United States v. 4,432 Mastercases of Cigarettes

FOR PUBLICATION
UNITED STATES COURT OF APPEALS
FOR THE NINTH CIRCUIT
UNITED STATES OF AMERICA, 
Plaintiff-Appellant,
INTRIGUE TRADING, INC., No. 04-55354

Claimant-Appellee, D.C. No.
v. CV-01-10113-FMC
4,432 MASTERCASES OF CIGARETTES,
More or Less,
Defendant.

UNITED STATES OF AMERICA, 
Plaintiff-Appellee,
INTRIGUE TRADING, INC., No. 04-55356

Claimant-Appellant, D.C. No.
v. CV-01-10113-FMC
4,432 MASTERCASES OF CIGARETTES,
More or Less,
Defendant.

UNITED STATES OF AMERICA, 
Plaintiff-Appellant,
INTRIGUE TRADING, INC., No. 04-56350

Claimant-Appellee, D.C. No.
v. CV-01-10113-FMC
4,432 MASTERCASES OF CIGARETTES, OPINION
More or Less,
Defendant.

6015
6016 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
Appeal from the United States District Court
for the Central District of California
Florence Marie Cooper, District Judge, Presiding
Argued and Submitted
November 16, 2005—Pasadena, California
Filed June 2, 2006
Before: Procter Hug, Jr. and Kim McLane Wardlaw,
Circuit Judges, and James K. Singleton,* District Judge.
Opinion by Judge Wardlaw
*The Honorable James K. Singleton, Senior United States District
Judge for the District of Alaska, sitting by designation.
6020 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
COUNSEL
Brian M. Hoffstadt, Assistant United States Attorney, and Pio
S. Kim, Assistant United States Attorney, Los Angeles, Cali-
fornia, argued the case and were on the briefs for the
appellants/cross-appellees.
Eric Honig, Law Office of Eric Honig, Marina del Rey, Cali-
fornia, argued the case and was on the briefs for the
appellees/cross-appellants.
Dennis Eckhart and Peter M. Williams, Office of the Attorney
General, were on the briefs for amicus curiae California
Board of Equalization.
OPINION
WARDLAW, Circuit Judge:
This appeal and cross-appeal arise from the search and sei-
zure by the United States Customs Service of over 44 million
cigarettes, contained in 4,432 mastercases, for nonpayment of
California cigarette taxes. The appeals require us to determine
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6021
the extent of immunity from state and federal regulatory and
taxing power that businesses can expect when they operate in
foreign trade zones. We hold that an importer of goods des-
tined for domestic consumption is not exempt from state
excise taxes and administrative searches by federal Customs
officials simply because it stores its merchandise in a foreign
trade zone.
I. FACTS AND PROCEDURAL HISTORY
Between 1998 and 2000, Intrigue Trading, Inc.
(“Intrigue”), a California corporation, was licensed by the
Bureau of Alcohol, Tobacco, and Firearms to import gray
market cigarettes into the United States for domestic sale. The
term “gray market cigarettes” refers to both American-made
exported cigarettes that are re-imported into the United States,
as well as American brands of cigarettes manufactured abroad
for sale in foreign markets but then imported into the United
States.1 Until the year 2000, importing gray market cigarettes
was legal, as was their sale in California. See Tariff Suspen-
sion and Trade Act of 2000, Pub. L. No. 106-476, tit. IV,
§ 4002 (effective as amended Nov. 9, 2000, at 26 U.S.C.
§ 5754) (banning importation of previously exported tobacco
products); Act of May 5, 2000, S.B. 1038, § 1, Cal. Legis.
Serv. 18 (codified as amended at Cal. Rev. & Tax. Code
§ 30163) (making illegal in California the importation of ciga-
rettes in violation of 26 U.S.C. § 5754, and the importation by
third parties of American-branded cigarettes manufactured
abroad). Throughout most of the period of Intrigue’s opera-
tions, however, California law required cigarette distributors
either to obtain a state distributor’s license or to pay use taxes
on cigarettes placed into storage.
1
Collier, Shannon, Rill & Scott, PLLC, Memorandum to NACS, Ques-
tions and Answers Relating to Gray Market Cigarettes (Sept. 10, 1999),
available at http://www.nacsonline.com/NACS/Resource/Government/
gray_market_cigs_091099.htm.
6022 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
Intrigue is ninety percent owned by Andy Lee, who is also
the majority shareholder of two other corporations that dealt
in gray market cigarettes, National Trade Industry, Inc.
(“NTI”) and Ampac, Inc. (“Ampac”). The companies were
similarly structured and shared storage facilities, but each
company served a particular purpose. For instance, only NTI
was licensed to sell cigarettes in California. The companies
are separately incorporated.
Between 1998 and April 2001, Intrigue regularly stored
gray market cigarettes, including the 4,432 mastercases at
issue here, in a storage space rented under Ampac’s name at
the Port Services Foreign Trade Zone in Carson, California.
Foreign trade zones (“FTZs”) are discrete areas located adja-
cent to ports of entry and authorized by Congress to receive
preferential treatment under United States customs laws.
BMW Mfg. Corp. v. United States, 241 F.3d 1357, 1359 n.1
(Fed. Cir. 2001). Merchandise from foreign countries stored
within an FTZ is not subject to United States customs duties
so long as it remains in the FTZ. 19 U.S.C. § 81c. Congress
thus allows international shippers to use American ports as a
duty-free way station in international commerce. Companies
operating within FTZs are also permitted to manipulate or
alter these foreign goods (by repackaging, breaking up,
assembling, sorting, mixing with other foreign or domestic
parts, etc.) before reshipment abroad, without incurring Cus-
toms duties unless they are entered into the United States for
sale. Id. In addition, domestic merchants may use FTZs as a
holding area for eventual exports, or to store “domestic sta-
tus” merchandise, imported goods on which Customs duties
have already been paid. See 19 C.F.R. §§ 146.43; 146.44.
Intrigue’s mastercases of cigarettes were “domestic status”
goods.2
2
More information on the establishment and regulation of FTZs can
be found at United States Customs & Border Protection, Foreign Trade
Zones Manual, http://www.cbp.gov/xp/cgov/toolbox/publications/
manuals_handbooks/, and United States Customs & Border Protection,
About Foreign-Trade Zones & Contact Info, http://www.cbp.gov/xp/cgov/
import/cargo_contr ol/ftz/about_ftz.xml.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6023
Intrigue purchased the 4,432 mastercases of Marlboro
brand cigarettes between August 2000 and January 2001 from
three different companies that had imported them through
Miami, Florida. Importation documents indicated that the cig-
arettes were manufactured in Switzerland. They had passed
through Customs and all duties were paid. From Miami,
Intrigue shipped the cigarettes to the Carson Port Services
FTZ in California, where they were placed in storage for a
planned eventual sale to LPC, Inc., a Missouri-based com-
pany doing business under the name DirtCheapCigarettes-
.com. This transaction never occurred because the United
States Customs Service seized the cigarettes.
Customs Service agents began searching FTZs in the Los
Angeles and Long Beach area in early April 2001 as part of
an investigation into counterfeit and contraband cigarettes
they suspected were being stored there. Customs Inspector
Rudolfo Villacana visited the Carson FTZ on April 3 or 4,
2001, but was informed by Zone Operator John Yeskel that
there were no cigarettes on-site. A day or two later, additional
Customs Service agents visited the Carson FTZ and a differ-
ent zone employee, in response to the agents’ questioning, led
them to Intrigue’s space. There, they found a fenced-in,
locked storage area covered with black tarp that obscured the
contents of the pallets. Zone employees did not have a key to
the storage space, nor could they locate documents detailing
Intrigue’s admissions and removals of cigarettes from the
FTZ. When the Customs inspectors threatened to cut the lock,
an Intrigue employee, Nick Choi, was summoned. He had a
key to the space and opened it for the inspectors to enter. Dur-
ing this initial search, the inspectors found mastercases of cig-
arettes wrapped in opaque black plastic. This combination of
circumstances made one senior Customs inspector “very
suspicious” of the nature of the cigarettes.
Customs Service officials returned to the FTZ again on
April 5 and seized twelve sample cartons of cigarettes for test-
ing. The next day, April 6, four officials at a Customs ware-
6024 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
house performed a series of field tests on the cigarettes. Those
tests indicated that the cigarettes were “likely counterfeit,”
“possibly counterfeit,” or at least “appeared to be counterfeit.”
Based on the field test results and the suspicious circum-
stances of the cigarettes’ storage, the Customs Service
decided to seize all the cigarettes in Intrigue’s storage area
and move them to a secure Customs warehouse.
The following Monday, April 9, 2001, Customs Specialist
Trevor Rudalevige performed another test on packs of ciga-
rettes from the sample cartons. The results of this second test
(the “Rudalevige test”) were inconclusive. Officer Rudalevige
recommended forwarding some of the samples to Phillip Mor-
ris for further analysis. That same day, Customs officials
began a detailed, week-long inventory of the cigarettes. On
April 10, in the course of the inventory, agents found two
boxes of cigarettes that bore Customs notations indicating that
they had previously been denied importation into the United
States. Sometime between April 10 and April 17, Customs
officials also discovered evidence of country-of-origin viola-
tions: some of the inventoried cigarettes were not from Swit-
zerland, as Intrigue had claimed, but rather from the Czech
Republic, Germany, Holland, and Malaysia.
Phillip Morris responded to the Customs Service’s inquiry
on April 19. Its tests established that the cigarettes in fact
were not counterfeit, but it confirmed that three of the four
cartons it reviewed were incorrectly labeled as manufactured
in Switzerland. The Customs Service retained control of the
cigarettes, asserting that it now had probable cause to believe
that a large number of the cigarettes were imported in viola-
tion of country-of-origin rules or imported despite having
been previously denied entry. All but 408 mastercases ulti-
mately were sold at a court-ordered interlocutory sale in Octo-
ber 2002 for $450,000. The estimated domestic market value
of the 4,432 mastercases of cigarettes was between $1.7 mil-
lion and $5.5 million.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6025
In December 2001, the United States filed this civil forfei-
ture complaint against the cigarettes as goods entered into the
country in violation of law. See 19 U.S.C. § 1595a. The
United States initially alleged only country-of-origin and
unlawful importation violations but amended its complaint in
December 2002 to add charges under the Contraband Ciga-
rette Trafficking Act (“CCTA”), 18 U.S.C. § 2341 et seq. The
CCTA claim alleged that the cigarettes could be seized
because they were “found” in California without bearing “evi-
dence of the payment of applicable State cigarette taxes.” 18
U.S.C. §§ 2341, 2344.
Intrigue moved to suppress the cigarettes as fruits of an ille-
gal search and seizure in violation of the Fourth Amendment.
The district court denied the suppression motion, holding that
“there is no legitimate expectation of privacy in imported
merchandise located in [an FTZ],” and that “imports released
from Customs’ custody may still be subject to Customs sam-
pling or additional examination after they are released.”
After the government withdrew five of its eight original
claims, the parties filed cross-motions for summary judgment.
The district court denied summary judgment to Intrigue on the
country-of-origin and unlawful importation claims but granted
summary judgment in its favor on the CCTA claim. The dis-
trict court held that California cigarette taxes were not due on
Intrigue’s mastercases because such taxes are preempted by a
provision of the Foreign Trade Zones Act (“FTZ Act”) that
prohibits the imposition of state and local ad valorem taxes
against goods stored in FTZs. See 19 U.S.C. § 81o(e). It con-
cluded that California’s imposition of a tax on cigarettes des-
tined for sale in another state “transform[s] a tax on the sale
or distribution of cigarettes in California into an ad valorem
property tax.”
The parties entered into a consent judgment in December
2003. In return for the government’s agreement to drop its
remaining country-of-origin claims, Intrigue agreed that the
6026 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
government preserved its right to appeal the CCTA judgment.
In turn, Intrigue preserved its right to appeal the denial of its
motion to suppress. Thereafter, the district court awarded
Intrigue $491,000 in attorney fees. The government appeals
that award, arguing only that if we reverse the grant of sum-
mary judgment on the CCTA claim, Intrigue will not be a
“prevailing party” and the fee award should be vacated. We
consolidated these timely appeals.
II. MOTION TO SUPPRESS
We review the denial of a motion to suppress de novo, see
United States v. Willis, 431 F.3d 709, 713 n.3 (9th Cir. 2005),
although we accept the district court’s underlying findings of
fact in the absence of clear error, see id. We hold that the dis-
trict court properly denied Intrigue’s motion to suppress the
4,432 mastercases of cigarettes as fruits of an illegal search
and seizure.
Intrigue argues that the warrantless search of its locked
cage and sealed cigarette cases on April 4 or 5, 2001, and the
related seizure of twelve sample cartons of cigarettes for test-
ing, violated the Fourth Amendment. It further contends that
the United States lacked probable cause when it seized all
4,432 mastercases of cigarettes on April 6. Lastly, Intrigue
contends that the government’s continuing retention of the
mastercases after the inconclusive Rudalevige test on April 9
was unconstitutional, because any probable cause that may
have arisen at earlier points in the Customs Service investiga-
tion dissipated at the conclusion of the second, inconclusive
test.
A. Initial Search
It is undisputed that Customs agents searched Intrigue’s
storage area within the Port Services FTZ and seized twelve
sample cartons of cigarettes without a warrant. We conclude,
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6027
however, that this initial search and sampling was a constitu-
tional administrative search.3
[1] As a general rule, searches and seizures violate the
Fourth Amendment unless they are based on probable cause
and executed pursuant to a valid search warrant. See Katz v.
United States, 389 U.S. 347, 357 (1967). The protection
against unreasonable searches and seizures extends to com-
mercial premises, see Tucson Woman’s Clinic v. Eden, 379
F.3d 531, 550 (9th Cir. 2004), and it also applies in the con-
text of civil forfeiture proceedings, see One 1958 Plymouth
Sedan v. Pennsylvania, 380 U.S. 693, 696 (1965).
[2] The United States Supreme Court, however, has carved
out a limited number of contexts within which a warrant is not
required. Administrative searches of “closely regulated”
industries are one such exception and may be conducted with-
out a warrant, so long as they meet certain standards of rea-
sonableness. See, e.g., New York v. Burger, 482 U.S. 691,
702-03 (1987). We do not require a warrant in such situations
because “the federal regulatory presence is sufficiently com-
prehensive and defined that the owner of the commercial
property cannot help but be aware that his property will be
subject to periodic inspections undertaken for specific pur-
poses.” Donovan v. Dewey, 452 U.S. 594, 600 (1981). Indus-
tries deemed “closely regulated” under this doctrine include
liquor distribution, Colonnade Catering Corp. v. United
States, 397 U.S. 72 (1970); sale of sporting weapons, United
States v. Biswell, 406 U.S. 311, 316 (1972); stone quarrying
and mining, Donovan, 452 U.S. at 606; and automobile junk-
yards, Burger, 482 U.S. at 703-04; United States v. Argent
Chem. Labs., Inc., 93 F.3d 572, 575 (9th Cir. 1996) (veteri-
nary drugs); United States v. V-1 Oil Co., 63 F.3d 909, 911
(9th Cir. 1995) (transportation of hazardous materials). The
3
Intrigue does not independently contest the constitutional validity of
the sampling. Therefore, we consider the initial search and sampling
together.
6028 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
Supreme Court, in Burger, upheld a warrantless search and
inspection regime for automobile junkyards that allowed
police officers to inspect not only a company’s business
records but also the cars and auto parts stored on its property.
In reaching its determination that automobile junkyards are
closely regulated, the Court focused on “the pervasiveness
and regularity of the federal regulation and the effect of such
regulation upon an owner’s expectation of privacy.” Burger,
482 U.S. at 701 (internal quotation marks omitted); see also
Tucson Woman’s Clinic, 379 F.3d at 550.
The United States contends that FTZs are a “closely regu-
lated” industry and that Customs Service regulations suffi-
ciently authorize warrantless searches. As a result, those who
store property within FTZs have a diminished expectation of
privacy and adequate notice of the likelihood of warrantless
inspections. We agree that, given the closely regulated nature
of FTZs, a warrant is not required, so long as the search is
otherwise reasonable.
Although storing cigarettes in an FTZ is more akin to a
“business activity” than an “industry,” we have previously
approved administrative searches premised on the “closely
regulated” nature of a particular commercial activity, even
where the entire industry might not be tightly regulated. In V-
1 Oil, we evaluated the constitutionality of a warrantless
search provision in the federal Hazardous Materials Transpor-
tation Act. Although V-1 acknowledged that it was regulated
by 331 different state and federal agencies, the company
argued that it could not be subject to administrative searches
because it was not part of the railroad industry or any other
industry that could be deemed “closely regulated.” V-1 Oil, 63
F.3d at 911. We disagreed, focusing not on the industry to
which V-1 belonged but rather on the closely regulated nature
of its business activity: “V-1 has a reduced expectation of pri-
vacy because it transports, sells, and stores propane gas.” Id.;
see also United States v. Gonsalves, 435 F.3d 64, 67 (1st Cir.
2006) (holding that “[w]hatever the status of the [medical]
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6029
profession in the abstract,” the manufacture, storage, and dis-
pensation of pharmaceuticals is closely regulated). Therefore,
we need only decide whether the activity of storing merchan-
dise in an FTZ is closely regulated.
[3] We first note that the regulation of FTZs is pervasive.
An FTZ may be established only with the consent and autho-
rization of a federal agency, the Foreign Trade Zones Board.
19 U.S.C. § 81b. Entities seeking to admit merchandise to an
FTZ must submit an application and numerous supporting
documents, 19 C.F.R. § 146.32; they must do so again if they
wish to manipulate, manufacture, exhibit, or destroy their
merchandise, id. § 146.52; and they must gain permission yet
again from the Port Director to remove their merchandise
from a zone, id. § 146.71. Each of these steps is tightly con-
trolled, requires documentation, and is subject to Customs
supervision. Detailed regulations also address safety condi-
tions, security, and recordkeeping responsibilities within
FTZs. See id. §§ 146.4, 146.21-26; 15 C.F.R. § 400.46. Most
importantly, the statute and accompanying regulations clearly
authorize the Customs Service to monitor, search and inspect
items stored therein. Customs Service officers have primary
responsibility for policing the admission of foreign goods into
customs territory. See 19 U.S.C. § 81d; 19 C.F.R. § 146.3.
FTZ operators must “permit any Customs officer access to a
zone,” 19 C.F.R. § 146.4(b), and once on-site, those officers
may examine any merchandise stored in an FTZ so long as
“the examination is considered necessary to facilitate the
proper administration of any law, regulation, or instruction
which Customs is authorized to enforce.” Id. § 146.10. The
Foreign Trade Zones Manual, which serves as a comprehen-
sive guidebook for zone users and operators, further empha-
sizes the breadth of the Customs Service’s authority:
To properly enforce the laws and regulations, Cus-
toms officers are given considerable authority to
conduct searches, arrest suspected violators, and
seize merchandise and articles. . . . Merchandise may
6030 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
be seized by any Customs officer who has reason-
able cause to believe that any law or regulation
enforced by Customs has been violated, by reason of
which the merchandise has become subject to sei-
zure or forfeiture.
United States Customs & Border Protection, Foreign Trade
Zones Manual 197-98 (2003) (citing 19 C.F.R. § 162.21).4
These numerous and specific regulations should have pro-
vided sufficient notice to Intrigue “that its property and
records will from time to time be inspected by government
officials,” V-1 Oil, 63 F.3d at 912 (internal quotation marks
omitted), and that its goods might be subject to occasional
sampling.
[4] The duration and regularity of this scheme also supports
our conclusion that the commercial activity of storing mer-
chandise in FTZs is “closely regulated.” Customs supervision
has been part of the scheme for FTZs since they were con-
ceived in 1934. Section 146.10, which enables warrantless
searches of merchandise in FTZs by Customs Service agents
has been in place since 1969,5 and was not modified during
the period of Intrigue’s operations. Moreover, the Carson FTZ
zone operator testified that Customs officials inspected
Intrigue’s inventory and manipulation activity “two to three
times a year” during the thirty months Intrigue rented space
there.
Intrigue correctly points out that “domestic status” goods,
like Intrigue’s cigarettes, which have come through Customs
4
http://www.cbp.gov/~xp/cgov/toolbox/publications/manuals_
handbooks/.
5
From 1970 to 1984, a regulatory provision with almost identical lan-
guage was located at 19 C.F.R. § 146.6. See 49 Fed. Reg. 28,855, 28,878
(July 17, 1984); 35 Fed. Reg. 9262, 9263 (June 13, 1970). Between 1969
and 1970, the provision authorizing Customs Service examinations of
merchandise in FTZs could be found at 19 C.F.R. § 30.6. See 34 Fed. Reg.
4957 (Mar. 7, 1969).
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6031
and on which duties have been paid, are subject to less scru-
tiny and regulation than goods in international transshipment
or domestic goods bound for export. That fact, however, does
not relieve Intrigue from most of the FTZ regulations, includ-
ing especially the search provisions of sections 146.4 and
146.10. In Burger, the Supreme Court held that a regulatory
scheme far less comprehensive and enacted more recently
nonetheless rendered automobile junkyards “closely regulat-
ed.” The New York statute, less than five years old when the
warrantless inspection occurred, Burger, 482 U.S. at 705, was
comparatively limited in scope. It required junkyard owners
to obtain a license and keep records of vehicles coming into
and leaving their possession, and allowed police officers to
examine the records or the vehicles during normal business
hours. Id. at 694 nn.1 & 3. The regulatory regime for “domes-
tic status” goods in FTZs is at least as pervasive and well-
established.
Next, we disagree with Intrigue that the FTZ regulations
fail to clearly authorize warrantless searches. In support of its
contention, Intrigue cites a statutory provision detailing obli-
gations for Customs Service officers:
If any officer or person authorized to make searches
and seizures has probable cause to believe that—(A)
any merchandise . . . which has been otherwise
brought into the United States unlawfully . . . is in
any dwelling house, store, or other building or place,
he may make application, under oath, to any [autho-
rized judge], and shall thereupon be entitled to a
warrant to enter . . . and to search for and seize such
merchandise or other article described in the warrant.
19 U.S.C. § 1595(a)(1). In United States v. Mendoza-Ortiz,
262 F.3d 882, 885 (9th Cir. 2001) (per curiam) we held that
19 U.S.C. § 1595(a) required Customs officers to obtain a
warrant to search a private warehouse, even though they had
probable cause to believe drugs were located on the site. 262
6032 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
F.3d at 885. An FTZ, however, is not private property. It is
a heavily regulated, government created and controlled loca-
tion at which only particular commercial activity, defined by
the government, is allowed. Business activities that otherwise
would be private fall under extensive federal control and Cus-
toms supervision when they are conducted in FTZs. Our deci-
sion in Mendoza-Ortiz turned on the fact that the search
involved private activity at a private facility, one that typically
would be shielded from government intervention. Indeed, in
Mendoza-Ortiz, we were careful to note that the officers could
have intercepted the drugs at the border or at any place en
route to the private warehouse without a warrant; it was only
“[a]t the moment the planks were unloaded into Space G” that
a warrant became necessary. Id. Furthermore, the specific
statute and regulations giving Customs search and inspection
power over merchandise in FTZs, 19 U.S.C. § 81d; 19 C.F.R.
§§ 146.3, 146.4, 146.10, trump the more general statute
requiring a warrant in the majority of situations, 19 U.S.C.
§ 1595. See Bonneville Power Admin. v. FERC, 422 F.3d 908,
916 (9th Cir. 2005) (describing the “basic principle of statu-
tory construction . . . that the specific prevails over the gener-
al”).
We also reject Intrigue’s similar argument that the statute
and regulations do not authorize a “warrantless search and
seizure” because they do not use those particular terms. Nei-
ther of the statutes held to authorize administrative searches
in Burger and V-1 Oil used the words “warrantless search and
seizure.” In Burger, the statute allowed “any police officer
. . . to examine” vehicle records, vehicles, and vehicle parts.
482 U.S. at 694 n.1 (citing N.Y. Veh. & Traf. Law § 415-a5
(McKinney 1986)). In V-1 Oil, the statute empowered “any
officer, employee, or agent to enter upon, inspect, and exam-
ine, at reasonable times and in a reasonable manner, the
records and properties of persons [relating to transportation or
shipment of hazardous materials].” 63 F.3d at 912 (citing 49
U.S.C. § 1808(c) (1988)). We decline to hold that the words
“warrantless search and seizure” are talismanic.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6033
[5] Even though we conclude that the FTZ regulations
clearly authorize inspections without warrants and that the
storage of goods in FTZs is “closely regulated” commercial
activity, to satisfy the Fourth Amendment, the administrative
search must also be reasonable. In Burger, the Supreme Court
held that a warrantless search is nevertheless reasonable if
three conditions are satisfied: 1) the underlying regulatory
scheme advances a substantial government interest; 2) war-
rantless inspections are “necessary” to further the regulatory
scheme; and 3) the inspection program provides a “constitu-
tionally adequate substitute for a warrant.” Burger, 482 U.S.
at 702-03 (internal quotation marks omitted); V-1 Oil, 63 F.3d
at 911. Each of these conditions is met here.
[6] First, the underlying regulatory scheme for FTZs
advances the government’s substantial interest in ensuring
that duties are paid, that consumers are protected from coun-
terfeit or adulterated cigarettes, and that country-of-origin
labels are reviewed. Second, it is plain that a warrantless
inspection program is necessary to further the regulatory
scheme, because here, as in V-1 Oil, advance notice of inspec-
tions could permit those violating American customs laws “to
temporarily correct violations and frustrate enforcement
efforts.” 63 F.3d at 912. This is particularly the case for so-
called “domestic status” goods, like Intrigue’s cigarettes,
because they can be moved in and out of FTZs without per-
mits. See 19 C.F.R. § 146.71.
[7] Third, the FTZ regulations provide a “constitutionally
adequate substitute for a warrant.” As the Supreme Court
explained in Burger,
the regulatory statute must perform the two basic
functions of a warrant: it must advise the owner of
the commercial premises that the search is being
made pursuant to the law and has a properly defined
scope, and it must limit the discretion of the inspect-
ing officers.
6034 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
482 U.S. at 703; see also Argent Chem. Labs., 93 F.3d at 576.
The FTZ regulations provide adequate notice that inspections
will occur in accordance with the law. 19 C.F.R. sections
146.4 and 146.10 identify who will be performing the
searches (“any Customs officer”), the object of the search
(“merchandise”), the timing of searches (“at the time of
admission to a zone, or at any time thereafter”), and the cir-
cumstances under which searches are allowed (only as “nec-
essary to facilitate the proper administration of any law,
regulation, or instruction which Customs is authorized to
enforce”). Furthermore, the record indicates that Customs
officials inspected Intrigue’s storage area two to three times
per year. The “certainty and regularity” of these searches indi-
cate that Intrigue was aware that its property would be subject
to lawful periodic inspections. See Burger, 482 U.S. at 703;
Donovan, 452 U.S. at 600.
Although the FTZ regulations place few limits on the dis-
cretion of searching officers, we are confident that they are
sufficient. The Supreme Court’s opinion in Burger instructs
that we should review the scheme’s limitation on officer dis-
cretion in context. The Burger Court upheld the New York
vehicle-dismantling statute, even though it did not indicate
how often searches would occur, provided virtually no limita-
tion on the scope of the search within automobile junkyards,
and failed to “provide[ ] limits or guidance on the selection”
of businesses for inspection. 482 U.S. at 722-23 (Brennan, J.,
dissenting). The Court instead relied on the restriction of the
searches to certain types of businesses and certain types of
items that could be inspected. Id. at 711 (majority opinion).
The same basic limitations are present in the FTZ statute and
regulations.
Moreover, because companies operating in FTZs do not
have the expectation of privacy one would have in a private
home or business, we require fewer safeguards to satisfy us
that the search is reasonable. In Rush v. Obledo, we struck
down as unconstitutional a regulation that enabled warrantless
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6035
searches of family-home day care facilities because it failed
to place any limits on the time of searches, the area that could
be searched, or the regularity of searches. 756 F.2d 713, 721
(9th Cir. 1985). The overbroad search provision would have
authorized searching anywhere within day care providers’ pri-
vate residences, even in areas unconnected to the provision of
day care, at any time of day. As we explained, constitutionally
adequate searches “must be directly connected with the envi-
ronment the Legislature seeks to regulate—i.e., the areas of
the home used by children when the children are present.” Id.Similarly, in Argent Chemical Laboratories, we concluded
that a statute authorizing warrantless FDA searches of veteri-
nary drug manufacturers was reasonable, because notice was
furnished at the time, the statute limited the scope of what
could be inspected and what could be seized, and most sei-
zures required approval from a district office before items
could be seized. 93 F.3d at 576-77. In that case, allowing
searches of pharmaceutical plants without those limitations
would have far exceeded the FDA’s interest in regulating the
“safety and effectiveness” of veterinary drugs. Id. at 576.
Here, unlike the situation in Rush, the area in which searches
are authorized (FTZs) is the same area subject to regulation.
There is minimal risk that Customs Service officers will go
beyond the scope prescribed by the FTZ regulations, because
virtually all the activities that take place within an FTZ fall
within the scope of Customs inspection and monitoring. See
A.T. Cross Co. v. Sunil Trading Corp., 467 F. Supp. 47, 51
(S.D.N.Y. 1979).
Finally, we note the settled expectations that surround the
use and control of FTZs. It is long-established and well under-
stood that, in exchange for the benefits afforded to users of
FTZs, those who store merchandise in FTZs must keep Cus-
toms apprised of their activities and afford Customs officials
the right to inspect their operations. Intrigue was well aware
of this trade-off when it decided to run its operations out of
an FTZ.
6036 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
[8] We therefore hold that the Customs Service searches
authorized by the FTZ regulations are “directly connected
with the environment the Legislature seeks to regulate,” Rush,
756 F.2d at 721, and the FTZ regulatory scheme provides a
constitutionally adequate substitute for a warrant. The war-
rantless search of Intrigue’s storage area and the initial sam-
pling constituted a valid and reasonable administrative search.
B. Probable Cause for Seizure of all 4,432 Mastercases
[9] We next conclude that, under the “totality of the cir-
cumstances” confronting the Customs Service, probable cause
supported the government’s seizure of all 4,432 mastercases
of cigarettes on April 6, 2001. As we held in United States v.
One 1978 Piper Cherokee Aircraft:
The standard for probable cause in forfeiture pro-
ceedings resembles that required to support a search
warrant. The determination of probable cause is
based upon a “totality of the circumstances” test, and
the government’s evidence must be more than that
which gives rise to a mere suspicion, although it
need not rise to the level of prima facie proof.
91 F.3d 1204, 1208 (9th Cir. 1996) (citations omitted).6 Thus,
probable cause to seize property does not require absolute cer-
tainty, but only a “fair probability” that the property is contra-
band. See United States v. Sokolow, 490 U.S. 1, 7 (1989);
United States v. Alaimalo, 313 F.3d 1188, 1193 (9th Cir.
2002). Because judicial constructs like “probable cause” and
“reasonable suspicion” are “fluid concepts that take their sub-
stantive content from the particular contexts in which the
standards are being assessed,” Ornelas v. United States, 517
6
Although the United States points to regulatory provisions indicating
that the appropriate standard might be the lesser “reasonable cause”
instead of “probable cause,” because we find that probable cause existed,
we do not reach this issue.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6037
U.S. 690, 696 (1996), we give reasonable deference to the
inferences and judgments of experienced agents in the field,
see id. at 700; United States v. $129,727.00 U.S. Currency,
129 F.3d 486, 489 (9th Cir. 1997).
The Customs Service agents encountered the following
combination of circumstances when they inspected the Carson
FTZ. The FTZ operator initially indicated that there were no
cigarettes on-site, but an FTZ employee queried the next day
led Customs officers to Intrigue’s cigarette storage space. The
FTZ operator could not immediately produce records for
Intrigue’s cigarettes, records the zone operator generally
maintains and must have “readily available for Customs
review.” 19 C.F.R. § 146.4(d). The FTZ employees did not
have a key to the storage area, and an Intrigue employee
showed up with a key only when Customs was preparing to
break the lock. Intrigue’s storage cage was covered with a
black tarp and the pallets inside were wrapped in opaque
black plastic, both elements that Senior Customs Inspector
Rudolfo Villacana testified he had not encountered before.
When an Intrigue employee showed up, he was not initially
able to produce any documentation that duties had been paid
on the cigarettes. The next day, Customs inspectors (accom-
panied by a government chemist) performed field tests on
sample packs of Intrigue’s cigarettes, which indicated that the
cigarettes were “likely counterfeit,” “possibly counterfeit,” or
at least “appeared to be counterfeit.” Inspector Villacana
declared that this combination of factors caused him to be
“very suspicious that the mastercases were entered illegally.”
Although Intrigue now offers explanations for each of these
circumstances, at the time, an objectively reasonable Customs
officer could properly conclude that probable cause existed
for seizure. See Ornelas, 517 U.S. at 696.
[10] Intrigue’s contention that the field test results were not
sufficiently certain to support a finding of probable cause
lacks merit. The Supreme Court has upheld probable cause
determinations that are based on ambiguous or inconclusive
6038 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
field tests, even in the absence of other evidence supporting
a finding of probable cause. For example, in Illinois v. Cabal-
les, the Supreme Court upheld the search of a car based on a
dog-sniff detection of narcotics, 543 U.S. 405, 410 (2005),
even though evidence in the record indicated that Illinois drug
dogs return false positives anywhere from 12.5% to 60% of
the time, id. at 412 (Souter, J., dissenting). Here, moreover,
the “likely counterfeit”/“possibly counterfeit” field test results
did not stand alone. They were one of a combination of cir-
cumstances giving rise to probable cause for the seizure.
[11] Once Customs officers had probable cause to believe
the merchandise was counterfeit, it was within their discretion
to seize all of the cigarettes. “Property may be seized, if avail-
able, by any Customs officer who has reasonable cause to
believe that any law or regulation enforced by the Customs
Service has been violated, by reason of which the property
has become subject to seizure or forfeiture.” 19 C.F.R.
§ 162.21(a). Similarly, 19 C.F.R. § 162.11 allows Customs
officers “lawfully on any premises and [ ] able to identify
merchandise which has been imported contrary to law [to]
seize such merchandise without a warrant.” We therefore hold
that the seizure was based on probable cause and statutorily
authorized.7
C. Retention of the Mastercases
Intrigue contends that even if probable cause existed for the
seizure of the 4,432 mastercases, the Customs Service lacked
probable cause to retain them once the Rudalevige test
returned inconclusive results on April 9, 2001. Intrigue is cor-
rect as a matter of law that when there ceases to be probable
cause for continuing a search or seizure, it must end immedi-
ately. See Jacobs v. City of Chicago, 215 F.3d 758, 772 (7th
7
We do not reach the United States’ alternative argument that it was jus-
tified in seizing all the mastercases without a warrant because of exigent
circumstances.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6039
Cir. 2000). However, because Intrigue mischaracterizes the
import of the Rudalevige test, we cannot agree that probable
cause evaporated with its failure to reach conclusive results.
Probable cause existed at each step in the Customs Service’s
investigation of the cigarettes.
By April 19, 2001, when Phillip Morris definitively estab-
lished that the cigarettes were not counterfeit, the Customs
Service had developed new bases for probable cause, as its
inventory of the cigarettes had turned up country-of-origin
and re-importation violations. Intrigue does not dispute this
fact but instead contends that there was a one-day break in
probable cause, between the completion of the inconclusive
Rudalevige test on April 9 and the discovery of previously-
denied cigarettes on April 10. It contends that once the
Rudalevige test failed to establish with certainty that the ciga-
rettes were counterfeit, the inventory should have stopped and
the cigarettes should have been returned to Intrigue.
We disagree. Intrigue asserts that the Rudalevige test
“proved wrong” the initial field tests indicating that the ciga-
rettes might be counterfeit. That is not correct. The
Rudalevige test report identifies a number of characteristics of
the tested cigarettes that were similar to genuine gray market
cigarettes, including “the filter holes, the glue, the printing,
the cigarette packing, the control number, the folding pattern
of the foil, the lack of fluorescence, the placement of the
material codes, and the statement ‘Blend of USA.’ ” How-
ever, the report also notes that the lack of codes on the filter
paper, the misspelling of Switzerland on two of the sample
packs, and a number of “signs of poor quality control,” such
as uneven folds, poorly aligned bands on the filters, and loose
tobacco in the packages, raised red flags about their genuine-
ness. Due to these potentially troubling factors, the
Rudalevige test report stated, “We cannot draw any conclu-
sion based on these observations.” The report recommended
sending the cigarettes to Phillip Morris for further testing. The
Rudalevige test results did not dispute, or even address, the
6040 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
findings of the initial field tests. They merely indicated that
additional testing would be required to determine with any
certainty whether the cigarettes were counterfeit or not.
[12] The inconclusive Rudalevige test did not extinguish
probable cause. Indeed, the test report noted several additional
factors that would have supported a probable cause determi-
nation. Rudalevige found these elements troubling enough
that he sought further testing from the supposed manufacturer.
Furthermore, virtually all of the factors that had generated
support for the initial seizure, including the suspicious cir-
cumstances of Intrigue’s storage and the field tests indicating
that the cigarettes were “possibly” or “likely” counterfeit,
remained in play and supported probable cause.
Intrigue points to one out-of-circuit district court case to
support its argument that an inconclusive test result nullifies
probable cause to continue seizure. See United States v. One
DLO Model A/C, 30.06 Mach. Gun, 904 F. Supp. 622 (N.D.
Ohio 1995). One DLO Model dealt with the arcane issue of
whether a 28 U.S.C. § 2465 “certificate of reasonable cause,”
which exempts federal officials from liability after a judicial
determination that the government wrongly seized property
for forfeiture, should be predicated on the appropriateness of
the initial evidentiary seizure or alternatively on the appropri-
ateness of the “warrant for the arrest of property” that enables
forfeiture. Id. at 636, 638. The claimant had been charged
with federal weapons violations and the case turned only on
whether or not he had forged documents transferring owner-
ship of the weapons to himself. Id. at 641-42. However, dur-
ing the investigation that followed the initial seizure, neither
the government’s nor the claimant’s forensic experts found
anything that would indicate that the claimant had forged the
documents. Id. at 642 (noting that “[t]here was no longer any
evidence linking [claimant] to the forgery . . . rising above
mere suspicion”). Therefore, the court held, while the govern-
ment might have had probable cause to seize the weapons
pursuant to the search warrant, that probable cause had evapo-
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6041
rated by the time the government filed the complaint to forfeit
them. Id.[13] Even if One DLO Model were controlling authority, it
would not compel the result Intrigue seeks. In One DLO
Model, the forensic tests exonerated the claimant. The
Rudalevige test, on the other hand, produced findings both
inculpatory and exculpatory. In addition, the Customs Service
still possessed evidence from the initial field test that the ciga-
rettes might indeed be counterfeit. Intrigue was not exoner-
ated on the counterfeiting charge until April 19, days after the
new violations were discovered. Cf. One DLO Model, 904 F.
Supp. at 642 (noting that the exonerating evidence was pos-
sessed by government officials “well before the filing of the
complaint and the subsequent seizure”). The probable cause
that existed on April 6 did not lapse before the additional
bases for probable cause (for violating other importation laws)
arose on April 10.
III. CONTRABAND CIGARETTES TRAFFICKING ACT
Next we consider the United States’ cross-appeal, challeng-
ing the district court’s decision that the Contraband Cigarettes
Trafficking Act (“CCTA”) was inapplicable to Intrigue’s cig-
arettes because the California cigarette tax is an ad valorem
tax, expressly precluded by the FTZ Act from application to
goods stored in FTZs. We agree with the United States that
the district court misapprehended the nature of the California
cigarette tax.
This dispute arises at the intersection of two federal laws:
the CCTA, which authorizes the federal forfeiture of ciga-
rettes found in a state without the appropriate state tax stamps,
and the FTZ Act, which specifically limits the application of
state and local taxes. The CCTA makes it unlawful “for any
person knowingly to ship, transport, receive, possess, sell, dis-
tribute, or purchase contraband cigarettes,” 18 U.S.C.
§ 2342(a), and allows the federal government to seize and for-
6042 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
feit such cigarettes, id. § 2344(c). The CCTA, at the time of
the seizure, defined “contraband cigarettes” as
a quantity in excess of 60,000 cigarettes, which bear
no evidence of the payment of applicable State ciga-
rette taxes in the State where such cigarettes are
found, . . . in the possession of any person other than
[a permitted manufacturer, common carrier, entity
licensed to pay cigarette taxes by other means, or
federal or state agency or employee].
Id. § 2341(2) (2005).8 Federal liability under the CCTA is
thus predicated on the non-payment of state taxes or any other
violation of an applicable state cigarette tax law. See United
States v. Gord, 77 F.3d 1192, 1193 (9th Cir. 1996). The FTZ
Act, however, prohibits state and local governments from
imposing ad valorem taxes on tangible personal property held
in FTZs. 19 U.S.C. § 81o(e). Therefore, whether Intrigue’s
cigarettes were contraband and seizable for failure to pay the
California tax turns on whether California’s cigarette tax is
properly characterized as an ad valorem tax or an excise tax.
A. Nature of Cigarette Tax
[14] We hold, contrary to the district court, that the Califor-
nia cigarette tax is an excise tax, not expressly precluded by
the FTZ Act. 19 U.S.C. § 81o(e). An ad valorem tax is
defined by its method for calculating the size of the tax. Ad
valorem is the Latin phrase for “according to value,” and it
describes a tax the size of which directly correlates to the
value of the item taxed. See Quinault Indian Nation v. Grays
8
A 2006 amendment to the CCTA lowered the threshold for contraband
cigarettes from 60,000 to 10,000 cigarettes. See USA Patriot Improvement
& Reauthorization Act of 2005, Pub. L. 109-177, § 121(a)(1), 120 Stat.
192, 221 (2006). Congress also amended the CCTA to include non-
payment of local taxes as a source of liability. Id. § 121(b)(6), 120 Stat.
at 222. Neither of these changes affects our analysis.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6043
Harbor County, 310 F.3d 645, 647 n.1 (9th Cir. 2002). The
most common example of an ad valorem tax is the local prop-
erty tax. An excise tax, by contrast, is one “imposed on the
performance of an act . . . or the enjoyment of a privilege.”
Id. at 651 (citing Black’s Law Dictionary 563 (6th ed. 1990))
(alteration in original). The quintessential excise tax in our
country is the sales tax. An excise tax, because it is based on
a particular transaction or activity, can be imposed only once
per act, whereas an ad valorem property tax can be imposed
annually, as is typical of property taxes.
[15] The California cigarette tax makes no reference to
value, instead calculating the tax solely according to the num-
ber of cigarettes distributed within the state. The statute pro-
vides: “Every distributor shall pay a tax upon his or her
distributions of cigarettes at the rate of . . . [$0.006 per ciga-
rette distributed] on and after 12:01 a.m. on January 1, 1994.”
Cal. Rev. & Tax. Code § 30101. The statute also imposes sep-
arate taxes of $0.0125 per cigarette to fund community health
education and disease research, id. §§ 30121-30129, and
$0.025 per cigarette to fund early child development pro-
grams, id. § 30131. Distributors, therefore, owe the state 4.35
cents per cigarette, whether the cigarettes are very expensive
Dunhills, mid-priced Salems, or lower-priced Dorals.
[16] On its face, the California tax is not imposed ad
valorem, but rather is an excise tax. See Cal. State Bd. of
Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9, 10-11
(1986) (repeatedly describing California’s cigarette distribu-
tion tax as an excise tax). The tax does not in any way corre-
late to value, and it is imposed only once, when the cigarettes
are “distributed.” See Cal. Rev. & Tax. Code § 30008 (defin-
ing “distribution”). Intrigue argues, however, that imposing
the per-cigarette tax on the act of storing the cigarettes in Cal-
ifornia for future sale “transform[s]” the tax into an ad
valorem tax. We reject the notion that a tax calculated in a
manner other than ad valorem can be an ad valorem tax.
6044 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
That conclusion is consistent with our case law and the lan-
guage of the California statute. We have previously deter-
mined that a tax on the storage of goods for out-of-state sale
may nonetheless be an excise tax. Mount Tivy Winery v.
Lewis, 134 F.2d 120 (9th Cir. 1943). In Mount Tivy, a
California-based winery challenged a federal tax on wine
stored for future sale as an unconstitutional direct tax. Id. at
122. The outcome of the case similarly turned on whether the
tax at issue was an excise tax or an ad valorem property tax.
After reviewing the Supreme Court’s definition of an excise
tax, “a tax imposed upon a particular use of property or the
exercise of a single power over property incidental to owner-
ship,” we held that the liquor tax was indeed an excise tax. Id.
at 124-25 (quoting Bromley v. McCaughn, 280 U.S. 124, 136
(1929)).
[17] The language of California’s cigarette tax, which is
imposed on “the exercise of any right or power” over ciga-
rettes, Cal. Rev. & Tax. Code § 30009, parrots the terminol-
ogy of Mount Tivy and of the “use taxes” common throughout
the United States. See, e.g., Cal. Rev. & Tax. Code § 6201;
Mo. Rev. Stat. § 144.610; Tex. Tax Code Ann. § 151.011; Vt.
Stat. Ann. tit. 32, § 9701(15). As B.E. Witkin explains in his
foundational treatise on California law, the use tax is an “ex-
cise tax imposed . . . on the storage, use or other consumption
in [a] state of tangible personal property.” Witkin, Summary
of California Law, Vol. 9, § 305 (9th ed. 1989). We therefore
conclude that a tax on cigarettes placed in storage does not
transform an excise tax into an ad valorem tax.
B. CCTA Application to Cigarettes Stored for
Out-of-State Sale
Intrigue also argues that even if the California cigarette tax
is an excise tax, by its terms, it does not reach the storage of
cigarettes to be sold in another state. Because the district court
found that the California tax was an ad valorem tax, it did not
reach this question. We reject Intrigue’s argument and hold
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6045
that California law requires unlicensed distributors like
Intrigue to pay cigarette taxes on cigarettes stored in Califor-
nia for out-of-state sale.
The plain language of the statute compels this reasoning.
See United States v. Daas, 198 F.3d 1167, 1174 (9th Cir.
1999) (“The first step in ascertaining congressional intent is
to look to the plain language of the statute.”). We follow the
plain meaning of a statute unless it is ambiguous or its appli-
cation would lead to unreasonable results. Id.[18] California taxes “distributions” of cigarettes, requiring
“distributors” to either affix a pre-paid stamp on the pack of
cigarettes or make direct payment to the state. Cal. Rev. &
Tax. Code §§ 30101, 30161. “Distribution” is defined as
either the “sale of [previously] untaxed cigarettes or tobacco
products in this state,” or “[t]he use or consumption of
untaxed cigarettes or tobacco products in this state.” Id.§ 30008. In turn, “use or consumption” is defined as
the exercise of any right or power over cigarettes or
tobacco products incident to the ownership thereof,
other than the sale of the cigarettes or tobacco prod-
ucts or the keeping or retention thereof by a licensed
distributor for the purpose of sale.
Id. § 30009.
We agree with the United States that California’s use of the
term “the exercise of any right or power over cigarettes . . .
incident to [ ] ownership” is intended to include the act of
storage. A number of courts and statutes have recognized or
approved this interpretation. For example, in D.H. Holmes
Co. v. McNamara, the United States Supreme Court upheld
against a Commerce Clause challenge a Louisiana use tax that
defined “use” as “the exercise of any right or power over tan-
gible personal property incident to ownership, and includes
consumption, distribution, and storage.” 486 U.S. 24, 27
6046 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
(1988). Similarly, in Mount Tivy Winery, we held that the “ac-
tivity of holding wine intended for sale” could be taxed under
a statute that imposed taxes on the “exercise of a single power
over property incidental to ownership.” 134 F.2d at 124
(internal quotation marks omitted). See also Dept. of Revenue
of State of N.M. v. United States, 408 F.2d 574, 576-77 (10th
Cir. 1969) (describing New Mexico excise tax which defined
“use” as “exercise of any right or power over tangible per-
sonal property incident to . . . ownership” and laid the tax on
“personal property stored, used or consumed in state”); Texas
Co. v. Siefried, 147 P.2d 837, 844 (Wyo. 1944) (holding that
a tax on “use” reached the storage and withdrawal from stor-
age of gasoline).
[19] Given the definition of “distribution” in § 30008, we
cannot accept Intrigue’s argument that the California statute
is intended to tax only sales of cigarettes. Because California
explicitly defined the term in the statute, we need not resort
to dictionary definitions of “distribution.” See Konop v.
Hawaiian Airlines, Inc., 302 F.3d 868, 880 (9th Cir. 2002).
California’s definition of “distribution” includes not only the
“sale of untaxed cigarettes in this state” but also the use and
consumption of cigarettes. All other exercises of right or
power over cigarettes, including storage, fall within this sec-
ond definition of “distribution.” Cal. Rev. & Tax. Code
§ 30009. Intrigue’s proposed interpretation would write out of
the statute the second basis for § 30008 tax liability, some-
thing we must seek to avoid. See Miller v. United States, 363
F.3d 999, 1008 (9th Cir. 2004) (“Courts must aspire to give
meaning to every word of a legislative enactment.”).
Our interpretation of the California statute is reinforced by
the exception built into § 30009. California explicitly exempts
from its definition of “use or consumption” the “keeping or
retention [of cigarettes] by a licensed distributor for the pur-
pose of sale.” Cal. Rev. & Tax. Code § 30009 (emphasis
added). Thus, “use or consumption” would have to include
the keeping or retention for sale of cigarettes by an unlicensed
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6047
distributor. Intrigue concedes it was not a licensed distributor
within the state of California at the time of seizure; therefore,
it would not qualify for the exception.
The legislative history of the “use or consumption” defini-
tion in § 30009 further confirms our conclusion that the Cali-
fornia cigarette tax reaches Intrigue’s cigarettes. The
California legislature, in 1998, amended the exception to
§ 30009 for “the keeping or retention thereof for the purpose
of sale” to add the words “by a licensed distributor.” Act of
Aug. 28, 1998, ch. 420, § 4, 1998 Cal. Legis Serv. 420 (S.B.
2230) (West). The legislative history of Senate Bill 2230,
which enacted this amendment, indicates that California
intended to make unlicensed distributors liable for taxes on
any unstamped cigarettes found in their possession. It reads:
“This bill . . . revises the definition of ‘use and consumption’
to allow for the imposition of the tax on inventory seized
while in the possession of an unlicensed distributor . . . .” Cal-
ifornia Bill Analysis, Assembly Committee, 1997-1998 Regu-
lar Session, Senate Bill 2230 (Aug. 5, 1998). Elsewhere, the
legislative history offers a more thorough explanation, envi-
sioning the precise scenario presented in this case:
Unlicensed distributors have been known to obtain
cigarettes and sell them directly to consumers with-
out the cigarette tax having been paid. However,
under current law, unlicensed distributors cannot be
held liable for the cigarette tax on unstamped ciga-
rettes that are seized because they can claim that a
large portion of their inventory is being held for pur-
poses of resale, rather than for direct sale to consum-
ers.
This bill would draw a distinction between
licensed and unlicensed distributors. Unlicensed dis-
tributors would be liable for tax on all unstamped
cigarette or tobacco products found in their posses-
sion. The presumption would be that the unlicensed
6048 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
distributor is really in the business of selling ciga-
rettes to consumers. Licensed distributors would not
be liable for unstamped products in their possession.
California Bill Analysis, Senate Floor, 1997-1998 Regular
Session, Senate Bill 2230 (May 6, 1998).
Unlicensed distributors, like Intrigue, were precisely the
target of the 1998 amendment. Indeed, Intrigue’s owner Andy
Lee testified that Intrigue kept the cigarettes in an FTZ
because he believed that, by doing so, Intrigue could avoid
paying California taxes. The clear implication of the statute,
as amended in 1998, is that an unlicensed distributor like
Intrigue owes taxes when it stores cigarettes within the state
of California.
The distinction between licensed and unlicensed cigarette
distributors also has practical merit. As the United States, and
amicus California Board of Equalization (“BOE”), contend,
the statutory scheme intentionally creates an “either/or” sys-
tem that balances fairness to distributors with the government
interest in combating cigarette smuggling. A distributor may
choose to obtain a license, in which case it must report the
cigarettes it brings into or ships out of state; or it may remain
unlicensed but face liability for taxes on any cigarettes found
in its possession, even if it intends to ship the cigarettes else-
where. Contrary to Intrigue’s representations at oral argu-
ment, licensed distributors are required to file regular reports
with the California BOE detailing their inventories (both tax-
stamped and unstamped), any distributions or sales, and the
tax they believe is due. See Cal. Rev. & Tax. Code
§§ 30182(a), 30183(a); Cal. Code Regs. tit. 18, §§ 4022,
4031. Licensed distributors must also keep a record of all cig-
arettes stored on a particular site, a record which must be
made available to the BOE upon request. See Cal. Rev. &
Tax. Code § 30454; Cal. Code Regs. tit. 18, § 4026. Taxing
the cigarettes of unlicensed distributors is a precautionary
measure to limit the state’s financial risk that a distributor will
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6049
claim cigarettes are destined for export, only to sell them at
the lower, pre-tax price within California.
Intrigue argues that our reading of the statute would enable
a system of double taxation, because it would be taxed for
storing cigarettes in California and then taxed again when it
sells the cigarettes in another state. We find this argument
unavailing. First, any risk of double taxation would apply
only to the small number of distributors who neglect to obtain
a California license. Second, section 30008 makes clear that
the “use or consumption” tax is due not for the sale, but rather
for the privilege of storing the cigarettes within the state, a
right that imposes on the state the reciprocal burdens of pro-
tecting and monitoring the cigarettes stored there. Third, Cali-
fornia provides a legal procedure for companies like Intrigue,
when they actually sell the cigarettes in another state, to peti-
tion the California BOE for a credit or refund of taxes on
those cigarettes sold out of state. See Cal. Rev. & Tax. Code
§§ 30176.1, 30178.1-2. In that way, the specter of double tax-
ation can be avoided altogether.
Intrigue also asserts that, because the legislative history of
the CCTA indicates that its purpose was to combat organized
crime and bootlegging, Intrigue, as a legitimate business,
should not be subject to the law. Even assuming, as we do,
that Intrigue is a legitimate business, this argument lacks
merit. The explicit language of the statute does not limit the
CCTA to organized crime or bootlegging operations; any
knowing possession, sale, or receipt of contraband cigarettes
exposes one to liability under the statute. See 18 U.S.C.
§ 2342(a). Furthermore, it defies logic that, under a penal stat-
ute, a defendant who violated clear statutory provisions could
escape punishment merely because his particular class of
criminal offenders was unmentioned in the authorizing stat-
ute’s legislative history.
For similar reasons, we reject Intrigue’s argument that the
CCTA is inapplicable to Intrigue because its operations were
6050 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
closely monitored by state and federal officials and because
the United States offered no proof that it “evaded” tax laws.
The CCTA does not require an intentional evasion of the law
to prompt forfeiture of cigarettes. Compare 18 U.S.C.
§ 2344(a), (b) (requiring “knowing” violations to trigger crim-
inal punishments), with id. § 2344(c) (“Any contraband ciga-
rettes involved in any violation of the provisions of this
chapter shall be subject to seizure and forfeiture.”). We have
previously held that the federal government may seize and
forfeit cigarettes whenever they are found in a state in viola-
tion of that state’s tax laws, regardless of the possessor’s
intent to evade state tax laws or its intent to distribute the cig-
arettes in another state. Grey Poplars, Inc. v. 1,371,100
Assorted Brands of Cigarettes, 282 F.3d 1175, 1178 (9th Cir.
2002). This case is no exception.
Finally, we reject as factually unfounded Intrigue’s argu-
ment that it owed no taxes because the cigarettes were in
“joint possession” with NTI, Intrigue’s sister corporation that
was licensed to distribute cigarettes in California. Even
Intrigue’s CEO Andy Lee conceded during his deposition
that, “Well, legally . . . Intrigue Trading, Inc. owned the prod-
uct,” agreeing that Intrigue “always had possession” of the
cigarettes once they entered the FTZ. Intrigue offered no evi-
dence indicating that it conveyed joint ownership rights over
the cigarettes to NTI in a written document, as California law
requires to establish joint ownership. See Donovan v. Dono-
van, 223 Cal. App. 2d 691, 697 (1964) (citing California
Trust Co. v. Bennett, 33 Cal. 2d 694, 697 (1949)). Nor did
NTI demonstrate “possession” by exerting any control over or
taking any action with regard to the 4,432 mastercases, other
than paying the rent on the storage space where they were
located. See Black’s Law Dictionary 1201 (8th ed. 2004)
(defining possession as “the exercise of dominion over prop-
erty” or “[t]he right under which one may exercise control
over something to the exclusion of all others”). Furthermore,
there is no indication in the record that NTI reported the
acquisition of the cigarettes to the California BOE, as it would
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6051
have been required to do as a licensed distributor that believed
itself to be a rightful owner. See Cal. Code Regs. tit. 18,
§§ 4022, 4031. NTI does not cite to, and we cannot find, any
authority suggesting that shared storage space creates this
form of joint ownership or allows a company like Intrigue to
piggyback on the license of a separate and independent corpo-
ration. Because there was no “joint possession” of the ciga-
rettes, we need not decide whether “joint possession” by a
licensed distributor could exempt a co-possessing unlicensed
distributor from the California tax.
C. Preemption
Having concluded that California’s cigarette tax applies to
the storage of cigarettes in California destined for future out-
of-state sale, we must reach the broader question whether the
FTZ Act preempts all state and local efforts to impose taxes
on merchandise stored within FTZs. We hold that it does not.
[20] Federal law may preempt state law under the Suprem-
acy Clause of the Constitution. U.S. Const., art. VI, cl. 2.
“Preemption can occur in one of three ways: express pre-
emption by statute, occupation of the field, or conflict
between state and federal regulation.” Air Conditioning &
Refrigeration Inst. v. Energy Res. Conservation & Dev.
Comm’n, 410 F.3d 492, 495 (9th Cir.), petition for cert. filed,
74 U.S.L.W. (Sept. 12, 2005) (No. 05-331). In any consider-
ation of preemption, we view the purpose and intent of Con-
gress as the “ultimate touchstone,” Cipollone v. Liggett
Group, Inc., 505 U.S. 504, 516 (1992), and presume that Con-
gress did not intend to supplant state law, Air Conditioning &
Refrigeration Inst., 410 F.3d at 496 (citing Medtronic, Inc. v.
Lohr, 518 U.S. 470, 485 (1996)).
[21] The FTZ Act does not expressly preempt all state reg-
ulation and taxation. “Express preemption occurs when Con-
gress enacts a statute that expressly commands that state law
on the particular subject is displaced.” Gadda v. Ashcroft, 377
6052 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
F.3d 934, 944 (9th Cir. 2004). The only express preemption
in the FTZ Act is the prohibition on state and local ad valorem
taxes. 19 U.S.C. § 81o(e). We view this limited statement of
preemption through the canon of statutory construction inclu-
sio unius est exclusio alterius, indicating Congress’s lack of
interest in more broadly limiting state power. See Metro-
phones Telecomm., Inc. v. Global Crossing Telecomm., Inc.,
423 F.3d 1056, 1072 (9th Cir. 2005); United States v. Ter-
rence, 132 F.3d 1291, 1294 (9th Cir. 1997); see also 3M
Health Care Ltd. v. Grant, 908 F.2d 918, 920-21 (11th Cir.
1990) (concluding that the FTZ Act does not expressly pre-
empt all state power over FTZs).
[22] Nor do we find that Congress has expressed an intent
to occupy the entire field of activity around FTZs, such that
state law should be preempted, or that state regulation creates
an irreconcilable conflict with the FTZ Act and federal regu-
lation. As the Supreme Court has explained:
[Field preemption] may be inferred from a scheme of
federal regulation . . . so pervasive as to make rea-
sonable the inference that Congress left no room for
the States to supplement it, or where an Act of Con-
gress touch[es] a field in which the federal interest
is so dominant that the federal system will be
assumed to preclude enforcement of state laws on
the same subject.
English v. Gen. Elec. Co., 496 U.S. 72, 79 (1990) (internal
quotation marks omitted). State law may also be preempted
where it would be impossible for a party to comply with both
state and federal requirements or where the state law would
“stand[ ] as an obstacle to the accomplishment and execution
of the full purposes and objectives of Congress.” Id. (internal
quotation marks omitted).
As discussed above, supra at pp. 6029-30, there is signifi-
cant federal control over the “field” of FTZs. However, sev-
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6053
eral factors militate against applying field preemption in this
arena. First, the federal regulations implementing the CCTA,
which Congress enacted forty-five years after the passage of
the FTZ Act, envision that certain activities within an FTZ
would remain subject to state cigarette taxes. Those regula-
tions exempt from the CCTA both cigarettes in the stream of
international commerce and domestic cigarettes destined for
export, but not those like Intrigue’s that have been entered
into the United States for domestic consumption. In defining
parties exempted from the CCTA, 27 C.F.R. § 646.143includes “[a]ny person who is . . . (g) Operating within a
foreign-trade zone established under 19 U.S.C., section 81b,
when the cigarettes involved have been entered into the zone
[pending foreign export] or, in respect to foreign cigarettes,
have been admitted into the zone but have not been entered
in the United States.” The 4,432 mastercases at issue here do
not fall within either of these exceptions. They had already
passed through Customs in Miami, so they were no longer
“foreign cigarettes,” nor were they destined for foreign
export. By implication then, the federal government has
acknowledged that states retain taxing authority over some
products within FTZs. Otherwise, the regulation would have
exempted every person operating within an FTZ.
Second, the Supreme Court itself has indicated that the fed-
eral interest in domestic-bound goods stored in FTZs is not so
dominant as to completely preclude state activity in this field.
In a pair of cases from the 1980s, Xerox Corp. v. Harris
County, Texas, 459 U.S. 145 (1982) and R.J. Reynolds
Tobacco Co. v. Durham County, North Carolina, 479 U.S.
130 (1986), the Supreme Court addressed this same preemp-
tion question in the context of customs-bonded warehouses.
Customs-bonded warehouses (“CBWs”) and FTZs are func-
tionally quite similar and often treated as one and the same.
An importer may store goods in a CBW, just as he would in
an FTZ, without paying duties until the products leave the
CBW for domestic consumption. Also like in an FTZ, goods
in the stream of foreign commerce may be temporarily stored
6054 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
in a CBW, and may be manipulated, combined, or re-
packaged before being sent abroad again, all without paying
American duties. CBWs, however, need not be located adja-
cent to ports; the importer must pay a bond for the right to
store merchandise in a CBW, which he gets back when the
products are re-exported or domestic duties are paid; and the
duties owed on goods that have been manipulated are set at
the time of withdrawal from the warehouse (whereas an
importer using an FTZ can choose whether to pay duties on
the imported raw goods or the manipulated final product).9
From a customs perspective though, FTZs and CBWs are far
more alike than they are different.
In Xerox, the Supreme Court struck down an ad valorem
property tax the Texas county sought to impose on copiers
that had been built in Mexico and were being stored in a
CBW until they could be sent to distributors in Latin Amer-
ica. The Court’s reasoning combined elements of field pre-
emption and conflict preemption. The Court first pointed to
“the continuous control and supervision” of Customs officials
over CBWs and the “[d]etailed regulations control[ling] every
aspect of the manner in which the warehouses are to be oper-
ated,” 459 U.S. at 150, which demonstrated a “pervasive” sys-
tem of regulation, id. at 153. Then, after reviewing the
legislative history of the Warehousing Act of 1846 and Con-
gress’s purpose in establishing CBWs, the Court also held that
the state tax would “offset substantially the very benefits Con-
gress intended to confer” in creating CBWs. Id.[23] Four years later, in R.J. Reynolds, the Supreme Court
clarified its preemption reasoning. The R.J. Reynolds Court
held that a county was not preempted from imposing an ad
valorem tax on foreign tobacco that R.J. Reynolds was storing
and aging in CBWs, because Reynolds ultimately intended to
9
United States Customs & Border Protection, U.S. Customs Bonded
Warehouse (2001), www.cbp.gov/linkhandler/cgov/toolbox/publications/
trade/bon ded_ 20wh2.ctt/bonded_20wh2.doc.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6055
enter the tobacco into the United States for domestic manu-
facturing and consumption. At the beginning of its analysis,
the Court explicitly pulled back from any “field preemptive”
language in Xerox. R.J. Reynolds, 479 U.S. at 142 (“[The
Xerox Court] limited its pre-emption analysis to whether taxa-
tion would impede the congressional objectives.”); see also
id. at 149 (“[T]he [customs] regulations, while detailed,
appear to contemplate some concurrent state regulation and,
arguably, even state taxation.”). Then, after reviewing the
same legislative history of the Warehousing Act of 1846 that
it had examined in Xerox, the Court found that local taxes on
imports destined for domestic consumption would not
obstruct congressional objectives. Id. at 142-43 & n.10, 148.
Seven years later, the Court reiterated that Congress had not
occupied the entire field of taxation with regard to CBWs:
[W]e have not held that state taxation of goods in
bonded warehouses is pre-empted by Congress’
intent to occupy the field of bonded warehouse regu-
lation. In fact, in R.J. Reynolds we specifically held
that the bonded warehouse statutes and regulations
did not evidence such a purpose.
Itel Containers Int’l Corp. v. Huddleston, 507 U.S. 60, 71
(1993). For the same reasons, we hold that state regulation
and taxation of goods in FTZs are not prohibited under the
doctrine of “field preemption.”
[24] With respect to conflict preemption, we read Xerox
and R.J. Reynolds as drawing a clear distinction between
goods within the stream of international commerce and goods
destined for domestic consumption. In the former case, where
federal duties are not even due, local taxation would inhibit
the use of American ports; in the latter, federal duties will
already be required and an exemption from local taxation
would provide a windfall for foreign manufacturers that
domestic manufacturers do not receive, hardly the aim of the
statute. R.J. Reynolds, 479 U.S. at 144-46. As the Court
6056 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
explained: “There is no indication in the legislative history of
the Warehousing Act that one of the goals of the [CBW] sys-
tem was to benefit imported goods in their competition with
domestic goods.” Id. at 145 n.14. Therefore, “[p]ermitting
imposition of a tax . . . leads to equal treatment for imported
and domestic tobacco.” Id. at 147. This bifurcated approach
to CBWs, treating goods differently depending on whether
they are in foreign transshipment or destined for domestic
consumption, is also consistent with the approach taken by
California’s courts. See Am. Smelting & Refining Co. v.
County of Contra Costa, 271 Cal. App. 2d 437, 474 (1969)
(concluding that “the laws and regulations relating specifi-
cally to [CBWs] do not . . . confer an immunity from a non-
discriminatory tax on property of foreign origin being
processed for domestic consumption”).
The reasoning of the R.J. Reynolds opinion applies with
equal force to FTZs. Intrigue cites dicta in a footnote to the
R.J. Reynolds opinion to argue that the holding of that case
should not extend from CBWs to FTZs. In its opinion at foot-
note 22, the R.J. Reynolds Court sought to explain why the
then-recently passed 19 U.S.C. § 81o(e), which explicitly pro-
hibited ad valorem taxes in FTZs, did not preclude it from
approving an ad valorem tax in a CBW. After noting the lim-
ited scope of the 1984 amendment that inserted § 81o(e), the
Court explained:
Foreign trade zones are valued because they actually
promote domestic industry and create jobs [citing
129 Cong. Rec. 14501 (1983) (remarks of Sen. Bent-
sen)]. Given that the taxation of goods in foreign
trade zones could arguably harm domestic industry,
while exemption from taxation of the imported
goods in the present case would serve to discriminate
against domestic producers, there appears to be a
sufficient justification for the difference in state tax-
ation with respect to these customs entities.
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6057
R.J. Reynolds, 479 U.S. at 151 n.22. We are unpersuaded
that the dicta in footnote 22 compels the result Intrigue seeks.
We conclude that, outside the context of ad valorem taxes
(which Congress expressly prohibited for property in FTZs),
there is no reason to treat the two facilities differently. FTZs
and CBWs serve almost identical roles in our system of inter-
state commerce. The legislative history of the Warehousing
Act of 1846, which enabled the creation of customs-bonded
warehouses, indicates that the aim of CBWs was twofold:
granting flexibility to importers as to when they pay their
duties (duties need only be paid when the goods are removed
from the CBW and entered into the United States); and
encouraging shippers to utilize American ports as a way sta-
tion in international commerce (because duties are never
required if the goods are re-exported directly from the CBW).
See R.J. Reynolds, 479 U.S. at 145-47 & nn.14-16 (providing
detailed analysis of legislative history of Warehousing Act).
Foreign trade zones were created by Congress for the same
basic purposes. Although there is no formal legislative history
for the 1934 FTZ Act, its stated purpose was “to expedite and
encourage foreign commerce, and for other purposes.” Act of
June 18, 1934, 48 Stat. 998, 998. Congress’s twin aims in
passing the FTZ Act, further encouraging use of United States
ports in the flow of interstate commerce and enabling manipu-
lation of foreign goods before they are imported, are apparent
from the face of the statute. See 19 U.S.C. § 81c(a); see also
3M Health Care, 908 F.2d at 921 (“[T]he goal of the [FTZ
Act] is straightforward—to facilitate the use of U.S. ports for
the transshipment of goods in foreign commerce.”); Fountain
v. New Orleans Pub. Serv., Inc., 387 F.2d 343, 344 (5th Cir.
1967) (“The purpose of [FTZs] is to expedite and encourage
foreign commerce . . . without subjecting same to the customs
laws of the United States.”); A.T. Cross, 467 F. Supp. at 50(suggesting that the purpose of the FTZ Act is to allow Amer-
ican workers and companies to “profit from the breaking
6058 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
down, repacking and relabeling of the goods” temporarily
stored there).
Moreover, the reasons given in R.J. Reynolds for distin-
guishing FTZs from CBWs are inapplicable here. When
goods like cigarettes are bound for domestic use already, as
Intrigue’s were, exempting them from state cigarette taxes
because they are stored in an FTZ will not adversely affect
domestic industry or job creation. Indeed, like the local
tobacco growers in R.J. Reynolds, domestic cigarette distribu-
tors would be disadvantaged by allowing Intrigue a tax
exemption not afforded to unlicensed distributors storing cig-
arettes elsewhere in California. Allowing California to impose
its tax on domestic-bound cigarettes would lead to “equal
treatment for imported and domestic” cigarettes. R.J. Reyn-
olds, 479 U.S. at 147.
The Eleventh Circuit similarly has found the Xerox/R.J.
Reynolds dichotomy relevant in the context of FTZs. See 3M
Health Care, 908 F.2d 918. The court in 3M Health Care
blocked Florida’s effort to apply its Drug and Cosmetic Act
to foreign pharmaceuticals being stored in an FTZ for even-
tual transshipment to Latin American countries. Id. at 919.
Performing a similar preemption analysis, the Eleventh Cir-
cuit held that allowing Florida to regulate products that would
never actually enter the domestic market would “encumber
the ease of transshipment through the zones . . . [and] frus-
trate[ ] the goal of the Foreign Trade Zones Act.” Id. at 921.
In doing so, the Eleventh Circuit relied on the Supreme
Court’s Xerox/R.J. Reynolds distinction between goods that
are in transshipment and those destined for domestic sale. Id.at 922 n.6.
[25] We find distinguishable the state and federal cases
cited by Intrigue that have limited state taxing authority
within FTZs. See Hostetter v. Idlewild Bon Voyage Liquor
Corp., 377 U.S. 324, 333-34 (1964) (holding that New York
lacked power to regulate duty-free liquor shops, which are
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6059
technically FTZs, in airports); McGoldrick v. Gulf Oil Corp.,
309 U.S. 414, 428-29 (1940) (holding that New York did not
have the power to tax oil imported into a customs-bonded
warehouse that was then reprocessed and sold to vessels in
foreign commerce); During v. Valente, 46 N.Y.S.2d 385, 387
(App. Div. 1944) (holding that sale of alcohol in an FTZ “was
not subject to local regulation or tax”). All of these cases
addressed state regulation or taxation of goods that were in
the stream of foreign commerce, as opposed to goods like
Intrigue’s cigarettes that were destined for domestic consump-
tion. Moreover, all of these cases pre-date the Supreme
Court’s opinion in R.J. Reynolds. We believe that, post-R.J.
Reynolds, the operative framework is the transshipment/
domestic consumption dichotomy, and we will straightfor-
wardly follow it. Because Intrigue’s cigarettes were bound for
domestic consumption and there is not “any suggestion that
taxation here would conflict with the central purpose” of our
country’s system of foreign trade zones, R.J. Reynolds, 479
U.S. at 148, we fail to see any conflict between imposition of
the California cigarette tax and the goals of the FTZ Act. That
the CCTA regulations exempt from forfeiture all cigarettes in
an FTZ except for those in the situation presented here
(“domestic status” cigarettes) only confirms the correctness of
this result. 27 C.F.R. § 646.143(g).
[26] We therefore hold that state excise taxes on merchan-
dise stored in FTZs for eventual domestic consumption are
not expressly preempted by federal law. Nor has the federal
scheme for FTZs so occupied the field as to prohibit state tax-
ation. Finally, imposition of California’s cigarette tax does not
create an irreconcilable conflict with the FTZ laws, at least
when the goods taxed are already duty-paid and bound for
domestic consumption.10
10
We do not reach the question of whether a state or local tax imposed
on domestic-bound goods that have not yet been “entered into” the United
States would conflict with the purpose of the FTZ Act.
6060 UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES
IV. ATTORNEYS’ FEES
[27] The district court awarded attorneys’ fees based on its
grant of summary judgment to Intrigue. Because we reverse
that judgment, we vacate the fee award. Baffert v. Cal. Horse
Racing Bd., 332 F.3d 613, 617 (9th Cir. 2003); Lovell v.
Poway Unified Sch. Dist., 90 F.3d 367, 373-74 (9th Cir.
1996).
V. CONCLUSION
California has made the decision to impose its cigarette tax
on unlicensed distributors who store cigarettes within the state
for future sale in another state, including those cigarettes
stored in FTZs. That decision is not preempted by the express
language of the Foreign Trade Zones Act, nor does it conflict
with the general purpose or intent of Congress in establishing
foreign trade zones. Though Intrigue’s motives may have
been pure, and it may simply be the victim of bad legal advice
or a poor gamble on the outcome of unsettled law, Intrigue’s
cigarettes were ultimately found in California without Califor-
nia tax stamps. That was sufficient, under the CCTA, to allow
the federal government to seize and forfeit them.
The storage of goods in foreign trade zones is “closely reg-
ulated,” and Customs officials are empowered by statute to
search and inspect merchandise in foreign trade zones without
a warrant. Customs officials had probable cause to believe
that Intrigue’s cigarettes were counterfeit, and it lawfully
seized them. Probable cause for the seizure never dissipated,
because the Rudalevige test was not conclusive and because,
by the time the cigarettes were demonstrated to be genuine,
the Customs Service had developed probable cause to believe
that the cigarettes otherwise violated importation laws. The
search and seizure both comported with the Fourth Amend-
ment.
We therefore AFFIRM the denial of the motion to sup-
press, REVERSE the grant of summary judgment, VACATE
UNITED STATES v. 4,432 MASTERCASES OF CIGARETTES 6061
the award of attorneys’ fees, and REMAND with instructions
that summary judgment be granted to the United States.