Sales Tax Slice: Did Arizona’s Online Cigarette Tax ‘Break’ Go Up in Smoke?

Last week, AZ Central reported that approximately 30,000 Arizona smokers are facing fines and penalties from unpaid use and luxury taxes stemming from their online cigarette purchases.

Arizona’s Department of Revenue sent notifications to taxpayers, who must immediately pay a use tax of 5.6 percent to 6.6 percent on every pack of cigarettes purchased online and a luxury tax of 10 cents per cigarette, or \$20 a carton. Smokers are liable for all cartons of cigarettes they purchased online after 2006.

Many smokers who made such purchases over the last seven years are outraged at the notion of paying hundreds or even a few thousand dollars in back taxes. However, when compared to retail purchases, their online purchases may still work in their favor. The retail cost of a carton of Marlboro Reds in Phoenix today is about \$71. Customers who purchased cigarettes online paid approximately half the retail price, or about \$35. There are 20 cigarettes in a pack and 10 packs per carton, meaning 200 cigarettes per carton.

To put these numbers into perspective, compare two smokers, John and Jane, who both purchased two packs of cigarettes per day for three years (approximately 219 cartons.) John purchased his cigarettes online without having paid the taxes, while Jane purchased through retail, with taxes:

Jane’s Purchases with Taxes:

\$71 x 219 cartons over three years     = \$15,549

x 1.06 for use tax (approximately 6 percent)

\$16,482

+ (219 x \$20) = \$4,380 for luxury tax

= \$20,862

John’s Purchases without Taxes:

\$35 x 219 cartons over three years     = \$7,665

Purchasing cigarettes at retail with taxes cost Jane \$20,862, while John’s online purchases without tax only cost \$7,665.

If back taxes are added to the online purchases, it will still cost John far less than if he had purchased his cigarettes at retail.

John’s Purchases with Taxes:

\$35 x 219 cartons over three years     = \$7,665

x 1.06 for use tax (approximately 6 percent)

\$8,124.90

+ (219 x \$20) = \$4,380 for luxury tax

= \$12,504.90

So, even with the new tax bill, John still saved over \$8,000 by purchasing online compared to Jane. While the notion of paying years of back taxes on a major purchase item all at one time may seem harsh on its face, smokers in Arizona continue to save in the long run by purchasing online.

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: What are the economic impacts of back tax payments on certain products?