Photographer: Daniel Acker/Bloomberg

New York Seeks More Than $800 Million From UPS Over Cigarettes

  • N.Y. kids allegedly got cheap smokes as UPS turned blind eye
  • UPS Tells Judge ‘Little Cigars’ at Heart of Cigarette Case

United Parcel Service Inc. ought to pay more than $800 million in penalties for turning a blind eye to shipments of untaxed cigarettes to New Yorkers, lawyers for the state’s top cop said at the start of a trial.

UPS cost the state millions of dollars in tax revenue by delivering smokes to private residences and unauthorized sellers, New York Attorney General Eric Schneiderman claims. The cheaper cigarettes attract young people who are disproportionately lured to smoking by lower costs, his lawyers say.

UPS’s lawyer, Carrie Cohen, said the company was in full compliance with the law and that the dispute was triggered by the city and state mistaking cartons of legally shipped "little cigars" for cigarettes. 

"Little cigars are practically indistinguishable from cigarettes," Cohen said Monday in her opening statement in Manhattan federal court, holding up plastic bags containing individual samples. "UPS is in full compliance with the law."

‘Ridiculously High’

She also called the damages figure a "ridiculously high number," adding the government first disclosed the figure to the company in its own opening statement at the trial.

The city’s lawyer, Lilia Toson, said 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.

"When UPS employees did see those signs, they ignored them," Tosen said. UPS drivers who were supposed to be trained to help stop the shipping of illegal cigarettes, "didn’t remember getting any training” or only recalled getting about five minutes a year.

The lax approach, Tosen said, 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.

From at least 2010 to 2014, UPS allegedly made more than 78,500 illegal shipments in violation of a 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 and New York City of almost $30 million and $4.7 million, respectively, Schneiderman said.

Judge Decides

Key issues in the case are whether UPS officials knew what the company was shipping and whether UPS broke the 2005 agreement. The case will be decided by a judge.

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. The New Yorker also led an effort in urging the U.S. Food & Drug Administration to restrict the manufacture and marketing of electronic cigarettes.

Shipped Cigars?

U.S. District Judge Katherine Forrest last year denied Atlanta-based UPS’s request to dismiss the case, rejecting the argument that many of the deliveries may have contained other tobacco products, such as cigars. She said such a possibility doesn’t eliminate the company’s liability for those shipments that contained untaxed cigarettes.

UPS argues it agreed to stop delivering cigarettes to consumers throughout the U.S. as part of the 2005 accord, and that the policy went beyond the requirements of federal and state law.

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 track in that case, 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).

Before it's here, it's on the Bloomberg Terminal. LEARN MORE