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The City of New York v. Golden Feather Smoke Shop

December 30, 2011

THE CITY OF NEW YORK, PLAINTIFF,
v.
GOLDEN FEATHER SMOKE SHOP, INC., KIMO SMOKE SHOP, INC., SMOKE AND ROLLS INC., SHAWN MORRISON, KIANA MORRISON, IN HER INDIVIDUAL CAPACITY, MONIQUE'S SMOKE SHOP, ERNESTINE WATKINS, IN HER INDIVIDUAL CAPACITY, JESSEY WATKINS, WAYNE HARRIS, PEACE PIPE SMOKE SHOP, RODNEY MORRISON, SR., CHARLOTTE MORRISON, IN HER INDIVIDUAL CAPACITY, RED DOT & FEATHERS SMOKE SHOP, INC., RAYMOND HART, IN HIS INDIVIDUAL CAPACITY, SMOKING ARROW SMOKE SHOP, DENISE PASCHALL, IN HER INDIVIDUAL CAPACITY, TONY D. PHILLIPS, TDM DISCOUNT CIGARETTES, AND THOMASINA MACK, IN HER INDIVIDUAL CAPACITY, DEFENDANTS.



The opinion of the court was delivered by: Amon, Chief United States District Judge:

NOT FOR PRINT OR ELECTRONIC PUBLICATION MEMORANDUM & ORDER

Currently before the Court is the City's motion, pursuant to Rule 55(b) of the Federal Rules of Civil Procedure, for a default judgment against defendant Tony Phillips. For the reasons stated below, the motion is granted on the issue of Phillips' direct liability under the CCTA and the CMSA. The City shall submit its briefing on the appropriate monetary relief as against Phillips together with its motion for summary judgment against the other defendants in this action.

I.BACKGROUND

The City of New York brought this action against the above-captioned defendants, seeking injunctive relief, penalties and damages under the Contraband Cigarette Trafficking Act, 18 U.S.C. § 2341 et seq. (the "CCTA"), and the Cigarette Marketing Standards Act, N.Y. Tax L. § 483 et seq. (the "CMSA"). Defendants are individuals and businesses engaged (or formerly engaged) in the sale of cigarettes from the Poospatuck Indian Reservation in Mastic, New York. According to the City, the defendants purchased large quantities of cigarettes on which State and City taxes had not been paid and sold them in bulk to bootleggers, who transported the cigarettes off the reservation and sold them in the City and elsewhere.

Under the version of the New York Tax Law that was in effect at the time this action and the instant motion for default were filed, N.Y. Tax L. § 471 provided, in pertinent part: "There is hereby imposed and shall be paid a tax on all cigarettes possessed in the state by any person for sale, except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax . . . ." Dep't of Taxation & Fin. of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61, 64 (1994). No specific exception was made in the statute at that time for sales of cigarettes by or to Native Americans or by retailers on Indian reservations. *fn1

Under New York law, cigarette taxes are normally pre-paid by State-licensed "stamping agents," usually wholesale cigarette dealers, who purchase tax stamps from the State and affix them to cigarette packages as evidence of payment. The tax burden is built into the cost of the cigarettes and passed along the distribution chain to each subsequent purchaser, ultimately falling on the consumer. See N.Y. Tax L. § 471(2); New York Assoc. of Convenience Stores v. Urbach, 92 N.Y.2d 204, 209 (1988). The purpose of this system is to prevent the widespread evasion of New York cigarette taxes. See Milhelm Attea & Bros., 512 U.S. at 75.

Federal and state governments lack authority to tax cigarettes sold to members of Native American tribes for their own consumption. Thus, cigarettes to be consumed on the reservation by enrolled tribal members are tax-exempt and need not bear stamps. Milhelm Attea & Bros., 512 U.S. at 64 (citing Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 475--81 (1976)). "On-reservation cigarette sales to persons other than reservation Indians, however, are legitimately subject to state taxation." Id. (citing Washington v. Confederated Tribes of Colville Reservation, 447 U.S. 134, 160--61 (1980)). In recognition of these principles, this Court held that cigarettes sold to enrolled tribe members for their own consumption were exempt from New York State cigarette tax pursuant to the limits of state power and the express exception in § 471 that no tax is imposed "on cigarettes sold under such circumstances that this state is without power to impose such tax." See City of New York v. Golden Feather Smoke Shop, Inc., 2009 WL 705815, at *1 (E.D.N.Y. March 16, 2009) ("Golden Feather I"); City of New York v. Milhelm Attea & Bros., Inc., 550 F. Supp. 2d 332, 346--49 (E.D.N.Y. 2008). However, with regards to cigarettes sold from the reservation to non-tribe members of the public, the Court held that § 471 constituted an "applicable" tax for the purposes of the CCTA and could serve as the basis for claims under both the CCTA and the CMSA. See City of New York v. Golden Feather Smoke Shop, Inc., 2009 WL 2612345, at *26-37 (E.D.N.Y. August 25, 2009) ("Golden Feather II"); Golden Feather I, 2009 WL 705815, at *1, 11; Milhelm Attea & Bros., Inc., 550 F. Supp. 2d at 346--49.

On August 25, 2009, this Court entered a preliminary injunction against all the defendants in this case, which enjoined them from selling unstamped cigarettes other than to members of the Unkechauge Nation for their personal use. See Golden Feather II, 2009 WL 2612345, at *43. Following several legal developments in state and federal court, and passage of the Tax Law Amendments (see footnote 1), the Court denied motions to vacate or modify this injunction on August 16, 2011. (Docket entry #353.) For purposes of this motion, the Court will largely assume the parties' familiarity with the details of this long procedural history.

Defendant Tony Phillips was served in this action on October 14, 2008 but has never answered or otherwise appeared. (See docket entry #34.) Accordingly, the City moved for a default judgment against him. On December 16, 2008, the Clerk of Court made an entry of default against Phillips. (Docket entry #56.) Under Rule 55(b)(2) of the Federal Rules of Civil Procedure, because Phillips never appeared in this action, the City was not required at that time to serve him with its motion for a default judgment. However, in light of a July 2011 amendment to Local Civil Rule 55.2, which requires the mailing of a motion for default judgment to the last known residence of a non-appearing defendant, and in an abundance of caution, the City mailed its motion papers to Phillips' last known address on October 5, 2011. (See docket entry #365.)

The complaint alleges that Phillips operates the Smoking Arrow Smoke Shop, and that he, like the other defendants, is or was engaged in the practice of purchasing large quantities of unstamped cigarettes and selling them off the reservation to members of the broader public, including in New York City. (Compl. ¶¶ 20, 38-50.) The complaint states that "each defendant has shipped, transported, received, possessed, sold, distributed or purchased in excess of 10,000 cigarettes that do not bear that State cigarette tax stamps required by [§ 471]." (Compl. ¶ 52.)

Further, the complaint asserts that "each of the defendants has repeatedly advertised, offered to sell and/or sold cigarettes for less that the 'basic cost of cigarettes' within the meaning of [the CMSA]." (Compl. ¶ 61.)

At the hearing on the motion for a preliminary injunction, the City presented evidence that Phillips worked at Smoking Arrow as a cashier, and participated in ordering inventory and paying bills. Golden Feather II, 2009 WL 2612345, at *16. The City's confidential witness testified that she purchased large quantities of unstamped cigarettes from Smoking Arrow for re-sale in New York City during 2007 and 2008. Id. at *16-18. She also testified that she dealt with Phillips and understood him to be effectively the owner of Smoking Arrow. Id. at *17.

In its Order imposing the preliminary injunction, the Court found that "each defendant has received, possessed, sold, distributed, and purchased quantities far in excess of 10,000 cigarettes, which do not bear New York tax stamps, under circumstances where such stamps are required." Id. at *34. The Court also found that "each defendant has sold, and continues to sell, large quantities of cigarettes at less than the cost of the retail dealer, as that term is defined by the CMSA." Id. at *37. The Court noted that although Phillips and a co-defendant were in default, "ample evidence introduced at the hearing establishes that ...


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