May–June 2010
State Law & State Taxation Corner
By John A. Biek
RICO Claims for Vendor Sales and Use Tax Collection
Liabilities: A Step Too Far?
Introduction
John A. Biek is a Partner in the Tax Practice Group of Neal, Gerber & Eisenberg
LLP in Chicago, Illinois.
JOURNAL OF PASSTHROUGH ENTITIES
All state sales and use tax laws provide a comprehensive mechanism for their enforcement. Sales tax
administrators are given the authority to conduct audits of vendors and consumers to determine whether
they are reporting and remitting the correct amount
of tax. State tax auditors typically have the ability to
subpoena and review records, to question taxpayer
personnel and third parties, and to tap the knowledge of tax administrators of other states about the
taxpayer’s business operations and tax returns. Large
businesses usually undergo regular sales/use tax audits
by the states, helping to ensure that the correct amount
of tax is collected and remitted at the end of the day.
Woe to the wayward vendor or consumer who has
underpaid its sales/use tax liability and will be subject
to interest and civil penalties—and possibly criminal
penalties—on the deficiency amount!
It is a fair question, then, to ask whether, with
such extensive sales/use tax collection procedures
already in place, state tax administrators need or
deserve extraordinary collection measures such as
a posse of private tax collectors or the blunderbuss
of federal criminal laws to enhance their enforcement of the sales/use tax laws. Earlier this decade,
a number of national retailers were sued in qui tam
actions that private whistleblowers filed under state
False Claims Acts, alleging that the defendant retailers
had been defrauding the state by not collecting and
remitting more sales tax revenues on their retail sales
transactions. These qui tam plaintiffs may have been
high-minded, but it was clearly not lost on them that
they would receive a cut of the treble damages that
47
State Law & State Taxation Corner
the profit from organized crime by separating the rackthe retailer would owe if it were found to have unpaid
eteer from his dishonest gains.4 However, the scope
sales tax liabilities. Most of these retailers probably
believed that they had legitimate nexus defenses for
of the RICO Act is broad enough that its provisions
not having collected and remitted the sales/use taxes
can apply not only to mobsters but also to otherwise
that the qui tam plaintiffs were claiming on behalf
law abiding businessmen.5 The RICO Act augments
of the state. Some states were not happy, either, that
its criminal penalties with a civil enforcement scheme
private plaintiffs were intruding in the state’s sales/use
that allows plaintiffs to bring private RICO actions to
tax audit sphere. Ultimately, a number of these False
recover treble damages for the injuries that the plaintiff
Claims Act suits were dismissed by the courts.
has suffered to its business or property as a result of
Now another, even more drastic, sales/use tax
the defendant’s racketeering activity.
enforcement gambit has entered upon the stage:
Section 1962(a) of Title 18 of the United States
the attempted application of the federal Racketeer
Code is the operative provision that makes it unlawful
Influenced and Corrupt Organizations Act (RICO)
for a person who has derived any income, directly
to vendors who have allegedly underreported their
or indirectly, from a pattern of racketeering activsales/use tax collection liabilities. Readers may be
ity, or through the collection of an unlawful debt in
excused for thinking that the RICO Act was intended
which such person has participated as a principal,
to combat the menace
to use or invest, directly
to society of gangsters
or indirectly, any part of
and organized crime, not
those ill-gotten gains (or
Now another, even more drastic,
sales/use tax scofflaws.
the investment proceeds
sales/use tax enforcement gambit
The reach of the RICO
therefrom) in the acquisiAct is potentially broader
tion of an interest in, or
has entered upon the stage:
than that, however, and in
the establishment or opthe recent cases of Anza v.
eration of, any enterprise
Ideal Steel Supply Corp.1 and Hemi Group, LLC v.
engaged in or affecting interstate commerce. Section
1962(c) makes it unlawful for any person employed
City of New York,2 the United States Supreme Court
by or associated with any enterprise engaged in or
dealt with RICO claims by a business competitor and
affecting interstate commerce, to conduct or particia municipality that the defendant vendor’s alleged
pate, directly or indirectly, in the conduct of such
undercollection of sales taxes had resulted in mail
enterprise’s affairs through a pattern of racketeering
fraud or wire fraud violations that had caused injury
activity or collection of unlawful debt.
to the “business or property” of the business comSection 1961 defines the critical term “racketeerpetitor or municipality. These private RICO actions
ing activity”—again quite broadly––to include, inter
sought to recover treble damages from the vendor.
alia, “any act which is indictable under any of the
The Supreme Court held in the Anza and Hemi Group
following provisions of Title 18, United States Code:
cases that the vendor’s alleged undercollection of
. . . Section 1341 (relating to mail fraud), Section
sales tax had not proximately caused the plaintiffs’
1343 (relating to wire fraud) . . . .”6 A “pattern of
claimed injuries, but the Supreme Court did not rule
out the possibility of states utilizing the RICO Act as
racketeering activity” is defined in the RICO Act as
a sales/use tax collection tool.
two or more acts of racketeering activity within a
This column will review the requirements of the
ten-year period.7
RICO Act and then discuss the Anza and Hemi Group
Section 1963 provides extensive criminal penalties
cases in some detail, concluding with some thoughts
for violations of the RICO Act, while Section 1964
on the suitability of bringing RICO claims to enforce
provides a number of civil remedies for RICO violastate sales/use tax laws.
tions. Of relevance to this article is Section 1964(c),
which authorizes the following private RICO cause
of action to recover damages from a defendant who
The RICO Act
has engaged in a pattern of racketeering activity:
Congress enacted the RICO Act3 in October 1970 in
Any person injured in his business or property
order to prevent and punish the financial infiltration by
by reason of a violation of Section 1962 of this
organized crime of legitimate business operations afchapter may be sued therefor in any approprifecting interstate commerce. Congress hoped to extract
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ate United States district court and shall recover
threefold the damages he sustains and the cost
of the suit, including a reasonable attorney’s fee,
except that no person may rely upon any conduct
that would have been actionable as fraud in the
purchase or sale of securities to establish a violation of Section 1962.8
This treble damages provision in the RICO Act is
meant to be a powerful deterrent to illegal racketeering activity, but it also can encourage opportunistic
private plaintiffs to give criminal overtones to a commercial dispute or civil administrative matter so as
to gain leverage over the defendant in the matter. To
accomplish this, however, the plaintiff must be able
to identify two or more predicate criminal offenses
that the defendant has engaged in and then be able
to demonstrate that the injury to the plaintiff’s “business or property” stemmed directly from that pattern
of racketeering activity.
The Anza Case
Ideal Steel Supply Corporation (Ideal) was such an
opportunistic plaintiff. Ideal sold steel mill products,
along with related supplies and services, from two
store locations in New York City.9 Ideal’s principal
competitor was National Steel Supply, Inc. (National),
which also operated two store locations in New York
City.10 Joseph and Vincent Anza were the owners and
officers of National.11
When Ideal heard that National was not collecting
New York State and New York City sales taxes on its
taxable retail sales of products to cash-paying customers, Ideal contended that this policy was allowing
National to undercut Ideal’s prices by the amount
of the sales taxes that National was not charging its
customers.12 Ideal went on the attack by filing a RICO
claim against National and its two shareholders, the
Anzas, in the United States District Court for the
Southern District in New York.
In its complaint, Ideal alleged that National and
the Anzas were engaged in an unlawful racketeering
scheme designed to “gain sales and market share
at Ideal’s expense.”13 Ideal further alleged that the
New York sales tax returns that National had filed
were fraudulent because they did not report the receipts from the sales transactions with cash-paying
consumers, and that the filing of these fraudulent
sales tax returns presented a pattern of criminal mail
fraud (when the returns were filed by mail) or wire
JOURNAL OF PASSTHROUGH ENTITIES
fraud (when the returns were filed electronically).14
As noted earlier, these two federal crimes are listed
among the “racketeering activities” in 18 U.S.C.
§1961(1)(B) that can furnish the predicate offenses
needed to support a RICO claim. Ideal’s RICO action
sought to recover three times the amount of damages
that National’s alleged undercollection of New York
sales taxes had purportedly caused to Ideal’s market
share for sales of steel products.
National and the Anzas filed a motion to dismiss
Ideal’s complaint on the grounds that it failed to state
a claim on which relief could be granted. The District
Court granted the motion to dismiss, concluding that
because Ideal did not allege that it had relied on any
facts misrepresented in the National sales tax returns,
Ideal had not been injured by a mail fraud or wire
fraud racketeering activity that could provide the
predicate offense for a violation of the RICO Act.15
The United States Court of Appeals for the Second Circuit reversed the District Court, however,
holding that where a complaint alleges a pattern of
activity “that was intended to and did give the defendant a competitive advantage over the plaintiff,
the complaint adequately pleads proximate cause
and the plaintiff has standing to pursue a civil RICO
claim.”16 The Second Circuit concluded that Ideal’s
RICO claims were viable “even where the scheme
depended on fraudulent communications directed to
and relied on by a third party [i.e., the State of New
York] rather than the plaintiff.”17
The United States Supreme Court reversed again,
concluding that National’s allegedly fraudulent New
York sales tax returns had not proximately caused
the claimed injury to Ideal’s business or property.
In Holmes v. Securities Investor Protection Corp.,18
the Supreme Court had held that the provision in 18
U.S.C. §1964(c) granting a civil cause of action to
persons injured “by reason of” a defendant’s RICO
violation “required a showing that the defendant’s
violation not only was a ‘but for’ cause of his injury,
but was the proximate cause as well.”19 In Holmes,
the plaintiff Securities Investor Protection Corporation
(SIPC) alleged that the criminal conspiracy of Robert
Holmes and others to manipulate stock prices, when
detected, caused share prices to plummet, resulting
in significant losses to broker dealers—and to their
customers when the broker-dealers were forced to
liquidate. SIPC, in turn, was contractually obligated
to reimburse the customers for their losses, and SPIC
then sought to recover those amounts from Holmes
and his co-conspirators through its RICO action
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State Law & State Taxation Corner
against them.20 The Supreme Court rejected SIPC’s
RICO claim, however, finding that “the link is too
remote between the stock manipulation alleged and
the customers’ harm, being purely contingent on the
harm suffered by the broker-dealers.”21
The majority of the Justices concluded in the Anza
case that:
RICO claim, against National. This led the Supreme
Court majority to comment that:
The requirement of a direct causal connection is
especially warranted where the immediate victims
of an alleged RICO violation can be expected to
vindicate the laws by pursuing their own claims.
. . . Again, the instant case is instructive. Ideal
accuses the Anzas of defrauding the State of New
Applying the principles of Holmes to the presYork out of a substantial amount of money. If the
ent case, we conclude Ideal cannot maintain its
allegations are true, the State can be expected to
claim based on §1962(c). Section 1962(c), as
pursue appropriate remedies. The adjudication
noted above, forbids conducting or participating
of the State’s claims, moreover, would be relain the conduct of an enterprise’s affairs through
tively straightforward; while it may be difficult to
a pattern of racketeering activity. The Court has
determine the facts such as the number of sales
indicated the compensable injury flowing from a
Ideal lost due to National’s tax practices, it is conviolation of that provision “necessarily is the harm
siderably easier to make
caused by predicate acts
the initial calculation of
sufficiently related to
The
Jenkins
Act
provides
how much tax revenue
constitute a pattern, for
the Anzas withheld from
the essence of the violarelatively minor penalties for the
the State. There is no
tion is the commission of
failure of out-of-state cigarette
need to broaden the
those acts in connection
vendors
to
fi
le
the
required
universe of actionable
with the conduct of an
harms to permit RICO
enterprise.”22
information reports with state
suits by parties who
tobacco products administrators.
have been injured only
According to the majorindirectly.24
ity opinion, the problem
with Ideal’s RICO claim was that the direct victim of
the allegedly fraudulent National sales tax returns
Although not explicitly stated in the Anza opinion,
was the State of New York, not Ideal, while:
New York probably would have had a more viable
RICO claim against National, assuming it was actuThe cause of Ideal’s asserted harms, however, is a
ally undercollecting the New York sales tax, because
set of actions (offering lower prices) entirely disthat noncompliance would have caused direct harm
tinct from the alleged RICO violation (defrauding
to New York’s tax revenues. However, that issue was
the State). The attenuation between the plaintiff’s
not before the Supreme Court in the Anza case.
harms and the claimed RICO violation arises from
a different source in this case than in Holmes,
The Hemi Group Case
where the alleged violations were linked to the
asserted harms only through the broker-dealers’
Four years later, the Hemi Group, LLC v. City of
inability to meet their financial obligations. NevNew York25 case presented the Supreme Court with
ertheless, the absence of proximate causation is
such a governmental agency RICO claim based on
equally clear in both cases.23
allegations of a conspiracy to undercollect sales
taxes, although New York City’s RICO claim, too, ran
aground on the shoals of the proximate cause requireThe majority opinion was clearly concerned that
ment. Hemi Group was a New Mexico company that
unless there was a rigorous proximate cause requiremade online sales of cigarettes to consumers in New
ment for private RICO causes of action, plaintiffs
York City and elsewhere in the United States.26 Hemi
could attempt to bootstrap a claim for treble damages under the RICO Act off of another party’s more
Group was not required to collect New York State and
immediate injury from the defendant’s racketeering
New York City cigarette taxes on these interstate sales
activity. In fact, it does not appear that New York had
transactions because Hemi Group did not maintain
asserted a sales tax deficiency, let alone filed its own
the requisite physical presence in New York City.27 Of
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course, Hemi Group’s customers were obligated to
pay the New York state and city cigarette taxes due
on their use of the cigarettes, but such voluntary payment of taxes can be less than perfect.
One mechanism that states have been given to
collect excise taxes on interstate sales of cigarettes is
the federal Jenkins Act,28 which requires out-of-state
cigarette sellers to register and file regular information
reports with state tobacco products tax administrators
listing the name, address, and quantity of cigarettes
purchased by in-state residents. While the Jenkins Act
does not obligate the out-of-state cigarette vendor to
collect the state’s cigarette excise tax, an energetic
state tax administrator could utilize the information
provided in the Jenkins Act reports to pursue the consumers who are making a taxable use of the cigarettes
in the taxing state. The Jenkins Act provides relatively
minor penalties for the failure of out-of-state cigarette
vendors to file the required information reports with
state tobacco products administrators.29
For whatever reason, Hemi Group did not file any
Jenkins Act reports with the State of New York.30 If the
State of New York had received the Jenkins Act reports
from Hemi Group, the State would have shared the
cigarette sales transaction information in those reports
with New York City.31 New York City alleged in its
RICO complaint against Hemi Group that, as a result
of its not receiving the cigarette sales transaction
information from the State, the City was not able to
dun its residents for the cigarette taxes that they owed
the City, costing it “tens if not hundreds of millions
of dollars in cigarette excise tax revenue.”32
The City claimed that Hemi Group’s “interstate
sale of cigarettes and the failure to file Jenkins Act
reports identifying those sales” resulted in mail fraud
and wire fraud crimes that provided the predicate
offenses to give the City a private RICO cause of action under 18 U.S.C. §1964(c) against Hemi Group.33
The City further alleged that Hemi Group’s pattern
of racketeering activity had caused the City to suffer
injury to its “business or property” in the form of lost
tax revenue.”34 Through this RICO action, the City was
essentially trying to collect three times the amount
of New York City cigarette excise taxes that the City
could not collect directly from Hemi Group under
the New York City cigarette excise tax laws.
It is not clear from the various Supreme Court
opinions in the Hemi Group case how not filing
the Jenkins Act reports constituted the RICO predicate offenses of mail fraud or wire fraud, but Hemi
Group did not challenge this allegation in the City’s
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complaint, and the Supreme Court assumed, for the
purposes of Hemi Group’s motion to dismiss, that
the Company’s failure to file Jenkins Act reports gave
rise to the RICO predicate offenses.35 However, Hemi
Group did dispute the City’s allegations that (1) the
City had suffered injury to its business or property as
a result of the lost cigarette excise tax revenue and
(2) the City had suffered this injury “by reason of”
Hemi Group’s failure to file the Jenkins Act reports,
within the meaning of 18 U.S.C. §1964(c).
The majority opinion written by Chief Justice
John Roberts took up the second of these questions
and determined that the City had not satisfied the
proximate cause requirement of Section 1964(c).
Referring to the Holmes v. Securities Investor Protection Corp. case, the majority opinion noted that
“[p]roximate cause for RICO purposes, we made
clear, should be evaluated in light of its commonlaw foundations; proximate cause thus requires
‘some direct relation between the injury asserted
and the injurious conduct alleged.’ Ibid. A link that
is ‘too remote’ is insufficient.”36
The majority opinion went on to conclude that:
The City’s causal theory is far more attenuated
than the one we rejected in Holmes. According
to the City, Hemi committed fraud by selling
cigarettes to city residents and failing to submit
the required customer information to the State.
Without the reports from Hemi, the State could
not pass on the information to the City, even if
it had been so inclined. Some of the customers
legally obligated to pay the cigarette tax to the
City failed to do so. Because the City did not
receive the customer information, the City could
not determine which customers had failed to pay
the tax. The City thus could not pursue those customers for payment. The City thereby was injured
in the amount of the portion of back taxes that
were never collected. See Record A996.
But as we reiterated in Holmes, “[t]he general
tendency of the law, in regard to damages at least,
is not to go beyond the first step.”37 Because the
City’s theory of causation requires us to move
well beyond the first step, that theory cannot meet
RICO’s direct relationship requirement.38
The majority opinion drew additional support from
the Anza case for its conclusion that Hemi Group’s
failure to file the Jenkins Act reports had not proxi-
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State Law & State Taxation Corner
mately caused the City’s loss of cigarette excise tax
revenue. As the majority noted, “Here, the conduct
directly responsible for the City’s harm was the customers’ failure to pay their taxes. And the conduct
constituting the alleged fraud was Hemi’s failure to
file Jenkins Act reports. Thus, as in Anza, the conduct directly causing the harm was distinct from the
conduct giving rise to the fraud.”39 Or, as the majority
opinion put it, “the City’s theory of liability rests not
just on separate actions, but separate actions carried
out by separate parties.”40
The majority opinion ended with the following
observation:
any lost tax revenue. Suffice it to say that the State
would have concrete incentives to try.”42
Justice Ruth Bader Ginsburg wrote a concurring
opinion in the Hemi Group case pointing out the
irony of the City of New York attempting to compel
Hemi Group to pay taxes under the RICO Act that
the City could not, consistent with Commerce Clause
principles, require Hemi Group to collect from its
customers.43 Justice Ginsburg explained that:
I resist reading RICO to allow the City to end-run
its lack of authority to collect tobacco taxes from
Hemi Group or to reshape the “quite limited remedies” Congress has provided for violations of the
Jenkins Act, see ante, at
It bears remembering
993, n.2. Without subwhat this case is about.
Ultimately, this question of
scribing to the broader
It is about the RICO lirange of the Court’s
ability of a company
whether sales tax noncompliance
proximate cause analyfor lost taxes it had no
results in a RICO injury to a state
sis, I join the Court’s
obligation to collect,
or local government’s business or
opinion to the extent
remit, or pay, which
it is consistent with the
harmed a party to whom
property will have to be decided
above-stated view, and
it owed no duty. It is
by the Supreme Court.
I concur in the Court’s
about imposing such lijudgment.44
ability to substitute for or
complement a governing body’s uncertain ability
or desire to collect taxes directly from those who
The three dissenting Justices, Stephen Breyer, John
owe them. And it is about the fact that the liability
Paul Stevens and Anthony Kennedy, would have
comes with treble damages and attorney’s fees atfound that the City had satisfied the proximate cause
tached. This Court has interpreted RICO broadly,
requirement of 18 U.S.C. §1961(c) because it was
consistent with its terms, but we have also held
“foreseeable” that Hemi Group’s failure to file the
that its reach is limited by the “requirement of a
Jenkins Act reports with the State of New York would
direct causal connection” between the predicate
result in the City not being able to collect cigarette
wrong and the harm. Anza, 547 US, at 460, 126
excise tax revenue from its residents, and that was the
SCt 1991. The City’s injuries here were not caused
“consequence that Hemi intended, indeed desired;
directly by the alleged fraud, and thus were not
and it falls within the sort of risks that Congress sought
caused “by reason of” it. The City, therefore, has
to prevent.”45
no RICO claim.41
The dissenting Justices also placed more reliance
than the majority did on the allegation in the City’s
complaint that the Hemi Group was advertising its
While the City was not able to prove proximate
cigarettes as “tax free” and that Hemi Group often
cause in connection with its RICO claim against
told customers it “does not report any sales activity
Hemi Group, it appears that the State of New York
to any State taxing authority.”46 Based on these facmight have fared better if it had asserted a RICO claim
against the company. After all, New York State was
tual allegations, the dissenting opinion concluded
the party that was entitled to receive the Jenkins Act
that “in both Holmes and Anza, unlike the present
reports from Hemi Group, and the State could have
case, plaintiffs alleged special harm, neither squarely
used the information provided in those reports to
within the class of harms at which the relevant statutes
collect the $2.75 per pack New York state cigarette
were directed, nor of a kind that typical violators
excise tax from Hemi Group customers in the state.
would intend or even foresee.”47
The majority opinion stated that “[w]e do not opine
Having determined that Hemi Group’s failure to
on whether the State could bring a RICO action for
file the Jenkins Act reports proximately caused the
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City’s injury, the dissenting Justices turned to the
initial question presented in Hemi Group’s motion
to dismiss of whether the City’s loss of tax revenue
constituted “business or property” under 18 U.S.C.
§1964(c).48 The dissenting Justices acknowledged that
this “question has led to concern among the lower
courts. Some fear that an affirmative answer would
turn RICO into a tax collection statute, permitting
States to bring actions and recover treble damages
for behavior that amounts to no more than a failure to
pay taxes due.”49 Noting that the United States Courts
of Appeal for the Sixth Circuit and the Seventh Circuit
are narrowly split on this question,50 the dissenting
Justices came down on the side of treating lost tax
revenue as “business or property” for RICO purposes,
but they expressed the perhaps naive hope that state
and local tax agencies would exercise ample discretion in bringing RICO claims against vendors for
undercollected sales taxes.51
Analysis of the Anza and
Hemi Group Cases
The Supreme Court’s Anza opinion appears to have
put to rest the risk of vendors being hauled into court
by their business competitors on RICO claims stemming from the vendor’s failure to collect and remit
sales taxes. In Anza, the Supreme Court forcefully
held that even if National had failed to collect and remit New York sales taxes, that lack of tax compliance
had not proximately caused Ideal’s loss of market
share, its claimed injury to its “business or property”
under 18 U.S.C. §1961(c). It is difficult to imagine
other business competitors being able to succeed
where Ideal failed. That is just as well, because the
RICO Act is not meant to be a whistleblower statute.
Rather, RICO is intended to compensate for actual
injury to the plaintiff’s business or property resulting
from a pattern of racketeering activity.
What remains, however, after the Hemi Group
case of the ability of a state or municipality to bring a
RICO action against a vendor that has failed to collect
and remit that government’s own sales/use tax? New
York City lost in the Hemi Group case because the
City based its injury claim on the vendor’s failure to
file the required Jenkins Act information reports with
the State of New York. The majority of the Justices
concluded that the City had not proved proximate
cause under 18 U.S.C. §1961(c) because the City’s
lost cigarette excise tax revenues resulted more from
the failure of New York City consumers to comply
JOURNAL OF PASSTHROUGH ENTITIES
with their tax payment obligation than from Hemi
Group’s failure to provide transaction information to
the State that it might have been shared with the City,
eventually leading the City to the consumers. The
various Supreme Court opinions in the Hemi Group
case indicated that New York State probably would
have had a stronger RICO claim than the City did
because the State was entitled to receive the Jenkins
Act reports from Hemi Group. Left unsaid in these
opinions was that if Hemi Group had maintained
physical presence in New York City—thereby being
obligated to collect the City’s cigarette excise tax—it
would probably have been easier for the Supreme
Court to find that Hemi Group’s failure to collect the
City’s cigarette excise tax under those circumstances
had proximately caused injury to the City.
So, should a state or city government be allowed to
bring a RICO claim against a vendor that has nexus
in that jurisdiction, claiming that the vendor’s failure
to collect sales/use tax has proximately caused injury
to the state or city’s business or property? It would
be a worrisome development if this were a viable
RICO cause of action because it could greatly raise
the stakes in garden variety sales/use tax audits. State
and local tax auditors can be intimidating enough
without the additional arrow of RICO criminal and
civil remedies in their quiver.
The first line of defense to such a RICO cause of
action might well be that the vendor has not committed the predicate mail fraud or wire fraud offense.
If the vendor has not submitted any sales/use tax
returns or otherwise provided tax information to the
tax agency, where are the fraudulent misrepresentations that could result in indictable federal criminal
offenses? Admittedly, it is troubling that Hemi Group
did not contest the City of New York’s allegation that
Hemi Group had committed a pattern of mail fraud
or wire fraud by not filing Jenkins Act information
reports with the State of New York. The Supreme
Court majority opinion expressly noted it was not
finding that predicate mail or wire fraud offenses had
resulted from Hemi Group’s failure to file the Jenkins
Act reports, but the Supreme Court majority did not
reject the idea either.
The second line of defense might be for the
vendor to argue that the deprivation of the government’s tax revenue has not resulted in the injury
to its “business or property” required by 18 U.S.C.
§1961(c). The lower courts appear to be divided on
this issue, and the majority opinion in Hemi Group
did not reach this issue at all. The Seventh Circuit,
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State Law & State Taxation Corner
though, “reluctantly” held in the Phillips case that
the defendant vendor’s filing of fraudulent Illinois
sales tax returns had caused injury to the state’s
business or property within the meaning of the
RICO Act. The dissenting Justices in Hemi Group
also appeared somewhat reluctant to find that lost
tax revenue constituted “business or property” of
New York City out of concerns that it would be
turning the RICO Act into a sales tax collection
tool. The dissenting Justices tried to have it both
ways by concluding that the business or property
injury requirement of 18 U.S.C. §1961(c) had been
satisfied, but expressing the hope that state and local tax agencies would exercise their discretion in
using the RICO Act to pursue vendors for sales tax
collection liabilities. This is not a very comforting
prospect for the vendor community.
Ultimately, this question of whether sales tax noncompliance results in a RICO injury to a state or local
government’s business or property will have to be
decided by the Supreme Court. It may turn out to be
the key question if more state and local tax agencies
assert RICO claims against vendors for undercollecting sales/use taxes from consumers.
ENDNOTES
1
2
3
4
5
6
7
8
9
10
11
12
13
14
Anza, 547 US 451.
Hemi Group, 130 SCt 983.
RICO was enacted as Part IX of the Organized Crime Control Act of 1970, (P.L. 91452), 91st Cong., 2d Sess., and codified as
18 U.S.C. §§1961–1968.
Russello, 464 US 16; Cappetto, 502 F2d
1351 (7th Cir. 1974).
31A Am. Jur. 2d, Extortion §107 (2002).
18 U.S.C. §1961(1)(B).
18 U.S.C. §1961(5).
18 U.S.C. §1964(c) (emphasis added).
Anza, 547 US 451, 453 (2006).
Id. at 454.
Id.
Id. It should be noted that all the facts presented in the Supreme Court’s Anza opinion
(and the Hemi Group opinion discussed
later in this article) were taken from Ideal’s
complaint because the Supreme Court
was addressing the defendants’ motion to
dismiss Ideal’s complaint. It is possible, of
course, that the defendants’ conduct was
not actually as bad as portrayed in Ideal’s
complaint.
Id.
Id.
15
16
17
18
19
20
21
22
23
24
25
26
27
28
29
30
31
32
33
34
35
36
Id. at 455.
Id., quoting Anza, 373 F3d 251, 263.
Id.
Holmes, 503 US 258.
Anza, 547 US at 456 and 457, quoting
Holmes, 503 US at 265–266 and 268.
Anza, 547 US at 456.
Holmes, 503 US at 271.
Anza, 547 US at 457, quoting Sedima,
S.P.R.L, 473 US 479.
Anza, 547 US at 458.
Id. at 460.
Hemi Group, 130 SCt 983.
Id. at 986.
N.Y Tax Law §471(2).
Jenkins Act, 15 U.S.C. §§375–378.
15 U.S.C. §377 (providing that a violation
of the Jenkins Act may be punished as a
misdemeanor with a fine of up to $1,000
and up to six months of imprisonment).
Hemi Group, 130 SCt 983 at 987.
Id.
Id.
Id.
Id. at 988.
Id.
Id. at 989, quoting Holmes, 503 US at 271.
37
38
39
40
41
42
43
44
45
46
47
48
49
50
51
Citations omitted.
Hemi Group, 130 SCt at 989.
Id. at 990.
Id. (emphasis in original).
Id. at 994.
Id. at 990.
Id. at 994.
Id. at 995.
Id. at 997–998 (Breyer, J. dissenting).
Id.
Id. at 1000.
Id.
Id.
Compare Michigan Department of Treasury
v. Fawaz, No. 86-1809, 1988 WL 44736
(6th Cir. 1988) (holding that tax revenue
is not RICO “property” lest district courts
become “collection agencies for unpaid
state taxes”), with Illinois Department of
Revenue v. Phillips, 771 F2d 312 (7th Cir.
1985) (“reluctantly” holding that “a state’s
Department of Revenue may file suit in federal court for treble damages under [RICO]
against a retailer who files fraudulent state
sales tax returns”).
Id. at 1000–01.
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