A federal judge in Washington on Monday blocked enforcement of a provision in a new cigarette trafficking law that required remote sellers of tobacco products to pay state and local taxes in advance of a sale.
Chief Judge Royce Lamberth of Washington federal district court granted a preliminary injunction staying enforcement of the tax provision in the Prevent All Cigarette Trafficking Act. Click here for the ruling.
The judge said the provision may violate due process rights because it subjects a nonresident of a state to certain taxes regardless of the person’s contact with the jurisdiction.
The lead plaintiff, Robert Gordon of New York, sold cigarettes and tobacco products online, proclaiming that he passed on discounts to consumers because he did not pay state taxes.
Represented by Baker Botts, Gordon sued the government in June 2010 in U.S. District Court for the District of Columbia. Since then, Gordon has only sold tobacco products in a brick-and-mortar store in upstate New York and via telephone orders.
Lamberth on Monday upheld the law’s ban on shipping tobacco products through the U.S. mail. Gordon, a member of the Seneca Indian tribe, has relied in recent months on a small shipping company that delivers to select zip codes in six states, Lamberth said in his ruling.
The mail ban, Lamberth said, advances “the legitimate government interests of reducing underage tobacco use and cigarette trafficking.”
But the judge said Gordon is likely to win on his claim that the law’s tax provision violates due process rights. Lamberth said the law “appears to impose a new, independent duty on the delivery seller by requiring that they ensure that the applicable state and local taxes are paid.”
A lawyer for Gordon, Baker Botts appellate litigation partner Aaron Streett in Houston, said Monday evening that a ruling in favor of the tax provision “would have set a very dangerous precedent giving the government the ability to essentially tax Internet transactions. In that sense, the ruling is a significant win.”
Still, Streett said, he is disappointed Lamberth upheld the constitutionality of the mail-ban in the new law, which became effective in June 2010.
“The mailing ban was enacted for the purpose of bankrupting Internet retailers that were cutting into the profits of big tobacco companies,” Streett said. “We are disappointed the court didn’t see it that way.”
Lamberth said in the 28-page opinion that “regardless of whether Congress may have been influenced or motivated by a purpose other than those it stated, the Court must uphold the Act ‘if there is any reasonably conceivable state of facts that could provide a rational basis for the classification.’”
U.S. Justice Department lawyer Gerald Kell of the Civil Division’s consumer litigation office, was not immediately reached for comment this evening. The government could decide to challenge Lamberth’s injunction against the tax provisions in the new law.
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