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Internet cigarette sales tax bill goes before House

WASHINGTON - Tribal sovereignty got all of 30 seconds at an Oct. 2 hearing on a tax bill that could undermine more than 200 years of precedent, according to Native organizations in the nation's capitol.

H.R. 2824 in the House of Representatives is an attempt to bring state taxation powers up to speed with Internet commerce - in the words of one congressman, "to put teeth into the Jenkins Act," a 1949 federal law that requires the sale and shipment of tobacco products to be reported, by the seller, to the purchaser's state tobacco administrator. "Compliance with this federal law by cigarette sellers enables states to collect cigarette excise taxes from consumers," the General Accounting Office states. States now have no way of forcing compliance with the Jenkins Act, a situation two bills now in Congress aim to change.

With the advent of the Internet, many online cigarette vendors have not bothered to report on the sale and shipment of tobacco products. And many consumers have turned to the Internet as a source of tax-free tobacco products. This has led to the elaboration of state taxation systems that would demand taxes on tobacco products be paid prior to their delivery to vendors. Internet vendors would then pass the taxes on to consumers in their pricing decisions, just as non-Internet vendors do now; but they do so after the sale, having collected taxes at the point of sale.

This is the crux of it for tribal sovereignty. The Constitution and court precedent forbids state exercise of regulatory authority on reservations, including authority to levy taxes. In more than one instance, states have gotten around this by embargoing reservations, in effect - that is, by intercepting trucks using state roads to deliver retail goods to reservations for sale there. States have feared in these cases that taxes dues on goods sold on-reservation to non-Indians - and therefore, arguably at least, eligible for collection by the state - would never be collectible. Far more frequent are tribe-state tax compacts, freely entered into by both parties that tend to minimize both confrontation and litigation.

But in most such instances, taxation is still at the point of sale. Tribal organizations argue that a federal delegation of authority to states for collecting taxes from reservation-based vendors prior to any sale amounts to a back-door abrogation of tribal sovereignty.

"We suffer from generalization," said Tim Martin, executive director of United South and Eastern Tribes. Congress typically sweeps up tribes in legislation aimed at states, he explained. "That's what we work on most." Congress would be better off giving separate consideration to tribal issues due to the unique legal status of tribes, he added.

A "paid prior" system that is set forth in H.R. 2824 and its companion bill in the Senate, S. 1177.

At the Oct. 2 hearing of the House Judiciary Committee Subcomitttee on Courts, the Internet and Intellectual Property, Rep. Mark Green, R-Wis., characterized H.R. 2824 as "a new enforcement tool so that states can enforce laws that are already on the books" - a reference to the Jenkins Act.

Howard Berman, D-Calif., said he intends to vote for the bill but asked to know "how the issue of tribal sovereignty plays into these questions."

"Tribes are already covered by the Jenkins Act," Green replied.

Green and Marty Meehan, D-Mass., then engaged in a brief exchange that suggested tribal sensitivities would be considered as the bill moves along, with Meehan disavowing any attempt "to treat tribes any differently than anyone else."

Tobacco is not the only product that consumers purchase tax-free on the Internet, nor is the Internet the only venue for tax-free sales. The National Association of Counties estimates that states, counties and cities will lose $26 billion this year from uncollected sales taxes on catalog and Internet sales.

But many online cigarette vendors are located on reservations.

Few tribal governments have developed tobacco and/or tax codes. Those that have tried have encountered strong resistance from tribal communities.

Into this regulatory void, states are now stepping - not always perhaps with singular malevolence toward tribes, but certainly with an eye on two larger prizes. One is increasing tax revenues for states. Between 1993 and 2001, according to Colorado Governor Bill Owens, state spending increased at twice the rate of federal spending. Now that those economic boom times have turned to hard times nationally, many states face ruinous budget deficits. According to the National Association of Counties, three of four counties nationwide are experiencing revenue shortfalls even as 95 percent face a rising demand for services. "Some of our challenge is of our own making," Owens said (in tax-related testimony before the House that did not concern H.R. 2824).

The other larger prize for lawmakers is enhanced competitiveness for powerful constituents on the state side of reservation borders. The National Association of Convenience Stores has lobbied for the Senate and House bills. Convenience store and gas station owners have long opposed tribal cigarette sales, which go untaxed as a rule because tribal organizations cannot be taxed based on the status of tribes as governments. This gives tribally affiliated and reservation-based cigarette vendors a competitive pricing advantage over other cigarette vendors, whose prices must reflect state excise, sales or use taxes. This pricing advantage in tax-free cigarettes is doubly significant in that cigarettes are often used as a "teaser" item, one that draws customers who will then spend on other items, such as gasoline and food.

The next stop for H.R. 2824 is the full House Judiciary Committee. The full committee meeting on H.R. 2824 has not yet been scheduled, according to Berman's office. A spokesperson there, requesting she not be quoted by name because she was not at the Oct. 2 hearing, interpreted Berman's brief remarks to mean any issues of tribal sovereignty in the bill would be "taken up at the committee level."

Martin said USET will discuss the bills at a meeting later this month. He expects either the organization or separate tribes to take a position on the bill. "We're against anything that restricts tribal sovereignty."

The National Congress of American Indians and the National Indian Gaming Association have already weighed in against the bills' potential delegation of state authority over tribes.