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Court Issues Another Ban on State Taxes in Tobacco War

New York State has been blocked again from taxing cigarettes sold on Indian reservations.

Associate Justice Jerome C. Gorski of the Appellate Division of the State Supreme Court issued a temporary restraining order (TRO) on Thursday, June 9, preventing the state from collecting taxes on cigarettes sold to non Indians on sovereign Indian land.

It’s the latest move in the legal chess game that characterizes the tobacco war between the State of New York and the indigenous nations within its borders.

A day earlier, Supreme Court Justice Donna Siwek lifted a temporary restraining order which blocked the state from collecting taxes on cigarettes sold to non Indians on sovereign Indian land – an order that she herself had issued three weeks earlier. Attorneys for the Seneca Nation of Indians immediately appealed to the Appellate Division, which followed through by imposing the TRO the next morning. The order is effective until June 20 when the State of New York, its tax department and state officials named as defendant are ordered to appear in court to argue why the court should not issue a preliminary injunction against the state’s tax law, pending an appeal of the lower court’s order.

Seneca Nation President Robert Odawi Porter reiterated his statement from a day earlier. “If New York State courts eventually allow this New York State law to stand, it will have two primary results. One, good-paying retail jobs, selling a legal product in Western New York, will be lost; and, two, there will be no change in the Seneca Nation’s stand that it will never collect or impose sales taxes for New York State. If the Nation’s businesses need to shift their product mix to render such onerous tax laws moot, they will,” Porter said.

The Seneca Nation insists that the nation’s 1842 Treaty of Buffalo with the federal government governs taxation issues in the state. The treaty says, in part, that the U.S. “will protect such lands of the Seneca Indians, within the State of New York, as may from time to time remain in their possession from all taxes, and assessments for roads, highways, or any other purpose.”

“No one should underestimate the Nation’s resolve to defend and protect its sovereign rights. Immunity from taxes by federal treaty is the law of the land. Our people survived state encroachment before and triumphed for centuries as an independent and successful people. That will not change now.”

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In lifting the ban against the state, Siwek had rejected a motion by the Seneca Nation that the state tax department had violated state procedural requirements in adopting regulations last June that require wholesalers to pay for and affix a $4.35-a-pack tax stamp on all cigarettes sold in the state, including those sold to Indian nations on sovereign reservation lands. The law was originally slated to take effect Sept. 1, 2010, but several Indian nations filed lawsuits in federal court last August to stop its enforcement. Two federal courts granted a stay, but on May 2 the U.S. Court of Appeals for the Second Circuit vacated all orders staying enforcement. The Senecas then moved to state court where Siwek granted a TRO on May 10.

The new law requires a sovereign Indian nation to ask the state for reimbursement of the taxes paid on cigarettes sold to Indians on reservations. Alternately, a nation could commit to a quota system in which the state determines exactly how many tax-free cigarettes tribal members could smoke each year. None of the Iroquois Confederacy nations – the Seneca, Oneida, Onondaga, St. Regis Mohawk, Cayuga, Tuscarora nations – or the Unkechaug and Shinnecock nations have signed up for the quota system.

In her 10-page ruling lifting the TRO that she had imposed on May 10, Siwek said that New York's tax policy "is required to strike the difficult balance between the state's objectives with regards to the sovereignty.” But she also noted that her ruling did not address the broader issues surrounding the state’s claimed right to collect taxes from Indian reservations.

Meanwhile, the nations within New York’s borders have moved increasingly toward sales of reservation-produced cigarettes, putting the tax issue out of the reach of the state. The Oneida Nation said Siwek’s decision would not impact its ability to sell cigarettes at a lower cost. “We will continue to provide our customers with a selection of cigarette brands like Niagara's, Bishop, Great Country and Cool Harbor as they are manufactured on the Oneida homelands and not subject to state taxes. We will sell the remaining inventory of cigarette brands not manufactured on the Oneida Indian land," said Mark Emery, Oneida Nation’s director of media relations.

John M Becker, chairman of the Madison County Board of Supervisors, issued a press release early Thursday, apparently before the appellate court issued the new ban on the state’s tax law. He praised Siwek for ruling “in favor of the State of New York. This ruling follows recent decisions of the federal courts that the State law requiring collection of sales and excise taxes on tribes' cigarette sales to non-Indians does not infringe tribal sovereignty.”

Becker appeared to blame Indian nations for the state’s $9.2 billion budget deficit. “It (tax collection from reservations) will be a great benefit to taxpayers who have suffered from the economic hardship caused by Native American tribes who have refused to cooperate in the collection of these taxes on cigarettes sold to non-Indians and have cost the State and counties across the State, including Madison County, hundreds of millions of dollars in tax revenues.”

Becker particularly targeted the Oneida Indian Nation, which has been in litigation with the county for decades. “It is disappointing the Oneida Indian Nation continues efforts to avoid collection of taxes from non-Indian consumers that would help pay for the services they receive that are essential to and benefit their businesses (e.g. plowing and road maintenance, fire and police protection, etc.) and their members (various social services provided by the State and County),” Becker said. The Oneida Nation, which has a philosophy of sharing resources, had contributed almost $45 million to the surrounding communities, including more than $1 million to the Verona Fire Department by the end of 2007 when Turning Stone Resort Casino had been operating for 17 years.