Nov 2 (Reuters) - New York city and state authorities urged a federal judge on Wednesday to impose a fine of $872 million against United Parcel Service for delivering untaxed cigarettes from smoke shops on Indian reservations.

The closing arguments came in a lawsuit over whether UPS illegally shipped more than 683,000 cartons of untaxed cigarettes, mostly from reservation smoke shops. The lawsuit is part of a broader effort by the state to combat smuggling of cigarettes from lower-tax areas.


John Oleske, a lawyer for the state, told U.S. District Judge Katherine Forrest that a stiff penalty was justified because UPS acted with "an entitled sense of disregard" for the law in failing to vet shipments from entities on the reservations with a history of dealing in contraband.

Oleske also argued that a large fine was needed to act as a deterrent for a company that had $4.84 billion in net profit last year. The state and city have brought a similar lawsuit against UPS rival FedEx Corp that is pending.

Lawyers for UPS have said that the state and city made misleading allegations, that the evidence would show it complied with the law and that authorities had mistaken cartons of legally shippable "little cigars" as cigarettes. Lawyers for UPS are scheduled to make closing arguments later on Wednesday.

Forrest questioned the state's and city's arguments, including how to reconcile evidence that the bulk of some shipments were cigars instead of cigarettes. She also asked whether the authorities were not "double-counting" by seeking damages for violations of both a 2005 agreement between the state and UPS governing its compliance with cigarette deliveries and a 2010 law creating new regulations for carriers of cigarettes.

"The law allows for the stacking of all of these penalties for all of these violations," Oleske said, arguing the judge should also appoint a monitor to police UPS's compliance. "The court should stack and max out all those penalties."


The deliveries to residences, unlicensed wholesalers and unlicensed retailers were made despite the 2005 agreement between UPS and New York in which the company agreed to stop cigarette shipments to consumers and unlicensed dealers, the lawsuit said. (Reporting by Nathan Layne in New York; Editing by David Gregorio)