Smoke and mirrors: tax-free cigarettes aren't

Gristede's Foods, Inc. v. Unkechauge Nation, 2007 WL 4232778 (E.D.N.Y.)

Gristede’s sued the Unkechauge for their cigarette-selling practices. Specifically, the defendants allegedly sold untaxed cigarettes to non-tribe members in stores, over the internet, through telemarketing, and using print ads, creating an illegally discounted market. Gristede’s alleged RICO claims, which the district court refused to dismiss for complicated RICO reasons, false advertising in violation of the Lanham Act, and related state-law claims.

The false advertising claim was based on ads touting “tax-free” or “cheap” cigarettes. New York law imposes two cigarette taxes on all cigarettes it has the power to tax: the sales tax and the use tax, the latter of which must be paid by any person who uses (possesses, retains, etc.) cigarettes in the state for which the sales tax has not been paid.

New York has no power to tax cigarettes sold to tribal members for their own consumption. But on-reservation sales to non-Indians are taxable. There’s a dispute over how to collect these taxes; the burden of collecting the sales tax is on wholesalers, but the state tax department has allowed wholesalers to sell cigarettes untaxed to tribes, without requiring an accounting to ensure that the untaxed cigarettes are only sold to reservation Indians. Regardless, the law is clear that non-reservation consumers are in fact liable for the tax. It’s a misdemeanor to willfully fail to pay the tax or attempt to evade it.

The ads for “tax-free” cigarettes, the court held, may be false advertising if they lead consumers to believe they need not pay any taxes. The defendants’ motion to dismiss the Lanham Act and state-law false advertising claims was denied. As for the state-law claims, an element is an affect on the public interest. The court found that harm to the public was clearly present if the allegations are true: defendants would be defrauding the state of tax revenue and inducing consumers to violate the law, exposing them to criminal fines. Gristede’s unfair competition claims, however, failed because Gristede’s didn’t allege misappropriation of its own labors and expenditures. Likewise, unjust enrichment claims failed because defendants didn’t enrich themselves from a relationship between themselves and Gristede’s – the connection is simply too attenuated.