The battle between New York and its federally recognized tribes over the taxation of cigarettes continues.
In the most recent development, other players involved were on the losing end of a recent ruling in federal court. The judge held that wholesalers failed to collect New York City cigarette tax on the sale of millions of cigarette cartons to tribal retailers located on reservations in New York. The New York Times estimates the wholesalers could have to pay penalties up to $15 million to New York City.
New York City brought this action alleging that the wholesalers violated federal law. The Contraband Cigarette Trafficking Act prohibits persons from selling “contraband cigarettes,” which are defined as “a quantity in excess of 10,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes.”
Defendant wholesalers Mauro Pennisi and Gutlove & Shirvint each sold from May 2008 to January 2011 more than 10 million cartons to Indian retailers mostly on the Poospatuck Reservation, where fewer than 500 people live. Although cigarette packs sold to tribal members on reservation are exempt from NY cigarette tax, packs sold off-reservation in NYS are taxable.
New York City asserted that the cartons sold by the wholesalers were trafficked into New York City without payment of the New York City cigarette tax and re-sold. The judge ruled that New York City met its burden of proof to establish that the wholesalers should have known the vast majority of the untaxed cigarettes sold to the tribes were re-sold to non-tribal members.
This case will only further encourage tribes located in New York to manufacture their own cigarettes. Whether or not NYS will again seek to stop such activity remains to seen.
In the ongoing war over cigarette taxes between the State of New York and its federally recognized tribes, the latter scored a victory in the most recent battle.
Supreme Court Justice David Demarest issued an order last week requiring the State to return cigarettes seized last January by state police. The 26,160 cigarette cartons and 72 bags of tobacco were sold by the St. Regis Mohawk Tribe to HCI Distribution, Inc., a political division of the Winnebago Tribe of Nebraska.
Some of the State’s tribes began to manufacture and sell their own cigarettes after losing a court case requiring them to pay the $4.35 per pack cigarette tax on their purchase of name-brand cigarettes from wholesalers located off reservation.
NY Tax Law imposes a cigarette tax on on-reservation sales of cigarettes to non-members of an Indian tribe. The consumer bears the responsibility to pay the tax.
In this case, however, the cigarettes were sold to out-of-state purchasers, which, according to Justice Demarest, are not subject to the State’s cigarette tax. Therefore, the State had no authority to seize the cigarettes and loose tobacco en route to Nebraska.
A spokeswoman for NY Attorney General Eric T. Schneiderman confirmed the AG will appeal the decision.
The Indian Country Today Media Network has more.
The ongoing war between the State of New York and cigarette sellers is nothing new. Last November, New York City authorities filed a suit against a Chinatown shop that doesn’t collect the $5.85 tax per pack sold because its customers roll the cigarettes on the store’s premises.
Last week, the New York Times ran a story about far bigger cigarette sellers also engaged in the war: New York’s eight federally recognized Indian tribes.
The tribes lost one battle in court that lasted several years. The ruling requires them to pay the cigarette tax on their purchase of name-brand cigarettes from wholesalers, which are located off reservation.
Their latest move: Stop purchasing name-brand cigarettes and manufacture the cigarettes themselves. For example, the Oneidan Indian Nation bought a plant’s equipment and set up shop in a former bingo hall located on the reservation. Tribes are taking the position that as sovereign nations the state’s cigarette tax does not apply to sales made on their reservations.
I think this reasoning may hold if the cigarettes are sold to tribal members. And some are. The problem is that tribes sell their own manufactured cigarettes to non-Indians as well. To me, it sounds like the equivalent of asserting that non-Indian New York residents who gamble at an Indian casino aren’t subject to the state’s income tax on gambling winnings because the activity took place on a reservation. Of course, New York residents must report and pay state income tax on all gambling winnings won at Tribal casinos in the state.
Whether this most recent maneuver by the tribes is a calm before the storm remains to be seen. New York State Tax Commissioner Thomas Mattox has said it’s far more efficient to focus enforcement at the wholesale level as opposed to going store-to-store. Problem is, the wholesale level is shrinking.
Your move, Mr. Mattox.
Cigarette taxes in New York City are as high as it gets: $5.85 per pack. In order to sell cigarettes on the cheap, some shops are attempting to circumvent the tax. The result: A lawsuit by the city.
As reported by USA Today, Island Smokes, a Chinatown cigarette shop, is facing a lawsuit from New York City for evading cigarette taxes. Island Smokes patrons use high-speed cigarette machines to “package loose tobacco and rolling papers into neatly formed cigarettes.” The cigarette shop sells some 10-pack cartons of these “roll-your-own” cigarettes for less than $40. A summary of the “savings”:
Many stores sell customers loose pipe tobacco, which is taxed by the federal government at $2.80 per pound (450 grams), compared with $25 per pound for tobacco made for cigarettes. The shops don’t pay into the cigarette manufacturer trust fund, intended to reimburse government health programs for the cost of treating smoking-related illness. And the packs produced by “roll-your-own” shops are generally also being sold without local tax stamps, which in New York include a $1.50 city tax and a $4.35 state tax.
According to Island Smokes’ attorney, the store is neither selling cigarettes nor manufacturing them. Instead, Island Smokes merely sells loose tobacco and tubes, and the customers are provided access to the rolling machines.
Similar legal disputes over roll-your-own cigarette shops are ongoing in Wisconsin, West Virginia, and New Hampshire.