City of New York v. Milhelm Attea & Bros., Inc., No. 06-CV-3620(CBA).

• Court: United States District Courts. 2nd Circuit. United States District Court (Eastern District of New York)
• Writing for the Court: Amon
• Citation: 550 F.Supp.2d 332
• Parties: The CITY OF NEW YORK, Plaintiff, v. MILHELM ATTEA & BROS., INC., Day Wholesale, Inc., Gutlove & Shirvint, Inc., Mauro Pennisi, Inc., Jacob Kern & Sons, Inc., Windward Tobacco, Inc., and Capital Candy Company, Inc., Defendants.
• Decision Date: 30 April 2008
• Docket Number: No. 06-CV-3620(CBA).

550 F.Supp.2d 332 The CITY OF NEW YORK, Plaintiff,
v.
MILHELM ATTEA & BROS., INC., Day Wholesale, Inc., Gutlove & Shirvint, Inc., Mauro Pennisi, Inc., Jacob Kern & Sons, Inc., Windward Tobacco, Inc., and Capital Candy Company, Inc., Defendants. No. 06-CV-3620(CBA). United States District Court, E.D. New York. April 30, 2008.

Page 333

COPYRIGHT MATERIAL OMITTED

Page 334

COPYRIGHT MATERIAL OMITTED

Page 335

COPYRIGHT MATERIAL OMITTED

Page 336

Eric Proshansky, Corporation Counsel of the City of NY, Brad Michael Snyder, New York City Law Department, New York, NY, for Plaintiff.

Gerald T. Walsh, Zdarsky, Sawicki & Agostinelli, Margaret A. Murphy, Law Offices of Margaret A. Murphy, Buffalo, NY, Michael S. Feldberg, Nathan Daniel Reilly, Allen & Overy LLP, Daniel Steinberg, Hodgson Russ LLP, James Simermeyer, New York, NY, Paul Francis Keneally, Underberg & Kessler LLP, Rochester, NY, for Defendants.

MEMORANDUM & ORDER

AMON, District Judge.

INTRODUCTION

The City of New York has brought an Amended Complaint against the abovecaptioned defendants, a group of cigarette wholesalers who are state-licensed cigarette stamping agents. The principal contention of the City is that the wholesalers violate the Contraband Cigarette Trafficking Act ("CCTA"), 18 U.S.C. § 2341 et seq., by shipping in excess of 10,000 unstamped cigarettes to reservation retailers who re-sell the cigarettes to the public. According to the City, New York Tax Law § 471 requires that cigarettes sold to Native Americans for re-sale to the public must be taxed, and that the defendant agents are responsible' for collecting the tax by purchasing tax stamps from the New York State Tax Commission and affixing them to cigarette packages. The City brings additional state law claims under New York Tax Law § 484, the Cigarette Marketing Standards Act, as well as a public nuisance claim. Defendants have moved to dismiss the Amended Complaint pursuant to Federal Rules of Civil Procedure 12(b)(1), 12(b)(6) and 12(b)(7). For the reasons set forth below, defendants' motions to dismiss are denied.

Page 337

I. Background

The following facts are undisputed.

A. New York State's Cigarette Tax Scheme

Article 20 of the New York Tax Law imposes a tax on all cigarettes possessed for sale or use in New York State, except for those cigarettes that New York is "without power" to tax. See N.Y. Tax L. § 471 ("There is hereby imposed and shall be paid a tax on all cigarettes possessed in the state by any person for sale, except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax ...."); Dep't of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61, 114 S.Ct. 2028, 129 L.Ed.2d 52 (1994) (citing N.Y. Tax L. § 471(1)). New York's cigarette tax has two components: the cigarette tax imposed on possession for sale in the State pursuant to N.Y. Tax Law § 471; and the cigarette use tax imposed pursuant to N.Y. Tax Law § 471-a. See N.Y. Tax L. §§ 471, 471-a. Under § 471, cigarettes are presumed taxable. N.Y. Tax L. § 471 (stating that "all cigarettes within the state are subject to tax until the contrary is established, and the burden of proof that any cigarettes are not taxable hereunder shall be upon the person in possession thereof."). New York City also imposes a cigarette tax pursuant to authority delegated by the state and its own regulations. See N.Y.C. Admin. Code § 11-1302(a)(1).

The New York State tax on cigarettes is presently $1.50 per pack; the City tax is $1.50 per pack. State and local sales tax is $0.33 per pack. The total tax on a pack of cigarettes sold in New York City, therefore, is $3.33 per pack, or $33.30 per carton.

Under New York law, taxes on cigarettes are largely collected through a system of prepayments, and then passed along the distribution chain to the consumer. See N.Y. Tax Law § 471(2); In re New York Assoc. of Convenience Stores v. Urbach, 92 N.Y.2d 204, 209, 677 N.Y.S.2d 280, 699 N.E.2d 904 (N.Y.1998). Wholesalers, such as the defendants in this action, may be licensed by New York as "stamping agents" pursuant to New York Tax Law § 472. N.Y. Tax L. § 472(2) ("The commissioner may license dealers in cigarettes ... as agents to buy or affix stamps to be used in paying the tax herein imposed...."). A stamping agent prepays cigarette taxes and affixes a tax stamp to each package of cigarettes; when the tax is paid, any dealer subsequently receiving the stamped cigarettes is not required to purchase and affix tax stamps. See id. § 471(1). State-licensed stamping agents are permitted to sell tax-stamped cigarettes and other tobacco products to registered New York retailers and licensed wholesalers. See id. §§ 472(1), 480(1)(a).

Federal and state governments lack authority to tax cigarettes sold to members of Native American tribes for their own consumption. Thus, cigarettes to be consumed on the reservation by enrolled tribal members are tax-exempt. Milhelm Attea & Bros., Inc., 512 U.S. at 64, 114 S.Ct. 2028 (citing Moe v. Confederated Salish and Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 475-81, 96 S.Ct. 1634, 48 L.Ed.2d 96 (1976)). However, "on-reservation cigarette sales to persons other than reservation Indians ... are legitimately subject to state taxation." Id. (citing Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134, 160-161, 100 S.Ct. 2069, 65 L.Ed.2d 10 (1980)).

B. Forbearance Policy

Whether and how to collect taxes on cigarettes sold on reservations to persons other than Native American tribe members

Page 338

has been the subject of ongoing debate in New York. As described above, New York wholesalers generally collect cigarette sales tax by selling cigarettes affixed with tax stamps to retailers, and remitting the tax payments to the State. However, the New York State Department of Taxation and Finance (the "Department") has allowed wholesalers to sell unstamped cigarettes to Native American tribes, without requiring an accounting to reflect that the unstamped cigarettes are being sold only to tribe members. See State of New York Commissioner of Taxation and Finance, Advisory Opinion Petition No. M06316A, March 16, 2006 (hereinafter "Advisory Opinion").

In 1988, the Department adopted regulations requiring reservation retailers to pay sales and excise taxes on cigarettes. The regulations allowed retailers to purchase a limited quantity of untaxed cigarettes based on estimates of demand by tribe members. See In re New York Assoc. of Convenience Stores v. Urbach, 275 A.D.2d 520, 712 N.Y.S.2d 220, 221 (N.Y. 2000). Any cigarettes sold above the allotment were subject to applicable state taxes. Id. The regulations were challenged by reservation retailers and suspended by the Department pending outcome of the related litigation. Id. The Supreme Court ultimately upheld the Department's regulations, concluding that the state could lawfully tax sales by reservation retailers to non-tribe members. See Milhelm Attea & Bros., Inc., 512 U.S. at 61, 114 S.Ct. 2028. The Department, however, did not reinstate its regulations after the Supreme Court's decision in Milhelm.

In 1997, Governor George Pataki directed the repeal of the Department's 1988 regulations, and proposed new legislation that would allow reservation retailers to sell tax-free cigarettes. The 1988 regulations were repealed on April 28, 1998. In re New York Assoc. of Convenience Stores v. Urbach, 92 N.Y.2d at 213-14, 677 N.Y.S.2d 280, 699 N.E.2d 904. Governor Pataki's proposed legislation was never passed.

In 2005, New York passed a tax law that would require wholesalers to sell only stamped cigarettes to Native American tribes. See N.Y. Tax Law § 471-e. Under the new scheme, tribe members would be granted reimbursement coupons on a quarterly basis. Id. These coupons would allow the possessor to purchase stamped cigarettes without paying taxes. However, the regulations required by § 471-e were never adopted, and a New York Supreme Court decision has preliminarily enjoined the section's enforcement. See Day Wholesale v. State of New York, No. 06-7688, slip op., at 5 (N.Y.Sup.Ct. Jan. 2, 2007) (holding that § 471-e "is not in effect because on March 1, 2006 and subsequent thereto there has not been actions taken or rules and regulations issued that would be necessary to implement the provisions of this act").

On March 16, 2006, The Department issued an Advisory Opinion in response to a request by Milhelm Attea & Brothers. The Advisory Opinion noted that the Department "has a longstanding policy of allowing untaxed cigarettes to be sold from licensed stamping agents to recognized Indian Nations and reservation-based retailers making sales from qualified Indian reservations." Advisory Opinion at 3. The Department indicated that it has "no intention to alter" its policy of forbearance, but "if the Department decides to revise its policy in the future, it will provide adequate notice to all affected stamping agents." Id. at 4. Wholesalers continue to sell unstamped cigarettes to reservation retailers.

Page 339

DISCUSSION

I. The City's Claims and the Defendants' Arguments

In view of the above-described federal and state statutory schemes, the City contends that defendant wholesalers violate the Contraband Cigarette Trafficking Act ("CCTA"), 18 U.S.C. § 2341 et seq., by shipping unstamped cigarettes to reservation retailers, who re-sell the cigarettes to the public. According to the City, N.Y. Tax Law § 471(1)-(2) provides that cigarettes sold to Native Americans for re-sale to the public must be taxed, and that the defendant agents are required to purchase tax stamps and affix them to cigarette packages. The City contends that these cigarettes are "contraband" within the meaning of the CCTA because the State "requires" that stamps be placed on packages of cigarettes by the wholesaler defendants, and the cigarettes at issue bear no evidence of the...