A Level Playing Field
By Scott Orr

At its BP-branded convenience store in Manistee, Michigan, the Little River Band of Ottawa Indians sells cigarettes to a local population — both tribal and non-tribal smokers — for about $5 per pack. A few miles west on U.S. Highway 31, the Wesco World convenience store offers the same products to the same consumers, at the same price.

Both stores collect state taxes on the sales, though the Little River tribe receives a partial rebate from the state to support the services it provides to its resident population. The only ex­ception: Resident members of the tribe can file for a refund of the taxes they pay on tobacco purchases. This is consistent with a 1994 U.S. Supreme Court ruling.

Across the country, a number of states are negotiating tobacco tax com­pacts with willing Native American tribes in the hopes of establishing the kind of level playing field that exists along Highway 31 in Michigan.

Still, 15 years after the High Court ruled states are entitled to collect sales taxes on tobacco sold on Indian land to non-Indians, most states still have no tax arrangements in place. And many states fail to enforce exist­ing tax rules or look the other way as black markets in tax-free cigarettes proliferate.

With the number of retail stores owned by Native American tribes grow­ing at an unprecedented rate, the con­troversy over taxing the sale of tobacco products on tribal lands burns hotter than ever.

Further fanning the flames are spi­raling tax rates for tobacco products put in place nationwide by states looking for new revenue streams. So what once might have been an advantage of a few cents per pack for tribal smoke shops has now grown to $1 to $2 per pack — or more — in many states.

So far, no nationwide standard has materialized to govern the taxation of tobacco sales on tribal lands, leaving in­stead a patchwork of regulations rang­ing from those that seem to be working fairly well — like in Michigan — to those that are completely dysfunctional. At stake are billions of dollars in tax reve­nues for the states and billions of dollars in sales for non-tribal convenience stores that cannot compete with their Native American counterparts that offer low-tax or tax-free tobacco products.

Tribal Taxing
Nationwide, 34 states are home to fed­erally recognized Native American tribes. But according to a 2004 study by the National Association of State Legis­latures, only eight, including Michigan, have negotiated tax collection agree­ments with the tribes.

The growth in the number of tobac­co retailers on Native American land has not been documented, but accord­ing to a recent study by consulting firm Klas Robinson Q.E.D., the number of convenience stores at Indian casino lo­cations has grown by 70 percent since 2004, to a total of 167 nationwide — and that doesn’t count smoke shops and on­line stores.

Robert Memberto, director of com­merce for the Little River Band of Ot­tawa Indians, said many tribes abide by state tax agreements and charge the same for a pack of cigarettes as competing non-tribal retailers that operate near tribal lands. Memberto, a NACS member, says his tribe’s con­venience store, located across the street from its casino, charges ap­proximately $5 per pack, including all state taxes.

“It seems like everyone always fo­cuses on states like New York...All states are different. We charge the same taxes as everyone else in Michigan,” he said.

Mark Griffen, president of the Mich­igan Petroleum Association/Michigan Association of Convenience Stores, said his state’s system works well in some places, but is not perfect. “Yes, for those tribes that are part of compacts it seems to be working pretty well, but there are some Native American loca­tions that have no compacts and they have a tendency to sell below market rates,” Griffin said.

Twelve federally recognized Native American tribes reside in Michigan, seven of which have entered into compacts with the state. The state is seeking deals with the other tribes, which are still required to pay taxes but don’t always fully comply. Resident members of tribes that do not enter into compacts do not qualify for tobacco sales tax refunds from the state.

“In states like Michigan, where sev­en of 12 tribes have entered into tax agreements, you’ve got to wonder what the other five tribes are doing,” said Douglas Kantor, a partner in the Wash­ington law firm of Steptoe & Johnson and counsel to NACS.

Kantor added that tribes often treat the rebate of the state taxes as part of the profit on their sales, which can al­low them to continue to undercut their non-tribal competitors even when their products are fully taxed. “If the state has a collection mechanism where they collect the tax before it gets to a retailer, there is a way for it to work. The tax amount is built in before the tribe gets the product. That is the way some states have done it that has worked,” Kantor said.

But little can be done in states that don’t negotiate tax agreements with tribes or in states, such as New York, that fail to enforce them. Some tribes have refused to enter into agreements with states and others have passively or actively contributed to the spread of a tobacco black market that evades state taxes.

In Oklahoma, for example, state Attorney General Drew Edmondson recently filed lawsuits against Creek Nation smoke shops and tribal leaders for receiving millions of packs of un­taxed cigarettes. The Creek Nation signed an agreement with the state in 2005, but it expired and the tribe has re­fused to sign a new compact.

Vance McSpadden, executive direc­tor of the Oklahoma Petroleum Market­ers and Convenience Store Association, said things are improving in Oklahoma as more and more tribes have entered into compacts with the state. The com­pacts have helped limit the advantage enjoyed by Native American smoke shops to about 17 cents per pack, a mar­gin McSpadden said non-tribal retail­ers can live with.

“We’re trying to make it more oner­ous not to be in a compact,” McSpadden said, adding that legislation to help level the playing field is pending in the state legislature. Some of the larger Oklaho­ma tribes have become an unlikely ally of non-tribal retailers in seeking to get rogue tribes to comply.

“We try to work with all of the tribes on compacts,” McSpadden said. “Some of the biggest tribes have really good business people who are interested in doing it right. Some of the other tribes are even competing with the big tribes, so we’ve got the support of the biggest tribal players in the state.”

To Tax or Not to Tax?
States have been wrestling with the is­sue of taxing tobacco sales on tribal lands since at least 1994, when the U.S. Supreme Court ruled that states may collect taxes on Indian sales of ciga­rettes and other goods to non-Indians.

Among the various approaches taken by states: agreements under which tribes purchase cigarettes from wholesalers that collect applicable taxes, quota systems designed to allow retailers access to enough tax-free cigarettes to meet the needs of tribal members, and deals that allow for the collection of the appropriate taxes at the point of sale. In exchange, tribes reap a share of taxes.

The issue becomes even more criti­cal for retailers as cash-strapped states, propelled by anti-smoking advocacy groups, look to tobacco taxes as a new source of revenue.

According to a survey by the Cam­paign for Tobacco Free Kids, every state but California, North Dakota, Missouri, Mississippi, South Carolina and Flori­da has raised its tobacco taxes since 1999. Taxes range from 7 cents per pack in South Carolina to $2.75 per pack in New York. Some municipalities tack on additional levies.

Florida exemplifies how rising ciga­rette taxes can threaten retailers that must compete with tax-free sales on Indian lands. Legislation pending in the state legislature would nearly qua­druple the state excise tax on ciga­rettes, from 34 cents to $1.34 per pack. Florida Indian tribes pay no state tax­es on tobacco sales, so if the tax hike passes, as expected, Sunshine State convenience store operators will likely see an already uneven playing field get even more uneven.

Jim Smith, president of the Florida Petroleum Marketers and Convenience Store Association, said the tax hike would shift sales away from traditional convenience stores to Indian tobacco stores that already enjoy a significant tax advantage. “If this increase goes into effect, Native American tribes can simply buy a piece of land any­where, open a tobacco shop and sales at nearby convenience stores would be decimated,” Smith said.

Since 64 percent of tobacco products in Florida are purchased at convenience stores, Smith said, the competition from Indian stores could prove ruin­ous, “particularly for mom-and-pop convenience stores that don’t have the diverse offerings of products large con­venience stores have.”

Smith said he hopes that, if the new tax is approved, Florida will follow the lead of other states and negotiate tax agreements with the tribes to try to keep competition “as level as it can be.” Still, he is not optimistic.

Battle in New York
New York — where the thriving black market in cigarettes is second in dollar value only to trafficking in illegal drugs — has lost billions of dollars in tax rev­enue by failing to enforce its tax laws on Indian tobacco sales.

“The traffic is part of a nationwide boom in smuggled cigarettes, but the trade has reached a peak in New York,” said a report issued in December by the Center for Public Integrity. “In 2007, one in three cigarettes sold in New York was channeled untaxed through Indi­an smoke shops, robbing the state and New York City of nearly $1 billion in tax revenue.”

In 2007, the report found, more than 6 billion untaxed cigarettes came through New York’s 10 Indian reser­vations. If those cigarettes were sold only to tribal members, as required by law, each man, woman and child would have had to have smoked 44 cigarettes per hour.

In December 2008, New York Governor David Paterson signed into law legislation that would require cigarette manufacturers to sell their products only to wholesalers that can certify that tax-free cigarettes will not be re-sold to tribal entities.

State courts have said the laws are unenforceable until the state issues coupons to the tribes to allow for tax-free sales from tribal smoke shops to members of their own tribes. “What needs to happen is for the governor to tell the tax department to get those coupons to the tribes; that would render the injunction moot,” said Jim Calvin, executive director of the New York Association of Convenience Stores.

So far, New York has been reluctant to require Indian tribes to pay legally mandated state taxes on tobacco prod­ucts sold to non-Indians at tribal smoke shops. In 1997, the last time the state made a push to collect tobacco taxes, tribal members protested by burning tires and briefly shutting down the New York State Thruway, which runs through the tribal lands of the Seneca Indian Nation. The Seneca tribal coun­cil recently authorized the expendi­ture of $1 million toward a plan to ex­tract tolls from motorists on the free­way if the state tries to enforce its new tax plan.

Since the 1997 protest, former New York Governors George Pataki and El­iot Spitzer both promised to crack down on Native American tax evasion, but showed little political will to fol­low through. “It remains unclear whether Paterson will be any different from his predecessors,” according to the Center for Public Integrity.

“There is no indication that the col­lection of these taxes is imminent...My speculation is that this governor and those before him have made a political calculation that they have more to lose politically then they have to gain by forcing the issue,” Calvin said.

Congressional Involvement
Then there is the problem of Internet cigarettes sales by some Indian tribes that claim their tax status should ex­tend throughout cyberspace. Accord­ing to a 2002 study by the University of Minnesota, Indian-owned Internet sites sell cigarettes for as little as one-fifth of the price at retail stores, “making this a more convenient, lower-priced, and appealing method of purchasing cigarettes.”

Some tribes even offer their own cigarette and cigar brands, like Smokin’ Joes, made by the Tuscarora Indian Nation, near Buffalo, which sell online for $20 per carton. The national average for non-Indian brands is about $50 per carton.

The problem of Internet tobacco sales has not been lost on Congress, which for years has been considering legislation to regulate online sales without success. “There has been leg­islation on Internet sales, most of which are tribal and that ought to be dealt with. The Internet takes the problem national. A number of tribes have essentially exported tax evasion to the rest of the U.S. through the In­ternet,” Kantor said.

Congress has also given attention to a bill, the Family Smoking Prevention and Tobacco Control Act, that would give the U.S. Food and Drug Adminis­tration the power to regulate tobacco. The bill has passed both the House and the Senate and has been sent to Presi­dent Obama for his signature. While the legislation could lead to enforce­ment of some tobacco regulations like age restrictions and Internet sale, it would do nothing to deal with tax in­equalities.

“The bill’s authors were very, very careful that this bill remain in the En­ergy and Commerce Committee so they were careful to do nothing with taxation,” said Lyle Beckwith, NACS senior vice president for government relations.

“They didn’t even want to hear the word taxes. So we still have the tax problem, but we will have regulation of the tribes that we didn’t have before,” Beckwith said. 

Scott Orr is a freelance writer based in Washington, D.C.