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United States v. Morrison

February 6, 2009

UNITED STATES OF AMERICA,
v.
RODNEY ARNOLDO MORRISON, DEFENDANT.



The opinion of the court was delivered by: Hurley, Senior District Judge

MEMORANDUM AND ORDER

Presently before the Court is the motion by defendant Rodney Morrison ("defendant" or "Morrison") to dismiss Counts Two and Eight of the second superseding indictment (hereinafter "indictment") under Federal Rule of Criminal Procedure ("Rule") 29 or for a new trial pursuant to Rule 33. For the following reasons, defendant's motion is DENIED.

BACKGROUND

Familiarity with the facts and procedural background is presumed. Thus, the Court states only those facts necessary for disposition of the instant motion.

I. The Indictment

On July 11, 2006, the government filed the indictment charging defendant, a cigarette on-reservation retailer,*fn1 with eleven counts, to wit: (1) Count One (conducting and participating in the affairs of an enterprise in violation of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), 18 U.S.C. § 1962(c) ("substantive RICO count")); (2) Count Two (racketeering conspiracy in violation of 18 U.S.C. § 1962(d) ("RICO conspiracy")); (3) Count Three (arson conspiracy in violation of 18 U.S.C. § 844(i)); (4) Count Four (arson in violation of 18 U.S.C. §§ 844(i) and 2); (5) Count Five (conspiracy to use extortionate means to punish nonrepayment of credit in violation of 18 U.S.C. § 894(a)(2)); (6) Count Six (extortionate punishment for nonrepayment of credit in violation of 18 U.S.C. §§ 894(a)(2) and 2); (7) Count Seven (use of fire to commit a felony in violation of 18 U.S.C. §§ 844(h)(1) and 2); (8) Count Eight (illegal possession of a firearm by a convicted felon in violation of 18 U.S.C. § 922(g)(1)); (9) Count Nine (illegal possession of a firearm by a convicted felon in violation of 18 U.S.C. § 922(g)(1)); (10) Count Ten (conspiracy to use interstate facilities in the commission of murder for hire in violation of 18 U.S.C. § 1958); and (11) Count Eleven (use of interstate facilities in the commission of murder for hire in violation of 18 U.S.C. §§ 1958 and 2).

The indictment charged eighty separate predicate acts, viz. (1) Racketeering Act One (robbery conspiracy in violation of 18 U.S.C. § 1951(a) and robbery in violation of 18 U.S.C. §§ 1951(a) and 2); (2) Racketeering Act Two (conspiracy to use extortionate means to punish nonrepayment of credit in violation of 18 U.S.C. § 894(a)(2); use of extortionate means to punish nonrepayment of credit in violation of 18 U.S.C. §§ 894(a)(2) and 2; arson conspiracy in violation of N.Y. Penal Law §§ 150.10 and 105.10; and arson in violation of N.Y. Penal Law §§ 150.10 and 20.00); (3) Racketeering Act Three (conspiracy to use interstate facilities in the commission of murder for hire in violation of 18 U.S.C. § 1958; use of interstate facilities in the commission of murder for hire in violation of 18 U.S.C. §§ 1958 and 2; murder conspiracy in violation of N.Y. Penal Law §§ 125.25(1) and 105.15; and murder in violation of N.Y. Penal Law §§ 125.25(1) and 20.00); and (4) Racketeering Acts Four through Eighty (trafficking in contraband cigarettes in violation of 18 U.S.C. §§ 2342(a) and 2).

II. Racketeering Acts Four through Eighty -- Contraband Cigarettes Racketeering Acts

Four through Eighty of the indictment alleged that Morrison "knowingly and intentionally sold and distributed contraband cigarettes . . . lacking valid New York State tax stamps, in violation of Title 18, United States Code, Sections 2342(a) and 2" from January 8, 1997 to August 2, 2004.

18 U.S.C. § 2342(a) is part of the Contraband Cigarettes Trafficking Act ("CCTA"), 18 U.S.C. §§ 2341 et seq., and provides:

It shall be unlawful for any person knowingly to ship, transport, receive, possess, sell, distribute, or purchase contraband cigarettes or contraband smokeless tobacco.

18 U.S.C. § 2342(a). Contraband cigarettes are defined in § 2341 as follows: a quantity in excess of 60,000[*fn2 ] cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes, and which are in the possession of any person other than [setting forth exempted persons]

Id. § 2341(2) (emphasis added).

III. New York Tax Law

Article 20 of the New York State Tax Law imposes "a tax on all cigarettes possessed in the state by any person for sale, except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax" or on certain sales to the United States. N.Y. Tax Law § 471(1). Federal law forbids the collection of these taxes on cigarettes sold on Native American reservations to enrolled tribal members for their personal consumption. See Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463 (1976). However, when cigarettes are sold on the reservation to non-Native Americans, the taxes may be collected. See Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134 (1980).

With regard to all cigarettes the state has power to tax, including cigarettes sold on-reservation to non-Native Americans, § 471(2) sets forth a mechanism for the collection of the tax whereby a state licensed stamping agent is required to advance the amount of the tax by purchasing adhesive stamps from the state and affixing them to each package of cigarettes. N.Y.

Tax Law § 471(2).*fn3 The stamping agent then adds the amount of the tax to the price of the cigarettes sold to its customers, which is passed along the chain of distribution to the consumer. Thus, § 471(2) provides that "the ultimate incidence of and liability for the tax shall be upon the consumer." Id. § 471(2).

Although § 471(2) provides that "the tax commission may by regulation provide that the tax on cigarettes imposed by this article shall be collected without the use of stamps," id. § 471(2), no such regulation has been passed. Thus, pursuant to § 471, all cigarettes that the state has the power to tax are required to be stamped.

IV. Racketeering Acts Four through Eighty Charged Morrison with Violations of the CCTA Under Both 18 U.S.C. § 2342(a) and 18 U.S.C. § 2

Racketeering Acts Four through Eighty charged Morrison with selling and distributing contraband cigarettes in violation of 18 U.S.C. § 2342(a) and 18 U.S.C. § 2. For each Racketeering Act Four through Eighty, the indictment sets forth the approximate quantity of contraband cigarettes sold by defendant on the reservation and sets forth a specific date per act.

V. The "Forbearance Policy"

In 1988, the New York Department of Taxation and

Finance (the "DTF") determined that large volumes of unstamped cigarettes were being purchased by non-Native Americans from reservation retailers. Department of Taxation and Finance of N.Y. v. Milhelm Attea & Bros., Inc., 512 U.S. 61, 64-65 (1994). Because unlawful purchases of unstamped cigarettes deprived New York of substantial tax revenues, the DTF adopted regulations, 22 NYCRR §§ 336 et seq., for the enforcement of the collection of taxes from non-Native American purchasers of cigarettes from on-reservation retailers. Id. at 65; see also N.Y. Assoc. of Convenience Stores v. Urbach, 646 N.Y.S.2d 918, 921 (Sup. Ct. Albany County 1996). The regulations recognized the right of exempt Native American consumers to purchase untaxed cigarettes on the reservation. However, "[t]o ensure that nonexempt purchasers do not likewise escape taxation, the regulations limit[ed] the quantity of untaxed cigarettes that wholesalers may sell to tribes and tribal retailers." Milhelm, 512 U.S. at 65. "To prevent non-Indians from escaping the tax, [the] regulatory scheme . . . impose[d] record keeping requirements and quantity limitations on cigarette wholesalers who sell untaxed cigarettes to reservation Indians." Id. at 64. Under the regulations, "[r]etailers were to keep accurate records of those to whom they sold untaxed cigarettes and submit these records to the [DTF]." Warren v. Pataki, No. 01-CV-0004E, 2002 WL 450056, at *1 (W.D.N.Y. Jan. 9, 2002).

Following adoption of the regulations, a proceeding was commenced by Native American merchants to permanently enjoin the DTF from enforcing them and, as a result, the DTF suspended implementation pending the outcome of that litigation. N.Y. Assoc. of Convenience Stores v. Urbach, 712 N.Y.S.2d 220, 221 (3d Dep't 2000) (discussing the Milhelm case). Ultimately, the Supreme Court in Milhelm held that the regulations were valid and enforceable. 512 U.S. at 78; see id. at 75 ("[W]e now hold that Indian traders are not wholly immune from state regulation that is reasonably necessary to the assessment or collection of lawful state taxes."). Despite this outcome, the DTF continued its non-enforcement or "forbearance" policy. Urbach, 712 N.Y.S.2d at 221.

According to evidence adduced at trial, in February 1996, Governor Pataki announced his intention to begin enforcement of the regulations and formally notified the tribes that they had 120 days to comply, or prepare to comply, with the regulations. (Tr. at 11087.)*fn4 However, the following year, in May 1997, Governor Pataki did an about-face and directed the repeal of the regulations and proposed legislation that would allow on-reservation stores to sell tax-free cigarettes. Santa Fe Natural Tobacco Co. v. Spitzer, No. 00 CIV. 7274, 00 CIV. 7750, 2001 WL 636441 (S.D.N.Y. June 8, 2001), rev'd on other grounds, 320 F.3d 200 (2d Cir. 2003). The regulations were repealed by the DTF on April 28, 1998. New York Assoc. of Convenience Stores v. Urbach, 92 N.Y.2d 204, 214 (1998). Although Governor Pataki sent to the legislature a bill that would amend the State Tax Law to allow reservation stores to sell tax-free cigarettes, the proposed amendments never passed. Nonetheless, the State's policy of non-enforcement or "forbearance" continued.

In July 1998, the New York Court of Appeals held that convenience stores in direct competition with Native American reservation retailers had standing to bring an equal protection challenge to the DTF's forbearance policy based on a "differential enforcement of the tax laws," id. at 212, and that the applicable standard was whether there was a rational basis for the DTF's forbearance policy, id. at 213. Because the regulations had been repealed prior to the court's decision, the matter was remanded to the New York Supreme Court so that "the court can reconsider the dispute in light of the Tax Department's newly minted long-term policy of abstaining from taking active measures to enforce the legislatively mandated excise and sales taxes on motor fuel and cigarettes destined for sale on Indian reservations." Id. at 215 (emphasis in original).

Upon remand, the New York Supreme Court found, and the Third Department affirmed, that there was "a rational basis for [the DTF's] indefinite forbearance." Urbach, 712 N.Y.S.2d at 222. Explaining that "'the rational basis test' has been characterized as 'the lowest level of judicial review,'" the court found:

Because of tribal immunity, the retailers cannot be sued for their failure to collect the taxes in question, and State auditors cannot go on the reservations to examine the retailers' records.

Additionally, the [DTF] cannot compel the retailers to attend audits off the reservations or compel production of their books and records for the purpose of assessing taxes. In that regard, representatives of the [DTF] engaged in extensive negotiations with the tribes in an effort to arrive at an acceptable agreement. Those efforts were largely unsuccessful and the vast majority of the Indian retailers refused to register with the [DTF]. In further efforts to enforce the statute, the State attempted interdiction, i.e., interception of tobacco and motor fuel shipments and seizure of those shipments that were found to be in noncompliance with the Tax Law. That strategy resulted in civil unrest, personal injuries and significant interference with public transportation on the State highways. In our view, all of these factors provide a rational basis for the differential treatment of the parties . . . .

Id. at 222.

VI. Defendant's Pre-Trial Motion to Dismiss Racketeering Acts Four through Eighty is Denied

By motion filed September 11, 2007 (docket no. 332), defendant moved to dismiss Racketeering Acts Four through Eighty pursuant to Rule 12. Defendant argued, inter alia, that because New York State was not enforcing its tax law with regard to on-reservation cigarette sales, New York did not "require[] a stamp" on cigarettes sold on reservation under § 2341(2) of the CCTA.

By bench decision dated October 9, 2007, the Court denied defendant's motion, finding, inter alia, that "what the state requires[] is determined by the statutes enacted by the legislative body." (Oct. 9, 2007 Tr. at 57.)*fn5 In denying defendant's motion, the Court indicated that it had decided the motion "on the issues as framed in the motion papers" and that it would be amenable to revisiting defendant's application on new grounds, including a potential substantive due process violation. (Oct. 9, 2007 Tr. at 63.)

VII. The Verdict

On May 1, 2008, the jury found that the government had proved Racketeering Acts Five through Eighty (the "CCTA Racketeering Acts")*fn6 and found defendant guilty of Count Two, RICO conspiracy based on the CCTA Racketeering Acts.*fn7 The jury also found defendant guilty of illegal possession of the firearm as alleged in Count Eight. During the second part of the bifurcated trial as to that charge, the jury found that defendant was a prior felon on May 5, 2008. Defendant was found not guilty on all remaining counts, as well as on Racketeering Acts One through Three.

VIII. The Instant Motion

By instant motion, defendant seeks to dismiss Counts Two and Eight under Rule 29, or for a new trial under Rule 33. For the reasons stated below, the motion is denied.

DISCUSSION

I. Defendant's Motion to Dismiss Count Two (RICO Conspiracy) is Denied

Upon finding that the government had proved that defendant conspired to commit Racketeering Acts Five through Eighty under the Count Two RICO conspiracy charge, the jury returned a guilty verdict as to that count. Defendant advances three primary arguments in support of his motion to dismiss Count Two: (1) "[New York] Tax Law § 471 neither authorizes, requires,

[n]or permits the collection of taxes on cigarettes sold on Indian reservations absent implementing regulations, and § 471 therefore cannot support a CCTA prosecution"; (2) "[t]his criminal RICO conspiracy prosecution of a New York Indian retailer under the CCTA for on-reservation sales deprived . . . Morrison of substantive due process"; and (3) "[t]he CCTA racketeering acts incorporated into Count Two -- and therefore Count Two itself -- should be dismissed for the same reason the Court dismissed these same acts as charged in Count One, i.e. insufficient evidence to prove the government's theory of prosecution, that . . . Morrison aided and abetted off-reservation cigarette sales in violation of the CCTA." (Def.'s Mem. of Law in Supp. at i - ii.) The Court will address defendant's arguments seriatim.

A. The Absence of Regulations

Under New York Tax Law § 471 Does not Preclude Prosecution Under the CCTA Defendant argues that the CCTA Racketeering Acts should be dismissed because "New York Tax Law § 471 is not self-executing with respect to the collection of taxes on cigarettes sold on Indian reservations, but rather may be enforced against Indian retailers only in tandem with implementing regulations, which, at a minimum, must outline a system providing a certain quantity of tax free cigarettes for sales to Native Americans." (Def.'s Mem. of Law in Supp. at 6.) For the reasons that follow, the Court finds this argument unpersuasive.

1. The Court Will Address Defendant's Argument Concerning the Regulations Even Though it was Previously Addressed by the Court

Before the trial began, defendant moved to dismiss Racketeering Acts Four through Eighty. During oral argument, the Court asked defense counsel whether the New York Tax Law could function absent the regulations. (Oct. 5, 2007 Tr. at 144.) Citing Warren v Pataki, No. 01-CV-0004E, 2002 WL 450056 (W.D.N.Y. Jan. 9, 2002) and Day Wholesale v. State of N.Y., No. 06-7688, (N.Y. Sup. Ct. Jan. 2, 2007), defense counsel argued that it could not. (Id. at 144-46.)

Oral argument continued on October 9, 2007, and defense counsel again argued that absent the regulations, Native American retailers were permitted to sell unlimited quantities of unstamped cigarettes on the reservations. (Oct. 9, 2007 Tr. at 19, 25, 44-45.) The government, on the other hand, asserted that the repeal of the regulations was a "red herring" as it "did not eviscerate the existing statute." (Id. at 38; see also id. at 40-41.) Ultimately, the Court rejected defendant's arguments and denied his motion to dismiss Racketeering Acts Four through Eighty. (Id. at 51-66.)

Thereafter, by letter dated October 16, 2007 (docket no. 367), defendant moved for reconsideration of the Court's October 9th decision, arguing that New York Tax Law § 471 was not a self-executing statute as applied to the sale of cigarettes on tribal lands absent implementing regulations. Defendant again relied on the Day Wholesale case. By Memorandum and Order dated November 9, 2007, the Court denied defendant's motion, finding that this issue was explicitly discussed at oral argument on the original motion (see Oct. 5, 2007 Tr. at 144) and that defendant failed to satisfy his burden of showing that the Court overlooked a controlling decision or material fact that would alter the outcome of its previous decision. United States v. Morrison, 521 F. Supp. 2d 246, 252 (E.D.N.Y. 2007). The Court also stated: Parenthetically, the Court notes that Defendant's reliance on cases such as Pierre v. Gonzales, -- F.3d --, 2007 WL 2597600 (2d Cir. Sept. 11, 2007) and United States v. Belcher, 927 F.2d 1182, 1185 (11th Cir. 1991), is misplaced as the treaty and statute addressed, respectively, in those cases were clearly not self-executing. Here, on the other hand, the effect of the repeal of the regulations is that cigarette retailers located on Indian reservations can sell an unrestricted number of untaxed cigarettes without keeping records or reporting to the DTF but "the repeal [of the regulations] does not eliminate the statutory liability for taxes as they relate to sales on Indian reservations to nonexempt individuals." Urbach, 92 N.Y.2d at 214 [citation and internal quotation marks omitted].

Id. at 252 n.5.

By instant motion, defendant attempts yet once again to have another bite at the apple, arguing that the recent decision of the Fourth Department affirming the lower court's holding in Day Wholesale*fn8 "lends substantial support to [his] argument and demonstrates that absent the necessary implementing regulations there simply are no 'applicable' taxes -- i.e., taxes that are 'capable of being applied' -- concerning on-reservation cigarette sales." (Def.'s Mem. of Law in Supp. at 7.) Defendant also relies on Milhelm Attea, 512 U.S. 61, a case also previously addressed by the Court, albeit briefly. In response, the government simply indicates that "there is nothing 'new' about th[e Day Wholesale] decision or any legal opinion that would alter this Court's previous rulings." (Gov't's Mem. in Opp'n at 22.)

Although the Court has already rejected defendant's argument in this regard, given the emphasis defendant places on Day Wholesale and Milhelm Attea coupled with the fact that the Court's decision on this point was not as expansive as it might have otherwise been, the Court will address defendant's arguments.

2. The CCTA and the New York Tax Law Before examining Day Wholesale and Milhelm

Attea, it is helpful to briefly review the general framework of the CCTA and the New York State Tax Law. It is also helpful to note that the racketeering acts at issue occurred from May 2, 2003 to August 2, 2004.

Morrison was charged with selling and distributing contraband cigarettes under the CCTA, which provides:

It shall be unlawful for any person knowingly to ship, transport, receive, possess, sell, distribute, or purchase contraband cigarettes or contraband smokeless tobacco.

18 U.S.C. § 2342(a). Contraband cigarettes are defined by reference to state law as: a quantity in excess of 60,000 cigarettes, which bear no evidence of the payment of applicable State or local cigarette taxes in the State or locality where such cigarettes are found, if the State or local government requires a stamp, impression, or other indication to be placed on packages or other containers of cigarettes to evidence payment of cigarette taxes, and which are in the possession of any person other than [setting forth exempted persons]

Id. § 2341(2) (emphasis added).

Section 471(1) of the New York Tax Law provides that "[t]here is hereby imposed and shall be paid a tax on all cigarettes possessed in the state by any person for sale, except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax . . . ." N.Y. Tax Law § 471(1). It is undisputed that federal law forbids the collection of these taxes on cigarettes sold on Native American reservations to enrolled tribal members for their personal consumption, see Moe, 425 U.S. 463, but that taxes may be collected on cigarette sales made on the reservation to non- Native American consumers, see Confederated Tribes of Colville Indians Reservation, 447 U.S. 134.

Section 471(2) sets up a mechanism whereby state licensed stamping agents, including wholesalers, are required to prepay the amount of the tax by purchasing tax stamps from the state and affixing them to each package of cigarettes. N.Y. Tax Law § 471(2) ("Agents . . . shall purchase stamps and affix such stamps in the manner prescribed to packages of cigarettes to be sold within the state . . . ."). These taxes are passed along the distribution chain to the consumer. Id. ("It is intended that the ultimate incidence of and liability for the tax shall be upon the consumer, and that any agent or dealer who shall pay the tax to the tax commission shall collect the tax from the purchaser or consumer."). There is no dispute that this statute was in effect and governed all of the racketeering acts alleged in this case.

Effective May 13, 2003, the New York State Legislature enacted § 471-e, which provided as follows:

Where a non-native American person purchases, for such person's own consumption, any cigarettes or other tobacco products on or originating from native American nation or tribe land recognized by the federal government and reservation land recognized as such by the state of New York, the commissioner shall promulgate rules and regulations necessary to implement the collection of sales, excise and use taxes on such cigarettes or other tobacco products.

Id. § 471-e (2003). This version of § 471-e, which was effective until February 28, 2006, was contemporaneously in effect with all but three of the CCTA Racketeering Acts presented to the jury in this case (Racketeering Acts Eight through Eighty). The other three, Racketeering Acts Five through Seven, occurred prior to the enactment of § 471-e. However, neither party claims that this version of § 471-e, which pertains solely to non-Native American purchasers acquiring cigarettes for their "own consumption," governs the instant CCTA prosecution.*fn9

Section 471-e was later amended. The Notes to the statute provide that the amendment "shall take effect March 1, 2006 provided that any actions, rules and regulations necessary to implement the provisions of [the statute] on its effective date are authorized and directed to be completed on or before such date." Id. § 471-e (Historical and Statutory Notes 2006). This amendment post-dates all of the CCTA Racketeering Acts charged in the indictment.

The amended version of § 471-e provides that "all cigarettes sold on an Indian reservation to non-members of the nation or tribe or to non-Indians shall be taxed, and evidence of such tax will be by means of an affixed tax stamp." Id. § 471- e(1)(a) (2006). It further provides that "[q]ualified Indians may purchase cigarettes from a reservation cigarette seller exempt from the cigarette tax even though such cigarettes will have an affixed cigarette tax stamp." Id. § 471-e(1)(b). This is achieved through a tax exemption coupon system, spelled out in the amended version of the statute, which is discussed in more detail below.

3. The Day Wholesale Case

In arguing that § 471 is inoperative as applied to the collection of taxes on cigarettes sold on-reservation absent implementing regulations prescribing a scheme for such collection, defendant places great reliance on the Day Wholesale case, which involved the viability of the amended version of New York Tax Law § 471-e. Although this statute is not applicable to the instant prosecution as the earliest date it could have taken effect is March 1, 2006 --- which postdates all of the racketeering acts charged in the indictment --- for purposes of dispelling defendant's argument, the Court addresses this decision below.

In Day Wholesale, plaintiffs Day Wholesale, Inc. ("Day"), a cigarette wholesaler, and Scott Maybee ("Maybee"), a reservation owner, sued New York State and the New York Attorney General, among others, seeking an injunction to prevent the enforcement of the amended version of § 471-e. As explained by the Fourth Department, pursuant to § 471(2), "the ultimate liability for the cigarette tax falls on the consumer, but the cigarette tax is advanced and paid by agents such as Day through the use of tax stamps." 856 N.Y.S.2d at 808. Recognizing that not all cigarettes sold by reservation retailers are subject to taxation, viz. those sold to Native American Indians on their own reservation, the amended version of § 471-e was "designed to serve dual goals, i.e., providing for the collection at the wholesale level of cigarette tax from non-Indians or Indians purchasing cigarettes off of their own reservation and exempting from the cigarette tax purchases made by qualified Indian consumers." Id. at 809. Thus, the amended version of § 471-e sets forth a scheme by which wholesalers are required to stamp all cigarettes to be sold on a reservation but reservation retailers are permitted to purchase a limited amount of stamped cigarettes tax-free upon the presentment to the wholesaler of tax exemption coupons. The statute provides that the DTF "shall" provide these coupons to the tribes based upon "probable demand." N.Y. Tax Law § 471-e(2) (2006). "Qualified Indians may [then] purchase cigarettes from a reservation cigarette seller exempt from the cigarette tax even though such cigarettes will have an affixed cigarette tax stamp." Id. § 471-e(1)(b). A cigarette wholesaler can then redeem the coupons and obtain a refund "with respect to any cigarette tax previously paid on cigarettes it sold without collecting the tax because it accepted an Indian tax exemption coupon from its purchaser . . . ." Id. § 471-e(4).

Section 471-e provides that it "shall take effect March 1, 2006, provided that any actions, rules and regulations necessary to implement the provisions of [the statute] on its effective date are authorized and directed to be completed on or before such date." Id. § 471-e (Historical and Statutory Notes 2006). However, the DTF "did not take any action or promulgate any rules or regulations necessary to implement the statute on or before March 1, 2006." Day Wholesale, 856 N.Y.S.2d at 809. In that regard, the DTF failed to issue tax exemption coupons for qualified Native Americans. Instead, the DTF issued an advisory opinion stating that it would not begin enforcement of the statute on March 1, 2006 due to its forbearance policy. Id. The New York Attorney General, however, concluded that the statute was effective and subject to enforcement as of March 1, 2006 and sent a letter to "Philip Morris and other cigarette manufacturers advising them that Day and other wholesale cigarette dealers were continuing to sell unstamped cigarettes to Indian reservations 'in direct violation' of the amended version of Tax Law § 471-e, and warning them that such sales were a matter of 'significant concern' to the Attorney General." Id. at 809-10. As a result, Philip Morris suspended sales to Day until Day provided assurances that it would not sell unstamped cigarettes to the reservations or New York State indicated that such sales were not illegal. Id. at 810. Day and Maybee thereafter commenced suit against the State of New York and its then Attorney General Elliot Spitzer.

The Fourth Department initially focused its analysis on the statute's "effective date clause" which explicitly provided that "the amended version of Tax Law § 471-e would become effective only in the event that 'any actions, rules and regulations necessary to implement' its provision were complete on or before March 1, 2006 . . . . At a minimum, the actions, rules and regulations necessary for the implementation of the statutory scheme include the issuance of Indian tax exemption coupons." Id. Given that no such coupons were issued, which coupons were both a condition precedent to the statute becoming effective and an integral part of the statute's specific collection scheme, the Court concluded that the statute was not "presently in effect." Id. at 808.

4. Defendant's Reliance on Day Wholesale is Misplaced

Acknowledging that the amended version of § 471-e does not apply to the racketeering acts alleged in the indictment, defendant nonetheless argues that the Day Wholesale case is relevant because "[i]f (as Day holds) § 471-e is non-enforceable absent implementing regulations with respect to the very specific conduct § 471-e targets (i.e., on-reservation sales) then surely the far broader language of § 471 cannot be enforced with respect to the narrow (and politically sensitive) category of on-reservation sales absent like implementing regulations." (Def.'s Mem. of Law in Supp. at 13-14.) Defendant's argument is without merit.

The very first sentence of the Day Wholesale decision emphasizes that the amended version of § 471-e is a collection mechanism: "Tax Law § 471-e . . . embodies the Legislature's most recent effort to collect taxes on cigarettes sold on Indian reservations." 856 N.Y.S.2d at 808 (emphasis added). The Appellate Division then describes the collection mechanism that the amended version of § 471-e creates: All cigarettes sold on-reservation must be stamped but refund coupons distributed by the DTF permit Native Americans to purchase cigarettes for their personal use free of tax and the cigarette wholesaler can later redeem the coupons to obtain a refund. Because the DTF failed to issue the refund coupons, the Appellate Division found that the statute did not take effect. If all cigarettes on the reservation were to be stamped, then refund coupons had to be available so that exempt sales to qualified purchasers could occur.

The conclusion reached by the Fourth Department is fully understandable and follows given the specific statutory scheme set forth in the amended version of § 471-e. The detailed collection mechanism set forth in the statute simply cannot take effect absent the issuance of the tax exemption coupons. This is confirmed by the Notes following § 471-e which provide that the statute "shall take effect March 1, 2006, provided that any actions, rules and regulations necessary to implement the provisions of [the statute] on its effective date are authorized and directed to be completed on or before such date." N.Y. Tax Law § 471-e (Historical and Statutory Notes 2006).

Day Wholesale and its analysis of the amended version of § 471-e are distinguishable from the instant case, which is governed by § 471. "The plain, mandatory phrasing of [§ 471] sets forth a requirement that stamping agents affix tax stamps to all cigarettes the state has the power to tax, which includes those sold by reservation retailers for re-sale to the public." City of N.Y. v. Milhelm Attea & Bros., Inc., 550 F. Supp. 2d 332, 346 (E.D.N.Y. 2008) (Amon, J.). There is nothing in the language of § 471 which even remotely suggests that the statutory liability set forth therein does not attach absent regulations designed to facilitate collection of these taxes on the reservation. Cf. Cayuga Indian Nation of N.Y. v. Gould, No. 2008-16350, 2008 WL 5158093, at *5 (Sup. Ct. Monroe County Dec. 9, 2008) ("Inasmuch as the tax liability referred to in § 1814*fn10 springs from § 471, the fact that recently enacted § 471-e has been judicially declared by Day Wholesale to be 'not in effect' is of no moment."). Defendant concedes as much when he states that "[a]lthough the State Legislature did not state in haec verba that regulations must be implemented in order for reservation retailers to be obliged, under § 471, to sell only tax-stamped cigarettes to non-exempt persons, the absence of any purely statutory mechanism to achieve this end within this narrow and politically sensitive area confirms that the promulgation of regulations was essential -- rather than merely expedient -- for taxes to be imposed on sales at Indian smoke shops." (Def.'s Mem. of Law in Supp. at 13 (emphasis added).)

The Historical and Statutory Notes to § 471 further undermine defendant's argument:

This act shall take effect April 1, 2002; provided, however, if this act shall become a law after such date it shall take effect immediately and shall be deemed to have been in full force and effect on and after April 1, 2002; . . . provided further that sections thirty, thirty-one and thirty-three of this act[*fn11 ]shall take effect April 3, 2002 and shall apply to all cigarettes possessed in the state by any person for sale and use in the state by any person on and after April 3, 2002 and to taxes, interest and penalties collected or received by the commissioner of taxation and finance under sections 471 and 471-a of the tax law on and after such date; provided, however, that the commissioner of taxation and finance shall be authorized on and after this act shall have become a law to take steps necessary to implement these provisions on their effective date . . . .

N.Y. Tax Law § 471 (Historical and Statutory Notes 2002). The Notes clearly provide that § 471 "shall take effect" in April 2002 and do not suggest that the statute is inoperative pending the possible promulgation of related regulations. Instead, it explicitly provides to the contrary.

Moreover, the fact that the Notes authorize the DTF to "take steps necessary to implement" this section "on and after this act shall have become a law" does not warrant a different conclusion. Although there were no regulations in place to enforce the collection of the taxes due for on-reservation cigarette sales at the time of the racketeering acts alleged in the indictment, defendant could have easily complied with § 471 by simply purchasing stamped cigarettes from a state licensed wholesaler/stamping agent in the amount necessary to cover his reservation sales to non-Native Americans.*fn12 At the same time, defendant could have purchased unstamped cigarettes consistent with his standard practice, but in such lesser amount as he deemed necessary to serve the needs of Native Americans on the reservation for their own personal consumption. The lack of implementing regulations does not negate the obligation of individuals such as Morrison to sell only stamped cigarettes to non-Native American purchasers but rather implicates the ability of the state to collect the tax from Native American tribes, which have repeatedly flouted state attempts at collection. As explained by the Third Department in Urbach and as noted earlier:

The record here clearly reflects . . . that the [New York Tax] statutes cannot effectively be enforced without the cooperation of the Indian tribes. Because of tribal immunity, the retailers cannot be sued for their failure to collect the taxes in question, and State auditors cannot go on the reservations to examine the retailers' records.

Additionally, the [DTF] cannot compel the retailers to attend audits off the reservations or compel production of their books and records for the purpose of assessing taxes. In that regard, representatives of the [DTF] engaged in extensive negotiations with the tribes in an effort to arrive at an acceptable agreement. Those efforts were largely unsuccessful and the vast majority of the Indian retailers refused to register with the [DTF]. In further efforts to enforce the statute, the State attempted interdiction, i.e., interception of tobacco and motor fuel shipments and seizure of those shipments that were found to be in noncompliance with the Tax Law. That strategy resulted in civil unrest, personal injuries and significant interference with public transportation on the State highways. 712 N.Y.S.2d at 222. Essentially, defendant's argument boils down to the claim that because Native Americans, such as Morrison, have successfully thwarted enforcement of § 471, the statute is inoperative until the DTF can figure out a way to compel compliance. The Court rejects this proposition.

Although the facts in the Second Circuit's decision in Kaid are distinguishable,*fn13 the following passage is instructive for present purposes:

Federal law prohibits the states from taxing cigarettes sold on Native American reservations to Native Americans, but allows state taxes to be imposed on non-Native American consumers on reservations. New York law provides for taxes on non-Native Americans purchasing cigarettes in stores on reservations, but New York has a policy of non-enforcement of this tax. [Defendants] assert that this non-enforcement policy effectively de-taxed sales of cigarettes to non-Native Americans on reservation land, thereby negating the element of contraband necessary to a conviction for trafficking in contraband cigarettes under 18 U.S.C. §§ 2341-42. This argument is meritless. While it appears that New York does not enforce its taxes on small quantities of cigarettes purchased on reservations for personal use by non-Native Americans, nothing in the record supports the conclusion that the state does not demand that taxes be paid when, as in this case, massive quantities of cigarettes were purchased on reservations by non-Native Americans for resale. . . .

Kaid, 241 Fed. Appx. at 750.

In sum, the Day Wholesale decision only addressed whether or not the specific collection mechanism set forth in the amended version of § 471-e, which statute does not even apply to the present prosecution, could operate absent the issuance of refund coupons.*fn14 The fact that the court found that version of § 471-e ineffective does not vitiate the statutory liability set forth in § 471 and does not support a finding that the latter statute cannot operate absent regulations designed to facilitate its enforcement. See Cayuga Indian Nation, 2008 WL 5158093, at *4 ("Section 471-e was merely designed to facilitate the state's collection of cigarette taxes arising from Indian sales to non-Indian consumers . . . . § 471-e does not create the tax obligation itself, although it refers to it. The tax obligation itself long ago was established by the legislature . . . .").

5. The Milhelm Attea Case

In a separate but related argument, defendant contends that "[i]f § 471-e could not be implemented and applied to Indian retailers without [corresponding] regulations, § 471 could not be implemented without the [Milhelm] Attea regulations." (Def.'s Mem. of Law in Supp. at 10.) As with defendant's other regulatory claims, this argument is unavailing.

a. Milhelm Attea

Milhelm Attea, a case decided by the Supreme Court in 1994, arose in response to the DTF regulations adopted in 1988.*fn15

Noting that "[o]n-reservation cigarette sales to persons other than reservation Indians . . . [we]re legitimately subject to state taxation" 512 U.S. at 64, and that the DTF determined that "unlawful purchases of unstamped cigarettes [by non-Native Americans from reservation retailers] deprived New York of substantial tax revenues . . . estimated at $65 million per year," the Court explained that in 1988, the DTF adopted regulations "[t]o ensure that nonexempt purchasers do not . . . escape taxation." Id. at 65. These regulations limited the number of untaxed cigarettes that wholesalers could sell to tribal retailers, id., and imposed recordkeeping requirements. Id. at 64.

The plaintiffs in Milhelm Attea were wholesalers doing business on Native American reservations who sued to enjoin enforcement of the regulations, arguing that they violated the Indian Trader Statutes. These statutes provide, inter alia, as follows:

The Commissioner of Indian Affairs shall have the sole power and authority to appoint traders to the Indian tribes and to make such rules and regulations as he may deem just and proper specifying the kind and quantity of goods and the prices at which such goods shall be sold to the Indians.

25 U.S.C. § 261. These statutes have been interpreted as evidencing a Congressional desire to comprehensively regulate the field of Indian trading such that there is no room for additional regulation by the states. See, e.g., Warren Trading Post Co. v. Az. Tax Comm'n, 380 U.S. 685, 690 (1965).

In finding that the 1988 DTF regulations did not violate the Indian Trader statutes, the Court distinguished the Warren Trading Post case, decided by the Court in 1965. In Warren Trading Post, Arizona State attempted to tax the gross proceeds of a licensed Native American trader who was located on the reservation and conducted business with other Native Americans. The Court found that the state tax was preempted by the Indian Trader Statutes:

We think the assessment and collection of this tax would to a substantial extent frustrate the evident congressional purpose of ensuring that no burden shall be imposed upon Indian traders for trading with Indians on reservations except as authorized by Acts of Congress or by valid regulations promulgated under those Acts. This state tax on gross income would put financial burdens on appellant or the Indians with whom it deals in addition to those Congress or the tribes have prescribed, and could thereby disturb and disarrange the statutory plan Congress set up in order to protect Indians against prices deemed unfair or unreasonable by the Indian Commissioner.

Warren Trading Post, 380 U.S. at 690-91.

"The state law . . . found pre-empted in Warren Trading Post was a tax directly 'imposed upon Indian traders for trading with Indians.'" Milhelm Attea, 512 U.S. at 74 (quoting Warren Trading Post, 380 U.S. at 691). "That characterization[, the Court found,] does not apply to regulations designed to prevent circumvention of 'concededly lawful' taxes owed by non-Indians." Id. at 74-75 (quoting Moe, 425 U.S. at 482-83).

Moe,*fn16 Colville,*fn17 and Potawatomi*fn18 make clear that the States have a valid interest in ensuring compliance with lawful taxes that might easily be evaded through purchases of tax-exempt cigarettes on reservations; that interest outweighs tribes' modest interest in offering a tax exemption to customers who would ordinarily shop elsewhere. The balance of state, federal, and tribal interests . . . in this area thus leaves more room for state regulation than in others. In particular, these cases have decided that States may impose on reservation retailers minimal burdens reasonably tailored to the collection of valid taxes from non-Indians.

Id. at 73 (internal citation and quotation marks omitted). Thus, the Court "h[e]ld that Indian traders are not wholly immune from state regulation that is reasonably necessary to the assessment or collection of lawful state taxes." Id. at 75. After reviewing the 1988 DTF regulations, the Court found that they did not impose excessive burdens on Indian traders. See id. at 75 ("We are persuaded, however, that New York's decision to stanch the illicit flow of tax-free cigarettes early in the distribution stream is a reasonably necessary method of preventing fraudulent transactions, one that polices against wholesale evasion of [New York's] own valid taxes without unnecessarily intruding on core tribal interests.") (citation and internal quotation marks omitted). Thus, the Court held that the "regulations d[id] not, on their face, violate the Indian Trader Statutes." Id. at 61.

b. Defendant's Argument

Defendant argues that "[t]he Supreme Court in [Milhelm] Attea recognized that the regulations were key to the constitutional application of § 471 to cigarette sales on reservations" (Def.'s Mem. of Law in Supp. at 12) and that "the Legislature's requirement that regulations be enacted to implement §471-e simply reflected the Legislature's recognition that the Supreme Court upheld §471 because of its accompanying regulations . . . ." (Def.'s Reply at 6.) Defendant's argument mischaracterizes the Court's findings.

The Milhelm Attea case involved a facial challenge to New York's regulatory scheme, not a challenge to the underlying statutory liability. In fact, the Court began its discussion by explicitly noting that pursuant to New York law, non-Native Americans purchasing cigarettes on-reservation "must pay" the tax. 512 U.S. at 64 ("Cigarette consumers in New York are subject to a state tax of 56 cents per pack. Enrolled tribal members who purchase cigarettes on Indian reservations are exempt from this tax, but non-Indians making purchases on reservations must pay it.") (emphasis added). Because the State had the power to tax non-native Americans purchasing cigarettes on the reservation, id. at 71, 74, the Court held that the plaintiff wholesalers were "not wholly immune from state regulation that [wa]s reasonably necessary to the assessment or collection of lawful state taxes." Id. at 75. Thus, contrary to defendant's contentions, the Court did not uphold the statutory liability prescribed in § 471 because of its accompanying regulations. Rather, the Court held that the state could impose regulations reasonably necessary to facilitate the collection of the legal tax and that the 1988 DTF regulations were sufficient in this regard. There is nothing in the Milhelm Attea case which even suggests that liability under § 471 is not operative absent regulations.

Moreover, it is significant to note that if the comprehensive 1988 DTF regulations were found by the Supreme Court to not impose an excessive burden on Native American traders, then surely Morrison's ability to simply purchase stamped cigarettes from licensed wholesaler/stamping agents for resale to non-Native Americans on the reservation, and unstamped cigarettes for resale to qualified Native Americans, cannot be deemed excessive.

6. Conclusions as to Defendant's Regulatory Arguments

In sum, the Court rejects defendant's arguments that the absence of implementing regulations under § 471 precludes prosecution under the CCTA. The 1988 regulations, which were later repealed, and the enactment of, and later amendment to, § 471-e, were attempts by New York State to solve its problem of enforcement. But as the Court has stated many times in this case, the failure of the executive branch to enforce the law cannot undermine the viability of a statute duly enacted by the legislature. Moreover, the absence of any language in the relevant New York Tax Law requiring the DTF to prescribe regulations as a condition precedent to statutory liability precludes any finding that § 471 is not operative absent the implementation of a formal regulatory program.

B. Change in Theory*fn19

Defendant argues that Count Two should be dismissed because (1) the government relied solely on an "off-reservation" theory of prosecution until the Court granted defendant's Rule 29 motion as to Count One's Racketeering Acts Five through Eighty, and (2) the Court erred when it permitted the government to change its theory mid-trial and present Count Two to the jury under a new theory of "on-reservation" sales.

The government's response to defendant's change of theory claim is as follows:

In the context of opposing defendant's entrapment-by-estoppel and due process claims, the government consistently argued that § 471-e had no applicability to this case. Notwithstanding the obvious mis-communication that led to the dismissal of Racketeering Acts ("RAs") 5 to 80 for purposes of Count One [discussed infra], the government never asserted, as claimed by the defense here, that the defendant's criminal liability rested upon proof that, in addition to selling un-taxed cigarettes to Peace Pipe customers, the defendant subsequently performed additional conduct to aid and abet in the re-sale of those same cigarettes off the reservation. To the contrary, the government sought to prevent the defendant's attempts to conflate, and thereby confuse for the jury, the regulatory history of Tax Law § 471-e with evidence of the defendant's aiding and abetting the evasion of the state's cigarette tax requirements by selling un-taxed cigarettes to Peace Pipe customers whom he knew were re-selling to consumers. (Gov't's Mem. in Opp'n at 7.)

The threshold question, then, is whether the government did change its theory. However, before addressing that issue, a brief overview of the relevant ...


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