Cigarette Trafficking

There are four cases involving cigarette trafficking and the Prevent All Cigarette Trafficking Act (PACT Act):
Red Earth LLC v. New York City (2010)
New York City & New York State v. Federal Ground Package System Inc. and Federal Express Corp. (ongoing)
New York City & New York State v. United Parcel Service, Inc. (2017)
State of New York v. King Mountain Tobacco Company, Inc. (ongoing)

City of New York and The People of the State of New York v. Federal Ground Package System Inc. and Federal Express Corp. Civil Action No. 13-cv-9173-ER (ongoing)

In 2013 New York City and in 2014 the State of New York (“New York”) sued FedEx alleging that the commercial carrier knowingly shipped untaxed cigarettes to residential customers throughout the city and state in violation of state and federal law. In 2016, a federal judge consolidated these separate lawsuits. New York claims that FedEx “knowingly delivered” nearly 80 million contraband cigarettes to individual consumers throughout the state, ordered over the internet or by mail from cigarette traffickers, including vendors in Kentucky, California and the Shinnecock Indian reservation in South Hampton, New York. FedEx allegedly violated multiple federal and state laws by delivering cigarettes directly to consumers, repeatedly shipping cigarettes without required tax stamps affixed, and/or without a required statement explaining tobacco product sellers’ licensure and tax stamping obligations under federal law. New York seeks penalties and damages under laws in place to address the illegal transport of cigarettes, as this contributes to tobacco use and, in turn, the tremendous public harms tobacco use causes.

  • Contraband Cigarette Trafficking Act (CCTA) (prohibiting transportation and distribution of more than 10,000 unstamped cigarettes);
  • Prevent All Cigarette Trafficking Act (PACT Act) (requiring cigarette shippers to register with and report tax information to federal and state authorities, and prohibiting cigarettes shipments to noncompliant sellers);
  • Racketeer Influenced and Corrupt Organizations Act (RICO) (making unlawful the participation in an enterprise’s affairs through a pattern of racketeering activity (such as repeated trafficking of contraband cigarettes), and making unlawful conspiracy to violate RICO);
  • New York Public Health Law § 1399-ll (prohibiting shipments to unauthorized persons and placing responsibility on carriers to determine whether recipient is authorized to receive cigarettes);
  • Assurance of Compliance (AOC) (settlement with the New York State Attorney General requiring compliance with state laws prohibiting delivery of cigarettes to residences, and ensuring controls are in place to prevent continued residential deliveries).

In September 2018, the Southern District Court of New York ruled on Plaintiffs’ and Defendant’s motions for Summary Judgment (i.e., requests that the court find the other party has no case) on some of the claims. In an abbreviated opinion that will be soon followed by more detailed findings, the court dismissed the RICO claim, while granting yet curbing New York’s CCTA and AOC claims. The CCTA and AOC assertions will remain, but are limited to alleged acts falling within the Statute of Limitations.

Parties have until October 31, 2018 to appeal.


City of New York and The People of the State of New York v. United Parcel Service, Inc. Civil Action No. 15-cv-1136

In March 2017, a federal District Court ruled in favor of New York City and the State of New York (“New York”) in their joint lawsuit against UPS. The court found that UPS had knowingly shipped thousands of cartons of untaxed cigarettes from Native American reservations to unauthorized recipients in violation of state and federal law. In May 2017, the trial court ordered UPS to pay nearly $247 million to the city and state. UPS appealed the decision in June 2017, arguing the judge erred both in determining the legal violations and the judgment amount. New York cross-appealed in February 2018, seeking affirmation of the judgment and arguing for increased damages, and UPS filed its reply brief in May 2018 reiterating, among other arguments, that the assessed penalties were impermissibly high.

New York presented evidence indicating between 2010 and 2014 UPS made more than 78,000 impermissible deliveries of untaxed cigarettes from Native American reservations to New York residences, representing millions of packs of cigarettes and $30 million in lost tax revenue. The lower court found that UPS engaged in repeated violations of various state and federal statutes and in violation of its settlement agreement with the state, by failing to audit shippers and knowingly transporting cigarettes to unauthorized consumers. Through knowingly transporting untaxed cigarettes, UPS not only violated the statutes, but undermined the public health intent of these laws, which is to reduce availability of low-priced cigarettes that drive experimentation, use, and addiction resulting in significant public harm.

The court specifically held that UPS violated the following:

  • Contraband Cigarette Trafficking Act 18 U.S.C. § 1961, et seq. (CCTA) (prohibiting transportation and distribution of more than 10,000 unstamped cigarettes);
  • Prevent All Cigarette Trafficking Act 15 U.S.C. § 375, et seq. (PACT Act) (requiring cigarette shippers to register with and report tax information to federal and state authorities, and prohibiting cigarettes shipments to noncompliant sellers);
  • New York Public Health Law § 1399-ll (prohibiting shipments to unauthorized persons and placing responsibility on carriers to determine whether recipient is authorized to receive cigarettes);
  • Assurance of Discontinuance (AOD) (2005 settlement with the New York State Attorney General requiring compliance with state laws prohibiting delivery of cigarettes and smokeless tobacco to residences, and ensuring controls are in place to prevent continued residential deliveries).

On May 25, 2017, the Court awarded compensatory damages (for lost tax revenues) under the CCTA, and penalties under the AOD, PACT Act, N.Y. Public Health Law and CCTA totaling nearly $247 million ($165,817,479 to the state and $81,158,135 to the city). Citing the “egregious and prolonged nature of UPS’s conduct,” and the company’s failure to acknowledge wrongdoing, the court justified the “significant award” so as to make a “sufficient corporate impact.” The sum was derived through calculating penalties for each violation, with a purpose to “maintain meaningful ongoing incentives” to deter future bad conduct by UPS.

Public health groups jointly filed an amicus brief supporting the award to New York, focusing on the public health importance of cigarette taxes and consequent high retail prices. Parties with tobacco and other business interests, including three southern states, filed amici curiae in support of UPS’s claim, focusing on constitutional implications of the penalty awards.


State of New York v. Mountain Tobacco Company, D/B/A/ King Mountain Tobacco Company, Inc., and Delbert Wheeler, Sr. 17 cv. 3198; 17 cv. 3222 (2nd Cir. 2018) (ongoing)

In a complaints filed on December 21, 2012 and May 21, 2014, the State of New York argued that cigarette manufacturer and wholesaler “King Mountain,” violated federal and state laws by systematically shipping into the state 25 million packs of unstamped (untaxed) cigarettes, allegedly costing the state more than $111.5 million in tax revenue. King Mountain is owned by a member of Yakama Indian Nation, and located on and organized under this Nation’s laws. Yakama Nation is located on a reservation in Washington State. Neither party disputes that King Mountain sold and delivered unstamped cigarettes to Indian Nations situated within New York.

On July 21, 2016, a New York federal District Court cleared the company of most of the alleged federal trafficking violations:

  • New York alleged King Mountain violated the Contraband Cigarette Trafficking Act (CCTA), which prohibits transportation and distribution of more than 10,000 unstamped cigarettes to locations where state law requires tax stamps. The state unsuccessfully argued that CCTA’s “Indian in Indian Country” exemption applies to Indian tribes and individuals, and not to King Mountain. The lower court disagreed, concluding that the corporation King Nation is an “Indian” in the context of the CCTA, and is therefore exempt from CCTA.
  • New York alleged King Mountain violated Prevent All Cigarette Trafficking Act (PACT Act), requiring state and federal tax filings by anyone shipping cigarettes in “interstate commerce.” New York unsuccessfully argued that King Mountain entered interstate commerce by shipping cigarettes from the Yakama Nation, located within a reservation of Washington State, to Indian reservations located in within boundaries of other states (e.g., New York). The court disagreed and found sales and shipments from one Indian reservation to other Indian reservations does not constitute interstate commerce. Accordingly, shipments of untaxed cigarettes between these entities is not a PACT Act violation that New York is eligible to enforce.

However, the same court found the company liable for state law violations of direct sales of unstamped cigarettes to other Indian tribes and for failing to submit certifications for fire prevention.

  • New York contended that King Mountain violated New York Tax Law §§ 471 (requiring taxes paid on cigarettes “possessed” in state for sale), 471-e (establishing an Indian tax exemption coupon system imposing taxes on non-tax exempt purchasers). The court agreed with New York’s contention that King Mountain violated state tax law by failing to ship its unstamped cigarettes directly to a New York licensed stamping agent so that excise tax could be paid and tax stamps properly affixed. The trial court ruled that King Mountain could not sell “unstamped cigarettes directly to Indian nations or tribes and/or reservations cigarette sellers or entities that are not licensed stamping agents.” The court further agreed with the state that King Mountain is required to file annual certifications required under New York Tax Law 480-b and its failure to do so constituted a violation of that law.
  • Finally, New York successfully argued that King Mountain failed to comply with New York Executive Law § 156-c, requiring tobacco manufacturers file their fire prevention certification.

King Mountain appealed to the Second Circuit to overturn the District Court’s rulings favorable to the state. New York filed its response in May 2018, setting forth the problem of the enormous public health costs of cigarette smoking and federal efforts to combat cigarette trafficking; seeking affirmation of the lower court’s legal conclusions that King Mountain’s bulk shipments of vast quantities of unstamped cigarettes to New York purchasers constituted violations of state law; and challenging the lower court’s conclusions regarding the state’s claims of King Mountain’s federal violations. King Mountain’s reply brief followed, filed July 20, 2018. This case is ongoing.