Judge Boosts City's Crackdown on Tax-Free Cigarettes

A federal judge has given a boost to New York City's attempt to curtail the sale of tax-free cigarettes on Indian reservations.

In a ruling signed on Wednesday, U.S. District Judge Carol Amon refused to throw out a lawsuit in which the city accused seven tobacco wholesalers of violating the federal Contraband Cigarette Trafficking Act by selling millions of packs to reservation smoke shops.

State law has, for several years, required wholesalers to collect excise taxes on cigarettes shipped to reservation stores, but the rule has never been enforced.

Tribal officials have argued that they are exempt from state taxes because of the sovereign status of the reservations, and two former governors, Eliot Spitzer and George Pataki, had both hesitated to confront the issue.

As a result, nearly a third of all cigarettes sold in New York State now pass through stores on the reservations, enabling buyers to avoid some of the highest tobacco taxes in the country.

New York State's excise tax is $1.50 per pack and will be rising soon to $2.75. New York City tacks on its own $1.50 tax.

In its lawsuit, lawyers for the city said it loses millions of dollars in tax revenue annually due to the activities of smugglers who tax-free cigarettes on the reservations and illegally resell them in the city. The suit claims the wholesalers knowingly oversupply cigarettes to the reservations, selling millions more packs than could possibly be legally consumed by members of the tribes.

The wholesalers argued that the city is inappropriately using the courts to attack a legal business that has, so far, been sanctioned by the state.

But Ms. Amon rejected the wholesalers' motion to dismiss the suit, ruling in part that the state's tax law was still in effect, even if a succession of governors had ordered the Department of Taxation and Finance not to enforce it.

"An enforcement decision by the Department does not serve to obviate state legislation," she wrote. Ms. Amon also said that the law plainly requires wholesalers to "affix tax stamps to all cigarettes the state has the power to tax, which includes those sold by reservation retailers for resale to the public."

Her order, however, was a preliminary one and did not indicate whether the city would ultimately succeed in the case.

An attorney for one of the wholesalers, Capital Candy Company, Inc., of Vermont, Paul Francis Keneally, said he disagreed with the judge's decision and remained convinced the city has no legal basis for its suit.

Lawyers for other wholesalers did not immediately return phone calls yesterday.

The state's tribes are not parties to the suit.

New York's Indian reservations sold nearly 304 million packs of cigarettes last year, according to state records.