State Versus Tribe Tobacco Issues Resurface

Repeated efforts by the Muscogee (Creek) Nation to conduct tobacco sales without state intervention appear to have floundered in a federal appeals court which dismissed sovereignty-related arguments and appeals to federal law.

The court found February 28 that off-reservation Indian transactions and tobacco sales to non-Indians are subject to state laws that govern all state residents and that enforcement of those laws does not violate federal legislation or tribal self-government.

A three-judge panel of the U.S. 10th Circuit Court of Appeals upheld a lower court’s dismissal of the Nation’s complaint against Oklahoma tax authorities because, it said, the Nation failed to state a plausible claim against individual state officials.

The conflict in Muscogee (Creek) Nation v. Scott Pruitt, Attorney General of Oklahoma and state tax officials began in 2009 when Oklahoma Highway Patrol officers stopped Nation-owned trucks traveling outside of tribal lands and allowed state tax officials to seize tobacco products deemed “contraband.”  It resulted in extensive litigation.

In 2009 the Nation approached the U.S. District Court in Tulsa, Oklahoma for an injunction to prevent the state from seizing tobacco products. The court subsequently denied the injunction and refused to charge state tax officials with helping to violate federal law in connection with the seizures. In 2010, the District Court dismissed an amended complaint concerning the tobacco confiscation and was upheld by the 10th Circuit in 2011. In 2012, the 10th Circuit affirmed the District Court in dismissing the Nation’s claims concerning Oklahoma tax statutes.

In its last appeal, the Nation contended that state tax laws are preempted by federal Indian Trader statutes, which outline accepted practices and safeguards for trading with tribes, and by violations of the Nation’s right to self-government.

Generally, states cannot tax reservation lands and reservation Indians, the court said, but Indians outside their own Indian country lands are subject to nondiscriminatory state laws applicable to all state citizens.

The Supreme Court has held that the state has no authority to tax tribal tobacco retailer’s sales to Indians, but it does have the authority to tax Indian sales to non-Indians without preempting the Indian Trader statutes and other federal law. The high court has not found that “application of state law outside Indian country infringes on tribal sovereignty,” according to the latest petition.

The state tax laws the Nation called into question were the Excise Tax Statute, the Escrow Statute and the Complementary Act. A three-judge panel of the 10th Circuit found the laws did not improperly regulate the Nation’s sale of tobacco products to its own members or place “impermissible burdens” on the sale of tobacco to non-tribal members.

The Nation challenged Oklahoma tax statutes that imposed an excise tax on all non-tribal members who purchase tobacco products from retailers located on tribal land that provide tax-free sales to Nation members.

Under the Excise Tax Statute, tribes (“compacting tribes”) can enter into compacts with the state to collect sales taxes on cigarettes and other tobacco products sold in Indian country while those that do not (“noncompacting” tribes, including the Nation) are exempted from the tax when sales to tribal members occur on tribal land. Licensed wholesalers are issued tax-free stamps to affix to the cigarettes, with stricter rules applying to other tobacco products.

Under a Master Settlement Agreement (MSA), a liability-related compact with the nation’s four major tobacco companies, tobacco product manufacturers make payments to the state and, to offset competitive advantages by non-participating manufacturers, the Escrow Statute requires the latter to pay into the escrow fund except for sales of cigarettes bearing tax-free stamps.

The Complementary Act requires all tobacco product manufacturers selling cigarettes in Oklahoma to certify they are either participating in the MSA or are making payments to the escrow fund. The Act makes it unlawful to affix tax-stamps if the manufacturers are not certified participants.


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State Versus Tribe Tobacco Issues Resurface