Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 1 of 28 UNITED STATES DISTRICT COURT WESTERN DISTRICT OF NEW YORK

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1 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 1 of 28 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 MEMORANDUM OF LAW IN OPPOSITION TO DEFENDANTS MOTION FOR SUMMARY JUDGMENT, AND IN SUPPORT OF CROSS MOTION FOR SUMMARY JUDGMENT AND PERMANENT INJUNCTION

2 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 2 of 28 TABLE OF CONTENTS Page TABLE OF CONTENTS... i INTRODUCTION...1 STATEMENT OF THE CASE...3 A. Tribal Regulation and Sale of Cigarettes....3 B Tax Amendments...4 C. Procedural History of the Case....6 D. Tribe s Post-Enforcement Claims...7 E. State Case Brought by Akwesasne Convenience Store Association...8 ARGUMENT...8 I. REQUIRING PREPAYMENT OF STATE TAXES ON THE SALE OF CIGARETTES APPROVED FOR TAX-EXEMPT SALES TO TRIBAL MEMBERS INFRINGES ON TRIBAL SOVEREIGNTY AND VIOLATES THE EQUAL PROTECTION CLAUSE....8 A. States May Impose On Wholesalers and Retailers Only Minimal Burdens Reasonably Related to the Collection of Valid Taxes on Sales to Non-Indians...8 B. 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 Precollection Cannot Be Justified as Being Reasonably Tailored to the Collection of the Taxes Due on Sales of Cigarettes to Non-Indians Precollection Places More Than a Minimal Burden on Indian Traders and It Will Not Lead to the Collection of Taxes from Non-Indians...12 C. The Prepayment Obligation is Impermissible As Applied to the Tribe...16 i

3 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 3 of 28 D. Requiring Prepayment of the Tax on the Sales of Limited Quantities of Cigarettes Approved for Tax-Exempt Sales to Tribal Members Is Discriminatory in that No Such Prepayment is Required for the Sale of Other Untaxed Cigarettes...18 II. THE TRIBE IS ENTITLED TO A PERMANENT INJUNCTION...21 A. Absent Injunctive Relief, The Tribe Would Suffer Irreparable Injury...22 B. Legal Remedies, Such as Monetary Damages, are Inadequate...23 C. The Public Interest Would Not be Disserved by a Permanent Injunction, and the Balance of Hardships Between the Tribe and Defendants Tips in Favor of the Tribe...23 CONCLUSION...24 ii

4 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 4 of 28 INTRODUCTION Now that 2010 tax amendments have been enforced by the Department of Taxation and Finance ( Department ), it has become clear that those laws are fatally flawed, and that Plaintiff St. Regis Mohawk Tribe ( Tribe ) is entitled to summary judgment on its claim that the tax amendments infringe on the federally-protected sales of tax-exempt cigarettes by tribal retailers to tribal members. Although Defendants concede that they do not have the power to tax on-reservation sales of cigarettes to tribal members, the 2010 tax amendments require state-licensed wholesalers to prepay in Defendants words (Defs. Mem. of Law in Support of Motion for Summary Judgment at 7) ( Defs. MOL ) the state cigarette excise tax and sales tax on the quantities of cigarettes that have been approved for tax-exempt sales to tribal members. Because reservation cigarette sellers do not pay taxes on these sales, the wholesalers must then apply for a refund to recoup the taxes they have prepaid, a complicated and costly transfer of money back and forth between the Department and the wholesalers for the sole purpose of having a tax stamp affixed to packs of tax-exempt cigarettes. Thus, in order to purchase tax stamps to be affixed to the quarterly allocation of tax-exempt cigarettes allowed by the Department for the Mohawk reservation, the wholesalers would have to prepay over $1.4 million, and then apply for refunds. This scheme fails to meet any controlling tests set out by the Supreme Court. A scheme requiring the precollection of a tax has never been upheld by the Supreme Court. In fact, in sharp contrast to the tax scheme at issue in this case, the New York tax scheme at issue in Department of Taxation and Finance v. Milhelm Attea & Bros., 512 U.S. 61 (1994) ( Attea ) did not require precollection of a tax not actually owed on the limited quantities of tax-exempt 1

5 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 5 of 28 cigarettes sold to tribal members. Id. at 76. This fact was critical to the Court s decision upholding the scheme in a limited facial challenge by federally-licensed wholesalers. Id. ( [A]ssuming that the probable demand calculations leave ample room for legitimately taxexempt sales, the precollection regime will not require prepayment of any tax to which New York is not entitled. ). The requirement for precollection of millions of dollars of taxes that are not owed cannot be justified as a mere minimal burden[] reasonably tailored to the collection of valid taxes from non-indians. Attea, 512 U.S. at 72. The probable demand allocation itself limits the availability of tax-exempt cigarettes to the number deemed necessary by Defendants to meet tribal member demand. The cigarettes at issue here are not intended for sale to non-indians and this prepayment requirement will not lead to the collection of one cent of taxes from a non-indian. All it will do is lead to transfers of money from the wholesaler to the State and back in a circular process to assure tax stamps are affixed to products that will not be taxed. Finally, prepayment of a tax that is not due on cigarettes to be sold to tax-exempt tribal members cannot be justified as a minimal burden on collection of the taxes due on other cigarettes sold to non-tribal members. The prepaid tax on one pack of cigarettes is $4.96, about fifty times the profit on a pack of cigarettes, and a prepayment requirement of $1.4 million per quarter for the probable demand allocation for Mohawk alone is anything but minimal. Due to this prepayment requirement, the state-licensed wholesalers who have sold cigarettes to Mohawk tribal retailers in the past and who are registered with the Tribe to make such sales have made business decisions to discontinue making such sales, and Mohawk tribal retailers cannot obtain any cigarettes from state wholesalers. Because the wholesalers are unwilling to assist the State in carrying out its scheme, the tribal retailers are without any suppliers. The practical result is 2

6 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 6 of 28 that the prepayment requirement violates the [State s] obligation to make available to tribal members a tax-free quantity of cigarettes sufficient to satisfy the legitimate demands of those reservation Indians who smoke. Oneida v. Cuomo, 645 F.3d 154, 170 (2d Cir. May 9, 2011) (quoting Attea, 512 U.S. at 69). 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, and the Court should deny Defendants motion for summary judgment. The Court should therefore grant the Tribe the declaratory and injunctive relief it seeks. Absent an injunction, the Tribe will suffer irreparable injury to its sovereignty, to its revenues on cigarettes, and to its licensed tribal retailers revenues on cigarettes and associated sales. The State has no legitimate interest in burdening the taxexempt sales to tribal members. STATEMENT OF THE CASE A. Tribal Regulation and Sale of Cigarettes The St. Regis Mohawk Tribe is a federally-recognized Indian tribe with a reservation in northern New York, along the St. Lawrence River and the Canadian border. Unkechauge Indian Nation v. Paterson, No. 10-cv-711, Decision and Order, Dkt # 49 at 2, 752 F.Supp. 2d 320, (W.D.N.Y. 2010). The Tribe has adopted a regulatory system to encourage tribal member owned businesses, and to generate tribal revenue. Declaration of Elliot Lazore 8, 9. There are 144 registered Mohawk businesses, including 35 tribally-licensed tobacco retailers who employ hundreds of local residents. Id. 8. The Tribe, through its business arm, owns three of the licensed retailers (the IGA, the Mohawk Bingo Palace, and the Akwesasne Mohawk Casino). Id. 3

7 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 7 of The remaining 32 licensed retailers are owned by tribal members, as required under tribal law. Id. Under tribal law, cigarette wholesalers must pay a Tribal Tobacco Fee, which is assessed at varying levels, and affix a tribal stamp on all tobacco products. Lazore Decl., Exh. A (St. Regis Mohawk Tobacco Ordinance, 5.j); Exh. B at 1-2 (current fee structure). The tobacco fees collected by the Tribe which totaled $2.8 million in 2010 support tribal programs and services, including law enforcement, sanitation, the fire department, education, health and environmental services. Lazore Decl. 10, Mitchell Decl B Tax Amendments New York imposes an excise tax on cigarettes. N.Y. Tax Law 471. The legal incidence of the tax is on the retail purchaser, but the tax is collected through tax stamps which are affixed by a state-licensed stamping agent, and the tax is then added to and collected as part of the sales price of the cigarettes, ultimately being paid by the retail purchaser. N.Y. Tax Law 471(2), (3). Since it first imposed the tax in 1939 until recently, however, the State did not require the pre-collection of the tax on cigarettes sold on-reservation to non-tribal members. See Cayuga Indian Nation v. Gould, 14 N.Y.3d 614, (2010); Oneida, 645 F.3d at 166. On June 21, 2010, the New York Legislature enacted amendments to Tax Law 471 and 471-e, regarding the distribution and sale of cigarettes to Indian reservations in New York. See 2010 N.Y. Laws 134, Part D; N.Y. Laws 136, 1. Regulations to carry out the amendments were adopted as emergency regulations on June 22, 2010, XXXII N.Y. Reg. 38 (July 7, 2010), and were later adopted as final. 20 N.Y.C.R.R On July 29, 2010, the Department also issued a guidance document to explain further how the system is intended to work. Affirmation of Michael Roy, Exh. A. 4

8 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 8 of 28 The amendments and regulations (together the Tax Amendments ) create a system to collect the excise tax on cigarette sales to non-members while exempting sales to tribal members for personal use. Oneida, 645 F.3d at 160. The Tax Amendments limit the quantities of taxexempt cigarettes that can be sold to reservation cigarette sellers to a tribe s probable demand calculation, determined by the Department. N.Y. Tax Law 471-e(2)(b); 20 N.Y.C.R.R. 74.6(e). The Tax Amendments offer two mechanisms for tribes and reservation cigarette sellers to obtain these limited quantities of tax-free cigarettes: the Indian tax exempt coupon system, and the prior approval system. N.Y. Tax Law 471(1); 20 N.Y.C.R.R. 74.6(a)(4). The Tribe has not elected the coupon system, and so the prior approval system is in effect as to it. Lazore Decl. 13. The detailed workings of these two systems which have been described by the Second Circuit and in this Court s earlier opinions, see Oneida, 645 F.3d at ; Seneca Nation of Indians v. Paterson, No. 10-cv-687A, Dkt # 87, 2010 WL at *4-*6 (W.D.N.Y. Oct. 14, 2010) (decision denying preliminary injunction) are not material to the Tribe s motion, for the most part. What is material is that the Tax Amendments require[] state-licensed stamping agents (i.e., wholesalers) to prepay the tax and affix tax stamps on all cigarette packs, including those intended for resale to tax-exempt Indians, Oneida, 645 F.3d at 160, notwithstanding that the cigarettes are to be sold at retail in tax-exempt sales to Indians, in quantities determined by the Department. N.Y. Tax Law 471(5)(b), 471-e(3)(c)(iii); 20 N.Y.C.R.R. 74.6(a)(3); Defendants Statement of Facts 4. Thus, when a wholesaler sells permitted quantities of taxexempt cigarettes to a reservation cigarette seller, using either the coupon system or the prior approval system, the wholesaler cannot recover the cost of the tax stamps from the reservation cigarette seller. Instead, the wholesaler will have to prepay taxes not due on the cigarettes, at 5

9 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 9 of 28 substantial expense, and then have to apply for a refund from the Department. N.Y. Tax Law 471(5)(b), 471-e(4); 20 N.Y.C.R.R. 74.6(c)(6), (d)(4). C. Procedural History of the Case On November 9, 2010, the Court denied the Tribe s motion for a preliminary injunction on the grounds that the Tribe had not demonstrated likelihood of success on the merits, but stayed implementation and enforcement of the Tax Amendments pending appeal, finding that [a]bsent a stay,... plaintiffs will suffer irreparable injury, and that a stay pending appeal is in the public interest. Unkechauge, Decision and Order, Dkt # 49 at 12, 752 F.Supp. 2d at 328. On appeal, the Second Circuit affirmed the denial of the preliminary injunction and vacated the stay pending appeal. Oneida, 645 F. 3d 154. The Defendants would have this Court believe that the claims of the Tribe fail as a matter of law because they were rejected by the Second Circuit. That is not correct. The denial of a motion for a preliminary injunction does not constitute a determination on the merits of the Tribe s action. Pugh v. Goord, 345 F.3d 121, 125 (2003) (2d Cir. 2003) ( [l]oss of a motion for preliminary injunction means only temporary lethality ) (internal quotation omitted). In its ruling, the Second Circuit addressed only the legal theories advanced in the motion for preliminary injunction and the evidence submitted in support. Importantly, the Second Circuit did not consider or render any decision on the requirement that taxes be prepaid on tax-exempt sales. The Oneida and Cayuga Nations argued that the State could not require prepayment as to sales of taxable cigarettes destined for retail sales to non-tribal members. The Court rejected this argument, but in doing so did not address the precollection of taxes on tax-exempt sales. Oneida, 645 F.3d at See Tribe s Amended Complaint, St. Regis Mohawk Tribe v. Paterson, No. 6

10 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 10 of cv-811, Dkt #7 (Count VI - challenging precollection of taxes on cigarettes sold to tribal members). Moreover, the Second Circuit specifically left open whether enforcement of the Tax Amendments would infringe on tribal sovereignty or unduly burden tribal retailers. Actual problems of implementation can be addressed if and when they arise. Oneida, 645 F.3d at 175 (internal quotation omitted). Thus the Court left open possible post-enforcement claims. D. Tribe s Post-Enforcement Claims Starting on June 21, 2011, Defendants have required wholesalers to affix tax stamps on all cigarettes sold to reservation cigarette sellers including cigarettes that are approved for taxexempt sales to tribal members under the prior approval system. Affidavit of Peter Day 10-12, 23, & Exh. A ( All packs of cigarettes sold by wholesale dealers to Indian nations and tribes and reservation cigarette sellers are required to have New York tax stamps affixed to them. ); Defs. MOL at 7. A tax stamp costs $4.96, which includes the excise tax of $4.35 plus the prepaid sales tax of $0.61. Day Aff. 23. To sell the quarterly allocation of 291,600 packs of cigarettes on the Mohawk reservation, 20 N.Y.C.R.R. 74.6(e), wholesalers would have to advance to the Department more than $1.4 million. Day Aff. 25. Annually, wholesalers would have to advance more than $5.6 million to the Department for sales to Mohawk retailers alone. Id. After a wholesaler completes a sale to a reservation cigarette seller, he must apply for a refund. Id ; N.Y. Tax Law 471(5)(b), 471-e(4). As a direct result of the burden of the requirement to prepay the tax on approved sales of tax-exempt cigarettes to reservation cigarette sellers, all of the stamping agents who sold cigarettes to Mohawk retailers or wholesalers before the Tax Amendments were enforced and who are registered with the Tribe to make such sales have made a business decision not to sell 7

11 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 11 of 28 cigarettes to Mohawk retailers and wholesalers. Day Aff. 38; Affidavit of George W. Burnes, 22; Affidavit of Stephen M. Valvo, 30. Consequently, Mohawk retailers have been unable to purchase cigarettes under the prior approval system. Affidavit of Julie Back Skidders 5. E. State Case Brought by Akwesasne Convenience Store Association On or about July 15, 2011, the Akwesasne Convenience Store Association ( ACSA ), an unincorporated association of retailers licensed by the Tribe, brought suit in the Supreme Court, County of Erie, New York, challenging the Tax Amendments on the ground that the precollection requirement resulted in the wholesalers being unwilling to sell cigarettes to tribal retailers. Roy Aff. 3 & Exh. B. ACSA asserted that the inability of the retailers to obtain products created an unconstitutional burden on tribal commerce. On August 18, 2011, the Court denied the ACSA s request for preliminary injunction on the ground that the retailers allegations of harm were speculative since the wholesalers had not actually attempted to use the precollection/refund system, and that wholesalers could possibly obtain bonds sufficient to enable them to purchase on credit tax stamps to be affixed to tax-exempt cigarettes for sale to tribal members. Id. Exh. B. ARGUMENT I. REQUIRING PREPAYMENT OF STATE TAXES ON THE SALE OF CIGARETTES APPROVED FOR TAX-EXEMPT SALES TO TRIBAL MEMBERS INFRINGES ON TRIBAL SOVEREIGNTY AND VIOLATES THE EQUAL PROTECTION CLAUSE A. States May Impose on Wholesalers and Retailers Only Minimal Burdens Reasonably Related to the Collection of Valid Taxes on Sales to Non-Indians Indian tribes possess attributes of sovereignty over both their members and their territory. Oneida, 654 F.3d at 164 (quoting White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 142 (1980)). Tribal sovereignty vests tribes and their enrolled members with the federallyprotected right to make their own laws and be ruled by them, id. (quoting Williams v. Lee, 358 8

12 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 12 of 28 U.S. 217, 220 (1959)), including, [a]mong other things,... authority to... create economic policies, and tax economic activities within their territories.... Id. citing, inter alia, Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 137 (1982). Because [t]he Constitution vests the Federal Government with exclusive authority over relations with Indian Tribes, and in recognition of the sovereignty retained by Indian tribes..., Indian tribes and individuals generally are exempt from state taxation within their territory. Id. at 165 (quoting Montana v. Blackfeet Tribe of Indians, 471 U.S. 759, 764 (1985) (citing U.S. Const. art. I, 8, cl. 3)). Thus, absent Congressional authorization, states are categorically barred from placing the legal incidence of an excise tax on a tribe or on tribal members for sales made inside Indian country. Oneida, 654 F.3d at 165 (quoting Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, (2005)) (emphasis added by Oneida court). In the area of state taxation of non-members who engage in commerce on Indian reservations, however, courts must subject a state tax scheme over on-reservation, non-member activities to a particularized inquiry into the nature of the state, federal, and tribal interests at stake. Id. (quoting Bracker, 448 U.S. at 145). The Supreme Court has applied these legal principals to state cigarette excise taxation onreservation. In Moe v. Confederated Salish and Kootenai Tribes of Flathead Reservation, the Court held that the state sales tax could not be imposed on sales to Indians, 425 U.S. 463, , but upheld the application of the tax to the non-indian purchasers, and upheld a requirement that the tribal member retailer collect and remit the tax on sales to non-indians. The Court held: The State s requirement that the Indian tribal seller collect a tax validly imposed on non-indians is a minimal burden designed to avoid the likelihood that in its absence non-indians purchasing from the tribal seller will avoid payment of a concededly lawful tax. Id. at

13 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 13 of 28 In Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980) ( Colville ), the Court upheld a Washington statute requiring wholesalers to sell only cigarettes to which... stamps have been affixed, but permitting tribal retailers to possess unstamped cigarettes for purposes of resale to members of the tribe. 447 U.S. at 141. The Court stated: [w]e recognized in Moe that if a State s tax is valid, the State may impose at least minimal burdens on Indian businesses to aid in collecting and enforcing the tax. Id. at 159 (upholding requirements that the tribal retailer affix tax stamps on cigarettes sold to non-tribal members, keep records of tax-exempt and taxable sales, and require that Indian purchasers not known to the retailer present a tribal identification card). Id. The Court held that such burdens must also be reasonably necessary to collect the tax. Id. at Moe and Colville together stand for the proposition that States may impose on reservation retailers minimal burdens reasonably tailored to the collection of valid taxes from non-indians. Attea, 512 U.S. at 73. In Attea, the Court held that burdens that could be imposed on tribal retailers under Moe and Colville could also be imposed on wholesalers, because it would be anomalous to hold otherwise. Attea, 512 U.S. at The decisions in Moe and Colville were based in large part on the fact that the cigarettes were not manufactured on the reservation. Colville, 447 U.S. at 155 ( the value marketed by the [reservation cigarette seller] to persons coming from the outside is not generated on the reservation[] ) (citing Moe, 425 U.S. at ). Neither the Supreme Court nor any court has addressed the application of state taxes to cigarettes manufactured by Indians. Compare California v. Cabazon Band of Mission Indians, 480 U.S. 202, 220 (1987) (holding that state could not regulate tribal casino, notwithstanding that patrons were non-tribal members coming onto the reservation; Colville was distinguished because the tribes were generating value on the reservations through activities in which they have a substantial interest. ). 2 After the Supreme Court held that the regulations were not facially invalid under the Indian trader statutes, Attea, 512 U.S. 61, the Department nonetheless repealed the regulations and adopted a policy of forbearance under which it chose not to collect taxes from reservation retailers. See Cayuga, 14 N.Y.3d at Due to the forbearance policy, and the failure of the Department to issue coupons to allow sufficient quantities of tax-exempt cigarettes to be sold to tribal members, state courts agreed that the statute was not in effect, and that the general directive in Tax Law 471 prohibiting the possession or sale of untaxed cigarettes could not be enforced against tribal retailers or their wholesalers. Day Wholesale v. New York, 856 N.Y.S.2d 808, 812 (N.Y. App. Div., 4th Dept. 2008); Cayuga, 14 N.Y.3d at

14 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 14 of 28 B. 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 1. Precollection Cannot Be Justified as Being Reasonably Tailored to the Collection of the Taxes Due on Sales of Cigarettes to Non-Indians The prepayment obligation is not reasonably tailored to the collection of valid taxes from non-indians. Attea, 512 U.S. at 62. See Colville, 447 U.S. at 160 (burdens must be reasonably necessary to collect the tax on sales to non-indians). First, it is a prepayment of a tax that is not even due on the sale of a product to a tribal member. The cigarettes at issue here are intended to be sold to tax-exempt Indians. The State law simply requires affixation of a tax stamp on which the tax is prepaid to a pack of cigarettes, which is actually a meaningless gesture because no tax is due. The result is that the State collects funds from wholesalers which are not owed under federal law and with no real effect on collecting taxes from non-indians. Like the Tax Amendments, the New York regulations at issue in Attea were designed to limit the quantities of cigarettes that could be sold by state stamping agents to reservation cigarette sellers to an amount sufficient to meet the demand for cigarettes by tribal members. But the Attea regulations did not require prepayment of taxes on the limited quantities of cigarettes approved for sale to reservation cigarette sellers for tax-exempt sales to tribal members. Attea, 512 U.S. at 69. This feature of the Attea regulations was of critical importance to the Supreme Court in its decision. In Attea, the Supreme Court stated: If the Department s probable demand calculations are adequate, tax-immune Indians will not have to pay New York cigarette taxes and neither wholesalers nor retailers will have to precollect taxes on cigarettes destined for their consumption. Attea, 512 U.S. at 75 (emphasis added). The Attea Court further stated: Again assuming that the probable demand calculations leave ample room for legitimately tax-exempt sales, the precollection regime [on sales to non-tribal members] will 11

15 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 15 of 28 not require prepayment of any tax to which New York is not entitled. Id. at 76 (emphasis added). The lack of the requirement for precollection of the state tax on the cigarettes approved for sales to tribal members appears to have been an important consideration in the Court s decision to sustain the regulations.... Cayuga Indian Nation v. Gould, 14 N.Y.3d at 624 n.2; see also id. at 650 (the Supreme Court in 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. ). At oral argument in the Attea case, the State acknowledged that a requirement that the tax be prepaid by the wholesalers on cigarettes approved for sale to tribal members with a subsequent refund of the prepaid tax might well not pass muster because it would require more burden on the wholesaler. Attea, Transcript of oral argument, 1994 WL at *9-*10, * Precollection Places More Than a Minimal Burden on Indian Traders and It Will Not Lead to the Collection of Taxes from Non-Indians. Requiring prepayment of taxes on the sales of cigarettes that have been approved for tax-exempt sales to tribal members is no mere minimal burden on the wholesaler. Attea, 512 U.S. at 73. In fact, the law at issue here imposes burdens on federally-licensed Indian traders and tribal retailers that go far beyond any minimal burden approved by the Supreme Court. The prepaid tax amount is very large, especially in when viewed in light of the margin on the sale of cigarettes. The Tax Amendments would require wholesalers to prepay taxes of $4.96 per pack (excise and prepaid sales tax) totaling more than $1.4 million on the allocation of 291,600 packs of cigarettes per quarter on the Mohawk reservation (more than $5.6 million per year). Day Aff ; 20 N.Y.C.R.R. 74.6(e). By comparison, wholesalers profit on the sales is much smaller about $ per pack average. 3 3 See Day Aff. 24 (profit of $ /pack; average of $0.12/pack); Burnes Aff. 18 (profit of $

16 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 16 of 28 The burden of prepaying an invalid tax was recognized by the Solicitor General of the United States. In Herzog Bros. Trucking v. State Tax Commission, 69 N.Y.2d 536 (1987), the New York Court of Appeals held that New York could not precollect a motor fuels excise tax on sales by a wholesaler to on-reservation retailers. The Department petitioned for a writ of certiorari to the United States Supreme Court. In an amicus brief to the Supreme Court at the certiorari stage, the U.S. Solicitor General disagreed with the Court of Appeals decision insofar as it applied to motor fuel to be sold for resale to non-tribal members, taking the position that a state cannot require precollection of excise taxes on a product to be sold in a tax-exempt sale to tribal members. The Solicitor General stated: [W]e doubt that the Indian trader statutes permit a State to require a distributor that delivers products to an Indian trader (or to require the Indian trader itself) to prepay sales taxes or similar taxes on products that will ultimately be sold to Indian retail customers on the reservation -- if, as we must assume is true here..., the Indian trader statutes bar the impostion [sic] of the taxes on the retail sales.... A requirement that an Indian trader routinely prepay an invalid tax and then recover his prepayment only by seeking a refund under state law would seem to be such an impermissible additional burden under the comprehensive regulatory scheme imposed by the Indian trader statutes -- at least where it is reasonably practicable for the State to fashion an exemption from its prepayment requirement for that portion of a wholesale sale of goods that will ultimately be sold to Indian consumers. Brief for the United States as Amicus Curiae, State Tax Commn. v Herzog Bros. Trucking, 487 U.S (1988), Roy Aff. Exh. C at 7-8 (emphasis added). 4 The prepayment requirement runs afoul not only of Attea, and the views of the Solicitor General expressed in Herzog, but also of decisions providing that persons trading with the Indians cannot be taxed for the privilege of trading with the Indians. Congress has enacted 0.15); Valvo Aff. 27 (profit of $ /carton, or $ /pack). 4 The Supreme Court granted certiorari, and vacated and remanded the case for reconsideration in light of new regulations by the Department. State Tax Commn. v Herzog Bros. Trucking, 487 U.S (1988). On remand, the Court adhered to its earlier decision. Herzog Bros. Trucking v. State Tax Commission, 72 N.Y. 2d 720 (1988). 13

17 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 17 of 28 sweeping and comprehensive regulation over persons wishing to trade with Indians, in order to protect the Indians. Attea, 512 U.S. at 70; see Warren Trading Post Co. v. Arizona Tax Comm n, 380 U.S. 685, 687 (1965). The Indian Traders Statutes, 25 U.S.C. 261 et seq., and their implementing regulations, 25 C.F.R. 140, require persons trading with the Indians to be licensed by the Bureau of Indian Affairs, and regulate sales by Indian traders. See 25 U.S.C. 262 ( [a]ny person desiring to trade with the Indians on any Indian reservation is subject to the regulatory authority of Commissioner of Indian Affairs). The State cannot tax an Indian trader for the privilege of doing business with the Indians. In Warren Trading Post, the Court struck down a state gross proceeds tax on a licensed Indian trader, reasoning that the tax would put financial burdens on [the trader] or the Indians with whom it deals. 380 U.S. at 691 (emphasis added). The Court followed this decision in a later case involving an unlicensed Indian trader. Central Machinery Co. v. Arizona State Tax Comm., 448 U.S. 160 (1980) (tax imposed on seller on sale to Indian tribe was preempted by Indian trader statutes though seller was not federally-licensed trader). Because the Indian Trader Statutes are intended to protect the tribe and its members, Attea, 512 U.S. at 70, it would be anomalous, Attea, 512 U.S. at 74, not to extend the protections of those statutes to the Indians with whom [the Indian trader] deals. Warren Trading Post, 380 U.S. at 691. As the Second Circuit noted, Attea s reasoning is applicable in this case involving tribal sovereignty because federal preemption over the regulation of Indian tribes is closely related to federal recognition and protection of tribal sovereignty. Oneida, 645 F.3d at 170. Significantly, this burden could be avoided. First, the probable demand limitation on sales of tax-exempt product adequately protects the State s interest in collecting taxes from the sale of cigarettes to non-indians. This is the whole purpose of the probable demand calculation. 14

18 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 18 of 28 See Attea, 512 U.S. at 75; Oneida, 645 F.3d at 170. To the extent that the State has an interest in tracking cigarettes through the use of stamps, it could adopt the scheme used by other states of requiring a special tax-exempt stamp to be affixed to cigarettes to be sold on reservation to tribal members. For instance, pursuant to Arizona s Indian Reservation Tobacco Tax (Ariz. Rev. Stat ), Arizona established a stamping scheme whereby green tax-exempt stamps are affixed to cigarettes to be sold tax-free to tribal members. See Roy Aff., Exh. D at 2. 5 The State of Washington provides untaxed (but stamped) cigarettes to uncompacted tribes in an amount sufficient for the personal use of each tribal member. See Wash. Rev. Code (4) and Roy Aff., Exh. E. Finally, it bears mentioning that there has been nothing said by this Court or the Second Circuit on appeal that addresses prepayment as of taxes not due. The Second Circuit upheld the prepayment requirement on sales to non-tribal members, holding that the incidence of the tax was on the non-tribal member purchasers, and that the tribal retailers were simply required to precollect a valid tax on non-tribal members. Oneida, 645 F.3d at This reasoning, of course, cannot be applied to the prepayment by state wholesalers of taxes on tax-exempt cigarettes to be sold to tribal members. Because the tax cannot be passed on to the tribal members, they do not bear the legal incidence of the tax. The legal burden of the prepayment requirement is on the wholesaler who sells to the reservation cigarette seller i.e., the person desiring to trade with the Indians, 25 U.S.C. 262 who must prepay and then apply for a refund to recoup the tax. 6 The prepayment obligation is, in effect, an interest-free loan to the 5 Available online at (Last accessed August 21, 2011.) 6 The law recognizes that there is a detriment to a party of losing the use of money, and a corresponding benefit to the other party of having use of another s money interest-free. See Love v. State, 78 N.Y. 2d 540, 544 (1991) (defendant required to pay interest from date of decision of liability, not as a penalty, but as simply the cost of having the use of another person s money ); Doolin v. United States, 918 F.2d 15, 15 (2d Cir. 1990) (government s failure to pay interest on estate tax overpayment constituted windfall 15

19 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 19 of 28 State for the right to sell tax-exempt cigarettes to reservation cigarette sellers, with no impact on the collection of taxes from non-indians. C. The Prepayment Obligation is Impermissible As Applied to the Tribe As discussed above, the prepayment requirement is impermissible as a matter of law, and the Tribe is entitled to summary judgment on Count VI of its complaint. Tribe s Amended Complaint, St. Regis Mohawk Tribe v. Paterson, No. 10-cv-811, Dkt #7. In addition, as applied to the Tribe, the prepayment obligation violates the [State s] obligation to make available to tribal members a tax-free quantity of cigarettes sufficient to satisfy the legitimate demands of those reservation Indians who smoke. Oneida, 645 F.3d at 170 (quoting Attea, 512 U.S. at 69). As a direct result of the requirement to prepay the tax on approved sales of tax-exempt cigarettes to reservation cigarette sellers, Mohawk retailers are unable to obtain tax-exempt cigarettes from state-licensed wholesalers. Before the Tax Amendments went into effect, two state-licensed wholesalers Day Wholesale, Inc. ( Day ) and Capital Candy Company, Inc. ( Capital ) sold to Mohawk tribal retailers, pursuant to licenses they have from the Tribe under tribal law. Day Aff. 4; Burnes Aff. 3; Lazore Decl. 6. A third state-licensed wholesaler Valvo Candies, Inc. ( Valvo ) sold to Mohawk wholesalers for resale to tribal retailers. Valvo Aff. 6. Given the burden imposed by the Tax Amendments, these state wholesalers have made a business decision to discontinue sales of tax-exempt cigarettes to tribal retailers so long as the wholesalers must prepay the taxes that are not even owed on the cigarettes. Day Aff. 38; Burnes Aff. 22; Valvo Aff. 30. Day, Capital, and Valvo are the only state wholesalers who are licensed by the Tribe under tribal law or registered with the Tribe under the Jenkins Act, 15 U.S.C. 376(a)(3), see Day Aff. 6-7; Lazore Decl. 6, and these were the only licensed agents selling to the Mohawk to the United States). 16

20 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 20 of 28 reservation from 2006 through August 2009 according to the Department s own records. Roy Aff., Exh. F. In any event, the State s prepayment requirement would impose a substantial burden on any wholesaler who could legally sell to tribal wholesalers and retailers. Why would a wholesaler who had not previously sold to Mohawk tribal retailers, when no prepayment was required, enter that market now that a prepayment of a substantial tax is required, especially given that the wholesaler s profit is just a fraction of the prepaid tax? In the state case challenging the Tax Amendments brought by ACSA, Justice Siwek ruled 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. The Tribe s claims, however, are not speculative. The only three wholesalers who have sold cigarettes to Mohawk reservation cigarette sellers will not do so due to the substantial burdens imposed by the Tax Amendments. While the Defendants in the ACSA case argued, as they likely will here, that no wholesaler had purchased cigarettes using the probable demand allocation and applied for a refund, and so it was not proven that refunds would be delayed, id. at 6-7, the Tribe s concern is not how long it will take a wholesaler to obtain a refund; rather, it is that wholesalers have made business decisions not to prepay substantial taxes not due and then have to apply for and wait for refunds, and that tribal retailers therefore cannot obtain cigarettes from them. Moreover, the possibility that some wholesalers could obtain a bond and buy tax stamps on credit is simply irrelevant to the Tribe s claim. For those wholesalers who might qualify to purchase stamps on credit, the requirements and limitations of the credit also impose more than minimal burdens that are not reasonably related to the collection of taxes on sales to non-tribal members. Only state stamping agents and not all wholesalers can avail themselves of this 17

21 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 21 of 28 option; to do so, they must post a bond, at their expense, to cover the price of the stamps; and they must agree to pay the cost of the stamps within thirty days (regardless of whether they have received refunds of their tax-exempt sales to reservation cigarette sellers in that time). 20 N.Y.C.R.R. 71.2(b)(1) ( the Department... may, in its discretion, permit a licensed cigarette agent to purchase stamps and to pay for such stamps within 30 days after the date of purchase, provided the agent has filed a credit bond (or has deposited other acceptable security) with the department in the required amount conditioned upon such payment. ) (emphasis added); N.Y. Tax 472(1). 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, presenting serious burdens on the agents. See Day Aff. 32; Burnes Aff ; Valvo Aff In any event, the Department can no more require that wholesalers post a bond equivalent to the cost of tax stamps than it can require the wholesaler to prepay the cost of the tax stamps for a tax that is not due. D. Requiring Prepayment of the Tax on the Sales of Limited Quantities of Cigarettes Approved for Tax-Exempt Sales to Tribal Members Is Discriminatory in that No Such Prepayment is Required for the Sale of Other Untaxed Cigarettes Generally, an agent sells tax-exempt cigarettes through the sale of unstamped cigarettes. 20 N.Y.C.R.R. 76.1(b)(1)( In general, exemptions from the cigarette tax shall be effectuated by means of a licensed cigarette agent s sale of cigarettes upon which such tax has not been prepaid by the seller on behalf of the ultimate consumer nor precollected as part of the selling price of such cigarettes. ). Agents may... sell unstamped cigarettes in New York when those 18

22 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 22 of 28 cigarettes are sold tax-exempt to the United States, the State of New York, out-of-state purchasers, diplomatic missions, diplomatic personnel and the United Nations (20 NYCRR, Part 76). Roy Aff., Exh. A. The only exception to this rule is the requirement that tax stamps be affixed to approved quantities of tax-exempt cigarettes to be sold to Indians on-reservation. Day Aff. 37. In requiring prepayment of taxes not due on tax-exempt cigarettes to be sold to tribal members, the State is discriminating against lawful sales to tribal members. The Supreme Court has made clear, in its Indian cigarette tax jurisprudence, that to be upheld, the tax scheme cannot discriminate against Indian commerce. See Colville, 447 U.S. at 151 ( The State may sometimes impose a nondiscriminatory tax on non-indian customers of Indian retailers.... ); id. at 156. Second, it contravenes the Equal Protection Clause of the Constitution. U.S. Const. amend. XIV, 15 ( no State shall... deny to any person within its jurisdiction the equal protection of the laws. ). 7 The clause is essentially a direction that all persons similarly situated should be treated alike. City of Cleburne v. Cleburne Living Center, 473 U.S. 432, 439 (1985). Legislation that does not restrict a fundamental right or employ a suspect classification must be rationally related to a legitimate government interest. Id. at 440. Under the rational relationship test, the State s objective in the legislation must be rationally related to the distinction between groups made by the legislation. Zobel v. Williams, 457 U.S. 55, 60 (1982). By requiring that 7 Defendants do not address the Tribe s Equal Protection Claim (Count VII of the Tribe s Amended Complaint, St. Regis Mohawk Tribe v. Paterson, No. 10-cv-811, Dkt #7) in their motion for summary judgment. The Tribe s failure to pursue this claim as the basis of its preliminary injunction motion on appeal, see Oneida, 645 F.3d at 163, n. 14, does not foreclose the Tribe from pursuing this claim. Cf. Pugh, 345 F.3d at 125 (denial of a motion for a preliminary injunction does not constitute a determination on the merits). Nor does it address the Tribe s pendant law claim for violation of the New York Constitution (Amended Complaint Count III). The Tribe does not object to dismissal of Court III for lack of jurisdiction, as argued by Defendants in their opposition to the preliminary injunction motion, Unkechauge, No. 10-cv-711, Dkt. #36, at 19, but the dismissal should not constitute an adjudication on the merits of that claim. 19

23 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 23 of 28 the classification bear a rational relationship to an independent and legitimate legislative end, we ensure that classifications are not drawn for the purpose of disadvantaging the group burdened by the law. Romer v. Evans, 517 U.S. 620, 633 (1996); see also Consolidated Edison Co. v. Pataki, 117 F.Supp.2d 257, (N.D.N.Y. 2000) ( [I]f this Court determines that the legislature acted arbitrarily or classified Plaintiff upon some ground not having a fair and substantial relation to the object of the act, such that similarly situated persons are treated differently, it must strike down the statute. ). The purpose of the Tax Amendments is to create a system to collect the excise tax on cigarettes to non-members while exempting sales to tribal members for personal use. Oneida, 645 F.3d at 160. Even assuming, as this Court held in its earlier ruling on the motion for preliminary injunction, that the probable demand calculations are rationally related to a legitimate legislative purpose, see Unkechauge, Decision and Order, No , Dkt. # 49 at 10-12, 752 F.Supp.2d at , the prepayment requirement is not. Defendants have not and cannot articulate a rational basis for requiring prepayment by wholesalers of taxes on tax-exempt sales to reservation cigarette sellers, while not requiring prepayment as to other tax-exempt sales. The dual legislative purposes of creat[ing] a system to collect the excise tax on cigarettes to non-members while exempting sales to tribal members for personal use, Oneida, 645 F.3d at 160, are not furthered by requiring prepayment of the tax not due. The prepayment requirement on tax-exempt cigarettes in no way furthers the legislative goal of collecting taxes on sales to non-indians, especially given that the quantities of tax-exempt cigarettes are limited by the probable demand allocation even without the prepayment requirement. Moreover, the prepayment requirement does not further the goal of providing tax-exempt cigarettes to tribal members in fact, it undermines that goal, as noted above. Because the legislative goals [are] 20

24 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 24 of 28 not in any way served by requiring prepayment of tax-exempt sales to non-indians but not as to other tax-exempt sales, Zobel, 457 U.S. at 61, the classification violates the Equal Protection Clause, and impermissibly discriminates against Indian commerce. Colville, 447 U.S. at 151. II. THE TRIBE IS ENTITLED TO A PERMANENT INJUNCTION The Tribe is entitled to an injunction enjoining the Defendants from enforcing the Tax Amendments. The standard for a permanent injunction is essentially the same as the standard for a preliminary injunction, except that for a permanent injunction the plaintiff must actually succeed on the merits of the case, rather than merely demonstrate a likelihood of success in a future proceeding. See, e.g., Lusk v. Village of Cold Spring, 475 F.3d 480, 485 (2d Cir. 2007). In ebay, Inc. v. MercExchange, LLC, 547 U.S. 388 (2006), the Supreme Court held that to grant a permanent injunction in a copyright case, [a] plaintiff must demonstrate: (1) that it has suffered an irreparable injury; (2) that remedies available at law, such as monetary damages, are inadequate to compensate for that injury; (3) that, considering the balance of hardships between the plaintiff and defendant, a remedy in equity is warranted; and (4) that the public interest would not be disserved by a permanent injunction. ebay, 547 U.S. at 391. The Second Circuit recently stated that we see no reason that ebay would not apply with equal force to an injunction in any type of case. Salinger v. Colting, 607 F.3d 68, 77-78, n. 7 (2d Cir. 2010). In its ruling on the Tribe s motion for a preliminary injunction, this Court denied the preliminary injunction based solely on the Tribe s inability to show likelihood of success on the merits. Unkechauge, No. 10-cv-711, Decision and Order, Dkt # 49 at 12, 752 F.Supp. 2d at 328. But the Court granted the Tribe a stay of enforcement of the Tax Amendments, following its earlier decision in Seneca Nation, and explicitly holding that absent a stay, the Tribe would suffer irreparable injury and that a stay was in the public interest. Id. So the Court has already ruled on the factors for the grant of a permanent injunction. Because the Tribe is entitled to 21

25 Case 1:10-cv RJA Document 70-1 Filed 08/22/11 Page 25 of 28 summary judgment on the merits of its case, and because the criteria for an injunction are met, a permanent injunction should be entered. A. Absent Injunctive Relief, The Tribe Would Suffer Irreparable Injury First, as this Court has previously held, Where, as here, enforcement of a statute or regulation threatens to infringe upon a tribe s right of sovereignty, federal courts have found the irreparable harm requirement satisfied. Seneca Nation of Indians v. Paterson, No. 10-cv-687A, Dkt # 87, 2010 WL at *2 (W.D.N.Y. Oct. 14, 2010) (decision on stay pending appeal) (citing Prairie Band of Potawatomi Indians v. Pierce, 253 F.3d 1234, 1250 (10th Cir. 2001); Seneca-Cayuga Tribe of Oklahoma v. State of Oklahoma, 874 F.2d 709, 716 (10th Cir. 1989)). The infringement on tribal sovereignty is clear the State is requiring prepayment of a tax of products that are intended to be sold to tax exempt tribal consumers, placing a burden on the wholesaler, the retailer and the consumer, and in a way that has no relationship to the State's stated goal, to collect taxes from non-indians. This is especially true when the State has an option of creating a stamp that indicates a product is tax exempt. This Court also found previously that the Tax Amendments would have an adverse impact upon the tribes existing tobacco economies and lead to layoffs and business closures. Seneca Nation, No. 10-cv-687A, Dkt # 87, 2010 WL at *2; Unkechauge, Decision and Order, No , Dkt. # 49 at 12, 752 F.Supp. 2d at 328. A significant disruption of a business can constitute irreparable injury. See Nemer Jeep-Eagle v. Jeep-Eagle Sales Corp., 992 F.2d 430, 435 (2d Cir.1993); Automotive Elec. Serv. Corp. v. Association of Automotive Aftermarket Distribs.,747 F.Supp. 1483, (E.D.N.Y.1990). The Tax Amendments will allow Mohawk retailers to purchase from state stamping agents only about 1.2 million packs of cigarettes per year, compared to the 7.2 million packs that 22