NYC sues Web cigarette vendors for tax evasion
NEW YORK, Jan 17 (Reuters) - New York City, which has one of the nation's highest cigarette taxes, sued a group of web site owners on Friday for evading the steep taxes by selling cartons over the Internet to Big Apple smokers.
The suit, believed to be the largest filed so far by a city or state against Internet tobacco vendors, was filed under the federal Racketeer Influenced and Corrupt Organization Act that allows for triple damages. Under that act, plaintiffs must prove that defendants engaged in a pattern of wrongdoing consisting of two or more incidents of certain crimes.
Although the suit does not specify a damage amount being sought, lawyers for the city said they hope to recover as much as $15 million. Eric Porshansky, a city lawyer, said the damage amount is still hazy because the city has not yet been able to determine the amount of taxes it has lost. He said lawyers are basing the $15 million figure on sales revenue that has been reported by certain Internet sites.
The suit also does not allege when the tax evasion scheme began, but Porshansky said it is believed the sales started about the time mainstream consumers really began coming online in the mid 1990s.
The city's case, which was filed in Manhattan federal court, alleges the defendant companies and some of their officers own or control about 15 Internet web sites that sell cigarettes.
The defendants include Cyco.net of Albuquerque, New Mexico, which the suit states is publicly traded. The company could not immediately be reached for comment.
The suit alleges that the defendants are breaking a federal law that requires cigarette sellers to notify state tax administrators of every interstate cigarette shipment they send into the administrator's state.
Not only are the defendants failing to report the sales, but they are allegedly telling customers that purchases will be concealed from state tax authorities, the suit charged.
According to the complaint, some defendants also tell customers that cigarettes sold to New Yorkers over the Internet are "tax free," despite New York City and State laws requiring purchasers to pay cigarette excise and sales taxes on cigarettes bought in the state.
New York City and the state impose excise and sales taxes totaling $33.30 on every carton and 33 cents per pack of cigarettes sold within the Big Apple, an amount that exceeds taxes in most other states. In turn, cigarette sellers in other states, can sell to New York residents at prices well below those charged locally.
For example, a carton of premium brand cigarettes sold in such low-tax states as Virginia or Kentucky can be bought for about $30, while the same carton in New York City costs about $70. The difference in price, the suit said, is almost all due to New York State taxes.
New York City's suit is the latest legal attack on Internet cigarette vendors. Last year, Washington State sued one web site to force it to turn over its list of customers.
In September, Philip Morris (NYSE:MO - News) said it filed eight lawsuits in New York and Los Angeles against more than a dozen web sites, seeking to block sales.
Defendants in those suits allegedly infringed on Philip Morris trademarks to promote and sell illegally imported cigarettes and made false claims about the legality of the sales.