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N.Y. Counties Appeal Cayuga Court Win In Cigarette Tax Case

On Aug. 19, the counties filed a motion with the Appellate Court, asking permission to appeal to the New York Court of Appeals. Although the counties could have filed directly with the Court of Appeals, the strategy gives the counties extra time to prepare their case for the higher court whether or not the Appellate Court approves the motion.

The state’s long and unsuccessful attempts to collect cigarette taxes from sales on sovereign Indian reservation lands took another hit in July when a state appellate court ruled that the Cayuga Indian Nation has the right to sell untaxed cigarettes at its two convenience stores in Seneca and Cayuga counties in upstate New York.

On July 10, the Appellate Division, Fourth Department, issued a two part 4-1 majority ruling, determining that the nation’s two Lakeside Trading stores in Union Springs and Seneca Falls are on qualified Indian reservation land, and therefore can sell tax free cigarettes.

The court also determined the tax law that governs cigarette sales on reservations is section 471-e, “Taxes imposed on qualified reservations.” Section 471-e requires the state to provide the nations with tax exempt coupons for cigarettes sold to tribal nation members on reservations and aims to provide a means to collect taxes on cigarettes sold to non-Indians. Although the law is on the books, it has never gone into effect because the state has not been able to figure out an effective legal coupon system.

cigarettes to tribal members on reservations are not taxable by law. New York legislators have been trying for years to force tribal smoke shops to collect taxes on cigarettes sold to non-Indians, but the nations say that as sovereign entities they are not obligated to act as tax collectors for other sovereign entities, such as the state. According to other parts of state law, non-Indians who cigarettes on reservations are obligated to report and pay the taxes on those purchases.

“This case has enormous impact statewide,” said attorney Lee Alcott, of the nation’s Syracuse firm of French-Alcott. “This is really a sweeping victory for one small Indian nation and Indians as a whole. We’re praying, of course, that the ruling will stand appellate scrutiny if it goes to the Court of Appeals.”

The case began when the nation was forced to stop selling cigarettes Nov. 25, 2008 after Cayuga and Seneca county sheriffs’ deputies raided the tribe’s stores and seized almost 20,000 cartons of cigarettes. Supreme Court Justice Kenneth Fisher, who issued the search warrants, sided with the counties in an early December ruling that the stores were not on sovereign territory or a qualified reservation and, therefore, the nation could not exercise Indian nations’ right to tax free trade on their lands.

Cayuga appealed to the Appellate Court, which in January issued a declaratory judgment allowing the nation to seek the return of their seized property from the lower court, and preventing the counties from criminally prosecuting the nation’s officials. “It was extremely noteworthy because we believe it was the first time a court in New York or, in fact, maybe in any jurisdiction intervened and halted a criminal prosecution in a civil lawsuit,” Alcott said.

Fisher denied the nation’s request for the return of its seized cigarettes – worth some $500,000 – and granted the counties’ request prohibiting the stores from selling cigarettes to non-Indian customers while the appeal proceeded. After re-opening briefly in January, the stores stopped selling cigarettes again until the Appellate Court ruling in July.

Although the judge prohibited the stores from selling cigarettes to non-Indians, they stopped selling cigarettes altogether, because they refused to participate in what they considered racial profiling. “There is really no way of telling an Indian from a non-Indian. That’s why the state created this coupon system under section 471-e of the tax law that has never been implemented,” Alcott said.

The Appellate Court decision rejected the counties’ assertion that a civil case could not issue a declaratory judgment to stop prosecution in a criminal case on the ground that “a declaratory judgment action is available in cases where a constitutional question is involved or the legality or meaning of a statute is in question and no question of fact is involved,” the court said, quoting case law.

By reference to common law, the court also upheld the state’s legal definition of qualified reservation as “lands held by an Indian nation or tribe that is located within the reservation of that nation or tribe in the state.” In 2003, when the state’s tax department drafted the regulations later adopted by the legislature, federal common law provided that Indian nations or tribes could purchase land on the open market and regain sovereignty over it provided the land was within the nation’s or tribe’s original reservation.

“We conclude that the legislature intended that the definition of qualified reservation reflected the existing federal common law at the time that the legislation was passed,” the majority wrote. The Appellate Court noted, however, that the Cayuga lands were purchased before the U.S. Supreme Court’s 2005 ruling in City of Sherrill v. Oneida Indian Nation of N.Y. that the nation could not automatically regain sovereignty over dispossessed aboriginal lands that it had reacquired.

Justice Erin Perotta wrote a dissenting opinion in which she agreed with the majority decision that the Cayuga’s convenience stores are located on reservation lands, but she said that section 471, not 471-e, is the “imposing” law on all cigarettes for sale in the state. The counties present the same argument as Perotta in their request for an appeal.

Additionally, they argue against the Appellate Court ruling on reservation lands because then any purchase of lands in a tribe’s historic reservation “ipso facto transforms such lands into a checkerboard of sovereign tax-free havens.” The counties also took the unusual step of asking the Appellate Court to nullify its July 10 ruling by prohibiting Cayuga from selling cigarettes during the pendency of the appeal.

“We could be in that position for a couple of years and then either side may try to take it to the U.S. Supreme Court. So, the nation is, to say the least, vigorously opposing the application for permission to appeal and stay that would prohibit the nation from selling cigarettes.

“We think the Appellate Court got it exactly right and the stay would be purely punitive – it would be punishing the nation for doing something this court has already determined it had the right to do,” Alcott said. The court reviewed the motions Aug. 31 and may take a few weeks or months to rule on them, Alcott said.

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