uying discount cigarettes online has now become much more difficult. Last month, the major card companies teamed up with the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF) and the National Association of Attorneys General (NAAG). The parties agreed to enforce a ban on Internet tobacco sales made with credit cards.

Longstanding policies among the card companies deal specifically with the prohibition of illegal credit card transactions. In a meeting held in conjunction with the ATF and several Attorneys General on March 17, 2005, the card companies agreed not to process illegal transactions and to report illegal and suspicious activity to the proper authorities.

We want to "remind our global membership that MasterCard does not tolerate illegal activities of any kind," said MasterCard International Senior Vice President Joshua Peirez. "Consumers purchasing cigarettes from an out-of-state vendor cannot avoid paying state mandated tobacco taxes and other tariffs, and vendors need to be mindful of properly documenting such sales and shipments."

The sale of tobacco products online almost always violates one or more state and federal laws. These include age verification, direct shipment and tax laws as well as the federal Jenkins Act, which requires that companies report tobacco sales to state authorities, and the Racketeer Influenced and Corrupt Organizations ACT (RICO), which is used to curb organized crime. Individual state Attorneys General as well as the ATF have always enforced laws regarding tobacco sales. The partnership with private business to further curtail illegal sales is a new approach to dealing with the problem.

"We are taking a multifaceted, multijurisdictional approach to halting illegal Internet cigarette sales," said NAAG President and Vermont Attorney General William H. Sorrell. "We believe this is the most effective and efficient strategy to enforce state and federal laws regulating online sales. We are very appreciative of the work by these companies."

No legally binding agreement or contract exists on the part of the card companies to enforce the ban. The enforcement on Internet cigarette sales is also a new realm of authority for the ATF, according to Jeff Cohen, ATF Assistant Chief Counsel. "The cooperation of the credit card companies is completely voluntary and they have been fantastic." Cohen added that the necessary resources to go after each individual merchant are lacking and that the support of the credit industry is vital.

The New York State District Attorney and Attorney General spearheaded the agreement. On GS Online's MLS Forum, in a recent discussion on the subject of Internet tobacco sales ("Can Anyone Touch Tobacco Merchants?"), Steve Norell, President of ISO US Merchant Services, posted the following: "Several states headed by New York have been successful in getting all of the cards to discontinue acceptance of that type of payment if the card is not present ... New York may be trying to say it is to protect the children, but it is clear to one and all that it is about the sales tax ... many customers are getting served with past tax bills as we speak."

According to the "New York Post," many online tobacco stores including Cigs4free.com and 00taxfree.com have already begun to decline online credit card tobacco transactions with New York State residents.

"Creating and enforcing a consistent policy between states and credit card companies was the natural thing to do," said Brad Maione, spokesperson for the New York Attorney Generals office. "It's no secret that the states are losing money."

And according to the ATF's Cohen, states are losing an estimated $2 billion in tax revenue because of online cigarette sales.

MasterCard said financial institutions will still be allowed to process Internet tobacco transactions, but only if they have documented evidence that proves merchants are compliant with all the relevant federal, state and local laws to the satisfaction of the ATF and any applicable state Attorney General.

Some of the credit card company policies already in place to prohibit illegal Internet transactions include requiring member banks to verify the legitimacy of businesses before allowing them to accept their cards as payment; routine checks of merchants' Web sites; and the monitoring of daily business transactions. One post on GS Online's MLS Forum said MasterCard will fine merchants $25,000 for a first time offense.

The effect on MLSs remains to be seen. "Some MLSs who have accounts with large Internet tobacco companies will be hurt by the crackdown," Norell said. However, a move toward electronic check processing through the automated clearing house will most likely not be enforced by federal agencies and is a way for MLSs to recoup some of their losses. "You can't stop checks," he said.