Tobacco Tax Causes Chaos in NY State

Tobacco Tax Causes Chaos in NY State
December 1, 2003

Diane Bast

Diane Carol Bast is The Heartland Institute's executive editor and finance manager. As executive... (read full bio)



Every year, New York smokers avoid the state’s punitive cigarette taxes by buying millions of dollars in tax-free cigarettes from Native American stores. Lawmakers now aim to tax those sales as well, attracting the ire of smokers and the blessing of some groups ordinarily opposed to tobacco tax increases.

The New York Department of Taxation and Finance was scheduled to begin collecting sales taxes on tobacco sold by Indian vendors on December 1. That action has been postponed until at least March, as Governor George Pataki’s tax department says it needs more time to study the issue. “In light of the complexity and importance of this issue, the Department will use this additional time to continue to receive public comments and to evaluate and study this matter,” stated a department news release issued November 3.

The department’s decision evoked frustration among New York state retailers hoping for a “level playing field.” As Jim Calvin, president of the New York Association of Convenience Stores, explained in a November 10 statement, “The last mile of the long, hard journey toward a level playing field is being obstructed by clouds of propaganda and unwarranted delay. But we are determined not to let misinformation poison public opinion or shake the resolve of the courageous legislators who share our thirst for tax fairness.”

New York smokers, however, appear to support the Indian tribes on this one. New York City C.L.A.S.H. (Citizens Lobbying Against Smoker Harassment) urged its Web site viewers to oppose the measure.

“[The Indians] have embarked on an ad campaign informing state residents that the NYS government is breaking a centuries’ old treaty,” its Action Alert #2 reads. “They’re asking you to get involved and you should--for ALL of our sakes. Besides it just not being right, ... you’ll find yourself paying the taxes on your cigarettes no matter where you get them from in New York.”



Addressing a Budget Deficit

In December 1999, the New York state legislature nearly doubled the excise tax on a carton of cigarettes from $5.60 to $11.10--the second highest state cigarette tax in the country. According to Calvin’s group, taxable cigarette sales across New York dropped by 51.8 million cartons in the 24 months following the March 2000 implementation of that tax increase.

The FACT Alliance for the Fair Application of Cigarette Taxes, of which Calvin’s group is a founding member, has estimated New York state government lost $1.5 billion in 2001 and 2002 by failing to collect taxes on Indian cigarette sales to non-Indian customers. Establishing parity between Indian and non-Indian tobacco sales is thus part of New York’s 2003 state budget plan. The state faces an $11.5 billion budget deficit, which it hopes to help address with additional tobacco tax monies.

Wholesalers would be required to pay the excise tax--including a 39 cent per pack federal excise tax--on every carton of cigarettes they sell to retailers on Native American territories.

The FACT Alliance represents groups that ordinarily would oppose tobacco tax increases, among them Calvin’s Association of Convenience Stores, the Food Industry Alliance of New York State, Gasoline and Repair Shop Association of New York, New York State Association of Wholesale Marketers & Distributors, and Independent Petroleum Marketers of New York.

Having lost their battle to fend off the 1999 cigarette tax hike, the groups now hope to win a level playing field. “We’re tired of shouldering the negative effects every day,” said Calvin. “Tired of rampant, state-sanctioned tax evasion eroding our customer base, diminishing our bottom line, sapping our ability to provide employment, to serve our patrons, to invest capital, to support our communities.”



Native Americans Respond

Tribal leaders say paying the tax would weaken their claims of sovereignty and cause a loss of jobs on their reservations. “None of the state’s Indian nations are willing to pay (cigarette) taxes to New York, not even if the tax is paid indirectly through a wholesaler,” Onondaga Nation Chief Irving Powless said.

Leaders of the Seneca Indian Nation in upstate New York are contemplating the launch of a wholesale tobacco business, the Buffalo News reported on October 25, in order to avoid paying state taxes on tobacco products. The Seneca Nation is one of the six tribes of the Iroquois Confederacy who occupy aboriginal lands in New York State set aside in 1794. The Seneca Nation has a total population of more than 7,200 and holds title to three reservations in New York.

By creating its own tobacco-wholesaling business, the Seneca Nation believes it would not be required to collect the new tax, allowing it to keep cigarettes prices low and sales high at reservation stores. According to Seneca leaders, the state would be “unable to enforce the new regulation on cigarettes coming from their (own) wholesale company to Seneca retailers.”

According to news reports, one option being explored by Seneca leaders is the purchase of the tobacco wholesale company A.D. Bedell. Bedell is a licensed cigarette stamping agent, responsible for placing excise tax stamps on all cigarettes except those destined for Indian reservations, where they are currently tax-exempt. The company is currently in litigation in New York and Michigan over illegal business practices.

State officials are meeting with tribal leaders, who remain gravely concerned about the job losses that would result from taxing their currently tax-free tobacco sales. “We are confident that once New Yorkers know the facts they will support our position and will take action with their leaders,” Seneca Nation President Rickey Armstrong Sr. said in late October.

At risk, the nation said, are 1,000 Seneca and non-Seneca jobs, as well as the nation’s right to operate free of interference from state government. The Seneca Nation is the primary employer of Indians on the reservations. The Nation operates the Seneca Niagara Casino in Niagara Falls, New York, as well as “Seneca One Stop” convenience stores on each of the three reservations, Seneca Bingo Halls, and the Highbanks Campgrounds. Tax-free cigarette sales are a significant attraction for many patrons of the Seneca Nation’s business enterprises.

The FACT Alliance contends the job-loss argument is a red herring, noting in a fact sheet that “Any increase in employment experienced by tribal stores in recent years was actually a job shift from licensed, tax-collecting non-tribal retail stores to tax-free tribal stores fueled by a huge shift in purchasing habits by non-New York smokers seeking to avoid paying taxes.

“The retail jobs are going to exist somewhere,” continues the fact sheet. “The question for New Yorkers is, do you want those jobs to be on the licensed, regulated, tax-generating side of the street?”


Diane Carol Bast is vice president of The Heartland Institute. Her email address is dbast@heartland.org.


For more information ...

from a smoker’s perspective, visit the Web site of New York City C.L.A.S.H. at http://www.nycclash.com/; The Smoker’s Club at http://www.smokersclub.com/; and The Heartland Institute’s Smoker’s Lounge at http://www.heartland.org/IssueSuites.cfm?issId=4.

from the retailer’s perspective, visit the Web site of the New York Association of Convenience Stores at http://www.nyacs.org/; and the FACT Alliance at http://www.factalliance.org/taxstudy.html.

from the perspective of Native Americans, visit the Web site of the Seneca Nation of Indians at http://www.sni.org/news.html.

Diane Bast

Diane Carol Bast is The Heartland Institute's executive editor and finance manager. As executive... (read full bio)