State, Senecas fight over online tobacco taxes

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By LOU MICHEL and ANTHONY CARDINALE
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CATTARAUGUS INDIAN RESERVATION - The modern-day fight between the state and Native Americans continues, fought not over land but over taxes.

As New York State prepares to bring a halt next week to Internet and mail-order sales of tobacco products in hopes of collecting taxes on millions of dollars in sales of cigarettes by Native Americans, Seneca Nation business leaders vow a battle that might end up a repeat of a violent confrontation between state troopers and about 1,000 Senecas and their supporters on the Thruway in 1997.

At stake, Seneca business leaders say, are about 1,500 jobs with an estimated $28 million annual payroll, economic development on the nation's two reservations and tribal sovereignty.

"We basically intend to seek an injunction against the law," said Scott Maybee, owner of one of the biggest Seneca online smoke shop businesses. "It would be a big blow to my business and devastating to my employee base of about 85 workers."

But if peaceful means fail, they will shut down the Thruway where it crosses Seneca lands "and any other roads necessary to get the attention of the State Legislature," a tribal official said Thursday, speaking on the condition of anonymity.

At stake for New York is the ripple effect of millions of dollars being lost in untaxed cigarettes sold on the Internet to customers in all 50 states. Some estimates place the loss at $900 million to the state.

Tom Bergin, spokesman for the state Department of Taxation and Finance, declined to say how the state will halt Internet sales, except to say tax auditors and enforcement officials will be involved in the effort.

"I'm not going to speculate on how the enforcement is going to occur," Bergin said.

Rick Jemison, spokesman for Seneca Sovereign Partnership, which represents the nation's business community, said the Senecas received a letter Thursday from the state tax department saying that the new state law "will have no effect on shipments of cigarettes by wholesalers to recognized Indian nations or tribes or Indian-run businesses on reservation lands."

The letter created a stir at Thursday night's Tribal Council meeting, according to Jemison.

"We'll be able to get cigarettes," Jemison said. "A letter that went out (Wednesday) was saying that they weren't going to release any cigarettes whatsoever to reservation lands."

However, Joseph F. Crangle, attorney for the Seneca Nation, explained that another letter received Thursday says the law applies only to delivery of cigarettes, not to whether they will be taxed.

"There was some confusion by some of the cigarette wholesalers that they could no longer ship cigarettes to Indian reservations unless (the Indian retailers) were licensed by New York State," Crangle said. "We brought that to the attention of the tax department, and they agreed that the Public Health Law does not prevent these shipments. It doesn't address the tax issue."

The remaining problem for the Native American Internet retailers, Crangle said, is shipping cigarettes to customers off the reservation. And this is where the tax issue arises.

"If I can't order cigarettes (from Native Americans) through the Internet, then I go to the neighborhood store - and I end up paying the taxes," Crangle said. "That's the idea. It's an indirect kind of a revenue law to try to put the Indian (cigarette) retailers out of business."

The Senecas are asking U.S. District Judge William M. Skretny to permanently enjoin the new state law. Skretny has set July 15 for arguments for a preliminary injunction. Now that the state has announced it intends to begin enforcing the law on June 18, Crangle said, he will go to Skretny next week and ask for a temporary restraining order.

The Legislature, in its new state budget, included sales tax revenue from Native American sales of tobacco products to non-Native American customers.

The Senecas also hope that Gov. George E. Pataki will intervene and reverse a decision by the state Department of Taxation and Finance to begin enforcing the law banning Internet tobacco sales, starting Wednesday.

The restraining order, if granted, would give Internet retailers some breathing room to make their case in a pending federal lawsuit that seeks to overturn the state law requiring the ban.

Online smoke shop retailers on Thursday dismissed the state's claim that enforcement of the 3-year-old public health law is aimed at cracking down on illegal tobacco sales to minors, insisting it exists exclusively to collect taxes on cigarettes sold by Native Americans.

The effort to put Native American online retailers out of business could end up reducing the state's portion of tobacco settlement money from lawsuits against cigarette manufacturers, according to Gregg Prockton, chief operator of another major Seneca online retailer with 60 workers.

"The state is chasing the sales taxes, but they have to look at the master settlement money (from tobacco companies), which in 2003 could mean $1 billion for the state, but that is calculated on the number of cigarette cartons sold in the state," Prockton said.

Seneca online retailers draw from a national customer base, Prockton explained, creating a much higher volume of sales that kicks up the amount the state receives in tobacco settlement funds.

Industry groups representing convenience stores and some cigarette wholesalers, however, estimate the state is losing about $900 million a year in sales tax from Native American Internet sales, tax-free purchases at reservation smoke shops and bootleg sales of cigarettes.

But Seneca President Rickey L. Armstrong Sr. said many convenience stores are part of major chains that siphon money out of the region.

"Seneca-owned Internet businesses bring hundreds of thousands of dollars to our region, and those profits are invested right here," Armstrong said. "The same cannot be said about the giant convenience store conglomerates who convinced state lawmakers to trample on our sovereignty and corrupt the playing field in their favor."

"We're creating new dollars, bringing them into the New York State and Western New York economy," said Jemison.

Prockton, Maybee and other Seneca Internet retailers are pinning their hopes on a federal court lawsuit that is pending before Skretny.

The lawsuit, filed in April, asks Skretny to find that the state public health law cannot legally be applied to Native American retailers.

"As a sovereign Indian nation, the Seneca Nation and its members continue to have the right of free trade and commerce with any entities on or off the reservation," the group said in its court papers. "The State of New York does not have the authority to limit Indian commerce or otherwise regulate Indian affairs."

A group headed by Florida-based OLTRA - Online Tobacco Retailers Association - filed the lawsuit against Pataki, State Attorney General Eliot L. Spitzer and Dr. Antonia C. Novella, state health commissioner.

State lawyers argue that the law can be applied to Native Americans and have asked Skretny to dismiss the lawsuit.

"We're hopeful that the judge will see the merits of our argument that this law should not apply on Indian reservations," said Crangle, who represents Maybee and others in the lawsuit.

In backing up that position, Seneca Tribal Council Chairman Barry E. Snyder Sr. cited an Oct. 13, 2000, letter to Native American officials from Arthur J. Roth, state commissioner of taxation and finance.

Roth, according to Snyder, determined that "federal constitutional law" prohibited the state from "interrupting the shipment of cigarettes to Indians on Indian reservations within New York based on the new public health law provision."

News Staff Reporter Dan Herbeck contributed to this report.

Click here to check out a little bit of history in this matter, and protest pix from 92' & 97