Judge Blocks Tax Scheme in New Cigarette Law

A provision of the new cigarette-trafficking law unfairly subjects remote sellers of tobacco products to unfair local and state taxes, a federal judge ruled.
Passed to combat illegal trafficking and cigarette sales to minors, the Prevent All Cigarette Trafficking (PACT) Act prohibits the post office from delivering cigarettes sold on the Internet and forces Native American vendors to pay excise taxes to local and state governments.
Robert Gordon, a member of the Seneca Nation of Indians who sells tobacco products online through Allofourbutts.com and by mail from upstate New York, claimed that the act cost him nearly all his business. Before the law took effect on June 30, 2010, Gordon said Internet and phone sales accounted for 95 percent of his business.
Gordon's lawsuit in Washington, D.C., claimed constitutional violations and infringement on tribal sovereignty. Under the regulations, Gordon can accept only phone orders and must use a private shipping service to mail cigarettes across six states.
He said the new regulations caused a 90 percent loss of business and made him lay off 16 of 22 workers.
A federal judge had previously denied Gordon's motion for a restraining order and preliminary injunction, but the D.C. Circuit revived Gordon's suit in February.
On remand, Chief U.S. Judge Royce Lamberth upheld the ban on shipping cigarettes through the mail, saying that the ban aligns with "the legitimate government interests of reducing underage tobacco use and cigarette trafficking."
Gordon had argued that the mail ban was intended to "reward the lobbying efforts of the tobacco industry and convenience stores and amounts to simple economic protectionism," according to the Dec. 5 decision.
Lamberth did agree, however, to stay enforcement of the law's taxing mechanism, saying Gordon is likely prove that the provision violates due process because it "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," even if the retailer doesn't have a substantial connection with those jurisdictions.
Gordon cannot advance claims that PACT violates his 10th Amendment rights by "commandeering" states to collect taxes from delivery sellers before a product can be shipped, the 28-page opinion states.