adamant it will make her quit shopping online.
“My thought process was, ‘Oh my God, do you know how much money I spend online?’ What’s to say they won’t come back to me eight years from now?” she said. “I’ll never buy another thing online.”
Reach the reporter at email@example.com. Follow him on Twitter @robertanglen.