NYC sues Indian reservation over tax-free cigarettes

New York City is suing eight smoke shops that have been selling tax-free cigarettes on an Indian reservation on Long Island.

The lawsuit accuses the small cluster of shops on the Poospatuck (POOS'-puh-tuhk) Indian Reservation of breaking state and federal law by selling massive quantities of cigarettes to bootleggers, who then smuggle the cartons off the reservation and resell them throughout the metropolitan area.

A probe documented sales by the shops of nearly 24 million cartons of contraband cigarettes since 2004, city officials said. About 279 people live on the reservation.

While residents of Indian reservations are permitted to buy cigarettes tax-free for personal use, "the sales numbers translate to every resident of this reservation, including babies, each smoking 19,200 cigarettes each single day," city officials said.

The tax losses from the sales have been estimated at $525 million in state taxes and up to $195 million for New York City. The lawsuit was filed in Brooklyn federal court.

"We've done a good job of saving surpluses for tough times and cutting costs, but we owe it to taxpayers to be just as tough on the tax collection side," Bloomberg said. "As we all pull together to do more with less, it's just grossly unfair to hardworking taxpayers to leave hundreds of millions of dollars of tax revenue on the table uncollected."

Tribal authorities have long acknowledged that smuggling is a problem, but they defend the right of the shops to sell cigarettes without collecting state tobacco taxes. The suit was filed in Brooklyn federal court.