In an interesting decision that vividly describes an actual seizure of unstamped cigarettes, but (more importantly) addresses questions of statutory interpretation of a penalty exemption under the cigarette and tobacco products tax, a New York State Administrative Law Judge held that an employee of a Native American-owned cigarette wholesaler was exempt from penalties for possessing or transporting unstamped cigarettes and cancelled the penalties. Matter of Shawn E. Snyder, DTA No. 825785 (N.Y.S. Div. of Tax App., June 22, 2017).

Facts. Shawn Snyder was employed by a Native American-owned tobacco wholesaler located on a Seneca Nation reservation in upstate New York. The wholesaler was regulated solely by the Seneca Nation of Indians, and was not licensed by the State of New York. On December 3, 2012, while delivering cigarettes for the wholesaler, Mr. Snyder was found to be in possession of unstamped cigarettes, which led to the imposition of the penalties.

The facts regarding the cigarettes sale in question, and the events that took place leading up to and following the seizure, are quite detailed. In essence, the tobacco wholesaler agreed to sell 150 cases of cigarettes to another Native American business for $164,000, and to "drop ship" them in the Ganienkeh territory in New York, considered by some to be a Native American nation. The cigarettes were manufactured by a Native American-owned tobacco company located in the state of Washington. There is no dispute that the cigarettes were unstamped.

Neither the tobacco wholesaler nor the purchaser were licensed by or registered with the Department of Taxation and Finance as a cigarette agent or wholesaler.

On December 2, 2012, Mr. Snyder helped load the 150 sealed cases of cigarettes onto his truck at the wholesaler's warehouse. The following day, the New York State Police stopped Mr. Snyder's truck for failing to stop at a border checkpoint truck inspection station. The State Trooper issued a traffic summons, followed by the issuance of a vehicle examination report charging various vehicle safety violations unrelated to the cigarettes. Shortly thereafter, a State Trooper cut open a padlock on the back door of the truck and observed that the cigarettes did not bear tax stamps. Although not directly relevant to the decision, the ALJ appears to question the methods used by the State Police in connection with the inspection and seizure of the cigarettes, since Mr. Snyder also claimed his Fourth Amendment rights were violated by the search and seizure. Certain facts in the decision suggest that the Department's policy did not permit the seizure of unstamped cigarettes transported between Native American reservations.

On December 20, 2012, the Department issued a Notice of Determination asserting penalties against Mr. Snyder totaling nearly $1.3 million for possession of unstamped cigarettes in New York State, imposed at a rate of up to $150 per carton in excess of five cartons, and also seized the unstamped cigarettes. Separate notices were also issued to the wholesaler, tobacco manufacturer, and the purchaser. After a dispute regarding the timeliness of Mr. Snyder's protest was resolved, a hearing was held on the merits of the penalty notice.

The Law. Chapter 262 of the Laws of 2000 enacted various cigarette and tobacco tax civil and criminal enforcement provisions in order to deter the bootlegging of untaxed cigarettes and tobacco products. One of the enforcement provisions was a penalty for possession of unstamped or unlawfully stamped cigarettes in New York State, with a maximum of $150 per carton (in 2013, the penalty was increased to $600 per carton). At issue in this case was a provision that rendered the penalties inapplicable to "common or contract carriers . . . while engaged in lawfully transporting" unstamped cigarettes. The exemption also applied to any employees of the carrier "acting within the scope of his employment." Tax Law 481 (2).

Issue. As noted above, there was no dispute that the seized cigarettes were unstamped. Directly at issue was the scope of the exclusion from penalties for contract carriers and their employees, referred to in the decision as an "exemption." Mr. Snyder claimed that, as an employee of an exempt contract carrier, he was not subject to the penalties. The Department maintained that Mr. Snyder was not "lawfully transporting" the cigarettes because neither he nor his employer wholesaler were licensed by New York State, and so he did not qualify for exemption.

Decision. The ALJ held that Mr. Snyder qualified for the exemption. She first recited several principles of statutory construction, including that tax exemptions are strictly construed, but also that where the statutory language is clear, the plain meaning of the words must be used. Applying those principles, the ALJ first concluded that neither the Tax Law nor the cigarette tax regulations require that a common carrier be licensed by New York State in order to qualify for the exemption.

She also concluded that the requirement that the carrier or employee be "lawfully transporting" means that the carrier "is acting in a lawful manner," and not that it must be transporting stamped cigarettes. The ALJ noted that there must be unstamped cigarettes for the penalties to apply in the first place, suggesting that the exemption would have little meaning if transporting or possessing unstamped cigarettes rendered the exemption inapplicable. The ALJ held that since the wholesaler was a contact carrier engaged in lawfully transporting unstamped cigarettes, and Mr. Snyder was acting within the scope of his employment with the carrier, Mr. Snyder qualified for the exemption, and the penalties against him were cancelled.

Additional Insights

The ALJ's decision, which is subject to appeal by the Department, raises interesting questions regarding the meaning of the statutory phrase "lawfully transporting." The ALJ correctly concludes that the definition of a contract or common carrier does not require that the carrier be "licensed," but she provides little guidance regarding what the phrase "lawfully transporting," a condition for the exemption from penalties, actually means.

Although not discussed in the decision, the New York Public Health Law renders it "unlawful" for any person in the business of selling cigarettes to ship or cause to be shipped cigarettes to a destination in New York State unless the person to whom the cigarettes are shipped is "licensed as a cigarette tax agent or wholesale dealer" in New York State. Public Health Law 1399-11(1). To be properly licensed or registered, the person's name must appear on a list published by the Department (which is maintained on the Department's website). None of the relevant parties in this case were so registered. The decision does not address whether the phrase "lawfully transporting" may actually refer to this requirement in the Public Health Law.