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Court: Racketeering law can't help collect cigarette tax

The United States Supreme Court rejected one prong of Mayor Michael Bloomberg's war on smoking Monday, ruling that it's improper for the city to use civil racketeering laws to try to collect taxes on Internet sales of cigarettes.

In suits filed in 2003, the city charged that Internet retailers were costing it millions in tax revenues by failing to follow federal laws requiring them to tell states the names of purchasers - blocking the city from going after them for taxes, and effectively circumventing city cigarette taxes.

But in a 5-3 ruling in a suit against New Mexico Internet seller Hemi Group, the Supreme Court said that the city could sue only for direct harm from the violation of federal law. Its loss of tax revenue was caused directly by the failure of purchasers to pay, the court said, and only indirectly by the vendors' failure to report their names to the state.

"The City's theory requires that we extend . . . liability to situations where the defendant's fraud on the third party (the State) has made it easier for a fourth party (the taxpayer) to cause harm to the plaintiff (the City)," wrote Chief Justice John Roberts for the majority. "We have never before stretched the causal chain . . . so far, and we decline to do so today."

The city's theory was that Hemi's failure to report names constituted mail fraud and wire fraud, forming the basis for a civil suit under the Racketeer Influenced and Corrupt Organizations law. Roberts was joined by Justices Antonin Scalia, Clarence Thomas, Samuel Alito and Ruth Ginsberg. Justice Sonia Sotomayor did not vote.

City lawyers minimized the significance of the ruling. They said Internet cigarette retailing had dramatically wilted under various legal assaults since the city sued in 2003. All the vendors sued by New York City other than Hemi have defaulted and settled, and a 2006 federal law expanded retailers' liability for selling cigarettes without New York tax stamps.

"The complaint is now seven years old, and the city currently has available to it stronger, new legal ammunition that we have used successfully, and will continue to use in the future, in our fight against cigarette bootlegging and tax evasion," said Leonard Koerner, chief of the appeals division, in a statement.

Bloomberg's administration has also banned smoking in restaurants and bars, raised taxes and sued Indian tribes over reservation cigarette sales. With AP

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