Indian Cigarettes - NY court nixes Indian cigarette sales tax cases

ALBANY, N.Y. (AP) – New York's top court on Tuesday rejected prosecutors' cases against two Indian-owned convenience stores in central New York for selling tax-free cigarettes.

The Court of Appeals, divided 4-3, said the stores acquired by the Cayuga Indian Nation in 2003 qualify as reservation lands under state tax law and can sell the cigarettes to tribe members free of tax.

While sales to non-Indians should be taxed at $2.75 per pack, the court majority said that proposed state regulations aren't yet in effect and defending against county enforcement efforts is too burdensome on the Indians.

“The issue in this case is not whether sales taxes are due when non-Indian consumers purchase cigarettes from Indian retailers – they are,” Judge Victoria Graffeo wrote. “The issue is whether Indian retailers can be criminally prosecuted for failing to collect the sales taxes from consumers and forward them to the (Tax) Department.”

Graffeo, Chief Judge Jonathan Lippman and Judges Carmen Beauchamp Ciparick and Theodore Jones Jr. agreed that prosecutors cannot do that. Authorities in 2008 seized 176,000 cartons of cigarettes without tax stamps from the two stores in Seneca and Cayuga counties. Indictments were handed up but never unsealed. The Cayugas sued.

The court's ruling Tuesday ends those possible criminal cases, attorneys said.

In a dissent, Judge Eugene Pigott Jr. wrote that it's “undisputed” that most of the cigarettes should be taxed, and the lack of regulations doesn't change the Indians' obligation to collect that money from non-Indian consumers. Judges Susan Read and Robert Smith agreed with Pigott.

Daniel French, an attorney for the Cayugas, said they've always been willing to negotiate these issues with the counties. “Now there's a half-million dollars of spoiled product and the Cayuga Nation fully intends to litigate for those expenses,” he said of the seized cigarettes.

The U.S. Supreme Court has yet to determine if parcels of aboriginal lands like these two, later reacquired by Indians, actually constitute reservation property under federal law, Graffeo noted. The Court of Appeals is ruling only that the two stores have “qualified reservation” status for tax purposes, and the tribe does not argue it can exert full sovereign authority, she wrote.

The state court agreed that cigarette taxes are owed, and only ruled that they cannot be collected without state regulations in place, said attorney Philip Spellane, who represents the counties. “In essence, it's a very narrow holding saying these two prosecutions cannot go forward,” he said.

The New York Department of Taxation and Finance is reviewing public comments on its proposed regulations, spokesman Brad Maione said. The comment period ended April 26.