Saturday, September 20, 2008

Delinquent Cigarette Retailers May Be Liable Under RICO for NYC’s “Lost Taxes”

This posting was written by Mark Engstrom, Editor of CCH RICO Business Disputes Guide.

The City of New York had standing to bring civil RICO claims against out-of-state cigarette retailers that failed to submit monthly sales reports to the State of New York, the U.S. Court of Appeals has ruled. The retailers’ conduct allegedly prevented the city from collecting tens, perhaps hundreds, of millions of dollars a year in excise taxes.

Monthly Sales Reports

Congress enacted the Jenkins Act in 1949 to require cigarette retailers to file monthly sales reports with the tobacco tax administrators of the states where they had shipped cigarettes. The reports include information such as the name and address of each out-of-state consumer who purchased cigarettes during the prior month, and the quantity of cigarettes that each had purchased.

The City of New York alleged that that the retailers had engaged in a pattern of racketeering activity by committing a “predicate act” of mail or wire fraud each time they used the mails or wires to sell cigarettes to city residents without complying with the Act’s reporting requirements. To succeed in its RICO claim, the city had to show: (1) a substantive RICO violation under Section 1962; (2) an injury to its business or property; and (3) causation (i.e., the alleged injury occurred “by reason of “the substantive RICO violation).

Substantive Violation

To state a claim under RICO Section 1962, the city had to allege that the retailers conducted an enterprise through a pattern of racketeering activity. It was “settled law” in the Second Circuit that a Jenkins Act violation could form the basis of a wire or mail fraud conviction.

The City identified RICO persons—employees and/or officers of the retailers—who allegedly directed the enterprise to: (1) conceal cigarette sales from state tax authorities by not filing Jenkins Act reports and (2) use misrepresentations to sell cigarettes via the mails or wires to residents of New York City. It further alleged that this conduct amounted to a scheme to defraud the City of its use taxes because it deprived the City of the information it needed to charge and collect those taxes.

According to the court, these allegations sufficiently alleged a fraudulent scheme or artifice that was furthered by the use of mails or wires.

As to the “enterprise” requirement, the U.S. Supreme Court has determined that a plaintiff must allege and prove the existence of two distinct entities: a RICO “person” and an enterprise that is not simply the same person referred to by a different name.

Although the City’s allegations were sufficient to meet the distinctiveness requirement with respect to enterprises that the court characterized as the “primary” enterprises (i.e., corporate entities that were alleged to be passive enterprises , with officers and/or directors acting as RICO persons who conduct the affairs of the enterprise in violation of RICO) , the court determined that they were not sufficient with respect to the alleged association-in-fact enterprises (associations consisting of a defendant entity and a third party, with RICO persons consisting of a defendant entity and a third party, with RICO persons consisting of the defendant entities and, in general, the officers and/or directors of the entities that compose the enterprise).


The retailers unsuccessfully argued that the City’s “lost taxes” did not constitute an injury to the City’s business or property because the loss was not incurred in a commercial transaction. The retailers based this argument on dicta that the court expressly rejected. Because lost taxes could indeed constitute an injury to the City’s business or property for purposes of RICO, the City adequately satisfied RICO’s injury requirement, in the court’s view.


The City also met RICO’s causation requirement, according to the court. More specifically, the City alleged that it had been injured (via lost revenues) by the retailer’s RICO violations (the predicate acts of mail and wire fraud), which were committed in furtherance of a scheme to defraud the City of taxes. The purported loss of tax revenue was directly caused by the alleged schemes to defraud the City. The fact that the State of New York also may have been injured by the schemes did not render the injury any less direct.

The September 2 decision is City of New York v., Inc., CCH RICO Business Disputes Guide ¶11,547.

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