NY cigarette tax law stopped

UTICA, N.Y. – Judges in two separate federal courts in New York have issued rulings stopping the state from collecting taxes on cigarettes sold to non-Indians on sovereign tribal land.

Judge David Hurd, of the U.S. District Court for the Northern District of New York, issued a preliminary injunction Oct. 14 in a case filed by the Oneida Indian Nation against Gov. David Paterson and other state officials, asking the court to declare illegal the state’s new laws to collect cigarette taxes from Indian businesses.

The ruling was issued a day before the judge’s temporary restraining order was scheduled to expire.

In his decision, Hurd agreed with the nation’s arguments in requesting injunction.

“The Oneida Nation has established irreparable harm will occur absent injunctive relief, there is
likelihood of success on the merits, and the balance of the equities tips in its favor and an injunction is in the public interest,” Hurd wrote.

Under the new law, which was to be implemented Sept. 1, cigarette wholesalers are required to pay for and affix a $4.35-a-package tax stamp on all cigarettes sold in the state. A tribe can opt in to a coupon system for cigarette-store.biz/info/benefits-to-buy-cigarette-online for its members, or into a “prior approval” system to buy tax exempt cigarettes from wholesalers who are approved by the state to sell a certain limited amount of cigarettes to a particular tribe.

The efforts to capture state taxes from Indian cigarette sales were spurred by the states massive $9 billion-plus deficit.

Hurd denied the state’s request to consolidate the Oneida Nation’s lawsuit with lawsuits filed by the Seneca Nation and other Indian nations and move it to the Western District federal court.

He also ruled in favor of the Oneida’s request for mediation in the case, ordering the action to the Hon. Andrew T. Baxter, a U.S. magistrate judge, for mediation to conclude by Dec. 17, 2010.

“The Oneida Nation is pleased that the federal district court has halted an attempt by New York state to circumvent the nation’s sovereignty by imposing taxes upon suppliers of products to be sold on the Oneida reservation,” Oneida spokesman Mark Emery said. “Although we are pleased with the ruling, we remain convinced that these issues are best resolved through negotiation. For that reason, we are especially gratified that the federal court compelled the state to participate in good faith mediation, as we believe that parties who negotiate in good faith resolve these differences in a way that respects all interests involved.”

In his 25-page ruling, Hurd provided a number of devastating arguments against the state’s new cigarette tax law as applied to the Oneida and other Indian nations.

He agreed with Oneida that the law would impose irreparable harm by requiring the nation to pay a $4.35-a-package tax, which he deemed “unconstitutional,” because the tribe is “an untaxable entity.”

“These impingements upon the Oneida Nation’s tribal sovereignty, self-government, and constitutional rights, cannot be compensated for in money damages. Moreover, even if the impingements could be valued at some monetary amount, the plaintiff cannot bring an action against the state to recoup monetary damages it suffers. Thus, the harm from permitting the state to enforce its new tax law will be irreparable to the Oneida nation,” Hurd wrote.

He also agreed that the tax imposes more than “minimal burdens reasonably tailored to the collection of valid taxes from non-Indians” and, therefore, the nation is likely to be successful in a trial on the merits of its case.

Oneida would have to pay out around $3.5 million to maintain the inventory for its retail businesses, plus at least $208,000 a year in financing costs, Hurd noted.

“It cannot be said that $3.5 million or more imposes only a minimal burden upon the Oneida Nation,” Hurd wrote.

In addition, Hurd noted, New York tax law already has a provision that requires the user to remit the tax to the state within 24 hours of purchase.

“Thus, New York already has a valid law providing for payment of cigarette taxes by non-member on-reservation cigarette purchasers. Given that this law is already in effect and could be enforced by the state, the new law is unnecessary,” Hurd wrote.

By contrast, Judge William Arcara in the Western District Court denied the Seneca and Cayuga Nations’ request for a preliminary injunction against the state.

Arcara found that the nations’ tribal sovereignty “is not unconstitutionally burdened” by the state’s new cigarette tax laws, and that they failed to demonstrate a likelihood of success on the merits of their claims.

He did, however, grant a stay.

“The nations have expressed their intent to appeal the denial of their motion (for a preliminary injunction) to the U.S. Court of Appeals for the Second Circuit, which they have the right to do.”

Arcara acknowledged that the tax law “will almost certainly have an adverse impact upon the nations’ existing tobacco economies.” If the appeals court rules that the tax burden on the nations is unconstitutional, “it may be too late to undo the harm suffered by the nations’ existing tobacco businesses in the interim. Accordingly, the threat of irreparable harm favors granting a stay pending appeal,” Arcara wrote.

Morgan Hook, Paterson’s spokesman, issued a statement applauding Arcara’s ruling.

“Judge Arcara’s well-reasoned ruling makes several matters of law absolutely clear, and all of them are in favor of the state’s position. We will seek to have any appeal process completed as expeditiously as possible. It is time for decades of court battles to come to an end. Due to Gov. Paterson’s leadership, New York is now closer than it has been in decades to reaching resolution on this long standing dispute.”

By Gale Courey Toensing

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