June 6, 2006
Section: Front
Page: 01A
By Sarah Ryley
The Detroit News
MOUNT CLEMENS -- When Marilyn Mostek, a senior living in a subsidized apartment, heard she could save $20 on a carton of cigarettes by ordering from an out-of-state Indian reservation, she thought she had found a clever way to save money.
Those savings went up in smoke on May 19 when she received a bill from the state of Michigan for $511 in unpaid cigarette taxes -- nearly half of her fixed monthly income. Her neighbor, Robert Stutsman, received a bill the same day for $744.
Mostek, 69, and Stutsman, 75, are among 11,000 Michigan residents who over the past year and a half have felt the pinch of a state crackdown on people who have avoided Michigan's cigarette tax by buying from out-of-state vendors online.
The bills, averaging $1,787, have hit the elderly and poor particularly hard.
To pay the debt, some have taken the state's payment plan option. Others have used credit cards or taken out bank loans. A number of people are just refusing to pay, hoping the problem will go away.
Higher rates of smoking among the poor only increase the likelihood that the tax is hurting them more than others. A 2004 state survey showed 35.7 percent of those making $20,000 a year are smokers, versus 14.3 percent of those earning more than $75,000.
Attached to Mostek's and Stutsman's bills were letters that told them to pay up by June 19 or face a 500 percent penalty.
"Now I'm going to have to borrow from the bank; I have no other way of paying it," Mostek said. Stutsman said he will get the money by postponing the purchase of an air conditioner for his one-bedroom apartment.
Within the past few weeks, 3,500 new bills have been mailed. The state's take since launching the effort in February 2005: nearly $8 million.
State officials aren't giving anyone a break. Even those on the installment plan must pay interest (the prime rate plus 1 percentage point).
The state decided to target scofflaw smokers after the cigarette tax jumped from $1.25 to $2 a pack in June 2004, sparking a huge increase in the number of people buying from out-of-state vendors, Department of Treasury spokesman Terry Stanton said.
The increase made Michigan's cigarette tax the fourth-highest in the nation. Other states have started similar pay-up programs.
Some refuse to pay
Some people are refusing to pay the back taxes, either because they think it's unfair or because they can't afford the
tab.
"They're going to have to throw me in jail before they get any money from me," said John Pearson, 51, of Livonia. He and his wife, Michele, 45, received bills for roughly $8,000 each last year for purchases made as far back as 2002, when they were buying eight cartons a week from DirtCheapCigs.com. Some of those cartons were for the couples' two children, also smokers, who lived at home.
John Pearson throws out -- unopened -- any new letters that come from the state, and he won't sign for letters that come by certified mail. So he has no idea how much their bills have grown.
"We never looked at it as illegal or cheaper because we weren't paying the taxes," he said. "We thought they were cheaper because they were from Kentucky, where cigarettes come from.
"I wouldn't have had a problem with them saying it was illegal, we would have just stopped. But going back to 2002 kind of ticked me off."
Mostek and Stutsman said they would pay their tab on time, but they are doing so begrudgingly because their one-month deadline doesn't give them enough time to get legal assistance. "We're putting 'paying in protest' in the memo line," Mostek said.
State can force them to pay
Besides piling on fines, the state has other tools it can use to force smokers to pay. It can garnish wages, deduct the money from income tax refunds, or place liens on property. Stanton wouldn't say if the state has used any of those tools.
The state also could slap nonpayers with a misdemeanor or felony, depending on the number of cartons bought, but hasn't yet, Stanton said.
But officials won't back off, he pledged, saying the Department of Treasury is willing to pursue "any and all actions available to us to ensure payment."
Stanton doesn't buy the I-didn't-know-it-was-illegal argument.
He said he has personally sent out numerous press releases and given hundreds of interviews on the subject since it became illegal to buy unstamped, and therefore untaxed, cigarettes in 1998. He said it is ultimately the customer's responsibility to know the law.
"I would certainly hope the light bulb would go off over your head that would say, 'Wait a minute, aren't I still responsible for paying these taxes?'" Stanton said.
She didn't know it's illegal
For her part, Mostek, of Mount Clemens, swears she didn't know she was breaking the law.
"I just don't think it's right that they can go back that far, especially when we didn't even know what we were doing is illegal," said Mostek, who was billed for taxes on 24 cartons of Basic Ultra 100s that she bought from BuyCheapCigarettes.com starting in 2005.
"We just assumed that if there were taxes, they'd appear on the bill," said Marge Roehl, 61, who purchased four cartons from BuyCheap, but stopped when they would no longer take credit cards for payment. The state is likely to spare her a bill.
Stanton said there is a minimum purchase required before the state will send out a bill. He wouldn't disclose what that minimum was, "given that there could be some inference that purchasing less than the threshold is OK in some way."
The state's crackdown is far from over.
So far, only four of 13 out-of-state companies that were subpoenaed have given up their customer lists. Other companies have voluntarily complied with the state's request. Stanton wouldn't divulge which companies have complied and which haven't, saying that information is confidential.
The state also is contacting delivery companies, such as UPS, to get the addresses of online cigarette vendors, "because it is difficult to subpoena a Web site."
State aggressive in pursuit
Cigarette vendors haven't exactly rushed to let their customers know that state taxes aren't included in their prices and that states are aggressively pursuing collection of those taxes.
BuyCheapCigarettes.com, formerly Ron's Smoke Shop, just recently started noting on its mailers, in small print, that buyers are responsible for paying all taxes, and there is a link to each state's Web page in the company's "About Us" section. Other companies, like Cheap-Cig2.com in Europe, still claim that taxes are already included in the purchase price.
Representatives from each company did not return telephone calls.
Now that she's paying the full freight for cigarettes again, Mostek is trying to quit. Getting residents to kick the habit was one of the goals of the state's 2004 tax increase.
So far, though, she's been unsuccessful, still puffing a pack and half to two a day. "They call me the chimney," she said as she lit up another.
11,103
people got tax bills by May 30
4,471
of them have paid
$1,787
is the average bill
Source: Michigan Department of Treasury
* Jenkins Act: Vendors who sell cigarettes via interstate commerce are required by federal law to report those sales to
the state of destination.
* Michigan Tobacco Products Tax Act: A person in possession of an untaxed, unstamped tobacco product is
responsible for the tax, plus a penalty of 500 percent of the amount of tax due, and could face other fines and
imprisonment.
* Penalty for not paying: 100 percent of the tax for purchases made on or before Dec 27, 2004; 500 percent of the tax
for purchases made on or after Dec. 28 2004; plus 25 percent of "use tax" (6 percent of total purchase price, with
cigarette taxes included).
* State cigarette tax: $1.25 per pack, or $12.50 per carton, between August 2002 and June 2004, $2 per pack, or $20
per carton, after June 2004
* To set up a payment plan: Call Tobacco Product Purchases Unit in the Discovery and Tax Enforcement Division at
(517) 636-4120
Source: Michigan Department of Treasury
Michigan's aggressive crackdown on collecting state cigarette taxes from online buyers began in February 2005.
$7,973,615
Collected in back taxes so far
$5,482,843
Is past due
2,186
People have missed the deadline
4
Companies have turned over information after a state subpoena; nine have not
