FOCUS: INDIAN CIGARETTE SALES
Indian merchants reap huge profits on untaxed tobacco sales
Scott Maybee is not a top-ranked pro quarterback, an ace hurler nor a Wall Street tycoon, but he made as much as $34 million in 2006. He was selling tax-free cigarettes on the Seneca Indian reservations and over the Internet.
Barry E. Snyder Sr., the president of the Seneca Nation of Indians and chairman of the Seneca Gaming Corp., made $5.4 million from 2005 through 2007 selling tax-exempt smokes at his Seneca Hawk gasoline station on the Cattaraugus Reservation.
And Tara Sundown, a tobacco merchant who sells cigarettes without state taxes on the Tonawanda Band of Senecas Reservation in Basom, made $16.8 million during that same three-year period.
Those figures come from monthly sales reports that tobacco wholesalers file with New York’s Department of Taxation and Finance, released for the first time in a federal lawsuit in New York City.
The Buffalo News took those figures, used as a profit margin the $7 price difference between what the Senecas pay for most cigarettes and what they charge, and came up with what the cigarettes sellers may have grossed. Salaries, utility costs and other overhead expenses come out of those revenues.
Actual profit figures are known only by the individual merchants, and they do not disclose those. A congressional report last year put the figure at $3 a carton, but several non-native cigarette distributors told The News that profit margin was too low.
Taxes add up
They put the profit margin at $7 a carton on major brands, or the difference between the price the Senecas pay per carton and what they charge on Web sites. The profit margins on native brand cigarettes are lower than that, but not known.
Maybee, a Canisius College graduate, sells more native brand cigarettes than most Seneca merchants. Maybee, through his attorney, refused to confirm his purchases, as reported to the New York State Department of Taxation and Finance.
The millions of dollars in profits show the high stakes involved in the state’s attempts at levying taxes on Indian cigarette sales to non-natives.
Until two weeks ago, when Gov. David A. Paterson signed a bill requiring tobacco wholesalers to certify that they have complied with state tax law, the state has declined to collect the tax.
State Supreme Court Justice Rose H. Sconiers has put a temporary hold on the state’s enforcing that law until she can hear further arguments.
The new amendment to the tax law, which some lawmakers say could bring as much as $400 million in uncollected cigarette taxes, is already under attack by tobacco wholesalers and the various tribes in New York.
The New York City lawsuit takes a different approach and may present an even tougher obstacle for the Seneca tobacco merchants.
The suit, filed by city lawyers representing Mayor Michael Bloomberg, charges that the state’s tobacco wholesalers are violating federal law by selling unstamped cigarettes to Indian retailers.
Bloomberg, fed up with the state’s refusal to collect taxes on cigarettes that Indians sell tax-free to non-natives in stores and over the Internet, filed the suit in July 2006. Bloomberg’s lawyers cited two U. S. Supreme Court rulings that said that states have a right to tax cigarettes that Indians sell to non-Indians. States have no right to tax sales from Indians to other Indians.
U.S. District Court Judge Carol B. Amon agreed with New York City lawyers in April, refusing to dismiss the case.
She also went a step further, declaring the tax-free cigarettes sold to Indians as contraband under the federal Cigarette Contraband Trafficking Act.
And now those city attorneys have prepared papers asking the judge to issue an injunction to stop the continued sales. Amon denied the request last week.
The city attorneys said that in 2007, three of the wholesalers delivered 9.4 million cartons of untaxed cigarettes to the Seneca reservations. They said that’s equal to 68 packs a day for each resident on the Indian territories.
Loophole costs millions
Tobacco wholesalers, including Milhelm Attea & Bros. of Buffalo, the biggest seller of tax-free cigarettes in the state, and their Indian retailer customers “have parlayed that limited exemption into a multibillion dollar loophole,” argued New York assistant corporation counsel Eric Proshansky.
While the company takes the federal lawsuit seriously, Joseph Zdarsky, a Buffalo attorney representing Milhelm Attea, said he disagrees with New York City’s arguments. He also said it’s very early in the case, and he eventually expects the wholesalers to win.
“Their position is sort of a straw man that they set up,” Zdarsky said, “and then they knock it down.”
“In other words,” Zdarsky added, “under the law, as they see it, the only exempt transactions would be sales from one Indian to another Indian. It’s obvious from the 25-year history of this, that the general public walks into stores down there and buys cigarettes.
“The idea that somehow the only exempt sales are the sales to Indians [by other Indians] is sort of a fiction,” he said. “Everybody knows what’s going on down there, and the state has not enforced the law because of the difficulty in getting tribal cooperation for that law enforcement.”
Margaret A. Murphy, a former Buffalo city judge who represents another of the defendants, Day Wholesale, a Tupper Lake tobacco wholesaler, said the New York City case has to take New York law into account.
She earlier held up the state’s enforcement in 2007 because the tax department did not issue rules and regulations, and she is back before Sconiers with another motion to derail the latest effort.
“Without constitutional, statutory or regulatory authority,” Murphy said, “the City of New York has chosen to ignore all state court precedence and has turned to the federal courts for relief.”
Murphy objected to the New York City lawyers releasing how many cartons of cigarettes the tribes buy, and said it had no more relevance than how many cartons Wilson Farms buys for its customers.
She and the Senecas say treaties bar the state from collecting taxes and that merchants like her client, Maybee, are doing nothing wrong.
The Seneca Nation, which is not a party to the federal lawsuit, declined to comment. A spokesman referred a reporter to the nation’s friend of the court brief.
Christopher G. Kelly, a partner in the New York City firm of Holland & Knight, argued that the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, which enforces laws on contraband cigarettes, has a working relationship with the Seneca Nation and has had several contraband prosecutions as a result.
“Were this court to rule to the contrary,” Kelly argued, “nation-owned and nation-licensed businesses would suffer the threat of criminal prosecution for activities with respect to which the ATF currently has no objection.”
Disproportionate sales
The Senecas, Kelly added, have their own import-export law and affix Seneca Nation tax stamps to the cigarettes sold by its 200 retailers, as well as its several tribal-owned stores.
Kelly said the tribe, along with the ATF, has halted several contraband operations that are similar to the complaints that New York City has against certain cigarette vendors on Long Island’s Poospatuck Reservation.
Sales there, the city lawsuit charges, grew from 406,000 cartons in 1996 to 11 million cartons last year.
Proshansky, the city’s lawyer, said the Poospatucks have 279 people living on the reservation.
“If defendants’ 2007 purchases of 9,780,469 cartons were disposed of in reservation sales,” he argued, “every man, woman and child on the reservation would have had to consume approximately 960 packs of cigarettes a day, a patent absurdity.”
The New York City attorneys included the monthly sales figures in the lawsuit to show deliveries to individual Seneca retailers, as well as the Poospatucks, and other tribes in the state.
The lawyers then ordered cigarettes over the Internet from several of those retailers and showed the court that they had neither New York State tax stamps nor New York City tax stamps.
Besides the state’s $15 excise tax on each carton, there are also local sales taxes that Indian merchants do not charge. In New York City, taxes make up $4.25 of a $9 pack of cigarettes.
Log into MyBuffalo to post a comment
MyBuffalo is the new social network from Buffalo.com. Your MyBuffalo account lets you comment on and rate stories at buffalonews.com. You can also head over to mybuffalo.com to share your blog posts, stories, photos, and videos with the community. Join now or learn more.
Reader comments