Samantha K. Graff, State Taxation of Online Tobacco Sales: Circumventing the Archaic Bright Line Penned by Quill

58 Fla. L. Rev. 375 (2006) | | | |

INTRODUCTION :: Over the past decade, the Internet has become an increasingly popular shopping destination for cigarette buyers. A 1997 survey identified thirteen online cigarette vendors, and today that number has multiplied to over 700. The online market for cigarettes thrives on the anonymity and extraterritoriality that characterize so many transactions in cyberspace-allowing parties on both sides to benefit from a mutual disregard of applicable laws.

State governments across the nation are particularly troubled by the pervasive practice of tax evasion in the online cigarette marketplace. The state excise tax comprises a significant portion of the retail price of a pack of cigarettes. The Internet gives sellers the opportunity to turn a healthy profit by selling “tax free” cigarettes directly to consumers. In turn, it gives smokers a chance to save money by avoiding payment of cigarette excise taxes. Many state governments stand to lose millions of dollars each year from unpaid cigarette taxes. Unpaid cigarette taxes rob not only state treasuries but also the public’s health. Tobacco taxes have proven to be one of the most effective means of reducing tobacco use. Therefore, state governments are concerned that untaxed online sales will impair longstanding campaigns to drive down smoking rates. This is an urgent problem in light of the fact that smoking is the leading cause of preventable death in the nation.


In response to this emerging tax evasion crisis, several states have begun enacting laws designed to capture taxes from online cigarette sales. The new wave of statutes reflects a range of strategies, from an out-and-out ban on the remote sale of cigarettes to state residents to a mere requirement that online sellers notify purchasers of state taxes owed. One strategy adopted by a few states, including Arizona, requires online and other remote sellers to collect state tobacco taxes. This Article uses Arizona’s approach as a case study to explore the dormant Commerce Clause implications of a statute that requires out-of-state vendors to collect and remit applicable state tobacco taxes on cigarettes sold into the state.

The Arizona statute applies to vendors who accept purchase orders for the delivery sale of tobacco products. The Arizona statute defines “delivery sale” as any sale of tobacco products to a consumer in Arizona in which the consumer submits the order remotely (e.g., via the telephone, the mail, or the Internet) or in which the tobacco products are delivered by use of the mail or a delivery service. The statute mandates that every vendor engaging in the delivery sale of tobacco products shall collect and remit all applicable state tobacco taxes or show proof that such taxes have already been paid. The Arizona tobacco delivery sales statute warrants special attention for policy and legal reasons.

Arizona’s statute offers a promising policy solution that could be replicated in other states. Although a total ban on delivery sales of tobacco products to state residents is a more comprehensive tactic, it is likely to be politically unfeasible in many jurisdictions. And statutes that require remote tobacco sellers to alert their customers about taxes owed to the state have hardly produced a wave of voluntary submissions on the part of online shoppers. Yet a statute that compels remote tobacco vendors to shoulder their fair share of the tobacco tax collection and remission burden is a politically palatable solution that is likely to have a significant impact on the problems associated with untaxed cigarette sales.

The Arizona statute provides an ideal lens through which to examine an untested constitutional issue. In the 1992 case of Quill Corp. v. North Dakota, the Supreme Court of the United States ruled that under the dormant Commerce Clause, mail-order vendors who did not have a physical presence in a state could not be held responsible for collecting and remitting sales and use taxes on orders shipped into the state. This Article will address the novel legal question of whether the physical presence requirement is pertinent to tobacco excise taxes. It will debunk the prevailing belief that Quill should stand in the way of an Arizona-like statute and will explain that such a statute actually should withstand constitutional scrutiny.

This Article begins with a summary of the legal and policy challenges relating to untaxed online sales of cigarettes. Next, it reviews the history and current state of the dormant Commerce Clause doctrine. The Supreme Court has enunciated two different standards for assessing state regulations and state tax schemes under the dormant Commerce Clause. This Article explains both standards and sheds light on the relationship between them. Finally, this Article analyzes the constitutionality of the Arizona tobacco delivery sales statute.

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