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The nation's biggest Internet cigarette sales industry is showing signs of decline following concerted pressure by several states to shut off tobacco customer access to credit cards.

Several retailers on the Cattaraugus Indian Reservation who operate Internet smoke shops selling tax-free cigarettes are laying off workers, closing or attempting to retool their operations.

The decline follows credit card companies' decisions to cooperate with law enforcement authorities from across the nation. The credit card companies no longer are participating in Internet tobacco transactions, following a meeting last month with law enforcement officials who explained that Internet tobacco sales violate several laws.

In addition, Seneca sellers face a barrage of threatening letters and, in some cases, subpoenas aimed at recovering unpaid tax revenues.

Seneca Maxine Jimerson's response was to sell her lucrative online business.

"They were harassing me. They sent me a subpoena asking me to forward all of my records, lists of employees, customers' names and who owned the business," Jimerson said of authorities in several states. "The letters kept getting more and more aggressive listing the laws we were breaking."

She received the subpoena from Indiana and letters from tax officials in New York City, Pennsylvania and Washington State and has received many other notices in the past from tax officials around the country.

"I don't feel I have to comply with them," she said. "I'm on an Indian reservation, and they don't have rights on the reservation."

No exact figures

It is not easy to get exact figures on how many people were laid off or how many businesses closed, because many of these Internet businesses are mom-and-pop operations in homes with family members and a handful of employees.

But with the sale of Jimerson's business to another Native American, it is estimated that as many as 80 workers lost their jobs, according to Gregg Prockton, who serves as Jimerson's chief operating officer.

Jimerson, who still runs a smoke shop on the Allegany Reservation, was one of the biggest online merchants from the Seneca Nation, which comprises one of the largest blocs of Web cigarette sellers.

For years, New York State has gone back and forth on the issue of collecting taxes on Native American cigarette and gasoline sales to non-Indians.

In 1997, Gov. George E. Pataki backed away from attempts to collect taxes following violent Native American protests. Three times the State Legislature has adopted laws ordering the collection of taxes, including a new measure in the just-adopted state budget.

A lot of money is at stake.

More than 90 percent of the $347.5 million worth of cigarettes and other tobacco products sold by Senecas in 2003 was generated through telephone and Internet transactions.

Senecas have a huge price edge over non-Indian retailers when it comes to selling untaxed cigarettes for as low as $9 a carton -- about $15 less than cigarettes sold off reservation lands.

Question of sovereignty

State governments claim that the Internet crackdown is about stopping sales of cigarettes to minors, halting the flow of black market cigarette profits to criminal enterprises and complying with laws governing the sale of tobacco products.

Senecas see different issues.

They say it is all about collecting billions of dollars in lost tax revenue that, if successful, will come at the expense of the Seneca Nation's sovereignty, which they insist makes them immune to state taxes.

But Seneca President Barry E. Snyder Sr. has said the Internet sales dispute is outside the realm of native sovereignty rights -- a stance that has upset the tribe's online retailers.

By failing to take up their cause, the merchants say it is only a matter of time before state government once again attempts to force collection of sales taxes on tobacco and gasoline sales involving customers who drive onto Seneca reservations.

"We are a sovereign nation, and the nation has to back us up. It can't say you guys are out on your own," said Suzanne Smith, who works at a family-owned Internet smoke shop. "The nation has to draw the line."

Snyder, at a Tribal Council meeting last week, said he plans to set up a meeting with State Attorney General Eliot L. Spitzer to discuss the credit card ban.

But if the state succeeds in shutting down Internet businesses, Smith says, it will destroy the economic progress Senecas have made in recent years and hurt the overall Western New York economy as Internet workers lose their jobs.

Senecas estimate their Internet tobacco businesses employ as many as 1,500 people, many of them non-Indians, though that number is now dropping because of the credit card prohibition. They note these jobs pay above minimum wage, sometimes as much as $10 or more an hour.

"Most of us are just small businesses trying to make a dollar, and New York State is coming in and telling us they want the business and we can't have it," said 22-year-old Joseph Campbell, a shipping clerk at an Internet smoke shop. "I'll probably go to Tops or Wal-Mart looking for work."

In the fight to stay in business, Irene and Gerald "Chief" Jimerson say they have diversified and now are selling pet food and bottled Native American water for walk-in sales at their shop on Richardson Road.

An older couple, they opened their business in 1999 to create an economic opportunity for their younger son, who had not gone to college.

"A small amount of our business comes over the Internet," Irene Jimerson said. "We're here in our shop seven days a week, 12 hours a day. It's not an easy life. I don't believe the government should be involved in anyone's livelihood."

A different strategy

Other Seneca Internet sellers say they are attempting to find ways around the credit card ban by making use of money orders and financial services that guarantee checks written by customers or verify that there is enough money in the customers' checking accounts to cover the purchases.

But this strategy has generated concern among customers, according to Smith, who says some of her customers have expressed reluctance in switching over to checks and banks.

"Customers have asked if authorities could come in and see our business records. We tell them no one sees our records, and the reason we say that is we are a sovereign nation," Smith said.

For buyers who switch over to money orders or checks, the state considers that an illegal practice as well, according to Marc Viollette, a spokesman for Spitzer.

"The payment mechanism is irrelevant. It's an illegal act," Viollette said. He declined to say what legal steps Spitzer is taking to ensure compliance of halting Internet tobacco sales.

And while some Native Americans believe they are being racially discriminated against, Viollette says the efforts against tobacco credit card sales by state attorneys general are not only nationwide, but also aimed at blocking cigarette bootleggers abroad.

"This extends beyond U.S. borders. In October we seized a planeload of cigarettes at (Kennedy) Airport that came in from Switzerland," he said.

Attorney Joseph Crangle, who represents Seneca retailers on tax issues, said that the Seneca's online businesses will ultimately "persevere and succeed."

He blamed convenience store owners, in part, for the push to deprive Senecas of the Internet business they have built up in recent years.

When told that it appeared the credit card ban was shutting down Internet sales of cigarettes, James Calvin, president of the New York Association of Convenience Stores, welcomed the development.

"It's encouraging that there is movement toward the level playing field we have been seeking all these years," Calvin said. "American society simply won't accept sales of cigarettes without proper taxation and age verification."

Convenience store operators, Calvin added, want state law requiring collection of taxes at reservation stores enforced.

News Albany Bureau reporter Tom Precious contributed to this report.

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