Red Earth LLC v. United States, 728 F. Supp. 2d 238 (W.D.N.Y. 2010)
The Prevent All Cigarette Trafficking Act (the “PACT Act”), P.L. 111-154 was enacted in 2010. The law is intended to prevent tax evasion and illegal online cigarette sales to youth by (a) prohibiting the use of the U.S. Postal Service to mail tobacco products, (b) requiring remote (internet- or mail-order) sellers to use shipping methods that verify the age of the person receiving tobacco products, and (c) requiring online vendors to ensure that all applicable state and local taxes are paid on the cigarettes they sell. The law also imposes additional reporting requirements on online vendors and provides the government with enhanced enforcement authority.
Soon after the law was enacted, Red Earth, LLC, a Seneca Nation tobacco retailer (“plaintiff”) filed suit in the U.S. District Court in the Western District of New York challenging the constitutionality of the law. Plaintiff, who sells tax-free cigarettes via the internet, phone orders, and mail orders, claimed that the PACT Act violates federal Native American treaty rights as well as numerous provisions of the Constitution.
On November 9th 2012 a voluntary dismissal was entered into in the case. The dismissal is voluntary without prejudice, which means there was no decision on the merits of the case and Plaintiff or others are entitled to later litigate the claims. In dismissing the case, the parties agreed to the following:
- Plaintiff will provide the name and address of each person receiving a shipment of cigarettes or smokeless tobacco to each and every state where the shipment is made. (California and Pennsylvania will also receive the quantity and brand information.)
- Plaintiff will provide the name, address, and phone number of every person or company delivering such shipments to each and every State where a shipment is made.
- Plaintiff will designate an agent authorized to accept delivery on behalf of Plaintiff in each state where a shipment is made. (Plaintiff agreed to, but opposed this stipulation. The opposition is noted on the record, but has no legal significance.)
- Defendant (the U.S. government), upon the filing of the stipulation, shall remove Plaintiff from the Non-Compliant list, a list of those in violation of the PACT Act who may face criminal and civil penalties.
The case was initially heard in 2010. Plaintiff challenged many aspects of the law, but the court was most sympathetic to Plaintiff’s claim the law violated the Constitution’s Due Process Clause. Due Process requires, among other things, that a person or business subjects itself to the laws of a given state, for instance, by being physically present or engaging in some minimum level of business dealings with that state. Plaintiff had argued there were states in which it had not engaged in enough business to subject itself to that state’s law, and Plaintiff was therefore not obligated to pay state taxes in those jurisdictions. Plaintiff further asserted the PACT Act’s requirement that retailers pay a state or local tax in advance of mailing tobacco products violated Due Process, since a retailer may not have met the threshold level of business dealings or “minimum contacts” to trigger the local tax obligation. The 2010 the court ordered the U.S. to pause enforcement of the PACT Act’s provision requiring advance retailer tax payment while the issue was litigated; the court ruled the U.S. could enforce the remainder of the law. This decision was affirmed on appeal in September of 2011 in the Second Circuit Court of Appeals.
Similar legal challenges to the PACT Act have been filed in D.C. (Gordon v. Holder, 632 F.3d 722 (D.C. Cir. 2011)) and Pennsylvania (Musser v. United States, Case No.5:10-cv-04355-LS (E.D. Pa., filed Aug. 27, 2010)). Legal proceedings are ongoing in both cases. In the Pennsylvania case, the district court denied the plaintiff’s request for an injunction, finding that all parts of the PACT Act were likely to survive legal challenge. In the D.C. Circuit case Gordon v. Holder (826 F. Supp. 2d 279 (D.D.C. 2011)), the court held that Plaintiff, a member of the Seneca Indian tribe in New York, demonstrated a likelihood of success on his claim that Due Process was violated as a result of the tax obligation under the PACT Act. This case is currently on appeal in the United States Court of Appeals for the District of Columbia.
For information on the PACT Act read our technical report on tax evasion in New York.