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Spitzer vows to collect tax from Indians State levy applies to cigarettes sold to non-Indians on reservations

The state will move to collect taxes on the sale of cigarettes by Indian retailers, Gov. Eliot L. Spitzer said Monday, a week after a state judge in Buffalo blocked the state from enforcing a 2005 tobacco tax law.

Spitzer's comments, the first on the issue since he became governor last week, indicate he will not back down from his campaign pledge last year to bring in hundreds of millions of dollars a year for the state in the cigarette taxes on a product that has become an economic engine for dozens of Seneca Nation tobacco merchants, as well as those on the Tuscarora Reservation in Niagara County.

The plan by Democrat Spitzer is also a sharp turnaround in state policy from that of his predecessor, Republican George E. Pataki, who steadfastly broke with state legislators by rebuffing their efforts over the past decade to collect the tax.

Spitzer said he believes his tax department can "make moot" a preliminary injunction issued last week by State Supreme Court Justice Rose Sconiers in a lawsuit that sought to block enforcement of the 2005 tax collection law.

The lawsuit, brought last year against the state by Scott Maybee, a Seneca tobacco merchant, along with a Northern New York cigarette wholesaler, sought to stop Spitzer, then the state's attorney general, from enforcing the law that legally took effect last March 1 but was never enforced by Pataki's tax agency.

The challengers argued that the state's tax department under Pataki failed to first carry out one of the law's requirements. The 2005 law called for the tax agency to distribute special coupons to allow Indians to continue buying the products tax-free for their personal consumption. The law pertains only to the sale of tobacco and gasoline products by Indian retailers to non-Indians.

"The term 'Indian tax exemption coupon' appears 18 times in the [2005] statute. It is undisputed that, at present, Indian tax exemption coupons have not been issued or distributed as contemplated by the statute," Sconiers wrote in the Jan. 2 ruling. As such, she added, the law "is not in effect" and cannot be enforced by the state.

Lawyers for the state, who submitted their papers while working for Spitzer when he was still attorney general, had argued that Indians could get refunds from the state tax agency if they had paid taxes on cigarettes. Sconiers said there is no such plan available.

Spitzer indicated Monday that his administration will work to correct the legal concerns raised by the judge.

"My understanding is that [Sconier's] decision -- and this is not said with any disrespect to the judge who issued the decision -- can be rendered moot by Tax and Finance taking certain steps to effectuate the statute, and if that is done, then the reasoning behind the opinion would be rendered moot," Spitzer told reporters after a 45-minute, closed-door meeting with Republican state senators.

Asked if he intended to take that step, Spitzer said: "As I said before, in a measured and thoughtful way, I believe in both a level playing field with respect to competition in the marketplace in terms of sales of the product at issue and also believe in appropriate respect for the sovereign nations. But I believe the statute passed several years ago is an appropriate statute, so we will be moving forward."

The governor said the issue will likely emerge in his upcoming 2007 state budget plan, in which there will be "certain references" to the issue in terms of revenues that could be expected if the law is enforced. He did not elaborate.

John Milgrim, a spokesman for Andrew Cuomo, the new attorney general, said the ruling by Sconiers was still being reviewed.

The Indian tax issue holds many complexities, involving potentially $1 billion or more in state excise and sales taxes, battles between Indian and non-Indian retailers over market share in the lucrative tobacco trade and a debate over just how far the state can go before it violates the sovereign rights of Indian tribes.

The decision by Sconiers is a legal victory -- though potentially a short one, given Spitzer's position -- for Maybee and the other 200 or so Seneca tobacco retailers. They have enjoyed a booming mail order and Internet cigarette trade over the years, taking advantage of New York's relatively high cigarette taxes by being able to sharply undercut non-Indian tobacco merchants.

Maybee declined to comment.

But Joseph Crangle, a Buffalo lawyer who represents Seneca business owners, including tobacco retailers, said he believes the decision will make it more difficult for the state to implement the 2005 law.

"There's a very basic legal principle that so many people want to forget about. It took an act of Congress to impose criminal law on Indian reservations. Congress has never given New York State the civil regulatory authority to impose its civil laws on Indian reservations in New York State," Crangle said.

"The fact of the matter is New York State does not have civil tax regulatory authority over sovereign Indian territories. It's as simple as that,"' he added.

Like Spitzer, representatives of non-Indian retailers say they believe the law can be easily put into effect by issuing the tax-free coupons for Indian smokers.

"It appears to us that if Gov. Spitzer is inclined to enforce the law, he can have his tax department do so in spite of this ruling," said James Calvin, executive director of the New York Association of Convenience Stores.

Calvin, whose group had battled Pataki since he backed off efforts to collect the tax in 1997, called Spitzer's comments on the judge's ruling "refreshing."

Spitzer gave no indication how he will carry out his campaign pledge to collect the tax on cigarette and gasoline sales. As attorney general, he put pressure on wholesalers and shipping companies to limit business with the tax-free Indian retailers. In some cases, the steps worked, such as with some private shippers, but tobacco companies continue to supply the Indian retailers despite Spitzer's past efforts.

It would seem unlikely -- especially given his "measured and thoughtful way" response Monday -- that Spitzer would want to pick a fight so early with Indian nations, which maintain treaty rights and whose sovereignty affords them the legal rights to the tax-free sales.

The tribes argue the tax-free businesses employ thousands of people across the state in areas, such as the Seneca's two reservations, with few other employment opportunities.

Some have theorized Spitzer, aware of the violence in 1997 the last time the state tried to collect the taxes, will try to negotiate other side deals with some Indian nations to get them to drop the tax-free sales.


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