New York Governor Signs Law to Tax Cigarettes Sold on Tribal Lands
December 16, 2008
New York has been aggressive in reaching beyond its borders to tax transactions occurring out-of-state. Back in May, forced to choose between keeping 3,400 New York-based advertisers and being forced to collect New York sales and use taxes on out-of-state sales, Overstock.com (a business with no property or employees in New York) fired the advertisers. Amazon.com is currently in litigation over the same law. New York is also currently barred by court order from forcing wholesalers to collect cigarette taxes if they sell cigarettes to Indian tribal retailers, since the law would pass taxes forward to Indians with no mechanism for refund. See Day Wholesale, Inc. v. State, 856 N.Y.2d 808 (2008).
Yesterday Governor Paterson signed into law a new effort to collect cigarette taxes sold on reservations to non-Indians, by requiring wholesalers to sign a perjury statement promising not to sell cigarettes to any retailer who sells them to New York residents untaxed (new § 471 of the Tax Law). Such efforts are inherently tricky because states cannot tax Indians for sales on Indian land, and forcing retailers to charge a tax for one group of people but not others is burdensome and non-neutral. Non-Indians already have an obligation to pay a use tax on purchases they make out-of-state, but few pay it. While it certainly is easier for the state to force a few out-of-state companies to collect New York taxes rather than millions of New Yorkers, doing so probably exceeds the state’s constitutional power. This is especially true since New York is essentially shutting down commerce in cigarettes with Indian tribes unless its taxes are paid by in-state wholesalers, a likely violation of the Indian Commerce Clause of the U.S. Constitution.
In Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 459-60 (1995), the U.S. Supreme Court authorized state taxes ultimately borne by Indians, so long as Indians making purchases on tribal land are exempt, heavy burdens are not imposed on tribal retailers, and tax law predictability is not undermined. Therein lays the downfall of the cigarette tax bill, since punishing wholesalers for failing to require retailers to do something they have no legal obligation to do is burdensome and also leaves a bad taste. Ultimately, these laws are an attempt to evade the reality that Indian tribes are sovereign and sales occurring there are beyond the state’s taxing power. If New York’s taxes are so high that people are induced to shop on the reservation, forcing the other guy to raise his taxes isn’t the best solution for long-term economic growth.