Tax-Hungry State Officials Revive Indian Wars Over Cigarettes


Get yer home-rolled cigarettes
Paul Martin Lester

You know the world has come a long way, baby — in a circle — when politicians try to tax that toasted taste right out of your smokes and find themselves fighting Indians in the process. Around the world, officials have tried to squeeze smokers (for their own good, of course) of as much cash as possible in return for allowing them to enjoy their chosen vice. The end result has been thriving black markets, whether in Europe or the United States. Complicating this matter in the U.S., though, are those little islands of quasi-sovereignty known as Indian reservations. As cigarette taxes have soared, Native Americans have perceived entrepreneurial opportunity in peddling and even manufacturing low-cost smokes for eager customers. Not so surprisingly, state officials have responded with attacks on tribal independence.

Technically, states are authorized to tax cigarettes sold on reservations to non-Indians, but they don't have the authority to enter reservations to collect that tax. That's courtesy of Oklahoma Tax Commission v. Citizen Band of Potawatomi, decided in 1991. There's a lot of hedging and on the other hand in that situation — some states claim a measure of legal power over tribal lands under Public Law 280 or similar measures. But, basically, a legal standoff is in place.

As you might guess, this infuriates some public officials. New York City Mayor Bloomberg went so far as to urge then-Governor David Paterson to "get yourself a cowboy hat and a shotgun" to collect cigarette taxes from Indian tribes and their customers.

You see, not just justice, but tax collection, truly is blind.

That approach doesn't work as well as you might think, so state officials have taken to leaning on tobacco companies. As part of an interesting analysis of the cigarette tax standoff, Ryan D. Dreveskracht summarizes a major tax collecting approach for Native American Times:

In 1998, the Attorneys General of 46 states, five U.S. territories, and the District of Columbia settled various legal actions involving antitrust, product liability, and consumer protection claims against the nation's four largest tobacco companies.  (In the early years of the Bush Administration, the Department of Justice decided not to pursue claims against tobacco manufacturers for harm caused in Indian country).  The states wanted billions of dollars, and were likely right to demand it.  The tobacco companies, however, anticipated that they would have to substantially raise cigarette prices to pay for their financial obligations to the states.  They also knew that by raising their prices, other nonparticipating companies would have a competitive price advantage.

In settling the suits, the major tobacco companies got a sweetheart deal.  As part of the settlement agreement, states agreed to enact and "diligently enforce" escrow statutes that "effectively and fully neutralize[d]" competition from nonparticipating companies.  These statutes impose financial obligations on non-participating companies by requiring them to make escrow payments based on the number of tax-stamped cigarettes sold in a participating state.  Participating tobacco companies are not subject to these payments.  Nonparticipating companies, however – companies that have never been sued or found culpable for conduct giving rise to liability – are required to make the payments.

Further complicating matters, courts say that tribal imports of cigarettes from outside the U.S. are subject to state regulation.

But remember, tax laws may apply to tribal lands, but enforcement is another matter entirely. So if "nonparticipating companies" are actually based on reservations…

That's right, tribes including New York's Oneida Indians set up their own cigarette companies, cranking out smokes under their own brand names. Last year, Thomas Kaplan reported for the New York Times:

ONEIDA, N.Y. — The trucks lumber past cornfields and dilapidated farm houses, pull up to a onetime bingo hall and unload their cargo: boxes of tobacco imported from the Carolinas.

Inside, employees of the Oneida Indian Nation dump the shredded tobacco leaves into rolling machines and fashion them into cigarettes to be sold at a dozen tribal convenience stores midway between Syracuse and Utica.

The cigarettes, branded with names like Niagara's and Bishop, sell for as little as $39.95 for a 10-pack carton — much cheaper than those at non-Indian retailers — and bring in millions of dollars a year to the tribe, which also has a resort casino, five golf courses and a multimedia production house.

"We tried poverty for 200 years," the Oneidas' leader, Ray Halbritter, said in an interview. "We decided to try something different."

The article points out that New York's tribes have been the most aggressive with their home-rolled tactics, cranking out vast quantities of cigarettes to satisfy the demand in a state where taxes are the highest in the nation at $4.35 per pack, plus another $1.50 levied in New York City.

New York officials tried seizing reservation-made cigarettes — but the courts have ruled that out. The state also, says Dreveskracht "ramped up its enforcement by trailing vehicles that leave the Reservations, inspecting tax stamping agents' inventories, and secretly conducting surveillance on Reservation smoke shops."

It could be worse. In 2003, Rhode Island state troopers flat-out invaded a reservation and battled tribal police and officials to shut a smoke shop. Members of the Narragansett tribe are still pissed.

Nothing brings out old-school authoritarianism and brutality in government officials like taxes.

By the way, Native Americans are fighting the feds over taxes, too, but I'll leave that for another day.

H/T to BroadSnark, who covered the often-overlooked cigarette tax battle between Native Americans and state officials on her blog.