Tobacco Companies Broke Law by Selling Untaxed Cigarettes

A federal judge ruled last week that two tobacco wholesalers illegally skirted paying millions of dollars in taxes by selling truckloads of untaxed cigarettes to retailers on an American Indian reservation on Long Island, which then resold them in the city at cut-rate prices. The judgment, which could cost the wholesalers up to $15 million in penalties, was the latest victory in a battle that the city and state have waged for years to collect taxes on cigarettes sold by Indian-owned businesses to non-Indians.

The city has argued that the availability of cheaper cigarettes is a public health concern because taxes were in part a way to discourage smoking. Cigarette tax stamps are $43.50 per carton in New York; thus, a pack of cigarettes — about $12 to $14 — includes $4.35 in taxes. Federal law prohibits wholesalers from selling large quantities of cigarettes without paying state or local taxes on the goods. Wholesalers selling to Indian retailers are exempt from paying the tax if the cigarettes are resold only to other Indians. In 2006, the city sued three wholesalers — which buy the cigarettes from the manufacturer and resell them to retailers — for violating the law.

One of those, a Long Island company, Mauro Pennisi, sold more than 11 million cartons of unstamped cigarettes to Indian retailers from May 2008 to January 2011, mostly on the Poospatuck Reservation, where fewer than 500 people live, according to the written opinion of Judge Carol B. Amon of the Eastern District of New York. A Queens company, Gutlove & Shirvint, sold more than 10 million cartons during that period to the same tribe, including nearly 400,000 in one month alone. (The city estimated that the tribe’s average demand for one month would be 270 cartons.)

After the lawsuit was filed, the defendants voluntarily stopped selling to the Indian retailers, a move that took place not long after new state legislation clarified the circumstances under which cigarettes sold on Indian reservations were exempt from taxes. But Judge Amon ruled that the companies should have stopped selling long before. “The vast majority, if not all, of the unstamped cigarettes the defendants sold to reservation retailers were resold to and consumed by non-Native Americans,” Judge Amon wrote in her decision. “Any reasonable wholesaler would have been well aware of that fact.”

The judge found that the city did not prove its case against a third company, Day Wholesale. The companies’ lawyers did not return calls seeking comment. “This decision demonstrates the strong legal basis for the city’s efforts to curb illegal tobacco sales,” Michael A. Cardozo, head of the city’s Law Department, said in a statement released on Wednesday.