New York suing 2 Kentucky companies over Internet cigarette sales
LOUISVILLE, Ky. - A Louisville company and another in Paducah that sell cigarettes over the Internet are named in a lawsuit filed by New York City, where taxes bring the cost of a carton of premium-brand cigarettes to around $70.
The lawsuit, filed against owners and operators of about 15 Web sites dedicated to tobacco sales, accuses the sites of allowing buyers to evade New York's hefty cigarette taxes.
New York contends the Web sites do not report cigarette sales to state authorities, as required by the federal Jenkins Act. In fact, the suit says, Web sites make claims such as "All sales are tax free" and "No tobacco tax."
Hooray's Inc. of Louisville, which owns the Web sites www.smokes-direct.com and www.cigsonline.com, was named, along with its president, Stephen F. Knopp, and Dmitriy Zilberman, a partner in the company.
D.C. Inc., a Fenton, Mo., company that operates www.dirtcheapcig.com in Paducah, also was named in the suit filed last Friday. The suit could reap $15 million for the city, which is seeking three times the amount of taxes that it says it has lost because of the online sales.
New York has some of the highest cigarette taxes in the nation - $33.30 a carton. New York residents are required to pay taxes on out-of-state cigarette purchases, the suit says.
The business plans of the companies depend on concealing the purchases from state authorities, the suit claims. "If Internet purchasers were identified and required to pay taxes, virtually all of the economic incentive for the Internet purchase disappears," it says.
Zilberman declined to answer questions. Employees at the Paducah online store twice hung up on a reporter's calls seeking comment.
Many of the companies offering cigarettes through Web sites have operations in Virginia and Kentucky, which have the lowest and second-lowest cigarette taxes in the nation. Virginia collects 2.5 cents per pack in taxes, while Kentucky collects 3 cents.
The state of New York and New York City each charge an excise tax of $1.50 per pack. The combined state and city sales tax is 33 cents per pack, bringing the total to $3.33 per pack, or $33.30 per carton.
A carton of premium-brand cigarettes sold in Virginia or Kentucky costs about $30, the suit says, while the same carton bought in New York City costs about $70.
The civil suit, filed in U.S. District Court in Manhattan, alleges violations of federal Racketeer Influenced and Corrupt Organizations laws, saying the defendants violated federal mail- and wire-fraud laws.
It also alleges violations of a state law against deceptive consumer transactions.
In addition to the financial damages, the suit seeks an injunction that would require the defendants to file the Jenkins Act reports and to desist from misrepresenting the tax status of Internet purchases.
Last fall the state of Washington sued www.dirtcheapcig.com, alleging that it had refused to provide monthly reports that allow the state to bill customers for unpaid cigarette and sales taxes.
State revenue officials estimate that in 2001, the state lost about $6 million in sales/use and cigarette taxes that were owed but not paid by Washington consumers who buy cigarettes by mail order and over the Internet.