Trying to Smoke Out More Revenue

Tensions are rising as New York state prepares to collect taxes on cigarettes sold by Indian tribes. David Duprey / AP

The tax man just can't seem to get a break these days. Billion-dollar private-equity companies are fighting against President Obama's proposal to tax them at higher levels. Congressional Republicans are working to extend Bush-era cuts. And the Taxed Enough Already Party is demonstrating across the country against what it sees as the federal government's overreach into their pockets. Now American Indians are battling New York Gov. David Paterson over whether the state has the right to tax cigarettes sold on reservations.

A federal court yesterday halted efforts by New York to start levying the taxes on cigarettes sold to nontribal buyers. Faced with a mounting budget crisis, Paterson had vowed to start bringing in money from reservation sales as soon as today. The Seneca Nation, which asked for the injunction, sees the right to sell tobacco on its land as part of its national sovereignty. "Most Americans don't understand that reservations are separate from the state," says Greg Gagnon, who is a Chippewa and associate professor of Indian studies at the University of North Dakota. "State jurisdiction is not supposed to extend onto reservations."

At issue is more than $150 million in taxes, according to the state's collection bureau. The tribes have always sold tax-free cigarettes. And sales of tobacco on Native American land has exploded with the increase in national cigarette taxes over the past decade, as non-Indians drove to reservations or ordered over the Internet to avoid paying the $10-per-pack price. At its height in 2005, reservation cigarette sales were more than $2 billion—43 percent of all tobacco sales in the state, according to the tax bureau. New York thinks of all that untaxed money as lost revenue, but the Senecas see it as a backbone of their economy.

Paterson is not the first governor to tangle with the Indian nations. The administrations of governors George Pataki and Mario Cuomo also tried to bring in funds from the reservations. They caved on the issue after tribal members shut down interstate highways, blocking traffic and setting fires. "It's been 25 years and somehow the state hasn't gotten what they are trying for," Seneca Nation president Barry Snyder told NEWSWEEK following yesterday's ruling. "So they are still coming after us, still trying to come after the Senecas' economics."

The Senecas aren't the only nation being pushed to pay tobacco taxes. Indian nations in Kansas, Washington, and Oklahoma are involved in court cases to decide cigarette-tax issues, although most Indian nations settled disputes with states years ago, after a series of Supreme Court rulings in the 1980s, which held that states may tax sales to non-Indians.

New York Indian tribes say the high-court ruling shouldn't apply to them because of the Canandaigua Treaty signed in 1795 between President George Washington and the tribes of New York, which promised the nations "the free use and enjoyment" of their lands. "The Supreme Court didn't even look at our treaty rights," said Carrie Garrow, a member of the Akwesasne Nation and executive director of the Center for Indigenous Law, Governance and Citizenship at Syracuse University. "We have the right to engage in any business we want on our lands."

Snyder, the Seneca president, told NEWSWEEK the state's efforts to tax the cigarettes might actually help the nation build up its own tobacco industry. New York is planning to tax the tribe's cigarettes by hitting wholesalers, who buy outside the reservation. But the Senecas already produce their own cigarette brand on their lands and tax it, collecting $15 million to $20 million per year. The Seneca brand is purchased around the country by other Indian nations that want to "buy Indian," as well as nontribal customers looking for a discount brand.

If the state succeeds and ends up collecting tax on the Marlboros nontribal people buy, it won't affect the Seneca much because, says Snyder, "we are planning to get rid of Philip Morris anyway and have the entire business—manufacturing and distribution—all in our nation. We are ultimately going to have no Marlboros, and then there will be no New York state taxes."

Trying to Smoke Out More Revenue | U.S.