Last Thursday the state Department of Taxation and Finance issued a memo that formalized the process of collecting taxes on cigarettes sold to non-Indians on Indian reservations. Does this mean Gov. David Paterson is prepared to enter a minefield that previous governors have carefully avoided? Maybe. We’ll find out come Sept. 1, which is when a new state law requires those collections to begin.
The law was designed to deal with several problems caused by the Indian tribes’ refusal to collect state taxes on cigarettes sold to non-Indians on reservations. One is the large competitive disadvantage at which this places nearby convenience stores and other places where cigarettes are sold. Cigarette taxes in New York state have always been hefty, and became prohibitive when, as part of the same new state law, they were increased by $1.60, bringing them to $3.40 a pack, highest in the nation. As a result, almost any smoker who is able to will buy smokes not at a store, but at a reservation, or in a border state, or on the black market.
Another problem is bootlegging. Those unstamped cigarettes from Indian reservations have a way of winding up far away, in places like New York City, where they are illegally sold on the street or, after smugglers affix counterfeit stamps to them, at a retail store. Either way, the city and state don’t get the tax.
The lost tax revenue to the state alone is estimated at anywhere from $600 million to $1.5 billion. Particularly at a time of fiscal crisis like this, it cannot afford to forgo that kind of money — money it is legally entitled to.
The tax department memo lays out a scheme that is logical and fair. Starting Sept. 1, all cigarettes sold on reservations will have to bear a tax stamp. To ensure an adequate supply of tax-exempt cigarettes for tribal members, the reservations can choose either to receive coupons based on probable demand — i.e. the reservation’s population times the national smoking rate — or get prior approval from the tax department for a certain number of tax-exempt packs to be sold each year. Wholesalers will pay state taxes up-front, and then receive an expedited refund for the tax-exempt sales.
It sounds workable, but will it work? Paterson is retaining the right to negotiate with different tribes to work out separate deals. Will this memo show them that the state is serious and make them more inclined to reach agreements with Paterson?
If not, will they pay the taxes now being demanded by the state? They’ve always said they never will, and have even resorted to violence over the issue in the past, and continue to threaten it now.
It’s time to find out. Legitimate local merchants have already been collecting the additional $1.60, hurting their sales even more. The state has an obligation to them, to equity and fiscal responsibility, to start collecting those taxes.