California may be considered a technology pioneer, but at least one state lawmaker wants to put the brakes on a growing segment of the online retail market.

Assemblyman Roger Dickinson, D-Sacramento, has introduced a measure to ban online sales of all tobacco products, including cigarettes, cigars and e-cigarettes. Dickinson says the bill, Assembly Bill 1500, would help state regulators combat teen smoking.

“Although great progress has been made to curb teen smoking, the use of e-cigarettes and the internet availability of tobacco products pose a serious risk,” Dickinson said in a press release. “AB1500 will make it impossible for young people to order e-cigarettes or other tobacco products online thereby safeguarding them from the dangers of smoking.”

Although Dickinson has made teen smoking central to his media pitch, the real battle over AB1500 is over the dollars and cents at stake in online cigarette sales. Unsurprisingly, state tax collectors are anxiously hoping new regulations will boost state coffers.

Online sales result in tax ‘breakage’

Dickinson’s bill, which blocks a segment of the online marketplace, is expected to generate $24 million in tax revenue for the state. At first blush, that might sound a bit counterintuitive: How could a bill that bans commerce generate more revenue for the state?

Smokers who buy tobacco products online won’t quit smoking. Consequently, the ban is expected to redirect online sales to brick and mortar stores. With online transactions, there’s more tax “breakage,” sales and use tax that is either never charged or collected.

“By requiring purchases at brick-and-mortar retailers, it will ensure that tax revenue is collected,” said Taryn Kinney, Dickinson’s communications director. “The purpose of the bill is aimed at limiting access to tobacco products for teenagers but the additional tax revenue is an added benefit.”

The state Board of Equalization, which administers the state’s sales and use tax laws, has yet to take a position on the bill but acknowledges the difficulty in tracking e-commerce.

“The BOE has no formal revenue estimate for eCigarette sales,” said Venus Stromberg, a spokeswoman for the Board of Equalization. “Since there is no excise tax on these products, and no licensing requirements, BOE does not track these purchases.”

Although the Board of Equalization doesn’t track online purchases, it has implemented a program, the Cigarette and Tobacco Product Internet Program, to pursue use tax from consumers that purchase tobacco products from out-of-state Internet retailers. Federal laws also assist the state with this program.

“Currently, federal laws such as the Jenkins Act and PACT Act assist with tax collection by requiring out-of-state sellers to submit reports to each state’s tax agency of their cigarette and certain tobacco sales made to residents,” Stromberg said.

State taxes on cigarettes are hefty

With nearly a dollar of taxes on each pack of cigarettes, state tax collectors have reason to track down online sales. Of the 87 cents in taxes per pack of cigarettes, the Board of Equalization says that 50 cents goes towards programs that  ”encourage proper childhood  development, including the  development of professional and  parental education and training,  informed selection of childcare,  development and education of  childcare providers, and research  into the best practices and  standards for all programs and  services relating to early childhood  development.”

The remaining tax funds are distributed with 25 cents for tobacco-related health education programs and disease research; 10 cents for the state’s  General Fund; and two cents for the Breast Cancer Research Fund.

“With proper outreach to consumers, eCigarette purchases would be redirected to brick and mortar stores in CA where there is oversight with regard to compliance with the tax laws,” said Stromberg, a Board of Equalization spokeswoman.

Unique tax issues behind retailers vs. onlight fight

Online sales of tobacco products, just like all e-commerce, pose unique tax issues. Right now, the amount of taxes owed to the government is the same for online sales and brick and mortar transactions. The difference lies with the reporting and collection obligations. Retailers collect sales taxes at the point of sale, whereas with online sales, consumers are obliged to report use taxes.

Earlier this year, U.S. Sen. Lamar Alexander, R-Tenn.,  vowed to reintroduce legislation that would allow states to require online retailers to collect sales taxes. Known as the Marketplace Fairness Act, the bill would switch the tax obligation from consumers to online retailers. It is backed by some business groups that represent brick and mortar retailers.

Critics of the Marketplace Fairness Act say the legislation would force small online businesses to adhere to thousands of tax regulations.

“For the first time, online merchants would be forced to collect sales taxes for all of America’s estimated 9,600 state and local taxing authorities,” the Wall Street Journal cautioned in an editorial against the bill. “New Hampshire, for example, has no sales tax, but a Granite State Web merchant would be forced to collect and remit sales taxes to all the governments that do. Small online sellers will therefore have to comply with tax laws created by distant governments in which they have no representation, and in places where they consume no local services.”

In California, online retailers have largely given into the online tax push. In 2012, Amazon, the world’s largest online retailer, cut a deal with Gov. Jerry Brown to begin collecting sales tax on transactions involving California residents.

Dickinson’s bill once again makes California a leader in the effort to restrict online commerce. His spokesperson says it’s justified to treat tobacco products differently from other products and impose an outright ban on online sales.

“Tobacco products should be treated differently because each day in the United States, nearly 4,000 under 18 smoke their first cigarette, and an estimated 1,000 youth in that age group become new daily cigarette smokers,” said Kinney, Dickinson’s communications director.  ”The Internet is currently the only way a minor can purchase tobacco products in California that does not require age verification.”

Thus far, the industry isn’t weighing in on the issue. The Cigar Association of America, Inc. declined to comment for this story.

Cross-posted at CalWatchDog.