Hemi Group, LLC v. City of New York

2010-01-25

Headline: Limits RICO claims for city tax losses: Court blocks New York City from suing an out-of-state online cigarette seller under RICO for lost sales tax revenue, narrowing civil RICO for indirect harms.

Holding: The Court held that New York City cannot bring a civil RICO claim because it failed to show its lost cigarette tax revenue was directly caused “by reason of” the alleged mail and wire frauds.

Real World Impact:

Bars cities from using RICO to collect unremitted taxes from out-of-state sellers.
Limits civil RICO claims where harm is caused indirectly through third parties.
Leaves states better positioned to pursue tax enforcement and remedies.

Topics: RICO limits, state and local tax collection, interstate online sales, mail and wire fraud

Summary

Background

New York City, which charges a per-pack cigarette tax, sued Hemi Group, an out-of-state online cigarette seller. State and local law do not require sellers like Hemi to collect the City tax. Federal Jenkins Act rules require out-of-state sellers to report customer names and addresses to the States, and New York State agreed to share that data with the City. The City alleged Hemi repeatedly failed to send Jenkins Act reports, and that omission kept the City from identifying and collecting unpaid taxes on many purchases. The City sued under the Racketeer Influenced and Corrupt Organizations Act (RICO), claiming mail and wire fraud as the predicate offenses.

Reasoning

The Court’s central question was whether the City’s lost tax revenue occurred “by reason of” Hemi’s alleged RICO violations. Applying this Court’s proximate-cause standard from Holmes and Anza, the majority required a fairly direct link between the fraud and the injury. The Court concluded the causal chain here was too indirect: Hemi’s failure to report to the State, the State’s forwarding of information, and individual customers’ decisions not to pay created multiple intervening steps. Because the City’s injury was caused most directly by customers, not Hemi’s reporting omission, the majority reversed the Second Circuit and rejected the RICO claim.

Real world impact

The ruling prevents cities from using civil RICO to recover taxes they cannot compel out-of-state sellers to collect. It narrows RICO’s reach where harms arise through third-party decisions and leaves states (or other better-situated plaintiffs) to pursue tax enforcement or statutory remedies. This opinion does not decide Jenkins Act enforcement itself.

Dissents or concurrances

Justice Ginsburg concurred in the judgment, emphasizing that the City did not invoke the Jenkins Act directly and warning against using RICO to bypass the Act’s limited remedies. Justice Breyer, joined by two colleagues, dissented, arguing the lost taxes were foreseeable, intended, and constituted recoverable "business or property."