Opinion ID: 614134
Heading Depth: 2
Heading Rank: 1

Heading: Legal Incidence of the State Cigarette Tax

Text: The Constitution vests the Federal Government with exclusive authority over relations with Indian tribes . . ., and in recognition of the sovereignty retained by [the] tribes . . ., Indian tribes and [registered] individuals generally are exempt from state taxation within their own territory.' Oklahoma Tax Comm'n v. Chickasaw Nation, 515 U.S. 450, 455, 115 S.Ct. 2214, 132 L.Ed.2d 400 (1995) (quoting Montana v. Blackfeet Tribe, 471 U.S. 759, 764, 105 S.Ct. 2399, 85 L.Ed.2d 753 (1985)). The initial and frequently dispositive question in Indian tax cases, therefore, is who bears the legal incidence of a tax. If the legal incidence of an excise tax rests on a tribe or on tribal members for sales made inside Indian country, the tax cannot be enforced absent clear congressional authorization. Chickasaw Nation, 515 U.S. at 456-57, 115 S.Ct. 2214. However, where the legal incidence of tax does not rest on a tribe or its members, a state may impose the tax so long as the balance of federal, state, and tribal interests favors the [s]tate, and federal law is not to the contrary, and a state may place on a tribe or tribal members `minimal burdens' in collecting the toll. Id. at 459, 115 S.Ct. 2214 (citation omitted). The legal incidence of an excise tax refers to determining which entity or person bears the ultimate legal obligation to pay the tax to the taxing authority. See Colville, 447 U.S. at 150-51, 100 S.Ct. 2069 (We upheld the tax, insofar as sales to non-Indians were concerned, because its legal incidence fell on the non-Indian purchaser as the competitive advantage which the Indian seller . . . enjoy[ed] . . . [was] dependent on the extent to which the non-Indian purchaser is willing to flout his legal obligation to pay the tax.) (emphasis added) (citing Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 482, 96 S.Ct. 1634, 48 L.Ed.2d 96 (1976)). Identifying legal incidence requires a court to analyze the taxing statute and its implementation to determine which entities or individuals will likely face detrimental legal consequences if the tax is not paid. See Moe, 425 U.S. at 482, 96 S.Ct. 1634; Coeur D'Alene Tribe of Idaho v. Hammond, 384 F.3d 674, 681 (9th Cir.2004) ([T]o discern where the legal incidence lies, we `ascertain [ ] the legal obligations imposed upon the concerned parties[.]' (quoting Crow Tribe of Indians v. Montana, 650 F.2d 1104, 1111 (9th Cir. 1981))). [A] party does not bear the legal incidence of the tax if it is merely a transmittal agent for the state tax collector[,] because that party's legal liability in event of non-payment would depend either on another responsible party's failure to pay to the transmittal agent or on the transmittal agent's withholding collected taxes. Hammond, 384 F.3d at 681 (citing Chickasaw Nation, 515 U.S. at 461-62, 115 S.Ct. 2214). The person or entity bearing the legal incidence of an excise tax is not necessarily the one bearing an economic burden from the tax. Hammond, 384 F.3d at 681 (citing Chickasaw Nation, 515 U.S. at 460, 115 S.Ct. 2214). While a party bearing an economic burden, perhaps as the result of reduced sales, may also bear the legal incidence of the tax, the Supreme Court has clarified that an economic analysis of the realities of taxation should not be a substitute for legal-incidence analysis. Chickasaw Nation, 515 U.S. at 459-60, 115 S.Ct. 2214 (If we were to make `economic reality' our guide, we might be obliged to consider, for example, how completely retailers can pass along tax increases without sacrificing sales volumea complicated matter dependent on the characteristics of the market for the relevant product.). Legal incidence accommodates the reality that tax administration requires predictability, id., and while a state cannot fully control how the market will adjust to a tax, a state can control tax enforcement and the determination of who is ultimately obligated to pay the tax. Id. at 460, 115 S.Ct. 2214 ([I]f a State is unable to enforce a tax because the legal incidence of the impost is on Indians or Indian tribes, the State generally is free to amend its law to shift the tax's legal incidence.). Because few statutes are identical, legal-incidence determinations necessarily will depend on myriad, often situationspecific factors. In Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation , the Supreme Court upheld a Montana cigarette tax because the legal incidence of the tax was on the non-Indian purchaser, as the Court explained: Since nonpayment of the tax is a misdemeanor as to the retail purchaser, the competitive advantage which the Indian seller doing business on tribal land enjoys over all other cigarette retailers, within and without the reservation, is dependent on the extent to which the non-Indian purchaser is willing to flout his legal obligation to pay the tax. Without the simple expedient of having the retailer collect the sales tax from non-Indian purchasers, it is clear that wholesale violations of the law by the latter class will go virtually unchecked. Id. at 482, 96 S.Ct. 1634 (footnotes omitted). The Moe Court also rejected the argument that collecting the tax from non-Indian customers rendered the retailer an involuntary agent for collection because the obligation to collect was only 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 483, 96 S.Ct. 1634. In Chickasaw Nation, the Court, in holding that the legal incidence of an Oklahoma motor-fuel tax fell on Indian retailers, gave special attention to two factors: whether the legislature specifically identified who bore the tax's legal incidence and whether the tax statute contained an explicit pass through provision requiring distributors and retailers to pass the tax onto consumers. 515 U.S. at 461, 115 S.Ct. 2214. The Court stated that if the Oklahoma legislation expressly identif[ied] who bears the tax's legal incidence, the language would be dispositive. Id. (In the absence of such dispositive language, the question is one of `fair interpretation of the taxing statute as written and applied.' (quoting Chemehuevi Tribe, 474 U.S. 9, 11, 106 S.Ct. 289, 88 L.Ed.2d 9 (1985))). The Court returned to this concept of dispositive legislative identification in Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 126 S.Ct. 676, 163 L.Ed.2d 429 (2005), by again referencing Chickasaw Nation 's suggest[ion] that [] `dispositive language' from the state legislature is determinative of who bears the legal incidence of a state excise tax. See Wagnon, 546 U.S. at 102, 126 S.Ct. 676. In Hammond, we held that an Idaho motor-fuel tax fell on Indian retailers in light of its striking similarity with the tax voided in Chickasaw Nation, 515 U.S. at 450, 115 S.Ct. 2214. Four key factors guided us: (1) the non-tribal distributors who received the motor fuel and sold it to the Indian tribes were required to pass on and to collect the tax from the retailer, and then to remit the taxes to the State; (2) the statute provided a tax credit to the distributor, but not a retailer, for collecting and remitting the tax on behalf of the State; (3) the State gave tax credits to the distributor for fuel taxes that the distributor has paid but cannot then collect from the retailer; and (4) retailers could not set off their tax liability when consumers failed to pay, nor were they compensated for their tax collection efforts. 384 F.3d at 685-88. In short, in addition to express statements of legislative intent, legal incidence analysis depends on whether a taxing statute contains an explicit pass through which moves incidence down the distribution chain, Hammond, 384 F.3d at 685-86, which individuals or entities are compensated for collecting and remitting the tax on behalf of the State, id. at 686, what invoices show regarding payment of the tax, id., whether a retailer may recoup the tax paid for unsold product, id. at 684, if the retailer is refunded the tax when a consumer fails to pay, id. at 687-88, and ultimately who is penalized by state authorities when the tax is not paid, Wagnon, 546 U.S. at 103, 126 S.Ct. 676; Moe, 425 U.S. at 482, 96 S.Ct. 1634.
We begin our analysis of the Act with the recognition that the primary issue before us was litigated and decided some three decades ago in Colville, 446 F.Supp. at 1339, aff'd in part and rev'd in part, 447 U.S. 134, 100 S.Ct. 2069, 65 L.Ed.2d 10 (1980). There, a three-judge district court held that the legal incidence of the Washington cigarette tax, as then written, fell on non-Indian cigarette purchasers as opposed to Indian retailers. 446 F.Supp. at 1355. Although the district court found the absence of a pass through to be of particular importance, id. at 1353, a broader consideration of the other statutory provisions and Department publications led to the conclusion that the statute evidences the legislature's intent to impose the legal incidence of the tax at the earliest constitutional opportunity. Id. at 1355. Thus, where on-reservation tribal sales to non-Indians [were] involved, the first taxable event [was] . . . the use or consumption by the non-Indian purchaser. Id. Colville reached the Supreme Court on direct appeal, and the Court accept[ed] the district court's conclusion that the legal incidence of the cigarette tax fell on the non-Indians purchasers. 447 U.S. at 142 n. 9, 100 S.Ct. 2069. The Court held, inter alia, that the collection burden imposed on Indian retailers was legally indistinguishable from the collection burden upheld in Moe  and was therefore valid in toto.  Id. at 159-60, 100 S.Ct. 2069. [4] The Tribes claim that amendments to the Act since Colville have changed the legal incidence calculus, and the State does not argue that Colville precludes such a reexamination. [5] Specifically, the Tribes contend that the absence of an express pass through, the inability of retailers to defer payment of the cigarette tax, the absence of compensation for collecting the cigarette tax, the liability Indian retailers face for unsold products, and the record keeping requirements of the amended Act shift the legal incidence of the cigarette tax onto the Indian retailers. We disagree. We first consider the fact that the Act does not contain an express pass through requirement. Such a pass through requirement was also missing from the earlier version of the Act considered in Colville. See 446 F.Supp. at 1353. The current Act requires wholesalers to pass on all but a tiny fraction of the cigarette tax to their purchasers, RCW § 82.24.020(2) (allowing for wholesalers to absorb five one-hundredths cents per cigarette), but contains no corresponding requirement that retailers pass through the cigarette tax to the cigarette consumer. The absence of a pass through to consumers is significant and problematic, given the Supreme Court's observation in United States v. Mississippi Tax Commission, 421 U.S. 599, 95 S.Ct. 1872, 44 L.Ed.2d 404 (1975), that where a State requires that its sales tax be passed on to the purchaser and be collected by the vendor from him, this establishes as a matter of law that the legal incidence of the tax falls upon the purchaser. Id. at 608, 95 S.Ct. 1872 (characterizing test from First Agr. Nat. Bank of Berkshire Cnty. v. State Tax Comm'n, 392 U.S. 339, 88 S.Ct. 2173, 20 L.Ed.2d 1138 (1968)). In response, the State first contends that there is an implied pass through in the Act's pre-collection obligation. See RCW § 82.24.080. But a pre-collection obligation, even were we to accept the State's characterization, is not the functional equivalent of an explicit pass through as it does not resolve to a legal certainty who is obligated to pay the tax. While it would be prudent for any Indian retailer to pass on and then collect the tax from consumers, the Act does not require it; rather that is an economic choice left to the Indian retailers. In general, the Act is anchored by the principle that whoever can pay the tax first will pay. See RCW 82.24.080(1) (It is the intent and purpose of this chapter . . . to collect the tax from the person who first sells, uses, consumes, handles, possesses . . . or distributes them in the state.). Despite the absence of a pass through, we recognize that the Act sustained in Colville also did not include a pass through and that its absence was not outcome determinative. Moreover, the pre-collection obligation, even if not equivalent to a pass through, serves a purpose in setting forth the responsibilities of the Indian retailers as transmittal agents. That obligation to transmit the tax and the record keeping requirements it requires are the same as the obligations the Supreme Court endorsed in Colville as legally indistinguishable from the collection burden upheld in Moe.  447 U.S. at 159, 100 S.Ct. 2069. Thus, we will not treat the absence of a pass through as dispositive. Indeed, numerous provisions in the Act are written with the purpose of excluding Indian tribes and their members from compliance with the Act. After all, the cigarette tax applies only to the first taxable event and upon the first taxable person under RCW § 82.24.080. There is no dispute between the parties that as between an Indian retailer and a non-Indian purchaser, the latter is the first taxable person. Even if there were a dispute, § 82.24.900 provides that [t]he provisions of this chapter shall not apply where the state is prohibited from taxing under the Constitution of this state or the Constitution or the laws of the United States, RCW § 82.24.900, a catch-all provision which includes the Tribes. Moreover, Section 82.24.260 states that [o]ther than . . . [a]n Indian tribal organization with respect to sales to enrolled members of the tribe, a person who is in lawful possession of unstamped cigarettes and who intends to sell or otherwise dispose of the cigarettes shall pay, or satisfy its pre-collection obligation that is imposed by this chapter, the tax required by this chapter by remitting the tax . . . . RCW § 82.24.260(1). A fair construction of these provisions leads to the conclusion that an Indian retailer will be excluded from paying a tax for sales to members. The language also indicates that if an Indian retailer ever found itself facing a State collection effort for the retailer's non-payment of the tax, the retailer would be shielded from civil or criminal liability, except in the instance where the Indian retailer has failed to transmit the tax paid by the consumer and collected by the retailer. Section 82.24.020 references the Colville decisions upholding the tax and explicitly attempts to incorporate the Supreme Court's holding into the Act by providing the precollection obligation is a minimal burden on the Indian tribal organization. Colville sustained the ability of a state to require Indian tribes to tax sales to nonmembers, observing that this would not contravene the principle of tribal selfgovernment, for the simple reason that nonmembers are not constituents of the governing Tribe. 447 U.S. at 160, 100 S.Ct. 2069. By attempting to comply with Colville, the legislature reveals its intent to incorporate that holding which permits states to require Indian retailers to collect and transmit the tax from non-Indian, non-exempt purchasers. Finally, the Department's regulations speak of collecting and remitting the cigarette tax, WAC § 458-20-192(5)(c), which implies that someone other than the Indian retailer is ultimately responsible for payment of the cigarette tax. These points of statutory construction are buttressed by the Act's legislative history; since Colville, there have been no amendments to the Act which alter the legal obligations for paying the tax. Rather, the key amendments have been administrative in natureto preclude retailers from affixing stamps and to prevent retailers from absorbing a small amount of a stamp's cost. See 1995 Wash. Sess. Laws, ch. 278, §§ 2-4; 2003 Wash. Sess. Laws, ch. 114, § 1(4). These amendments affect, at most, the economic burden of the cigarette tax, primarily by shifting to wholesalers the entire cost of affixing stamps. Moreover, by precluding retailers from absorbing any portion of the cigarette tax, it is implied that they will need to pass on the entirety of the tax to consumers. We also note that the Act does not compensate any party (wholesaler or otherwise) for serving as a collection agent for the State. Contra Hammond, 384 F.3d at 686. Although the Tribes argue that the State's failure to compensate them for fulfilling the pre-collection obligation indicates the legal incidence falls on the Indian retailers, non-Indian wholesalers and retailers are also not compensated for collecting the tax. Rather, the only compensation wholesalers receive is for their services in affixing the stamps required under this chapter. RCW § 82.24.295(2) (emphasis added). As discussed supra, in Chickasaw Nation and Hammond, courts invalidated tax schemes where non-Indian distributors were compensated for their role as agents in collecting a tax while Indian retailers were not compensated. See Chickasaw Nation, 515 U.S. at 462, 115 S.Ct. 2214 ([F]or their services as agent of the state for [tax] collection, distributors retain a small portion of the taxes they collect.); Hammond, 384 F.3d at 686-87. Those factors are not present here as there is no discriminatory compensation scheme vis-a-vis wholesalers and retailers. Washington's cigarette tax ultimately makes consumers who possess unstamped cigarettes liable for a misdemeanor or felony, regardless of whether they purchased those cigarettes from Indians or non-Indians, whereas the statutes in Chickasaw and Hammond contained no downstream liability. See RCW §§ 82.24.260(3), 82.24.020(4). The Tribes also have not posited a foreseeable scenario when an Indian retailer would have an obligation greater than transmittal agent. Instead, the only counter-scenarios offered by the Tribes involve situations where no sale is ever made to a customer, such as when cigarettes become damaged, or when a customer steals the cigarettes and does not tender the tax payment. The Act provides an express remedy in the first situationRCW § 82.24.210 provides that the Department shall promulgate rules and regulations providing for the refund to dealers for the cost of stamps affixed to articles taxed herein, where such products are damaged. That section also allows the Department to refund unused stamps. RCW § 82.24.210. In its briefing, the State has represented that [r]efunds are available to anyone who is legally entitled to one and that the refund form from the Department may be used by any person, Appellees' Answering Brief at 48-50. Indeed, the Department's regulations provide that  any person may request a refund of the face value of the stamps when the tax is not applicable and the stamps are returned to the department. WAC § 458-20-186(203) (emphasis added). A reasonable interpretation of any person would include retailers, Indian or not, and there is no record evidence that the State has implemented this regulation in a discriminatory manner. Nor have the Tribes proffered any evidence that Indian retailers who have applied for tax-stamp refunds in accordance with the regulations have had their refund claims denied by the Department. In response to the hypothetical situation of non-payment of the tax by a customer who steals stamped cigarettes, the State concedes that the Department will not issue refunds to retailers for the cost of cigarette stamps, but a third-party breach of contract does not alter our interpretation of the Act. As with the damaged goods hypothetical, non-payment by a third-party would leave Indian retailers with other legal remedies to collect the cigarette tax. Finally, the ability of wholesalers to defer their payment for thirty days by posting a bond does not impact our legal incidence analysis. See WAC § 458-20-186(301)(b). Deferring the payment of money due is a matter of timing and accounting, which does not change who is ultimately responsible for the payment of the tax. After all, the particular point in time when the retailers remit that tax from the consumer does not change the underlying fact that the retailer was not legally obligated to pay the tax. Timing is a matter of accounting; even though the Tribes want the tax to be treated as an account payable, instead of an immediate cash payment, the legal obligations remain the same. To summarize, despite the absence of a statutory pass through, we conclude that the overall intent of the Washington cigarette tax, with respect to on-reservation sales by Indian retailers, is for consumers to be legally obligated to pay the cigarette tax. The precollection obligation is a minimal burden on the Tribes and their retailers and does not change the legal incidence calculation. We therefore hold that the provisions of the current Act are not materially different from those upheld in Colville, and that they do not contravene established principles of Indian tax immunity.