MANHATTAN (CN) – New York can charge tax when Indian tribes sell cigarettes to non-tribe members on their reservations, the 2nd Circuit ruled.
A federal judge for New York’s Northern District had granted the Oneida an injunction against the state’s comprehensive new regulations, but four other tribes lost their bid for the same relief in New York’s Western District.
Those unsuccessful tribes – the Seneca, Cayuga, Unkechauge and Mohawk – appealed, as did the state officials who were rejected in the Oneida’s suit.
The Indians claimed that the new regulations would “interfere with their right of self-government, unduly burden tribal retailers, and fail to adequately ensure members’ access to tax-free cigarettes,” according to a 52-page opinion.
New York tax officials determined in the 1980s that, given the volume of their sales, reservation retailers must have been selling tax-free cigarettes to non-Indian New Yorkers, and that is was costing the state about $65 million annually.
The Unkechauge Nation, for example, has about 376 members, yet bought roughly five million untaxed cartons of cigarettes in 2009.
“If only Unkechauge members had consumed these cigarettes, every man, woman, and child would have smoked 364 packs per day in 2009,” 2nd Circuit Judge Richard Wesley wrote for the three-judge panel.
“A substantial number of non-Indian New Yorkers clearly purchased their cigarettes from reservation retailers without paying the tax.” Historically, Indians do not have to pay tax for buying cigarettes on their own land.
Officials tried to rein in the tax evasion by promulgating regulations in 1988, but the attempt was later aborted “due to additional litigation, civil unrest, and failed negotiations,” the panel noted.
This gave way to a “forbearance” policy that allowed wholesalers to sell untaxed cigarettes to reservation retailers without restriction.
But in June 2010, state legislators took another shot at restricting on-reservation sales of untaxed cigarettes to non-Indians.
A new tax scheme was crafted, whereby wholesalers could sell tribal retailers an amount of untaxed cigarettes that mirrored the respective tribe’s “probable demand,” based on population and smoking statistics.
Legislators drafted amendments to New York tax law that were slated to take effect in September 2010.
After the tribes sued, however, implementation of the changes was stayed pending the outcome of a consolidated appeal to the 2nd Circuit.
Under the “prepayment” component of the new tax law, Indian cigarette retailers would pay wholesalers a price for cigarettes that included the $43.50-per-carton state excise tax, whereupon the Indians would include the tax in the retail price of cigarettes they sell to non-Indians.
“The Oneida and Cayuga Nations argue that this prepayment obligation is, in effect, a categorically impermissible direct tax on tribal retailers,” the ruling states. “We disagree.”
Statutory language makes it clear that, ultimately, the non-Indian consumer will shoulder the excise tax, even if the reservation retailers are required to pay it up front, the judges said.
“In fact, the [revised New York] statute contains mandatory ‘pass-through provisions’ that require wholesalers and retailers to pass on the tax to the consumer,” Wesley wrote.
The requirement that Indian retailers front the tax for non-Indian smokers is a problem in and of itself, the Oneida argued, as the new arrangement would force the tribe to set aside $3.5 million annually for its pre-payment obligations.
A judge in the Northern District, who granted the Oneida a preliminary injunction against enforcement of the new rules, agreed that the financing costs were an impermissible burden on tribal sovereignty.
The 2nd Circuit did not.
Although the changes will impose an increased economic burden on Indian retailers in their sales to non-Indians, the retailers are making a personal choice to participate in the taxable cigarette market, according to the ruling.
And the pre-collection scheme at issue is “materially indistinguishable” from Supreme Court-approved schemes in Montana and Washington.
As in those states, New York’s proposed scheme constitutes “a minimal tax collection burden that is ‘reasonably necessary’ to prevent” evasion of valid taxes without needlessly intruding on tribal interests, the panel found.
Before wholesalers can sell tax-free cigarettes to reservation retailers under the new scheme, they must obtain prior approval from tax officials, who will vet the purchase order by verifying that the tribe has not yet exhausted its quarterly allowance of tax-free cigarettes.
The wholesaler is then given 48 hours to complete the order.
The tribes argued that this arrangement could allow a wholesaler to “preemptively lock up a tribe’s entire quarterly allotment” through a continuous cycle of requesting approval to sell a tribe the balance of its tax-free cigarette allowance, letting the 48-hour approval period expire, and re-requesting approval.
“Thus, [the tribes argue] a wholesaler could leverage this forty-eight hour long monopoly position to charge premium prices, force tribal retailers to purchase exclusively from that wholesaler, or sell exclusively to favored tribal retailers,” the judges summarized. “Plaintiffs contend that a market-dominant wholesaler could ultimately deprive tribal members of access to tax-free cigarettes and disrupt their tobacco economies.”
The panel conceded that this scenario is possible under the proposed arrangement, but found that wholesalers who abuse the prior approval system will be held accountable and, if need be, the mechanics of the system can be tweaked to prevent abuse.
“Plaintiffs ultimately request that the tax law be enjoined prior to its implementation on the basis of hypothetical private behavior,” Wesley wrote. “This kind of speculation cannot support a pre-enforcement injunction of a state taxation scheme that is valid as written.”