UPS Sued Over Shipments Containing Untaxed Cigarettes, New York Demands $872 Million

United Parcel Service Inc (UPS) has been sued over shipments that contained more than 683,000 cartons of untaxed cigarettes. New York state and city authorities have demanded that the company pay $872 million for making the illegal deliveries.

The city's lawyer, Lilia Toson, told U.S. District Judge, Katherine Forrest, that UPS had repeatedly ignored signs that many of its shipments made from the American Indian reservation areas contained cartons of untaxed cigarettes, according to Reuters.

UPS stock price closed slightly higher on Monday, at $107.12 up 0.24 percent, despite being sued for over $800 million. The company saw 2.17 million shares changing hands at the stock market, which is higher than the daily average of 2.13 million shares.

"The evidence will show a sufficiently large number of contraband shipments to suggest that UPS is turning a blind eye."
United Parcel Service boxes
[Image by David Goldman /AP Images]

The state has lost millions of dollars as a result of the illegal deliveries made by UPS according to New York Attorney General, Eric Schneiderman. He said that the cigarettes were delivered to unauthorized sellers and private residences. His lawyers said that the cheaper smokes were meant to attract younger people who were lured into smoking by the lower costs.

Bloomberg reports that the company's lawyer, Carrie Cohen, argued that UPS had not broken law. The state and city, Cohen said, were wrong in suing it over the shipment of "little cigars" that had been mistaken for cigarettes. She even produced samples in the court, saying that the so-called cigars were practically indistinguishable from normal cigarettes.

Cohen seemed caught off guard on hearing the amount of damages claimed, saying that no notice had been given by the state about the potential figure. She said that the state had previously informed that the damages could be about $180 million.

Lilia Toson on her part argued that UPS' lax approach towards preventing the shipment of cheap cigarettes had undermined the state's efforts to curb smoking rates and improve public health. She said that the company's drivers were supposed to be trained to prevent the shipping of illegal cigarettes. They either didn't recall any training or said they had received only about five minutes per year.

It has been alleged that UPS made over 78,500 illegal shipments between 2010 and 2014 in direct violation of the 2005 pact to stop the practice. This translates to 683,000 cartons of untaxed cigarettes being delivered by the company and the state and New York City losing $30 million and $4.7 million each in direct tax.

United Parcel driver delivers packages
[Image by Carlos Osorio /AP Images]

UPS has argued that the plaintiff failed to produce any evidence to show that the company was aware that it was delivering cigarettes. Attorney General, Schneiderman, had similarly sued FedEx in 2014 over charges that it had shipped illegal cigarettes to New York. The AG has made the initiative against smoking a priority. He leads the national effort that urges major pharmacy chains to ban cigarettes from their stores.

Judge Forrest had refused to throw out the UPS suit last year, rejecting the argument that many of the deliveries made by the company contained cigars instead of cigarettes. She held that UPS was still responsible for the shipments that contained untaxed cigarettes.

State cigarette tax is the highest in New York at $4.35 per pack. New York City charges an additional local tax of $1.50. The Tax Foundation said that about 58 percent of all cigarettes in New York come via smuggling. The state was the largest net importer of contraband cigarettes in the country in 2013.

UPS has defended itself in the suit over shipments of untaxed cigarettes saying that it had agreed to cease delivering cigarettes throughout the country as part of the 2005 pact, saying that its policy went beyond what federal and state law required of the company. It remains to be seen what effect the case has on UPS stock price today.

[Featured Image by David Goldman /AP Images]