New York wins ruling in tribal cigarette tax clash

NEW YORK (Reuters) - Two Native American tribes have lost a round in their court battle to block New York state from collecting cigarette taxes from reservation stores.

The U.S. Court of Appeals for the Second District, in a decision released on Monday, annulled an injunction that had prevented New York from enforcing cigarette tax laws that had been due to go into effect on September 1, 2010.

A spokeswoman for the state Department of Taxation was not available to say if New York might now start collecting cigarette taxes. Seneca Nation of Indians President Robert Odawi Porter said the tribe would continue their battle.

Several New York governors have tried and failed to collect the disputed taxes. In 1997, then-Governor George Pataki backed down on an effort to collect the reservation store cigarette taxes after 12 state troopers were injured in tire-burning protests by two upstate tribes.

The injunction on enforcing the cigarette tax laws had been granted by the Northern District's federal court. The appeals court rejected that decision, saying tribes failed to demonstrate they were likely to succeed on merits of their case.

The appeals court, which lifted all court stays pending appeal, also upheld the Western District federal court's decision to deny a request by the Seneca Nation, the Cayuga Nation, the Unkechauge Nation and the Mohawk Tribe to stop the state from levying the cigarette taxes.

New York's decades-long battle to collect taxes on cigarettes bought by smokers who are not members of Native American tribes could grind on because the appeals court sent the cases back to the lower courts.

State Attorney General Eric Schneiderman estimated that lost tax revenue amounts to $500,000 a day. New York state's cigarette taxes are among the nation's highest at $4.35 a pack.

"Today's decision respects tribal rights and at the same time represents an important victory for the state to collect deserved revenue and to protect public health," said Schneiderman.

New York City Mayor Bloomberg, a former smoker who banished cigarettes from parks, bars and restaurants, estimated the state could get as much as $500 million a year from Native American cigarette taxes.

Bloomberg has sued to block blackmarket sales of cigarettes over the Internet. Referring to the court decision, he added: "It will also greatly reduce New York City's tax losses caused by the bootlegging of unstamped cigarettes."

New York, like many states, has yet to see tax revenue rebound to pre-recession levels, which heightens its desire to collect the lost cigarette tax revenue.

The tribes say they do not have to charge cigarette taxes -- or fuel taxes either -- because of their sovereign immunity. "We will continue fighting against this overreaching action by the state to protect our treaty rights, tobacco commerce and all the jobs it supports," the Seneca president said.

New York state tried to sidestep the issue on sovereign immunity by requiring the wholesalers, which sell reservation stores millions of cigarettes a year, to collect the taxes. Native American smokers would not have to pay the taxes as each tribe would get a set amount of tax-free cartons.

The Oneida, Cayuga and Unkechauge had argued that forcing the wholesalers to charge the tax "imposes an impermissible direct tax on tribal retailers, or alternatively, imposes an undue and unnecessary economic burden on tribal retailers," the appeals court said in its decision.

But the appeals court noted the U.S. Supreme Court has decided that Native American governments are not authorized "to market an exemption from state taxation to persons who would normally do business elsewhere."

(Reporting by Joan Gralla; Editing by Leslie Adler and Andrew Hay)