Hemi Group Decision Will Reshape Cigarette Marketing Laws
A recent Supreme Court decision, Hemi Group v. New York City, will result in a dramatic reshaping of the laws governing the marketing of cigarettes. The Hemi Group, an internet seller of cigarettes, sells cigarettes online to residents of New York City. Neither State nor City law required out-of-state sellers, such as Hemi, to charge, collect, or remit the City’s tax. Instead, the City sought to recover its tax on out-of-state sales directly from the purchaser using the Jenkins Act, 15 U. S. C. §375-378, which requires out-of-state sellers to submit customer information to the states into which they ship cigarettes. New York State forwarded that information to the City, thereby helping the City track down cigarette purchasers who did not pay their taxes.
After failing to reach an agreement with Hemi concerning taxes, New York City filed a RICO action alleging that Hemi’s failure to file Jenkins Act reports with the State constituted mail and wire fraud, which are defined as “racketeering activit[ies].” To establish an injury, a plaintiff must show that a predicate offense “not only was a ‘but for’ cause of his injury, but was the proximate cause as well.” Proximate cause requires “some direct relation between the injury asserted and the injurious conduct alleged.” According to the City, Hemi committed fraud by selling cigarettes to City residents and failing to submit the required customer information to the State. Without the reports from Hemi, the State could not pass on the information to the City. The City thus could not pursue those customers for payment. The City argued it thereby was injured in the amount of the portion of back taxes that were never collected.
The case ultimately came before the U. S. Supreme Court which concluded that because the City could not show that it lost tax revenue “by reason of” the alleged RICO violation, it could not state a RICO claim. The Supreme Court found the City’s position to be attenuated. Hemi’s obligation was to file Jenkins Act reports with the State, not the City, and the City’s harm was directly caused by the customers, not Hemi.
The Court’s decision in Hemi Group will most likely result in additional pressure for Congress to enact the PACT Act or to expand the Jenkins Act to give cities and states more tools to enforce tax obligations against tobacco companies. In either case, marketing practices will be impacted and will be required to change.
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