In 2003 and 2004, New York City sued several online cigarette retailers for failing to pay city taxes on cigarettes that were shipped to city residents. The city had been unsuccessful in getting the online cigarette retailers to turn over information about their customers to state officials for tax-collection purposes, and thus based its claim on an alleged violation of federal racketeering law, better known as RICO.
Defendants asserted that the city did not have standing to invoke RICO, arguing that New York City’s loss of tax revenue was not an injury that was incurred as a party to a commercial transaction.
After a district judge dismissed the city’s RICO complaint, the Second Circuit reversed, holding that lost taxes are property under the mail and wire fraud statutes and therefore meet the RICO standing requirement.
On January 25, 2010, the Supreme Court reversed, with 4 Justices holding that the connection between the alleged fraud by the defendant and the injury to the city was too remote. There must be a proximate cause between fraud and injury. Justice Ginsburg supplied the fifth vote to reverse the lower court, but found that the city could not compel the defendant, a New Mexico corporation, to collect city taxes, and could not broaden the remedies available to it under the relevant statute.
Manufacturers are very concerned about this effort by state and local jurisdictions to skirt constitutional limits on the extraterritorial reach of their laws. If New York can have asserted jurisdiction over a company that has no physical presence in the city, and then claim a RICO violation for failure to collect sales taxes, along with treble damages, this case could have revolutionized tax enforcement around the country. It is another example of efforts by states to greatly expand the traditional requirement that it may only exercise jurisdiction over persons or companies with a physical presence, or nexus, in the state.