On September 20, 2011, the U.S. Court of Appeals for the Second Circuit affirmed a New York federal court’s order enjoining portions of the Prevent All Cigarette Trafficking Act. In July 2010, the trial court enjoined the PACT Act’s provision requiring remote sellers (Internet and mail order) to collect taxes for out-of-state sales, and to register as distributors in each state in which they conduct remote sales.
The trial court and the Second Circuit relied on the Due Process Clause of the U.S. Constitution, which generally prohibits states from collecting taxes from entities without a sufficient nexus to the taxing state. (This is the same reason why mail order and Internet shoppers usually do not have to pay sales taxes for purchases from out-of-state merchants.)
The appellate court also affirmed the trial court’s refusal to enjoin the PACT Act’s provision barring the use of the U.S. Mail to deliver cigarettes, RYO and smokeless tobacco to consumers. The plaintiffs challenged this provision as irrational, in that it exempted U.S. Mail deliveries to Hawaii and Alaska, but the trial and appellate courts found that this exemption met the relatively minimal burden of rationality.
The case will now be remanded to the trial court for a decision on the merits of the plaintiffs’ claims.