Online tobacco store
…The BBC spoke very positively of Yesmoke's idea. This program, in which everyone agreed that “taxes should be paid only once”, set off a boom of sales in English speaking countries, including far-off Australia and New Zealand.
Taxes should not be paid two times
The Yesmoke story all began in the spring of 1998, strangely enough with an online purchase from an American store of 5 CDs of Oscar Peterson, price 130.00 dollars including shipping costs. At destination, the purchaser in Italy received a notice from the Italian customs office that instructed him to go to their offices to pay customs duties on goods coming from abroad. The unlucky buyer tried in vain to explain to the indifferent official that the CDs had been bought through a normal store that sold by mail, and the price, which was considerable, already included the taxes, just like any purchase made in regular shops.
But the official was inflexible: “The taxes may have been paid, but not in Italy, so if you want this package, you'll have to pay Italian taxes, otherwise it will be sent back to the sender”.
So the price of the CDs rose to over 160.00 dollars, and this episode pointed out that ordering products online through the international postal service was not a good idea, because it meant paying taxes two times. In fact, all the products sold online were, and unfortunately still are, already taxed in the country of origin. But this has no importance for the customs services of the country of destination.
So what about stores like Amazon and E-Bay, quoted on the stock market at thousands of millions of dollars, based on the prospects of their online sales? How do they manage? How can they continue to sell products already taxed in the country of origin, when the customs office of the country of destination can also require the payment of taxes, though sometimes they “let it go”?
Summer 1998 - How can we avoid paying double taxes? The experience with the Oscar Peterson CDs (and the $ 160.00 paid for them), pointed out that an online shop, that uses the international postal service, should find a way to let buyers pay only the taxes of the country of arrival of the goods and not the taxes of the departure country that are not requested.
To do this, a seller or shipper would have to offer its customers products that were legitimately free of the customs duties of the departure country, and that would then be taxed only by the country of destination.
The idea, on which Yesmoke's website sales was based, was to handle a large shipment of goods the same way as a small package of the same shipment. An import export company, in fact, when it buys a batch of goods, purchases goods that are not nationalised, that is, that have not been cleared through customs. In this way, the customs duties on the goods are paid, logically, only in the country of destination, where the goods are marketed.
So, Yesmoke reasoned, goods ordered online and shipped by international post, first had to be purchased wholesale by the reseller as products destined to export, then they would be sorted, repackaged and sent in small packages to the final consumers from a logistics site in the “foreign trade zone or free zone” inside a customs area. In this way, the goods would be taxed only in the country of the buyer.
These “free zones” are storage or transit areas for goods to be exported; the customs services of all countries have them and they are made available to import and export companies. So, Yesmoke decided to ship its cigarettes from the “free zone” of Balerna, in Ticino in the Italian part of Switzerland.
In practice, this is what happens: a container of 50 thousand cartons of cigarettes not yet cleared through customs would arrive in the “free zone”, and from here it would be shipped to the countries of final destination in 50,000 separate packets of 200 cigarettes, addressed to 50,000 different people.
All these little shipments would be provided with the necessary customs documents, to be used, obviously, by the customs service of the destination country to collect any duty taxes.
The positive aspect of this system was that the online purchase, when it reached the buyer, even after paying all customs duties, was considerably cheaper than cigarettes purchased in the regular shops; this was mostly because a long string of intermediaries had been eliminated.
With competitive shipping costs, the ultimate outcome of this system would have been a new distribution channel, legitimate, free and independent, that could be used for all types of goods.
Early 1999: to make sure this project was possible, Yesmoke inquired first at the Italian customs office, but received no response.
So, in the summer of 1999 the Swiss customs office was contacted and an appointment was immediately fixed with three officials. They listened to the description of the project and after a few days confirmed that it could be done.
The important thing was the customs declaration that had to be affixed to the goods and that corresponded to an import request.
At the time the creators of Yesmoke were living in Moscow. And it was here, in a small room, guests of a prestigious Russian publishing house at 12 Bakuninskaya street, in the summer of 1999, they began to work with enthusiasm on their online tobacco store project.
The name of Yesmoke.com was decided on in Moscow (it was lately changed into Yesmoke.ch), and from Moscow the site was run technically by a Ukrainian webmaster Alexey Kulentzov, before the move, in 2001, to Rome.
On the eve of the shop's opening, Alexey Kulentzov worked continuously for 48 hours, so they could begin the shop's activities at exactly midnight on the 1st of January 2000… a historical date! Yesmoke had to wait six days before receiving its first order.
At the Yesmoke Store people could buy cartons of cigarettes of any brands, paying online by credit card. The cartons were opened and repackaged to have a package less than 3 cm. thick that allowed the store to take advantage of lower postal rates.
The costs ranged from $ 13.95, with shipping costs included in the price, for a carton of 200 Marlboros produced in the European Community, to $ 6.95 for a carton of Abba', the cheapest brand of cigarettes. The shipments were picked up every morning at 7 o'clock and every afternoon at 3.00 local time.
The goods travelled only by air mail, and the deliveries were fast: “Priority” shipping, with a 2 dollar supplement per carton, took from 1 to 4 days in Europe and from 2 to 7 days in the rest of the world.
The “Economy” shipments were a bit slower: they were picked up twice daily by the Swiss Post, but the “economy” packages left Switzerland only when the shipping lots to a country were suitable.
The “Economy” shipments could take, such as, from 1 to 4 weeks to the USA, but the shipping cost in this case was free for the buyers.
The customs declaration, that Yesmoke had printed on the packages, contained all the required information: Content: 200 Cigarettes - Weight: gr. 300 - Value: 10 US Dollars (this was the value not counting the shipping charges).
1st January 2000: ready to go
The first order arrived on the 6th of the month from Beaumont sur Oise in Northern France: a carton of Marlboro Lights.
On January 7th the second order arrived from London: a carton of Marlboro Reds ordered by an Italian.
But the cigarettes, instead of being subjected to the request for duty payments, as had happened for the Oscar Peterson CDs in Italy, reached their purchasers duty-free.
Five days passed, and on January 12th, the first order arrived from the USA, Pittsburgh, Pennsylvania: a carton of Winstons. In a month 15 cartons were sold.
After 6 months the average sales had risen to more than 100 cartons a day. On July 9th 2003 Yesmoke set a record: 47.000 cartons in a single day. The Online Tobacco Shop would soon reach an annual turnover of over 100 million dollars.
No one had ever imagined that the store would be shipping 6 million duty-free cartons per year, and this started up a singular debate: according to some people, the cigarettes were “contraband”; according to others they were just “duty-free”. The only certainty was that they were delivered by the mailman.
At first, the packages were prepared by only one person, but this soon had to change to handle the avalanche of orders. Yesmoke built up a logistics system that was almost completely automated: it opened the carton, repackaged the packets and closed and sealed the edges, then wrapped the shipment in cellophane; this was all done with specially built machines.
A conveyor belt ended the process transporting the packages to the lower floor, where they ended up at a Swiss Post sorting centre that sent off the packages without any delays.
This handling process, a pride of Yesmoke, eventually even produced its own padded shipping bags, labels, boxes for packaging, etc. and it didn't throw anything away. There were no waste products, the system recycled all leftovers including the tons of original packaging of the cartons that were opened and repackaged for shipment. The warehouse stocks, that initially contained 25 thousand cartons of Marlboro Reds, Lights and Winstons, from of the first purchase of a small 20 ft. container, soon became a real sight to see. It grew to many millions of cartons that took up the best part of the “free zone” of the Balerna customs site. The sight was stunning, visitors were astounded.
The most popular brand was always Marlboro Light, followed by Marlboro Red, Camel, Winston, Benson & Hedges. In Northern Ireland, Yesmoke sold a massive flow of Regal, Silk Cut and Superkings. The online tobacco store received orders from almost all the countries of the world, the Americas, Africa, Asia, China, Polynesia, even the Tonga islands.
Yesmoke soon began receiving email messages from all over the world with the most varied questions, that reached several thousand communications every day. To handle all this email, a unit was set up dedicated entirely to customer service.
The customer service centre was not in Switzerland, but in Italy, in the countryside in the Province of Torino in a little town of 150 inhabitants, and it soon became a company specialised in customer services, independent of Yesmoke Tobacco.
Customer service, too, became quite a sight: every morning a sizeable team of young women translators came to work in a rural rebuilt stall, very attractive and pleasant. Later because of the growing number of employees, the company had to move into a more spacious and a more conventional center.
So, what were the customs offices doing in the countries of destination of the goods? Surprisingly, only a few applied duties when the goods arrived, like Canada, where a new legitimate distribution channel was opened, functional and considerably cheaper than the traditional one.
In Canada, in fact, though the buyers had to pay the customs duties to the mailman when the packages were delivered, in Ontario they saved up to 26 Canadian dollars per carton compared to the traditional shop prices. It was great!
But most of the countries, starting from the USA, never asked for any payment of customs duties at all, leaving the cigarettes completely duty-free.
Other countries, like the United Kingdom, applied customs duties on average to about 50% of the packages, but then requested the buyers to pay penalties and surcharges that made the online purchase more expensive than buying at the tobacconist. In these cases, the goods were almost always sent back to the seller and the disappointed customers were always fully reimbursed by Yesmoke.
France never asked its happy buyers for tax payments. But in 2002, when the quantities began to grow, the country began systematically sending back to the seller all the cartons, to avoid having to open a new legitimate purchasing channel. Francès was an illegal procedure, but Yesmoke took no steps against it.
Italy, although, showed an unexpected efficiency, demanding the payment of the customs duties on the cigarettes. Only, instead of paying the mailman when the package was delivered, the customs office sent the purchaser a notice informing him of the customs duties that had to be paid before he could pick up the cigarettes. Just like what happened for the Oscar Petterson CDs.
But to pay the Italian duties and pick up the package, the buyer had to go not to his nearest Post Office, but to the address of the Central Customs Office, that in many cases was far from home. So, after many customers objected, Yesmoke was forced to break off its sales in Italy, that actually lasted only a few weeks.
But, as we will see, in Italy some other very interesting things happened…
Yesmoke on the BBC – here comes the mass media
In 2001, articles about Yesmoke began to appear in newspapers around the world; they generally spoke well of the initiative. In the spring of that year, the BBC invited the originators of Yesmoke to London to take part in a radio program on BBC Radio 4's Business broadcast, where they were interviewed by Peter Day.
The BBC spoke very positively of Yesmoke's idea; the program underlined the immense prospects of such online sales, but also the lack of regulations and the vagueness that reigns in the international postal services, that were totally unprepared to deal with a venture like this one.
This interview, where everyone agreed that “taxes should be paid only once”, set off a boom of sales in English speaking countries, including far-off Australia and New Zealand.
In this period, every newspaper article in a country led to a great jump in the sales of that country. When an “order explosion” took place somewhere, is was clear that some newspaper “had talked”.
But in spite of the information of the BBC and of the press, as far as the application of customs duties was concerned, except for Canada that had required payment from the start, no other countries made any moves.
Cigarettes continued to arrive duty–free on the doorsteps of Yesmokes happy customers, along with the bottle of milk and the morning paper. Even after the start of the “war” with the colossus Philip Morris, and in spite of the articles of the Associated Press and reports in newspapers all over the world, nothing was done to solve the customs duties tax issue.
Yesmoke's first buying boom took place in 2001, in little Northern Ireland; Yesmoke's shipments peaked at many thousands of cartons at day.
The smokers of that country, in fact, had discovered how to make sure their cigarettes always arrived duty–free.
Instead of selecting “Belfast, United Kingdom” as the destination country, where they risked receiving the shipment with a duty payment requested by the English Customs office as sometimes happened in the United Kingdom, they selected “Belfast, Ireland”.
So the cigarettes first arrived in Ireland, in Dublin, where they had no customs inspection because they were destined to another country.
And from there, they were re–addressed to the correct address in the United Kingdom (Northern Ireland).
As there is no customs control between Ireland and the UK, the cigarettes always arrived at their happy customers duty–free. It was said in the pubs that everyone was smoking cigarettes bought from the Yesmoke.
Everything went smoothly until autumn 2001, when newspapers and television began to talk about with some concern this new phenomenon.
It was said that the cigarettes purchased from Yesmoke were smuggled and resold to finance the IRA, the Irish Republican Army - a liberation movement of Northern Ireland. The homepage of the site appeared in the evening newscast.
So the problem was becoming serious, British customs intervened and soon after, it began applying customs duties on 100% of the cigarettes heading for Northern Ireland.
No one could pay those taxes, increased and penalizing, that made the online purchase considerably more costly, and the shipments were refused and sent back to the shipper - and Yesmoke had to reimburse everyone.
United States against the market
The country that made Yesmoke history was the United States, that for a while became by far its number one customer.
Here the Yesmoke was to become a great protagonist: newspapers and television talked about the Marlboros purchased online, and from overseas reached the buyers' mailboxes free of all customs duties.
There was great publicity, both among smokers exasperated by the continuous price increases and also among the customs officials, perhaps they too, Yesmoke customers. But in the USA, customs duties were never applied.
Swiss customs, as confirmed by the director Fritz Weber, in a television programme in Switzerland dedicated entirely to the Yesmoke story, broadcast on March 24, 2005, already in 2000 had contacted its American colleagues: Switzerland was ready to work with the American authorities to ease and speed up the taxation of these packages, whose numbers were growing day after day.
Weber stated, during the interview, that he did not know what why the American customs never made any moves and didn't even reply to his repeated communications.
Even so, the Swiss Post Office and the Customs office organised the shipments separating the packages containing cigarettes from the other packages and putting them in special containers, and informing the American customs that these containers were arriving.
This procedure would have simplified and made it much faster for the American customs to tax the shipments. However, for some reason, their American colleagues never did anything.
The cartons of cigarettes continued to reach their enthusiastic Americans smokers completely duty–free - until that November 16th, 2004, the day of the fateful “raid” on the Yesmoke plane at New York's JFK airport, that we will describe later.
Philip Morris against Yesmoke
The real boom of Yesmoke.com's Online Tobacco Store was not the result of the BBC or other news reports, but of Philip Morris.
Big Tobacco, in 2001, started up a lawsuit for “unfair competition” and “copyright violations”, accusing Yesmoke of selling to American citizens Marlboro cigarettes destined for the European market.
There had always been rumours about “mysterious” differences in the ingredients and in the taste of Marlboro cigarettes depending on the country where they were sold.
It was good to have the chance to freely choose either Marlboros USA, or Marlboro's Europe, or Marlboro for Airport duty–free shops, or Marlboro Lights with white filter and those with a brown filters as smokers could now do thanks to Yesmoke.
This was exactly why online sales were so successful - besides the customs bureau never asked for the payment of duties.
The issue became even more interesting when the Los Angeles Times, followed by other prestigious newspapers, published the results of a study of the Journal of Tobacco and Nicotine Research: the Marlboros made in the USA showed a level of nitrosimine, considered by scientists one of the potential cancer-inducing agents in tobacco smoke, up to 22 times higher than the level recorded in Marlboros destined to other countries.
What infuriated the American smokers was the fact that all of this was kept secret from consumers; they were expected to smoke only those cigarettes that someone had chosen for them; they mustn't worry about what was in them because that was Philip Morris's business… So much for consumer rights!
So the orders for Marlboros made in the European Union climbed astronomically.
Philip Morris's lawsuit went on for more than three years, bringing Yesmoke into the headlines of newspapers and televisions all over the world, and contributing decisively to the increase of sales that reached a peak of 6 million cartons per year.
In January 2003, Philip Morris won its lawsuit on all points, but Yesmoke continued to sell totally disregarding the American sentence.
The Swiss Post Office said “no” to David H. Katz, director of the “brand integrity” department of Philip Morris, who asked the Swiss authorities to block the shipments of Marlboros, insinuating that the proceeds from the Yesmoke sales were used to finance international terrorism.
Switzerland was categorical: shipping cigarettes to the USA is completely legal, based on the Universal Postal Convention of September 15, 1999. This measure was ratified both by Switzerland and by the United States and cigarettes were among the permitted products. Blocking these shipments Switzerland would be violating this Agreement.
The Swiss authorities also pointed out that every pack was accompanied by a truthful customs declaration intended for use by the competent American authorities.
And the USPS (United States Parcel Sevice) continued undaunted to deliver the cigarettes, under the American Federal Law, that sanctions the right of the citizens to import cigarettes from abroad with customs declaration and payment of the customs duties (which, however, the Customs Bureau, for some reason, continued to ignore).
But Big Tobacco, that starts its lawsuits in the United States and thinks it can apply the sentences over the world, did not give in, and in August 2004, managed to take possession of Yesmoke.com’s web domain, thanks to a questionable sentence of Judge Gerard E. Lynch of the Southern District of New York.
The site was flooded with email messages of support that also expressed opinions on this Tobacco multinational. These have been collected in a special section. View: Customers' opinion
Fortunately, this gross move, that will certainly be referred to in the future as a very dangerous precedent in the jurisdiction of the Internet, had no effect whatsoever: Yesmoke moved its store over to a different address “Yesmoke.ch”, registered in Switzerland.
This site could not be attacked by Philip Morris and by the American judges and the company continues to sell on it today more than ever before.
It had obviously been an attempt, using the means of telecommunications from the United States, to close down a foreign company, that would have led to the firing of its workers, and the authorities of the foreign country hadn’t even been informed about the issue.
So, Philip Morris won only a "virtual" victory, but the "Marlboro Man" Jack Holleran (this is what the press called him), "Senior Vice President of Compliance and Brand Integrity" stated: "against Yesmoke we have won on all points".
548 million dollars
Summer 2003: "Big Tobacco", the had won the lawsuit against Yesmoke, now wanted compensation for damages from the online store, for having sold to Americans smokers Marlboros destined to the European market. After an initial request for damage payments of 548 million dollars, the highest request for "unfair competition and copyright violation" in the history of American justice, Judge Gerard E. Lynch of the Southern District of New York, in March 2005, reduced the payment awarding Philip Morris "only" 173 million dollars.
The City of New York joined Philip Morris in its war are against the online shop, suing e Yesmoke for a wide variety of crimes, including those under the R.I.C.O. (Racketeer Influenced and Corrupted Organization Act): "Contraband, Criminal Association, Violation of the New York Public Health Law, Violation of the New York Mail Law, Computer Crimes, Violation of the Jenkins Act", etc.
The sentence arrived in October 2004, and it condemned Yesmoke to the payment of 17 million dollars to the City of New York.
In January 2005, came the turn of the State of Oregon: the Oregon Tobacco Tax Compliance Task Force announced to the Associated Press its attack against "the biggest online Tobacco store in the world”, accusing it of a long list of crimes: “Yesmoke is violating the law not only in Oregon, but it is violating laws in all the States, we are the first to act against it, but all the States will follow us", said Attorney General Hardy Myers.
This attack turned out to be the result of an “investigation” that took six months, conducted by the Oregon Tobacco Tax Compliance Task Force, by the Oregon Department of Revenue, by the Oregon State Police and by the Oregon Department of Justice, declared Myers. … But what was this "investigation"?
It was clear that if things continued this way, the amount of damages to be paid to Philip Morris, the City of New York and all the States of the American Union could one day reach well over a billion dollars. Big Tobacco had surrounded and isolated Yesmoke; the Giant had acquired the right to confiscate any Yesmoke possession and any goods belonging to Yesmoke on the entire American territory.
But Philip Morris was not satisfied yet, and in November 2005, it tried to gain possession of the Yesmoke trademark in the USA (this case is still going on); we suppose the purpose of this is to keep this “very dangerous cigarette” away from the American market.
But no one seemed to notice that this new brand is becoming "100 % forbidden in the USA"… just like Cuban cigars!
United States Postal Service
In spite of the 2003 sentence in favour of Philip Morris, and the one of 2004 in favour of the City of New York, the cigarettes of the now famous Online Tobacco Store continued to be delivered regularly to Americans smokers. The USPS (United States Postal Service), in fact, didn’t seem very much worried about the “Copyright” problems of the tobacco colossus and continued delivering cigarettes all over the United States even after a new law in 2003 was passed, studied especially to counter Yesmoke, that prohibited the shipment of cigarettes by mail in New York State.
Soon many other States adopted the same prohibition, but always without success. The USPS continued undaunted to deliver the cigarettes, under the American Federal Law, that sanctions the right of the citizens to import cigarettes from abroad with customs declaration and payment of the customs duties (which, however, the Customs Bureau, for some reason, continued to ignore).
And even after August 20th 2004, when Philip Morris took possession of the Yesmoke.com domain and the online store transferred to its Swiss address Yesmoke.ch, the USPS went on delivering the cigarettes, which continued to arrive duty-free on the doorsteps of enthusiastic Americans smokers.
Phillip Morris succeeded in imposing itself on American Federal law, leading to the end of online cigarette sales, only thanks to pressure on the credit card companies. These, from the beginning of 2005, would no longer accept online payments for cigarette purchases, considering Internet a "possible source of supply for minors".
So, Canadian smokers, too, where duty taxes had been regularly requested and paid, had to give up their online cigarette purchases. The use of credit cards, on the other hand, remains completely free and usable by minors to access pornographic sites, gambling houses, online drug stores, and everything else. These apparently don’t interfere with Philip Morris’s business.