The opinion of the court was delivered by: Honorable Richard J. Arcara United States District Judge
Currently before this Court are motions by the St. Regis Mohawk Tribe ("Mohawk Tribe" or "Tribe") and the Unkechauge Indian Nation ("Unkechauge Nation" or "Nation") for a preliminary injunction enjoining the implementation of certain amendments to the New York State tax law relating to the taxation of cigarettes sold by reservation retailers. In addition, the Unkechauge Nation requests that this Court order the defendants to participate in court-ordered mediation. Defendants oppose both motions and seek to opt out of this Court's mediation program.
For the reasons stated, the Court: (1) denies the motions for a preliminary injunction; (2) grants a stay pending appeal; and (3) denies the mediation-related motions without prejudice to renew after appeal.
A. St. Regis Mohawk Tribe
The St. Regis Mohawk Tribe is a federally-recognized Indian tribe located in northern New York, along the St. Lawrence River and the Canadian border. The Tribe's current reservation constitutes 14,000 acres spanning Franklin and St. Lawrence Counties. There are currently 141 registered tribal businesses, 30 of which are cigarette retailers that employ 417 local residents.
The Tribe has adopted a regulatory system to control cigarette prices while generating income to pay for essential government services. Tobacco retailers must be tribal members licensed by the Mohawk Tribe. All cigarettes sold by licensed retailers must bear a tribal tax stamp. The cost of the stamp varies depending on the tobacco product. The Tribe has also enacted legislation that requires a certain markup over invoiced cost per carton of tobacco product. The failure to abide by this minimum pricing regime can result in fines or suspensions of the offender's license to do business on the reservation. Tribal regulations also prohibit internet sales and tobacco sales to minors.
The Tribe has established a compliance department that is responsible for enforcement of the tobacco regulations. The compliance department consists of four employees who assess and collect fees associated with taxes, fines and penalties. The Tribe does not currently regulate transactions between the reservation retailers and state wholesalers. That relationship is strictly market-based. Nor does the Tribe currently regulate transactions between retailers and consumers. The Tribe's interest is limited to ensuring that cigarettes sold by reservation retailers bear a tribal stamp and are sold at a minimum price. In 2008, the Tribe collected $2 million in fees from sales of tobacco products which were used by the Tribe to support governmental programs and services.
B. Unkechauge Indian Nation
The Unkechauge Nation is a sovereign nation of Indians residing on a 55-acre parcel of land on eastern Long Island, New York. The Nation is governed by a Tribal Council. The Tribal Council regulates the tobacco trade through a licensing regime and by Tribal Resolutions. Before opening a tobacco retail business, Unkechauge Nation members must first obtain a license from the Tribal Counsel. Additionally, the Unkechauge Nation requires that any wholesaler doing business with tribal retailers also obtain a license to do so from the Tribal Council. The Nation's sole economic industry is retail tobacco sales. Like the Mohawk Tribe, the Unkechauge Nation levies its own tribal tax on cigarettes sold by Nation retailers. The Unkechauge levies a $1.00 per carton tribal tax. According to the Nation, there is considerable demand for their cigarettes because that $1.00 per carton tax pales in comparison to the $4.35 per pack New York State cigarette tax. The Nation notes that New York City levies its own $1.50 per pack tax, which provides New York metropolitan residents with an incentive to travel to the reservation to avoid paying City and State cigarette taxes.
C. 2010 New York Tax Law Amendments
The background and history of New York's effort to tax reservation tobacco retailers and the 2010 New York tax law amendments is set forth in this Court's decision in Seneca Nation of Indians v. Paterson, Dkt. No. 10-cv-687A, at Item 87, 2010 WL 4027796 (Oct. 14, 2010) (hereinafter "Seneca Nation" decision), denying a similar motion for a preliminary injunction made by the Seneca Nation of Indians and the Cayuga Indian Nation. Familiarity with the Seneca Nation decision and with the new tax scheme is assumed. Briefly, 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, the New York State Department of Taxation and Finance 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 their use and enjoyment on reservation territory. It is the validity of those tax law amendments that is at issue in this motion.
The amendments contemplate two alternative statutory mechanisms by which Indian nations and their members may obtain a limited quantity of tax-exempt (albeit New York State tax stamped) cigarettes: (1) an "Indian tax exemption coupon system" and (2) a "prior approval" system.*fn1 See N.Y. Tax Law § 471(1). Both systems are discussed in detail in this Court's Seneca Nation decision. Nations desiring to participate in the coupon system are required to make an annual election to participate by August 15th of each year. Because the August 15th deadline for 2010 passed shortly after the amendments were enacted, the State defendants have represented to this Court that the State would entertain ...