Opinion ID: 201580
Heading Depth: 3
Heading Rank: 2

Heading: The Legal Incidence of the Cigarette Tax

Text: The question of whether the legal incidence of Rhode Island's cigarette tax scheme falls on the Narragansett Tribe, as dealers of cigarettes, or merely on the consumer or non-Indian purchaser of the cigarettes, will likely determine whether the Narragansetts are required to comply with the tax scheme. The Narragansetts argue that the legal incidence of Rhode Island's cigarette tax falls directly on the Tribe and its members, and that the tax may not be enforced against the Tribe without express congressional authority. The State, on the other hand, argues that the legal incidence of the cigarette tax, as stated in the language of the Rhode Island statute, rests on the consumer rather than the Tribe. See R.I. Gen. Laws § 44-20-53 (All taxes paid in pursuance of this chapter are conclusively presumed to be a direct tax upon the retail consumer, precollected for the purpose of convenience and facility only.). If the legal incidence of the cigarette tax falls on the Tribe itself, it presents serious tribal sovereignty concerns that might preclude the State from enforcing its tax due to the United States' recognition of the Narragansetts as a sovereign Indian tribe. Oklahoma Tax Comm'n v. Chickasaw Nation, 515 U.S. 450, 45859 (1995) (citing Moe v. Confederated Salish and Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 483 (1976)). Such a tax -11- cannot be enforced absent clear congressional authorization. Chickasaw Nation, 515 U.S. at 459. The district court determined that the legal incidence of Rhode Island's cigarette tax falls on the consumer and not the Narragansett Tribe, noting that the pass through provision in Rhode Island's statute was plain. Narragansett Indian Tribe, 296 F. Supp. 2d at 167. The district court stated that [w]hile the Supreme Court has held that a tax scheme does not need to contain such an express statement to place the legal incidence of the tax on the consumer, the Court has enforced such provisions when they are present. Id. In adjudicating matters of state law, federal courts ordinarily defer to the decisions of state courts. For example, in Gurley v. Rhoden, 421 U.S. 200 (1975), a gasoline retailer claimed that because the legal incidence of the state's gasoline excise tax fell on his consumers and he therefore merely collected the tax for the state, due process entitled him to deduct the state tax from the amount of his sales which were subject to a state sales tax. The Mississippi Supreme Court held that the legal incidence of the excise tax fell on petitioner. In deciding Gurley, the Supreme Court observed that a State's highest court is the final judicial arbiter of the meaning of state statutes, and said that [w]hen a state court has made its own definitive determination as to the operating incidence, . . . [w]e give this finding great weight in -12- determining the natural effect of a statute, and if it is consistent with the statute's reasonable interpretation it will be deemed conclusive. Id. at 208 (citing American Oil Co. v. Neill, 380 U.S. 451, 455-456 (1965). The Narragansett Tribe cites Gurley as the basis for its argument that the district court should not have made an independent determination of the legal incidence under Rhode Island law. Rather than making an independent determination, the Tribe contends, the district court should have given great weight to Daniels Tobacco Co. v. Norberg, 114 R.I. 502, 506 (1975), a Rhode Island State Supreme Court decision regarding the legal incidence of the cigarette tax. Daniels involves a ruling by the Rhode Island State Tax Administrator ordering a distributor to pay the taxes due on cigarettes and tobacco products that were stolen prior to sale. The distributor appealed the decision in state courts, arguing that as a distributor he should not be liable for the imposition of the cigarette tax on the stolen cigarettes because R.I. Gen. Laws § 44-20-12 does not make a distributor liable for the cigarette tax, and furthermore, R.I. Gen. Laws § 44-20-53 states that cigarette taxes are a direct tax on the consumer, precollected for convenience only. Daniels, 114 R.I. at 505. The Rhode Island State Supreme Court ultimately determine[d] that the legislative intent in enacting § 44-20-12(1) was to place the risk of loss of cigarettes on the distributor and -13- not on the state, noting that § 44-20-28 . . . requires a distributor to affix tax stamps to all cigarettes he distributes. In addition, the mere fact that the ultimate economic burden of a tax is one [sic] the consumer does not determine the legal incidence of the tax. Id. at 506 (citing Ferrara v. Director, Div. of Taxation, 127 N.J. Super. 240, 317 A.2d 80 (1974)). Thus, the Tribe argues that Daniels establishes that the legal incidence falls on the Tribe. However, [i]n situations wherein federal immunity is affected by a determination as to which party to a transaction bears the legal incidence of a state tax, the federal courts 'are not bound by the state court's characterization of the tax.' Confederated Tribes of Colville Reservation v. State of Washington, 446 F. Supp. 1339 (E.D. Wash. 1978), (quoting First Agric. Bank v. Tax Comm'n, 392 U.S. 339, 347 (1968), aff'd in part, reversed in part, 447 U.S. 134, 151 (1980)). Rather, in cases where courts must determine whether the legal incidence of a tax falls on an Indian tribe, courts apply federal law. See, e.g., Sac and Fox Nation v. Pierce, 213 F.3d 566, 578 (10th Cir. 2000) (For our purposes, the question of where the legal incidence of the Kansas motor fuel tax rests is one of federal law.); see also United States v. Mississippi Tax Comm'n, 421 U.S. 599, 609 n.7 (1974)). The Narragansett Tribe argues that the district court should not have applied federal law. Citing Kern-Limerick, Inc. v. -14- Scurlock, 347 U.S. 110 (1954), the seminal Supreme Court case underpinning Gurley and other tax incidence cases, the Tribe notes that the Supreme Court instructs federal courts to defer to state courts on questions of where the incidence of a state tax falls, unless the case involves federal constitutional issues. Id. at 121. The Tribe asserts that the federal immunity at issue in Kern-Limerick does not encompass tribal immunity because, the Tribe argues, tribal sovereignty does not arise under federal or constitutional law, but rather from the inherent sovereignty of the Tribe. The Narragansetts point to United States v. Lara, 541 U.S. 193 (2004), as confirming that tribal sovereignty does not arise under the Constitution or federal law. Lara involves a double jeopardy claim brought in light of recent congressional legislation that authorizes Indian tribes to prosecute members of other Indian tribes. The resolution of this claim hinged on whether there was dual sovereignty, leading the Lara court to consider whether the source of the power to punish nonmember Indian offenders is inherent tribal sovereignty or delegated federal authority. Id. at 1632. The Supreme Court determined that Congress intended the former because the statute says that it 'recognize[s] and affirm[s]' in each tribe the 'inherent' tribal power (not delegated federal power) to prosecute nonmember Indians for misdemeanors and because the statute's legislative history confirms that such was Congress' intent. Id. at 1632-33. Based on this logic, the Tribe -15- asserts that federal courts must look first to an existing interpretation of state law by the state's highest court in cases such as the instant case. The Tribe, however, ignores Supreme Court precedent to the contrary. For example, in Kiowa Tribe v. Manufacturing Technologies, Inc., the Supreme Court stated that [l]ike foreign sovereign immunity, tribal immunity is a matter of federal law. 523 U.S. 751, 759 (1998). The Tribe also ignores the Supreme Court's precedent where the Court accepted a district court's use of federal law in determining whether the legal incidence of the Washington tax fell on the Indian tribe over the state court's interpretations. See Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134, 142 (1980); California State Bd. of Equalization et al. v. Chemehuevi Indian Tribe, 474 U.S. 9, 11 (1985)(explicitly reiterating that the Court accepted the district court's conclusion that the legal incidence of Washington state's cigarette tax fell on purchasers). In addition, other courts have consistently applied federal law in deciding whether the legal incidence of a state tax falls on a sovereign Indian tribe. See, e.g., Sac and Fox Nation, 213 F.3d at 578 (noting that the question of where the legal incidence of the Kansas motor fuel tax rests is one of federal law in a case regarding whether the State of Kansas could impose its tax on fuel distributed to tribally owned and operated retail stations located on Indian lands within -16- the State) (citing United States v. Mississippi Tax Comm'n, 421 U.S. 599, 609 n. 7 (1975)); Kern-Limerick, 347 U.S. at 121-22; Coeur D'Alene Tribe v. Hammond, 384 F.3d 674, 681 (9th Cir. 2004) (The incidence of a state tax on a sovereign Indian nation inescapably is a question of federal law that cannot be conclusively resolved in and of itself by the state legislature's mere statement.). Even if we were to consider the Rhode Island Supreme Court's decision in Daniels, it is not outcome determinative. Daniels predates the Supreme Court decisions, such as Moe, 425 U.S. at 482, that held that pass through tax provisions are dispositive as to who bears the legal incidence of a tax. In Moe, the Supreme Court evaluated a Montana tax statute that provided that the tax shall be conclusively presumed to be [a] direct [tax] on the retail consumer precollected for the purpose of convenience and facility only. Id. (quoting Mont. Rev. Code Ann. § 84-5606(1) (1947)). The Supreme Court determined that to the extent that the 'smoke shops' sell to those upon whom the State has validly imposed a sales or excise tax . . . the State may require the Indian proprietor simply to add the tax to the sales price and thereby aid the State's enforcement and collection thereof. Id. The Supreme Court has repeatedly affirmed that cigarette tax schemes containing pass through provisions place the legal incidence of the tax on the consumer rather than the distributor. See Chickasaw, 515 U.S. at -17- 461; Milhelm Attea, 512 U.S. at 64; Chemehuevi, 474 U.S. at 11; Colville 447 U.S. at 159. Therefore, the holding of Daniels does not persuade us that the incidence of the Rhode Island cigarette tax falls on the Narragansetts. It is not required that the law expressly state that the tax must be passed on to the ultimate purchaser for a State to require a tribe to collect cigarette taxes from non-Indian purchasers and remit it to the State. Chemehuevi, 474 U.S. at 11. The Supreme Court has instructed that the test we should apply in determining whether the incidence of a state tax falls on an Indian tribe is to make a fair interpretation of the taxing statute as written and applied. Id. In this case, the Rhode Island tax statute explicitly states that the cigarette taxes are conclusively presumed to be a direct tax upon the retail consumer, precollected for the purpose of convenience and facility only. R.I. Gen. Laws § 44-20-53. As the Supreme Court held in Moe, [t]he State's requirement that the Indian tribal seller collect a tax validly imposed on non-Indians is 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. Moe, 425 U.S. at 483. We therefore find that the legal incidence of the Rhode Island cigarette tax falls on the consumer, not the Narragansett Tribe, and we find that the State may require the Tribe to comply with the cigarette tax in order for the State -18- to collect the cigarette taxes that are passed on to the Tribe's non-Indian consumers.