|April 7, 2014|
Previously published on April 3, 2014
The City of New York (NYC) and the People of the State of New York (“New York,” and together with NYC, the “Plaintiffs”) are suing Federal Express (FedEx) in the U.S. Southern District Court of New York over what is, in part, a matter of taxation. The case is The City of New York v. FedEx Ground Package System, Inc., No. 13-cv-9173-ER. However, in this case, tobacco is involved, which automatically ups the ante and adds additional legal wrinkles to the case.
According to the Plaintiffs’ amended complaint, FedEx knowingly carried and delivered cartons of cigarettes to residences in New York and NYC. One of the issues alleged by the Plaintiffs is that FedEx delivered these packages containing cartons of “unstamped” cigarettes.
Both New York and NYC impose a stamp tax on cigarettes. This stamp tax amounts to $15 per carton in NYC and $15, $27.50 or $43.50 per carton in New York. Cartons or packs of cigarettes for which the stamp tax has been paid have the appropriate stamp(s) affixed to them. Additionally, New York law prohibits common or contract carriers to knowingly transport cigarettes to any person in New York who is other than a permitted person. See N.Y. PHL § 1399-ll. Cigarettes knowingly transported to a home or residence are presumed to be in violation of New York law.
Prior to this case in 2006, FedEx allegedly resolved an investigation by the New York Attorney General into illegal residential cigarette deliveries by entering into an “Assurance of Compliance” (AOC) with New York, which required FedEx to cease making residential delivery of cigarettes and provided for a $1,000 penalty per violation.
Among FedEx’s clients alleged to have shipped cigarettes into New York and NYC are out-of-state businesses and businesses on Indian reservations selling cigarettes by mail, phone or Internet order. The primary reason why New Yorkers are purchasing cigarettes from these retailers is to avoid paying the high stamp taxes imposed on cigarettes in New York and/or NYC. These cigarette sellers that exploit interstate differences in cigarette tax rates by selling and shipping cigarettes to consumers in states with cigarette taxes higher than those of the seller are known as “delivery-sellers.” Note that merely possessing such cigarettes without the applicable stamp can constitute a violation of law by the purchaser of the cigarettes.
Relief and damages sought
Among the relief and damages sought by the Plaintiffs are:
Enjoining FedEx from making further deliveries of cigarettes into NYC and New York;
Requiring FedEx to submit to oversight by a court-appointed Special Master empowered to monitor FedEx’s tobacco deliveries and assure FedEx’s compliance with federal and New York law governing tobacco deliveries;
Recover damages equal to the amount of each $15 tax stamp that should have been affixed to each carton shipped in NYC and that amount of each $15, 27.50 or $43.50 tax stamp that should have been affixed to each carton shipped in New York;
Recover RICO damages of up to three times the applicable stamp tax for each carton specified in (3); and
Recover $1,000 per violation of the AOC.
To be sure, this is a substantial request for damages by the Plaintiffs, reaching into the tens of millions of dollars, potentially even higher. Also, FedEx may have an independent court-appointed agent overseeing its operations if the Plaintiffs are successful. The relief sought from FedEx is, in part, seeking remuneration for stamp taxes that arguably should have been paid by FedEx’s tobacco-selling clients. Because certain other laws are implicated, which provide for up to treble damages, FedEx may be liable for paying three times the stamp tax originally due.
While FedEx is unequivocally a major player in the shipping and delivery business, other shipping companies and delivery services may also deal with this same or a similar issue, albeit on a smaller scale. This case may also have implications and set precedent in other situations where one party delivers other controlled products, such as alcohol-related products, into a state without the payment of the related alcohol gallonage or similar taxes. Certainly, this case illustrates the potential liability one may face if not compliant with the applicable tax law.