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Tobacco suppliers to ignore new tax law

Cigarette wholesalers who supply Seneca Nation of Indians and other tribal stores with tobacco products are expected to ignore a state law, which takes effect today, banning tax-free cigarette sales to non-Indians.

With the state Department of Taxation and Finance saying it will not enforce the law, signed last year by Gov. George E. Pataki, wholesalers say the flow of tax-free cigarettes will continue.

"We're not breaking any laws because we're going by what the governor says," said Frank Attea, president of Attea Milhelm & Bros., a Buffalo firm believed to be one of the largest tobacco suppliers to Senecas, who sell cigarettes at smoke shops and over the Internet.

But the office of State Attorney General Eliot L. Spitzer warned Tuesday that the law -- no matter whether the tax department enforces it -- is on the books and that cigarette wholesalers who continue to supply Indian tribes with tax-free cigarettes could face legal troubles.

"Tax stamping agents who violate the law may be subject to criminal sanctions brought by local district attorneys," Darren Dopp, a Spitzer spokesman, said of wholesalers who are licensed by the state to affix tax stamps on cigarette packs. "The law is now in effect, and these tax stamping agents have to carefully consider their actions."

Dopp said Spitzer, whose office serves as the legal representative for the governor and state agencies, is not ruling out taking action on his own against cigarette wholesalers who continue to sell tobacco products tax free.

Erie County District Attorney Frank J. Clark was not available Tuesday for comment.

For several years, the State Legislature has passed bills to require the Pataki administration to collect the tax. Failure to do so, lawmakers estimate, has cost the state hundreds of millions of dollars in revenue. They also argue that Indian shops have been squeezing non-Indian retailers by ignoring the state's $1.50 per pack excise tax. That gives them a $15 per carton price advantage -- even before sales taxes.

That price advantage would grow if lawmakers adopt Pataki's plan to raise the per-pack tax to $2.50 without resolving the tax collection issue.

Last year, the Legislature took a more strident stance: it carved its tax collection demands into the state budget, which Pataki signed. The measure required that, starting today, the state tax department ensure that tobacco wholesalers collect the tax before the cigarettes reach reservation stores.

But Andrew Eristoff, state commissioner of taxation and finance, said last month that his agency would hold off on enforcing the tax-collection law because Pataki, as part of his 2006 budget plan, has offered to delay enforcement for one year to give the administration time to negotiate the matter with Indian tribes. Critics say Pataki, afraid of the kind of violence that occurred in 1997 when he last tried to collect the tax, is trying to punt the issue until after he leaves office in December.

"It would be premature to start acting on enforcement and collection while those legislative proposals are outstanding," said Michael Bucci, a tax department spokesman.

In a statement, Seneca Nation President Barry Snyder Sr. said that treaties dating back to 1842 protect the tribe's rights to sell goods tax-free. He said hundreds of Seneca-owned businesses would be forced to close if the state "does not respect our treaties."

Snyder said Pataki "respects our sovereignty and wants to do the right thing." He urged New Yorkers "to support the governor and tell all of the state's elected leadership that they, too, should respect Indian sovereignty and honor Indian treaties."

Attea's company took the issue all the way to the U.S. Supreme Court, which in 1993 ruled that the state has the right to collect taxes on sales of cigarettes by Indians to non-Indians.

The head of a trade group representing wholesalers who sell tobacco products subject to the tax said the state is ignoring its responsibility by not collecting the taxes.

"Just because there's some public official who chose not to enforce the law doesn't make it legal," said Arthur Katz, executive director of the New York State Association of Wholesale Marketers and Distributors. Katz said the state has only about three dozen independent wholesale suppliers. Only about a half-dozen, he estimated, sell cigarettes tax-free to Indian retailers.

One trade group for non-Indian retailers is considering a lawsuit against the state for not enforcing the law, though executives with the group acknowledge that also could end up delaying enforcement.

"It's a pretty sad situation that the governor and tax department would openly defy the constitution," said James Calvin, executive director of the New York Association of Convenience Stores.

Indian retailers also sell gasoline tax-free, and legislators have been trying to force that collection for years. But the tobacco issue has gotten much of the focus because such a growing number of smokers purchase their cigarettes from tax-free or low-tax outlets.

Spitzer has cut deals with private transportation companies to stop delivering tax-free cigarettes, but a loophole in the law has let the U.S. Postal Service continue to deliver the cigarettes to people who buy from mail order and Internet sites of Indian retailers.

Health groups have gotten into the battle because they say the lower-cost cigarettes keep more people smoking.


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