Welcome
Daily Tax Report ®

UPS Penalties Cut By Second Circuit in N.Y. Cigarette Tax Fight (3)

Nov. 7, 2019, 4:51 PMUpdated: Nov. 8, 2019, 12:23 AM

The Second Circuit slashed the amount United Parcel Service Inc. must pay for transporting untaxed cigarettes from American Indian reservations from nearly $247 million to $97.6 million.

Those amounts include unpaid taxes to the state and city of New York and penalties imposed on the company.

The penalties calculated by the U.S. District Court for the Southern District of New York are “far too large a pill to swallow for the conduct at issue here,” a three-judge panel for the Second Circuit said Nov. 7.

The district court improperly calculated one of the penalties by applying it to each seller’s package, rather than to each seller that UPS failed to audit, the panel said.

Considering the company was still facing a substantial remaining penalty, the panel said an additional penalty from the district court wasn’t necessary to combat unlawful trafficking in cigarettes, increase tax collection on cigarettes, or prevent young people from getting cheap cigarettes through illegal sales.

However, the panel did increase certain damages awarded to the state and city of New York. The lower court had awarded the governments a total of $9.4 million—50% of the state and local excise taxes that went unpaid on UPS’s cigarette shipments—reasoning that half of the purchasers of unstamped cigarettes would have found a way to buy untaxed or lower-tax cigarettes, even if UPS had complied with cigarette-trafficking laws.

The city and state are owed the full amount of unpaid taxes on cigarettes transported by UPS that violated a federal statute: $17.4 million for the state and $1.4 million for the city, the panel said.

“Rather than engaging in the required statutory analysis, the district court accepted a faulty analogy to tort principles,” said Circuit Judge Gerald E. Lynch.

The ruling is a win for New Yorkers and public health laws, New York City’s Corporation Counsel James E. Johnson said in an email statement.

“In upholding millions of dollars in civil fines and doubling the damages award, the court has sent a powerful message to companies: Do not illegally transport untaxed cigarettes; it will cost you,” he said.

New York Attorney General Letitia James offered a similar assessment. “For years, UPS knowingly engaged in unlawful behavior that harmed public health and swindled New York out of millions of dollars. Let this serve as a loud and clear message that we will not allow companies to harm New Yorkers or evade their legal obligations,” she said in an email statement.

UPS Reviewing

UPS is “reviewing the lengthy majority and dissenting opinions in the case and will consider further appellate relief,” a spokesman for UPS said in an email.

In a partial dissent, Circuit Judge Dennis Jacobs said he would have thrown out or reduced more of the penalties and damages UPS must pay, arguing that the majority incorrectly interpreted statutes and a settlement agreement involved in the case.

Lynch’s majority opinion was joined by District Judge Lawrence J. Vilardo of the U.S. District Court for the Western District of New York.

The New York Attorney General’s Office didn’t return a request for comment.

The case is New York v. United Parcel Service Inc., 2d Cir., No. 17-1993, 11/7/19.

To contact the reporters on this story: Colleen Murphy in Washington at cmurphy@bloombergtax.com; Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Nicholas Datlowe at ndatlowe@bloomberglaw.com