Smoke Taxes

FedEx Faces Legal Assault Over Cigarettes Sent to New Yorkers


New York City’s war on cigarettes continues by opening an unexpected front, with a lawsuit accusing FedEx (FDX) of a racketeering conspiracy for helping a Long Island-based tobacco merchant skirt city and state tax laws by shipping cigarettes to consumers.

In the lawsuit, filed on Monday against two FedEx subsidiaries, the city is seeking more than $52 million in penalties and lost tax revenue, as well as legal fees and a court-appointed overseer to ensure the shipping giant’s compliance. “Higher cigarette prices have been incontrovertibly established to convince greater numbers of smokers to quit, reducing the incidence of smoking-related death and disease,” the city contended.

The lawsuit alleges that FedEx delivered at least 55,000 cartons delivered to city residents from 2005 to 2012, with a tax loss of $825,000, from the Shinnecock Smoke Shop in Southampton, N.Y., owned by Jonathan Smith. The suit also seeks a civil penalty of $49.5 million and triple the tax-loss damages under civil terms of the U.S. Racketeer Influenced and Corrupt Organizations Act. Federal law prohibits the shipment of untaxed cigarettes to anyone except cigarette wholesalers, who typically act as a government taxing agent. New York City has sued about 20 smoke shops for selling untaxed cigarettes since 2008.

FedEx does not allow direct shipments of tobacco to consumers “and believes the claims made by the city are overstated and not founded in law,” the company said today in a statement. The Memphis-based company said it does not open packages without a reason and “intends to defend this case while continuing to work with authorities to stop prohibited tobacco shipments.”

Smith’s smoke shop is not a defendant in the FedEx lawsuit but could be named in later litigation, says Eric Proshansky, an attorney with the city’s Law Department. Smith did not return a call Tuesday to his business seeking comment.

New York City imposes a $15 excise tax on each carton of cigarettes, while New York State collects $43.50. That adds up to $5.85 in taxes on each pack, driving the cost to more than $10 per pack in the city. It’s an aggressive policy designed to deter smoking, particularly among teenagers. The Shinnecock Indian Nation and other New York tribes have claimed that their smoke shops aren’t subject to state and local taxes.

In March, meanwhile, FedEx agreed to pay $2.4 million to settle the city’s claim that it had delivered 160,000 cartons of untaxed cigarettes from a Kentucky-based website from 2006 to 2009. Federal authorities have since closed that business. FedEx, United Parcel Service (UPS), and DHL (DPW:GR) signed an agreement with then-Attorney General Eliot Spitzer in 2006 to abide by a New York law prohibiting the shipment of cigarettes to residences.

Smith has a long history of legal battles with state and federal authorities dating back to at least 1984—not always around tobacco. In December 2012 a state conservation officer issued the smoke shop owner a ticket in Montauk, N.Y., for possession of 87 undersized bay scallops. The following month, Smith sought to move the case (PDF) from the Town Court of East Hampton to a U.S. District Court, alleging his civil rights were violated. Smith claimed in his motion that he enjoys “aboriginal fishing rights” as a member of the Shinnecock Indian tribe. Smith has also tangled, unsuccessfully, with the U.S. Internal Revenue Service over income taxes.

Bachman is an associate editor for Businessweek.com.

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Companies Mentioned

  • FDX
    (FedEx Corp)
    • $162.01 USD
    • 3.54
    • 2.19%
  • UPS
    (United Parcel Service Inc)
    • $100.78 USD
    • 1.73
    • 1.71%
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