Distributors seek equity in battle against untaxed Native American cigarettes

by Bob Gatty

Key Takeaways
•    The situation in New York is the most severe, with the state losing upwards of  $200 million in revenue as year.
•    The Coalition to Stop Contraband Tobacco is working for passage of the PACT Act, which will halt mail delivery of tobacco and make failure to collect taxes a federal offense.
•    Distributors feel they are at an unfair disadvantage since the Native American tribes don’t have to collect taxes.  

    On a cold, snowy late January day, a band of lawmakers and business people went to the steps of the New York City Hall urging the state to start collecting taxes on cigarettes sold by Native American tribes to non-Native American customers and, thus, end years of unfair competition for law-abiding tobacco distributors and retailers.

    The protest by the New York Association of Convenience Stores (NYACS) and the New York State Wholesale Marketers Association (NYSWMA) was designed to push Gov. David Paterson into making good on a recent promise to begin collecting state cigarette taxes on tribal sales and at least delay implementation of a proposed $1 per pack state tax hike until that happens.

   “For the past 15 years or more, our members have had to do business with one hand tied behind their back by their state government,” James S. Calvin, NYACS president said in testimony just a few days earlier before the state Senate Standing Committee on Investigations and Government Operations in Albany.
    
    “For obtaining a license to sell tobacco products, complying with the myriad regulations, collecting and remitting taxes, providing employment, risking capital, and working seven days a week, their reward is a state tax policy that chases their customers away to unlicensed, unregulated, ‘tax free’ tribal stores they cannot possibly compete with,” Calvin declared.

    For law-abiding distributors in New York, the state’s policy of non-enforcement of the state’s tobacco tax laws on Native American tribes has meant a steady decline in tobacco sales as both federal and state taxes have skyrocketed, prompting more and more consumers to purchase their cigarettes from either Native American-operated smoke shops or from websites that they operate.

    “Forty percent of cigarette sales in New York are Native American,” says Dan Finkle, president, Finkle Distributors, Johnstown, NY.  “Any business will take any advantage that they can get. They are smart business people. But they are costing me 30 to 40 percent of my units.”

Some tribal agreements
    While distributors in other states also face competition from Native American tribes that sell cigarettes to non-Native American customers, the situation in New York, which has the highest cigarette taxes in the nation, appears to be the most severe. Nationwide, the situation is serious enough for the National Conference of State Legislatures (NCSL) to urge Congress to step in and help.

    A number of states either have established or are in the process of establishing agreements with Native American tribes with the goal of eliminating the unfair competition that results when tribe-operated outlets sell cigarettes at cut-rate tax-free prices. However, almost 16 years after the U.S. Supreme Court ruled in 1994 that states may collect sales taxes on tobacco sold on Indian reservations to non-Native Americans, most states still have not reached such agreements.

    Nevertheless, there are instances where agreements are proving successful. In the state of Washington, Tumwater-based Harbor Wholesale does a brisk and growing business with reservation-based tribal-operated stores. There, the playing field is level because those stores collect the state taxes, which are then returned to the tribe to support local projects. So there is no price differential as a result of non-collection of state tobacco taxes.

    In Wisconsin, the state refunds 70 percent of its excise tax on cigarettes that an Indian tribe collects for the state on lands that were designated as reservation or trust lands before 1983. That helps, but Ed Wojnicz, sales manager at Holiday Wholesale, Inc., Wisconsin Dells, says competition from Native American tribes is still difficult. “The tribes have an advantage over anyone else,” he says. “The tribes are in the number-one position, selling more and more products.”

     Nationwide, 34 states are home to federally-recognized Native American tribes, many of which operate smoke shops, convenience stores, and casinos that do a brisk business in tobacco sales. In the few states that have compacts similar to the one in Washington, unfair competition is generally eased – as long as the tribes are part of the compact and comply with its taxation provisions. For example, in Michigan, there are 12 federally-recognized tribes, only seven of which have signed compacts with the state.

Battle for fairness
    “We’re trying to protect our members in states where there are large amounts of Native American tobacco sales,” says AWMA President & CEO Scott Ramminger. “We encourage the government to enforce the law, which it is really not doing in many cases, and the result is very aggressive high volumes of sales both over the Internet and in drive-up operations.”

    Ramminger points out that exemptions provided to Native American tribes by the federal government “were designed to allow them to sell cigarettes to their own people, not to create a business that thrives only because of tax avoidance.”

    AWMA is leading a national Coalition to Stop Contraband Tobacco initiative that is seeking approval of the Prevent All Cigarette Trafficking Act (PACT Act), which would prohibit the U.S. Postal Service from delivering cigarettes through the mail. It would also make failure to collect taxes a federal offense.

    The Seneca Indian Nation, based in western New York, says that legislation, which has been approved by the House of Representatives and the Senate Judiciary Committee, would “devastate” the tribe’s economy.

    “If the PACT Act becomes law, it will prevent all mail-order cigarette sales and destroy roughly 1,000 native and non-native tobacco industry jobs here in western New York,” warns Barry E. Snyder Sr., nation president. “We applaud the goal of halting rogue tobacco smuggling, but it’s wrong to wipe out legitimate jobs in the process.”

    Nation officials say enforcement of the PACT Act could result in up to a 65 percent loss in revenue. “The PACT Act is being portrayed as a tool to fight cigarette smuggling,” Snyder says. “In reality, it will kill legitimate, treaty-sanctioned Native American commerce, causing significant economic harm.”

    The Seneca’s apparently are determined in their opposition, as the Buffalo News reported in January that the tribe is considering spending as much as $250,000 to oppose the reelection bid of freshman Sen. Kirsten Gillibrand (D-NY) because of her support of the PACT Act.

    Meanwhile, Indian Country Today reports that the National Congress of American Indians has asked the U.S. Senate “to honor federal treaty obligations guaranteeing free trade in Indian country, confirm that Indian nations can continue to use USPS to conduct their legal tobacco trade and ensure other governments are not empowered to override Indian tribes’ sovereign authority to govern their territories.” It said the PACT Act would put Indian-owned mail order tobacco businesses out of operation.

    In New York, the tribes claim “sovereign immunity” from such taxation. The Seneca Indian Nation contends that the 1994 Supreme Court decision is trumped by the Treaty of 1842 at Buffalo Creek that expressly forbids the state from imposing sales taxes on their trade with non-Indians.  

    “For over 200 years, New York State has tried to steal our lands, assert jurisdiction over what lands we have left and impose its taxes on us and our activities,” J.C. Seneca, co-chairman of the Seneca Nation Foreign Relations Committee, told that same New York state Senate committee last October. “In response, and in our defense, the United States promised to protect us from any effort by the state to impose its taxes in our territories.”

    However, NYACS’ Calvin told those same lawmakers in Albany that New York’s courts have stated unequivocally that the Buffalo Creek treaty refers solely to exempting Indian land, not commerce, from taxation.

Fear of violence
    Another reason often given for the failure to enforce state cigarette tax revenue from Native American tribes in New York has been the fear of violence. Last October, the Albany Times Union reported that New York State Police were concerned that a government effort to block the flow of tax-free cigarettes onto the state’s Indian reservations would lead to violence and possibly escalate into a “military problem,” according to an adviser to Gov. Patterson.

    The governor’s chief legal counsel, Peter Kiernan, told a state Senate committee that a police “threat assessment” predicted that tribes based in western New York would fiercely resist any attempt to interfere with their multimillion dollar cigarette business. He said the cost of enforcement could be as much as $2 million per day, based on the state’s experiences when it tried to impose cigarette taxes on the reservations in 1992 and 1997.

    Then, members of the Seneca tribe set up blockades on state highways, set tires on fire, and in some cases brawled with troopers during the protests.

    At the New York City rally in January, Sen. Carl Kruger had this response to concerns that violence would erupt again and perhaps lead to bloodshed: “Well you know what, when an attempt was made, which lasted about 10 minutes, to collect the tax, some folks went out on a road and set some tires on fire. So everybody took a quick retreat, and the taxpayers of the state of New York lost billions of dollars.”

    In his testimony before the state Senate committee, Calvin cited provisions of state law that make it a Class D felony to attempt to “influence the policy of a unit of government by intimidation or coercion” by threatening to commit certain violent crimes, including assault, use of firearms, or arson. “Thus,” he said, “our state now has a mechanism for prosecuting the offenders in order to protect its citizens from terrorism and preserve the rule of law. If tax collection is being postponed in response to threats that already have been made, it would amount to succumbing to terrorist threats, which is unacceptable.”

    Calvin also pointed out that some tribes tout the economic benefits of their casinos, smoke shops and other business enterprises as reasons for the state not to implement the tax collection law. But he said that is no reason not to enforce the law.  “Being an economic powerhouse does not excuse any entity from abiding by standards enacted by the legislature for engaging in commerce with New Yorkers,” he said.

   To collect the taxes, Calvin said, the state needs to issue tax-exemption coupons to the tribes to preserve the undisputed tax exemption on Indian sales to other tribal members. Once that happens, he said, the state can begin collecting the taxes.

    There is suspicion that Gov. Paterson is not entirely serious about collecting Native American cigarette taxes because his budget does not include any revenue estimate for that action. According to a study by an economist hired by NYACS, upwards of $1 billion per year is being lost because of the state’s current non-collection practices. However, state budget officials argue that the ultimate impact would be about $200 million per year, or perhaps less.

    Regardless, the industry is anxious for the governor to follow through and issue regulations to implement the tax collection system as prescribed by law.

    “Whatever the true motivation for refusing to act, there is no question it is taking an enormous toll on small businesses, taxpayers, and public health,” said Calvin.

    For distributors like Dan Finkle, it’s about fair competition. Finkle, like other AWMA distributors in New York state, has testified before the state legislature and worked hard to convince lawmakers to level the competitive landscape with their Native American competitors.

    “These guys are making a fortune. It is one hell of an income stream for them, and they want to protect that income,” Finkle says. “I don’t blame them. But it’s hurting my business and it’s not right. We have empowered them to do this. It’s got to stop.”

Bob Gatty, contributing editor and writer for Convenience Distribution, also owns G-Net Strategic Communications in Sykesville, MD.