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Smokers asked to cough up taxes for Web buys

Michigan sends bills to more than 500 residents for cigarettes purchased tax-free over the Web.

Hundreds of Michigan residents are getting a big surprise this tax season--hefty tax bills for cigarettes they bought online over the past four years.

The state sent the bills to 553 residents last week after subpoenaing 13 online tobacco shops for names of Michigan customers and their order histories, a Michigan Treasury Department spokesman Caleb Buhs said on Friday. The tax bills are based on information from just one store, and the state expects to collect more names from the others.

Collectively, the people receiving this first round of bills owe the state $1.4 million, an average of $2,500 per person, Buhs said. They have until March 14 to pay.

"At its most fundamental level, this is an issue of tax fairness," State Treasurer Jay B. Rising said in a statement. "It is only right that out-of-state vendors, who conduct business only online and at arms length, follow the letter of the law. These taxes are collected by brick-and-mortar businesses in Michigan, and Internet vendors should not be allowed to skirt their responsibility."

Michigan, which levies a $2 tax on every pack of cigarettes, collected $993 million in tobacco taxes last year, Buhs said.

eSmokes.com, one of the top tobacco sellers on the Web, cancelled thousands of orders to Michigan customers after hearing about the tax crackdown, an eSmokes representative said. The representative would not discuss whether the store has been subpoenaed by Michigan or any other state.

Michigan did not disclose which companies it has subpoenaed.

Other states, including California, Washington and Wisconsin, have launched efforts to collect tobacco taxes from residents who dodged them online. A 2002 report (click for .pdf) from the U.S. General Accounting Office said most states tax the sale of cigarettes, and that online sales have cost them millions of dollars in lost revenue.

Internet shops that don't tell states about tobacco purchases by people other than licensed distributors are flouting a federal law known as the Jenkins Act. Laws that exempt online retailers from collecting sales taxes do not apply to tobacco excise taxes, the GAO report said.