(Updates with company’s response in seventh paragraph.)
Dec. 30 (Bloomberg) -- FedEx Corp. was accused by New York City of taking part in a racketeering conspiracy by shipping tons of untaxed cigarettes from a Long Island Indian reservation to city residents’ homes.
The city, in a complaint filed today in federal court in Manhattan, alleged FedEx transported about 19.5 tons of untaxed cigarettes from the Shinnecock Smoke Shop in Southampton, New York, from December 2005 to January 2012. The bulk of the shipments followed a February 2006 agreement with New York’s attorney general to stop the deliveries, the city claimed.
“FedEx intended to, and did in fact, actively facilitate the contraband cigarette trafficking of Shinnecock Smoke Shop,” the city said.
New York City imposes a $15 excise tax on each carton of cigarettes, which generally pass through wholesalers who affix tax stamps, according to the complaint. By law, the tax must be incorporated into the price of the product, the city said. New York state also taxes cigarettes.
The city is seeking triple damages of $2.5 million under civil provisions of the Racketeer Influenced and Corrupt Organizations Act in the lawsuit, which was filed against FedEx units FedEx Ground Package System Inc. and Federal Express Corp.
It’s also asking for a ruling that bars FedEx from making further deliveries of untaxed cigarettes in New York, a civil penalty of $49.5 million, and the appointment of an independent monitor to oversee FedEx’s compliance with the court order.
FedEx is the operator of the world’s largest cargo airline, and competes for package deliveries with United Parcel Service Inc. It “prohibits the shipment of tobacco direct to consumers and believes the claims made by the city are overstated and not founded in law,” according to a statement forwarded by Angela Wheland, a spokeswoman.
FedEx said that without a specific reason it won’t open packages to determine their content in order to protect customer privacy. It said it has ceased doing business with “shippers identified as violating this provision and notified the state of New York.”
“FedEx intends to defend this case while continuing to work with authorities to stop prohibited tobacco shipments,” the company said.
New York Indian tribes, including the Shinnecock Indian Nation, have claimed that their smoke shops aren’t subject to state and local cigarette taxes. The owner of the Shinnecock Smoke Shop, Jonathan Smith, is a member of the Shinnecock Nation and has been involved in legal disputes with state officials and others over his alleged sale of cigarettes without tax stamps.
A call placed today to a phone number for the smoke shop wasn’t answered. A Manhattan lawyer who has represented Smith in past lawsuits over his cigarette sales, Scott Moore, didn’t immediately respond to a request for comment.Smith and his shop weren’t named as defendants in today’s suit.
The city says cigarette trafficking undercuts its efforts to reduce the incidence of smoking and related health complications.
“Higher cigarette prices have been incontrovertibly established to convince greater numbers of smokers to quit, reducing the incidence of smoking-related death and disease,” lawyers for the city wrote in the complaint.
In addition to its dealings with Shinnecock Smoke Shop, FedEx provided delivery services for “numerous other cigarette traffickers” during and after negotiations of its 2006 deal with the state attorney general, the city alleged.
From at least 2006 through 2009, FedEx Ground serviced a Kentucky-based cigarette enterprise called “CigarettesDirect2U.com,” which was shut down by federal authorities, the city alleged.
FedEx Ground agreed to pay $2.4 million to the city in March to resolve claims of improperly delivering untaxed cigarettes for the Kentucky seller, according to a press statement from that period announcing the settlement.
Earlier this year, FedEx said that it was also the target of a U.S. criminal probe into drug shipments by illegal online pharmacies. UPS reached a non-prosecution agreement in the case in March, including forfeiture of $40 million in payments that it received from such outlets.
The case is New York v. FedEx Ground Package System Inc., 13-cv-9173, U.S. District Court, Southern District of New York (Manhattan).
--Editors: Fred Strasser, Mary Romano