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Big tax win in New York court boosts sovereignty

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ALBANY, N.Y. - Shopkeepers on Six Nations territory are breathing easier after a major victory in the New York state courts upholding their sovereign immunity from state sales taxes.

A state appeals court unanimously ruled that the state could not be forced to collect taxes on gasoline and tobacco sold to non-Indians by reservation vendors. The ruling confirms Gov. George Pataki's policy of non-collection adopted in 1997 after violent protests and state police action on the Seneca and Onondaga tribal lands.

The decision effectively ends a long-standing suit that caused deep divisions in the Iroquois Confederacy, and within its member nations, even though the Six Nations wasn't a direct party. The New York Association of Convenience Stores and several non-Indian shops near reservations filed the case against the commissioner of the state Department of Taxation and Finance.

Convenience store owners near Six Nations territory have long complained about "unfair competition" from tax-free tribal stores, and their suit originally tried to compel the state tax men to enforce the department's regulations on reservation sales to non-Indians. In dealing with the suit, New York tribes argued bitterly over whether to make tax compacts with the state or to resist outright.

Although the outcome would seem to vindicate the policy of resistance, tribes reacted with a caution reflecting the deep controversy. The office of Seneca Nation President Duane James Ray said only that its lawyers were still studying the opinion.

Mark Emery, spokesman for the Oneida Nation, observed that the lawsuit was directed against the governor, not the tribes. "The Oneidas, three years ago, tried to forge a tax compact with the governor. The governor walked away from that."

The present ruling also undercuts a bill to limit Internet cigarette sales that awaits the governor's signature. The bill was widely seen as an attack on reservation smoke shops when it passed the Legislature in June. As part of the governor's legislative program, it seemed to some a reversal of his 1997 policy and it threatened to reawaken those passions.

In addition to vindicating Gov. Pataki's surrender to tribal protests, legal experts say the decision is a major recognition of tribal sovereignty. "Oh, it is," said Joseph Crangle, lawyer for Mohawk and Seneca merchants. "It certainly is."

Crangle filed a "friend of the court" brief stating the case for the Iroquois Nations' sovereign immunity from New York state civil law.

This principle dominated the last stages of the lawsuit. Sales tax statutes, said the court, "cannot effectively be enforced without the cooperation of the Indian tribes.

"Because of tribal immunity the retailers cannot be sued for their failure to collect the taxes in question, and state auditors cannot go on the reservations to examine the retailers' records.

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"Additionally, the department (of Taxation and Finance) cannot compel the retailers to attend audits off the reservations or compel production of their books and records for the purpose of assessing taxes."

Because of these sovereign barriers, the court said the state tax department had a "rational basis" for dropping its regulations on reservation sales to non-Indians.

The long and twisty history of this suit is intertwined with divisions in the Six Nations, within and between tribes, that arouse deep emotion. A lower court decided in favor of the convenience stores in 1996. Under this legal pressure, the Pataki administration negotiated tax compacts with several tribal governments. Other nations in the Iroquois Confederacy adamantly refused, citing a long history of sovereign immunity to New York state civil law.

State tax men responded by seizing trucks delivering motor fuel and cigarettes to reservation stores in May 1997. Protesters in the Seneca Nation retaliated by closing the New York State Thruway where it crossed their Cattaraugus territory south of Buffalo. New York State Police entered the reservation to clear the burning tire barricades and put it under virtual occupation. As the protests spread to other reservations, Gov. Pataki flew to Buffalo and suspended the tax regulations.

In light of this dramatic reversal, New York's Court of Appeals, its highest court, sent the case back to the trial court for a rehearing. A new judge said the state could suspend the tax regulations, which by now had been repealed. The convenience stores appealed the loss, and the appellate division on Aug.3 turned them down. Crangle said the 5-0 margin of the ruling effectively ends the case.

Although striking a definite blow for tribal sovereignty, the actual technical grounds for the decision were somewhat narrower. On an earlier round, the appellate court supported the convenience stores, holding that the state's failure to enforce the tax laws amounted to "race-based discrimination." To justify any policy suspected of a racial bias, the state had to pass a very high hurdle of argument.

It was this finding the highest court rejected. It said Indian tribes weren't favored because of race but because they "possess attributes of sovereignty." So the Tax Department had to cross a much lower hurdle, showing only that its forbearance policy had "a rational basis." The high court also noted the sharp change in policy when the regulations were repealed.

The appeals court found plenty of "rational basis," starting with the sovereign protections for Indian retailers. It also referred to the failure of the Tax Department's "extensive negotiations with the tribes."

"The vast majority of the Indian retailers refused to register with the Department," said the decision. "In further efforts to enforce the statute, the state attempted interdiction, i.e., interception of tobacco and motor fuel shipments and seizure of those shipments that were found to be in noncompliance with the tax law.

"That strategy resulted in civil unrest, personal injuries and significant interference with public transportation on the state highways."

The head of the New York Convenience Store Association, Jim Calvin, seized on these words in criticizing the ruling. "I would ask the average New Yorker to ask this question: 'Is it rational to allow certain people to ignore the tax law simply because they threaten violence?'"

The State Tax Department welcomed the outcome. "We're pleased that the court supported our position," said spokesman Marc Carey. "It's a short and sweet decision."