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New York State and Tribes Clash Over Cigarette Tax Collection

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On a small strip of land just off Montauk Highway in Southampton, a row of smoke shops plastered with bright posters, neon signs and banners promise some of the cheapest cigarettes on Long Island.

The shops line the border of the Shinnecock Indian reservation, where members of one of New York’s nine Indian tribes sell tax-free cigarettes out of nearly a dozen tiny storefronts.

In one of these wood-paneled shacks, Taobi Silver makes his living selling cartons of cigarettes to hundreds of customers a week. They walk to the modest smoke shop’s window counters and pay about half as much as they would at off-reservation convenience stores — an average of $5 per pack as opposed to $10.

“These stores generate salaries and employment for many, many members,” Silver said.

His store, the Shinnecock Smoke Shop, has 15 employees. It’s one of almost a dozen smoke shops that bolster the local economy in the impoverished reservation community, which has average family incomes of $14,000 a year.

In addition to providing jobs, a $1 per pack tribal sales tax generates funds for community projects such as after-school programs and playground maintenance.

But the jobs and tribal income could disappear soon, as New York State pushes forward with a legal battle to collect state taxes for every cigarette pack sold to non-tribal members on reservation land—an action it estimates would bring in $200 million a year.

The current battle follows a June 2010 state law that raised the cigarette tax to $4.35 per pack – the highest in the nation – and outlined a method for collecting the tax from Indian cigarette sales.

But a slew of lawsuits have prevented the state from trying to collect the tax. In the latest ruling, a U.S. District Judge barred the state from collecting it until at least Nov. 12.

“What this law intends to do is to impose its will upon our territory,” said Unkechaug tribe Chief Harry Wallace. About 80 percent of employment on Wallace’s Mastic reservation is tied up in nearly two dozen smoke shops.

“The issue here is whether the state of New York can compel sovereign entities such as the Native nations of the state to collect that tax.”

Recognized as sovereign territories, Indian nations are generally able to set their own taxes and laws. But the cigarette tax problem has been brewing for more than a decade – since a 1994 Supreme Court case decision stated that New York can collect the tax on reservation sales to non-tribal members.

But since a workable collection model could never be agreed upon, the tax has never been collected.

“The real question is: How do you regulate this transaction without interfering with the tribes’ right to govern their own affairs?” said Joseph Zdarsky, a Buffalo lawyer who represented a wholesaler in the 1994 case. “Usually you can’t do much.”

In 1997, the problem escalated when then-Governor George Pataki tried to collect the tax and set off protest on the upstate Seneca reservation. Faced with the possibility of violence and the inability to create a set of regulations defining tax collection, Pataki put in place a “forbearance” policy.

The policy acknowledges that the state can collect the tax but suspends efforts to do so.

“The state has the ability to tax an Indian reservation but not the jurisdiction to do so,” Silver said outside his Southampton smoke shop. “This happens every time – every time we get a new governor they try to close this loophole.”

But Columbia Law Professor Richard Briffault, who has analyzed state authority to collect cigarette taxes on such sales, points to four other states that worked out a collection method following similar Supreme Court cases, including Montana and California.

“The concept of Native American sovereignty is not a bar to the application of state cigarette taxes to non-tribe members,” Briffault said.

But the tribes are arguing that collecting the tax will affect their sovereignty in an inadvertent way, according to court documents filed in a Buffalo federal court. By depleting their incomes and dissolving jobs, collecting the tax will impact their ability to self-govern.

Gov. Paterson’s recent push comes on the tail of a June State Senate committee report that found the failure to collect the tax has resulted in “a significant loss of vital state revenue.”

The report, Executive Refusal, also raised the question of local convenience stores missing out on cigarette profits. Nationally, cigarette sales make up about 25 percent of the average convenience store’s sales. But in Mastic and Southampton, they make up virtually none.

“Ninety-nine percent of people go to the reservation,” said Roy Schiebel, manning the counter at Aspava, a Mastic convenience store five minutes down the road from the Unkechaug’s reservation.

But, Schiebel said, he’s used to the competition — and his inventory is varied enough that he can compensate.

On Long Island’s Indian reservations, smoke shops stock only cigarettes, making retailers completely dependent on tobacco sales. And both tribes remain dependent on their $1 per pack tribal tax. Because of it, the Unkechaug are constructing a 10,000-square-foot community center and can provide college scholarships to members, according to Chief Wallace.

“We’ve found business opportunities where we can self-employ our people and be self-sufficient and they want to take that money,” said Ginew Benton, whose family owns a Shinnecock smoke shop. “It’s like a bully taking milk money from someone.”