Hank Investigates: Up in Smoke

It's the price you pay to smoke in Massachusetts, $1.51 of each pack's cost is state excise tax money - money that funds healthcare for children and seniors. But our investigation finds that some smokers are dodging that tax, costing the state up to $50 million.

Hank Phillippi Ryan, Investigative Reporter
"So this is a tax avoidance scheme that works?"

Alan LeBovidge, Commr., MA Dept. of Revenue
"Unfortunately, that's true."

Here’s where it begins, out of state Internet vendors lure smokers to purchase cigarettes from them online. Their pitch -- you don't have to pay that $15 a carton Massachusetts tax...

Eric Lindblom, Tobacco Policy Expert
"When they can find a lower price, that's what they'll do."

In fact, business is so good, the number of Internet smoke shops has quadrupled in just the past several years. But Researcher Kurt Ribisl, who studies online tobacco sales, says it has become a business based on fraud.

Kurt Ribisl, University of North Carolina
"The Internet has now become a hotbed of tax evasion."

Here's why, the promise of tax free smokes is not true, and it’s not even legal.

Alan LeBovidge
"They're really being co-conspirators in committing a crime."

Here's why, each state sets its own cigarette excise tax rate, some are high and some are low and even though out-of-state vendors may charge their state's tax, Massachusetts residents still must pay Massachusetts rates.

What’s more, federal law requires companies, who sell cigarettes across state lines, to report their customers to their state tax collectors. But we found online smoke shops just don't warn customers of their tax liability.

Carol, Smoker
"I was just shocked."

Carol thought she ordered tax-free cigarettes, months later she got a tax bill for $320.

Carol
"I think people should be warned of it, made aware of it."

But our investigation found that though the department of revenue aggressively pursues online smokers, most often, the name reporting and tax collection system does not work. Ali Davoudi, who represents two dozen of those online tobacco retailers, admits it.

Hank Phillippi Ryan
"How many of your members report the names of customers to state tax agencies?"

Ali Davoudi
"To my knowledge, none."

Davoudi claims the law invades customer privacy, doesn't apply to Native American sellers and doesn't even mention the Internet.

Hank Phillippi Ryan
"How can you just ignore a law because you don't think it’s a good law?"

Ali Davoudi
"We believe that that law is not clear."

But experts insist the law is clear, but without names, states can’t enforce it.

Eric Lindblom
"The system is now broken. We've got basically a wild west situation out there."

To test the system, we purchased cartons of cigarettes from three different online companies, but many months went by and not one tax bill arrived.

Hank Phillippi Ryan
"How can they get away with that?"

Alan LeBovidge
"They get away with it because they simply, we have no way of knowing what they're doing."

As a result, while some customers pay their fair share, critical health programs that rely on smokers' tax dollars are losing out as millions in state revenue goes up in smoke.

State officials are hoping a federal law now in the works will toughen the rules and help them track down online buyers.

If you bought cigarettes online or out of state, click below for information on your tax responsibilities and how to file the proper paperwork:

Massachusetts Department of Revenue