The opinion of the court was delivered by: Honorable Richard J. Arcara United States District Judge
(Preliminary Injunction Motion)
The Seneca Nation of Indians ("SNI" or "Seneca Nation") commenced this action on August 17, 2010, seeking to enjoin implementation of certain amendments to the New York State tax law relating to the taxation of cigarettes sold by reservation retailers. Along with the complaint, SNI filed a motion for a temporary restraining order and a preliminary injunction. On August 31, 2010, this Court issued a temporary restraining order and enjoined implementation of the tax law amendments pending a hearing on the preliminary injunction motion. In the meantime, the Cayuga Indian Nation ("CIN" or "Cayuga Nation") moved for, and was granted, permission to intervene and joined in the preliminary injunction motion.
A preliminary injunction hearing was held on September 14 and 15, 2010. On September 23rd, the Court heard supplemental argument on the motion for a preliminary injunction. Upon all of the testimony and evidence presented in support of and in opposition to the motion, and after hearing argument from counsel, the Court denies the motion for a preliminary injunction and finds that plaintiffs have failed to demonstrate a likelihood of success on their claim that the tax law amendments unconstitutionally burden their right of tribal sovereignty.
I. Tobacco Economies of Seneca and Cayuga Nations
The Seneca Nation of Indians Nation is a federally-recognized Indian nation comprised of five territories throughout Western New York: the Allegheny Territory, the Cattaraugus Territory, the Oil Spring Territory, the Niagara Falls Territory and the Buffalo Creek Territory. Approximately 4,000 of the Nation's members live on either the Cattaraugus or Allegheny Territories. Another 3,000 members live off Nation property in New York State. No members live on the Oil Spring, Niagara Falls or Buffalo Creek Territories, although there is at least one tobacco retail store on each of those three territories. SNI members characterize its tobacco economy as a well-established free market tobacco economy. In 2006, SNI enacted its own Import-Export Law (IEL) to combat cigarette trafficking and to create its own tax stamp system. Under the IEL, the Seneca Nation assesses a $0.75 per carton (7.5 cents per pack) tax on all imported*fn1 cigarettes sold on Nation property. The SNI stamp is affixed by one of 15 SNI-licensed cigarette stamping agents. All cigarettes imported onto SNI territories must be stamped by one of the 15 SNI stamping agents within 48 hours of arriving on Nation territory, before being sent to Nation retailers for resale to the public. There are approximately 172 SNI-licensed tobacco retailers who collectively employ about 3,000 SNI member and nonmember employees.
Revenue generated from the SNI tobacco tax is used by the Nation to support government and social services. Since the enactment of the IEL, SNI has collected approximately $45.7 million in revenue and fines.*fn2
The Cayuga Indian Nation is also a federally-recognized Indian nation. The Cayuga Nation is comprised of a 64,000-acre tract located in Seneca and Cayuga Counties. The CIN tobacco economy operates differently from that of the Seneca Nation. The CIN operates two tobacco retail convenience stores--one in Seneca County and one in Cayuga County. Both stores are Nation-owned and sell to CIN members and nonmembers. The Cayuga Nation does not have its own cigarette stamp or cigarette import-export law.
II. State's Efforts to Tax Nation
The background and history of New York State's cigarette tax collection efforts has received widespread media attention. The issue has been notably contentious and there is strong public support for both sides. A comprehensive recitation of New York's efforts to collect cigarette taxes from reservation retailers is set forth in Cayuga Indian Nation v. Gould, 14 N.Y. 3d 614 (2010). Summarized briefly,
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 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." [New York] Tax Law § 1814 declares that it is a misdemeanor to willfully evade the cigarette tax.
Tax Law § 471 (1) recognizes that there are certain instances when the State must forgo 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 (1976), 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 & Finance of N. Y. v. Milhelm Attea & Bros. ("Milheim"), 512 US 61 (1994). 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.
Cayuga Indian Nation, 14 N.Y.3d at 622-25 (internal citations and footnotes omitted). Although Milhelm Attea "seemingly paved the way for implementation" of § 471 of the New York Tax Law, id. at 625, the State voluntarily delayed enforcement 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. Id. at 625. Other litigation further stalled efforts to implement the cigarette tax scheme.
In 2003, the New York State Legislature adopted New York Tax Law § 471-e, which directed the Department of Taxation and Finance (DTF) to collect cigarette taxes on reservation sales to non-Indians. Id. at 627. DTF drafted regulations, but never formally adopted them. Section 471-e had an effective date of March 1, 2006. When that date passed without DTF adopting formal regulations for collection of on-reservation cigarette taxes for sales to non-Indians, a state wholesaler and tribal retailer brought a declaratory judgment action in state court seeking to declare § 471-e unenforceable. In May 2008, the New York Appellate Division, Fourth Department, agreed holding that, absent a procedure "that would permit the State to collect taxes on reservation sales to non-Indians... while simultaneously exempting from such tax reservation sales to qualified Indian purchasers," § 471-e was not "in effect." See Day Wholesale, Inc. v. State of New York, 51 A.D.3d 383, 387 (4th Dep't 2008). The Fourth Department then issued an injunction that remained in place until it was lifted in September 2010.
In the interim, the New York Court of Appeals decided Cayuga Indian Nation v. Gould, 14 N.Y.3d 614 (2010), which granted declaratory judgment in favor of the Cayuga Nation and declared that the Nation was under no obligation to collect and transmit cigarette taxes for on-reservation cigarette sales to nonmembers absent a regulatory scheme governing the calculation and collection of cigarette taxes to nonmembers.
III. June 2010 Tax Law Amendments and Emergency Rule
The Court of Appeals' decision in Cayuga Indian Nation was issued on May 11, 2010. Several weeks later, on June 21, 2010, the New York Legislature amended N.Y. Tax Law § 471 and § 471-e. The amendments increase the cigarette tax from $2.75 to $4.35 per pack. N.Y. Tax Law § 471(1). The following day, on June 22, 2010, DTF adopted an "emergency rule" to implement the amendments. See 20 N.Y.C.R.R. § 74.6. Together, the 2010 amendments and the emergency rule (collectively referred to herein as the "tax law amendments" or "amendments") seek to set forth a system for collecting taxes on sales made by Indian cigarette retailers to nonmembers while at the same time attempting to balance the right of Indian members to obtain cigarettes tax free for use and enjoyment on reservation territory. It is the validity of those tax law amendments that is at issue in this motion.
The amendments provide that the cigarette tax set forth in § 471 does not apply to cigarette sales "to qualified Indians for their own use and consumption on their nations' qualified reservations," but that a tax is imposed on all cigarettes sold "on an Indian reservation to non-members of the Indian nation or tribe" and that "evidence of such tax shall be by means of an affixed [New York State] cigarette tax stamp." See N.Y. Tax Law § 471(1). The amendments further provide that "the ultimate incidence of and liability for the tax shall be upon the consumer" and require New York state-licensed stamping agents and wholesale dealers to prepay the tax by purchasing tax stamps from the Commissioner of DTF. Tax stamps are then affixed to each pack of cigarettes and the tax is required to be collected and added as part of the sales price for the cigarettes. Id. at § 471(2), (3). The statute unequivocally provides: "All cigarettes sold by agents and wholesalers to Indian nations or tribes or reservation cigarette sellers located on an Indian reservation must bear a [New York State] tax stamp," id. at § 471(2), including cigarettes intended to be sold to tribal members for use and consumption on reservation territory.
The amendments contemplate two alternative statutory mechanisms by which Indian nations and their members may obtain tax-exempt (albeit New York State tax stamped) cigarettes: (1) an "Indian tax exemption coupon system" and (2) a "prior approval" system.*fn3 See N.Y. Tax Law § 471(1).
An Indian nation must affirmatively elect to participate in the "Indian tax exemption coupon system" (hereinafter "coupon system"). Under the coupon system, the DTF distributes a quantity of Indian tax exemption coupons to a participating Indian nation based upon DTF's calculation of the "probable demand" for tax-exempt cigarettes by members of that nation for their own personal use and consumption. N.Y. Tax Law § 471-e(2).*fn4 Those coupons can then be used by the Nation to obtain the "probable demand" quantity of cigarettes from a state-licensed wholesaler without paying the cost of the New York tax stamp to the wholesaler. Alternatively, the Nation can distribute the coupons to reservation retailers who then redeem them for tax-free cigarettes directly from state-licensed wholesalers. The amendments do not provide for allocation of the coupons among reservation cigarette sellers or tribal members. Instead, the amendments contemplate that the tribe or Indian nation will allocate the coupons among reservation cigarette sellers or, alternatively, redeem the coupons itself from a state-licensed wholesaler. In other words, New York State determines the number of coupons that each Indian tribe should receive and distributes those coupons to the tribe itself, leaving the tribe with the obligation to determine how those coupons should be redeemed, allocated and distributed. DTF issued a taxpayer guidance memorandum, TSB-M-10(6)M, explaining the coupon system as follows:
When the coupon system is in effect, an Indian nation or tribe may purchase stamped packs of cigarettes for its own official use or consumption from a wholesale dealer licensed under Tax Law Article 20 without paying the cigarette excise and prepaid sales taxes to the extent that the Indian nation or tribe provides the wholesale dealer with Indian tax exemption coupons.
A reservation cigarette seller may purchase cigarettes for resale from a wholesale dealer without paying the cigarette excise and prepaid sales taxes, provided that... [inter alia] the reservation cigarette seller provides the wholesale dealer with Indian tax exemption coupons entitling the reservation cigarette seller to ...