Posted on 14th Nov 2011 @ 7:08 PM
NOT since the dot-com bust have so many sites gone south so quickly.
Two weeks after credit card companies announced they would no longer accept payment for tobacco products bought online, scores of Internet cigarette merchants have effectively lost the means to do business profitably, and are either limping along or have shut down their operations altogether.
Visa International, MasterCard International, American Express, eBay's PayPal service and others cut off the online tobacconists last month after being told by a coalition of states and representatives of the federal Bureau of Alcohol, Tobacco and Firearms that virtually all such sales were illegal. Government officials said that merchants had not done enough to comply with age verification practices or to register sales with governments to insure the collection of state taxes.
Now, most merchants are reduced to accepting electronic or paper checks, and fewer customers may be willing to wait for those checks to clear before their orders are shipped. Meanwhile, some online merchants say they have been wrongfully singled out by authorities.
Maxine Jimerson, owner Ron's Smoke Shop in Allegany, N.Y., recently shut down the online part of her business and laid off 120 of her 160 employees. As a member of the Seneca Nation Indian tribe, she is entitled to sell cigarettes free of state tax.
''Most everybody else around here is going out of business too,'' said Ms. Jimerson, who will keep her retail shop open but has sold her Web address to another merchant who operates on Seneca territory. ''We're talking about probably 30 businesses, and between 1,500 and 2,000 employees being laid off.''
Ms. Jimerson said her company had gone to great lengths to verify customers' ages, contracting with a special vendor and requiring buyers to send in a copy of a government-issued picture ID, with age and signature, before a purchase could be made. Customer signatures at the time of delivery had to match the signatures on file.
But federal and state authorities said that online cigarette merchants did not do enough to insure the collection of taxes. In particular, they did not comply with the Jenkins Act, a federal law that requires sellers to register purchases in states where customers live. Like many other online sellers operating on Indian territory, Ron's Smoke Shop did not comply with such strictures because it argued that the law did not apply to it.
If there were online companies that complied with all state and federal regulations, ''it's news to us,'' said Marc Violette, a spokesman for the office of Eliot Spitzer, the attorney general of New York, where all online cigarette sales are considered illegal.
''It's good public relations to say you're bending over backwards to comply with the law, but the fact is, they're engaged in an illegal industry, and on their face, these transactions are illegal,'' Mr. Violette said.
State officials had for years tried unsuccessfully to collect cigarette tax revenues from online merchants, and had redoubled such efforts as budget deficits skyrocketed in recent years. By using the credit card companies as leverage, though, they appear to have made progress in the fight.
The credit card company embargo ''will significantly curtail cigarette sales over the Internet, to the advantage of the major cigarette manufacturers as well as state governments,'' wrote Robert T. Campagnino, an analyst with Prudential Equity Group, an investment firm, in a report late last month.
Mr. Campagnino estimated in his report that in 2004, $1 billion worth of cigarettes were sold online, or about 3.1 percent of the industry's total volume. Many of those sales were made to customers in states with particularly high cigarette taxes like New York, where offline merchants must charge $15 or more in taxes for each carton. New York bars direct shipment of tobacco products to its citizens, but many online merchants ignored that law.
Some established tobacco sellers, like Nat Sherman, a cigar and cigarette manufacturer based in New Jersey that also sells its products online, strenuously object to the government actions.
(will be continued)