By A.A. Hoyt – Gotham Government Relations
The combination of Governor David Paterson’s Emergency Expenditure Legislation and the federal CHIP and PACT legislation will destroy any hope for an Indian summer by New York tobacco consumers.
The PACT legislation, Prevent All Cigarette Trafficking Act, signed in April 2010 by President Obama, is scheduled to be implemented by the end of this month (June 2010). PACT prohibits the post office from delivering cigarettes sold on the Internet.
Last year, the federal tax on cigarettes was raised by 62 cents/pack and is currently $1.01/pack. President Obama okayed the tax increase in order to fund CHIP legislation (children’s health insurance program). Although the Wall Street Journal reported in February of 2009, when the CHIP legislation was proposed, that the move by the federal government could “complicate efforts around the U.S. to boost state cigarette taxes,” that has not stopped New York from proceeding full speed ahead with its proposed tobacco tax.
The New York Tobacco Tax
New York’s now infamous tobacco tax increases the tax on every pack of cigarettes by $1.60 (effective July 1, 2010), increases the tax on other tobacco products by 75%, increases the tax on snuff products by $1.04/pound, and creates a new category of tobacco product, the “little cigar” (which will be taxed at an equivalent rate to cigarettes, effective August 1, 2010).
An Act to Amend the Tax Law, in Relation to the Sales of Cigarettes to Indian Nations or Tribes
Aside from the unprecedented taxes on cigarettes and other tobacco products proposed in Governor Paterson’s Emergency Appropriations Bill (# 293) and Emergency Article VII Bill (# 294), the Emergency Article VII Bill (#294) promises to tax New Yorkers who buy their cigarettes on qualified Indian reservation land.
Part D of Governor Paterson’s Emergency Article VII Bill (#294) ends the tax shelter (a.k.a legal loophole) enjoyed by New Yorkers who buy their cigarettes on qualified Indian reservation land.
New York Tax Law § 471-e (Tax Law) provides that “qualified Indians” have the right to purchase tax exempt cigarettes on the “qualified reservation” property of their tribe or nation for their own consumption. The law’s intent was to exempt only “qualified Indians” from paying State taxes on cigarettes. In 2005, the Legislature amended Tax Law §471-e, making it clear that “non-Indians making cigarette purchases on an Indian reservation shall not be exempt from paying the cigarette tax when purchasing cigarettes within this state.”
However, due to enforcement problems, the State has not been able to put into place a regulatory scheme that would allow Indian retailers to distinguish between “qualified Indians” and non-Indians when making cigarette sales.
Enforcement: Proposed Regulatory Schemes
In 1988, New York’s Department of Taxation and Finance (Department) adopted an approach to tax New Yorkers who bought their cigarettes from Indian land – the “probable demand” approach. (The Supreme Court formally put its stamp of approval on this approach in 1994.) Probable demand limits the quantity of unstamped (“untaxed”) cigarettes wholesalers or distributors could sell to tribes and tribal retailers. Essentially the “probable demand” formula attempts to fulfill the projected monthly cigarette need of a particular Indian tribe or nation so that “qualified Indians” would continue to purchase their cigarettes tax free and there would not be an excess amount of tax free cigarettes that could be sold to non-“qualified Indians.”
The Department proposed to implement the probable demand mechanism in one of two ways: (1) The Department could project the probable demand for cigarettes attributable to members of a particular Indian tribe or nation, or (2) The Department could enter into agreements with tribal leaders to determine probable demand. Thereafter, tax exemption coupons would be issued to Indian retailers in an amount representing their monthly allotment under the probable demand formula. Retailers could then exchange those coupons with wholesalers for unstamped (untaxed) cigarettes. Retailers were to sell unstamped cigarettes only to “qualified Indians” whom would be provided with individual exemption certificates to present to retailers when purchasing cigarettes. However, these regulations were never implemented due to prolonged legal challenges and proceedings and in 1998 the Department announced its repeal of the regulations.
In 2003 the New York Legislature adopted Tax Law § 471-e, which directed the Department to issue whatever regulations would be necessary to collect cigarette taxes on reservation sales to non-Indians. The new regulatory scheme also used a coupon system as the mechanism of enforcement. Again, the Department was to determine the probable demand for cigarettes by tribal members through various means. However, this time the Department was to periodically issue to the governing body of a tribe tax exemption coupons representing the amount of cigarettes likely to be consumed by tribal members each quarter. Contrary to the first set of regulations which stated probable demand was to be calculated on a monthly basis, the new regulations stated that probable demand was to be calculated on a quarterly basis. Further, the new regulations provided that the tax exemption coupons were to be issued to the governing body of the tribe, not to Indian retailers. Under the new regulatory scheme, cigarette wholesalers were to pay the sales taxes on all cigarettes in their possession; all cigarettes were to bear tax stamps. A tribe could then purchase cigarettes for use by its members without paying any sales tax by proffering the tax exemption coupons it was provided by the Department to the wholesaler. The wholesaler, in turn, would use those coupons to obtain a refund from the Department for the sales tax it had already laid out on the cigarettes it sold to the tribe.
However, this new batch of regulations never took effect due to the Department’s failure to meet the March 1, 2006 deadline. The Department had not made the probable demand calculations nor had it issued the tax exemption coupons. In an advisory opinion on March 16, 2006, the Department stated that it intended to continue its policy of “forbearance” (a.k.a. it would not actively attempt to collect from wholesalers, distributors, or Indian retailers, cigarette sales taxes associated with on-reservation sales).
Cayuga Indian Nation of New York v. Cayuga County Sheriff David S. Gould, et al.
The most recent legal challenge to the sale of tax exempt cigarettes on reservation land to non-“qualified Indians” was decided by the New York Court of Appeals on May 11th, 2010. Pertinent to our discussion, the issue before the Court was whether the Sheriffs and District Attorneys of Cayuga and Seneca Counties may enforce Tax Law § 471 (imposing a sales tax on cigarettes sold by Indian retailers to non-Indians on reservation land) despite the fact that the tax exemption coupon system devised by the Legislature in Tax Law § 471-e was not in effect. Essentially the Court had to decide whether Indian retailers could be criminally prosecuted for failing to collect the sales taxes from non-Indian consumers and forwarding them to the Department. Without a regulatory scheme in place to collect these sales taxes, the Court answered this question in the negative: “[A] system of ad hoc enforcement by local District Attorneys, without implementation of an appropriate calculation and collection methodology, [would not] be consistent with legislative intent.”
The Court did provide some guidance as to future methods of enforcement: “It is generally up to the Legislature and the Department to articulate – before a transaction occurs – in what circumstances a tax is owed, who is obligated to collect it, how it should be calculated and when and how it must be paid.” Finally the Court stated: “Whatever methodology is ultimately used to calculate and collect sales taxes derived from on-reservation retail sales of cigarettes, we would expect that advance notice would be supplied to Indian retailers and that the system would be uniform throughout the state.”
Where Do We Go From Here?
The Department must put an end to its forbearance policy and heed the advice of the New York Court of Appeals in crafting regulations that pass muster under current legal standards. Cooperation from Indian tribes as well as tobacco wholesalers and distributors would contribute to smooth enforcement. New York should also look to other states with successful regulatory schemes in place for guidance.
Finally, in crafting its regulations the Department must fulfill the three requirements articulated by the United States Supreme Court in 1994: “States may impose sales or excise taxes on sales or activities within an Indian reservation if the legal incidence of the tax rests on persons who are not tribal members, the balance of Federal, State, and tribal interests favors the State, and minimal burdens on collecting the tax are imposed on a tribe or tribal members.” (Dep’t of Taxation and Fin. of N.Y. v. Milhelm Attia & Bros., Inc., 512 U.S. 61 (1994)). As the “legal incidence of the tax” will rest on New Yorkers who are not “qualified Indians,” and a strong argument can be made that the “balance of Federal, State, and tribal interests favors the State,” the only remaining issue is enforcement.
Whether or not New York’s proposed regulatory scheme imposes only “minimal burdens” on collecting the tax imposed on a tribe or tribal members is likely another issue to be decided in the courts.
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