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Winnebagos suffer from Kansas charges

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TOPEKA, Kan. ? The Winnebago tribe of Nebraska is suffering from an economic struggle because of criminal charges filed against two leading members of the tribe by the state of Kansas.

Ho-Chunk Inc., the business arm of the Winnebago Tribe, now has trouble getting bank loans and credit for products it sells. Profits from the sales that benefit the tribe will dry up if litigation continues over $1.25 million in motor fuel taxes the state of Kansas claims it is owed.

The Winnebago Tribe and three other tribes in Kansas filed a federal lawsuit in U.S. District Court in Topeka to stop the civil and criminal proceedings against them; they also seek the return of motor fuel tankers owned by HCI Distribution, an company owned by the Winnebago Tribe, that were seized by Kansas authorities.

Civil and criminal charges were issued against Lance Morgan, executive director of Ho-Chunk Inc. and John Blackhawk, chairman of the Winnebago Tribe. Civil charges were filed against Erin Morgan, Lance Morgan's wife and Earlene Hradec. The civil charges attempt to assess the tax bill on personal assets of the group.

"Credit cards have been canceled and the bank stopped loaning money. This has had a financial impact on us," Morgan said.

"We were going to do an upgrade on our computers but the banks will not loan the money anymore. It's a nightmare. The more it lingers out there, the more it hurts. This has the potential to put us out of business. We put millions of dollars into those banks and everything has stopped."

But Morgan added, " The Native American Bank hasn't stopped and they are doing great."

Morgan said the banks are reacting to the criminal charges filed against him and Blackhawk.

"Something comes in everyday. Some relationships are canceled, manufacturers won't sell us product and we can't borrow money to finish transactions. We will survive. We have a lot of capitol, but it has stopped our ability to grow," Morgan said.

"If we don't grow, the tribe doesn't grow and it stems from the criminal charges. This has become survival. Anything that affects us affects the tribe. There is a lot of negative (public relations) around this that has hurt our image. We are business minded and had a good solid reputation."

The tribe's federal complaint argues that an injunction against the state of Kansas is in the public interest because continued pursuit of the charges will result in the likely termination of essential tribal government services and jobs for tribal members and impairment of economic development.

Ho-Chunk Inc., run by Morgan, has received numerous national and local awards for performance in the business sector and for continuously showing a profit, which is used to benefit the tribe. Ho-Chunk Inc. started with $500,000 seed money from the Winnebago's WinneVegas Casino in 1995. Its projected revenues could be $50 million this year.

The company owns Internet catalogue businesses and invests in home building, cigarette sales, motels and convenience stores that sell motor fuels mixed by the tribe on reservation land in Nebraska. HCI Distribution, part of Ho-Chunk, Inc. transports the motor fuel from Nebraska to the Sac and Fox, Kickapoo and Iowa tribes of Kansas. The tribes sell the fuel on their lands in tribally owned convenience stores.

And that is where the problem arises.

The state of Kansas seized two tanker trucks of fuel owned by HCI Distribution on April 9 and then filed the civil charges. A few days later criminal charges were filed against Morgan and Blackhawk. The state filed a six count charge against HCI and the Winnebago officials that alleges six months worth of fuel taxes were not paid to the state tax commission. The amount was $1.25 million, not a lot of money in the whole scheme of things.

The state collected $360 million in taxes on gasoline, gasohol and diesel, the same types of fuel the Winnebagos sell to the Kansas tribes. The $1.25 million asked from the Winnebago tribe represents only one-third of one percent of the total motor fuels tax in Kansas.

"They want to put us in our place. It's a power play and they want to make a name for themselves. They didn't have a clue who we were when they attacked us. The mid-level bureaucrats are power mad. The fight becomes the issue. They need the politicians to step in and set it straight.

"They talk about these things like they believe their own b???? s????," Morgan said.

Through the tribal attorneys, the Winnebago Tribe and Ho-Chunk Inc. asked the state to drop charges and return the property, which the tribe argues was illegally seized.

The state did not respond to the letter and the tribes filed the federal complaint on May asking the court to stop the state from proceeding with the charges and actions.

"Defendants' (Kansas') conduct not only violates well-established principles of federal law, it has caused and will continue to cause irreparable harm to the plaintiffs and therefore must be enjoined," the complaint states.

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During a May 15 hearing in federal court, the state asked for dismissal of the complaint, said Mary Tritsch, spokeswoman for the Kansas Attorney General's office. The dismissal request is a normal procedure she said. State attorneys were preparing their case and had not further comments.

District Judge Dale Saffels took the case under advisement and said he would issue a written order within a few days. The order had not been issued at press time.

Should the complaint be dismissed, Morgan and Blackhawk would have to face the criminal charges with the result of prison and/or fines should they be found guilty.

If the court agrees to the Winnebago complaint and enjoins the state from pursuing the charges and taxes, the litigation would take months, if not years, to complete. It is expected that however the court rules both sides would pursue the appeal process to the U.S. Supreme Court.

The complaint further argues that the state tax violates the federal constitution for interfering with commerce among Indian tribes. The filing alleges that the state has no cause to impose the tax because the fuel is mixed or manufactured by the Winnebago Tribe on its reservation in Nebraska and sold at a wholesale price on the reservation, then sold at retail on the Kansas Tribe's reservations.

The Motor Fuels Act states that the distributor must sell the product within the borders of the state of Kansas, something the Winnebagos do not do. The fuel, according to the tribal officials, is sold in Nebraska and delivered to the Kansas Tribes, which are also sovereign nations.

The state asserted HCI Distribution was a "distributor of the first receipt" of the motor fuel. The complaint argues that the tribe does not receive any fuel in Kansas and is not classified as a distributor. The state rejected the tribe's application for distributor. Therefore plaintiffs then argue the state motor fuel taxation act does not apply and the tribe is not liable for the motor fuel tax.

And should the Winnebago tribe and HCI be considered a distributor and received the fuel on the Kansas reservations, the complaint alleges that the taxes are invalid because the state is imposing a "tax on sales between tribes of a product manufactured by the selling tribe on the selling tribe's reservation."

Case law stands on the side of the Winnebagos. Various tax cases have been decided in favor of the tribes and struck down taxation of products created on Indian lands. And no state tax is ever charged on products sold on Indian reservations to tribal members.

"In this case, Kansas seeks to tax a product manufactured by the Winnebago Tribe on its reservation. Under the authority of Indian Country, U.S.A., therefore, the Kansas taxes are invalid as applied to the Winnebago Tribe," the complaint states.

The tribes ask not only for an injunction against the state, but more than $1 million in punitive damages and payment of expenses incurred in the case.

The state was given a chance to negotiate with the Winnebagos over the taxation issue. The tribe negotiated with the state of Nebraska and is now in negotiations with Iowa over the distribution and sales of motor fuel.

In September 2001, Blackhawk sent a letter to the state of Kansas to try to open the door for negotiations. He noted that HCI Distribution is owned by the Winnebago Tribe and its products are mixed on the reservation, so the state had no jurisdiction to tax on the fuel. The state rejected the offer to negotiate and instead seized the tanker trucks and filed civil and criminal charges.

"One would expect that before taking such draconian measures, practically unheard of in the last hundred years of federal and state relations with Indian tribal governments, the defendants would have made certain that they were on solid legal footing.

"They did not, choosing to ignore not only well established principles of federal Indian law, but also the plain language of the Kansas statute upon which they relied," the complaint states.

The tribes allege that Kansas has operated in a manner that rejects and ignores the fact that the Winnebago Tribe and the other tribes involved are sovereign nations.

"Kansas wants retribution, it wants punishment. Someone in Kansas needs to be a leader and agree there is time to sit down and negotiate this problem. Every other state that is rational makes an agreement. Nobody dominates for long," Morgan said.

The immediate cost to the Winnebago Tribe is the halt of development of 40 acres for commercial and housing use that Ho-Chunk Inc. was financing. The money is now going to pay legal fees, Morgan said. He added that the struggle was taking a toll on him and his family personally and that he could be putting his time to better use on worthwhile projects.

"But that's why I get paid. I feel like I trained for this, with this fight in mind. If anyone is going to do it is has to be up to us. The facts are solidly slanted to us on this issue," he said.

Defendants in the federal case are Carla J. Stovall, attorney general for Kansas; Stephen S. Richards, secretary of the Kansas Department of Revenue; Steven Maxwell, assistant attorney general; Jeffrey Lochow, director of Tax Operations; Jeffrey D. Scott, designee of the Director of Taxation, Kansas Department of Revenue.

The plaintiffs include the Winnebago Tribe; Sac and Fox Tribe of Kansas and Nebraska; Kickapoo Tribe of Indians in Kansas; Iowa Tribe of Kansas; HCI Distribution; John Blackhawk, chairman of the Winnebago Tribe; Lance Morgan; executive director of Ho-Chunk Inc.; Erin Morgan and Earlene Hradec.