New York wins ruling in tribal cigarette tax clash

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 Sept. 1, 2010.

A spokeswoman for the state Department of Taxation was not immediately available to say if New York might now start collecting cigarette taxes.

In 1997, then-Governor George Pataki backed down on an effort to collect the reservation store cigarette taxes after tire-burning protests by two upstate tribes left 12 state troopers with injuries.

The injunction on enforcing the cigarette tax laws had been granted by the Northern District's federal court, but the appeals court rejected that decision, saying the tribes failed to demonstrate that they were likely to succeed on the 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 in a statement estimated that lost tax revenue amounts to $500,000 a day.

"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, 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.

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 for them to buy.

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)