Appeals court rejects New York cigarette tax challenge

By Carolyn Thompson
Buffalo, New York (AP) May 2011

A federal appeals court lifted legal stays that have been blocking New York’s effort to collect taxes on cigarette sales by Indian-owned businesses to non-Indians.

The U.S. Court of Appeals for the 2nd Circuit ruled that five New York-based Indian nations challenging the state’s collection plans in court haven’t demonstrated that they’re likely to win by arguing that the taxing system unduly burdens reservation retailers and interferes with tribal sovereignty.

“We will now begin the implementation phase as we move to collect these taxes,” said Gov. Andrew Cuomo, who was attorney general when the lawsuits were filed.

Current Attorney General Eric Schneiderman called the ruling “an important victory for the state to collect deserved revenue and to protect public health.”

State officials, facing a $9.2 billion budget deficit, voted last June to begin collecting the $4.35-per-pack sales and excise taxes on the millions of cartons sold on reservation smoke shops to non-Indian customers. It was a break from the policy known as forbearance adopted by a string of governors who declined to enforce state laws requiring the taxation of sales to the general public.

The state anticipated collecting $500,000 a day in new tax revenue beginning Sept. 1, 2010, but has been stalled by the legal challenges.

The Seneca Nation, whose 172 tobacco retailers sell more cigarettes than any other tribe, said it would continue to oppose the state’s plans, even after the appeals court ruled that Judge Richard Arcara in Buffalo was correct in October when he denied an injunction against the state sought by the Senecas, Cayugas, Unkechaug Nation and the St. Regis Mohawk tribe.

Arcara had issued a stay of his ruling pending appeal.

“While today’s decision ... is disappointing, we will continue fighting against this overreaching action by the state to protect our treaty rights, tobacco commerce and all the jobs it supports,” Seneca President Robert Odawi Porter said. “The Seneca Nation will not be New York State’s tax collector.”

The last time the state tried to collect the tax, in 1997, protesters lit tire fires and shut down a 30-mile stretch of the New York state Thruway that bisects Seneca land near the Pennsylvania line. Current Seneca leaders have said they would not condone violence.

Last week's ruling also vacated a separate order granting the Oneida Indian Nation’s motion for a preliminary injunction against the state. The appeals court determined the Northern District judge had “committed legal error” in granting it.

A spokesman for the central New York tribe said retailers would sell off their remaining inventory of name-brand cigarettes but continue to sell Native American brands at reduced prices because cigarettes made on the reservation remain tax-exempt.

The Native American cigarette business has flourished as New York has increased its cigarette tax to the highest in the country. Native smoke shops charge about half of the $10 that non-Native convenience stores charge for name-brand cigarettes and even less for brands manufactured on reservations.

The state plans to tax Native American sales without going onto reservations by requiring cigarette wholesalers to prepay the sales taxes before supplying reservation stores. Wholesalers would pass along the levy to tribal retailers, who would have to raise their prices.