The opinion of the court was delivered by: Graffeo, J.
In this appeal involving a dispute between law enforcement authorities and the Cayuga Indian Nation concerning the collection of cigarette sales taxes, two principal issues are presented. The first is whether the Cayuga Indian Nation was entitled to a declaration that two convenience stores it operates in Central New York are located on "qualified reservation" property within the meaning of Tax Law § 470(16)(a). The second is whether, absent the implementation of a statutory or regulatory scheme addressing the specific tax collection issues posed by the retail sale of cigarettes on Indian reservations, Nation retailers can be prosecuted for the possession and sale of untaxed cigarettes under Tax Law § 471.
I. The Background of This Dispute
The current controversy between the Cayuga Indian Nation and law enforcement authorities in Seneca and Cayuga Counties cannot be resolved without an understanding of New York State's past efforts to collect taxes derived from the retail sale of cigarettes on Indian reservations. Since 1939, New York has imposed sales taxes on cigarettes sold in this state under Tax Law § 471, which generally requires the use of tax stamps that are purchased by cigarette wholesalers and then affixed to packages of cigarettes. Under the statute, the "agent" --typically the wholesaler -- "is liable for the collection and payment of the tax on cigarettes . . . and shall pay the tax to the tax commission by purchasing" tax stamps (Tax Law § 471). Having prepaid the sales taxes, wholesalers pass the tax obligation on to distributors who, in turn, collect the taxes from retailers, until they are finally paid by consumers. Thus, the "ultimate incidence of and liability for the tax [falls] upon the consumer" (Tax Law § 471). Tax Law § 1814 declares that it is a misdemeanor to willfully evade the cigarette tax.*fn1
Tax Law § 471 recognizes that there are certain instances when the state must forego cigarette tax collection because it is "without power to impose such tax." At the time of its enactment in 1939, one of those situations included the sale of cigarettes occurring on Indian reservations since states were not authorized to tax goods sold by an Indian Nation on its reservation until 1976. That year the United States Supreme Court decided Moe v Confederated Salish & Kootenai Tribes of Flathead Reservation (425 US 463, 483 ), which held that states may impose sales taxes on goods sold by members of an Indian nation on reservation land to purchasers who are not members of the nation, particularly when it is the non-Indian purchaser who bears the ultimate tax burden under state law.
In the aftermath of Moe, in 1988 the New York Department of Taxation and Finance promulgated regulations aimed at implementing a scheme to calculate and collect the sales taxes due from sales to non-Indians on reservation properties in New York. The regulations adopted a "probable demand" mechanism that limited the quantity of unstamped -- i.e., "untaxed" --cigarettes that wholesalers or distributors could sell to tribes and tribal retailers. The Department would either project the "probable demand" for cigarettes attributable to members of a particular Indian tribe or nation, thereby restricting the quantity of unstamped cigarettes that could be sold to that tribe or nation to that estimated number, or enter into agreements with tribal leaders to determine probable demand. Tax exemption coupons would be issued to Indian retailers representing their monthly allotment under the probable demand formulation and the retailers could then exchange those coupons with wholesalers for unstamped cigarettes. Retailers were to sell unstamped cigarettes only to "qualified Indians," who would be provided with individual exemption certificates to present to retailers when purchasing cigarettes.
The 1988 regulations were never implemented by the Department, however, because the proposed tax collection scheme was immediately challenged by cigarette wholesalers who claimed the regulations were preempted by federal statutes governing trade with Indians. The litigation proceeded to the United States Supreme Court, which ultimately rejected the wholesalers' contention in 1994 (see Department of Taxation and Fin. of N.Y. v Milhelm Attea & Bros., Inc., 512 US 61 ). The Supreme Court reaffirmed the principle articulated in Moe and further declared that "States may impose on reservation retailers minimal burdens reasonably tailored to the collection of valid taxes from non-Indians." (id. at 73). Thus, the Court recognized the authority of states to collect sales taxes relating to cigarettes sold to non-Indians on reservation property or other Indian lands provided the regulatory scheme is not "unduly burdensome" (id. at 76).
After analyzing New York's regulations, the Milhelm Court concluded that they were not preempted by federal laws regulating Indian trading, but it did not "assess for all purposes each feature of New York's tax enforcement scheme that might affect tribal self-government or federal authority over Indian affairs" (id. at 69). Without endorsing every aspect of the New York approach, the Supreme Court approved in principle the "probable demand" methodology, while acknowledging that an "inadequate quota may provide the basis for a future challenge to the application of the regulations" (id. at 75). The Court emphasized that "[i]f the Department's 'probable demand' calculations are adequate, tax-immune Indians will not have to pay New York cigarette taxes and neither wholesalers nor retailers will have to precollect taxes on cigarettes destined for their consumption" (id.).*fn2 Finally, the Court concluded that the record-keeping requirements imposed under the regulations were less onerous than comparable provisions that had been upheld in Moe and would not impermissibly interfere with Indian trading activities (id. at 76).
Because Milhelm was commenced by non-Indian wholesalers, the Supreme Court addressed the narrow preemption issue before it and did not fully explicate the interests of Indian nations or tribes affected by the regulations (id. at 68-70). Although it rejected the wholesalers' facial challenge to the regulations, the Court was clearly aware of the enforcement difficulties that states faced when attempting to collect sales taxes directly from Indian tribes given their immunity from civil suits for nonpayment; it acknowledged that tax collectors must employ "alternative remedies" to ensure compliance, such as entering into agreements with the tribes, pursuing civil damages actions against individual members or engaging in off-reservation interdiction efforts (id. at 72).
Enforcement of the regulations was stayed during the course of the Milhelm litigation but the release of the decision in June 1994 seemingly paved the way for implementation. But, soon after Milhelm was decided, the Department announced that enforcement efforts would be delayed pending consideration of other issues arising from the decision and to allow for negotiations with the tribes in an attempt to enter into compacts or agreements pertaining to the collection of sales taxes. When the regulations had still not been put into effect more than a year later, an association of convenience store owners commenced an action in 1995 to compel enforcement of these regulations and similar provisions relating to sales taxes on motor fuel (see Matter of New York Assn. of Convenience Stores v Urbach, 92 NY2d 204 ). The Association claimed that the equal protection rights of its members had been violated by the state's selective enforcement of cigarette and gasoline sales taxes and the policy of forbearance against Indian retailers who were selling untaxed cigarettes and gasoline to non-Indians at reservation stores.
Although the Association prevailed in the lower courts, which employed a strict scrutiny analysis in finding that the forbearance policy amounted to unlawful discrimination, this Court rejected that argument, concluding that distinctions between sales on Indian reservations and other types of sales did not implicate invidious racial classifications because of the unique status enjoyed by Indian tribes under federal law. We held that the classification should be subjected to the rational basis test, rather than strict scrutiny, but we did not proceed to apply that test since state policy had changed during the course of the litigation. Although the Department's policy of forbearance had initially been temporary, by the time the case was argued in this Court, it had become permanent -- the Department announced in 1998 that it was repealing the regulations. In its notice of repeal, the Department explained that, as a practical matter, the regulations could not achieve their intended purposes and that repeal was predicated on the "State's respect for the Indian Nations' sovereignty" (id. at 214, quoting 20 NYS Reg, Apr. 29, 1998, Issue 17, Book 1, at 23). "Since these rules provide the only regulatory framework for enforcing the motor fuel and cigarette taxes on Indian reservations, their repeal signified that the Tax Department has committed itself to withholding active enforcement on a long-term basis" (New York Assn. of Convenience Stores, 92 NY2d at 214).
In light of this pronouncement, we remitted the case to the lower courts to assess, in the first instance, whether the now-permanent forbearance policy met the rational basis standard.
On remittal, both Supreme Court and the Appellate Division concluded that it did. The Appellate Division explained:
"The record . . . makes plain that the 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 Department 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 Department 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 Department. 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" (Matter of New York Assn. of Convenience Stores v Urbach, 275 AD2d 520, 522-523 [3d Dept 2000], lv denied 96 NY2d 717 , cert denied 534 US 1056 ).
The next significant policy shift occurred in 2003 when the Legislature adopted Tax Law § 471-e, which directed the Department to issue whatever regulations would be necessary to collect cigarette taxes on reservation sales to non-Indians (see former Tax Law § 471-e; L 2003, ch 63, pt Z, § 4).*fn3 As a result, the Department drafted a new set of regulations but they were never formally adopted. Consequently, in 2005, the Legislature amended Tax Law § 471-e by declaring that "qualified Indians" have a right to purchase tax exempt cigarettes on the "qualified reservation" of their tribe or nation for their own consumption. The statute further clarified that "non-Indians making cigarette purchases on an Indian reservation shall not be exempt from paying the cigarette tax when purchasing cigarettes within this state" (Tax Law § 471-e; see L 2005, ch 61, pt K, §§ 1-2, as amended by L 2005, ch 63, pt. A, § 4 [a 2004 attempt to enact similar legislation had been foiled by gubernatorial veto]).
The amendment also incorporated the Department's proposed regulations into Tax Law § 471-e, thereby creating a statutory mechanism for calculating and collecting sales taxes relating to on-reservation purchases by non-Indians. Although it differed from the 1988 regulatory scheme, Tax Law § 471-e also used a coupon system as the mechanism of enforcement. The Department was required to determine the "probable demand" for cigarettes by tribal members through various means (including potential agreements with the tribes) and periodically issue to the governing body of a tribe tax exemption coupons representing the amount of cigarettes likely to be consumed by tribal members each quarter. Cigarette wholesalers were to pay the sales taxes on all cigarettes in their possession, meaning all packages were to bear tax stamps, even those destined for on-reservation sales to tribe members. A tribe could purchase cigarettes for use by members without paying sales taxes by proffering tax exemption coupons provided by the Department. The wholesaler, in turn, would use the coupons to obtain a refund from the Department for its overpayment of cigarette taxes (the wholesaler would have already paid the sales taxes on the cigarettes it provided to the tribes in exchange for the coupons).*fn4
The effective date provision applicable to Tax Law § 471-e (L 2005, ch 63, pt A, § 4, amending L 2005, ch 61, pt. K, § 7) directed that the statute "shall take effect March 1, 2006, provided that any actions, rules and regulations necessary to implement the provisions of this act on its effective date are authorized and directed to be completed on or before such date." But the Department did not meet this deadline. It did not make the "probable demand" calculations or issue the tax exemption coupons that were integral to the tax collection methodology. In a March 16, 2006 advisory opinion, the Department explained that it intended to continue its policy of forbearance, meaning that it would not actively attempt to collect from wholesalers, distributors or Indian retailers, cigarette sales taxes associated with on-reservation sales (see NY St Dept of Tax & Fin Advisory Op No. TSB-A-O6M). The Department further advised that, if it "revise[d] its policy in the future, it [would] provide adequate notice to all affected stamping agents" (id.)
Soon after the proposed effective date passed, a cigarette wholesaler and a tribal retailer initiated a declaratory judgment action against the State and the Attorney General (who had threatened to enforce the statute, despite the Department's forbearance policy) seeking a determination that the amended version of Tax Law § 471-e was not enforceable, together with a preliminary injunction precluding any enforcement efforts. Supreme Court granted the preliminary injunction, reasoning that the statute was not in effect because the conditions precedent in the effective date provision had not been fulfilled and, in May 2008, the Appellate Division agreed (see Day Wholesale, Inc. v State of New York, 51 AD3d 383 [4th Dept 2008]). The appellate court noted:
"there is no question that the Legislature intended to create a procedure that would permit the State to collect cigarette taxes on reservation sales to non-Indians and non-members of the nation or tribe while simultaneously exempting from such tax reservation sales to qualified Indian purchasers. Because both aspects of the procedure must function simultaneously, the Legislature provided for a system utilizing Indian tax exemption coupons to distinguish taxable sales from tax-exempt sales. Without the coupon system in place, cigarette wholesale dealers and reservation cigarette sellers have no means by which to verify sales to tax-exempt purchasers" (id. at 387).
The preliminary injunction issued in Day has not been disturbed and the parties in this case agree that Tax Law § 471-e is not "in effect" and therefore remains unenforceable.*fn5 Thus, at present, there is no enforceable statutory or regulatory scheme specifically addressing the calculation or collection of taxes arising from the on-reservation retail sale of cigarettes. Moreover, the Department -- the agency charged by the Legislature with the collection of the taxes -- has not to date implemented a system that uses Indian retailers as an intermediary for collection of cigarettes sales taxes from consumers.*fn6
Against this historical synopsis, we turn to the facts giving rise to this controversy.
Plaintiff Cayuga Indian Nation operates two convenience stores in Cayuga and Seneca Counties on parcels of real property it purchased on the open market in 2003. The parcels are situated on what had been the Nation's approximately 65,000-acre aboriginal reservation but, by 1807, title to all of this reservation property had been transferred to the State and subsequently purchased by private successors in interest. The Nation acknowledges that it sells cigarettes on these properties both to its tribal members and non-Indian consumers and that the cigarettes do not bear tax stamps evidencing payment of New York cigarette sales taxes. For purposes of this litigation, it is also undisputed that Nation retailers at these two locations are involved in retail sales to consumers -- not cigarette wholesaling activities.
In September 2008, the District Attorneys of Seneca and Cayuga counties wrote to the Commissioner of Taxation and Finance requesting the Department's assistance in preventing the sale of untaxed cigarettes and other products by the Nation's retailers. In response, the Commissioner advised: "Governor Paterson is currently engaged in discussions with New York's Native American nations and tribes in an effort to resolve the many complex and important issues that have confounded multiple administrations for decades. Given these circumstances, we are constrained not to participate in your investigations." The Commissioner further expressed the "hope" that they would "exercise care to avoid taking actions that might disrupt or undermine the Governor's current global negotiations."
Dissatisfied with the Department's response, law enforcement authorities in both counties decided to pursue their own enforcement efforts. In November 2008, they obtained and executed search warrants in both stores operated by the Nation, confiscating the inventories of unstamped cigarettes, among other items. At that time, no criminal action had been commenced against the Nation, any of its members or any other individual in connection with the sale of cigarettes at the convenience stores.
The day after the warrants were executed, the Cayuga Indian Nation brought this declaratory judgment action against the Sheriffs and District Attorneys of Cayuga and Seneca counties (hereinafter "DAs"). Because Tax Law § 471-e -- the statute that creates a specialized tax exemption coupon system for the collection of taxes associated with the on-reservation retail sale of cigarettes -- is not in effect, the Nation sought a declaration that it is under no obligation to collect and transmit to the Department sales taxes on the cigarettes it sells to consumers in its stores because they are located on "qualified reservation" property within the meaning of Tax Law § 470(16)(a). Contending that no laws were being violated, the Nation claimed that the law enforcement authorities lacked the power to obtain a search warrant or seize property and demanded the return of the confiscated items. The Nation also sought an injunction barring the authorities from alleging that the Nation, or any of its employees, was violating the Tax Law by possessing or selling unstamped cigarettes on reservation land, asserting that such injunctive relief should remain in effect until a system for calculating and collecting the taxes stemming from on-reservation retail sales is properly put in place by the Department of Taxation and Finance.
The Nation moved for a preliminary injunction and the DAs cross-moved to dismiss the action arguing that the Nation could not evade the application of criminal laws by commencing a declaratory judgment action. In the alternative, the DAs asserted that their motion should be converted to an application for summary judgment because the facts were undisputed and the issue distilled to whether the convenience stores were located on a reservation and, if so, whether District Attorneys could enforce the existing criminal laws governing the collection of cigarette sales taxes in that context. During oral argument on the cross motions, the Nation agreed that the pending applications should be treated as requests for summary judgment.
Because no criminal action was pending against the Nation or any other individual associated with the operation of the convenience stores, Supreme Court concluded that the Nation could pursue its declaratory judgment action insofar as it challenged the scope and enforceability of the relevant cigarette tax statutes, but it could not contest the validity of the search warrant or the propriety of its execution in a collateral civil action. It therefore dismissed the action to the extent it challenged the search warrant or sought return of the property that had been seized.*fn7 The court then rejected the Nation's remaining claims on the merits, concluding that Tax Law § 471 --the general statute that imposes a tax on cigarettes sold in New York -- precluded any retailer, including an Indian Nation engaging in on-reservations sales to consumers, from possessing or selling unstamped cigarettes. The court reasoned that the DAs could use a criminal prosecution to enforce the general directive in Tax Law § 471, even though Tax Law § 471-e was not in effect. Supreme Court also concluded that the sales in question did not occur on a "qualified reservation" within the meaning of Tax Law § 470(16)(a), nor could the Nation exercise sovereign power over the property based on the analysis of the United States Supreme Court in City of Sherrill, N.Y. v Oneida Indian Nation of New York (544 US 197 ).
In the days following Supreme Court's decision, the DAs indicated that sealed indictments had been handed up by Grand Juries in Cayuga and Seneca Counties. But the individuals or entities named in those indictments have not been disclosed, nor has the criminal prosecution progressed, because the Nation appealed Supreme Court's order to the Appellate Division, which reversed the order insofar as appealed from and granted declaratory relief to the Nation.
The Appellate Division agreed with Supreme Court that the declaratory judgment action could proceed because no criminal charge was pending at the time the civil action was initiated. But it unanimously rejected Supreme Court's analysis of the qualified reservation issue, concluding that the Nation was entitled to a declaration that the convenience stores were situated on property that qualified as a reservation within the meaning of Tax Law § 470(16)(a). The Appellate Division split, however, regarding Supreme Court's interpretation of Tax Law § 471. The majority rejected the argument that the general statute provided an independent basis for enforcement action against the Nation or its employees, holding that a cigarette tax cannot be collected from an Indian nation (and, as a result, criminal penalties for non-compliance with the cigarette tax laws cannot be pursued) without a system in place that permits wholesale dealers and reservation sellers to lawfully distinguish between cigarettes destined to be sold to tax-exempt purchasers (members of the Cayuga Nation) and those earmarked for sale to other consumers. Given that sales by Indians to members of their tribe are tax-exempt under federal law, the majority viewed Tax Law § 471 as insufficient to establish the procedures for the lawful imposition and collection of such a tax. A single Justice dissented on the scope of Tax Law § 471, concluding that the provision unreservedly imposes a ...