Mayor Michael R. Bloomberg, Finance Commissioner Martha Stark and Corporation Counsel Michael A. Cardozo today announced a significant ruling in the City’s case against cigarette dealers located on a Long Island Indian reservation that serves as a major source of bootlegged cigarettes into New York City. The tax losses from the sales by the eight businesses named in the lawsuit alone amount to $195 million for the City and an additional $525 million for the State. Judge Carol Bagley Amon of Federal District Court for the Eastern District in Brooklyn ruled today that the stores were not protected from the City’s lawsuit by sovereign immunity, which can bar lawsuits against certain Indian tribes and tribal businesses. The court found that the cigarette sellers located on the Poospatuck Reservation in Mastic, Long Island, did not meet the factors that are necessary to show that the cigarette businesses were operating as part of the tribe’s own economic activity, in part because the store owners, not the tribe itself, profited from the businesses. 

“The $195 million in uncollected cigarette tax revenue we are suing to collect could be used to modernize a public hospital, or hire nearly 3,000 new police officers, firefighters, or teachers,” said Mayor Bloomberg. “As we all pull together to do more with less, it’s just grossly unfair to hardworking taxpayers to allow any company to shirk their responsibilities.”

The court also ruled that the stores could be sued under the federal Contraband Cigarette Trafficking Act, a federal statute designed to prevent trafficking in untaxed cigarettes, because the Long Island reservation does not qualify as “Indian Country,” a designation reserved for federally recognized Indian tribes. The decision cleared the way for a hearing tentatively scheduled for May 11th, at which the federal court could determine whether to issue an injunction barring cigarette sellers on the reservation from selling untaxed cigarettes to the public.   

The complaint, announced in September 2008, was filed in the Federal District Court for the Eastern District of New York against eight Long Island businesses located on the Poospatuck Indian reservation for illegally selling massive quantities of cigarettes on which State and City taxes have not been paid, in violation of the Federal Contraband Cigarette Trafficking Act and State law.  The City’s investigation had documented sales by these reservation businesses of nearly 24 million cartons of contraband cigarettes since 2004. While residents of Indian Reservations are permitted to buy cigarettes tax-free for personal use, the sales numbers would mean that every resident of this reservation, including children, smokes 19,200 cigarettes every single day. The tax losses from the sales by these eight businesses alone amount to $525 million in State taxes and up to an additional $195 million for the City, and the total losses to City and State taxpayers from fraudulent cigarette sales on Indian reservations total over $1 billion a year.  A similar lawsuit has been filed recently against the same businesses by Suffolk County.

Further investigations by the City through arrest records provided by the Suffolk County District Attorney and  the Suffolk County Police Department have shown that a steady stream of untaxed cigarettes are transported to the City, and to other locations inside and outside of New York State, by cigarette bootleggers who purchase bulk quantities of untaxed cigarettes from the reservation sellers.  The cigarettes are sold in the City, not only giving rise to the tax losses described above but injuring legitimate businesses and undercutting smoking prevention programs.  

“This is a significant step toward leveling the playing field for law-abiding retailers and ensuring that the City can collect badly-needed tax revenue,” said Commissioner Stark.

“We believe that the judge properly interpreted the statute in this decision, and we feel her ruling sets an important legal precedent in denying the plaintiffs the ability to hide behind sovereign immunity,” said Corporation Counsel Michael A. Cardozo.