willie69..
Selling cigarettes online has become a very big business. Internet
tobacco sales are expected to reach nearly $5 billion by 2005. In a
recent survey, it was estimated that there were over 170 websites
selling discounted cigarettes. Looking at the prices charged, it is
easy to see why you would be interested in starting one of these
businesses. However, there are several caveats to this type of online
business that you have to be aware of.
-Taxes-
Federal law states that retailers (and with an online store, you would
be a retailer) are require to pay whatever the state tax on cigarettes
is in their respective state. The Jenkins Act is the federal act that
governs interstate sale of tobacco products. Written in 1949, the
Jenkins Act requires that sellers of tobacco products who ship acorss
state lines to people other than licensed distributors must report the
sale to the buyer's home state so that state can collect tax.
However, no online sellers of cigarettes have been prosecuted under
the Jenkins Act. However, some states are demanding customer records
of online sellers of cigarettes and sending demand letters for taxes.
California, for example, has collected $1.4 million dollars between
1997 and 2001 with the records from only 20 of the 160 or so online
retailers. Most retailers have claims of Native American status(more
on that in a moment), the Internet Tax Freedom Act and other various
laws and regulations as their reason for not having to comply with the
Jenkins Act. However, in August of 2002, the General Accounting
Office wrote a 60 page report on the effect of internet sales of
tobacco products on taxes. Their summary was "However, our review of
the laws cited, as well as the Jenkins Act and its legislative
history, indicates that neither Native American status nor any of the
laws cited relieve Internet vendors of their Jenkins Act
responsibilities". They also stated that the Bureau of Alchol,
Tobacco and Firearms be given total jurisdiction over enforcement of
the Act as opposed to the FBI. They also recommended that if the
violations were changed from misdemeanors to felonies, they would be
easier enforced. Now, how would this affect you. Right now, that is
tough to say, however, the federal government has been cooperating
with state authorities. You should expect, in the near future, to
have to report to federal authorities every sale you make with
detailed information, such as customer name and address as well as
total sales. This will require a very accurate customer tracking
system on your part. At a minimum, you will have to collect excise
tax for cigarettes that you ship to customers within your own state
and pay those taxes to your local department of revenue. This is a
very dynamic issue and there are changes and pending legislation in
almost all 50 states as they are losing close to $1 billion in tax
dollars each year to online cigarette sellers. At least 7 states have
started enforcing the Jenkins Act and you can be sure, with the amount
of money we are talking about, more will follow.
-Competition/Pricing-
A study by the University of North Carolina showed that last year,
there were approximately 88 sites selling cigarettes online. Today,
that number is closer to 200. A vast majority of these sites are
operated by American Indian tribes. One of the reasons for this is
that Indian tribes are claiming tax exempt status for sales of
cigarettes as Indian reservations are considered sovereign lands and,
therefore, are not subject to state and federal sales tax laws. You
will see that if you compare the prices of the the cigarettes sold on
websites operated by American Indian tribes, their prices are
typically lower than those operated by non-Native Americans. The
issue for you is two-fold in this regard. Lower operating costs mean
lower prices. Lower prices mean more sales for them, less for others.
The other fact is that American Indians are claiming that they cannot
be held to the regulations of the Jenkins Act due to their
sovereignty. If and when the states become more proactive on
enforcing these laws, customers who are buying their cigarettes online
will migrate to the Indian-run sites as, currently, they would not be
required to submit customer data for tax purposes. Now, several other
online sites are refusing to do so regardless of their non-Indian
status, but as time goes by, that could change. Obviously, this is not
something that can't be overcome, but it is definately something you
need to consider when determining how you want to set up your
business. This, combined with no excise taxes, also explains the
misconception of by buying below wholesale and selling at wholesale.
An example: The State of New York charges $1.50 per pack tax on top
of their standard sales tax. Looking strictly at the excise tax, that
is an additional $11.50 that would not be charged by an internet sale.
The cigarettes being purchased by the resellers are not necessarily
below wholesale, they simply do not have the excise tax built into the
price.
Other than the competition from Indian reservations, you have
competition from "tobacco states". Being in North Carolina, I could
go down to the store and buy as many cartons of cigarettes as I
wanted, paying th 50 cent tax (used to be a nickel a pack) and sell
them online for whatever price I wanted and still charge less than
retail in stores. I wouldn't buy them wholesale, I simply paid my
state tax and resold them.
-Declining Customer Base-
To smoke or not to smoke is not an issue I feel is pertinent with your
question. What is an issue is the declining number of smokers in the
United State. Increased taxes, better health awareness, anti-smoking
laws and ordinances, and the drive by some to make smoking illegal
are causing more and more people to stop smoking and fewer and fewer
to start. There will, in my opinion, always be a demand for
cigarettes, however, that demand is dropping very rapidly, so your
customer base will be dwindling and is very finite at the top end.
This is simply something you will want to think about within your
business plan for this endeavor.
With those issues out of the way, let's assume you want to jump into
the fray and become one of the over 200 new online cigarette shops
that are expected to crop up on the internet this year. What do you
do?
-Website-
First, you will need to design a website and get it online. Depending
on your expertise, you could do this yourself or have someone else do
it for you for a fee. If you do not have the expertise, I would
recommend you visit Elance, http://www.elance.com, and have any one of
the number of freelance web designers give you an bid. While you
could do orders manually, you will want to have some sort of online
shopping cart. With age verification being a major sticking point for
lawmakers (it is illegal to sell cigarettes to minors) you will have
to accept credit cards for payment. This requires some sort of
merchant account. A merchant account is something that will allow you
to process credit cards. You could try to use a service such PayPal,
however, address verification is something that is being looked at as
a means to get to internet cigarette sellers, so I would recommend a
true merchant account that has security features as part of their
offering. You can find a large number of merchant account providers
at http://directory.google.com/Top/Business/Financial_Services/Merchant_Services/?tc=1/
You will also need a webhost to host your site. A webhost is a
company that provides space for you to store your website and charges
a monthly or annual fee for their services. You could start out small
and get by with a low space and bandwidth requirement. You can expect
to pay anywhere from $4.00 to $6.00 a month. However, as your site
and sales grow, you may have to move your allocation up and you could
end up paying upwards of $15 to $20 a month for webhosting. You can
find a list of web host directories at
http://directory.google.com/Top/Computers/Internet/Web_Design_and_Development/Hosting/Directories/?tc=1
If you do a search on online cigarettes,
://www.google.com/search?hl=en&lr=&ie=ISO-8859-1&q=online+cigarettes
, you will see that Google returns over 300,000 results. Obviously,
they aren't all sellers, but the first 60 results all are. You will
need to work very hard at making your website search engine friendly
and optimized as well as submitted to all the major engines (Yahoo!,
Google, etc.) and listed within the various directories. With the
competition in this space as fierce as it is, you have to do all you
can to ensure that people find your site.
Overall, assuming you pay for the website design, hosting and
professional search engine optimization, you can expect to pay upwards
of about $1000 to $2000 for your online cigarette store.
Cigarettes
OK, you have your website, you are ready to sell. Where do you get
your cigarettes? This is going to vary depending on which state you
reside in. Each state has different laws as it applies to reselling
cigarettes. You can find your particular state regulations by
visiting http://www.rjrt.com/TI/TIStateLawViewMap.asp and clicking on
the state you reside in. Most require some sort of retail license. Be
sure and have all your legal needs taken care of, including any
business licenses you may need for your locality. If you visit your
home state's Department of Revenue of (do a Google search on
"YourStateName" Department of Revenue) you should be able to determine
the licensing requirements for businesses in your state. Or, you can
go to http://www.taxadmin.org/fta/link/ and click on your state to be
taken to the respective site.
At a minimum, you will have to pay whatever the tax is within your
state as well as the 39 cents per pack federal excise tax. You can
see each state's individual excise taxes on cigarettes (as of 11/2002)
at http://www.ncsl.org/programs/health/cigarette.htm
Once you have all your states required licensing out of the way, you
will need to find a distributor of cigarettes. There are several
distributors that you can utilize, each will have their own
requirements as it pertains to minimum purchases:
International Distributing, Inc
Box 1528
Bethlehem, PA 18016
610-559-8291
http://www.iditobacco.com/
AMCON Distributing Company
10228 L St.
Omaha, NE 68127
402-331-3727
http://www.amcon-dist.com
You can also contact the manufacturers themselves to learn how they
distribute in your area. Below is a list of contact phone numbers,
based upon brand, that you can contact for information on reselling
their cigarettes:
Basic
800-343-0975
Benson Hedges
800-343-0975
Camel
800-334-8157
Capri
800-341-5211
Carlton
800-341-5211
Doral
800-252-3500
GPC
800-341-5211
Kool
800-341-5211
Lucky Strike
877-882-0573
Marlboro
800-343-0975
Merit
800-343-0975
Misty
800-341-5211
More
800-551-2250
Pall Mall
800-341-5211
Salem
800-433-4000
Vantage
800-826-8243
Virginia Slims
800-343-0975
Winston
800-862-2226
You will, more than likely, have to have some way of storing the
cigarettes and paying for them. Typcially, there are 60 cartons per
case of cigarettes, though that does vary according to distributor.
Your price will vary depending on how many cases you purchase as well
as your payment method. Again, I recommend checking with the
distributors that the companies recommend for their policies.
I wish you luck in your endeavor and I hope the information I have
provided proved to be helpful as you investigate this business
venture. If you need any additional clarification, please let me know
and I will do my best to provide you with the information you need.
Regards,
-THV
References:
http://www.cheaponlinecigarettesdirectory.com/
Taxes threaten booming sales of cigarettes online
http://news.com.com/2100-1017-237111.html?legacy=cnet
Online smoking sales choking states
http://news.com.com/2100-1017-949731.html?tag=dd.ne.dht.nl-sty.0
Internet Cigarette Sales
http://www.gao.gov/new.items/d02743.pdf
Oneidas sell cigarettes online and tax-free
http://www.syracuse.com/newsstories/20020224_ansmok.html
Online Cigarette Sales Hurting State Revenues - Oct 14, 2002
http://www.tobacco.org/news/105915.html
Sales have surged for cigarette retailers using the Internet
http://www.no-smoking.org/sept02/09-17-02-4.html
U.S. Cigarette Market Overview
http://www.rjrt.com/IN/COwhoweare_themarket.asp |
