Burned by online cigarette taxes

Wisconsin State Roundup

Published November 1, 2005  | November 2005 issue

State residents and the Department of Revenue recently did the do-si-do around the issue of online taxation.

The odyssey started earlier this year when the state received the names of 6,000 citizens who had purchased cigarettes dating back to 1999 from five online vendors, according to the Milwaukee Journal Sentinel. Online purchases allow buyers to conveniently avoid paying the cigarette tax of 77 cents a pack (59 cents before 2001), as well as local and state sales taxes, at the time of the transaction. Buyers are supposed to report such purchases and pay related taxes and fees. But the state had done little in the past to pursue such offenders, sending out only about 150 such tax notices each year, the newspaper reported.

Armed with the lengthy online-buyers list and hard evidence of tax avoidance, the state mailed out 500 letters in both June and July, notifying people about the law and their tax obligations. That effort was to be replicated the following 10 months until everyone on the list had been contacted. The state was also seeking 18 percent compound annual interest as well as annual late fees of $20. All totaled, the state was hoping to net about $3 million.

But two days after the newspaper reported on the matter, Gov. Jim Doyle promptly halted the effort, recommending that refund checks be issued to any of the 1,000 contacted in June or July who had already paid their tax bill. That effort got tangled when Department of Revenue lawyers questioned whether the state could refund taxes that had been legally due. The refunds also ignored online buyers contacted before this summer enforcement initiative who had settled up with the state; none were slated to receive refunds.

The department decided to go ahead with the limited refund, only to be upstaged by the state treasurer, who said he might withhold his signature on the refund checks—which would make them uncashable—because of the differential tax treatment.

Then in September, the state attorney general issued an opinion saying the state cannot lawfully issue refunds for taxes legally due. Those with overdue tax bills will remain in legal limbo—there's still some uncertainty over what action, if any, will be taken on those with outstanding balances. But those who have paid their balance are unlikely to receive any refund.

Ronald A. Wirtz