Announcement comes week before state's new crackdown on tax-free cigarettes
Mike Hopper, of Rome, completes a sale of cigarettes for Sue Beadore, of Glenfield, on Aug. 6 at the SavOn convenience store, in Verona.By Glenn Coin and Sarah Moses
Staff writers
Just a week before the state begins a new crackdown on tax-free cigarettes sold on Indian reservations, the Oneida Indian Nation issued a pre-emptive strike.
The tribe announced Wednesday it will move its cigarette manufacturing plant from Western New York to the tribe’s land in Madison County, possibly putting the sales of those cigarettes beyond the reach of the state tax department. The move suggests that the Oneidas fear the state’s crackdown on untaxed cigarettes, to begin next Wednesday, will end the supply of tax-free, national-brand cigarettes to Indian retailers.
In the long-running spy-vs.-spy game the tribes and the state have played, predictions are difficult. But if other nations take the Oneidas’ approach, New York smokers might see an end to years of brand-name, tax-free cigarettes sold by Indian smoke shops.
“Maybe the days of Philip Morris and Big Tobacco in our stores is coming to an end,” said J.C. Seneca, a tribal councilor for the Seneca Nation of Indians, which accounted for nearly half of the 24 million cartons of cigarettes sold by tribes in New York last year. “
Seneca said his tribe, like the Oneidas, will focus on making and selling its own brand. An unintended consequence of the state’s tripling of the cigarette tax in the past two years might be to make such Indian-made cigarettes much more appealing to cost-conscious smokers.
The announcement by the Oneidas raises other questions:
Have the Oneida, Seneca and Mohawk tribes, which can roll their own, found a way to keep alive their lucrative tax-free cigarette business? Is the state powerless to tax these sales?
What will happen to other tribes, including the Onondaga and Cayuga, that rely on cigarettes sales but don’t have their own factories?
If tribes stop selling heavily marketed national brands, will smokers be willing to trade their Camels for Oneida-made Niagara's — for $6 less a pack?
At stake is a business that reaps more than $1 billion in sales for New York tribes each year.
Next week’s deadline to begin collecting cigarette taxes from wholesalers who sell to tribes has been decades in the making. The state won a U.S. Supreme Court case in 1994 when justices ruled cigarette sales at Indian smoke shops to non-Indians were taxable. But sovereignty issues and threats of violence kept the state from enforcing it.
Since then, as the state has raised the cigarette tax from 56 cents to $4.35 a pack, tribal sales have grown from one in every 10 cigarettes sold in New York to one in three. At about 24 million cartons sold by Indian retailers every year, that amounts to about $1 billion in annual tax revenues that could be collected by the state.
Tribes have fought any taxation by the state, saying they are sovereign. The new collection scheme bypasses the tribes altogether, instead requiring state-licensed wholesalers to pay upfront the per-pack and sales taxes to the state and to stick a state tax stamp on every pack.
Unlike failed tax-collection attempts that ended in violence in 1992 and 1997, the state this time won’t be dealing directly with tribal retailers. Instead, the state Department of Taxation and Finance will go after about 10 state-licensed wholesalers that sell to tribes.
The Tax Chess Game:
NEW YORK MOVES:
August, 2008: After failing to get Indian nations to charge cigarette taxes for almost 20 years, the state puts the burden on non-native manufacturers and wholesalers.
ONEIDAS MOVE:
September, 2009: The Post-Standard reports the Oneida nation bought a cigarette plant in the Buffalo area in fall 2008.
NEW YORK MOVES:
February, 2010: State tax officials publish rules for taxing the suppliers, a plan that will go in effect Sept. 1.
ONEIDAS MOVE:
August, 2010: The nation announces it will move its cigarette plant to Oneida land, saying that will keep at least its own brands free of state taxes. That gives it a better chance of success than past efforts, tax officials said.
“Monitoring the activity of these agents is a whole lot different than being out on the streets and taking police enforcement actions,” said Bill Comiskey, deputy commissioner in the tax department’s Office of Tax Enforcement. “I think we will be able to bring licensed agents’ behavior under control without that sort of interdiction.”
Tax Whac-A-Mole
Any tax, regardless of who pays it directly to the state, is an affront to tribal sovereignty and won’t be paid, tribal leaders say.
The Oneidas sold about 1.6 million cartons of cigarettes last year. If sales averaged $50 a carton, that would mean $80 million in revenue. The Onondagas sold 1.2 million cartons.
The Oneida Nation says it’s willing to forgo the profits that come from national brands. Peter Carmen, the nation’s chief operation officer, said it’s not clear how much money the nation would lose.
“There’s a pretty broad array of what the consumers are choosing,” he said. “Right now, I think it’s difficult to say that one (brand) is more predominant than the other. Every time the state imposes new taxes you see a shift in consumer behavior, and it remains to be seen what the shift will be after Sept. 1.”
With taxes on cigarettes nearly tripling since 2008, smokers have scrambled to find cheaper options.
One study of discarded cigarette packs in New York City found 60 percent more untaxed packs after the 2008 tax increase. Researchers speculate that most untaxed cigarettes in New York City — which has an additional $1.50 per-pack tax — came from Long Island Indian tribes.
Smokers also drive to nearby states to find cheaper cigarettes, which aren’t hard to find because New York now has the highest tax in the nation.
A Syracuse smoker could drive about 85 miles to Pennsylvania, where the tax is $1.60 per pack. A roundtrip would cost about $20 in gas, but the savings on the first carton would be $27.50. New York state law allows smokers to bring in two packs without having to pay the tax, but those who study cigarette-buying say that law is flouted routinely.
“The thing about tax enforcement is it’s like Whac-A-Mole,” said Leonard Burman, a professor at Syracuse University’s Maxwell School who once served as deputy assistant secretary for tax analysis at the federal Department of the Treasury. “You shut down one avenue of tax avoidance and people find another avenue of avoidance.”
A loophole?
Two months after the state Legislature passed the tax-collection law in August 2008, the Oneida nation quietly paid $6.6 million for the manufacturing plant in Erie County. Although the nation is moving the plant to its former bingo hall on Territory Road, it will have to transport cigarettes on state highways to most of its cigarette outlets.
It remains unclear what enforcement power the state would have over those shipments. Two weeks ago, state tax agents seized a truck moving cigarettes from one Seneca reservation to another. Two days later, with no public explanation, the tax department turned the truck and its contents back to A.J. Wholesale.
Tax department spokesman Brad Maione declined to discuss why the state had stopped the truck, or why it returned the goods without pressing any charges.
“We returned the truck because our investigation determined that, while the seizure was warranted, the return of the truck was within our discretion,” Maione said.
The state probably would not have jurisdiction over cigarettes being transported from one reservation to another, said Larry Garrison, director of the Native American Tax Policy Project at the University of Missouri.
“If (the Senecas) were taking it from on the reservation to off the reservation, that wouldn’t hold as much water,” Garrison said. “From one reservation to another, though, they would be OK.”
Carmen said the Oneidas sell their house brands to other tribes and buy other Indian-made cigarettes. He said he did not know if that would continue after Wednesday.
Court fight in Buffalo
The latest effort by the state has gotten the attention of the tribes. For the first time in decades, leaders from all six of New York’s often-fractious tribes this month not only met in the same room but agreed on a statement that blasted the state for impinging on Indian sovereignty.
For the tribes, the tax collection is the second of two recent blows to the cigarette business: A new federal law restricting the shipment of cigarettes through the mail went into effect in June. A federal judge in Buffalo declined to stop enforcement of the law.
The Senecas have also filed suit against the state to stop the tax collection. A hearing is scheduled for Friday in federal court in Buffalo.
The Oneidas are prepared to file suit if the state tries to tax their cigarettes, Carmen said.
“We will not tolerate interference with the Oneida nation’s manufacturing of products on its own reservation and sale of those products on its own reservation,” he said. “The nation would respond swiftly to that, and whoever does interfere with those sales would find itself as a defendant very quickly.”
Carmen said the nation will sell off its brand-name inventory after Wednesday, but he could not say if or how it would obtain cigarettes besides its own after that date.
Wholesalers say that it looks like the state is serious this time, and that this enforcement action might just work.
“It will put me out of business,” said Frank Attea, owner of Attea Milhem & Brothers, which sold about 4 million cartons to tribes last year. “I won’t be able to sell one carton. They’re not going to buy them.”
Contact Glenn Coin at gcoin@syracuse.com or 470-3251.