Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 1 of 16 UNITED STATE DISTRICT COURT FOR THE NORTHERN DISTRICT OF NEW YORK

Transcription

1 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 1 of 16 UNITED STATE DISTRICT COURT FOR THE NORTHERN DISTRICT OF NEW YORK ST. REGIS MOHAWK TRIBE ) ) Plaintiff, ) ) CIVIL ACTION NO. v. ) ) DAVID A. PATERSON, GOVERNOR, ) State of New York; ) JAMIE WOODWARD, ) Acting Commissioner, New York ) Department of Taxation and Finance; ) and ) WILLIAM COMISKEY, Deputy ) Commissioner, Office of Tax Enforcement, ) New York Department of Taxation and Finance, ) each in his or her official capacity, ) ) Defendants. ) ) COMPLAINT This is an action for declaratory and injunctive relief wherein the St. Regis Mohawk Tribe alleges as follows: A. NATURE OF THE ACTION 1. This action challenges the State s newly adopted statutory and regulatory cigarette tax scheme, which is intended to serve as the method by which the State will collect sales and use taxes on cigarettes purchased by non-indians on reservations throughout New York. This scheme is fatally flawed since it violates the Tribe s right to self-government in violation of federal law, and denies to tribal members the right to purchase cigarettes without paying the state tax. It does so by imposing what it claims are two options by which tax-exempt

2 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 2 of 16 products may be sold to reservation retailers the Indian tax coupon system or the prior approval system. Although the state scheme ostensibly gives the Tribe a choice to opt in to the Indian tax coupon system, in fact the Tribe had no viable choice because, among other reasons, the coupon system places undue burdens on the Tribe by requiring it to take the lead in enforcing state law (in violation of tribal, federal and state law). The prior approval system which applies in the event that a tribe, like Plaintiff, did not choose to opt in to the Indian tax coupon system by August 15 is flawed since it has no safeguarding mechanism to control manipulation of the system, thus allowing a chaotic system of tax-exempt cigarette distribution. As such, both systems violate the test articulated by the Supreme Court, which permits only minimal burdens to be placed in the Tribe in order for the State to implement its tax scheme and impose taxes on non-indians. B. JURISDICTION and VENUE 2. This action arises under the Constitution and laws of the United States. This Court has jurisdiction pursuant to 28 U.S.C and 1362, and relief may be awarded pursuant to 28 U.S.C and Venue is proper in this district pursuant to 28 U.S.C. 1391(b) because one or more of the Defendants reside in this district and because the events giving rise to the claims herein arose within the Northern District of New York. C. PARTIES 3. The St. Regis Mohawk Tribe is a federally recognized Indian tribe that exercises sovereign authority over its territory in the State of New York, a federal reservation set aside by the 1796 Treaty with the Seven Nations of Canada, 7 Stat. 55. In this case, the Tribe has enacted tribal laws with regard to the sale of cigarettes within its territory and would have the sovereign authority over the enactment of or implementation of any new regulatory scheme. 2

3 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 3 of 16 The Tribe is also a cigarette retailer, having shops located within the Akwesasne Mohawk Casino on the reservation. 4. David A. Paterson is the Governor of New York and is charged with the duty of implementing the laws of the State of New York. He is sued in his official capacity. 5. Defendant Jamie Woodward is the Acting Commissioner of the New York State Department of Taxation and Finance (the Department ), is charged with the implementation and enforcement of tax laws and regulations, including the drafting or regulations to carry out the tax laws. She is sued in her official capacity. 6. Defendant William Comiskey is the Deputy Commissioner for the Office of Tax Enforcement of the New York State Department of Taxation and Finance, is charged with the implementation and enforcement of tax laws and regulations. He is sued in his official capacity. D. STATEMENT OF FACTS 1. History of Forbearance of State Tax Enforcement on Indian Reservations 7. For many years, New York did not seek to impose its excise tax on cigarettes sold on Indian reservations. After the Department promulgated regulations in 1988 to apply the tax to sales to non-indians, a facial challenge to the regulations was brought by a non-indian cigarette retailer. Department of Taxation and Finance v. Milhelm Attea & Bros., 512 U.S. 61 (1994). Although the United State Supreme Court upheld the regulations as to that particular facial challenge, in doing so it noted that implementation of the law could provide the basis for future challenge. Problems identified by the Court included the possibility that New York s calculation of probable demand would not be adequate, 512 U.S. at 75, that in the preapproval procedure, wrongful withholding or delay of approval could potentially 3

4 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 4 of 16 make the system burdensome, 512 U.S. at 76, and that problems involving the allocation of cigarettes among reservation retailers could create significant problems. 512 U.S. at After Attea was decided, the State did not implement the regulations addressed by the Supreme Court in Attea, eventually withdrawing them. Instead, the Governor instituted what became known as the policy of forbearance, in which the Governor concluded that the societal costs of implementing and enforcing the tax coupon system outweighed the need to collect the taxes. The State dropped the implementation of the system when it became clear to the Department that implementation was difficult and burdensome, and state courts upheld the forbearance policy. See New York Association of Convenience Stores v. Urbach, 181 Misc. 2d 589, 593, 694 N.Y.S.2d 885, 889 (N.Y. Sup. Ct. Albany Co. 1999), aff d, 275 A.D.2d 520, 712 N.Y.S.2d 220 (3d Dep t 2000), appeal dismissed, 95 N.Y.2d 931, 744 N.E.2d 142, 721 N.Y.S.2d 606 (2000). State courts later upheld the right of reservation retailers to sell non-new York stamped cigarettes, in the absence of an enforceable regulatory and statutory scheme addressing the calculation and collection of taxes arising from on-reservation sales of cigarettes. See Day Wholesale v. New York, 856 N.Y.S.2d 808 (4 th Dept. 2008); Cayuga Indian nation of New York v. Gould, 14 N.Y.3d 614, 629, (N.Y. Ct. App. 2010). 2. Amendments to N.Y. Tax Law 9. On June 21, 2010, the New York Legislature enacted amendments to N.Y. Tax Law 471 and 471-e, regarding the distribution and sale of cigarettes to Indian reservations in New York. The amendments are intended to address the collection of state taxes from non-indians who purchase cigarettes from qualified reservation retailers. They do so by requiring that a state tax stamp be placed on all cigarettes bound for the reservation, even if 4

5 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 5 of 16 those cigarettes will be sold to tribal members who are exempt from paying the tax. Those tribal members are supposed to be guaranteed access to tax-exempt cigarettes under one of two systems the Indian tax coupon system or the prior approval system. Both systems are based on a probable demand calculation made by the Department. Under either system, the Department determines the quota on the quantity of tax-exempt cigarettes to be provided for each tribe s territory based on its determination of the probable demand of tribal members for such tax-exempt products. The probable demand calculation sets a specific number of packs that may be transferred to the territories of a tribe without the collection of the tax from that tribe or retailer by the wholesaler. 10. On June 22, 2010, the Department adopted Emergency Regulations intended to carry out the new tax scheme. 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. TSB-M- 10(6)M, Cigarette Tax, TSB-M-10(8)S, Sales Tax ( Guidance ). 11. Under the state law and Emergency Regulations, the Tribe may obtain taxexempt cigarettes in one of two ways. First the Tribe may opt into the Indian tax exemption coupon system, set forth in 471-e. Under this system, the Tribe would receive from the Department coupons equal to the number of tax-exempt cigarettes permitted to be transferred to the reservation under the probable demand quota system. The quota is to be distributed on a quarterly basis. 12. Once the Tribe obtains the coupons, it would be up to the tribal government to determine how to allocate the coupons among its various retailers. The Guidance, at page 4, states: The Tax Department will not distribute Indian tax exemption coupons directly to reservation cigarette sellers. 5

6 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 6 of The Tribe currently has in force tribal laws that regulate the distribution and sale cigarettes on the reservation. Tribal law requires that wholesalers and retailers of cigarettes be licensed, and that tribal stamps be affixed to cigarettes. Tribal law prohibits the sale of cigarettes by unlicensed retailers, or the sale of products to which the tribal stamp is not affixed. Although tribal law regulates retailers and wholesalers on the reservation, those regulations do not contemplate the implementation and administration of the State s coupon system, or in any way allocate the distribution of cigarettes. To implement the coupon system the Tribe would have no choice but to set up a comprehensive regulatory scheme to address the distribution of the coupons as follows: a. The Tribe would first have to enact internal laws establishing institutions and procedures for administering and enforcing the State s coupon scheme, including development of regulations and procedures for determining the number of coupons to which a tribal retailer may be entitled from the allocation of coupons made by the State to the Tribe. Thus, the Tribe will have to request some evidence from the tribal retailer of the sales made by that retailer. This would require the collection and audit of sales data. b. If a retailer did not provide the required information, the Tribe would have to enforce the coupon system by withholding the coupons from the retailer for failure to provide the information. If a retailer provided the information, the Tribe would have to examine that evidence and make a determination as to allocation. The retailer may disagree with that assessment and then the Tribe would need to answer complaints from the retailer. Similarly, one retailer could object that another retailer received too many coupons and also file a complaint with the Tribe. Thus, at minimum, the Tribe would have to implement regulations regarding disputes by retailers as to the amount of coupons allotted to it or to another retailer. 6

7 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 7 of 16 c. The Tribe would also need to implement a system for monitoring the coupons including the development of record standards, and audits and investigations. The Tribe would have to enact internal tribal laws regarding appeals, records, and audits, among others. The Tribe would even be required to create an administrative body to implement the system. The Tribe does not currently have any such system or laws in place. d. If the Tribe finds that it does not have enough coupons, the burden would be on the Tribe to obtain evidence from its retailers regarding sales. Assuming that it could obtain this information (which is not at all certain), and the State disagreed with the evidence, the Tribe s only alternative would be to pursue legal remedies with the State on behalf of its tribal members. N.Y. Tax Law 471e requires the Department to consider evidence submitted by the Tribe in calculating probable demand, but leaves the calculation to the Department. N.Y. Tax Law 471e(2)(b)(ii). e. The Tribe would also be responsible for safeguarding the coupons. If the coupons disappeared, were counterfeited, or were otherwise misused, the burden would be upon the Tribe s law enforcement to investigate the matter. This could prove to be a very heavy burden for the Tribe s police force that already deals with border patrols and other tribal law enforcement problems. The Tribe may have to hire more officers to take care of the enforcement burden. 14. Once the coupons are distributed, a reservation retailer may obtain stamped but tax-exempt cigarettes from a state-licensed wholesaler without payment of the tax by providing an Indian tax exemption coupon. Because the tax was prepaid, as required by state law and as evidenced by the tax stamp, the stamping agent or wholesaler must request a refund by submitting the coupons to the Department along with a refund claim form. 7

8 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 8 of If the Tribe does not opt into the coupon system, the statute sets up a default mechanism at Tax Law 471(5), a prior approval system governed by the Emergency Regulations and further explained in the Guidance. Under the prior approval system, the quota of tax-free cigarettes available for sales to Indians within the tribe s territory is also based on the Department s probable demand calculation. However, in order for the Tribe or a reservation retailer to obtain tax-exempt cigarettes, it must contact a state-licensed stamping agent or a wholesaler who must obtain prior approval for the sale from the Department. As in the Indian coupon system, all tobacco products must bear a state tax stamp, notwithstanding that they are to be sold to tribal member purchasers, and the stamping agent or wholesaler must apply to the Department for a refund of the taxes that he prepaid when cigarettes are pre-approved for sale to tribal members. 16. The approval for the sale is based on whether the Tribe s quota has yet to be completely distributed. The prior approval mechanism is an internet-based interface and is in effect self-policing. When a wholesaler logs on, that agent will enter the amount of cigarettes requested. If there is room left in the quota, the wholesaler will be issued a confirmation number approving the sale. The website then automatically deducts that amount from the tribe s quota. 17. This mechanism fails to take into account that there is a potential for multiple and simultaneous transactions. The system assumes that one wholesaler will log in at a time. There is no detailed system for addressing the possibility that there will be many sellers seeking to purchase products from multiple agents under a single quota. It is unclear, for instance, what would happen if two different retailers place two different orders on the same day from two different wholesalers. The system will also cause practical and legal problems 8

9 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 9 of 16 for wholesalers who enter into contracts to purchase product for a retailer, only to find that he cannot purchase product because the quota has been met. 18. In addition, the system fails to take into account that there is a potential for manipulation of the system. With multiple wholesalers and retailers on the reservation, one wholesaler and/or one retailer could request the entire quota, thus freezing out all others who may wish to engage in the trade of tax-exempt tobacco products. This is so because the prior approval system does not allocate or apportion tax-exempt product among the many retailers and wholesalers serving the reservation. One retailer could potentially purchase the entire tax-exempt cigarette allotment, creating a retail monopoly on the reservation. Short of monopolization, the prior approval system because it does not allocate or apportion taxexempt product and instead relies on an internet system will result in unfair apportionment of cigarettes among individual reservation retailers and wholesalers. Nor does the system have any checks on the possibility that the cigarettes may be sold to a retailer who intends to transfer or sell the cigarettes on another reservation with a lower quota. The system is inadequate because it is simply a web-based mechanism for counting down the number of cigarettes sold under the quota until there are no more tax-exempt products left under the quota to be purchased. The result can be chaotic and even deceptive to those who might wish to participate. 3. Tribe s Response to New Tax Laws 19. The Emergency Regulation published on June 22, 2010 provided that the Tribe could elect to participate in the Indian tax exemption coupon system for the twelve-month period beginning September 1, 2010, provided that it made such election by August 15, The Tribe did not make that election, for two reasons. 9

10 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 10 of First, electing to participate in the Indian tax exemption coupon system would force the Tribe to do what the State will not do namely to implement and manage a system to allocate a limited number of tax-exempt cigarettes and to implement state law, which is in derogation of tribal law and the Tribe s right to self-government. 21. Second, given the magnitude of a decision to undertake to implement and enforce state law, the Tribe would not make any such decision without a referendum of its people. Under the Tribe s custom, a decision of such magnitude would usually set before the tribal members in a referendum. The August 15, 2010 deadline set by the Department for the election made it impossible for the Tribe to hold a referendum within the time allowed. 22. The Emergency Regulation presented the Tribe with a Hobson s choice either adopt internal laws implementing the Indian coupon system and an allocation system and enforcement mechanism, or allow the pre-approval system to take effect. Unwilling to be forced into carrying out state law by administering the coupon system, especially without the opportunity to hold a referendum on the issue, and also unwilling to leave its licensed wholesalers and retailers to the whims of the prior approval system, the Tribe declined to participate in the Indian tax coupon system and has filed this suit to challenge the State s flawed system. COUNT I VIOLATION OF THE RIGHT TO SELF GOVERNMENT AND IMPOSITION OF EXCESSIVE BURDENS THROUGH THE COUPON SYSTEM 23. Paragraphs 1 through 22 are incorporated herein. 10

11 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 11 of The U.S. Supreme Court has held that Indian tribes enjoy a protected right to self-government that may not be infringed upon by States. See e.g., Williams v. Lee, 358 U.S. 217, 219 (1959). 25. In circumstances where a state can tax on-reservation sales to non-indians, the state may place only minimal recordkeeping and tax remittance burdens on tribes and tribal retailers provided the burdens are narrowly tailored to prevent evasion of validly imposed state taxes on non-indians. Tribal sovereignty, however, precludes a state from placing the entire burden of collecting State taxes on a tribe. 26. The State s laws (the newly-enacted amendments to N.Y. Tax Law 471 and 471-e, and the Emergency Regulations implementing the law) impose more than minimal burdens on the Tribe. The burdens imposed including law enforcement and administration of a state coupon system are substantial. The coupon scheme violates the self-government doctrine by unlawfully infringing upon the right of reservation Indians to make their own laws and be ruled by them. 27. Similarly, the newly enacted laws will create major impacts on the Tribe and its internal relations with tribal members and licensed tribal wholesalers and retailers and it will require significant actions by the Tribe to enact internal tribal law and governance to carry out the State s tax coupon scheme. Moreover, the entire financial burden for carrying out this plan falls on the Tribe. The Tribe would have to hire and assign several employees to handle this system. As such, the system adopted by the Legislature violates the Tribe s sovereign right to self government, and is in violation of federal law. 11

12 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 12 of In addition, the State laws violated the Tribe s right to govern itself by providing the Tribe with insufficient time to allow tribal members to consider, thought the referendum process, whether to elect the Indian tax coupon system, and is in violation of federal law. COUNT II VIOLATION OF THE RIGHT TO SELF GOVERNMENT IN COERCING TRIBES TO ADOPT THE COUPON SYSTEM 29. Paragraphs 1-28 are incorporated by reference herein. 30. The State law is set up so that a tribe ostensibly has two options accept the coupon system or prior approval will be imposed upon you. However, this is not a real choice because unless a tribe agrees to implement the coupon system, with all of its attendant duties and responsibilities including law enforcement and adoption of tribal law to carry out the system, its quota will be left unprotected and its licensed wholesalers and retailers could easily be injured for lack of access to products. In addition, tribal members who are consumers could be left without products to purchase if the prior approval system is implemented without safeguards and protections. 31. The State law is coercive, in that it is designed to force tribes to carry out State law. The State is, in effect, commandeering the Tribe to carry out and enforce state law and regulations, in clear violation of the Tribe s right to self-government, and is in violation of federal law. COUNT III VIOLATION OF STATE LAW IN COERCING TRIBES TO ADOPT THE COUPON SYSTEM (PENDANT STATE LAW CLAIM) 32. Paragraphs 1-31 are incorporated by reference herein. 12

13 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 13 of Because tribes are tasked with enforcement and given the authority to develop laws necessary to carry out the State law, the coupon system also violates the New York State Constitution, specifically Article 3, 1, which provides that The legislative power of this State shall be vested in the Senate and Assembly. 34. The Tribe is a sovereign entity that exercises jurisdiction over its reservation. The Legislature cannot delegate the sovereign powers of the state to an administrative or executive authority of a foreign jurisdiction. 35. Nor can the legislature call upon a private entity that is neither responsible to the state government, nor constituted of public officers to exercise the discretion of a sovereign power. 36. In this case, the Tribe has been delegated the responsibility of carrying out an administrative function that would otherwise be the responsibility of the Tax Department. The Tribe is not and cannot be answerable to the State for whether this law is carried out properly and the State s attempt to rely on the Tribe violates the State constitution. COUNT IV VIOLATION OF THE RIGHT TO SELF GOVERNMENT AND IMPOSITION OF EXCESSIVE BURDENS IN THE IMPLEMENTATION OF THE PRIOR APPROVAL SYSTEM 37. Paragraphs 1-36 are incorporated by reference herein. 38. In the pre-approval system, the State has made no effort to take into account the allocation of the quota of tax-exempt cigarette (the so-called probable demand ) among wholesalers or retailers. It has made no effort at all to create any safeguards or mechanisms by which to protect the quota from potential fraud or manipulation. Its system can be summed up as one where the State has said, here is the quota, whoever comes to claim it, 13

14 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 14 of 16 gets it. The State s interest in collecting taxes cannot be stretched so far as to allow it to pay little heed to the right of tribal members to tax-exempt products, to the rights of triballylicensed wholesalers and retailers to obtain and sell cigarettes, or to the Tribe s right to selfgovernment and to be free of the imposition of state law. This not only unreasonable, but the methodology significantly unreasonably burdens the Tribe s rights by failing to detail adequate protections or safeguards of the Tribe s right to tax-exempt products without interference, in violation of federal law. COUNT V TAX IMMUNITY 39. Paragraphs 1-39 are incorporated by reference herein. 40. As a matter of federal law, the Tribe and its members enjoy immunity from state taxation and may purchase cigarettes on the reservation without paying the State tax, and tribally-licensed wholesalers and retailers possess the right to engage in tax-free commerce with the Tribe and its members. As a matter of federal law, with respect to tax-exempt sales to Indians in Indian country, New York State may not require the prepayment of cigarette tax to which it is not legally entitled. 41. N.Y. Tax Law 471 and 471e and the Emergency Regulations include no provisions to ensure access to non-new York taxed cigarettes by all tribally-licensed businesses and tribal members. 42. N.Y. Tax Law 471 and 471e and the Emergency Regulations require the prepayment of tax on cigarettes destined for purchase by tax-exempt Indians in Indian country by requiring the affixation of a New York tax stamp to such cigarettes, and collection and remittance of the tax by the state stamping agent. Based on the probable demand for 14

15 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 15 of 16 the Tribe s reservation calculated by the Department, and the state tax (now at $4.35 per pack of cigarettes), the State can expect to receive over $5 million in taxes pre-collected for cigarettes that will be sold to members of the Tribe. 43. Defendants implementation and enforcement of N.Y. Tax Law 471 and 471e and the Emergency Regulations as applied to the Tribe and its members unlawfully deny and interfere with the right of tribal members to purchase non-new York taxed cigarettes from retailers on the Tribe s reservation and the right of tribally-licensed businesses to engage in tax free commerce with tribal members on the reservation in violation of federal law. PRAYER FOR RELIEF A. A declaration that the Indian tax coupon system authorized by N.Y. Tax Laws 471 and 471e and the Emergency Regulations violates the Tribe s right to self-government in violation of federal law. B. A declaration that N.Y. Tax Laws 471 and 471e and the Emergency Regulations forces the Tribe to administer and enforce state law, in violation of both federal law, which precludes the state from commandeering the Tribe s sovereign authority to carry out its laws, and state law, which prohibits unlawful delegations of authority. C. A declaration that the State s prior approval system authorized by N.Y. Tax Laws 471 and 471e and the Emergency Regulations fails to safeguard and regulate sufficiently the Tribe s quota so that there is a substantial risk that the Tribe s quota may be manipulated or fraudulently obtained. D. A declaration that N.Y. Tax Law 471 and 471e and the Emergency Regulations unlawfully deny and interfere with the right of tribal members to purchase non- New York taxed cigarettes from retailers on the Tribe s reservation and the right of tribally- 15

16 Case 8:10-cv LEK -DRH Document 1 Filed 08/24/10 Page 16 of 16 licensed businesses to engage in tax free commerce with tribal members on the reservation in violation of federal law. E. A declaration that N.Y. Tax Law 471 and 471e and the Emergency Regulations unlawfully require pre-collection of the tax on cigarettes to be sold to tribal members in taxexempt on-reservation transactions, in violation of federal law. F. A preliminary and permanent injunction prohibiting the Defendants from enforcing either the Indian tax coupon system or the prior approval system until such time as the State revises its system to address the concerns of tribal self-government. G. A grant of such other relief as the court may deem just and proper. s/marsha K. Schmidt Marsha K. Schmidt (NDNY Bar No ) Hobbs Straus, Dean & Walker, LLP 2120 L Street, NW, Suite 700 Washington, D.C (202) (mschmidt@hobbsstraus.com) Counsel of record for the St. Regis Mohawk Tribe s/michael L. Roy Michael L. Roy (NDNY Bar No ) Hobbs, Straus Dean & Walker, LLP 2120 L Street, N.W. Suite 700 Washington, D.C (202) (mroy@hobbsstraus.com) Counsel for the St. Regis Mohawk Tribe August 24,