Jump to full article: Law.com, 2008-09-03
Author: Mark Hamblett New York Law Journal
Intro: A split federal appeals panel has reinstated part of New York City's case claiming online cigarette sellers are guilty of racketeering by skirting a law requiring the reporting of cigarette sales to collect taxes.
The 2nd U.S. Circuit Court of Appeals said the city has standing to sue under the Racketeer Influenced and Corrupt Organizations Act (RICO) "where it has alleged direct injury of lost taxes" caused by Internet retailers' "commission of mail and wire fraud" through the sale of cigarettes to city residents without complying with the reporting requirements of the federal Jenkins Act.
Judge Chester J. Straub wrote the majority opinion in the four consolidated cases led by City of New York v. Smokes-Spirits.Com Inc., 06-1665-cv. He was joined by Judge Sonia Sotomayor.
The Jenkins Act is a criminal law that was intended to be used by the U.S. government against tobacco companies to prevent state tax avoidance. The city sued the online cigarette retailers claiming their failure to file Jenkins Act reports on their sales volumes, as well as their marketing efforts designed to discourage tax collection, amounted to the predicate acts of mail and wire fraud under RICO. . . .
The city's theory was that full compliance with the reporting requirements of the Jenkins Act, 15 U.S.C. ยงยง375-78, would enable it to collect taxes directly from purchasers. The city charged that two of the online sellers, Smokes-Spirits and EZTobacco, coach their employees to tell purchasers they are prohibited from giving customer information to tax authorities. In the case of one defendant, Nexicon, the city claimed the company falsely advertised that its cigarettes were sold "tax-free."
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