448 F.3d 1168 (9th Cir. 2006), 04-55354, United States v. 4,432 Mastercases of Cigarettes, More or Less

Docket Nº:04-55354, 04-55356, 04-56350.
Citation:448 F.3d 1168
Party Name:UNITED STATES of America, Plaintiff-Appellant, Intrigue Trading, Inc., Claimant-Appellee, v. 4,432 MASTERCASES OF CIGARETTES, MORE OR LESS, Defendant. United States of America, Plaintiff-Appellee, Intrigue Trading, Inc., Claimant-Appellant, v. 4,432 Mastercases of Cigarettes, More or Less, Defendant. United States of America, Plaintiff-Appellant, I
Case Date:June 02, 2006
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

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448 F.3d 1168 (9th Cir. 2006)

UNITED STATES of America, Plaintiff-Appellant,

Intrigue Trading, Inc., Claimant-Appellee,



United States of America, Plaintiff-Appellee,

Intrigue Trading, Inc., Claimant-Appellant,


4,432 Mastercases of Cigarettes, More or Less, Defendant.

United States of America, Plaintiff-Appellant,

Intrigue Trading, Inc., Claimant-Appellee,


4,432 Mastercases of Cigarettes, More or Less, Defendant.

Nos. 04-55354, 04-55356, 04-56350.

United States Court of Appeals, Ninth Circuit.

June 2, 2006

Argued and Submitted Nov. 16, 2005.

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Brian M. Hoffstadt, Assistant United States Attorney, and Pio S. Kim, Assistant United States Attorney, Los Angeles, California, argued the case and were on the briefs for the appellants/cross-appellees.

Eric Honig, Law Office of Eric Honig, Marina del Rey, California, argued the case and was on the briefs for the appellees/cross-appellants.

Dennis Eckhart and Peter M. Williams, Office of the Attorney General, were on the briefs for amicus curiae California Board of Equalization.

Appeal from the United States District Court for the Central District of California, D.C. No. CV-01-10113-FMC, Florence Marie Cooper, District Judge, Presiding.

Before: Procter Hug, Jr. and Kim McLane Wardlaw, Circuit Judges, and James K. Singleton, [*] District Judge.

WARDLAW, Circuit Judge:

This appeal and cross-appeal arise from the search and seizure by the United States Customs Service of over 44 million cigarettes, contained in 4,432 mastercases, for nonpayment of California cigarette taxes. The appeals require us to determine the extent of immunity from state and federal regulatory and taxing power that businesses can expect when they operate in foreign trade zones. We hold that an importer of goods destined for domestic consumption is not exempt from state excise taxes and administrative searches by federal Customs officials simply because it stores its merchandise in a foreign trade zone.

I. Facts and Procedural History

Between 1998 and 2000, Intrigue Trading, Inc. ("Intrigue"), a California corporation, was licensed by the Bureau of Alcohol, Tobacco, and Firearms to import gray market cigarettes into the United States for domestic sale. The term "gray market

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cigarettes" refers to both American-made exported cigarettes that are re-imported into the United States, as well as American brands of cigarettes manufactured abroad for sale in foreign markets but then imported into the United States.1Until the year 2000, importing gray market cigarettes was legal, as was their sale in California. See Tariff Suspension and Trade Act of 2000, Pub. L. No. 106-476, tit. IV, § 4002 (effective as amended Nov. 9, 2000, at 26 U.S.C. § 5754) (banning importation of previously exported tobacco products); Act of May 5, 2000, S.B. 1038, § 1, Cal. Legis. Serv. 18 (codified as amended at Cal. Rev. & Tax. Code § 30163) (making illegal in California the importation of cigarettes in violation of 26 U.S.C. § 5754, and the importation by third parties of American-branded cigarettes manufactured abroad). Throughout most of the period of Intrigue's operations, however, California law required cigarette distributors either to obtain a state distributor's license or to pay use taxes on cigarettes placed into storage.

Intrigue is ninety percent owned by Andy Lee, who is also the majority shareholder of two other corporations that dealt in gray market cigarettes, National Trade Industry, Inc. ("NTI") and Ampac, Inc. ("Ampac"). The companies were similarly structured and shared storage facilities, but each company served a particular purpose. For instance, only NTI was licensed to sell cigarettes in California. The companies are separately incorporated.

Between 1998 and April 2001, Intrigue regularly stored gray market cigarettes, including the 4,432 mastercases at issue here, in a storage space rented under Ampac's name at the Port Services Foreign Trade Zone in Carson, California. Foreign trade zones ("FTZs") are discrete areas located adjacent to ports of entry and authorized by Congress to receive preferential treatment under United States customs laws. BMW Mfg. Corp. v. United States, 241 F.3d 1357, 1359 n.1 (Fed. Cir. 2001). Merchandise from foreign countries stored within an FTZ is not subject to United States customs duties so long as it remains in the FTZ. 19 U.S.C. § 81c. Congress thus allows international shippers to use American ports as a duty-free way station in international commerce. Companies operating within FTZs are also permitted to manipulate or alter these foreign goods (by repackaging, breaking up, assembling, sorting, mixing with other foreign or domestic parts, etc.) before reshipment abroad, without incurring Customs duties unless they are entered into the United States for sale. Id. In addition, domestic merchants may use FTZs as a holding area for eventual exports, or to store "domestic status" merchandise, imported goods on which Customs duties have already been paid. See 19 C.F.R. §§ 146.43; 146.44. Intrigue's mastercases of cigarettes were "domestic status" goods.2

Intrigue purchased the 4,432 mastercases of Marlboro brand cigarettes between August 2000 and January 2001 from three different companies that had imported them through Miami, Florida. Importation documents indicated that the cigarettes

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were manufactured in Switzerland. They had passed through Customs and all duties were paid. From Miami, Intrigue shipped the cigarettes to the Carson Port Services FTZ in California, where they were placed in storage for a planned eventual sale to LPC, Inc., a Missouri-based company doing business under the name DirtCheapCigarettes-.com. This transaction never occurred because the United States Customs Service seized the cigarettes.

Customs Service agents began searching FTZs in the Los Angeles and Long Beach area in early April 2001 as part of an investigation into counterfeit and contraband cigarettes they suspected were being stored there. Customs Inspector Rudolfo Villacana visited the Carson FTZ on April 3 or 4, 2001, but was informed by Zone Operator John Yeskel that there were no cigarettes on-site. A day or two later, additional Customs Service agents visited the Carson FTZ and a different zone employee, in response to the agents' questioning, led them to Intrigue's space. There, they found a fenced-in, locked storage area covered with black tarp that obscured the contents of the pallets. Zone employees did not have a key to the storage space, nor could they locate documents detailing Intrigue's admissions and removals of cigarettes from the FTZ. When the Customs inspectors threatened to cut the lock, an Intrigue employee, Nick Choi, was summoned. He had a key to the space and opened it for the inspectors to enter. During this initial search, the inspectors found mastercases of cigarettes wrapped in opaque black plastic. This combination of circumstances made one senior Customs inspector "very suspicious" of the nature of the cigarettes.

Customs Service officials returned to the FTZ again on April 5 and seized twelve sample cartons of cigarettes for testing. The next day, April 6, four officials at a Customs ware- house performed a series of field tests on the cigarettes. Those tests indicated that the cigarettes were "likely counterfeit," "possibly counterfeit," or at least "appeared to be counterfeit." Based on the field test results and the suspicious circumstances of the cigarettes' storage, the Customs Service decided to seize all the cigarettes in Intrigue's storage area and move them to a secure Customs warehouse.

The following Monday, April 9, 2001, Customs Specialist Trevor Rudalevige performed another test on packs of cigarettes from the sample cartons. The results of this second test (the "Rudalevige test") were inconclusive. Officer Rudalevige recommended forwarding some of the samples to Phillip Morris for further analysis. That same day, Customs officials began a detailed, week-long inventory of the cigarettes. On April 10, in the course of the inventory, agents found two boxes of cigarettes that bore Customs notations indicating that they had previously been denied importation into the United States. Sometime between April 10 and April 17, Customs officials also discovered evidence of country-of-origin violations: some of the inventoried cigarettes were not from Switzerland, as Intrigue had claimed, but rather from the Czech Republic, Germany, Holland, and Malaysia.

Phillip Morris responded to the Customs Service's inquiry on April 19. Its tests established that the cigarettes in fact were not counterfeit, but it confirmed that three of the four cartons it reviewed were incorrectly labeled as manufactured in Switzerland. The Customs Service retained control of the cigarettes, asserting that it now had probable cause to believe that a large number of the cigarettes were imported in violation of country-of-origin rules or imported despite having been previously denied entry. All but 408 mastercases ultimately were sold at a court-ordered

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interlocutory sale in October 2002 for $450,000. The estimated domestic market value of the 4,432 mastercases of cigarettes was between $1.7 million and $5.5 million.

In December 2001, the United States filed this civil forfeiture complaint against the cigarettes as goods entered into the country in violation of law. See 19 U.S.C. § 1595a. The United States initially alleged only country-of-origin and unlawful importation violations but amended its complaint in December 2002 to add charges under the Contraband Cigarette Trafficking Act ("CCTA"), 18 U.S.C. § 2341 et seq . The CCTA claim alleged...

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