(Reuters) - New York state and city authorities sparred with United Parcel Service Inc UPS.N on Wednesday during closing arguments in a trial over whether the world's largest package delivery company should be fined for allegedly delivering untaxed cigarettes from smoke shops on Native-American reservations.

A United Parcel Service (UPS) employee unloads packages from the cargo of an airplane at the Regional Air Hub in Rockford, Illinois, December 9, 2014. REUTERS/Jim Young

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 suit is part of a broader effort by the state to combat smuggling of cigarettes from lower-tax areas.

John Oleske, a lawyer for New York state, urged U.S. District Judge Katherine Forrest in Manhattan to impose an $872 million fine. He said such a steep penalty was justified because the company acted with an “entitled sense of disregard” in failing to vet shipments from entities with a history of dealing in contraband.

Attorneys for UPS countered that no penalty was appropriate because the company had abided by a prior agreement with the state on compliance.

Jamie Levitt, an attorney for UPS, said that if any fine were levied, it should be a small fraction of what the state had proposed.

“The penalties that are sought here are excessive and unconstitutional,” Levitt said.

UPS has denied the allegations. The company said in a statement it is “vigorously” fighting the case and believes the state and city are overreaching.

In addition to financial damages, the lawsuit, which was filed in February 2015, seeks a court-appointed monitor to police compliance.

On Wednesday, Forrest, who will decide the case, said she would consider such a measure cautiously.

“I think a monitor on a corporation is a very big deal,” the judge said. Forrest also 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 “double-counting” by seeking damages for violations of both a 2005 agreement between the state and UPS governing its compliance with cigarette deliveries as well as a 2010 law creating new regulations for carriers of cigarettes.

Oleske said that the law allowed for “stacking” of penalties.

Levitt said that a penalty, if imposed, should at most be a single-digit percentage of the revenues of the shipments in question, estimated at about $1 million a year.

Forrest said she would rule by Dec. 25.

New York state and city have brought a similar lawsuit against UPS rival FedEx Corp FDX.N that is pending.