Should federal and state governments track down Internet trafficking of cigarettes to scare up revenue?

Smoking is expensive. In addition to the health costs, the nicotine habit takes a big bite out of a smoker’s bank account, thanks in part to added taxes.

That’s a fiscal fact cigarette smokers are resigned to with every pack they buy. But no one expects to get a tax bill for smokes purchased almost a decade ago.

That, however, is what happened to Ray Mendenhall. The Arizona Department of Revenue said Mendenhall owed the state $4,575 in connection with cigarette taxes he didn’t pay when he bought packs online in 2007 and 2008.

The official breakdown was $2,900 in taxes, $950 in interest and $725 in penalties. After Mendenhall contested the bill, Arizona dropped the late fee, but his remaining unpaid bill and interest are still accruing more interest charges daily.

Many old unpaid taxes

So why did the 70-year-old Tucson retiree get a tax bill for old purchases he made years ago?

Mendhenhall’s name was on a list that Arizona tax officials got from the U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives of individuals who purchased cigarettes through the Internet from other states without paying taxes. Around 30,000 other Arizona smokers could soon get big tax bills, too.

Mendenhall, who lives on a fixed income and is still appealing the remaining tax bill, doesn’t think the levy is fair.

State tax officials feel the same way. But they say the inequity is borne by taxpayers who bought their cigarettes legally within Arizona — online cigarette purchases are prohibited by law — and paid taxes on the purchases.

Not new, but new urgency

Arizona’s collection action of old online tobacco taxes is not new. For years, states across the country have been tracking down their residents who bought untaxed cigarettes online.

As with all taxes, the revenue departments must weigh the collection effort costs against what they can realistically expect to get paid. When the sums are not that large, folks who smoke fewer packs usually are let off the tax hook.

But when the amount is sizable, state revenue offices pursue them. In some cases, liens have even been filed against smokers who amassed large tax bills.

The collection actions have increased as states struggle to fill budget gaps. These fiscal strains might even renew interest in a proposal from a few years ago that the federal government establish a national tracking system that would allow law enforcement to trace cigarette packs from manufacturer to consumer and cut down on interstate trafficking.

A 2013 study estimated that Boston, Philadelphia, New York, Providence, Rhode Island and Washington, D.C., could collectively bring in between $690 million and $729 million per year in cigarette taxes if trafficking stopped.

Do you think states are justified in going after old, unpaid cigarette taxes? Would you support a national tobacco tracking system to stop illegal trafficking in tobacco?

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