Cigarette tax fight still not over

Challenges already are mounting in reaction to new federal and state laws regarding the sale and distribution of tobacco products, mainly cigarettes.

New York tax on a pack of cigarettes increases Thursday from $2.75 per pack to $4.35 — the highest in the nation — in an effort to help close a projected deficit of more than $9 billion. It was approved by the Legislature last week as part of Gov. David A. Paterson’s budget extenders, which also include a plan to start collecting taxes Sept. 1 on cigarettes sold by Indian retailers.

The state Department of Taxation and Finance adopted emergency regulations June 22, describing how the plan will be implemented. Tribes, which are exempt from paying state taxes, will receive a specified amount of cigarettes quarterly for their own members and are expected to pay state taxes at the wholesale level on any cigarettes sold to non-tribal members.

Brad Maione, the state Tax Department’s director of public information, said the state could raise $310 million by the end of the fiscal year March 31. Of that, $150 million is expected from sales on reservations to non-Indians.

The law also allows the state to negotiate agreements with Indian tribes that would take precedence over the regulations.

“The Cayuga Indian Nation has been in negotiations with the governor’s office for years and they continue to negotiate,” said Daniel J. French, an attorney with the Syracuse law firm of French Alcott, which represents the nation. “There is specific language that allows the governor to settle these issues — taxes and other issues. We believe that’s the preferred course. That language on settlement wasn’t a mistake. It just didn’t happen to be in there. It’s in there because nations, including the Cayugas, are continuing to negotiate.

“I’m hopeful that we can get some kind of arrangement. My guess is Sept. 1 will come and go and the Indian nations will continue to sell cigarettes because the provisions allow the government to negotiate and I don’t think they’re going to stop negotiations in September.”

French said the state has tried unsuccessfully for years to collect taxes from tribal businesses, later deciding it didn’t have the authority.

In 1997, under former Gov. George Pataki, a forbearance policy was adopted — meaning the state wouldn’t enforce the law — after members of the Seneca  Indian Nation burned tires and closed down the portion of the state Thruway running through its Western New York reservation.

A report released earlier this month by the state Senate Standing Committee on Investigations and Government Operations — “Executive Refusal: Why the State Has Failed to Collect Cigarette Taxes on Native American Reservations” — outlines the state’s fiscal crisis, its history of trying to collect taxes on the sale of gasoline and cigarettes from Native Americans and recommends the forbearance policy be rendered inoperative as soon as possible. That policy ended upon the passage of the budget extenders June 21.

In court

The Cayugas own a number of businesses in the state, including convenience store and gas stations in Seneca and Cayuga counties. The Nation and the two counties, with state representation, have been fighting over the tax collection issue for several years. In November 2008, some 17,600 cartons of cigarettes and computers were confiscated from the Cayugas’ stores by sheriff’s deputies in each county, which resulted in the businesses closing for a few months.

Cigarette sales resumed last summer after the Appellate Division, Fourth Department, reversed a decision by Supreme Court Justice Kenneth R. Fisher in Rochester, who had determined the nation did not have a qualified reservation and could not sell cigarettes without paying the state tax.

District attorneys in both counties also pursued the prosecution of tribal members on tax-evasion charges. Sealed indictments were filed, but never opened.

Since then, the state Court of Appeals decided the two counties cannot prosecute the Cayugas for not collecting the taxes on cigarettes sold at their stores because they are located on qualified reservation land according the state tax law.

On Monday, Seneca County Supreme Court Judge Dennis F. Bender dismissed the indictments in that county. French said he will seek dismissal in Cayuga County during a July 14 hearing.

“It was the appropriate thing to do, given the Court of Appeals’ ruling that the prosecutions couldn’t go forward,” he said.

The nation also plans to sue both counties for $500,000 in damages for the lost cigarettes, which have passed their expiration date and can no longer be sold.

Also Monday, U.S. District Court for the Western District of New York Judge Richard J. Arcara issued a temporary restraining order so Seneca Nation member Aaron J. Pierce can continue to operate his Internet mail-order cigarette business, which distributes to 46 states.

Judge Arcara’s order temporarily prevents enforcement of the federal Prevent All Cigarette Trafficking Act with respect to Pierce. The Act, which went into effect at midnight Monday, bans the U.S. Postal Service from shipping cigarettes.

Pierce was represented by attorney Lisa A. Coppola, who could not be reached for comment.

U.S. Attorney Richard D. Kaufman, working with co-counsel Mary Pat Fleming, said the government will present written arguments by Friday to Judge Arcara, who is scheduled to hear the matter on July 7.

“We argued that Congress passed a very complex and thorough legislation targeting all retail tobacco sellers to ensure the public health of U.S. citizens and to ensure that under-age people do not get easy access to tobacco products,” Kaufman said.

He said the government disagrees with Pierce’s claim that the law is unconstitutional and violates the free commerce and equal protection clauses.

Kaufman said the commerce clause prevents states from regulating the flow of interstate commerce, but does not prevent the federal government from doing do. He also said it does not violate equal protection because it applies to all retailers, not just to Native Americans.

“We anticipate counsel from the Alcohol, Tobacco and Firearms may also want to argue on behalf of the government,” Kaufman said.

J.C. Seneca, Seneca Nation tribal councilor and co-chairman of the Seneca Nation’s Foreign Relations Committee, said the judge’s order was the right thing to do.

He said Washington essentially has closed it doors on Indians, despite promises from President Barack Obama’s promise of an open dialogue. He also said the new state tax is an unfair burden on smokers and people in the tobacco business.

“It’s an unfortunate thing when the state and the governor’s office take a route of over taxing, rather than cutting spending,” Seneca said. “The state has chosen their course and chosen their path as to what they want to do. We’re on this path of conflict and controversy.

“We’ve tried all different ways to communicate with them in terms of honoring our treaties, respecting our sovereignty and leaving us alone. We will never collect taxes for New York state.”

He said the Nation is reviewing recent state and federal actions and most likely will end up in litigation.

“The Seneca Nation will be resilient,” he said. “We’ll find a way to deal with this and succeed in the end.”