Tax-Exempt Cigarette Sales on Military Bases in Michigan

As these numbers show, Michigan was at one point losing more revenue to tax-exempt sales on military bases than on Indian reservations. While military bases obviously did not present the sovereign-nation problem of the Indian smokeshops, there was another impediment to cigarette tax remittance by military bases: In 1940 the federal government enacted the Buck Act, which prohibited states from taxing members of the military and their dependants on cigarette purchases. The act applied to sales in post exchanges (the military's equivalent of a department store), commissaries (similar to civilian grocery stores) and ships' stores run by the U.S. Army, Navy, Air Force, Marine Corps, Coast Guard and Veterans Administration.

This tax exemption lured shoppers who had military purchasing privileges. Smokers who wanted to avoid the tax but did not have purchasing privileges often asked friends and relatives to purchase cigarettes for them. Retirees, among others, frequently purchased large quantities of cigarettes at an Air Force base and sold them to civilians. This led some in the Michigan government to suggest that retired military personnel be removed from the tax exemption for on-base sales.[90] An Advisory Commission on Intergovernmental Relations study found that military stores sold more cigarettes than their civilian counterparts, even after controlling for sales to everyone with purchasing privileges.[91]

In 1979 the NTTA decided the problem of untaxed military sales was serious enough to warrant a new committee, the Committee on Military Cigarette Sales:

In 1980 this committee was originally appointed to arrive at a conclusion relative to the projected losses of illegal sales of cigarettes from military installations. The concern of the National Tobacco Tax Association was the tremendous amount of tax dollars being lost allegedly through illegal sales from military installations. ...
At a meeting of the Executive Committee of NTTA in 1979 it was unanimously agreed that we should form a special committee to look into this area of tax losses from illegal sales at military installations.

... A simple definition of these losses or what we now consider as abuses would be any "cigarettes that are purchased by an authorized person, be he active, reservist, retired, and authorized dependents that exceed those amounts that would normally be used for his personal use.

The definition is very simple and clearly states what constitutes authorized purchases. Anything above that which includes cigarettes purchased for resale in the local community or given away as a friendly gesture to neighbors, is considered an illegal purchase or abuse which results in loss of cigarette tax to the various states. It is these amounts that we are concerned with and for which this Committee was organized.[92]

The newly formed committee estimated that in 1981, Michigan lost $186,500 in cigarette tax revenue as a result of privilege abuse on military bases.[93] The ACIR also estimated that in fiscal 1973, Michigan lost $1,045,000 due to tax-exempt military sales, and a report from the U.S. General Accounting Office report estimated the loss for FY1977 at $746,000.[94]

In the late 1980s and 1990s, state and local governments raised their cigarette tax rates even further, which translated to a greater incentive for smokers to shop at military bases. State and local officials pressured the Defense Department to increase the price of cigarettes sold on military bases, hoping to offset the tax advantage. In 1996 the Pentagon partially granted the states' wish by ordering commissaries to raise cigarette prices to the level charged at post exchanges.[95] Then in 2000, the Defense Department ordered military stores to set cigarette prices at no less than 5 percent below the price in the most competitive local market.

[90] Leon Rothenberg, "The NTTA Survey of States' Views on the Exemption of Military Sales of Cigarettes," Proceedings from the 49th Annual Meetings of the National Tobacco Tax Association (Chicago: Federation of Tax Administrators, 1975), 41.

[91] State Taxation of Military Income and Store Sales (Washington, DC: Advisory Commission on Intergovernmental Relations, 1976), 13-16.

[92] Joseph C. Iniguez, Jr., "Report of the Committee on Military Cigarette Sales," Proceedings from the 55th Annual Meetings of the National Tobacco Tax Association (Chicago: Federation of Tax Administrators, 1981), 23.

[93] Ibid., 24.

[94] Ibid.

[95] Karen Jowers, "Butt Out: Tobacco Sales Plummet As Prices Rise," Army Times, October 20, 2003.