Opinion ID: 216352
Heading Depth: 4
Heading Rank: 2

Heading: Allocation of Tax-Free Cigarettes

Text: Plaintiffs argue that the amended tax law's dual allocation mechanismsthe coupon and prior approval systemsfail to adequately ensure members' access to tax-free cigarettes, unduly burden tribal retailers, and threaten tribal self-government.
Initially, we reiterate that the main features of the amended tax law's probable demand and allocation mechanisms are substantially similar to those of the 1988 version upheld against a preemption challenge in Milhelm Attea. Like the 1988 version, the amended tax law limits the tax-free cigarettes that wholesalers may sell according to each tribe's probable demand. New York's legitimate interest in avoiding tax evasion by non-Indian consumers justifies these probable demand limitations. See Milhelm Attea, 512 U.S. at 75, 114 S.Ct. 2028. Further, like in the 1988 version, through the alternative coupon and prior approval systems, the State meets its obligation to make available to tribal members a tax-free quantity of cigarettes sufficient to satisfy the legitimate demands of those reservation Indians who smoke[.] Id. at 69, 114 S.Ct. 2028. Thus, under the reasoning of Milhelm Attea, the main features of the amended tax law's quota and allocation mechanisms, as written, do not unduly burden tribal retailers or infringe tribal self-government. In an effort to distinguish Milhelm Attea, Plaintiffs argue that its rationale applies only to preemption challenges, whereas the present dispute concerns tribal sovereignty. They note that Milhelm Attea expressly declined to assess for all purposes each feature of New York's tax enforcement scheme that might affect tribal self-government or federal authority over Indian affairs. Id. at 69, 114 S.Ct. 2028. Contrary to Plaintiffs' argument, Milhelm Attea's reasoning is applicable here because federal preemption over the regulation of Indian tribes is closely related to federal recognition and protection of tribal sovereignty. Preemption and tribal sovereignty are two independent but related barriers to the assertion of state regulatory authority over tribal reservations and members. Bracker, 448 U.S. at 142, 100 S.Ct. 2578. [P]rinciples of federal Indian law, whether stated in terms of preemption, tribal self-government, or otherwise, Colville, 447 U.S. at 155, 100 S.Ct. 2069, ultimately measure the scope of a state's regulatory authority through a particularized inquiry into the nature of the state, federal, and tribal interests at stake, Bracker, 448 U.S. at 145, 100 S.Ct. 2578. Indeed, Milhelm Attea's reasoning demonstrates the relationship between the preemption and tribal sovereignty analyses within federal Indian law. The Court stated that [a]lthough Moe and Colville dealt most directly with claims of interference with tribal sovereignty, the reasoning of those decisions requires rejection of the submission that 25 U.S.C. § 261 bars any and all state-imposed burdens on Indian traders. Milhelm Attea, 512 U.S. at 74, 114 S.Ct. 2028. Accordingly, Milhelm Attea's analysis is relevant to the issues in this appeal, and to the extent the general features of the amended tax law's quota and allocation schemes mirror those in the 1988 version, Milhelm Attea undermines the likelihood of Plaintiffs' success on this pre-enforcement challenge to the amended tax law's validity.
The Cayuga Nation, Seneca Nation, Unkechauge Nation, and Mohawk Tribe argue that the coupon system interferes with their tribal self-rule because it would require tribal governments to either retain coupons for distribution by the government or allocate coupons among reservation retailers. [18] We agree with the Western District that the coupon system does not impose allocation burdens on the Cayuga Nation because its government owns and operates the Nation's two cigarette retailers. The Nation may elect the coupon system, use the coupons to purchase tax-free inventory, and sell that inventory to members from its stores. Therefore, the Cayuga Nation is unlikely to prevail on the merits of its argument that the coupon system infringes its right of self-government. The Seneca Nation, Unkechauge Nation, and Mohawk Tribe, which have regulated, market-based tobacco economies, argue that under the coupon system, tribal governments must distribute a limited number of coupons among their member-owned and -operated reservation retailers. They argue that creation of a tribal allocation system would involve political decisions and require the enactment and enforcement of new tribal regulations. They contend that because the coupon system would require these governmental actions, it interferes with their right of self-rule. Because the coupon system is optional, we disagree. Consistent with the right to make their own laws and be ruled by them, Williams, 358 U.S. at 220, 79 S.Ct. 269, the Seneca, Unkechauge, and Mohawk governments are free to decide whether involvement in the allocation of their respective cigarette allotments is in the members' best interests. If a tribal government chooses the coupon system, then it likewise accepts the correlated responsibility to design an effective allocation system, if necessary. New York has not foisted that requirement upon the tribal government.
As written, the prior approval system imposes no regulatory burdens on Plaintiffs or their retailers. It operates entirely off-reservation and involves only wholesalers and the Department. If prior approval does not unduly burden federally licensed Indian traders by requiring them to obtain the Department's approval before making tax-free sales, see Milhelm Attea, 512 U.S. at 75-76, 114 S.Ct. 2028, this same mechanism certainly does not burden tribes or tribal retailers that play no role in the prior approval system whatsoever, see United States v. Baker, 63 F.3d 1478, 1489 (9th Cir.1995) (holding that Washington's prior approval scheme did not impermissibly burden tribal sovereignty because the entire regulatory program [was] accomplished off-reservation). Plaintiffs vigorously argue, however, that the prior approval system might have the effect of denying tribal members access to tax-free cigarettes and disrupting the current functioning of Plaintiffs' tobacco economies. Specifically, Plaintiffs point out that under the 1988 regulations, prior approval was based upon evidence of valid purchase orders received by the wholesaler and presented to the Department. See Milhelm Attea, 512 U.S. at 66, 114 S.Ct. 2028 (quoting N.Y. Comp.Codes R. & Regs. tit. 20, §§ 336.7(d)(1), (d)(2)(ii) (1992) (repealed)). The amended tax law does not contain this purchase order requirement. Plaintiffs contend that without this requirement, any state-licensed wholesaler might preemptively lock up a tribe's entire quarterly allotment. Although approval automatically expires after forty-eight hours without confirmation of the sale, Plaintiffs predict that the same wholesaler might immediately re-request prior approval and do so indefinitely. Thus, a wholesaler could leverage this forty-eight hour long monopoly position to charge premium prices, force tribal retailers to purchase exclusively from that wholesaler, or sell exclusively to favored tribal retailers. Plaintiffs contend that a market-dominant wholesaler could ultimately deprive tribal members of access to tax-free cigarettes and disrupt their tobacco economies. In response, tribal governments would either have to enact new tribal laws to police against monopolistic wholesalers or elect the coupon system. Plaintiffs view both situations as interfering with their rights of self-government. To support its view, the Seneca Nation submitted an affidavit from Peter Day, a state-licensed wholesaler and federally-licensed Indian Trader. [19] Day stated that upon implementation of the tax law he intends to purchase the entire tax-exempt allocation for each qualified Indian reservation unless it has already been acquired by another agent and that quantity will be made available only to my customers. He further stated that given the limited quantity and high demand for tax-exempt cigarettes, tribal members can expect to pay higher prices for those cigarettes. The tax law does not explicitly prohibit a single wholesaler from obtaining approval over a tribe's entire allotment, and the regulations do not explicitly prohibit a wholesaler from selling that entire allotment to only one retailer. The Western District concluded that there is a very realistic possibility that the scenario presaged by Day will occur. Seneca Nation, 2010 WL 4027796, at . Though without the benefit of Day's affidavit, the Northern District likewise concluded that the prior approval system is ripe for manipulation by wholesalers, and actually incentivizes wholesalers to monopolize the Oneida Nation's quota. Oneida Nation, 2010 WL 4053080, at . Plaintiffs, particularly the Seneca Nation, argue that they have demonstrated significant implementation problems that will plague the prior approval system. They claim that because the problems are specific to each tribe's distinct tobacco economy, they have established that they are likely to prevail on the as-applied challenges that the Court in Milhelm Attea left for some future proceeding. Milhelm Attea, 512 U.S. at 77, 114 S.Ct. 2028. Again we disagree. Even if we accept, which we do not, that Plaintiffs have properly classified their challenges as as-applied, [20] nothing requires us to assume that a monopoly in tax-free cigarettes will occur and to evaluate the prior approval system under that assumption. Like the wholesalers in Milhelm Attea, Plaintiffs seek to enjoin the amended tax law before it is implemented; like the Court in Milhelm Attea, we decline to base our decision on consequences that, while possible, are by no means predictable. Id. at 69, 114 S.Ct. 2028. The Department anticipates that [u]pon receipt of a purchase request from a [tribe or reservation retailer] a wholesaler will request approval from the Department to sell that quantity of cigarettes. Technical Memorandum 5. Under the Department's general understanding of the prior approval system, wholesalers will only seek prior approval if the wholesaler has a legitimate tribal buyer. Plaintiffs contend that the prior approval system will not function as the Department intends. [21] For at least two reasons, on this record we cannot say which understanding will prove correct. First, Plaintiffs' predictions ignore the broader legal framework within which wholesalers and tribal retailers operate. That legal framework discourages wholesalers from abusing the prior approval system. To sell cigarettes to tribes or their retailers, a wholesaler must be a state-licensed distributor, see N.Y. Tax Law § 480, and a federally-licensed Indian Trader, see 25 U.S.C. § 262. Under New York law, the Tax Commissioner may cancel or suspend a wholesaler's state license for, among other things, commit[ing] fraud or deceit in his . . . operations as a wholesale dealer. N.Y. Tax Law § 480(3)(b)(i); see also N.Y. Comp.Codes R. & Regs. tit. 20, §§ 71.6(b)(2), 72.3(b)(2). Under federal law, the Superintendent of the Bureau of Indian Affairs must see that the prices charged by licensed [Indian] traders are fair and reasonable. 25 C.F.R. § 140.22. Wholesalers, like Peter Day, who intend to abuse the prior approval system risk losing their New York and federal licenses. A rational wholesaler must weigh the potential short-term financial benefits of gaming the prior approval system against the potential long-term financial loss caused by the suspension or revocation of necessary licenses. [22] Second, if wholesalers disregard the legal risks of monopolistic behavior, the Department has the flexibility to modify the prior approval system to deter such behavior. The Department enjoys discretion to set and amend the conditions for prior approval. N.Y. Tax Law § 471(5)(b) (The department shall grant agents and wholesalers prior approval in a manner and form to be determined by the department and as may be prescribed by regulation.) (emphasis added); N.Y. Comp.Codes R. & Regs. tit. 20, § 74.6(d)(3) (The manner and form of prior approval will be determined by the department, and may include the use of an interactive Web application.). Thus, modification of the prior approval system's mechanics does not require amending the statute or promulgating new regulations. Presently, however, the record of the Department's effectiveness in adapting the prior approval system is nonexistent because, as a result of the injunctions or stays that were granted, wholesalers have not been required to use the prior approval system. Moreover, any of the Plaintiffs may foreclose the uncertainty associated with the prior approval system by entering formal agreements with the Department. As the Supreme Court observed in Milhelm Attea, [a]greements between the Department and individual tribes might avoid or resolve problems that are now purely hypothetical. Milhelm Attea, 512 U.S. at 77, 114 S.Ct. 2028. Upon approval from the New York Legislature or a federal court, the collection and allocation mechanism contained in the agreement would supersede the statutory allocation mechanisms and eliminate the uncertainty of private behavior. See N.Y. Tax Law § 471(6). At this pre-enforcement stage, Plaintiffs have not demonstrated that they are likely to prevail on their claim that the amended tax law infringes tribal sovereignty or unduly burdens tribal retailers. Plaintiffs ultimately request that the tax law be enjoined prior to its implementation on the basis of hypothetical private behavior and the assumption that there will be no Department response. This kind of speculation cannot support a pre-enforcement injunction of a state taxation scheme that is valid as written. [23] Finally, the Seneca Nation, Unkechauge Nation, and Mohawk Tribe argue that flaws in the prior approval system will disrupt the current state of their tobacco economies. Specifically, they argue that certain tribal retailers might be unable to obtain a sufficient quantity of tax-exempt cigarettes and their businesses will suffer. The three Plaintiffs argue that this anticipated disruption will undermine the federal interest in promoting and protecting tribal economic self-sufficiency and burden tribal members' ability to engage in tax-free commerce with one another. Previously, all cigarettes sold to tribes and reservation retailers were untaxed. Reservation retailers sold approximately ninety-nine percent of those untaxed cigarettes to non-members. But there was no practical distinction between a reservation retailer's member and non-member cigarette markets. Plaintiffs' current tobacco economies developed under this system. For example, the mass quantity of available untaxed cigarettes allowed members of the Seneca Nation to open over 170 tobacco stores. Members could access tax-free cigarettes at any of these stores. New York's decision to limit the quantity of tax-free cigarettes sold to reservation retailers will undoubtedly disrupt the status quo, regardless of how the Department allocates the untaxed cigarettes. Yet in limiting the availability of tax-free cigarettes, the State does not have to ensure that each reservation retailer obtains its pre-amendment supply. Nor must the State ensure that tribal members continue to enjoy the same easy access to tax-free cigarettes. The Northern District erred in concluding at this pre-enforcement stage that the prior approval system burdens [the Oneida Nation] by not protecting the right to have available tax-free cigarettes for members and itself, as required by law. Oneida Nation, 2010 WL 4053080, at . As written, the prior approval system makes tax-free cigarettes available to member purchasers. Actual problems of implementation can be addressed if and when they arise. Milhelm Attea, 512 U.S. at 76, 114 S.Ct. 2028. [24]