The decision is important because it marks the first time a federal judge has indicated that a racketeering action, which can seek treble damages, may proceed against, said Eric Proshansky, the city's chief lawyer on the case.
New York charges $1.50 tax on a pack of cigarettes, the highest of any U.S. city. New York State charges an additional $1.50 tax, bringing the total to $3.00 for a pack and $30 for a carton. The city and state lose about $100 million a year in taxes due to Internet cigarette sales.
Although U.S. District Judge Deborah Batts dismissed the city's racketeering claims on technical grounds involving the description of the scheme, she ruled the case could be refiled within 45 days. City lawyers said the problems could be easily remedied within days.
The ruling was issued in one of four of the city's lawsuits pending against about 55 individuals and companies who operate more than 30 Internet sites that offer cigarettes to city residents. The city said that the ruling will likelyfor the remaining suits.
"The city's initiatives are critical because they will protect consumers from being duped by merchants who falsely and illegally advertise cigarettes as 'tax free," said Corporation Counsel Michael Cardozo.
As required by regulators, the city recently sent tax notices to consumers who had not paid taxes on their purchases of cigarettes on the Internet.
The suit is filed under the federal Racketeer Influenced and Corrupt Organization Act under which plaintiffs must prove that defendants engaged in a pattern of wrongdoing consisting of two or more incidents of certain crimes.
The city alleges that the defendants are breaking a federal law that requires cigarette sellers to notify state tax administrators of every interstate cigarette shipment they send into the administrator's state.
Not only are the defendants failing to report the sales, but they are allegedly telling customers that purchases will be concealed from state tax authorities, the suit charges.
According to the complaint, some defendants also tell customers that cigarettes sold to New Yorkers over the Internet are "tax free," despite New York City and state laws requiring purchasers to pay cigarette excise and sales taxes on cigarettes bought in the state.