united states district court southern district of new york · 9/7/2013 · plaintiff the city of...

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UNITED STATES DISTRICT COURT SOUTHERN DISTRICT OF NEW YORK ----------------------------------------------------------------------- x

THE CITY OF NEW YORK,

Plaintiff,

-against-

WOLFPACK TOBACCO; CLOUD AND COMPANY; ALLEGANY SALES AND MARKETING; PHILIP JIMERSON; HEIDI JIMERSON; JOHN DOES 1-5, being persons who own, are employed by or are associated with Wolfpack Tobacco; PM DELIVERY; MICHAEL W. JONES; JOHN L. POWERS; and JOHN DOES 6-10, being persons who own, are employed by or are associated with PM Delivery,

Defendants.

Civil Action No. 13 cv 1889

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MEMORANDUM OF LAW IN SUPPORT OF THE CITY OF NEW YORK’S MOTION FOR A PRELIMINARY INJUNCTION

____________________________________________________________

MICHAEL A. CARDOZO Corporation Counsel of the

City of New York Attorney for Plaintiff The City

of New York 100 Church Street, Room 20-84 New York, New York 10007 (212) 356-2274 By: Aaron Bloom

Eric Proshansky

Case 1:13-cv-01889-DLC Document 7 Filed 03/26/13 of 22

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TABLE OF CONTENTS

Page

TABLE OF AUTHORITIES .......................................................................................................... ii

PRELIMINARY STATEMENT .................................................................................................... 1

FACTS ............................................................................................................................................ 4

The Defendants’ Trafficking Scheme............................................. 4

New York State and City Cigarette Tax Regime............................ 7

ARGUMENT

THE WOLFPACK DEFENDANTS SHOULD BE PRELIMINARILY ENJOINED FROM VIOLATING THE PACT ACT AND THE CMSA. THE PM DELIVERY DEFENDANTS SHOULD BE PRELIMINARILY ENJOINED FROM VIOLATING CCTA. ..............................................................8

I. The City Is Not Required to Show Irreparable Harm for an Injunction Under the CCTA, CMSA or PACT Act.....................................................................................................8

II. The City Will Likely Succeed in Showing that the Wolfpack Defendants Violate the PACT Act. .............................................9

A. The Wolfpack Defendants Fail to File PACT Act Reports with the City. .............................................................10

B. The Wolfpack Defendants Fail To Comply with the PACT Act’s Labeling, Weight and Age Verification Requirements. ....................................................11

III. The City Will Likely Succeed in Showing that the Wolfpack Defendants Violate the CMSA..................................................12

IV. The City Will Likely Succeed in Showing that the PM Delivery Defendants Violate the Contraband Cigarette Trafficking Act...........................................................................14

V. The Defendants’ Violations are Likely to Recur if not Enjoined. ..............................................................................................17

CONCLUSION............................................................................................................................. 17


ii

TABLE OF AUTHORITIES

Cases Pages

City of New York v. Chavez, 2012 U.S. Dist. LEXIS 42792 (S.D.N.Y. Mar. 26, 2012) ........................................ 2, 10, 16, 17

City of New York v. Golden Feather Smoke Shop, Inc., 2009 U.S. Dist. LEXIS 76306 (E.D.N.Y. Aug. 25, 2009)................................ 1, 2, 9, 14, 15, 16

City of New York v. Golden Feather Smoke Shop, Inc., 2009 U.S. Dist. LEXIS 76306 (E.D.N.Y. Aug. 25, 2009), aff’d in relevant part 597 F.3d 115 (2d Cir. 2010) ................................................................. 1, 8

City of New York v. Milhelm Attea & Bros. Inc., 550 F. Supp. 2d 332 (E.D.N.Y. 2008) ........................................................................................ 7

City of New York v. Milhelm Attea & Bros. Inc., 2012 U.S. Dist. LEXIS 116533 (E.D.N.Y. Aug. 17, 2012)...................................................... 16

Gordon v. Holder, 826 F. Supp. 2d 279 (D.D.C. 2011), appeal docketed, Nos. 12-5031 (D.C. Cir.) ................................................................................ 3

Kapps v. Wing, 404 F.3d 105, (2d Cir. 2005)..................................................................................................... 17

Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, (2003) .............................................................................................................. 12

Musser’s Inc. v. United States, 2011 U.S. Dist. LEXIS 109629 (E.D. Pa. Sept. 26, 2011) ......................................................... 3

New York v. BB's Corner, Inc., 2012 U.S. Dist. LEXIS 88542 (S.D.N.Y. June 25, 2012) ................................................ 1, 8, 16

Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154 (2d Cir. 2011).................................................................................................... 1, 7

Red Earth LLC v. United States 657 F.3d 138 (2d. Cir.2011) aff'g 728 F. Sup. 2d. 238 (W.D.N.Y. 2010) ............................................................................. 3, 4

Save More Mkts. v. Chu, 1986 U.S. Dist. LEXIS 27054 (N.D.N.Y. 1986) ...................................................................... 16


Cases Pages

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United States v. Approximately Three Million Six Hundred Nine Thousand Eight Hundred Twenty Cigarettes of Assorted Brands, 2008 U.S. Dist. LEXIS 108021 (W.D. Wash. Mar. 20, 2008) ................................................. 15

United States v. Elshenawy, 801 F.2d 856 (6th Cir. 1986) .................................................................................................... 15

United States v. Oregon State Medical Soc., 343 U.S. 326 (1952).................................................................................................................. 17

United States v. Skoczen, 405 F.3d 537 (7th Cir. 2005) .................................................................................................... 16

Wholesale v. Worldwide Wholesale Trading Inc., 2007 U.S. Dist. LEXIS 72656, at (S.D.N.Y. Sept. 28, 2007)................................................... 13

Statutes

15 U.S.C. § 375............................................................................................................................... 9

15 U.S.C. § 375 et. seq.................................................................................................................... 1

15 U.S.C. § 375(7) ........................................................................................................................ 11

15 U.S.C. § 375(9) ........................................................................................................................ 11

15 U.S.C. § 375(9)(A)................................................................................................................... 11

15 U.S.C. § 375(9)(B).................................................................................................................. 11

15 U.S.C. § 376............................................................................................................................... 3

15 U.S.C. § 376(a) .................................................................................................................. 10, 11

15 U.S.C. § 376a(a)(3).......................................................................................................... 3, 9, 10

15 U.S.C. § 376a(a)(4).................................................................................................................... 3

15 U.S.C. § 376a(b) ........................................................................................................................ 3

15 U.S.C. § 376a(d) ........................................................................................................................ 3

15 U.S.C. § 376a(e)(3)(B)(ii)(I)...................................................................................................... 4

15 U.S.C. § 378(c)(1)(A) .......................................................................................................... 8, 10

18 U.S.C. § 1716E .......................................................................................................................... 4


Statutes Pages

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18 U.S.C. § 2341 ............................................................................................................................ 3

18 U.S.C. § 2341 et. seq............................................................................................................ 1, 14

18 U.S.C. § 2341(2) ...................................................................................................................... 15

18 U.S.C. §2342.............................................................................................................................. 3

18 U.S.C. § 2342(a) ...................................................................................................................... 14

18 U.S.C. § 2346(b)(1) ............................................................................................................... 3, 8

Fed. R. Civ. P. Rule 65(a)......................................................................................................... 1, 17

N.Y. Tax L. § 471 ................................................................................................................... 1, 7, 8

N.Y. Tax L. § 471(1) ................................................................................................................ 7, 13

N.Y.C. Admin. Code § 11-1302 ..................................................................................... 7, 8, 10, 13

N.Y.C. Admin. Code § 11-1302(a)................................................................................................. 7

N.Y.C. Admin. Code §11-1302(d).................................................................................................. 7

N.Y.C. Admin. Code § 11-1302(e) ............................................................................................... 7

N.Y.C. Admin. Code § 11-1302(h) ............................................................................................... 7

N.Y.C. Admin. Code § 11-1304. ............................................................................................. 7, 13

N.Y. C. Admin. Code § 11-1308 .................................................................................................. 10

N.Y. Tax L. § 473 ........................................................................................................................... 7

N.Y. Tax L. § 483 et seq ................................................................................................................. 1

N.Y. Tax L. § 483(a)(l)................................................................................................................. 13

N.Y. Tax L. § 483(b)(3)(A) .......................................................................................................... 13

N.Y. Tax L. §§ 483-489................................................................................................................ 12

N.Y. Tax L. § 484(a)(1) ................................................................................................................ 13

N.Y. Tax L. § 484(6) .................................................................................................................... 14

N.Y. Tax L. § 484(b)(1)................................................................................................................ 13

N.Y. Tax L. § 1103 ......................................................................................................................... 8


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Plaintiff the City of New York (the “City”) respectfully submits this memorandum of law

in support of its motion for an order preliminarily enjoining, pursuant to Fed. R. Civ. P. Rule

65(a), transactions in unstamped cigarettes1 by defendants Wolfpack Tobacco, Cloud and

Company, Allegany Sales and Marketing, Philip Jimerson, Heidi Jimerson, and John Does 1-5

(collectively, the “Wolfpack Defendants”), and defendants PM Delivery, Michael W. Jones, John

L. Powers and John Does 6-10 (collectively, the “PM Delivery Defendants”) in violation of the

Jenkins Act, 15 U.S.C. § 375 et seq., as amended by the Prevent All Cigarette Trafficking Act of

2010 (collectively, the “PACT Act”), the New York State Cigarette Marketing Standards Act,

N.Y. Tax L. § 483 et seq. (the “CMSA”) and the Contraband Cigarette Trafficking Act, 18

U.S.C. § 2341 et seq. (the “CCTA”).

PRELIMINARY STATEMENT _____________________________________

To combat the well-documented epidemic of cigarette trafficking into New York City,

the City has sought and procured injunctions barring sales of cigarettes on which State or City

cigarette taxes have not been paid. See City of New York v. Golden Feather Smoke Shop, Inc.,

2009 U.S. Dist. LEXIS 76306 (E.D.N.Y. Aug. 25, 2009) (“Golden Feather”), aff’d in relevant

part 597 F.3d 115 (2d Cir. 2010); New York v. BB's Corner, Inc., 2012 U.S. Dist. LEXIS 88542

(S.D.N.Y. June 25, 2012) (“BB’s Corner”).2 Continuing that effort, the present action and the

1 “Unstamped” cigarettes are cigarettes for which New York State and New York City excise taxes have not been pre-paid through the purchase of tax stamp. “Stamped” cigarettes are those for which a tax stamp has been purchased and affixed by licensed State and City stamping agents – who thereby pre-pay the tax prior to retail sale. See N.Y. Tax L. § 471; Oneida Nation of N.Y. v. Cuomo, 645 F.3d 154, 158 (2d Cir. 2011) (describing cigarette tax collection system). 2 The City has previously proven its injury from the “large quantities of untaxed cigarettes … purchased … and trafficked into the City where they are resold at below-market prices, without the payment of City or State taxes.” Golden Feather, 597 F.3d at 119 (quoting Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *61). This “‘substantial trade in unstamped cigarettes’ … caused injury to the City in the loss of ‘significant tax revenue’” and “concomitant effects on the


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instant motion seeks to enjoin the defendants’ “mail order” scheme to traffic unstamped

cigarettes into New York City. See, e.g. City of New York v. Chavez, 2012 U.S. Dist. LEXIS

42792 (S.D.N.Y. Mar. 26, 2012) (“Chavez”) (denying motion to dismiss claims against mail-

order cigarette trafficking scheme).

Through mailings and formerly through their website, www.wolfpacktobacco.com, the

Wolfpack Defendants offer unstamped cigarettes for sale to City residents and others at prices far

below the cost of tax-paid cigarettes. They receive responsive orders and payments by mail and

telephone and ship the cigarettes to buyers nationwide, including to City residents. Since at least

December 2010, the PM Delivery Defendants have managed and conducted the shipment and

transport aspects of the trafficking scheme. The PM Delivery Defendants contract with various

carriers to deliver the cigarettes sold by the Wolfpack Defendants to their ultimate destinations in

the City and elsewhere. The scheme could not succeed without PM Delivery’s participation

because, since June 29, 2010, the PACT Act has barred use of the postal service to ship

cigarettes.

The CCTA expressly authorizes local governments to enjoin sales of unstamped

cigarettes; the PACT Act does so for cigarette deliveries that, inter alia, do not meet reporting,

weight, labeling and age verification requirements; the CMSA permits any injured person to

enjoin below-cost (e.g., untaxed) sales. Irreparable harm is presumed under all three statutes.

The declarations accompanying this motion provide facts sufficient to establish the existence of

violations of all three statutes, entitling the City to an order enjoining the Defendants from

further violations.

public health ‘due to the relationship between cigarette price and smoking behavior.’” Id. (quoting Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *63).


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CCTA -- The CCTA prohibits receiving, possessing, selling, transporting, distributing

and/or shipping more than 10,000 unstamped cigarettes (50 cartons) in a jurisdiction in which the

cigarettes are required to bear tax stamps, such as New York City and State. See 18 U.S.C.

§§ 2341, 2342. The PM Delivery Defendants violate the CCTA by receiving more than 10,000

unstamped cigarettes from the Wolfpack Defendants and by transporting, distributing and

shipping those cigarettes to customers.3

PACT Act -- The PACT Act requires cigarette sellers to report all interstate (including

off-Reservation) cigarette sales to the taxing authorities of the jurisdiction into which the sale is

made. 15 U.S.C. § 376. The PACT Act also prohibits cigarette sales between a consumer/buyer

and a seller who are not in one another’s physical presence (“delivery sales”) unless the seller

complies with weight, labeling and age verification requirements. 15 U.S.C. § 376a(b). The

Wolfpack Defendants engage in delivery sales to City residents without reporting those sales to

City authorities and without complying with the PACT Act’s weight, labeling and age

verification requirements, thereby violating the PACT Act.4

3 The Wolfpack Defendants violate the CCTA as well. However, an “Indian in Indian Country,” such as Philip Jimerson may not be the subject of a civil CCTA action. See 18 U.S.C. § 2346 (b)(1). Should discovery reveal that any of the Wolfpack Defendants is not an “Indian in Indian Country” within the meaning of the CCTA the city will amend its complaint and this motion. 4 Enforcement of certain provisions of the PACT Act has been enjoined, namely provisions requiring remote sellers to comply with all laws, including the tax laws, of the jurisdiction into which the cigarettes are sold. See Red Earth LLC v. United States, 657 F.3d 138 (2d Cir. 2011), aff’g 728 F. Supp. 2d 238 (W.D.N.Y. 2010) (enjoining enforcement of 15 U.S.C. §§ 376a(a)(3), (a)(4) and 376a(d)); Gordon v. Holder, 826 F. Supp. 2d 279 (D.D.C. 2011), appeal docketed, Nos. 12-5031, 12-5051 (D.C. Cir.); but see Musser’s Inc. v. United States, 2011 U.S. Dist. LEXIS 109629 (E.D. Pa. Sept. 26, 2011) (refusing to enjoin any provisions of the PACT Act). The Gordon v. Holder, Red Earth and Musser’s decisions did not enjoin enforcement of the PACT Act’s reporting, age-verification, weight, labeling and recordkeeping requirements.


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CMSA -- The CMSA prohibits cigarette dealers from advertising, offering for sale or

selling cigarettes at prices that do not include the cost of tax stamps “required by law.” In

violation of the CMSA, the Wolfpack Defendants advertise, offer and sell cigarettes for vastly

less than the price of a New York State tax stamp, let alone the price of the joint New York

State/New York City tax stamp required for sales into the City.

FACTS _____________________________________

The Defendants’ Trafficking Scheme

Defendants Philip and Heidi Jimerson sell and distribute unstamped cigarettes nationwide

through businesses known as Wolfpack Tobacco, Cloud and Company, and Allegany Sales and

Marketing, which Philip and Heidi Jimerson own and operate and which are located on the

Allegany Reservation of the Seneca Nation of Indians. See Declaration of Aaron Bloom dated

March 21, 2013 (“Bloom Decl.”) at ¶ 3-13, 33.5 The businesses advertise through mailings and

formerly through a website, www.wolfpacktobacco.com, and make remote sales (with customer

service by phone and payments accepted by mail) of unstamped cigarettes to customers in New

York City and elsewhere. Id. at ¶¶ 3-4, 9. Because DHL, Federal Express, and UPS agreed to

cease transporting cigarettes in or around 2006, see 15 U.S.C. § 376a(e)(3)(B)(ii)(I), and the

PACT Act’s prohibition against mailing cigarettes went into effect on June 29, 2010, see 18

U.S.C. § 1716E, the Wolfpack Defendants retained PM Delivery – a business owned and

operated by defendants Michael W. Jones and John L. Powers – to ship the Wolfpack

Defendants’ cigarettes. See Bloom Decl. at ¶¶ 14-33.

Although the injunctions in Red Earth and Gordon v. Holder are not applicable to the City, the City sues here pursuant only to the PACT Act provisions that were not enjoined in Red Earth or Gordon v. Holder. 5 Citations to paragraphs of declarations are intended to include the exhibits cited therein.


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On various dates in 2011, and perhaps earlier, the Wolfpack Defendants mass-mailed an

advertisement and order form to New York City residents offering “TAX FREE NATIVE

BRAND CIGARETTES BY MAIL” from Wolfpack Tobacco. Bloom Decl. at ¶¶ 3, 4, Ex. 1;

Declaration of James Grayson dated March 18, 2013 (“Grayson Decl.”), ¶¶ 4, 10, 13, 15 and

Exs. A, E, G, K. The header of the order form is shown below:

Grayson Decl. ¶¶ 4, 13, Exs. A, G. The order form encouraged prospective purchasers to “Mail

Your Order To: Wolf Pack Tobacco, P.O. Box 227, Salamanca, NY 14779.” Id.; Bloom Decl. at

¶ 3, Ex. 1. The back of the order form listed the brands of cigarettes that could be purchased,

prices, shipping fees and other instructions to purchasers. Bloom Decl. ¶ 7; Grayson Decl. ¶ 4,

Ex. A. None of the listed prices, “accurate as of 11/15/11,” exceeded $33.49 per carton of

cigarettes. Grayson Decl. Ex. A; see also Bloom Decl. Ex. 1 (highest price “accurate as of

9/15/11” was $30.45 per carton).

On January 10, 2012 and December 27, 2012, respectively, Chief Investigator James

Grayson from the Office of the New York City Sheriff used the order form to place orders for

cigarettes. Grayson Decl. at ¶¶ 4, 5, 13. He mailed the orders to Wolfpack Tobacco, P.O. Box

227, Salamanca, NY 14779 and included money orders as payment. Id. The highest price of the

cigarettes in either of the orders was $34.45. Id.. No taxes were charged on either order. Id.

On January 19, 2012 and January 6, 2013, respectively, a package affixed with a label

stating “Shipped By: Acct # 51805, PM Delivery, 1784 Lindburg Dr., Columbia, MO 72654”

was delivered to the New York City address provided by the investigator on the Order Form. Id.


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at ¶¶ 7, 14. On neither occasion did the delivery driver ask for identification upon delivery. Id.

at ¶¶ 8, 14. Both packages contained the cigarettes the investigator had ordered, none of which

were in packs affixed with either the New York State or the joint State-City tax stamp. Id. at

¶¶ 10, 11, 15, 16. The delivery packages were not labeled with a notice that they contained

cigarettes. Id. at ¶¶ 7, 14, Exs. C, I. The Wolfpack Defendants did not report either shipment to

the New York City Department of Finance or to the chief law enforcement officer of the City of

New York, i.e., the Corporation Counsel. Grayson Decl. ¶¶ 12, 17; Bloom Decl. ¶ 34.

Records procured by the City show that since December 2, 2010, PM Delivery has

shipped thousands of packages, weighing more than 45,000 pounds in total, from the Wolfpack

Defendants to customers in the City. Bloom Decl. ¶¶ 16, 24. Since a carton of cigarettes weighs

less than one pound, see Grayson Decl. ¶ 18, this translates to more than 45,000 cartons of

cigarettes. The New York City cigarette tax owed on 45,000 cartons of cigarettes is $675,000 (at

$15 per carton, see infra, pp. 8-9), along with more than $2 million in additional New York State

taxes. The records also show that numerous individual deliveries shipped by PM Delivery to

City addresses weighed more than 10 pounds. See Bloom Decl. ¶¶ 19, 20, 23. PM Delivery

received the packages containing cigarettes directly from the Wolfpack Defendants, and then

arranged with other delivery services to complete the ultimate deliveries. See id. ¶¶ 26-29.

Interviews by the New York City Sheriff’s Office of a sample of the Wolfpack

Defendants’ City customers identified in the aforementioned records confirmed that the packages

of cigarettes were not affixed with New York State or joint City/State tax stamps. See

Declaration of Marta Rivera dated March 18, 2013; see also Bloom Decl. ¶ 25.


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New York State and City Cigarette Tax Regime

New York State and City each impose an excise tax on cigarettes. N.Y. Tax L. § 471(1);

N.Y.C. Admin. Code (“Ad. Code”) § 11-1302(a); see generally Oneida Nation, 645 F.3d at 158;

City of New York v. Milhelm Attea & Bros. Inc., 550 F. Supp. 2d 332, 349 (E.D.N.Y. 2008)

(“Milhelm Attea I”). The tax is presumptively imposed on all cigarettes within the state unless

the person claiming an exemption establishes otherwise. N.Y. Tax L. § 471(1); Ad. Code § 11-

1302(d). State and City tax law require that cigarette packages be affixed with a tax stamp to

evidence tax payment, including cigarettes sold from Indian reservations. See N.Y. Tax L. §

471(1) (“The tax imposed by this section is imposed on all cigarettes sold on an Indian

reservation to non-members of the Indian nation or tribe and to non-Indians and evidence of such

tax shall be by means of an affixed cigarette tax stamp.”); N.Y. Tax L. § 473; Ad. Code

§§ 11-1302, 1304.

The State and City license “stamping agents,” generally cigarette wholesalers, that pre-

pay cigarette taxes to the State and City by purchasing and affixing tax stamps to packs of

cigarettes. By purchasing the tax stamps, the cost of which equals the amount of the tax,

stamping agents incorporate the tax burden into the price of the cigarettes sold to cigarette

retailers, who ultimately pass it on to consumers, as required by statute. See N.Y. Tax L. § 471;

Ad. Code § 11-1302 (e) and (h). Thus, New York “‘precollects’ the [cigarette] tax from a

limited number of state-licensed stamping agents, and mandates that these agents be the only

entry point for cigarettes into New York's stream of commerce.” Oneida Nation, 645 F.3d at 158.

The cost of the required City and State tax stamps includes the $43.50 per carton State cigarette

excise tax, the $7.70 per carton prepaid State sales tax, and the City cigarette excise tax of $15


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per carton, for a total tax stamp cost of $66.20 per carton. See N.Y. Tax L. §§ 471, 1103; Ad.

Code § 11-1302.

ARGUMENT ____________________________________________________________

THE WOLFPACK DEFENDANTS SHOULD BE PRELIMINARILY ENJOINED FROM VIOLATING THE PACT ACT AND THE CMSA. THE PM DELIVERY DEFENDANTS

SHOULD BE PRELIMINARILY ENJOINED FROM VIOLATING CCTA. _________________________________________________________

The City is entitled to a preliminary injunction under the CCTA, the CMSA, and the

PACT Act because 1) irreparable harm and favorable public interest are presumed under all three

statutes; 2) the City is likely to succeed on all three claims; and 3) the statutory violations are

likely to recur if the defendants are not enjoined. See Golden Feather, 597 F.3d at 120-121.

I. The City Is Not Required to Show Irreparable Harm for an Injunction Under the CCTA, CMSA or PACT Act.

When the City seeks injunctive relief under the CCTA or the CMSA, it “d[oes] so ‘as a

statutory guardian charged with safeguarding the public interest,’” Golden Feather, 597 F.3d at

120, and therefore is “not required to make a showing of irreparable harm to obtain an injunction

under either the CMSA or the CCTA….” Id. at 121. The statutes’ grant of authority to enjoin

cigarette trafficking “indicat[ed] Congress and the New York Legislature’s determination that

such conduct, in and of itself, is harmful to the public.” Id.; see also BB's Corner, 2012 U.S.

Dist. LEXIS 88542, at *9 (noting that irreparable harm is presumed for statutory injunctions,

such as under the CCTA). Golden Feather’s analysis of the presumptions attached to statutory

injunctions applies with equal force to the injunctive authority afforded the City under the PACT

Act, the enforcement provisions of which are identical to the CCTA. Compare 18 U.S.C. §

2346(b)(1) with 15 U.S.C. § 378(c)(1)(A). Thus, no showing of irreparable harm is required


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under the CCTA, CMSA or PACT Act.6 Likewise, the injunction sought here, under all three

statutes, is necessarily in the public interest because “[t]he passage of the statute is, in a sense, an

implied finding that violations will harm the public and ought, if necessary, be restrained.”

Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *111-12 (citation omitted).

II. The City Will Likely Succeed in Showing that the Wolfpack Defendants Violate the PACT Act.

The PACT Act regulates Internet and other “remote” sales of cigarettes – i.e., sales, like

those of the Wolfpack Defendants, which are not face-to-face transactions. Congress passed the

PACT Act based on its findings that remote cigarette sales were made without payment of state

and local taxes, without compliance with existing federal reporting requirements, and without

precautions to prevent sales to minors. See 15 U.S.C. § 375 Note (Findings). Congress found

that delivery sales make it easier for children to obtain cigarettes; that criminals and terrorist

groups profit from trafficking in untaxed cigarettes; and that billions of dollars of tax revenue are

lost to State and local governments each year. Id.

The PACT Act provides that a local government

that levies a tax subject to Section 2A(a)(3) [15 U.S.C. § 376a(a)(3)], through its chief law enforcement officer, may bring an action in a United States district court to prevent and restrain violations of this Act by any person or to obtain any other appropriate relief from any person for violations of this Act, including civil penalties, money damages, and injunctive or other equitable relief.

6 In any event, trafficking of unstamped cigarettes is a proven source of irreparable harm to the City. The well-established reduction in smoking caused by high cigarette costs is diminished by the availability of unstamped, i.e., less expensive, cigarettes. The availability of cheap cigarettes has been found to sufficiently impair the beneficial health effects of high prices as to qualify as irreparable harm. See Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *66-67, 119-120 (finding that City established irreparable harm through a New York City Department of Health study concluding that unstamped cigarettes trafficked from a single Indian reservation lead to approximately 450 premature deaths in New York City annually).


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15 U.S.C. § 378(c)(1)(A). Standing is satisfied by Section 11-1302 of the Administrative Code

of the City of New York (“Ad. Code”), imposing a cigarette tax that is “subject to 15 U.S.C. §

376a(a)(3),” since it is a law “generally applicable to the sale of cigarettes.” As shown below,

the Wolfpack Defendants violate the PACT Act’s reporting, labeling, weight, and age

verifications requirements and should be enjoined from making further violations.

A. The Wolfpack Defendants Fail to File PACT Act Reports with the City.

The PACT Act requires delivery sellers such as the Wolfpack Defendants to report

cigarettes sales to tax authorities in each jurisdiction into which shipments are made:

(a) Contents. Any person who sells, transfers, or ships for profit cigarettes or smokeless tobacco in interstate commerce, whereby such cigarettes or smokeless tobacco are shipped into a State, locality, … shall—

(1) ***

(2) ***

(3) with respect to each memorandum or invoice filed with a State under paragraph (2) [detailing each and every shipment of cigarettes or smokeless tobacco made during the previous calendar month into such State], also file copies of the memorandum or invoice with the tobacco tax administrators and chief law enforcement officers of the local governments and Indian tribes operating within the borders of the State that apply their own local or tribal taxes on cigarettes or smokeless tobacco.

15 U.S.C. § 376 (a) (emphasis added).7

The Wolfpack Defendants’ sales and shipments to City residents are made “in interstate

commerce” within the meaning of the PACT Act, because they are made between Indian country

7 The City’s tobacco tax administrator is the Commissioner of the City’s Department of Finance; Ad. Code § 11-1308; the “chief law enforcement officer” for purposes of the PACT Act, is the Corporation Counsel. See Chavez, 2012 U.S. Dist. LEXIS 42792, at * 6-7.


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and a State. See 15 U.S.C. § 375 (9).8 The Wolfpack Defendants nonetheless failed to file the

necessary information required by PACT Act § 376(a) for the sales made to the City investigator

or for any of their thousands of other sales into the City. Bloom Decl. ¶ 34; Grayson Decl. ¶¶ 12,

17.

B. The Wolfpack Defendants Fail To Comply with the PACT Act’s Labeling, Weight and Age Verification Requirements.

The PACT Act, at 15 U.S.C. § 376a, provides:

(b) Shipping and packaging.

(1) Required statement. For any shipping package containing cigarettes or smokeless tobacco, the delivery seller shall include on the bill of lading, if any, and on the outside of the shipping package, on the same surface as the delivery address, a clear and conspicuous statement providing as follows: "CIGARETTES/SMOKELESS TOBACCO: FEDERAL LAW REQUIRES THE PAYMENT OF ALL APPLICABLE EXCISE TAXES, AND COMPLIANCE WITH APPLICABLE LICENSING AND TAX-STAMPING OBLIGATIONS".

***

(3) Weight restriction. A delivery seller shall not sell, offer for sale, deliver, or cause to be delivered in any single sale or single delivery any cigarettes or smokeless tobacco weighing more than 10 pounds.

(4) Age verification.

(A) In general. A delivery seller who mails or ships tobacco products--

8 The PACT Act defines “interstate commerce” as “commerce between a State and any Indian country in the State,” 15 U.S.C. § 375 (9) (A) and provides that transactions in interstate commerce are deemed to have been made into the State, place, or locality in which such cigarettes or smokeless tobacco are delivered. 15 U.S.C. § 375 (9) (B). The Wolfpack Defendants are located on the Allegany Reservation in New York, which qualifies as “Indian country” as defined by the PACT Act. See 15 U.S.C. §375 (7).


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* * *

(ii) shall use a method of mailing or shipping that requires—

(I) the purchaser placing the delivery sale order, or an adult who is at least the minimum age required for the legal sale or purchase of tobacco products, as determined by the applicable law at the place of delivery, to sign to accept delivery of the shipping container at the delivery address; and

(II) the person who signs to accept delivery of the shipping container to provide proof, in the form of a valid, government-issued identification bearing a photograph of the individual, that the person is at least the minimum age required for the legal sale or purchase of tobacco products, as determined by the applicable law at the place of delivery; …

As noted above, at p. 7, the Wolfpack Defendants’ deliveries to the investigator did not

contain the required labeling. See Grayson Decl. ¶¶ 7, 14, Exs. C, I. Many of the Wolfpack

Defendant’s deliveries into the City exceeded 10 pounds. See Bloom Decl. ¶¶ 19, 20, 23. The

Wolfpack Defendant’s deliveries to the investigator did not meet the PACT Act’s age

verification requirement, in that no identification was required of the person receiving the

delivery. Grayson Decl. ¶¶ 8, 14. Moreover, a statement of “Wolfpack’s Policies” informs

customers that “if you are not at home your package will be left at your address” – plainly

indicating that the delivery service does not require the person to whom the delivery is made to

provide it with age verification. Bloom Decl. ¶ 8, Ex. 1; Grayson Decl. Exs. E, K.

III. The City Will Likely Succeed in Showing that the Wolfpack Defendants Violate the CMSA.

The CMSA, N.Y. Tax Law §§ 483-489, “prohibits the sale of cigarettes below cost when

the seller intends thereby to ... evade taxes.” Lorillard Tobacco Co. v. Roth, 99 N.Y.2d 316, 319

(2003); see Save More Mkts. v. Chu, 1986 U.S. Dist. LEXIS 27054 at *3 (N.D.N.Y. 1986)

(CMSA serves to eliminate the evasion of New York State taxes on cigarettes). The statute


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provides that “any person injured by any violation or threatened violation” may bring an action

“to prevent, restrain or enjoin a violation, or threatened violation, of any of the provisions of this

article.” N.Y. Tax. L. § 484(b)(1). The City has standing to bring a CMSA claim because the

City’s tax losses caused by the CMSA violations constitute “direct economic injury to itself.”

Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *108; see also Milhelm Attea I, 550 F. Supp.

2d at 341 (supply of unstamped cigarettes injures City); Globe Wholesale v. Worldwide

Wholesale Trading Inc., 2007 U.S. Dist. LEXIS 72656, at *13 (S.D.N.Y. Sept. 28, 2007) (New

York City and State are harmed by sales of untaxed cigarettes).

The CMSA makes it unlawful for:

[A]ny agent, wholesale dealer or retail dealer, with intent to injure competitors or destroy or substantially lessen competition, or with intent to avoid the collection or paying over of such taxes as may be required by law, to advertise, offer to sell, or sell cigarettes at less than cost of such agent wholesale dealer or retail dealer, as the case may be.

N.Y. Tax L. § 484(a)(1). The statute defines the “cost of the retail dealer” as the “basic cost of

cigarettes” plus the dealer’s general costs of doing business. N.Y. Tax L. § 483(b)(3)(A). The

“basic cost of cigarettes” is defined as “the invoice cost of cigarettes to the agent ... to which

shall be added the full face value of any stamps which may be required by law.” N.Y. Tax L.

§ 483(a)(l).

The cigarettes that the Wolfpack Defendants sell to City residents are indisputably

“required by law” to bear tax stamps. See supra, p. 8; N.Y. Tax L. § 471(1) (“The tax imposed

by this section is imposed on all cigarettes sold on an Indian reservation to non-members of the

Indian nation or tribe and to non-Indians and evidence of such tax shall be by means of an

affixed cigarette tax stamp.”); Ad. Code §§ 11-1302, 11-1304; Milhelm Attea I, 550 F. Supp. 2d


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at 349 (“Thus, the ‘basic costs of cigarettes’ and the ‘cost of such agent,’ for the purposes of [the

CMSA], include the costs of tax stamps required by § 471.”).

As noted above, at pp. 8-9, the cost of the required tax stamps is $66.20 per carton,

including $43.50 in State excise tax alone. Accordingly, the Wolfpack Defendants, who sold

cigarettes to a City investigator for $28 and $30 and $34 per carton and who advertise cigarettes

on fliers sent to City residents for similar prices, plainly violate the CMSA by selling cigarettes

at prices that do not include the cost of tax stamps “required by law.” See Bloom Decl. ¶ 7,

Grayson Decl. ¶¶ 4, 5, 13.

The CMSA presumes the requisite “intent to avoid the collection or paying over of such

taxes as may be required by law” from the very fact that defendants have sold and advertised

cigarettes without including the cost of taxes in the price. See N.Y. Tax Law § 484(6)

(“Evidence of ... offering to sell or sale of cigarettes ... at a price less than cost ... shall be prima

facie evidence ... of intent to avoid the collection or paying over of ... taxes”). The Wolfpack

Defendants’ order form in fact concedes such intent, proclaiming “Tax Free Native Brand

Cigarettes By Mail.” Grayson Decl. ¶ 4, Exs. A, G.

The Wolfpack Defendants’ sales of unstamped cigarettes are no different than the sales

by reservation sellers preliminarily enjoined under the CMSA in Golden Feather, 2009 U.S.

Dist. LEXIS 76306, at *122. The Wolfpack Defendants’ sales should be enjoined as well.

IV. The City Will Likely Succeed in Showing that the PM Delivery Defendants Violate the Contraband Cigarette Trafficking Act.

The Contraband Cigarette Trafficking Act, 18 U.S.C. § 2341 et seq. (“CCTA”) provides:

It shall be unlawful for any person knowingly to ship, transport, receive, possess, sell, distribute, or purchase contraband cigarettes ….

18 U.S.C. § 2342(a) (emphasis added).


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“Contraband cigarettes” are:

a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes, and which are in the possession of any person….

18 U.S.C. § 2341(2). “Together, these provisions establish four elements for a CCTA violation:

that a party (1) knowingly ship, transport, receive, possess, sell, distribute or purchase (2) more

than 10,000 cigarettes (3) that do not bear tax stamps, (4) under circumstances where state or

local cigarette tax law requires the cigarettes to bear such stamps.” Golden Feather, 2009 U.S.

Dist. LEXIS 76306 at *74-75. If a jurisdiction imposes a cigarette tax and uses stamps to

evidence payment of that tax, then statutory quantities of cigarettes that are “found” in the

jurisdiction, without that jurisdiction’s tax stamps, are “contraband cigarettes.”

A CCTA violation is thus no more than conduct that causes more than 50 cartons of

cigarettes to be present in jurisdiction A without jurisdiction A’s tax stamp. “[T]he definition of

‘contraband cigarettes’ depends only upon the absence of indicia of state tax payment and

location in a state requiring such indicia.” United States v. Elshenawy, 801 F.2d 856, 858 (6th

Cir. 1986); see United States v. Approximately Three Million Six Hundred Nine Thousand Eight

Hundred Twenty Cigarettes of Assorted Brands, 2008 U.S. Dist. LEXIS 108021, at *16 (W.D.

Wash. Mar. 20, 2008) (“Because…state taxes were required on the cigarettes, and state law

always required stamps indicating the payment of applicable state taxes, the cigarettes are

contraband under 18 U.S.C. § 2341(2).”); Chavez, 2012 U.S. Dist. LEXIS 42792, at *11

(“Under the CCTA, … cigarettes … would qualify as contraband if sold and shipped (or

otherwise transported) to non-stamping entities in New York [City] because, by virtue of such

sale and shipment, unstamped cigarettes come to be “found” in a jurisdiction (New York City)


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that requires a stamp on the cigarettes indicating that taxes have been paid.”); BB's Corner, 2012

U.S. Dist. LEXIS 88542, at *15.

CCTA liability is independent of any statutory duty to pay a cigarette tax: “The federal

statute makes it a crime for any person knowingly to possess contraband cigarettes.…The

[CCTA] does not apply only to the person whom the state law requires to pay the stamps [sic],

but to anyone who possesses more than [1]0,000 cigarettes without the stamp in violation of the

state tax law.” United States v. Skoczen, 405 F.3d 537, 547 (7th Cir. 2005) (emphasis added);

accord Chavez, 2012 U.S. Dist. LEXIS 42792, at *10.

The present facts, including the City investigator’s receipt of PM Delivery-labeled

packages containing unstamped cigarettes and records showing PM Delivery’s shipment of

thousands of other such packages to City residents, establish each element of the PM Delivery

Defendants’ CCTA liability. Indeed, bills of lading list PM Delivery as the “shipper” of bulk

shipments of unstamped cigarettes from Wolfpack Tobacco. See Bloom Decl. ¶¶ 26-29, Ex. 11.

The PM Delivery Defendants (1) knowingly shipped, transported, received, possessed and

distributed; (2) more than 10,000 unstamped cigarettes; (3) which are subject to City and State

cigarette taxes; (4) in the State and City of New York, jurisdictions that require stamps to be

affixed to packages of cigarettes to evidence cigarette tax payments. Accordingly, the City is

likely to succeed in establishing showing that PM Delivery Defendants violate the CCTA and

they should be enjoined. See, e.g., Golden Feather, 2009 U.S. Dist. LEXIS 76306, at *100-04,

125-26 (granting preliminary injunction for CCTA violations); BB's Corner, 2012 U.S. Dist.

LEXIS 88542, at *12-17 (same); City of New York v. Milhelm Attea & Bros., Inc., 2012 U.S.

Dist. LEXIS 116533, at *56-76 (E.D.N.Y. Aug. 17, 2012) (finding CCTA violations); Chavez,

2012 U.S. Dist. LEXIS 42792, at *7-16 (denying motion to dismiss CCTA claims).


V. The Defendants' Violations are Likelv úo Recur if not Enioined.

Given the defendants' long history of selling and shipping unstamped cigarettes to

customers in the City and nationwide, there is no serious question that the violations

demonstrated above are likely to recur if not enjoined. "[W]here a history of legal violations is

before the district court, that court has signifrcant discretion to conclude that futurc violations of

the same kind are likely." Kapps v. Wing, 404 F3d 105, 122-123 (2d Cir.2005). "When

defendants are shown to have settled into a continuing practice or entered into a conspiracy

violative of ... law[], courts will not assume that it has been abandoned without clear proof."

United States v. Oregon State Medical \oc.,343 U.S. 326,333 (1952).

CONCLUSION

For all of the reasons set forth above, the City respectfully requests that the Court issue

an order pursuant to Fed. R. Civ. P. Rule 65(a) preliminarily enjoining (i) the Wolþack

Defendants from violating the PACT Act's reporting, weight, labeling and age verifìcation

requirements; (ii) the Wolfpack Defendants from violating the CMSA; and (iii) the PM Delivery

Defendants from violating the CCTA.

Dated: New York, New YorkMarch 21,2013

MICFIAEL A. CARDOZOCorporation Counsel of the

City of New YorkAttorney for Plaintiff the City of New York100 Church Street, Room 20-84New York, New York 10007(212) 356-2274

By:(AB te77)

Eric Proshansky (EP 1777)Assistant Corporation Counsel

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united states district court southern district of new york · 9/7/2013 · plaintiff the city of...

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