Paul Martin LesterYou know the world has come a
long way, baby — in a circle — when politicians try to
tax that toasted taste right out of your smokes and find themselves
fighting Indians in the process. Around the world, officials have
tried to squeeze smokers (for their own good, of course) of as much
cash as possible in return for allowing them to enjoy their chosen
vice. The end result has been thriving black markets, whether in

Europe or the
United States. Complicating this matter in the U.S., though,
are those little islands of quasi-sovereignty known as Indian
reservations. As cigarette taxes have soared, Native Americans have
perceived entrepreneurial opportunity in peddling and even
manufacturing low-cost smokes for eager customers. Not so
surprisingly, state officials have responded with attacks on tribal
independence.

Technically, states are authorized to tax cigarettes sold on
reservations to non-Indians, but they don’t have the authority to
enter reservations to collect that tax. That’s courtesy of Oklahoma
Tax Commission v. Citizen Band of Potawatomi, decided in
1991. There’s a lot of hedging and on the other hand in that
situation — some states claim a measure of legal power over tribal
lands under Public Law 280 or
similar measures. But, basically, a legal standoff is in place.

As you might guess, this infuriates some public officials. New
York City Mayor Bloomberg went so far as to urge then-Governor
David Paterson to “get
yourself a cowboy hat and a shotgun” to collect cigarette taxes
from Indian tribes and their customers.

You see, not just justice, but tax collection, truly is
blind.

That approach doesn’t work as well as you might think, so state
officials have taken to leaning on tobacco companies. As part of an
interesting analysis of the cigarette tax standoff, Ryan D.
Dreveskracht summarizes a major tax collecting approach for

Native American Times:

In 1998, the Attorneys General of 46 states, five U.S.
territories, and the District of Columbia settled various legal
actions involving antitrust, product liability, and consumer
protection claims against the nation’s four largest tobacco
companies.  (In the early years of the Bush Administration,
the Department of Justice decided not to pursue claims against
tobacco manufacturers for harm caused in Indian country).  The
states wanted billions of dollars, and were likely right to demand
it.  The tobacco companies, however, anticipated that they
would have to substantially raise cigarette prices to pay for their
financial obligations to the states.  They also knew that by
raising their prices, other nonparticipating companies would have a
competitive price advantage.

In settling the suits, the major tobacco companies got a
sweetheart deal.  As part of the settlement agreement, states
agreed to enact and “diligently enforce” escrow statutes that
“effectively and fully neutralize[d]” competition from
nonparticipating companies.  These statutes impose financial
obligations on non-participating companies by requiring them to
make escrow payments based on the number of tax-stamped cigarettes
sold in a participating state.  Participating tobacco
companies are not subject to these payments.  Nonparticipating
companies, however – companies that have never been sued or found
culpable for conduct giving rise to liability – are required to
make the payments.

Further complicating matters, courts say that
tribal imports of cigarettes from outside the U.S. are subject
to state regulation.

But remember, tax laws may apply to tribal lands, but
enforcement is another matter entirely. So if “nonparticipating
companies” are actually based on reservations…

That’s right, tribes including New York’s Oneida Indians set up
their own cigarette companies, cranking out smokes under their own
brand names. Last year, Thomas Kaplan reported for the
New York Times:

ONEIDA, N.Y. — The trucks lumber past cornfields and dilapidated
farm houses, pull up to a onetime bingo hall and unload their
cargo: boxes of tobacco imported from the Carolinas.

Inside, employees of the Oneida Indian Nation dump the shredded
tobacco leaves into rolling machines and fashion them into
cigarettes to be sold at a dozen tribal convenience stores midway
between Syracuse and Utica.

The cigarettes, branded with names like Niagara’s and Bishop,
sell for as little as $39.95 for a 10-pack carton — much cheaper
than those at non-Indian retailers — and bring in millions of
dollars a year to the tribe, which also has a resort casino, five
golf courses and a multimedia production house.

“We tried poverty for 200 years,” the Oneidas’ leader, Ray
Halbritter, said in an interview. “We decided to try something
different.”

The article points out that New York’s tribes have been the most
aggressive with their home-rolled tactics, cranking out vast
quantities of cigarettes to satisfy the demand in a state where
taxes are the highest in the nation at $4.35 per pack, plus another
$1.50 levied in New York City.

New York officials tried seizing reservation-made cigarettes —
but the courts have
ruled that out. The state also, says Dreveskracht “ramped up
its enforcement by trailing vehicles that leave the Reservations,
inspecting tax stamping agents’ inventories, and secretly
conducting surveillance on Reservation smoke shops.”

It could be worse. In 2003, Rhode Island state troopers flat-out
invaded a reservation and battled tribal police and officials
to shut a smoke shop. Members of the Narragansett tribe are

still pissed.

Nothing brings out old-school authoritarianism and brutality in
government officials like taxes.

By the way, Native Americans are
fighting the feds over taxes, too, but I’ll leave that for
another day.

H/T to BroadSnark, who covered the often-overlooked
cigarette tax battle between Native Americans and state
officials on her blog.