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Judge: State has ‘No legal Authority’ to Seize Untaxed Indian Cigarettes in Out-of-State Sales

A New York State Supreme Court justice has ruled that the state had no legal authority to seize and hold a shipment of untaxed cigarettes that were manufactured on Indian land and being sold to an out-of-state Indian reservation.

A New York State Supreme Court justice has ruled that the state had no legal authority to seize and hold a shipment of untaxed cigarettes that were manufactured on Indian land and being sold to an out-of-state Indian reservation.

In an 11-page ruling on June 18, Justice David Damarest ordered the state police “to return, immediately, any and all property seized” from HCI Distribution, Inc., a company owned by the Winnebago Tribe of Nebraska. HCI sued the state after state police on January 23 seized 26,160 cartons of Signal brand cigarettes and cigars and 72 bags of loose tobacco the company had purchased from Ohserase Manufacturing, LLC, a federally-licensed manufacturer that is organized under the laws of the St. Regis Mohawk Tribe and is owned by St. Regis citizens. The products, worth more than $2 million, were manufactured on St. Regis territory and were being trucked to HCI on Winnebago territory in Nebraska.

Border Patrol officers pulled the truck over and broke open the seal on the cargo doors of the semi-trailer transport truck without a warrant even though the driver, Michael Cagle, “readily supplied the agents with his bill of lading and advised them of his ultimate destination,” the ruling says. Cagle was detained for hours and then let go. But the cigarettes were seized and locked up in state police barracks. No criminal or civil charges were laid against any of the parties.

Jennifer Givner, a spokeswoman in New York Attorney General Eric T. Schneiderman’s office declined to comment on the ruling, but confirmed that the attorney general will appeal it.

The trade in Indian-manufactured cigarettes has mushroomed in the past two years since New York’s Department of Taxation and Finance (DTF) amended the state’s cigarette tax law in early 2010 to force Indian tobacco businesses to collect state taxes by requiring all cigarettes sold to reservations to have an affixed $4.35 cigarette stamp. The nations responded by announcing they would no longer buy the famous brand cigarettes manufactured by Philip Morris (Altria), Reynolds-American and Lorillard. Instead they would manufacture and sell their own brands of cigarettes.

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In his ruling, Demarest established that no taxes were due on the cigarettes. New York’s “ability” to tax on-reservation sales of cigarettes to non-members of an Indian tribe and to make off-reservation seizures of illegally transported products is well established, Demarest says. “The ultimate taxable event in New York is the sale of cigarettes to a non-member of an Indian tribe within the boundaries of New York state,” he writes. But, he notes, the consumer is responsible for paying the tax. Quoting a section of the tax law, Demarest says the law “makes it quite clear that ‘the ultimate incidence of and liability for the tax shall be upon the consumer.’ The requirements of (tax) stamping are merely a way to collect the tax, if, in fact, there is a tax due,” Demarest writes. A section of the New York Tax Law also clearly states that no tax will be imposed on cigarettes sold to out-of-state purchasers, he writes.

Demarest rejects the respondents’ claim that the cigarettes might be re-introduced into New York and subject to taxation, calling it “pure speculation.” Statements made by the driver about past deliveries and information on HCI’s website “are not sufficient to support the confiscation of private property without a warrant or the initiation of a criminal or civil proceeding,” Demarest writes. He also dismisses the respondents’ reliance on seizure laws from other states. The respondents had cited a case in Maryland in which a driver transporting un-stamped cigarettes was detained and charged because he didn’t have the proper paperwork. “The New York statute expressly exempts common carriers with a proper bill of lading, there was no tax due and no civil or criminal proceedings have ever been instituted,” Demarest writes. Finally, he throws out the respondents’ argument that Indian cigarette manufacturers can only make out-of-state sales through state-licensed agents or become agents themselves. “There is no such requirement either in the New York Tax law or in any regulations. Where the law is clear that no tax is due, for the court to extrapolate the type of regulatory scheme proposed by Respondents would be improper,” Demarest writes, adding that the issue should be left for the Department of taxation and Finance or the legislature.

Joseph Messineo, an attorney with the firm of Frederick Peebles & Morgan who represents HCI, told Indian Country Today Media Network that any attempt to pass such a law or regulation would be challenged. “They have very little jurisdiction. The only thing the (state) Supreme Court has said is the state has enough interest in collecting the tax on sales to non-Indians on Indian land,” Messineo said.

Messineo said he is working with the state to get HCI’s cigarettes and other tobacco products back. “We’ll need to inspect them and make sure they’re in good order. We filed a notice of intent to file a civil claim against the state and county should our cigarettes be unusable,” Messineo said.

HCI is prepared to argue against the state’s appeal. “This is speculation on my part, but I would presume that they’ll (the state will) spin this issue to their advantage in whatever way they can to limit the fallout of the decision, New York’s been fighting this too long to just say, ‘We’re going to let this go,’” Messineo said. “It’s a good ruling. We’re pleased with it and, hopefully, we’ll get our cigarettes back soon.”