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New York: FedEx embattled in a federal court lawsuit on a matter of state cigarette stamp taxes its clients did not pay

The City of New York (NYC) and the People of the State of New York (“New York,” and together with NYC, the “Plaintiffs”) are suing Federal Express (FedEx) in the U.S. Southern District Court of New York over what is, in part, a matter of taxation. The case is The City of New York v. FedEx Ground Package System, Inc., No. 13-cv-9173-ER. However, in this case, tobacco is involved, which automatically ups the ante and adds additional legal wrinkles to the case.


According to the Plaintiffs’ amended complaint, FedEx knowingly carried and delivered cartons of cigarettes to residences in New York and NYC. One of the issues alleged by the Plaintiffs is that FedEx delivered these packages containing cartons of “unstamped” cigarettes.

Both New York and NYC impose a stamp tax on cigarettes. This stamp tax amounts to $15 per carton in NYC and $15, $27.50 or $43.50 per carton in New York. Cartons or packs of cigarettes for which the stamp tax has been paid have the appropriate stamp(s) affixed to them. Additionally, New York law prohibits common or contract carriers to knowingly transport cigarettes to any person in New York who is other than a permitted person. See N.Y. PHL § 1399-ll. Cigarettes knowingly transported to a home or residence are presumed to be in violation of New York law.

Prior to this case in 2006, FedEx allegedly resolved an investigation by the New York Attorney General into illegal residential cigarette deliveries by entering into an “Assurance of Compliance” (AOC) with New York, which required FedEx to cease making residential delivery of cigarettes and provided for a $1,000 penalty per violation.

Among FedEx’s clients alleged to have shipped cigarettes into New York and NYC are out-of-state businesses and businesses on Indian reservations selling cigarettes by mail, phone or Internet order. The primary reason why New Yorkers are purchasing cigarettes from these retailers is to avoid paying the high stamp taxes imposed on cigarettes in New York and/or NYC. These cigarette sellers that exploit interstate differences in cigarette tax rates by selling and shipping cigarettes to consumers in states with cigarette taxes higher than those of the seller are known as “delivery-sellers.” Note that merely possessing such cigarettes without the applicable stamp can constitute a violation of law by the purchaser of the cigarettes.

Relief and damages sought

Among the relief and damages sought by the Plaintiffs are:

  1. Enjoining FedEx from making further deliveries of cigarettes into NYC and New York;
  2. Requiring FedEx to submit to oversight by a court-appointed Special Master empowered to monitor FedEx’s tobacco deliveries and assure FedEx’s compliance with federal and New York law governing tobacco deliveries;

  3. Recover damages equal to the amount of each $15 tax stamp that should have been affixed to each carton shipped in NYC and that amount of each $15, 27.50 or $43.50 tax stamp that should have been affixed to each carton shipped in New York;

  4. Recover RICO damages of up to three times the applicable stamp tax for each carton specified in (3); and

  5. Recover $1,000 per violation of the AOC.

Concluding remarks

To be sure, this is a substantial request for damages by the Plaintiffs, reaching into the tens of millions of dollars, potentially even higher. Also, FedEx may have an independent court-appointed agent overseeing its operations if the Plaintiffs are successful. The relief sought from FedEx is, in part, seeking remuneration for stamp taxes that arguably should have been paid by FedEx’s tobacco-selling clients. Because certain other laws are implicated, which provide for up to treble damages, FedEx may be liable for paying three times the stamp tax originally due.

While FedEx is unequivocally a major player in the shipping and delivery business, other shipping companies and delivery services may also deal with this same or a similar issue, albeit on a smaller scale. This case may also have implications and set precedent in other situations where one party delivers other controlled products, such as alcohol-related products, into a state without the payment of the related alcohol gallonage or similar taxes. Certainly, this case illustrates the potential liability one may face if not compliant with the applicable tax law. If you believe your business may have potential liability related to the nonpayment of taxes by a third party or a related legal issue, please contact us to discuss. 

Michigan: To lower your severance tax bill, all you need to add is CO2

Drilling companies that use carbon dioxide to enhance their oil and gas recovery efforts may be able to realize a significant decrease in their severance tax bill. H.B. 4885 was signed April 1, 2014 by Michigan Lt. Gov. Brian Calley and applies to carbon dioxide secondary or enhanced recovery projects approved after March 30, 2014. Operating a “carbon dioxide secondary or enhanced recovery project” means operations designed to increase the amount of oil or natural gas recoverable from a reservoir by injection of carbon dioxide, either alone or as primary component of a mixture with other substances, provided that the project has received the necessary approvals.

Generally, the amount of severance tax is five percent of the gross cash market value of the total production of gas or 6.6 percent of the gross cash market value of the total production of oil. However, an approved carbon dioxide secondary or enhanced recovery project would be subject to a flat severance tax rate of four percent on oil or gas produced. This represents a 20 percent severance tax reduction for gas and more than 39 percent severance tax reduction for oil produced.

This bill, naturally, is not without controversy. Proponents of this measure claim that by injecting carbon dioxide underground, atmospheric carbon dioxide is “permanently” contained underground. According to NPR-affiliate station WMUK, the Sierra Club's Mike Berkowitz claims the H.B. 4885 cuts amount to a "handout" to oil and gas companies. 

New York: Apportionment by audience? Financial publisher wins apportionment argument based on an alternative allocation methodology

The McGraw-Hill Companies Inc. (McGraw-Hill) may allocate receipts from the public credit ratings of its Standard & Poor’s division according to an audience-based or circulation-based methodology in order to accurately reflect its New York City business income, according to a Feb. 24, 2014 decision by a New York City tax appeals administrative tribunal.

Standard & Poor’s business

During the tax years at issue, Standard & Poor’s (S&P) was a division of McGraw-Hill. S&P operated as a credit rating agency, which provided both issuer ratings and issue ratings. According to the decision, issuer ratings assess an identified obligor’s capacity to meets its financial commitments and issue ratings addressed the creditworthiness of a specific financial obligation or program. S&P provided public ratings, private ratings and confidential ratings. S&P monitored ratings through a surveillance process for the duration of the instrument.

Public ratings and surveillance information were disseminated on S&P’s website and the rationale behind each rating was included on the website in a press release. This information is republished in newspapers, unrelated financial websites and in other media outlets.

S&P uses an issuer pays model, under which the issuer/obligor contracts for the rating and subsequent surveillance and pays a fee for such services. The S&P website is free to the public, but a user must register an account with S&P to use the website.

Business allocation percentage factor and ruling

McGraw-Hill filed amended City General Corporation Tax Returns for the years ended Dec. 31, 2003 through December 31, 2007, claiming in the aggregate approximately $35 million in tax refunds. Among other items, such amended returns explained that McGraw-Hill should have categorized revenue from S&P’s credit rating activities as “other business receipts” sourced to the location of the customer in New York City on a destination basis. On appeal of the disallowance of its refund, McGraw-Hill changed its position and argued that as a financial publisher, a special audience-based business allocation percentage factor should be applied to its S&P receipts for purposes of calculating the New York City general corporation tax. New York City argued that the S&P receipts are receipts from services earned primarily in New York City where the services were performed and should be allocated on an origin basis.

The administrative law judges determined the receipts from the credit rating activities were “other business receipts” because they were not receipts from the sale of tangible personal property or from services performed in New York City, nor from rents or royalties. Under the New York City administrative code, other business receipts are normally sourced on a destination or market basis. However, such administrative code provides for special allocations methods for publishers.

The administrative law judges determined that S&P, as a credit rating agency, is a financial information publisher and is entitled to the same protections of the First Amendment when it publishes financial information to the general public. Consequently, the U.S. Constitution requires that New York City tax the S&P income in the same manner that it taxes income from other publishers.

According to the special allocation methods for publishers provided in the New York City administrative code, a publisher’s receipts should be allocated based on circulation or audience. Therefore, the ruling determined that in order to properly reflect McGraw-Hill’s New York City general corporation tax in a manner that is consistent with the methodology used by other publishers, McGraw-Hill was entitled to allocate receipts form the public credit ratings of its S&P division according to an audience-based or circulation-based methodology that takes into account the geographic location of its website users. Based on this ruling, McGraw-Hill should be receiving a substantial refund on its New York City general corporation taxes for the tax years ended Dec. 31, 2003 through Dec. 31, 2007. 

For additional information regarding these subjects or any other multistate tax issues, please contact:

David M. Kall

Susan Millradt McGlone

Jeremy J. Schirra

Businesses must be vigilant and careful in managing their state and local tax liabilities and exposures. We understand this can be a daunting task. McDonald Hopkins Multistate Tax Services provides a broad range of state and local tax services including tax controversy, tax evaluation, tax planning, and tax policy. With professionals who have worked both inside and outside government agencies, our multistate tax team leverages its knowledge and experience to help clients control their complex multistate taxes.