The Last 10 Years: Tax Hikes and Internet Shopping

A mild recession during the early 1990s tightened state budgets, and so a new round of state and local cigarette excise tax increases commenced, and it continues to this day. New Jersey acted in 1990, bumping its rate up from 27 cents to 40 cents, but then it held that rate until 1998 when it doubled its rate to 80 cents.

That started a vicious cycle of tax hikes and illegal sales. Since 1998, tax hikes have boosted the price of cigarettes in New Jersey to approximately $6.50 per pack, higher than in many other states and nations. The state has persisted in its minimum-price laws, setting the price for every brand. In addition to the state's 1998 jump to 80 cents per pack, New Jersey joined 45 other states in a "Master Settlement Agreement" with the four largest tobacco manufacturers,[*] adding roughly another 45 cents to the price of each pack. Importantly, this new levy brought the United States into the sights of international smugglers, whose cigarettes, purchased abroad, could evade the MSA and other federal taxes, not just the state-level taxes that domestic interstate smugglers evaded.

The last four years have witnessed an unprecedented number of tax increases in New Jersey, and legally taxed sales have dropped like a rock. From 80 cents in 1998, the state tax has jumped to $1.50, then $2.05, then $2.40 and finally $2.575. With the highest rate in the nation, and with ports wide open to world trade, these taxes have made New Jersey a place where smugglers from all over the world are bringing millions of untaxed packs of cigarettes.[†]

Moreover, online ordering has established a new link between the smuggler and the consumer. One need only visit to see the site's promise: "We can 100% assure you, we do not report any information about our customers to any authorities."[175] The "Cheap Cigarettes Sale" Web site answers the question "How is my personal information protected?" by stating: "We do not sell our client list to anyone, at any price. And we do not give customers' information to any governmental organization for any reasons."[176] A similar "frequently asked question" is answered by the K2Smokes Web site with a more detailed answer:

We are required by law to treat all personal information according to the Swiss Data Protection Act, Article 12, Paragraph 3. This requires that under all circumstances, consumer data CANNOT BE DISCLOSED to any entity, individual, corporation, foreign government or foreign government authority regardless of claim.[177] (The emphasis appears in the original.)

The site adds that while most American companies and Indian reservations are subject to the Jenkins Act (which requires disclosure of whom the tobacco is sold to), the site's owners are "NOT subject to the Jenkins Act and DO NOT report your information to ANY authority" (emphasis in the original). The site does caution that you just might be asked to pay the taxes in the country the cigarettes are shipped to.[178]

[175] "Frequently Asked Questions,", (accessed November 23, 2008).

[176] "Frequently Asked Questions," Cheap Cigarettes Sale, (accessed November 23, 2008).

[177] "Frequently Asked Questions," K2Smokes, (accessed November 23, 2008).

[178] Ibid.

[*] In the 1990s, many state attorneys general sued tobacco companies for compensation for the alleged impact of residents' cigarette use on state health care costs. These lawsuits led in 1998 to an out-of-court settlement, known as the "Master Settlement Agreement," between 46 American states and the major tobacco manufacturers.

[†] New York subsequently leapfrogged New Jersey by hiking its rate to $2.75 per pack.