State drops collection of taxes on Indian cigarettes

ALBANY — Despite a ballooning budget deficit, the Paterson administration quietly has written off taxes it had been expecting to collect on sales of cigarettes by American Indian retailers — an admission that yet another governor has no plans to resolve the long-standing, thorny matter.

In April, Gov. David A. Paterson and lawmakers agreed on a budget for the state’s current fiscal year that projected revenue of $65 million from taxing cigarettes sold to non-Indians in smoke shops, through the mail or over the Internet from reservation-based businesses.

But with no fanfare — or even public notice — the administration has eliminated the $65 million, meaning the governor now does not expect to begin collecting the taxes at least until April 1, the start of the new fiscal year.

The decision drew immediate and sharp criticism from health groups and an association that represents non-Indian retailers who say they cannot compete with the American Indians, who do not charge the state’s sales $2.75-per-pack excise tax.

“It’s embarrassing, and it’s outrageous that the Empire State can’t seem to figure out how to collect this tax when just about every other state does,” said Russell Sciandra, director of the Center for a Tobacco Free New York, which is connected with the American Cancer Society.

Critics say the state loses $1 billion annually by not collecting the cigarette tax. Seneca Nation of Indians retailers lead the country in the sales of untaxed cigarettes.

For years, state officials have worried about potential violence, such as the clash between state troopers and Indians on the Thruway in 1995, when then-Gov. George E. Pataki tried to end the tax-free sales.

Seneca Nation officials, who were working Friday on flood relief efforts, were unavailable to comment.

Last week, the Paterson administration released a 329-page update on state spending through the first quarter of the fiscal year.

The report said the administration believes the state now faces a $2.1 billion deficit this year, and Paterson is looking at spending cuts and other options to propose to a special session of the State Legislature, expected to be held next month. Lawmakers have not ruled out raising taxes to close the gap.

Deep in its pages, the spending update briefly mentions lower cigarette tax revenues, but makes no specific reference to jettisoning the cigarette tax collections.

During an interview on an unrelated topic, Robert Megna, the governor’s budget director, revealed to The Buffalo News that the state is backing away from the projection of $65 million from the potential revenue source.

Matt Anderson, a spokesman for Megna, later said the $65 million was deleted from the budget “to prudently address potential risks to our receipts forecast.”

“We continue to work diligently toward a negotiated settlement of this issue,” he added.

Laws on the books already permit the state to collect the tax, which has been an issue going back to the days of Mario M. Cuomo’s tenure as governor. Over the past decade, the dispute has intensified as the state increased cigarette taxes, widening the playing field between Indian and non-Indian retailers.

The Senecas have maintained that treaty rights going back to the days of George Washington give them the right to sell products, including cigarettes, without taxes.

They have long said they never will act as agents of the state government in collecting taxes, which they say would kill off a flourishing Western New York business that employs hundreds of people.

On numerous occasions, the State Legislature has sought to force Paterson, and governors before him, to collect the tax.

In January, Paterson said he wanted to resolve the issue through negotiation. But critics say that, with the stakes so lucrative, the Indian tribes, especially the Senecas, have little reason to negotiate.

“It’s sending totally the wrong signal,” James Calvin, executive director of the New York Association of Convenience Stores, said of the administration quietly striking the Indian cigarette tax money from the budget.

“If the state has a $2.1 billion deficit, it’s crazy not to access the hundreds of millions of dollars in tax revenue that’s readily available from this source,” he added. “It’s already a law. It’s collectable. The United States Supreme Court has said we can collect it. Why would you ignore close to $1 billion when staring at such a huge deficit?”

In June 2008, the state raised its excise tax on a pack of cigarettes by $1.50 to $2.75. That gives an Indian retailer who does not charge the tax a built-in price advantage of $27.50 per carton.

“By the end of the fiscal year, the state and Gov. Paterson, we conservatively estimate, will have forgone $1 billion that is owed on Indian cigarette sales,” Sciandra said.

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