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States hope to tax Internet cigarette sales

WASHINGTON - The combination of local competition for cigarette sales and state budget deficits have brought about a clear and present threat to ban or tax Internet cigarette sales by reservation-based tribally affiliated vendors.

Two bills, S. 1177 in the Senate and H.R. 2824 in the House of Representatives, have moved quickly. The Senate bill, which proponents style the Prevent All Cigarette Trafficking Act for short, would restrict the shipment by mail of cigarettes purchased over the Internet, as well as facilitating the collection of state taxes on such cigarette sales. A second version of S. 1177 has already been "marked out" of the Senate Judiciary Committee; the congressional jargon means it could be ready for a vote of the full Senate if its sponsors decide to push it.

The House version, the Internet Tobacco Sales Enforcement Act, could be "marked up" and moved out of committee as early as Oct. 2, when a subcommittee of the House Judiciary Committee has scheduled a hearing. By tightening the screws on the manufacture, distribution and sale of cigarettes, H.R. 2824 would also restrict cigarette transactions and enforce state taxation rights.

Both bills are also concerned to end the smuggling of contraband cigarettes, though Mark Van Norman of the National Indian Gaming Association considers the issue alarmism as applied to most of Indian country.

The National Congress of American Indians and the National Indian Gaming Association are spearheading Indian objections to the bills. They've recently received indications that Congress knows Native organizations can slow the bills down, according to a Native organizational source who spoke on background but not for attribution. Accordingly, the bills' sponsors have shown a recent willingness to consider Native viewpoints.

In addition, the same source said, the impression has grown in Congress that the bill goes too far in effectively amending the Interstate Commerce Act by giving states regulatory authority over Internet-sold cigarettes that are shipped across reservation borders. Such authority is now limited to shipments across state borders.

Adam Bailey of the National Congress of American Indians said state authority on reservations is a possible outcome of both bills. NCAI considers both bills "very bad" for Indian country, he said.

A secondary disastrous outcome of the bills could be the scuttling of tribe-state tax compacts, Bailey added. Hundreds of such compacts are now in place after years of efforts by tribal and state governments. They tend to govern tax collections on reservation-based sales of goods that generate revenue for tribes from non-Indian purchasers (tobacco and motor fuels for instance). In general, the compacts set forth agreements on what should be taxed on reservations, at what rate, who will collect the tax (usually but not always the tribe), how it will be divided (this is where the state gets a share), and other matters. States lack authority to collect state taxes on the sale of goods on reservations, but they can make sovereignty tough for tribes by restricting access of inventory delivery trucks to reservations via state roads, among other measures. Many tribes therefore have arrived at the view that that tax-compacting with a well-disposed state government is an effective use of sovereignty.

But given a law in place that authorized states to collect taxes on cigarettes sold to on-reservation purchasers, Bailey explained, state attorneys general might well be tempted to disregard a compact and simply levy taxes across reservation borders, claiming the law as a precedent.

While final disposition of the bills is uncertain right now, the origins of the move against Indian cigarette sales over the Internet are clearer. The National Association of Convenience Stores has lobbied for the 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. In Oklahoma, for instance, state excise taxes alone add 23 cents to the price of a pack of cigarettes. In New York the state excise tax is $1.50 a pack, in Arizona $1.18, in California 87 cents and in South Dakota 33 cents. (All figures are from the General Accounting Office and reflect prices as of Jan. 1.)

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 foodstuffs.

But it isn't a given that tax-averse Republicans would give "legs" to a bill in Congress simply because tribes are using a business edge to compete against non-Indian business owners. Proponents of the bills have also seized upon the General Accounting Office study mentioned above. On May 1, before the House Judiciary Committee's Subcommittee on Courts, the Internet, and Intellectual Property, the GAO offered "Internet Cigarette Sales: Limited Compliance and Enforcement of the Jenkins Act Result [sic] in Loss of State Tax Revenue" as testimony.

The Jenkins Act, a 1949 law seldom applied to Internet uses, requires that the sale and shipment of cigarettes across state lines must 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 GAO states. States now have no way of forcing compliance with the Jenkins Act, a situation the bills now in Congress aim to change.

Internet cigarette vendors comply irregularly if at all with the Jenkins Act, leading the GAO to quote an estimate of $1.4 billion in tax losses to states in 2005 from such sales.

In a footnote, GAO acknowledges that it didn't assess the estimate's reliability because the methodology used to develop it is proprietary. But at a time when many state budgets have been driven into the red, a figure like $1.4 billion is bound to stand out.

Increasingly, tax-free tribal profits are standing out as a source of tribute money for states with strapped budgets. The GAO reviewed 147 cigarette-vending web sites in nine states. None were in compliance with the Jenkins Act. Eighty-seven of them, or 59 percent, were Native-owned or -affiliated.

S. 1177 can be accessed at http://thomas.loc.gov/cgi-bin/query/z?c108:S.1177.

H.R. 2824 can be accessed at http://thomas.loc.gov/cgi-bin/query/z?c108:h.r.2824.