Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 1 of 21 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK

Transcription

1 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 1 of 21 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK ) UNKECHAUGE INDIAN NATION, ) ) Plaintiff, ) Civil Action No: 10-CV-711(A) v. ) ) DAVID A. PATERSON, Governor of the State of ) New York; JAMIE WOODWARD, Acting ) Commissioner, New York State Department of ) Taxation and Finance; WILLIAM COMISKEY, ) Deputy Commissioner, Office of Tax Enforcement, ) New York State Department of Taxation and ) Finance; JOHN MELVILLE, Acting ) Superintendent, New York State Police, ) each in his or her official capacity. ) ) Defendants. ) ) ) ST. REGIS MOHAWK TRIBE ) ) Plaintiff, ) Civil Action No: 10-CV-811(A) v. ) ) DAVID A. PATERSON, Governor, State of New ) York, in his official capacity; JAMIE ) WOODWARD, Acting Commissioner, New York ) Department of Taxation and Finance, in her ) official capacity; WILLIAM COMISKEY, Deputy ) Commissioner, Office of Tax Enforcement, New ) York Department of Taxation and Finance, ) in his official capacity. ) ) Defendants. ) ST. REGIS MOHAWK TRIBE S REPLY IN FURTHER SUPPORT OF CROSS MOTION FOR SUMMARY JUDGMENT AND PERMANENT INJUNCTION

2 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 2 of 21 INTRODUCTION In its Memorandum of Law in Opposition to Defendants Motion for Summary Judgment and in Support of the Tribe s Cross-Motion ( Tr. MOL ), Plaintiff St. Regis Mohawk Tribe ( Tribe ) demonstrated that the requirement that taxes be prepaid on cigarettes approved for tax-exempt sales to tribal members fails to meet any controlling tests set out by the Supreme Court. The Tribe showed that Department of Taxation and Finance v. Milhelm Attea & Bros., 512 U.S. 61, 76 (1994) ( Attea ) specifically approved one feature of the 1988 regulations that the state was not permitted to precollect taxes on cigarettes that were ultimately the subject of tax-exempt sales, Cayuga Indian Nation v. Gould, 14 N.Y.3d 614, 650 (2010), and that this was an important consideration in the Court s decision to sustain the regulations.... Id. at 624 n.2. Defendants attempt to write-off the dicta in Attea and Cayuga Indian Nation on this issue, Defs. Reply Mem. of Law in Further Support of Motion for Summary Judgment and in Opp. to Plaintiffs Motions at 18 ( Defs. Opp. MOL ), but nowhere do they confront the fact that what they are doing here is requiring the prepayment of a large tax that they have no right to impose. Rather, Defendants offer, first, a variety of procedural arguments to try to keep the Court from reaching the merits of the Tribe s motion, and second, weak justifications for the prepayment requirement. Not only does Attea foreclose the prepayment requirement as a matter of law, but in addition the Tax Amendment s prepayment requirement is foreclosed here because it is not a mere minimal burden[] reasonably tailored to the collection of valid taxes from non-indians. Attea, 512 U.S. at 62. The probable demand allocation determined by Defendant Department of Taxation and Finance ( Department ) in tandem with the prior approval system limits the 1

3 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 3 of 21 availability of tax-exempt cigarettes to the number deemed necessary by Defendants to meet tribal member demand, and thus ensures the collection of valid taxes from non-indians. The prepayment requirement on cigarettes to be sold to tribal members in sales pre-approved by the Department is not reasonably tailored to the collection of valid taxes from non-indians. Defendants argument that it offers some wholesalers (i.e., the minority of wholesalers who are also state stamping agents) the opportunity to purchase the necessary tax stamps on credit, fails for several reasons, one being that this just exchanges one burden prepayment of large sums for another namely, burdensome credit requirements, including the requirement for posting a bond equal to the value of the tax stamps, at the stamping agent s expense. Because this scheme amounts to the precollection of a tax that is not owed and will not lead to the collection of a valid tax from non-indians, and because of the substantial burden imposed on tax-exempt Indian commerce by the scheme, as well as other reasons discussed below, the Tribe is entitled to summary judgment on its claims. ARGUMENT I. THE TRIBE MAY LITIGATE THE PREPAYMENT CLAIM PLED IN ITS COMPLAINT As an initial matter, Defendants make numerous arguments as to why the Tribe is supposedly foreclosed from litigating the prepayment claim pled in its complaint in an attempt to keep the court from deciding the Tribe's claim on its merits. We address those first. A. The Tribe s Claim is Not a New Theory Based on New Facts and is Not Barred Defendants assert that the Tribe s motion is based on a different theory of its case that relies on new facts asserted here for the first time. Defs. Opp. MOL at 3. This is not a new theory, as the Tribe asserted a cause of action challenging the prepayment requirement on cigarettes sold to tribal members in Count VI of its Amended Complaint, filed September 15, 2

4 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 4 of See Tribe s Amended Complaint, St. Regis Mohawk Tribe v. Paterson, No. 10-cv-811, Dkt #7. Although the Tribe did not pursue this claim at the preliminary injunction stage, failure to do so in no way precludes the Tribe from doing so now. [P]arties are not required to present everything they have when moving for a preliminary injunction. Pugh v. Goord, 345 F.3d 121, 125 (2d Cir. 2003). The Tribe does assert new facts, and for good reason. Defendants began implementing the Tax Amendments on June 21, 2011, after the last court order enjoining implementation expired. Affidavit of Peter Day 8-9 & Exh. A. When the parties were before this Court previously, we were in a pre-enforcement stage. We are now in a post-enforcement stage. In affirming the denial of the preliminary injunction in this case, the Second Circuit distinguished between the harms predicted by the tribes pre-enforcement, and actual harms that could arise post-enforcement. While foreclosing pre-enforcement claims because the harms predicted by the tribes while possible, are by no means predictable, Oneida v. Cuomo, 645 F.3d 154, 173 (2d Cir. 2011) (quoting Attea, 512 U.S. at 69, the Court expressly left open post-enforcement claims. Actual problems of implementation can be addressed if and when they arise. Id. at 175 (quoting Attea, 512 U.S. at 76). The Tribe is free to bring to the Court s attention new facts that have emerged subsequent to implementation of the amendments because the Second Circuit explicitly left the door open to post-enforcement claims, and further because denial of a motion for a preliminary injunction does not constitute the end of a case. See Pugh, 345 F.3d at 125 (entry of summary judgment sua sponte for defendants following denial of preliminary injunction was error); Rum Creek Coal Sales, Inc. v. Caperton, 926 F.2d 353, (4th Cir. 1991) ( our analysis regarding the preliminary injunction does not, of course, foreclose subsequent arguments as the case develops over the merits of the underlying issues ); cf. Adams 3

5 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 5 of 21 v. City of Chicago, 135 F.3d 1150, 1153 (7th Cir. 2002) (noting that a plaintiff denied a preliminary injunction may present a subsequent motion for preliminary injunction based on new evidence). Cases relied on by the Defendants for the proposition that the Tribe cannot assert new facts (Defs. Opp. MOL at 4) are distinguishable because they involve belated attempts to assert a new claim not pled in the complaint. See Viernow v. Euripides Dev. Corp., 157 F.3d 785, (10th Cir. 1998) (denying plaintiff leave to amend complaint after trial judge orally granted defendants summary judgment motion); Trade Fin. Partners, LLC v. AAR Corp., 573 F.3d 401, 412 (7th Cir. 2009) (new claim raised for first time in sur-reply was barred); Greenidge v. Allstate Ins. Co., 446 F.3d 356, 361 (2d Cir. 2006) (plaintiff was barred from raising claim not within its complaint in brief in opposition to summary judgment motion); La Asociacion de Trabajadores de Lake Forest v. City of Lake Forest, 624 F.3d 1083, (9th Cir. 2010) (same). B. This Issue Has Not Been Decided in this Case After arguing that the Tribe s claim is a new theory, Defendants turn around 180 degrees and argue that this claim was already litigated and decided in this case. Defendants quote from a portion of the Oneida decision upholding the requirement to precollect taxes on cigarettes sold to non-members, Defs. Opp. MOL at 14 (quoting Oneida, 645 F. 3d at 169), and from that conclude that the Second Circuit ha[s] now held that states may validly require the precollection of taxes for all cigarettes sold in-state. Defs. Opp. MOL at 18 (emphasis in original). The Second Circuit s discussion clearly concerned the claims by the Oneida and Cayuga Nations as to precollection of the taxes on cigarettes sold to non-tribal members, as is clear from the context. See Oneida, 645 F.3d at 168 ( [T]he legal incidence of New York s tax falls on non-indian consumers. Accordingly, whatever its economic impact, the tax is not categorically barred. ) (emphasis added); id. at 169 ( [T]he precollection mechanism will undoubtedly impose an 4

6 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 6 of 21 increased economic cost on tribal retailers who continue to market taxable cigarettes to nonmember purchasers. But those costs result from the retailer s decision to participate in the taxable cigarette market, a market in which Plaintiffs and their members have no vested right to a certain volume of sales to non-indians.... ) (emphasis added; internal quotation and citation omitted). In its opening brief, Defendants accurately acknowledged that this was the issue presented and decided at the preliminary injunction stage. Defs. MOL at 16. The Second Circuit clearly did not consider or decide the issue presented by the Tribe s motion. 1 C. The Tribe Has Standing Defendants argument that the Tribe has no standing to assert harms caused by burdens placed by Defendants on wholesalers with whom tribal retailers must deal to purchase taxexempt cigarettes, Defs. Opp. MOL at 5, is contrary to well-accepted rules governing tribal standing. In Moe v. Confederated Salish and Kootenai Tribes of Flathead Reservation, 425 U.S. 463 (1976), the Supreme Court recognized that a tribe s interest in tribal self-government provides it with standing to challenge state laws that infringe on that interest: [T]he Tribe, Qua Tribe, has a discrete claim of injury with respect to these forms of state taxation [2] so as to confer standing upon it apart from the monetary injury asserted by the individual Indian plaintiffs. Since the substantive interest which 1 The assertion by Amicus New York Association of Convenience Stores ( NYACS ) that the Tribe s claim has been raised and rejected, either expressly or by necessary implication, NYACS proposed Amicus Brief, Dkt # 72-2 at 6 (emphasis added), must therefore be rejected. NYACS s argument is based on selected portions of the Tribe s briefs, taken out of context. In no brief did the Tribe argue that a preliminary injunction should issue because prepayment of taxes on sales to tribal members violated tribal sovereignty. Prepayment of the tax on cigarettes sold to tribal members is not addressed at all in the Tribe s brief in support of its preliminary injunction filed in this Court following transfer from the Northern District, see Plaintiff St. Regis Mohawk Tribe s Supplemental Brief on Request for Preliminary Injunction. Unkechauge Indian Nation v. Paterson, No. 10-cv-711, Dkt # 37 (W.D.N.Y. filed Oct. 22, 2010). That brief was filed in conformance with this Court s order requiring a filing of a supplemental brief incorporating all of the Tribe s arguments in support of its motion for a preliminary injunction. Unkechauge Indian Nation v. Paterson, No. 10-cv-711, Dkt # 30 (W.D.N.Y. filed Oct. 15, 2010). 2 The taxes at issue in Moe were (1) cigarette taxes on the retail sale of cigarettes (and requirement for collection and remission of the same by tribal retailers), (2) a cigarette retailer s license, and (3) motor vehicle property taxes. Moe, 425 U.S. at The tribe itself was not the cigarette seller, id. at 467 (tribal member sold cigarettes), but was asserting non-monetary sovereignty interests. 5

7 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 7 of 21 Congress has sought to protect is tribal self-government, such a conclusion is quite consistent with other doctrines of standing. See, E. g., Warth v. Seldin, 422 U.S. 490, (1975). Moe, 425 U.S. at 468 n.7. Citing this passage in Moe, the Eleventh Circuit has held: the Supreme Court has explicitly held that when challenging a state s taxation of a business located on an Indian reservation, an Indian tribe satisfies Article III s injury requirement by alleging that the tax infringes upon its sovereignty. Miccosukee Tribe of Indians of Florida v. Florida State Athletic Com'n, 226 F.3d 1226, 1231 (11th Cir. 2000). Tribes have standing to challenge state laws as violating their sovereignty even when the law primarily imposes burdens on non-indians dealing with the tribe. For example, in Mescalero Apache Tribe v. State of New Mexico, 630 F.2d 724, (10th Cir. 1980), aff d on the merits, State of New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983), the court rejected the argument that the tribe lacked standing to challenge the state s regulation of hunting by non- Indians on tribal lands. The Court noted two types of injury that the tribe could suffer as a result of the state s regulation of non-indian hunters. First, there were economic injuries: the cost of obtaining a state license limits the Tribe s ability to raise the prices of its own licenses, and other state regulations necessarily deter some non-member hunters from entering the reservation at some times. Mescalero Apache Tribe, 630 F.2d at 727. These effects are not merely speculative, but are the straightforward and immediate results of economic forces. Id. In addition, the Court found standing based on usurpation of authority by the state. Id. The Supreme Court affirmed on the merits without addressing standing, holding that the state regulatory scheme was preempted by federal law. State of New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983). See also Prairie Band of Potawatomi Indians v. Pierce, 253 F.3d 1234, 1242 (10th Cir. 2001) (tribe had standing to challenge state s refusal to recognize tribally 6

8 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 8 of 21 issued vehicle registrations: The state s refusal to extend recognition, therefore, causes an obvious harm to the tribe: interference with or infringement on tribal self-government. ); Sac & Fox Nation v. Pierce, 213 F.3d 566, (10th Cir. 2000) (court had little difficulty in holding that tribe had standing to challenge the application of the state motor fuel tax even though the legal incidence of the tax was on non-indian distributors and not on tribe). In other cases, the Supreme Court has upheld tribal challenges to state taxation of entities doing business with the tribe on grounds of tribal sovereignty or preemption without considering the tribe s standing. See e.g., White Mountain Apache Tribe v. Bracker, 448 U.S. 136, (1980) (striking down motor carrier license and use fuel taxes imposed on non-indian logging company working for tribe notwithstanding that incidence of the tax was on the non-indian, because the tax would diminish the tribe s return on the logging operation); Ramah Navajo School Board v. Bureau of Revenue of New Mexico, 458 U.S. 832, 847 (1982) (striking down gross receipts tax on tribal school board s contractor). The cases cited by the Defendants (Defs. Opp. MOL at 6-7) are inapposite. None involve claims of tribal sovereignty, and they are clearly distinguishable. For example, to the extent that the holding in Ammex, Inc. v. United States, 367 F.3d 530 (6th Cir. 2004) was based on the fact that it was not the Government that collected the tax from Plaintiff, but rather plaintiff s suppliers, id. at 533, plaintiff therein was a private company, not a tribe, and extending that decision to a case involving a tribal claim for infringement of tribal sovereignty would be contrary to Moe, 425 U.S. at 468 n.7, and the other authorities cited above. Compare Ammex, 367 F. at 534 (fact that plaintiff would be required by taxed entity to pay a tax-included price did not confer standing), with Sac & Fox Nation v. Pierce, 213 F.3d 566, (10th Cir. 2000) (tribe had standing because, inter alia, most assuredly the distributors responsible for remitting 7

9 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 9 of 21 the tax pass the cost of the tax along to the Tribes ), and White Mountain Apache, 448 U.S. at 151 ( it is undisputed that the economic burden of the asserted taxes will ultimately fall on the Tribe ). In any event, even in non-tribal sovereignty cases, a plaintiff has standing to assert injuries caused by third parties not before the court where the injuries are fairly traceable to the challenged government regulation. Allen v. Wright, 468 U.S. 737, (1984), cited by defendants, Defs. Opp. MOL at 7. Plaintiffs have unquestioned standing where the absent party s actions were the result of the regulations challenged. Heldman on behalf of T.H. v. Sobol, 962 F.2d 148, 156 (2d Cir. 1992) ( A plaintiff does not lack standing simply by virtue of the indirectness of his or here injury, however.... Although a third party not before the court... played a role in [plaintiff s] alleged injury, [the absent party s] actions were the direct result of the regulations and do not constitute independent action. ). As discussed below, the Tax Amendments have resulted in the decisions by wholesalers selling to Mohawk cigarette sellers to discontinue making those sales. See infra at 11. II. REQUIRING PREPAYMENT OF THE TAX ON THE SALES OF LIMITED QUANTITIES OF CIGARETTES APPROVED FOR TAX-EXEMPT SALES TO TRIBAL MEMBERS IS IMPERMISSIBLE AS A MATTER OF LAW Defendants argument that the prepayment requirement is reasonable because it enables the Department to document that cigarettes are actually sold in tax-exempt transactions (Defs. Opp. MOL at 15), must be rejected because the prepayment requirement does not fulfill that purpose. As the Tribe noted in its opening brief, the probable demand calculation itself, and the need for prior approval, adequately protect the State s interest in limiting quantities of taxexempt cigarettes sold by tribal members. Tr. MOL at Defendants state that before the 2010 amendments, stamping agents and reservation cigarette sellers sold millions of untaxed cigarettes to individuals who were not entitled to the tax exemption, Defs Opp. MOL at 16, and argue that the prepayment and refund requirement is therefore necessary, but they fail to 8

10 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 10 of 21 acknowledge that the prior approval system (or alternatively, the coupon system) effectively limits the quantities of tax-exempt cigarettes that can be sold to tribal retailers for resale to tribal members. In addition, to the extent the State needs some way to ensure that untaxed cigarettes are actually sold to tribal retailers for sale to tribal members, there are other and better means the State can employ. As noted in our opening brief, the State could employ tax-exempt stamps, such as those used by other states, to track tax-exempt sales to tribal members. Tr. MOL at 15. Defendants do not contend that tax-exempt stamps would not work for this purpose; instead, they merely assert that they need not adopt the least burdensome mechanism available. Defs. Opp. MOL at 19. Defendants essentially admit that tax-exempt stamps would work. In fact, taxexempt stamps are actually better suited for the purpose of ensuring that taxes are paid by non- Indian cigarette purchases because such stamps would distinguish between taxed and untaxed cigarettes. By causing ordinary tax stamps to be affixed to tax-exempt cigarettes sold to tribal retailers, the Defendants make it impossible to determine whether the state taxes were paid on cigarettes purchased from tribal retailers by non-tribal members. Moreover, the Department has the ability to ensure that unstamped cigarettes that it has approved for sale to tribal retailers reach their destination through reporting by the wholesalers, and penalties for those who violate the law. The pre-approval system requires wholesalers to report the quantity actually sold, the name and address of each purchaser, and the invoice number for each sale within 48 hours of receiving" authorization to make the sale. Affidavit of Peter J. Spitzer, Exh. D at 6. In addition, state stamping agents are required to submit monthly reports to the Department regarding the sale of unstamped cigarettes and cigarettes sold to reservation cigarette sellers, and are required to certify annually that they will not resell 9

11 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 11 of 21 unstamped cigarettes in violation of Tax Law Article 20. See Supplemental Affirmation of Michael L. Roy, Exhs. A-E; Roy Affirmation, Exh. A at 1. Should stamping agents or wholesaler sell unstamped cigarettes in violation of the Tax Law, they would be liable for the unpaid taxes, and subject to substantial penalties and fines including possible loss of license, as well as possible criminal penalties. See N.Y. Tax Law 481; 20 N.Y.C.R.R. 71.6, 72.3; Roy Aff., Exh. A at 3. Defendants reliance on Keweenaw Bay Indian Community v. Rising, 477 F.3d 881 (6th Cir. 2007), Defs Opp. MOL at 17-18, is misplaced. Unlike the Tax Amendments, the state law at issue in Keweenaw did not have either a prior approval system or a coupon system that served to limit the quantity of unstamped (untaxed) cigarettes that could be sold to tribal retailers for tax-exempt sale to members. The state offered to tribes an agreement which included, if the tribe wished, a quota system under which the tribe could buy sufficient quantities of unstamped cigarettes for sales to tribal members, id. at 892, but the tribe opted not to enter into such an agreement. Because no quota system was imposed on wholesale sales to the tribe (unlike the system in New York), Michigan enforced its right to tax on-reservation sales of cigarettes to nontribal members by requiring the tribe to prepay the tax when it purchased cigarettes from the wholesaler, and to apply for a refund. Id. at 884. Michigan then limited refunds based on the amount of cigarettes that those members could reasonably have been expected to have consumed. Id. at 885. The tribe argued that the prepayment and refund requirement constituted more than a minimal burden under Attea. The court noted that the cost to the tribe of the loss of use of the prepaid tax money while waiting for a refund was less than a thousand dollars over a two-year period. Id. at 891 n This is a relatively insignificant amount when compared to the 3 Keweenaw Bay Indian Community is a small tribe, with 868 tribal members residing on the reservation). Keweenaw Bay Indian Community v. Rising, 2005 WL at *1 (W.D. Mich. 2005), 10

12 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 12 of 21 $400,000 in refunds received by the [tribe]. Id. at 892. On these facts, the court found that the refund provision imposed a minimal burden. Id. In so holding, however, the court recognized that Michigan, by requiring prepayment and allowing for refunds, has gone further than any taxation scheme that has explicitly been approved by the Supreme Court. Id. Keweenaw Bay is distinguishable. There, if a tribe opted not to enter into an agreement allowing it to buy sufficient quantities of unstamped cigarettes for sales to tribal members, Michigan employed a prepayment and refund scheme to accomplish what New York has accomplished through the use of the prior approval and coupon systems. In this case, because the Tax Amendments unlike the default Michigan scheme limit the quantity of tax-exempt product that can be sold to the Tribe, no prepayment and refund scheme is necessary to limit quantities of tax-exempt product to a tribe s probable demand. The Tax Amendments preapproval and coupon systems obviate the need for a prepayment and refund scheme. Moreover, the court in Keweenaw found that the prepayment and refund scheme imposed a minimal burden on the tribe, costing it less than $1,000 in lost interest over a two-year period, during which time the tribe received over $400,000 in refunds. The prepayment scheme at issue in this case is anything but minimal. It would require tribal wholesalers to prepay taxes of over $1 million per quarter on the Tribe s quarterly allocation of cigarettes. 4 And because of the prepayment requirement, wholesalers have discontinued sales to Mohawk tribal retailers. This was not so in Keweenaw. Finally, as the court in Keweenaw recognized, Michigan s, prepayment scheme has gone aff d, 477 F.3d In the Tribe s opening brief, the Tribe showed that the cost of the prepaid taxes on the quarterly allocation for the Tribe would be over $1.4 million. See Day Aff. 25. The quarterly allocation for the Tribe, however, has been reduced by the Department for the year beginning September 1, 2011 to 215,100 packs. Roy Supp. Aff. Exh. D. The Department rejected the tribe s objections to the reduced allocation. Roy Supp. Aff. Exh. E. The amount of the prepaid tax on the Tribe s current quarterly allocation would now be $1,066,896 (215,100 X $4.96/pack). 11

13 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 13 of 21 further than any taxation scheme that has explicitly been approved by the Supreme Court. 477 F.3d at 892. In fact, the Tribe submits that Keweenaw is contrary to Attea in that it allows prepayment of taxes on goods to be sold to tribal members. See Tr. MOL at In any event, Keweenaw is distinguishable for the reasons stated above and should not be extended to the Tax Amendments. As noted in the Tribe s opening brief, the Solicitor General has taken the position in a brief to the Supreme Court, submitted at the Court s invitation, that a state cannot require prepayment of an invalid tax by an Indian trader, with a refund. Brief for the United States as Amicus Curiae, State Tax Comm n. v Herzog Bros. Trucking, 487 U.S (1988), Roy Aff. Exh. C at 1, 7-8. Defendants response is confused, to say the least. The Tribe did not rely on the state court s holding in Herzog, as the Defendants assert (Defs. Opp. MOL at 19), but rather on the Solicitor General s position therein concerning prepayment of taxes on sales to tribal members a position that is consistent with Attea. Defendants argument that the Solicitor General s position in Herzog is inapplicable because that case involved Indian traders (Defs. Opp. MOL at 19) ignores that, as noted in the Tribe s opening brief (Tr. MOL at 14), the Indian trader statutes are intended to protect the tribe and its members. Because it is the Tribe s interests that are protected by the Indian trader statutes, the Tribe has standing to raise violations of those statutes. See Moe, 425 U.S. at 468 n.7 (tribe had standing to raise tribal sovereignty claims [s]ince the substantive interest which Congress has sought to protect is tribal selfgovernment ); Sac & Fox Nation, 213 F.3d at (tribe had standing where its economic interests were within the zone of interests which federal law seeks to protect. ); see also discussion of tribal standing supra at

14 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 14 of 21 III. THE PREPAYMENT OBLIGATION IS IMPERMISSIBLE AS APPLIED TO THE TRIBE Defendants assert that that the Tax Amendments do not impose impermissible burdens as applied to the Tribe for numerous reasons, all unconvincing. Defendants assertion that the Tax Amendments impose no burden on [stamping] agents at all because they can purchase tax stamps on credit (Defs. Opp. MOL at 10-12) ignores, among other things, that to obtain credit, a stamping agent must obtain a bond, at his expense, to cover the cost of the tax stamps, and that he must agree in advance to pay for the stamps within thirty days, regardless of whether he receives a refund within that time. 20 N.Y.C.R.R. 71.2(b). To avail themselves of this mechanism, state stamping agents would have to meet bond requirements, including the expense and other requirements of obtaining the bond, and would have to pay for the tax stamps purchased on credit within thirty days, even if the Department had not refunded the agent for the cost of prepaid tax stamps on tax-exempt cigarettes for the tribal members in the meantime. See Day Aff. 32; Affidavit of George W. Burnes 19-20; Affidavit of Stephen M. Valvo Defendants argument with regard to the amount of the current bonds of two stamping agents who have sold to tribal retailers ignores that those retailers also sell stamped cigarettes, and have posted the bond to cover those sales. See Day Aff. 35; Burnes Aff. 20 ( If Capital Candy were to use this credit to purchase stamps for tax-exempt cigarettes, then it would not have enough stamps to affix on cigarettes for non-tax-exempt sales. ); Roy Aff. Exh. F, Chart 4. The third stamping agent who has sold to tribal cigarette sellers sells only to reservation cigarette sellers and so has not posted a bond to obtain credit for tax stamps, and would have to do so to obtain a bond in order to purchase stamps on credit to sell to tribal cigarette sellers, as Defendants admit. Valvo Aff. 20; Roy Aff. Exh. F, Chart 4; Spitzer Aff

15 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 15 of 21 It is clear that the credit provisions of the Tax Law relied on by Defendants do in fact impose burdens on stamping agents. Moreover, those provisions are not even available to the majority of wholesalers who are not also stamping agents. 5 In any event, the Department can no more require that stamping agents post a bond equivalent to the cost of tax stamps than it can require the agent to prepay the cost of the tax stamps for a tax that is not due. The bond requirement and its limitation to stamping agents belie the Defendants contention that stamping agents and wholesalers have ready access to tax-free cigarettes for resale to reservation cigarette sellers. Defs. Opp. MOL at 21. Thus, Justice Siwek s preliminary injunction ruling in the pending state case brought by an association of Mohawk retailers that the plaintiffs were unlikely to succeed on the merits because the wholesalers claims and the plaintiffs reliance on them are speculative and untested, particularly when considering the agents bonding abilities..., Roy Aff. Exh. B at 11, is erroneous and should not be followed. Given the cost of prepaying the tax, and the credit requirements, wholesalers who sold to tribal wholesalers or retailers in the past have made business decisions not to sell cigarettes to Mohawk retailers and wholesalers. Day Aff. 38; Burnes Aff. 22; Valvo Aff. 30. Defendants acknowledge that no sales have been made under the prior approval system by these (or any other) wholesalers to any tribal retailers since the Tax Amendments were implemented, Spitzer Aff. 28, but they attack the wholesalers business decisions on the basis that they cannot be responsible for them. They say they cannot be held liable for the financial wherewithal of those stamping agents, and that they cannot compel the agents to make sales, and they question the motivations of the stamping agents in making their decisions not to sell, suggesting that the wholesalers are engaged in a boycott. Defs. Opp. MOL at 8, According to Defendants, there are 65 state-licensed stamping agents, and 150 state-licensed wholesalers. Spitzer Aff

16 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 16 of 21 Notwithstanding Defendants rhetoric, the business decisions made by the stamping agents are reasonable and predictable, given the significant and unwarranted burdens imposed by the prepayment requirement. It is simply irrelevant that Defendants cannot compel wholesalers to make the sales; Defendants have, in effect, prohibited wholesalers from selling to tribal retailers unless the wholesalers either prepay taxes of over $1 million per quarter and wait for refunds that will be paid without interest, or else meet the requirements for purchase of over $1 million in tax stamps on credit, including obtaining bonds sufficient to cover that amount, and agreeing to pay the taxes owed within thirty days whether the refunds are received or not. While wholesalers have a self-interest in selling cigarettes to tribal retailers to make a profit, the burdens imposed by the Tax Amendments are so onerous that the State has essentially compelled this result. Thus, a tribal retailer like Julia Skidders who needs to purchase tax-exempt cigarettes for her tribal customers and who tries to order tax-exempt cigarettes from a wholesaler finds that she cannot, notwithstanding that is in the interests of both the wholesaler and the retailer to consummate the sale, because the Department will not permit the sale unless its burdensome requirements are met. Affidavit of Julia Back Skidders 3-5. Defendants position at this stage in the litigation stands in marked contrast to their position earlier. At the preliminary injunction stage, when faced with allegations that wholesalers or retailers would monopolize or hoard cigarettes, the Department successfully argued that it has the flexibility to modify the prior approval system to deter such behavior, by using its rulemaking powers. Oneida, 645 F.3d at 174; see Response Brief for New York State Defendants, 2011 WL at *14 (Feb. 4, 2011) in Oneida, 645 F.3d 154 ( The 2010 amendments permit the State to respond flexibly to unforeseen circumstances. ). Now, they say that they cannot compel sales, and they blame the wholesalers and the Tribe. 15

17 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 17 of 21 Defendants suggest it is the fault of the Tribe that no other wholesalers will sell to it. No State law prevents the Mohawk Tribe from licensing any of the other agents and wholesalers.... Defs. Opp. MOL at 23. This ignores that tribal retailers had no problems purchasing cigarettes from these same wholesalers before the State imposed the prepayment requirement. (In fact, Defendants note that tribal retailers purchased many more untaxed cigarettes than were needed to meet the demand by tribal members. Defs Opp. MOL at 16.) Now, they cannot purchase any. Defendants own records show that very few state stamping agents have sold to tribal cigarette sellers, Roy Aff., Exh. F, Chart 4 (only 10 of 80 state stamping agents only 3 on the Mohawk Reservation sold to tribal cigarette sellers in August 2009), and in any event, the Tribe has not denied any applications for licenses by non- Indian wholesalers. Supplemental Declaration of Eliot Lazore The issue is not the Tribe s failure to issue licenses; it is the burden imposed upon wholesalers who are licensed and who are ready, willing and able to make sales, as indicated by past conduct, but who now will not do so because of new, expensive and unnecessary requirements. The Tax Amendments deter the wholesalers from making the sales, just as New Mexico s regulation of hunting by non- Indians on tribal lands necessarily deter[red] some non-member hunters from entering the reservation at some times. Mescalero Apache Tribe, 630 F.2d at 727; see also Heldman on behalf of T.H., 962 F.2d at 156 ( Although a third party not before the court... played a role in T.H. s alleged injury, [the absent party s] actions were the direct result of the regulations and do not constitute independent action. ). Even if the wholesalers were willing and able to meet the State s requirements either by 6 Moreover, [t]o sell cigarettes to tribes or their retailers, a wholesaler must be... a federally-licensed Indian Trader, Oneida, 645 F.3d at 174, and no wholesaler other than the three wholesalers who have sold to the Tribe have been issued or even applied for an Indian traders license on the Mohawk reservation. Lazore Supp. Decl

18 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 18 of 21 prepaying the tax, or posting a bond sufficient to cover the costs of the tax stamps the tribal retailers would be negatively impacted. The wholesalers undoubtedly will pass their increased costs on to the tribal retailers, especially given the high cigarette tax of $4.96 per pack compared to the relatively low profit margin on cigarettes. See Day Aff. 24; Burnes Aff. 18; Valvo Aff. 27. As the Second Circuit noted, with regard to precollection of taxes on sales to non-tribal members, the precollection mechanism will undoubtedly impose an increased economic cost on tribal retailers. Oneida, 645 F.3d at 169. Although the court held that such costs can be imposed upon tribal retailers with regard to taxable sales to non-indians, id., they cannot lawfully be imposed on sales of tax-exempt product to tribal members. IV. THE PREPAYMENT OBLIGATION IS DISCRIMINATORY Defendants do not squarely address the Tribe s argument with regard to discrimination, which is that because the legislative goals of the Tax Amendments i.e., (1) collecting taxes on sales to non-indians, and (2) providing tax-exempt cigarettes to tribal members [are] not in any way served by requiring prepayment of tax-exempt sales to non-indians but not as to other tax-exempt sales, the classification violates the Equal Protection Clause, and impermissibly discriminates against Indian commerce. Zobel v. Williams, 457 U.S. 55, 62 (1982). V. THERE ARE NO MATERIAL FACTS IN DUSPUTE Although Defendants contest certain facts, or state that they have not had discovery as to certain facts, there are no material facts in dispute that would prevent the Court from granting summary judgment to the Tribe. It is uncontested that the Tax Amendments require wholesalers to prepay taxes, in the amount of $4.96 per pack, on cigarettes to be sold under the prior approval system (or under the coupon system, if the Tribe were to elect it) to tribal retailers for retail sales to tribal members. On this basis alone, the Tribe is entitled to summary judgment. Although the precise amount of 17

19 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 19 of 21 time it will take to process refunds is uncertain, it is immaterial to the Tribe s motion. 7 It is uncontested that to obtain cigarette tax stamps on credit, a wholesaler must be a state stamping agent, that he must obtain a bond, at his own expense, and that he must agree to pay for the tax stamps within thirty days. 20 N.Y.C.R.R. 71.2(b)(1); N.Y. Tax 472(1). It is uncontested that no sales have been made under the prior approval system by wholesalers to any tribal cigarette sellers since the Tax Amendments were implemented. Spitzer Aff. 28. VI. THE TRIBE IS ENTITLED TO A PERMANENT INJUNCTION It follows from what the Tribe has said above, and in its initial brief, that the prepayment requirement infringes on its sovereignty, thereby causing the Tribe irreparable harm. Tr. MOL at Besides infringing on the Tribe s rights of self-government and regulation of tribal licensees and tribal economy, the prepayment requirement makes it impossible for tribal retailers to purchase tax-exempt cigarettes sufficient to meet tribal members legitimate demand. Defendants claim that any injunction against a state law causes the state irreparable injury, Defs. MOL at 28, is of course not the law. Although a state may suffer an abstract form of harm whenever one of its acts is enjoined, courts may nonetheless enjoin state laws that violate federal law. See Independent Living Center of Southern California, Inc. v. Maxwell- Jolly, 572 F.3d 644, 658 (9th Cir. 2009) (distinguishing New Motor Vehicle Bd. of Calif. v. Orrin W. Fox, Co., 434 U.S. 1345, 1351 (1977) (Rehnquist, J., in Chambers)); see also Stieberger v. Bowen, 801 F.2d 29, 34 (2d Cir. 1986) (consideration of the public interest may call for 7 Defendants assert that refunds will be issued in less than thirty days, based on the affidavit of Peter Spitzer, a Department official. Spitzer Aff. 9. Mr. Spitzer does not contest, however, that he had told Mr. Day that he had no idea how long the process would take, and that the office of the State Comptroller would have to audit and approve such a refund. Day Aff. 28. Nor did Mr. Spitzer contest that he had told Mr. Day that he did not know whether refunds would be issued in one month, or even in the same quarter. Id. 18

20 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 20 of 21 injunctive relief even when significant governmental action will be affected. ); Carey v. Klutznick, 637 F.2d 834, 839 (2d Cir. 1980) ( the Census Bureau assumes that the public interest is solely with it, because it is a public agency. But the public interest also requires obedience to the Constitution ). Defendants assert that the public health is at issue. Defs. MOL at 29. But the purpose of the legislation is to raise revenue. The injunction that the Tribe seeks is relatively narrow. The proposed order submitted by the Tribe seeks to enjoin the enforcement of only those provisions of the Tax Amendments requiring tax-stamps to be affixed on tax-exempt cigarettes distributed to reservation cigarette sellers under the coupon or prior approval system. Proposed Order Granting Permanent Injunction, Dkt. No , filed Aug. 22, This narrowly-tailored injunctive relief would assure that tribal sovereignty is not infringed and tribal commerce is not impeded by the State s new requirement of a prepayment of taxes where no taxes are owed. 19

21 Case 1:10-cv RJA Document 82 Filed 09/23/11 Page 21 of 21 CONCLUSION For the foregoing reasons, Plaintiff St. Regis Mohawk Tribe s Cross Motion for Summary Judgment and for Permanent Injunction should be GRANTED. Respectfully submitted, /s/ Michael L. Roy Michael L. Roy Hobbs, Straus Dean & Walker, LLP 2120 L Street, N.W. Suite 700 Washington, D.C (202) (mroy@hobbsstraus.com) Counsel for Plaintiff St. Regis Mohawk Tribe Marsha K. Schmidt Hobbs Straus, Dean & Walker, LLP 2120 L Street, NW, Suite 700 Washington, D.C (202) (mschmidt@hobbsstraus.com) Counsel of Record for Plaintiff St. Regis Mohawk Tribe Dated: September 23, 2011 Local Counsel: MARGARET A. MURPHY, ESQ Briercliff Drive Hamburg, New York (716) (justmam@aol.com) 20