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Proposed cigarette tax regulations will ‘mire’ NY in litigation

ALBANY, N.Y. – The latest scheme by the New York state government to force Indian businesses to pay cigarette taxes on reservation sales to non-Indians is “illegal” and “anti-Indian,” and will be challenged in court, Indian nation representatives have said.

On Feb. 23, Gov. David A. Paterson’s tax department posted proposed new regulations that would require cigarette manufacturers to sell cigarettes only to licensed stamping agents who sign a certification each year, under penalty of law, that they are not selling tax-free cigarettes to retailers, essentially cutting off supplies of brand name untaxed cigarettes to Indian businesses.

“We are in the early stages of formulating a strategic response to these anti-Indian regulations,” said attorney Thomas Moll, who represents the Seneca Free Trade Association, an alliance of more than 230 Seneca Nation-licensed businesses.

The regulations would require licensed stamping agents – the middlemen between manufacturers and retailers – to pay state taxes up front on their purchases from manufacturers, and pass the cost on to retailers.

Under the new regulations, each Indian nation would receive an allocation of untaxed cigarettes to be sold to tribal members. The allocation is based on population figures from the 2000 census and amounts to roughly 21 packs of cigarettes per person per quarter, or around seven packs a month.

The stamping agents would have to list the source of their cigarettes with the tax department and file copies of their certification with the cigarette manufacturers.

That means that the big tobacco companies, such as Philip Morris, which has long fought against Indian tobacco businesses and has helped write legislation targeting Indian retailers in New York state, will be given the power to reject the certification of stamping agents, who sell to Indian smoke shops and cut off their supplies. There are around 75 stamping agents in New York, but fewer than 10 sell to Indian retailers.

“If they persist in these rules, the state will once again be mired in litigation,” said attorney Margaret Murphy, who represents the Seneca Nation.

The new regulations are the latest skirmish in the ongoing battle to collect what some New York legislators, convenience store owners, and other opponents of Indian-owned smoke shops claim are “lost taxes” ranging from millions to billions of dollars from Indian tobacco sales.

The nations say that attempts to collect taxes from reservation sales trample on Indian sovereignty, violate long standing treaties and ignore federal laws that uphold the non-taxable status of Indian nations.

The new regulations reflect “another illegal attempt by the state to collect taxes on our commerce. The Seneca Nation will vigorously oppose all state efforts to interfere with our treaty rights and our economy,” said Seneca Nation President Barry E. Snyder Sr.

“Instead of trying to destroy our treaty-protected economy, the state should be focused on developing opportunities with us since the nation is a proven contributor to Western New York’s regional growth,” he said, adding that Seneca would not be a “scapegoat” for the state’s budget problems.

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The Seneca Nation “paid its fair share” when it relinquished most of its aboriginal lands to the state hundreds of years ago, Snyder said.

“There is no reason the Senecas should be paying the price today, especially when the nation has poured millions into New York state’s economy and created thousands of new jobs in Western New York.”

The posting of the regulations kicks off a 45-day comment and review period after which a determination will be made about whether to codify them.

Attorneys representing the nations said nothing reflects the government’s anti-Indian sentiments more than the fact that the nations were not included in the distribution list of governmental bodies, organizations and businesses that were notified of the regulations and invited to comment. The list included the New York Association of Convenience Stores, a group that has filed several lawsuits attempting to force Indian nations to collect

state taxes.

“This shows a total lack of respect for tribal sovereignty,” Murphy said.

The governor’s office did not respond to an e-mail and phone calls seeking comment.

The new regulations, like earlier attempts, are riddled with contradictions with existing law, unenforceable requirements, and unintended consequences.

Paterson signed a law in December 2008 that requires the same certification by stamping agents, but would have forced Indian retailers to purchase pre-taxed cigarettes for all of their customers, and then file coupons for tax refunds for cigarettes sold to Indians.

A month later, in a case brought forward by Murphy, a State Supreme Court justice imposed an injunction that stops the state and anyone charged with enforcing the state’s tax laws from restricting state stamping agents from selling unstamped cigarettes to tribal and non-tribal members until the state tax department devises a viable system to distribute tax exempt coupons for sales to tribal members.

While the tribal nations believe the coupon system is also unlawful, that law and the injunction against it are still in place, Murphy said. The tax department lacks the authority to enact or impose laws.

“I know they think these new rules make the injunction moot, but they better go back and read it. Anyone who attempts to enforce these regulations, anyone who claims to have authority under the state’s tax laws could be held in contempt.”

Among the many legal challenges the regulations would likely face is a challenge against requiring Indian business to pay taxes on goods they sell to consumers out of state through Internet sales – a tax the state has no authority to impose. The nations would also legally assail the state’s authority to allocate the number of untaxed cigarettes Indians could buy.

Among other unintended consequences, the new regulation would prompt Indian businesses to purchase untaxed cigarettes from out of state distributers, and it would likely encourage the nations to develop or enhance their own cigarette manufacturing businesses.