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NYC sues reservation smoke shops, claiming they encourage bootlegging of untaxed cigarettes

September 30, 2008
By SARA KUGLER, Associated Press

NEW YORK - Mayor Michael Bloomberg filed a federal lawsuit against eight smoke shops that sell tax-free cigarettes on a Long Island Indian reservation, saying the city is being cheated out of millions in tax revenues.

The lawsuit filed in federal court accuses the small cluster of shops on the Poospatuck Indian Reservation of breaking state and federal law by selling massive quantities of cigarettes to bootleggers, who then smuggle the cartons off the reservation and resell them throughout the metropolitan area.

The shops are permitted to sell untaxed cigarettes to reservation residents, but the city contends that sale records indicate something else is going on. The numbers show that each Poospatuck resident would have to be smoking 960 packs a day to consume the quantity of tax-free cigarettes sold in those stores.

The practice has existed for years, but Bloomberg said it costs the city $195 million per year in tax revenue, and the state is also losing millions.

"Selling these untaxed cigarettes to the public is a clear violation of the law, with real costs to the people of New York City," he said.

Tribal authorities have long acknowledged that smuggling is a problem, but they have defended the right of the shops to sell cigarettes without collecting state tobacco taxes.

Reservation cigarette dealers have also claimed repeatedly that any bootlegging happens without their knowledge, but in its lawsuit, the city accused the Poospatuck shops of being willing partners in such schemes.

It said the shop owners actively structure and conceal illegal bulk sales, help load contraband cigarettes into vans headed for New York City, and even make their own bulk deliveries off the reservation.

City lawyers are seeking an injunction barring the shops from selling untaxed cigarettes in any quantity to people who aren't members of their tribe.

The suit also seeks money damages equal to the lost city tax revenue. It doesn't specify an amount, but the total could be in the millions, based on state sales figures.

The per-pack tax on cigarettes is $4.25; $1.25 is a city tax and $2.75 is state.

Shop owners did not immediately comment on the suit.