The Long Island store, called the Peace Pipe Smoke Shop, has continued to operate despite the arrest of its owner on charges that he waged a violent campaign against rival tobacco sellers on the Poospatuck Indian Reservation.
Federal agents say the store has grossed as much as $35 million per month selling tax-free cigarettes, enough to make its owner, Rodney Morrison, a millionaire many times over, with Swiss bank accounts and substantial real estate holdings overseas.
The government has taken no action to shut Peace Pipe, but tobacco giant Philip Morris USA decided in December that it would no longer allow wholesalers to supply the store with cigarettes.
The city's lawsuit, filed Friday, claims that Gutlove initially agreed to the restrictions, then secretly evaded them by arranging to have other retailers upstate take shipments on Peace Pipe's behalf.
The city claims that some 44,745 cartons of cigarettes were delivered to the store over three months, including some funneled through fictitious companies. One truckload of cigarettes bound for Peace Pipe was seized by state tax agents on March 12.
A lawyer for the wholesaler said Tuesday that his client had no such secret deal with the store and had reported all its sales lawfully.
"We did not have any knowledge of any arrangement, if there was an arrangement," said the lawyer, Michael Feldberg.
Nonetheless, state and city tax officials informed the company Tuesday that they would take steps to strip it of its license. State law requires wholesalers to disclose the destination of every carton of cigarettes.
City Law Department attorney Eric Proshansky said the suit is part of a larger effort "to end cigarette bootlegging into the city."
The city previously sued seven cigarette wholesalers who do a substantial business with shops on the state's Indian reservations, claiming they improperly failed to collect taxes from shops on tribal land.
That suit has been pending since 2006, and its outcome is uncertain. New York state has traditionally failed to enforce cigarette tax collection on tribal lands, despite state law directing it to do so. Wholesalers have argued that the city, which also taxes cigarettes, can't force them to collect taxes until the state decides how it wishes to handle the issue.
In the federal case against Morrison, prosecutors have accused him of ordering the murder of a rival in 2003, blowing up another competitor's car and robbing a third cigarette dealer. He has been held without bail, even after offering to post $56 million in cash to secure his release.
Morrison is a non-Indian from Brooklyn who gained control of a reservation smoke shop after marrying into the tribe.
His lead attorney, William Murphy, did not return phone and e-mail messages from The Associated Press, but in court he has denied the charges and suggested they were fabricated by his client's enemies. A jury began deliberating in the case last week.
Federal authorities also have charged a manager at the shop with illegally facilitating bulk sales of cigarettes to middlemen who, having avoided paying state taxes, illicitly resell them in other parts of the state. That case is pending.
