A split federal appeals panel has reinstated part of New York City's case claiming online cigarette sellers are guilty of racketeering by skirting a law requiring the reporting of cigarette sales to collect taxes.
The 2nd U.S. Circuit Court of Appeals said the city has standing to sue under the Racketeer Influenced and Corrupt Organizations Act (RICO) "where it has alleged direct injury of lost taxes" caused by Internet retailers' "commission of mail and wire fraud" through the sale of cigarettes to city residents without complying with the reporting requirements of the federal Jenkins Act.
Judge Chester J. Straub wrote the majority opinion in the four consolidated cases led by City of New York v. Smokes-Spirits.Com Inc., 06-1665-cv. He was joined by Judge Sonia Sotomayor.
The Jenkins Act is a criminal law that was intended to be used by the U.S. government against tobacco companies to prevent state tax avoidance. The city sued the online cigarette retailers claiming their failure to file Jenkins Act reports on their sales volumes, as well as their marketing efforts designed to discourage tax collection, amounted to the predicate acts of mail and wire fraud under RICO.
In 2005, Southern District of New York Judge Deborah Batts dismissed racketeering claims and state claims based on common law fraud, New York state's consumer fraud statute, General Business Law §349 and public nuisance claims against the sellers.
But she gave the city leave to refile on the racketeering claims.
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