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Tax crisis in New York: State seeks to tax all retail sales on sovereign tribal lands

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ALBANY, N.Y. - Fast moving attempts to extract revenue from Indian reservations in New York state are roiling politics among the sovereign tribal nations as well as the state government.

A signing ceremony May 7 for a preliminary global settlement between the state and the St. Regis Mohawk leadership was abruptly cancelled two hours ahead of time. The Memorandum of Understanding was to outline agreement on a range of issues, from Mohawk land claims to casino compacts to "price parity" for Native-owned stores on the St. Regis (Akwesasne) reservation.

The office of New York Governor George Pataki said that a last-minute issue had come up on a "technical" issue, although it involved the central topic of tax policy, a deeply emotional issue for the state's Indians. Two of the three chiefs in the St. Regis government were driving to the local airport to fly to Albany for the ceremony when their car was reportedly run off the road by Akwesasne protesters led by rival candidates in the upcoming June 7 tribal elections.

Chief Hilda Smoke reportedly was taken to the hospital with elevated blood pressure but was later released. She and Chief Alma Ransom, also in the car, said they would still sign the memorandum, although the council emphasized that it would have to be debated and ratified by tribal members.

The proposed settlement also put Gov. Pataki in a sharp conflict with the state legislature over the state's troubled finances. Negotiators of the Mohawk deal say it will keep the state from collecting taxes on the reservation, but the legislature is relying on levies on reservations sales to raise more than $550 million to help close two years of state deficits.

The State Assembly and Senate passed a budget bill May 2 that attempts to cure the state's massive deficit by among other things ordering the state Tax Commissioner to collect sales, fuel and cigarette taxes on reservation sales to non-Indians. Gov. Pataki, a Republican said to have national ambitions, suspended reservation tax collection efforts in May 1997 after tribal protests turned violent.

The State Senate Finance Committee estimated the potential revenue from reservations at $560 million over the next two years, $186 million in fiscal year 2004 and $374 million in fiscal year 2005. The Governor's analysts and some private economists question these projections and argue that revenue will actually decrease over time as the tax-free reservation economy dies out. Tribal opponents however say the tax revenues are neither the state's to gain nor lose.

In the meantime, Gov. Pataki and the leaders of the St. Regis Mohawk (Akwesasne) Tribal Council were putting final touches on a parity agreement on reservation sales. The deal addressed another complaint about tax-free cigarette and fuel sales, that they hurt the business of nearby non-Indian convenience stores and gas stations. Under the agreement, the reservation government would gradually raise its prices to the regional level by collecting its own sales tax.

According to Bradley Waterman, an attorney for the St. Regis council long involved in tax matters, the revenue would belong to the Mohawk Nation. Nothing would give the state government a right to receive it.

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He said the talks had focused on a gradual approach to parity, to lessen the impact on existing businesses. According to press reports, the Memorandum would exempt tribally-owned stores from the parity rule if their gross receipts did not exceed $2 million a year.

It was not clear at press time how the state would reconcile the two approaches. A spokesman for State Assembly Speaker Sheldon Silver told Indian Country Today he was not even aware that Gov. Pataki was negotiating a price parity agreement.

The last-minute objection centered on a state provision requiring Indian wholesalers to obtain a state license to supply the reservation businesses. Although the state portrayed it as a "technical issue," negotiators for the Mohawks saw it as a basic challenge to tribal sovereignty. A frequent proposal for raising state taxes from reservation sales has been to require wholesalers to prepay the levy based on an estimate of the volume of sales to non-Indians.

First reports of the memorandum drew attacks from non-Indian critics of reservation sovereignty as well as from the chiefs of two other Mohawk plaintiffs in the land claims case. The Mohawk Nation Council of Chiefs in New York and the Mohawk Council of Akwesasne in Canada said in a joint press release that the deal with the St. Regis council breached a unity pact to solve the land claims together.

The extent to which other tribes would accept any taxation also remained in question. Harry Wallace, chief of the state-recognized Unkechaug Nation on Long Island, said, "Obviously we are going to resist it in as intelligent a way as we possibly can." Wallace was a leader in the successful tribal resistance to a state drive for tax compacts in 1997. He indicated that this time around he would rely on lobbying and the courts.

Tribal strategies could differ sharply in this crisis from the 1997 protests that shut down interstate highways at several points and pitted tribal members not only against state police but also against some tribal leaders. The economic stakes are much higher this time. The state government offers a carrot of five unsigned casino compacts already authorized by legislation. But the mandate to impose state levies on non-Indian customers could devastate reservation retail businesses, which have flourished under their own tribal sovereignty.

The state legislature makes the paradoxical assumption that businesses like smoke shops which grew from nowhere because they didn't charge taxes would still be around to generate revenue at the fully taxed price. New York levies one of the highest cigarette taxes in the country, at $1.50 a pack. A State Senate Finance Committee staff report concluded in April that 25 million cartons were sold on reservations, equating to a $500 million loss in cigarette tax revenue. It did not address the question of how many cartons would be sold if reservation smoke shops charged the same price as the rest of the state.

A "price parity" agreement could have the same dampening effect on sales, although in this case the tribal government would feel the primary effect of the dwindling tax revenue.

The debate has so far skirted the phenomenon of Internet cigarette sales, a booming segment of the reservation economy. A national study by the U.S. General Accounting Office last year found that around 73 of the 147 cigarette Web sites it located were based in the Seneca reservations of western New York. The Buffalo News reported that they employed around 1,500 people.

Waterman, the Mohawk's attorney, said he argued strongly in negotiations that a change in state policy could threaten an economic situation in which 30 or more businesses had grown up on the reservation, giving employment to 500 people. "The issue here is jobs," he said.