Senecas: State didn’t comply with cigarette tax rules

The impact on Indians was not taken into consideration when the state implemented regulations for the collection of taxes on cigarettes sold to non-Indians at reservation businesses.

Carol E. Heckman, a partner in Harter, Secrest & Emery LLP’s Buffalo office, who represents the Seneca Nation of Indians, argued before the Appellate Division, Fourth Department on Tuesday that the state Department of Taxation did not comply with the State Administrative Procedure Act in drawing up regulations to implement the collection.

The Senecas are appealing a June ruling by an Erie County judge who determined the department complied with the act.

Andrew D. Bing, deputy solicitor general in the appellate division of the attorney general’s office, argued the impacts the Nation claims are speculative and that the collection system does not apply to it directly.

The state passed a law, effective July 1, 2010, for the collection of taxes on all cigarettes sold in New York state, including those sold to non-Indians at Indian-owned businesses. Implementation was initially halted by court orders because the state did not have a means in place for the collections and providing tax-free cigarettes to Indians who are exempt from paying the taxes.

To remedy the situation, the state amended the law to require wholesale dealers to collect the cigarette excise tax and prepaid sales tax for all cigarettes sold for resale on an Indian reservation to non-Indians.

Two alternatives are offered to Indian nations for obtaining tax-exempt cigarettes for their own use, an amount determined by the state based on probable demand of members, calculated according to 2000 census data of the various tribes in the state.

Reservation cigarette sellers can participate in a coupon system in which they are given tax-exempt coupons to redeem with wholesale dealers for their allotted tax-free quantity. If they choose not to opt-in to the coupon system by Aug. 15 of each year, which is what happened, they are subject to the prior approval system in which wholesalers get prior approval from the state to sell the tribe or reservation seller their tax-exempt allotment as pre-approved by the tax department.

Wholesalers then get a refund for the tax-exempt sales to Indians by filing a form with the tax department.

Heckman said the department did not take into consideration the effects the collection will have on Nation employment, involving some 3,000 Seneca jobs. She also argued there are problems with the regulations, which do not provide retailers a way to find out who received a tribe’s quota. She also said there is nothing preventing a wholesaler from selling the whole tribe’s allotment to one retailer.

Justice John V. Centra, who was presiding, asked Heckman if her argument was that the cigarettes could be hoarded?

She agreed that was a concern, but said there are also negative impacts from the Web-based program set up by the state for the prior-approval system in that it is difficult for Indian nations to find out who got what, noting there are 7,800 enrolled Senecas on five territories, and that the website only allows wholesalers to access that information.

“The court below essentially followed the state’s argument that the impact comes from the legislation,” Heckman said, referring to a June 9 ruling by Erie County Supreme Court Justice Donna M. Siwek, which is the subject of the appeal.

Siwek ruled the Department of Taxation and Finance “substantially complied” with the requirements of the State Administrative Procedure Act in analyzing the impact of a rule implementing tax law amendments to allow for the collection of taxes from non-Indians on reservation territory.

She decided the negative impacts cited by the Senecas were directly related and flowed from the 2010 amendments to the tax law and that the Legislature dictated the taxing scheme, not the department.

Heckman argued the department drew up the regulations and needed to comply with SAPA rule-making requirements, including the consideration of deleterious effects and alternatives.

“A Job Impact Statement is not being submitted with this rule because it is evident from the subject matter of the rule that it could have no impact on jobs and employment opportunities,” according to SAPA documentation filed in conjunction with the law.

The Regulatory Impact Statement applies to approximately 73 licensed cigarette tax stamping agents and 265 licensed wholesalers to administer the law as amended and the Regulatory Flexibility Analysis for Small Businesses and Local Governments considers potential economic impacts to the same.

Bing argued SAPA was followed, including the statements Heckman referred to. He said SAPA does not require the department to agree with the Nation’s speculation about what might happen.

He said there was no showing that the impact is “so likely” that the department arbitrarily and capriciously adopted the regulations.

“Is this a result of the statute or the system?” asked Justice Centra.

“The statute is in the driver’s seat,” Bing replied.

He also said the new law, unlike a 1988 one that was repealed in 1990, does not involve reservation members. Bing said the point of the system was to move collections upstream, away from the reservations and that it directly impacts wholesalers and stamping agents.

“What about indirect effects?” asked Justice Eugene M. Fahey.

Bing said a speculation effect was too indirect and that tribal entities are not regulated by the system.

Outside the courtroom at the M. Delores Denman Courthouse, Bing declined to comment.

“I thought it went well,” Heckman said. “The judges clearly understand the issue. It will be interesting to see what they come out with.”

A decision will be issued at a later date.