NY may try to collect taxes on Indian cigarettes

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October 26, 2009

By MICHAEL GORMLEY The Press Republican Mon Oct 26, 2009, 11:28 PM EDT

ALBANY — A deepening deficit has New York officials looking again at how to collect unpaid taxes on cigarettes sold by Indian tribes to non-Indians.

The issue is also making unlikely allies of cigarette makers and anti-smoking interests who say taxation would limit illegal sales and keep cigarettes out of the hands of minors.

A budget hearing Tuesday in Manhattan will weigh the potential revenue against concerns that any attempt to collect the taxes could cause a repeat of sometimes violent confrontations between the state and tribes in the 1990s. The Legislature has pressed for collection before, but past governors have refused, preferring to try to negotiate agreements.

At stake is what lawmakers, cigarette companies and a leading anti-smoking group say is $400 million or more in annual revenue. That disputed figure would be almost equal to a proposed cut in midyear school aid that's intended to help close a $3 billion budget deficit.

For tribes like the Seneca Indian Nation, the taxes could mean an end to fortunes being made from an empire built on Internet sales to individual "smoke shops" on territories like the small Poospatuck Reservation on Long Island. They say the untaxed sales are guaranteed by treaties dating to 1794 that protect them from taxation, and they don't recognize state courts' views that side with the state.

The Senecas also argue that their sales yield millions more in spinoff economic benefits to communities than the taxes would generate.

Manufacturers would like the state to collect the taxes on an estimated 28 million untaxed cartons a year.

"If we had enforcement of the laws on the books, that would go a long way," said David Sutton, spokesman for Altria, Richmond, Va.-based Altria Group Inc., parent company of Philip Morris USA, the nation's largest tobacco maker.

Companies believe that would protect their product from illegal activities, including bootlegging and inferior "counterfeit" cigarettes packaged like branded products, which cut into profits and consumer loyalty. Sutton also notes it's easier for underage buyers to buy tobacco products over the Internet and by mail. More revenue could also forestall further tax increases on cigarettes, already the most taxed item on the market. A pack now carries a $2.75 state tax, with another $1.50 tax added in New York City.

Tobacco companies have recently mounted their own stings against counterfeit sales of their product, alerting police who would then raid the retailers.

"The failure to collect the tax is a major public health problem," said Russ Sciandra of the Center for a Tobacco Free New York, which finds itself on the same side of the argument as Philip Morris. "There are thousands of people who would quit smoking if they had to pay the full price."

He said Philip Morris, still a major lobbying force in Albany, will make a rare public appearance at the Tuesday hearing in part because tribes are no longer simply selling major brands. Some are making their own. Three manufacturing facilities are being operated in the Senecas' territory by independent makers.

Sciandra also disputes Gov. David Paterson's recent caution. The Democrat has warned that no state ever succeeded in collecting more than $75 million a year by going after Indian-sold cigarettes. That wouldn't be much of a dent in a $3 billion deficit and far short of the $400 million in revenue estimated by lawmakers, Philip Morris and the anti-smoking group.

But Sciandra said the point is that collecting the tax would significantly reduce sales on Indian territory and revenue would jump around the state.

The tribe estimates its cigarette sales bring $71 million in net gain to the states' communities in spinoff sales to restaurants, clothing stores and other businesses from its 1,000 employees, many of whom are not Indians. Under taxation, the tribe argues that revenue would be shifted to the state for its spending, much of it in New York City.