UPS Loses N.Y. Trial Over Reservations' Untaxed Cigarettes

(Bloomberg) -- United Parcel Service Inc. was found by a judge to have turned a blind eye to shipments of untaxed cigarettes to New Yorkers from American Indian reservations that undermined anti-smoking efforts. The state seeks more than $800 million in damages for lost tax revenue.

U.S. District Judge Katherine B. Forrest in Manhattan on Friday ruled that UPS failed to comply with a 2005 deal it struck with the state to fix the problem without going to court. She said she’d decide on damages later.

“Perfection was never required, but more should and could have been done,” Forrest wrote in a 218-page decision after a trial that also praised UPS for making changes since being sued. The company has “transformed itself from a willfully blind actor to one actively doing far more," Forrest said.

New York Attorney General Eric Schneiderman sued claiming UPS cost the state millions of dollars in tax revenue by delivering cigarettes to private residences and unauthorized sellers. The state’s top cop argued at trial in September that cheaper cigarettes attract young people who are disproportionately lured to smoking by lower costs.

UPS said in an emailed statement that it was still evaluating the ruling. “We are pleased that the court found that UPS’s current tobacco compliance program is adequate, and declined to award plaintiffs the injunctive relief they sought or to appoint a monitor to oversee UPS’s compliance program,” the company said.

UPS’s lawyer, Carrie Cohen, had argued the company was in full compliance with the law and that the dispute was triggered by the city and state simply mistaking cartons of legally shipped “little cigars” for cigarettes. The shipper contends the two products are practically indistinguishable and provided the judge with plastic bags containing individual samples at the trial.

She also called the damages figure a "ridiculously high number."

The city argued UPS’s employees and decision-makers chose to disregard the law and ignored internal polices that were intended to detect signs that cigarette traffickers and illegal shippers were using the company’s services.

Lax Approach

The lax approach, the city argued at trial, gave New Yorkers access to cheaper cigarettes that undermined the purpose of city and state taxes imposed to reduce smoking rates and improve public health.

Schneiderman claimed that from at least 2010 to 2014, UPS made more than 78,500 illegal shipments in violation of the 2005 pact to halt the practice. That amounted to more than 683,000 cartons of untaxed cigarettes and a direct tax loss to the state of almost $30 million and $4.7 million for New York City, Schneiderman said.

Key issues in the case were whether UPS officials knew what the company was shipping and whether UPS broke the 2005 agreement.

The UPS suit is similar to a 2014 case brought by Schneiderman accusing FedEx of shipping illegal cigarettes to New York. The New York attorney general has made anti-smoking initiatives a priority, leading a national effort calling on major pharmacy chains to stop selling cigarettes. New York also led an effort in urging the U.S. Food & Drug Administration to restrict the manufacture and marketing of electronic cigarettes.

Highest Tax

New York has the highest state cigarette tax at $4.35 a pack on top of a $1.50 local New York City tax. The state was the biggest net importer of smuggled cigarettes in the U.S. in 2013, one of the years in question in the case, according to the Tax Foundation. About 58 percent of the total cigarette market in New York consists of smuggled cigarettes, the research organization said a 2015 report.

Lawsuits over illegal products being shipped around the U.S. have had mixed success. In June, federal charges that FedEx intentionally shipped illegal online prescriptions were thrown out at the request of prosecutors, ending a trial that had been underway and scrapping conspiracy and money laundering counts that carried as much as $1.6 billion in fines.

UPS had taken a different tack when confronted with similar allegations, agreeing in 2013 to forfeit $40 million in payments from illicit online pharmacies under an agreement with the U.S. Justice Department. The company wasn’t prosecuted in that case.

The case is New York v. United Parcel Service Inc., 15-cv-01136, U.S. District Court, Southern District of New York (Manhattan).

--With assistance from Mary Schlangenstein

To contact the reporters on this story: Erik Larson in New York at elarson4@bloomberg.net, Chris Dolmetsch in New York State Supreme Court in Manhattan at cdolmetsch@bloomberg.net.

To contact the editors responsible for this story: David Glovin at dglovin@bloomberg.net, Michael Hytha, Joe Schneider