Position Statement 
Bloomberg's Hypocrisy 
On The Record 
Cigarette Tax Facts & Calculations 
"We Told You So" 
Tax Backlash News 
Anti-Tax Support 
Related Reading Material 
NYC Dept of Finance Campaign To Collect Back Cigarette Taxes 

UPDATE:  2/23/05 - NY State Gets in the Act.  The analysis applies to the state as well now. NYC residents to be hit a second time. 

UPDATE: 2/23/06 - Judge Dismisses New York's Suit Against Internet Cigarette Sellers 

UPDATE: 12/7/06 - Judge Dismisses suit brought by NYS Convenience Store Assoc. to have tax collection law enforced.  Lack of standing cited. 

UPDATE: 12/5/07 - Judge Dismisses most of suit brought by NYS Convenience Store interest charging Indian retailers with unfair competition.  


Don't pay this tax 
NY Daily News Editorial - April  5, 2005  

It's tax season again, and millions of New Yorkers are preparing to be scofflaws. They're going to fill in Line 56 on the state's long-form tax return or Line 27 on the short form by reporting that they made no out-of-state purchases, over the Internet, by catalog or in person, in 2004. Most will be lying. And good for them, we say.  

Over Gov. Pataki's veto, the state Legislature added those lines to the tax forms two years ago in a niggling grab at every last penny of sales tax technically owed by New Yorkers. We urged everyone to simply report zero out-of-state purchases and are happy to report that, quite on their own, 96% of taxpayers followed that course.  

Among the nearly 9 million filers who reported no out-of-state purchases were Pataki, Lt. Gov. Mary Donohue, Attorney General Eliot Spitzer, Controller Alan Hevesi, Assembly Speaker Sheldon Silver and Senate Majority Leader Joe Bruno. Only 386,000 taxpayers coughed up money, a total of $21 million, an average of just $54.03.  

Call those taxpayers scrupulously, admirably honest or call them suckers, but the bottom line is the same: Only 4% are following the law. And that has to be some kind of record for blatant noncompliance. The message to the Legislature is clear: The tax is unequally applied and unenforceable. Repeal it.  


The NYS Legislature approved Mayor Bloomberg's request to raise the city tax on cigarettes from 8 cents a pack to $1.50.  It was effective July 2002.
Sean Delonas
The attack on smokers can no longer go unchallenged.  While the rhetoric surrounds us that smoking is an "epidemic" it would appear that we are faced with a different epidemic of greed, social engineering and persecution. 
It's time to say ENOUGH ALREADY and show them that we mean it. 
"If I can't smoke in public why should I pay the public's taxes?"

Make a conscious effort not to support NYC first, and NYS second. When possible, buy your clothes, food, household items, appliances, etc. outside of the NYC limits and outside of NYS borders if the means are available. 

Eat at home!  Why patronize eating establishments where the city has determined that they must not accommodate one third of their customers?  The city doesn't care about your comfort so let's not keep them comfortable with the sales tax on food that we generate. 

Drink at home!  Getting up from your warm stool and being made to stand outside is demeaning.   If you're not smart enough to be embarrassed for accepting being treated like a pariah there are plenty of people who are embarrassed for you.  Need to socialize?  Entertain at home where YOU make the rules. 

Rent a movie! As the founder of NYC C.L.A.S.H. I have not entered a movie theater since they banned smoking completely over 10 years ago.  Many others have done the same.  Now there is another reason to stay away.  Snuggle up on the couch, light a cigarette and make your own popcorn.  It's cheaper, it's much more relaxing and you'll be keeping those tax dollars in your own pocket. 

Most of all we strongly encourage everyone to seek alternative means to obtaining your cigarettes.

Allowing government imposed tyranny to manipulate your behavior is unacceptable.  Thus A MODIFIED BOYCOTT: 

This is the present day version of the Boston Tea Party.  We will NOT throw our tea in the sea, thereby ceding to their demands to give up a perfectly legal behavior, but we will no longer support their addiction to tobacco money either. 

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Read the hypocritical statements made by then private, but campaigning, citizen Bloomberg on the BBC Program QUESTION TIME on the question: Should tobacco companies be sued for going about their legitimate business, or should smokers have to pay for the damages they are causing to themselves? 

Mike Bloomberg: "The government does better when people smoke because of the taxes they raise, and when they die early because they don't use their care or pension. The question is: at what level should the government be involved in protecting the public. The state governments have found themselves on the side of encouraging smoking by settling with the tobacco companies. I don't see any practical ways we can get rid of smoking. If you want to stay healthy: stay out of the sun, don't eat red meat and don't smoke. But in a free society, people have to have the right to run some risks." 


"Any loss of revenue by the state would be outweighed by lower health care costs brought on by a reduction in smoking-related illnesses," said Jordan Barowitz, a spokesman for the mayor. "The mayor has said he'd love to see the revenue on this tax go flat, to zero." ~NY Times; 3/2/02 

Mayor Bloomberg proposed raising the city's cigarette tax to $1.50 a pack from 8 cents yesterday, saying he was trying to get smokers to quit. Bloomberg said, " raise it [taxes], consumption goes down."~NY Daily News; 2/14/02 

Neither of these statements agree with his former statements that smokers save health care costs by dying early or that government shouldn't dictate behavior even if it's risky. 

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SBSC Study Shows NYC Tobacco Tax Hike Kills Jobs, Hurts  Businesses, Reduces Revenue, And Has Little Impact On Smoking: 

Released By 
Small Business Survival Committee

Tax Profiling of Adult Smokers in New York City 

Winston-Salem, N.C. - February 14, 2002 - "The proposed nearly 1,800 percent increase in New York City's excise tax on cigarettes, by $1.42 to $1.50 a pack, should be viewed as exactly what it is - tax profiling of adult smokers," Tommy Payne, executive vice president of external relations for R.J. Reynolds Tobacco Company, said today. 

"This proposal comes despite the fact that the New York state legislature passed a 39-cent, or 35 percent, increase in the state 
cigarette excise tax just last month.  If the city succeeds in passing its onerous tax increase, New York City smokers would pay an incredible $3.39 in city, state and federal excise taxes per pack," Payne added. 

In 2001, smokers in New York paid almost $2 billion to the state, over and above income, sales and other taxes.  State cigarette excise taxes, alone, amounted to more than $1 billion ($1.11 cents per pack tax) and Master Settlement Agreement (MSA) payments totaled $759 million. 

From 1999 to 2001, federal and state governments collected more than $88 billion - or about $80 million a day - from smokers through excise and other taxes and litigation settlement payments to the states. 

"Since 1999," Payne noted, "there is no doubt that state and federal governments have had a virtual monopoly on tobacco industry revenue.  In fact, they collect 15 times more from the sale of every pack of cigarettes than does R.J. Reynolds Tobacco Company.  On a per-pack basis, government makes $1.54 while RJR makes 10 cents.  Even without the proposed increase, New York, and virtually every other state, makes more per pack than Reynolds Tobacco does. 

"New York City residents have the right to ask their legislators where last year's $2 billion in state tobacco revenues went before a select few are hit with a 1,775 percent increase in cigarette taxes," Payne said. 

He pointed out that raising the tax would cause smokers to seek other places to purchase cigarettes such as Internet sites, 
cross-border purchases from other states with lower taxes, and the black-market. 

In addition to encouraging tax avoidance behaviors, he said, high cigarette excise taxes lead to loss of jobs, particularly in the 
retail and wholesale sectors; and jeopardize what could be a significant, stable revenue source if taxed at a reasonable level. 

R.J. Reynolds Tobacco Company (RJRT) is a wholly owned subsidiary of R.J. Reynolds Tobacco Holdings, Inc. (NYSE:  RJR).  R.J. Reynolds Tobacco Company is the second-largest tobacco company in the United States, manufacturing about one of every four cigarettes sold in the United States.  Reynolds Tobacco's product line includes four of the nation's 10 best-selling cigarette brands:  Camel, Winston, Salem and Doral.  Reynolds Tobacco has been recognized by FORTUNE Magazine as one of the "100 Best Companies to Work For."  For more information about RJRT, visit the company's web site at 

The Proposed New York City Cigarette Tax Increase: 
An Unprecedented Recipe for Economic Misery 

·        Under a proposal by Mayor Michael Bloomberg, the New York City cigarette excise tax will rise from 8¢ per pack to a $1.50 per pack – an astounding 1,775% increase.  An increase of this magnitude is unprecedented in the annals of tobacco taxation, and would make the City tax larger than any state tax in the country except New York’s.  Coupled with the state tax of $1.50 (effective April 3, 2002), NYC consumers would face state and city taxes of $3.00 a pack. 

·        The City tax would be 3 times as large as the average state tax and approximately 5 times as high as any municipal tax in the country. 

·        The combined New York City and New York State tax would reach $3.00 per pack – before state and city sales taxes are even included – a tax level virtually unheard of outside of Europe.  NYC prices would be nearly $6.80 per pack, making a pack of cigarettes about 50% more expensive than an ounce of silver. The typical NYC smoker would pay roughly $1,400 per year in NYC and NY State cigarette taxes. 

·        New York City retailers and consumers have already being hit hard by last year’s increase in the state cigarette tax – tax-paid sales have dropped 20% in New York State due to this increase. 

·        New York City retailers already hurting from the state tax increase and the economic recession will feel more pain as cigarette sales are likely to drop 60%.  The Mayor’s own projections indicate a drop in tax-paid sales of 47% in the first year alone. [1]  Even the Mayor’s lower assumption is cause for alarm – NYC merchants can expect close to $1 billion in gross retail sale losses. Gross profit losses would be about $180 million. These sales are hard to replace – cigarette sales are typically the number one in-store seller for convenience stores, comprising 35% of all sales. What a great way to pull NYC’s law-abiding small businesses out of the recession! 

·        Over 175 million packs of NYC tax-paid volume would disappear, likely to reemerge in the black market.  In fact, the magnitude of the Mayor’s projections suggests that his budget office is well aware of the smuggling problem that would be triggered by the draconian tax increase. 

·        Cigarette smuggling, already plaguing the state since its recent tax hike, would reach enormous levels within NYC.  A van can carry 57,000 packs of cigarettes.  Smugglers making a run from NY’s numerous Native-American Reservations could reap profits of $170,000. Just one tractor-trailer load per day each week would be enough to supply about 44% of the NYC market.  Back in 1978 New York’s Donati Commission recommended reducing the current 8¢ NYC tax to stem a bootlegging epidemic that was estimated to be taking about 20% of the NYC market. After the Bloomberg tax it will take more than a commission to stop the flood of contraband into the city. 

·        The combined NYC and NY State tax of $3.00 could potentially lead to a retailer’s revolt like the one that occurred in Canada during the 1990’s.  High taxes fueled rampant smuggling in which legitimate retailers would hurt.  This led previously law-abiding retailers to openly violate Canadian tax laws.  The problem was so widespread that the Canadian government lowered the hated tax. 

An Estimate Of What The State And City Is Losing 
From the NY Times, by Hope Reeves:
One could explore the economics this way: A reporter watched seven cartons of cigarettes being sold inside Chief Wallace's shop in five minutes one day in June. Erring on the side of caution, then, one could assume 50 cartons are sold an hour. The shop is open 13.5 hours a day every day, which translates to 675 cartons a day, 4,725 cartons per week, or 18,900 per month. (And that does not include phone and Internet orders.) At an average price of $27.50 per carton, Chief Wallace would take in about $520,000. 

His profit would be that sum, minus his overhead and what he paid for the cigarettes. Those two costs are another mystery, as Chief Wallace, as well as the cigarette manufacturers and distributors, would not say what he pays for them. 

Looked at another way, at $15 in tax per carton, assuming those hypothetical calculations are not too far off, the state is losing about $283,500 a month in revenue from Chief Wallace's shop alone (again, not counting Internet and phone orders). Chief Wallace said there were 85 Indian-owned tobacco outlets in the state at his last count, in 1998. So the hypothetical statewide total: a $24-million-a-month loss to the government. And New York City is also losing $1.50 in tax per pack. 

It All Started with Prop. 13 
From Merced Sun Star, by Dan Walters 

Speaking of bad habits, another of those high-dollar measures in 1988 was Proposition 99, the first of a spate of drives to raise cigarette taxes. At the time, although cigarette sales in California had been decreasing as smoking's health impacts had become better known, it was still a fairly common practice. Thus, the proposed boost in taxes from 10 cents a pack to 35 cents was highly controversial. 

The tobacco industry committed millions of dollars to an anti-Proposition 99 campaign. One of its most controversial propaganda themes was that by raising taxes on cigarettes, the measure would create a criminal black market in untaxed smokes. Pro-tax advocates and editorialists universally dismissed as the allegation as fanciful. 

The new tax, approved by 58 percent of voters, never generated the $650 million per year in revenue that its proponents promised. After a brief $500 million spike, revenues began a years-long slide until another boost in cigarette taxes, this time 50 cents a pack, was enacted in 1998. That one, sponsored by actor-director Rob Reiner to benefit early childhood development, caused another temporary uptick in cigarette revenues to $1.2 billion a year, but they have also since declined. Last year, voters rejected a $2.60 per pack boost to underwrite health care. 

Per capita cigarette sales, as calculated for tax purposes, have dropped from nearly 150 packs per year in the early 1960s to scarcely a fifth of that level today, undoubtedly a good thing from the public health standpoint. But as smoking has become much more expensive because of higher taxes and surcharges imposed by cigarette makers to pay for a multibillion-dollar lawsuit settlement, the old campaign propaganda about a black market has come true. 

Earlier this month, the dimensions of the black market became evident when three Southern California men were sentenced to federal prison and ordered to pay the state nearly $2 million in lost taxes for their roles in a massive scheme to smuggle untaxed cigarettes from Virginia to California. The Bureau of Alcohol, Tobacco, Firearms and Explosives, which cracked the case after an undercover investigation, described it as "a complex conspiracy" that involved potentially huge profits. 

The state Board of Equalization, in a 2003 report to the Legislature that is now being updated, estimated that the state was losing $292 million per year in taxes on black market cigarettes, mostly those brought in by organized smuggling rings. There was also so-called "casual evasion" by individuals buying cigarettes in nearby states, from Indian tribes and through Internet sales. 

The report helped persuade the Legislature to pass bills to tighten oversight of cigarette retailers and wholesalers -- laws that state tax officials hope will reduce the traffic in black market smokes. 

Nevertheless, the lucrative trade in untaxed cigarettes proves that the 1988 campaign claim was on the mark. As with liquor during Prohibition and illicit drugs today, when government makes a commodity illegal or expensive, it creates a market that criminals will supply. 

Cigarette tax hikes reduce smoking? 

The anti-smokers throw out sales revenue figures to convince you that raising taxes on cigarettes help to reduce consumption.  They crow about their success when receipts go down. 

That's malarky.  Oregon realized that and said so

"Oregon's take from cigarette taxes is declining, from $371.5 million in the 1997-1999 budget cycle to $293 million projected for the current two-year budget. 

"Officials say the decline cannot be attributed solely to a dwindling number of smokers. They also blame smuggling, sales of cigarettes intended for export and the use of counterfeit tax stamps." 

Oregon is not innocent itself.  It's become its own victim of greed and now cries about lost taxes, calling it a "catastrophic problem." 


Read more about how taxes and other payments end up going to the government rather than the cigarette manufacturer. 

State Excise Taxation: Horse-and-Buggy Taxes In an Electronic Age 
by Richard E. Wagner, Ph.D. 
The Tax Foundation, Background Paper No. 48 

Executive Summary 
Selective excise taxes are already obsolete, but because government is always slow to change, they will die a slow death. In the meantime they will cause a great deal of harm, both to taxpayers and to the state governments who use them most. 

Because many states have raised the cigarette tax rate precipitously during the last 10 years, this particular excise tax is putting on a clinic, so to speak. It is demonstrating to any dispassionate observer that the greater mobility of people and goods, along with instant communication, have made excise taxes obsolete. This is especially true of the cigarette tax because the product is lightweight, compact and highly taxed. 

Cigarette excise taxes only function as a predictable, untroublesome tax at a low tax rate. States that have raised their cigarette tax to the point that it is 50 cents per pack higher than a readily available, alternative source are discovering a host of problems: 

Revenue estimates are rarely met, causing budget problems. 

  • Bonds sold against future master settlement revenues are unattractive except at preposterously high interest rates, and even then they are downgraded by the rating agencies. 
  • In a replay of Prohibition-era social decay, law-abiding citizens learn to break the law routinely, and states respond by adopting intrusive and sometimes abusive tactics to catch them. 
  • Organized criminals and terrorist cells begin trafficking in smuggled cigarettes, and the states spend prodigiously to catch them, with almost no success. 
  • Businesses and jobs, along with their tax revenue on income, sales and property, are lost to interstate competition. 
The growth of these destructive consequences brings state governments to a crossroads. In one direction: state governments that use increasingly invasive, threatening, expensive and ultimately futile tactics to enforce high tax rates. In the other direction: innovative, service-oriented state governments that know they must compete with their neighboring jurisdictions, that they are evaluated by citizens according to their willingness to support the services that government offers with tax payments. 

Tobacco taxation is a severe form of tax discrimination whose victims reside primarily among the working classes and not professional people. It is tax discrimination against people of modest means for the benefit of the well-to-do. 

Revenues from the master settlement are declining because they are linked to taxable sales that are dropping precipitously because of high state cigarette tax rates. A vicious cycle is created where states react to lower-than-expected revenue with sharp tax increases which, in turn, drive down settlement revenue and make revenue estimates less reliable by pushing smokers to cross state borders for lower-taxed cigarettes or into the underground economy. 

The inaccuracy of revenue estimates for tobacco tax hikes obviously creates difficulties for state fiscal planning. That inaccuracy, moreover, will surely grow as the tax rates climb, and the rate of taxed sales is further and further divorced from the rate of tobacco consumption. 

State-by-state breakdown of tobacco taxes provided by Smokers Club, Inc. (does not include city/county taxes imposed in nine states). 

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Related Stories 

Online Cigarette Sales Hurt States' Tax Revenue, Says Report 

Higher Taxes Light Up Online Cigarette Business 

Tax Hike Puts Store Profits Up In Smoke 

$200M lost to smokes smugglers:  
Yearly city, state tax shortfall from gang & Internet sales 

Tax hike on smokes is burning bodegas 

Roll-Your-Owns Cut Taxes 

Web Burns States Expecting Cigarette Taxes:  States Feel Lost Tax Revenue Pinch as Smokers Turn to the Internet for Cigarette Deals 

Cig-Nificant Drop 

Pricier cigarettes a windfall for 
crooks: Robberies are rising after state tax hikes 

New York's cigarette tax is a taxing failure 

Police Investigate String Of Cigarette Thefts

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The NY Libertarian Party announces:  

"Taxes are too high--we call a boycott!"
The Libertarian Party supports 
NYC and NYS smokers. 
Read the LP statement! 
Join them in their efforts to say ENOUGH ALREADY! 


CONTACT -- Emile Milne 
July 3, 2002 


Congressman Charles Rangel today came out in strong opposition to the dramatic increase in the city's cigarette taxes, describing it as an unfair burden on the poor. 

"Low income people are the ones who will suffer from this," Congressman Rangel said.  "They are the ones who willl really feel the burden of a $1.50 tax.  To those who are better off, the tax won't make any difference at all." 

The Congressman, who has long opposed excise taxes on similar grounds, also questioned the argument that the so-called "sin tax" will change behavior. 

"If the motivation is to provide a kind of treatment for smokers by punishing them economically, the attempt is not only unfair, it is likely to fail," Congressman Rangel said.  "People stop smoking because they want to; if they want to continue they will find a way to get cigarettes they can afford -- even if it means illegally on the black market, on the internet or traveling to low tax states." 

The Congressman said he understood the city's need to raise revenues, but took issue with a method that would disproportionately burden the poor. 

"If the Mayor wants to raise revenues, he should find a way that spreads the pain equally.  It's just not fair to impose a $1.50 tax on people earning $25,000 or $100,000 a year, and then say you're doing it in order to stop them from smoking.  All you're really doing is making life harder for the... [sorry, lost the remainder] 


Van Dough, by Jacob Sullum - "...Yet Bloomberg, who equates zero tax revenue with zero smoking, apparently thinks smokers will not be resourceful enough to avoid his tax. He also seems to discount the possibility that they will respond to higher prices by, say, economizing on other expenditures, getting a second job, dipping into their savings, going into debt or turning to crime." 

New York's Deadly Cigarette Tax, by Patrick Fleenor - "Apparently more interested in meddling in individuals' choices than reducing crime, Mayor Bloomberg imposed a nearly nineteen-fold increase in the city's cigarette tax rate. To the mayor, the policy prescription is simple: "We all know that smoking kills. And increasing the cigarette tax saves lives." But it isn't that simple. The widespread availability of cheap cigarettes via the black market makes his claim dubious. Worse, the mayor's paternalistic effort to protect smokers from themselves has placed other Americans at greater peril." 

NYC Cigarette Tax Hike Endangers Pataki Health Funding, by FISCALWATCH MEMO - "...but it’s not unreasonable to speculate that if New York’s combined city and state cigarette is allowed to reach a whopping $30 per carton of 10 packs, the existing revenue leakage would turn into a veritable hemorrhage. Smokers could save at least $18 a carton by buying their cigarettes in any neighboring state -- or even more by using a tax-free Internet site." 

Cigarette Taxes Are Fueling Organized Crime, by Patrick Fleenor - "Last month, New York law enforcement authorities announced the arrest of Queens resident Rafea al-Nablisi for smuggling 12,000 cartons of cigarettes a week. It was not the first such arrest, and thanks to New York's latest cigarette tax hike, it will not be the last. 

On April 23, less than two weeks after Mr. Nablisi's arrest was made public, Gov. David Paterson signed into law a $1.25 per-pack tax hike on top of the state's $1.50 per-pack tax. That's in addition to New York City's own $1.50 per-pack tax. Come July 1, New York City's smokers will be paying on average $9 a pack for legal cigarettes. 

But if history is any guide, most cigarettes sold will actually be trucked up from Virginia, or shipped in from China, by "butt-leggers" who can make over $1 million on each tractor-trailer load of smuggled smokes. The blunt fact, which politicians of both political parties are determined to ignore, is that high cigarette taxes in New York have led to a bloody, decades-long smuggling epidemic." 

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A review of: 
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The NYC (that's CITY) Department of Finance, at the direction of Mayor Bloomberg, has embarked on an aggressive campaign to collect taxes not paid on cigarette purchases made over the internet.  

As the situation is explained we hope we can offer some additional information that will clarify it for you and also maybe calm some, but not everybody's, nerves. 

Discussion Breakdown: 

FOLLOWING THE NEWS (Updates on the Situation as they come in) 
> NY Daily News - January 28, 2005: "Cig suit snuffed, city may relight"  
> NY Times - February 12, 2005: "New York Hits Online Sellers of Cigarettes" 
> NY Post - February 14, 2005: "354G In Ash Cash" 
> Buffalo News - February 17, 2005: "Indians' cigarette, gas sales targeted" 
> NY Post - February 23, 2005: "Albany's Smoking Out Puffers For Online Taxes" 
> Chicago Tribune - March 7, 2005: "Smokers feeling unexpected burn" 
> USA Today - March 8, 2005: "Online tax bill due for smokers"  
> NY Post - March 9, 2005: "'Net Cigs Master-Barred" 
> U.S. Newswire Press Release - March 16, 2005: "Internet Cigarette Sales Spark Enforcement Meeting, Possible Crackdown" 
> Associated Press - March 18, 2005: "Deal Aims to Prevent Web Cigarette Sales" 
> Buffalo News - March 18, 2005: "Senecas cry foul on stymied cigarette sales" 
> Buffalo News - April 4, 2005: "Internet Cigarette Sales Take A Hit" 
> NY Times - April 4, 2005: "Trouble for Online Vendors of Cigarettes" 
> Buffalo News - April 6, 2005: "Regulations in works to collect taxes on Indian sales of cigarettes, gas"  
> NY Times - May 29, 2005: "Post Office Sidesteps Fray on Illicit Sales of Cigarettes" 
> The Buffalo News - January 18, 2006: "Pataki Seeks 1-Year Delay In Ending Indians' Tax-Free Cigarette Sales"  
> NY Post - February 3, 2006: "Web Buyers Smoked Out" 
> Associated Press - February 23, 2006: "Spitzer: Pataki Administration Poised to Violate Law March 1"  
> NY Times - March 8, 2006: "Settlement Reached to Pursue Online Cigarette Sales Taxes"  
> The Buffalo News - March 16, 2006: "Key Tobacco Supplier Halts Sales to Senecas" 
> The Buffalo News - March 17, 2006: "Indian Protests of Cigarette Tax Law Limited for Now" 
> Associated Press - March 18, 2006: "Tax Officials' Advice Eases Tension Over Indian Cigarette Sales" 
> NY Daily News - March 19, 2006: "Pols Fume as Cig Tax is Ignored 
> The Buffalo News - March 19, 2006: "Indians See Tax Battle With Spitzer" 
> NY Daily News - March 20, 2006: "Supermart Sues L.I. Indians Over Sale of Cigs" 
> Niagra Falls Reporter - March 21, 2006: "State's Latest Sales-Tax Grab Jeopardizes Rez Businesses" 
> NY Sun - March 22, 2006: "Council Wants Indian Tribes to Pay State Cig Taxes" 
> Indian Country Today - March 24, 2006: "Cigarette Tax Issue Smolders in NY State" 
> Convenience Store News - April 29, 2006: "NY Lawmakers Seek To Halt Tax-Free Cigarette Sales" 
> Utica Observer Dispatch - May 3, 2006: "Convenience Stores Plan To Sue Pataki" 
> Associated Press - May 3, 2006: "Group Sues State To Overturn Law Banning Internet Tobacco Sales" 
> Star-Gazette - June 22, 2006: "Senate Approves [Cigarette Tax Measure]" 
> The Buffalo News - June 22, 2006: "Senecas Blast New Law Cutting Tobacco Supply" 
> WXXI (PBS) - June 27, 2006: "Group Asks Pataki to Sign Back-Door Bill to Collect Cigarette Taxes" 
> NY Sun - July 25, 2006: "Law Department Sues Cigarette Wholesalers" 
> Adirondack Daily Enterprise - August 5, 2006: "Cigarette Tax Dispute Leaves Day Wholesale Facing Lawsuits" 
> Associated Press - August 7, 2006: "Tobacco Wholesalers Mull Suit Over NY Cigs" 
> NY Daily News - August 10, 2006: "City to Smokers: Cough Up 7M in Owed Net Taxes" 
> NY Post - August 10, 2006: "Cough Up Web Cig Taxes: City" 
> Queens Chronicle - September 14, 2006: "Up In Smoke: City Wants Cigarette Money" 
> WNBZ Radio - December 7, 2006: "Cigarette Tax Suits Against Day Wholesale Dismissed"  
> NY Post - February 12, 2007: "Cig-tax Dodgers Spared" 
> NY Post - March 4, 2007: "Pol Signals Smoke-Tax Health Aid"  
> The Buffalo News - March 18, 2007: "Focus: Taxing Cigarette Sales.  The State and the Senecas: Who Will Blink First" 
> Associated Press - March 22, 2007: "Gov. Spitzer Urged to Collect Cigarette Tax" 
> Democrat & Chronicle - April 3, 2007: "Proposed Bill Takes on Cigarette 'Buttleggers'" 
> Reuters - October 19, 2007: "Educated NY Smokers Dodge Cigarette Taxes --Report" 
> NY Times - December 5, 2007: "Much of Suit Aimed at Indian Cigarette Sales is Dismissed" 
> The Buffalo News  - April 11, 2008:  "Seneca Nation Remains Free of State's Soaring Cigarette Taxes" 
> NY Post - April 27, 2008: "'Cig Break' Brawl. Heat's on Gov to Tax Indian Smokes" 
> NY Times - September 30, 2008: "City Sues Reservation’s Cigarette Stores" 
> Newsday - June 9, 2009: "NYC suit claiming Internet cigarette taxes fails" 
> The Post-Standard - July 10, 2009: "Court Ruling Puts Cayuga Indian Nation Back in Cigarette Business" 
> The Buffalo News - August 15, 2009: "State Drops Collection of Taxes on Indian Cigarettes. Writes Off Revenue From Reservation Sales." 
> Associated Press - August 27, 2009: "Brooklyn Judge Enjoins Smoke-Shop Indians" 
> NY Post - November 3, 2009:  "Paterson Butts Out" 
> Wall Street Journal - January 25, 2010:  "High Court Rules Against New York City in Internet-Tobacco Suit" 
> The Buffalo News - February 24, 2010:  "Another Try at Taxing Indian Cigarettes" 
> NY Daily News - April 3, 2013:  "Cough Up 10M!. Cigarette Shops on L.I. Reservation Burned for Untaxed Sales" 


Only those who live in the five boroughs of NYC. 

UPDATE:  2/23/05 - NY State Gets in the Act.  The analysis applies to the state as well now. NYC residents to be hit a second time. (See 2/23/05 news below) 


It's consistently reported that the names were obtained through lawsuits brought against online cigarette retailers(s) compelling them to hand over their customer list.  It's unclear which jurisdiction gets the ultimate credit for obtaining the list and/or how many retailers are involved:  

NY Times:  "Compiling names of customers from an [singular] online cigarette retailer..." 

NY Newsday:  "The city got the New Yorkers' names from lawsuits brought by other jurisdictions that compelled online cigarette sellers to turn over their customer lists." 

NY Post:  "The Finance Department said 2,300 letters demanding payment went out Monday to a list of city smokers obtained from Web sites sued by the federal government in Virginia.  Another 1,800 letters went out yesterday to anyone who bought tobacco from another Internet company sued by the city." 

NY Daily News:  "...the city began issuing harsh letters to 3,700 city smokers whose names popped up in lawsuits against three online cigarette sites."  


Only those who purchased cigarettes from the retailer(s) that was the subject of the lawsuit(s).  

Some newspapers report that people receiving bills did business with that operated (now defunct) out of Virginia.  Those getting bills that contacted me did business with (also defunct) that also operated out of Virginia.  

After an exhaustive search, even with a report that it was a "landmark" court ruling in Virginia against, I found no court ruling or any other shred of information or documentation on Cigs4Cheap other than a dead link on sites that list tobacco retailers. Neither did I find anything that links the two.  

However, even lacking the evidence, generally one company will operate under several names and web sites.  Based on the puzzle pieces it can be reasonably concluded that was owned by the same company that operated  Furthermore, based on information contained in a lawsuit carried out in California against several internet retailers, it names LLP Enterprises, Inc. and its president Adib Mograbi as the Virginia corporation doing business as Cigoutlet-The Tobacco Store, and 

(related link

*At this time (Jan. '05), based on the cumulative information available, it appears that this is the ONLY company, operating under several web site names/addresses, whose customer list is the source of the names of NYC residents being targeted. Even though the California suit I cite doesn't include as one of the businesses operated by LLP Enterprises, there's sufficient reason to conclude that it might be.  Though I make no promises that it isn't a separate company and that the city is possibly in possession of two company's customer lists. It's just that I doubt it. 

If you did not do business with any of the sites operated by this company - or did, but not within the city's targeted period of July 2002 through April 2004 -- you can be more confident that you will not be receiving one of these letters this time around.  

Although some of the reports state that more letters will be forthcoming shortly in a second wave it's my OPINION that they will still be related to the web sites already identified.  While the first wave might have been from's customer list the second wave might be from's customer list.  Again, no promises though that that is the case.  Though by the numbers of letters reported to be in the second wave (1800) it sounds like it's not more than from one other retailer's customer list, whatever that one might be. 

March 7, 2006 - The NYC Law Dept. reports today that it has successfully sued and obtained the customer lists from eSmokes, Inc. for purchases made between 2000 and mid 2003. This vendor is missing from the two original (and first two) lists of named targets below -- obtained from two (and only) previous press releases -- because no press release was issued or otherwise publicly reported when a suit against eSmokes, Inc. was added. 

March 10, 2006 - Sources report that has agreed to settle the suit filed against them by NYC in Jan. 2003 (below) and provide their customer list to authorities who expect these back tax letters to go out in a few months.  

August 10, 2006 - NYC sends back-tax letters to customers  


The NYC Dept. of Finance is working on it but it will depend on the success, or the degree of any success, of the lawsuits filed by the city on behalf of NYC DOF that the news reports correctly speak about.  

In January 2003 the NYC Law Dept., in conjunction with the DOF, released a press release regarding its commencement of a lawsuit against 14 cigarette retailer web sites.  

The introduction of the press release:  The City’s suit seeks treble or triple the amount of the taxes the City has lost by reason of the defendants’ unreported sales to New York City residents -- which could amount to in excess of $15 million in recovery for the City -- and an injunction that would require the defendants to file the federally mandated Jenkins Act reports [that alert state tax authorities to out-of-state cigarette purchases, so that the purchases can be taxed] and to desist from continuing to misrepresent the tax status of Internet purchases. 

The sites named as defendants are: 
    both operated under, Inc. 
7. (notes on site it will not ship to NY) 
    all 5 operated under Hemi Group, LLC 
8. (notes on site it will not ship to NY) 
    operated under, Inc. 
    operated under PaylessCigs 
11. (currently unavailable - possibly defunct) 
    both operated under Hooray's Inc. 
12. (currently unavailable - possibly defunct) 
13. (reassigned to different product) 
    both operated under S4L Distributing, Inc. 
    operated under Double B Distributing d/b/a Discount Tobacco Store 

In October 2003 the NYC Law Dept. released another press release regarding its expansion of its quest and filing a new lawsuit against another 7 cigarette retailer web sites.  

The press release explanation is the same as the first but with the additional charge that the retailers are violating the new NYS law that prohibits shipment of cigarettes by retailers from any state (even NY) to New Yorkers. The law was effective (March 2003) prior to this second lawsuit but after the first. 

The sites named as defendants are: 
• (notes on site it will not ship to NY) 
• (defunct) 
• (defunct) 

(this time they do not note the operators but research indicates they are all operated by separate companies) 

(The following additional information was discovered and added on March 12, 2006) 

In April 2004 the NYC Law Dept. filed a third lawsuit against another 3 cigarette retailer web sites.  

The sites named as defendants are: 
• (defunct) 
• (defunct) 
   operated under National Wholesale LLC 
  operated under C4L(ess) LLC 

In March 2005 the NYC Law Dept. filed a fourth lawsuit against another 6 cigarette retailer web sites.  

The sites named as defendants are: 
• (site still up but reportedly out of business) 
   operated under PA Resources, Inc.  
• Silver Cloud Smoke Shop  
• (reassigned to a generic site) 

As it turns out, though the two sites' customer lists that were the first to fall into the hands of NYC  -- and -- are included in one of the city's lawsuits, it was a suit brought by the federal government that gets credited with settling with those companies and providing the states (aka "the victims") with the lists that were first handed over to them.  

You'll note that I added that even if successful in their suits there MIGHT be a degree to which they are successful.  That could mean they reach a settlement whereby the retailers agree to pay all or a portion of the taxes owed and agree to stop shipping to NY or if for some reason they continue to ship (hardly unlikely but for the sake of argument...) will agree to file the customer names with the city from that day forward. 

I present this scenario based on a study on Internet Cigarette Sales conducted by the United States General Accounting Office that, among other things, found that "results were limited" when states have taken action to promote Jenkins Act compliance by internet cigarette vendors.  Though none of the actions or results being reviewed were due to lawsuits.  This report also includes the reactions of private citizens, that might interest you, to receiving back taxes bills and what they did or did not do. 

The intent of this study was to conclude the best remedy to the "problem."  They concluded:  

To improve the federal government’s efforts in enforcing the Jenkins Act and promoting compliance with the act by Internet cigarette vendors, which may lead to increased state tax revenues from cigarette sales, the Congress should consider providing ATF with primary jurisdiction to investigate violations of the Jenkins Act (15 U.S.C. §375-378). 

Well, the recognized "problem" (which did need Congress as a good fix) was handled another way when special interests got together and crafted the PACT Act (Prevent All Cigarette Trafficking Act).  Rather than trying to enforce and recoup lost taxes the plan is to just make a federal law that prevents shipping of tobacco products.  The U.S. Senate bill passed in January 2004.  Since then the House has not acted on their version of the bill.  I implore you to visit our action alert page, use the suggested letter, and follow the directions on how to contact your representative. 

Further reporting by newspapers brings some new information on what the personal risk factors are and could relieve some tension: 

"The city claims it will not penalize citizens at this time who purchase tobacco products from Indian tribes..." ~CNS News 1/17/05 

New York also has launched lawsuits against 30 other Web sites, hoping to recover lost revenue. But those customers won't be getting letters just yet. The lawsuits ask for buyers' names and their orders to calculate how much taxes to demand from the Internet companies, a city lawyer said. New York resorted to going after the buyers this time because was bankrupt. 

''We would prefer to collect the money from the companies,'' said Eric Proshansky, a litigator for the city. ''It's rather inefficient to go after 5,000 people one at a time.'' ~LA Times 1/18/05 

Not that we approve of the government going after the retailers either but it's information on how this campaign relates to your personal situation. 


UPDATE: 2/23/06 - Judge Dismisses New York's Suit Against Internet Cigarette Sellers 

The New York Law Journal reports New York City's attempt to sue Internet cigarette sellers for lost tax revenue under a racketeering theory has been dismissed by a federal judge for the second time. 

This ruling will apply to all the suits filed since they were all based on the same theory. 

Caution to celebrate is warranted because the city will appeal, feeling confident the ruling will be reversed.  Well, time will tell (6 mos. to a year). 

Perhaps the most disturbing news is that the vendors who have recently settled with the city (eSmokes and -- by providing their customer lists --  could have now backed out but none want to.  So much for some promises of protecting their customers (already apparent but now emphasized). 


First and foremost, the question that first leaps from everyone's lips is, "Can they do this?  It can't be legal!"  

They can and it's legal.  There are no constitutional violations occuring.  Also, it does no good to point fingers at others who buy all sorts of other products over the internet and don't report taxes.  It's tobacco and smokers who are demonized and persecuted and if this is the tax category they want to hound then that's that. 

That said, we strongly urge anyone who received a bill to demand to see the written proof showing the purchases before paying.  Refuse to take their word for it.  

Despite what the person handling the taxes at the DOF told one caller  --that the only option was to pay -- that is not the case: 

The New York City Tax Appeals Tribunal ("The Tribunal") is an independent agency created by the New York City Charter. The Tribunal has the responsibility of providing a fair, impartial, efficient, and knowledgeable forum in which to resolve disputes between taxpayers and the New York City Department of Finance (DOF). 

The only impediment to seeking relief through the tribunal is that you must appoint either a lawyer or CPA to represent you. The form necessary is called "Power of Attorney."  

One other report confirms what we urge anyone receiving a bill to do -- demand to review their information before handing over your money.  It also reveals that the DOF will listen to appeals (without needing a lawyer or other professional representative): 

NY Daily News, Jan. 20, 2005 

Smokers billed for sales tax they never paid on cigarettes they bought over the internet can settle up in installments, but one puffer warned them to look closely at the city's paperwork. 

The city Finance Department said offenders can call the city Office of Tax Enforcement to set up payment plans. 

But one smoker who was billed said city snoops counted several of her purchases twice.  When she protested, the Finance Department cut her bill by $150. 

I'm sorry I can't offer any other legal suggestions.  A large part of the time eaten up in researching the situation was to find a legitimate legal defense.  Every angle I pursued ended with a door being slammed.  Perhaps an attorney reading this could share some possible defense I was unable to find myself. 


1. I've waited till now to discuss the safety of tribal-run internet retailers. 

It's time to reflect on which web sites have so far been the source of the customer lists obtained by the city.  They were not tribal-run.  

Indian reservation retailers have insisted, and continue to insist, that they will never hand over their customer lists, not even if faced with a subpeona.  They stand behind their sovereign nation status as being immune from government forcing them to do so or collect taxes from them. 

Tribal-run retailers are the safest refuge.  Though even with their commitment to shield their customers I want to emphasize the word "SAFEST."  

Unfortunately, it's not stopping the city from going after them.  Some of the retailer sites listed as defendants in the city lawsuit are tribal-run.  

Even so, it's a political and legal hot potato and we have most faith in their pledge not to divulge customer information under any pressure, legal or otherwise.  So if you saw one of the Indian reservation sites you've done business with on the above lists you have hope that you'll still be safe. 

2. The "Two Carton" provision 

During the constant battle over cigarettes and the NY laws created to regulate them it's been uttered (without much clarification) that "it's okay to purchase two cartons." 

I reviewed both the NYC Administrative Code (Title 11, Chapter 13) and the NYS Tax Code (Article 20).  Both say the same: 

NYC Admin. Code: 

 § 11-1302 
b. The tax imposed hereunder shall not apply to: 
    1.  The use, otherwise than for sale, of four hundred cigarettes or less brought into the city, on or in possession of, any person; 

NYS Tax Code: 

§  471-a 
There is hereby imposed and shall be paid a tax on all cigarettes used in the state by  any person, except that no tax shall be imposed... (3) on the use of four hundred or less cigarettes, brought into the state on, or in the possession of, any person. 

This exemption ONLY applies to cigarettes purchased IN PERSON.  The exemption does not apply if it is received by mail. 

You probably don't know that the state provides a separate tax form for reporting cigarette taxes owed -- "Cigarette Use Tax Return (Form CG-15)" (see also form CG-15-1 - "Instructions for Form CG-15" 

It is on this form that the explanation is provided:  

Note: Cigarettes shipped into New York by mail are not brought into the state on or in the possession of the user, and therefore do not qualify for the [two carton] exemption. 

It further goes on to explain: 

If more than 400 cigarettes are brought into the state (or into the state and city), then all of the cigarettes are subject to tax(es). 

Cigarettes acquired by an individual to be given as a gift to another individual are not exempt because the law does not exempt gifts of cigarettes. 

The only cold comfort the two carton provision brings is that you can choose to travel to the retailer to make your two carton maximum purchase and be free from paying tax.  Surely that's not convenient for most people but is for those who live close by. 

Note that purchases made at tribal-run retailers (NY based or otherwise) are the equivalent to an OUT of state purchase.  As sovereign nations, even though they reside within a state, they are technically not part of the state. More than that, they are a separate nation.  So the mailing exception to the exemption still applies.  But as a New Yorker you can go to a reservation in New York and you would be exempt from the tax on a two carton maximum purchase because you bought them OUT of state. 

3. Switch to a Discount Brand / Roll Your Own 

The last resort to beating them at their own game is to switch to discount or deep discount cigarettes. For instance, Seneca brand can be found for $10/carton (that's not a typo).  As disgusted as it might make you feel you can then also send a check for $15 to the NYC DOF for a total cost of $25/carton.  Considering that a carton of premium brand cigarettes in NYC would cost you $70+ you'd be way ahead of the game, legal, and able to give Mayor Bloomberg the finger without having anything to hide. 

The bonus (yes, a bonus to the finger!) is that by not purchasing cigarettes from any of the major three tobacco companies or some of the smaller tobacco companies who participate in the Master Settlement Agreement you'll be affecting the amount of the annual payment the state receives.  Each state’s yearly MSA payment is based on cigarette sales by MSA participants for the previous year.  That's the money the state steals from smokers (to cover the payments the tobacco companies passed the cost on to smokers by raising the price per pack) and depends on to fund just about everything else except smoking-related health care.  

As a matter of fact another advocate has just launched a campaign called "21st Century Boston Tea Party: Holding the States' MSA Payments Hostage."  Visit the site for a detailed explanation, including a further explanation of the MSA and which brands to buy. 

Or roll your own (as the phrase goes). Purchasing loose tobacco is not purchasing "cigarettes."  The usual city and state tax per pack does not apply. Loose tobacco products (tobacco, tubes, filters) are supposed to also be taxed but at a much lower rate and I believe is only collected by the state (who has yet to begin their own tax witchhunt). Rolling your own could cost you as little as $1.25 per pack.  Click here for a fun lesson on all you need to know about cost and how to do it.  


A strong rumor circulating is that the U.S. State Attorneys General are going to threaten the credit card industry with a class action lawsuit to force them to monitor credit card purchases of tobacco products.  

In the case of overseas vendors and the reservation shops (remember, also considered another nation) they cannot force an out of country vendor to come to the U.S. to be prosecuted for selling untaxed tobacco products in the states so they're looking to go after the buyers instead. 

(Read an interesting short piece on how Indian national sovereignty works in regard to  taxes and the courts) 

The rumor gets a little murky as far as the non-tribal U.S. retailers go. It's reported that they will be forced to sign contracts with UPS, Federal Express and other common carriers that they will not use them to ship tobacco products to anywhere in the U.S. (not just NY as it legally stands now).  That would leave only the US Postal Service, unless Congress passes the PACT Act as discussed previously that would make shipping illegal, period.  The rumor is not clear on whether the credit card companies will be asked to monitor purchases from these sites as well.  That's probably been left unclarified because non-tribal-run sites are not shielded from legal action and not immune from legal action that would demand they turn over their customer lists -- the government getting it that way instead of through credit card history.  However, it's reasonable to conclude that the AGs could easily ask the credit card companies to monitor them too. 

The solution to protecting yourself against this new threat is a MONEY ORDER.  Money orders are virtually untraceable and are happily accepted by retailers.  As far as tribal-run retailers go, they might record that purchase but since they won't turn over their customer list you're doubly covered.  

In a related matter, likely NY's first step in working toward the above, NYS Attorney General Spitzer just recently demanded that the credit card processor, VeriSign, not accept transactions that come from NY cigarette retailers no matter what state the customer resides in.  It's not clear that every retailer has been affected.  Those that are have sent notices to customers about the situation or posted a notice on their site, claiming that one way they hope to rectify the situation is by finding an alternate processor.  However, it appears that in regaining the ability to process credit cards, rectifying the situation only went so far as promising not to process NY customer orders only.  They can process credit cards for orders placed by residents of other states.  

At my prompting the NY Post covered this on January 5th: 

By Kenneth Lovett  

ALBANY — State Attorney General Eliot Spitzer has turned his attention to Internet cigarette sales by warning credit-card companies to block orders from tax-free online tobacco companies, The Post has learned.  

At least two web-based companies, and, have told customers that they are presently not shipping to New York.  

Cigs4free directly blames Spitzer.  

"Our site is temporarily down due to credit-card processor issues," the company says in a recent message posted on its Web site.  

"New York State Attorney General Eliot Spitzer has ordered Verisign, our processor, to block any orders from our Web site!"  

The Internet company yesterday began accepting phone orders again and said it hopes to begin accepting credit-card orders again as early as today.  

Spitzer spokesman Marc Violette denied the AG's office ordered card companies to stop processing orders from online tobacco companies, but acknowledged that "letters of guidance" were sent.  

"We're simply reminding credit-card companies and the processors of credit-card transactions that . . . this falls into the category of illegal transactions," Violette said.  

It's an understatement to say that New York smokers are under a complete attack.  If you don't live in New York, learn and be prepared. 


NYS Consolidated Law ARTICLE 13-F; Section 1399-ll (small letters "L") 
Regulation of Tobacco Products And Herbal Cigarettes 
Re: Unlawful shipment or transport of cigarettes (to NY) 

Court Case Contesting NYS Law re: Unlawful shipment or transport of cigarettes (to NY). Reversal of opinion.  Appelate Court finds in favor of the state. 

Jenkins Act as amended by the PACT Act 

Is the MSA Unraveling 

MSA Update 

MSA Challenged by Kentucky Retailers 

Reservation and Net Sales Under Fire (scroll down page) 

PACT Act Timeline and description 

Disclaimer:  No assurances can be given about the accuracy of any of the opinions  provided.  You should seek independent professional or legal advice before acting upon any opinion, advice or information contained in this notice. 


NY Daily News - April 3, 2013  
Cough Up 10M!  Cigarette Shops on L.I. Reservation Burned for Untaxed Sales  

Three Indian smoke shops must pay more than $10 million to New York City for trafficking untaxed cigarettes off a Long Island reservation, a Brooklyn federal judge ruled. 

Judge Carol Amon also prohibited the bootleg smoke sellers — which operated on the Poospatuck Reservation in Mastic — from ever selling untaxed cigarettes again. 

It’s a major win for Mayor Bloomberg, who sued the cigarette sellers in 2008, claiming they were selling cartons in bulk to people outside the tribe for huge profits. 

Bloomberg argued that selling the cheaper-priced, untaxed butts hurt lawful city businesses and deprived city coffers. 

“This is yet another major success in the legal battle against untaxed cigarettes,” said top city lawyer Michael Cardozo. “It should be very clear by now to those who sell and deliver untaxed cigarettes that flouting the law and undermining our city’s public health measures will cost them.” 

Poospatuck members would have had to smoke 960 packs a day to reach the number of cigarettes that were being sold on the reservation prior to the lawsuit, according to the city. 

The shops — Peace Pipe Smoke Shop, TDM Discount Cigarettes, and Red Dot Feather Smoke Shop — were permitted to sell untaxed cigarettes to members of the tribe, but not to nonmembers. 

In siding with the city, the court said in its March 28 decision that “unstamped cigarettes sold by these defendants were trafficked in large quantities into the city from the Poospatuck Reservation for many years. 

“These cigarettes entered the city without any payment of city cigarette taxes,” the court found. 

Authorities stamp cigarettes to show that the sellers have paid state and federal taxes. 

In New York City, an extra $5.85 in taxes is added onto the price of every pack of cigarettes. 

It’s the highest cigarette tax rate in the nation. 

The city had initially sued eight cigarette shops, but five voluntarily agreed to cease operations when the lawsuit began. 

The testimony of former cigarette bootleggers and company records helped the city win its case, the judge found. 

Peace Pipe was hit with the heftiest fines. The judge ordered it to pay $10,041,075, while TDM Discount must pay $450,000. 

Red Dot Feather Smoke will be assessed a penalty at a later date. 

Bloomberg — who banned smoking in bars in his first term — said that in addition to depriving the city of tax revenue, the sale of bootleg cigarettes also undermined the city’s efforts to decrease smoking. 

The Buffalo News - February 24, 2010 
Another Try at Taxing Indian Cigarettes 

ALBANY — A state tax department policy of not enforcing tax collections on Indian cigarette sales was officially rescinded Tuesday by the Paterson administration. But it will still take approval of a new set of regulations before the tax-free sales are halted.  

Gov. David A. Paterson announced a proposed set of rules to break the decades-long dispute over tax-free tobacco sales, which critics say could be costing the state as much as $1 billion a year in revenues. The new plan envisions the tax being collected “upstream” at the wholesale level and not at Indian retail shops.  

The proposed rules require cigarette manufacturers to sell cigarettes only to licensed stamping agents that certify they are not supplying tax-free retailers, such as the dozens of businesses on the Seneca Nation reservations, with cigarettes missing an official state tax stamp; they face perjury charges for lying.  

The latest move comes as the State Senate Finance Committee is poised to issue subpoenas as early as today to a broad segment of the tobacco industry.  

Sen. Carl Kruger, a Brooklyn Democrat who has railed against the lost tobacco excise taxes because of Indian and bootleg sales, is targeting nearly every aspect of the cigarette supply chain with a legal request for information that “could fill a dump truck,” said one government source.  

The lawmaker wants to get details on the extent of the state’s untaxed cigarette industry; one state estimate has claimed nearly 40 percent of smokers buy untaxed or low-tax cigarettes “regularly.”  

The Paterson administration today also will propose legislation to put in statute its new plan to permit a set number of tax-free cigarette sales to the state’s nine tribes for personal consumption by their members.  

It would bypass a law already on the books that calls for coupons to be used by Indians to buy their own tax-free cigarettes. The legislation would lift a current injunction imposed by a state court judge in Buffalo against the state’s enforcement of the coupon-based law.  

The release of the proposed rules kicks off a 45-day comment period and a review period that could see enactment in six months, according to an administration official. Government sources said any agreements struck in the coming months to resolve the issue with individual Indian tribes could supersede the new rules.  

The proposal comes as Paterson also is trying to push through a $1-per-pack excise tax increase, to $3.75, the nation’s highest. The move would further increase the profitability of bootleg and Indian cigarette sales unless a new collection mechanism is adopted.  

The new regulations would result in licensed stamping agents, which basically serve as middlemen between manufacturers and retailers, paying the taxes to Albany. Besides certifying they are making only legal, taxable sales, wholesalers would have to list the source of their cigarettes with the tax department.  

Manufacturers would have a legal burden, as well, because they would have to collect the certifications from wholesalers — meaning they could not sell their products to any wholesaler unless that supplier has certified to the tobacco companies that they do not sell any illegal tax-free cigarettes.  

The Seneca Nation did not comment on the proposal.  

“It seems reasonable to me,” Russell Sciandra, director of the Center for a Tobacco Free New York, said of the proposed rules.  

The plan also calls for an “adequate” number of cigarettes to be supplied tax-free to Indian tribes for personal consumption of its members. In the case of the Senecas’ 7,967 members, it would mean a total of 167,000 tax-free packs being supplied to the tribe every quarter — or 21 packs every three months for every man, woman and child enrolled as a Seneca.  

In all, the state’s nine tribes—with a total of 31,000 members — would receive 648,000 packs of tax-free cigarettes per quarter. Licensed stamping agents would be in violation of state law if they supply an amount beyond the approved allotment for each tribe. 

Wall Street Journal - January 25, 2010 
High Court Rules Against New York City in Internet-Tobacco Suit 

WASHINGTON—The Supreme Court ruled Monday that New York City couldn't use federal racketeering laws to sue out-of-state Internet tobacco retailers that don't file reports on city residents who buy cigarettes online.  

The city wants the reports so it can collect cigarette taxes directly from residents who purchased tobacco products online. The retailers aren't required to collect the taxes.  

The case before the high court centered on New York's allegations that New Mexico-based online retailer Hemi Group committed racketeering offenses of mail and wire fraud by allegedly failing to submit reports on its New York City customers to state tobacco administrators. The city, which said it lost millions of dollars in cigarette tax revenues, said federal law required Hemi to submit the reports.  

But the Supreme Court, in a 5-3 opinion written by Chief Justice John Roberts, ruled that the relationship between Hemi's alleged actions and the city's inability to collect taxes was too indirect to establish racketeering liability against the online retailer.  

Chief Justice Roberts said the direct cause of the alleged fraud against the city wasn't Hemi's conduct, but the refusal of residents to pay their taxes for online cigarette purchases. "The city, therefore, has no RICO claim," Chief Justice Roberts wrote.  

Justice Stephen Breyer said in dissent that the city made a sufficient racketeering connection to Hemi's alleged conduct. Had Hemi filed the reports, the state would have been able to obtain a significant share of the taxes it was owed, Justice Breyer said.  

Justice Sonia Sotomayor didn't participate in the case because she had participated previously as an appellate judge when the case was before the 2nd U.S. Circuit Court of Appeals.  

The case is Hemi Group v. City of New York, 08-969. 

NY Post - November 3, 2009 
Paterson Butts Out 

Looks like Gov. Paterson was just blowing smoke when he asked the feds to assess the risk of violence from attempts to collect cigarette taxes from state Indian reservations.  

At a state Senate hearing last Tuesday, Paterson's chief counsel, Peter Kiernan, made clear that his boss would not pursue the taxes, because the gov -- like his predecessors, George Pataki and Eliot Spitzer -- just doesn't think enforcing the tax law is worth the hassle.  

Even though his recent request for a federal "threat assessment" suggested that he was preparing to go after the taxes. And even though the courts say the state has every right to collect taxes from cigarette sales to non-Indians.  

Paterson, it seems, is just too nervous about the prospect of tribal violence to claim what Albany is legally owed.  

What a dangerous message to send.  

Among the "costs" of enforcement (i.e., excuses for non-action), Kiernan noted "the psychic harm of forgone opportunity to live in peace with those who are entitled to sovereignty and their interpretation of what that means."  

Say what? He's talking about tribes that rioted, threw burning tires on the Thruway and fought state troopers, sending many to the hospital, when authorities tried to collect the tax in 1992 and 1997.  

Indeed, tribal leaders have made their current intentions clear, too.  

"We will never allow the state to tax our commerce," said Seneca leader JC Seneca. "A strong reaction to further affronts on tribal sovereignty is inevitable," warned an Oneida spokesman.  

Of course, the issue is hardly "sovereignty"; with some 300 million packs flowing out of state reservations each year, what's really at stake is a vast racket premised on an unfair tax advantage. Law-enforcement agents believe even terrorist networks are getting a piece of the action.  

Meanwhile, the state and city lose an estimated $1 billion a year in uncollected tax revenues -- even as both face multibillion-dollar budget shortfalls.  

Paterson's message? We won't collect taxes from you if you threaten violence.  

Clearly, he has no right to gripe when critics attack his lack of mettle. 

Associated Press - August 27, 2009 
Brooklyn Judge Enjoins Smoke-Shop Indians 

A Brooklyn federal court federal judge this week issued a ruling that could doom an Indian reservation’s booming business in tax-free cigarettes and spell trouble for other native American tobacco dealers in the state.  

In a decision announced Wednesday, U.S. District Judge Carol Bagley Amon barred a group of smoke shops on Long Island’s Poospatuck reservation from selling tax-free cigarettes to the general public, saying their location on tribal lands didn’t exempt them from state and federal tax law.  

Only members of the Unkechaug tribe, which controls the reservation, have a right to buy cigarettes there without paying taxes, she ruled, not the many non-Indian customers who flock to the shops for cheap smokes.  

If upheld, the injunction would eliminate much of the business at the stores, which sell millions of cartons of cigarettes a year and are among the biggest suppliers in the state.  

The judge stayed the ruling for 30 days to give the shops time to appeal, and Unkechaug Chief Harry Wallace quickly promised that the tribe wouldn’t let the decision stand unchallenged.  

“It’s improper,” he said of the ruling.  

He accused the judge of ignoring state law and policy regarding taxes and Indian reservations because she dislikes cigarettes.  

“She wanted to stop sales at any cost,” he said, adding that the ruling would be difficult to comply with, while robbing the stores of their competitive edge. “It would put every Indian store ... out of business.” The ruling is a victory for the city and its mayor, Michael Bloomberg, who sued the stores over their sale of tax-free cigarettes, saying they were illegal.  

“The city will go after every dollar that is owed to city taxpayers,” Bloomberg said. “Based on the evidence introduced at the four-day hearing, the court found that each business was selling huge quantities of cigarettes on which state and city taxes had not been paid. It also found that such sales of unstamped cigarettes were likely to continue in the absence of the court’s injunction – and that there is a substantial trade in unstamped cigarettes between the Poospatucks and New York City.”  

The court issued the injunction after concluding that “the city has established a clear or substantial likelihood of success on the merits of its claim” that the defendant businesses’ “receipt, possession, sale, distribution and purchase of quantities far in excess of 10,000 cigarettes, which do not bear New York tax stamps, under circumstances where such stamps are required” violates the Federal Contraband Cigarette Traffick-ing Act, Bloomberg said.  

In its suit, the city claimed the reservation shops had made a mockery of rules restricting the sale of tax-free cigarettes to members of the tribe.  

Each resident of the 55-acre reservation, near the town of Mastic, would need to consume 19,200 cigarettes a day to account for the tons of tobacco sold by the shops, the city said.  

City lawyers estimated that smoke shops cost the city and state a combined $840 million in tax revenue, much of it lost to smugglers who traveled to the reservation to stock up on cigarettes, then resold them in the city.  

“We are pleased that the court ruled in the city’s favor,” said New York City Corporation Counsel Michael A. Cardozo. “The Law Department will continue to support efforts to lawfully collect cigarette taxes and also to reduce smoking.”  

Smoke shops located on state-recognized Indian reservations have enjoyed a huge business in cigarettes since the mid-1990s, in part thanks to a string of governors who have refused to enforce state laws that were supposed to set up a system for taxing sales to the general public.  

State courts have repeatedly split on whether that policy, known as forbearance, absolves the reservation shops of any responsibility of collecting taxes.  

As recently as July, a midlevel state appeals court ruled that smoke shops on land claimed by the Cayuga Indian Nation could not be prosecuted under state law for failing to collect taxes on cigarette sales.  

Federal judges, however, have taken a harder line. One Poospatuck smoke shop owner is awaiting sentencing in a case in which he was convicted of racketeering for selling large quantities of untaxed cigarettes. 

The injunction covers five smoke shops - Monique's, Peace Pipe Smoke Shop, Red Dot & Feather, Smoking Arrow and TDM - and nine individuals. Other reservation smoke shops settled earlier in the case. 

The Buffalo News - August 15, 2009  
State drops collection of taxes on Indian cigarettes. Writes off revenue from reservation sales 

Despite a ballooning budget deficit, the Paterson administration quietly has written off taxes it had been expecting to collect on sales of cigarettes by American Indian retailers — an admission that yet another governor has no plans to resolve the long-standing, thorny matter. 

In April, Gov. David A. Paterson and lawmakers agreed on a budget for the state's current fiscal year that projected revenue of $65 million from taxing cigarettes sold to non-Indians in smoke shops, through the mail or over the Internet from reservation-based businesses. 

But with no fanfare — or even public notice — the administration has eliminated the $65 million, meaning the governor now does not expect to begin collecting the taxes at least until April 1, the start of the new fiscal year. 

The decision drew immediate and sharp criticism from health groups and an association that represents non-Indian retailers who say they cannot compete with the American Indians, who do not charge the state's sales $2.75-per-pack excise tax. 

"It's embarrassing, and it's outrageous that the Empire State can't seem to figure out how to collect this tax when just about every other state does," said Russell Sciandra, director of the Center for a Tobacco Free New York, which is connected with the American Cancer Society. 

Critics say the state loses $1 billion annually by not collecting the cigarette tax. Seneca Nation of Indians retailers lead the country in the sales of untaxed cigarettes. 

For years, state officials have worried about potential violence, such as the clash between state troopers and Indians on the Thruway in 1995, when then-Gov. George E. Pataki tried to end the tax-free sales. 

Seneca Nation officials, who were working Friday on flood relief efforts, were unavailable to comment. 

Last week, the Paterson administration released a 329-page update on state spending through the first quarter of the fiscal year. 

The report said the administration believes the state now faces a $2.1 billion deficit this year, and Paterson is looking at spending cuts and other options to propose to a special session of the State Legislature, expected to be held next month. Lawmakers have not ruled out raising taxes to close the gap. 

Deep in its pages, the spending update briefly mentions lower cigarette tax revenues, but makes no specific reference to jettisoning the cigarette tax collections. 

During an interview on an unrelated topic, Robert Megna, the governor's budget director, revealed to The Buffalo News that the state is backing away from the projection of $65 million from the potential revenue source. 

Matt Anderson, a spokesman for Megna, later said the $65 million was deleted from the budget "to prudently address potential risks to our receipts forecast." 

"We continue to work diligently toward a negotiated settlement of this issue," he added. 

Laws on the books already permit the state to collect the tax, which has been an issue going back to the days of Mario M. Cuomo's tenure as governor. Over the past decade, the dispute has intensified as the state increased cigarette taxes, widening the playing field between Indian and non-Indian retailers. 

The Senecas have maintained that treaty rights going back to the days of George Washington give them the right to sell products, including cigarettes, without taxes. 

They have long said they never will act as agents of the state government in collecting taxes, which they say would kill off a flourishing Western New York business that employs hundreds of people. 

On numerous occasions, the State Legislature has sought to force Paterson, and governors before him, to collect the tax. 

In January, Paterson said he wanted to resolve the issue through negotiation. But critics say that, with the stakes so lucrative, the Indian tribes, especially the Senecas, have little reason to negotiate. 

"It's sending totally the wrong signal," James Calvin, executive director of the New York Association of Convenience Stores, said of the administration quietly striking the Indian cigarette tax money from the budget. 

"If the state has a $2.1 billion deficit, it's crazy not to access the hundreds of millions of dollars in tax revenue that's readily available from this source," he added. "It's already a law. It's collectable. The United States Supreme Court has said we can collect it. Why would you ignore close to $1 billion when staring at such a huge deficit?"  

In June 2008, the state raised its excise tax on a pack of cigarettes by $1.50 to $2.75. That gives an Indian retailer who does not charge the tax a built-in price advantage of $27.50 per carton. 

"By the end of the fiscal year, the state and Gov. Paterson, we conservatively estimate, will have forgone $1 billion that is owed on Indian cigarette sales," Sciandra said. 

The Post-Standard - July 10, 2009  
Court Ruling Puts Cayuga Indian Nation Back in Cigarette Business  

Cigarette sales resumed Friday at the Cayuga Indian Nation's LakeSide Trading convenience stores in Union Springs and Seneca Falls after state appellate judges in Rochester ruled in favor of the Indian nation in its tax dispute with Cayuga and Seneca counties. 

"The word is out," said B.J. Radford, retail operations manager for the Cayuga nation. 

In a 4-1 decision released about 3 p.m., judges in the Fourth Judicial Department ruled that as a "qualified reservation," the Cayugas could sell unstamped cigarettes. 

In late November, sheriff's deputies in the counties raided the Cayugas' two LakeSide stores, seizing about 17,600 cartons of cigarettes. The Cayugas estimated the cigarettes were worth more than $500,000. 

The Cayugas had not paid state excise taxes on the cigarettes, and the counties claimed that because the Cayugas did not have an official reservation they were violating state tax law. 

The nation's two stores lie within the Cayugas' former ancestral homeland around the north end of Cayuga Lake. The Cayugas argue that the territory is a reservation that was established by federal treaty and that it has never been disestablished. 

The stores have been selling gas and sundries -- but no cigarettes -- since the raid. Radford said customers buying gas used cell phones to alert friends that the stores were back in the cigarette business. 

"The customer base seems to be excited," she said. "I'm surprised at how fast the word seems to be getting around." 

The ruling also precludes prosecution of Nation officials by the counties. 

"The Nation is very gratified by this decision, which will permit it to resume doing what every other Indian tribe in the state has been doing for years without threat of criminal prosecution," said Dan French, the lawyer representing the Cayugas. 

Philip Spellane, an attorney for the counties, said he has not yet met with county officials to discuss what their next step would be. 

The Cayugas had appealed a December ruling by state Supreme Court Judge Kenneth R. Fisher, who said the Cayugas did not have a qualified reservation status and thus could not sell tax-free cigarettes. 

Fisher also allowed the counties to proceed with criminal tax-evasion charges against the Cayugas. District attorneys in both counties filed sealed indictments. 

The indictments were never opened, and an appeals court ruling later barred any prosecution until the court ruled on the Cayugas' appeal. 

French said Friday's ruling bars any prosecution. 

The Cayugas maintain the confiscated cigarettes have spoiled in the more than seven months since the counties raided the stores, he said. 

French said the Nation will pursue a separate civil claim, suing the counties not only for the actual value of the cigarettes but for revenue lost during the time the stores were closed. 

"The Nation anticipates lost revenues in the millions," he said. 

[NY counties plan to appeal Indian cigarette ruling - July 13, 2009] 

Newsday  - June 9, 2009  
NYC suit claiming Internet cigarette taxes fails 

New York's top court says New York City lacks legal standing to sue Internet cigarette retailers for lost taxes under state business laws.  

The Court of Appeals says the city and state now charge $4.25 per pack in excise taxes, which are owed by purchasers in New York.  

The city argued some online retailers misrepresent their cigarettes as "tax free" and claim that they don't have to file state sales reports identifying buyers, which is required by federal law.  (See Decision: 

NY Times  - September 30, 2008  
City Sues Reservation’s Cigarette Stores 

Plunging headfirst into a delicate issue that has long bedeviled New York State and Long Island’s Indian tribes, Mayor Michael R. Bloomberg criticized Gov. David A. Paterson on Monday for not enforcing cigarette tax laws, which the mayor estimated had deprived the city of up to $195 million a year in revenue. 

Residents of Indian reservations — like the 50-acre Poospatuck reservation in Mastic — are entitled to buy cigarettes tax free for their own use. 

But in a federal lawsuit filed on Monday, the Bloomberg administration accused eight stores on the reservation in Suffolk County of breaking state and federal law by selling cigarettes in bulk to bootleggers. The bootleggers, the lawsuit said, then shipped the cigarettes into the city. 

At a news conference in City Hall, Mr. Bloomberg acknowledged that the practice had existed for years. But he said the city’s lawsuit, filed in Federal District Court in Brooklyn, would not have been necessary if the state had been enforcing the law. 

Indeed, Mr. Bloomberg said, the state also would have benefited with $525 million a year in tax revenue.  

“I think the governor should go to the reservations and say, ‘As of tomorrow morning, stop this practice,’ ” Mr. Bloomberg said. “And if it requires law enforcement, that’s what the governor has the State Police for — to enforce the law.” 

To reinforce just how prevalent the practice was, Mr. Bloomberg stood next to a table stacked with packs of cigarettes and said that each of the 279 residents of the Poospatuck reservation — every man, woman and child — would have to smoke 960 packs, or 19,200 cigarettes, a day to account for the millions of cigarettes sold there in 2007.  

The mayor framed the lawsuit in the context of the global financial crisis, noting that the city was trying to slice $500 million from this year’s budget, and was likely to propose raising property taxes by 7 percent to generate an additional $600 million starting in January. “This one step alone could go a long ways in closing our budget gap,” he said. 

When asked about Mr. Bloomberg’s criticisms, Errol Cockfield, a spokesman for Mr. Paterson, said the governor was involved in discussions with the state’s Indian nations, those recognized by the state or the federal government, “to preclude the need for more endless litigation.” 

Harry Wallace, who is a lawyer and the chief of the Unkechaug Indian Nation, which is on the Poospatuck reservation, said in a telephone interview that he had not heard about the lawsuit. 

“Before we get a lawsuit, before we even get served, he serves the media first,” Mr. Wallace said of Mr. Bloomberg. “This debate has reached fanatical levels, where we are being scapegoated from everything from the fiscal crisis in New York to the mortgage crisis. I assume that at some point we’ll be blamed for global warming.” 

The lawsuit is part of a broader strategy by Mr. Bloomberg to tackle cigarette bootlegging as well as reduce smoking in New York. Earlier this year, the city won a couple of legal victories: cigarette wholesalers were found potentially liable for violating a federal law, and the city was allowed to proceed with racketeering lawsuits against out-of-state Internet cigarette retailers. 

The latest move seeks to go after cigarette retailers, but it could also entangle issues of Indian sovereignty, said Kathryn R. L. Rand, a law professor at the University of North Dakota who is an expert on Indian gambling. 

“It has legal merit, but I think it’s pushing the envelope a little bit,” she said.   

NY Post  - April 27, 2008  
'Cig Break' Brawl. Heat's on Gov to Tax Indian Smokes  

Tax-free cigarettes from Indian reservations will go up in smoke if some in Albany get their way.  

Lawyers for a state lawmaker and Gov. Paterson are scheduled to face off in an upstate courtroom tomorrow in a case aimed at forcing the state to follow the law and collect sales tax on every pack sold by the 200 or so reservation stores and via the Internet.  

Last year, roughly 304 million packs of cigarettes were sold by New York's Indian tribes - and, as has been the practice for years, not a penny of tax was collected.  

As the state tax rises to $2.75 a pack - the highest in the nation - on June 3, New York would be forfeiting about $836 million in annual revenue by choosing not to collect taxes from reservations. In the city, the tax is $1.50 more.  

Critics of the state's non-enforcement stance say sales via Indian reservations - which now represent one of every three cigarettes sold in the state - stand to soar as folks look to save money.  

Assemblyman David Townsend, an upstate Republican who has sued to force the state to collect the tax, is hoping to change that.  

In 1997, when then-Gov. George Pataki began collecting the tax, violent protests broke out at reservations. In one instance, Seneca Indians set fire to tires on a state highway, closing it. Since then, the state has lost and regained its right to collect the taxes.  

The state passed a law allowing for the collection of sales tax from reservation sales to non-Indians in 2006, but Govs. Pataki and Eliot Spitzer did not move to enforce it. Some say they were afraid of sparking protests or a political backlash.  

The price of cigarettes at reservation stores ranges from $11 to $30 a carton, compared to $40 or more in the city. As a result, local convenience stores are hurting.  

"It is driving hundreds of thousands of non-Indian customers away from licensed convenience stores, decimating their businesses," James Calvin, president of the New York Association of Convenience Stores, wrote in a recent letter to Paterson.  

Under pressure from Spitzer, then New York attorney general, credit-card companies and overnight-delivery firms stopped their associations with tax-free cigarette sales. But customers were willing to pay with a check or money order and absorb the cost of a more expensive US postal delivery service.  

Paterson has asked his staff to research the topic, and he wants to come to an agreement with the tribes, a statehouse spokesman told The Post.  

That is not sitting well with a host of critics. They are urging Paterson simply to follow the law.  

The Poospatuck Indian reservation on Long Island, home to about 270 residents, accepted shipment from wholesalers of roughly 100 million packs of cigarettes in 2007. That is enough to supply every smoker in New York City with a pack a day for more than three months. 

The Buffalo News  - April 11, 2008  
Seneca Nation remains free of state's soaring cigarette taxes. 
Defying New York law, Indian nationmerchants can expect a windfall fromstate’s continuing lack of enforcement. 

If smokers are stewing over the state’s decision this week to raise the cigarette tax by $1.25 per pack, one group that stands to reap a considerable financial windfall was not complaining Thursday: Seneca Nation tobacco merchants. 

The tax increase makes cigarettes in New York the costliest in the nation. So come June 3, Buffalo smokers will be paying more than $30 per carton just in excise and sales taxes. 

On the Senecas’ Cattaraugus territory Thursday, a carton of Marlboro cigarettes was selling for $27 to $28, while lesser-known brands were selling for as low as $11 per carton. 

By contrast, at the CVS downtown at Main and Court streets, a carton of Marlboro costs $42.70. 

The state will take no steps to try to stop the sale of tax-free cigarettes. Legislators erased from the final budget a provision that then- Gov. Eliot L. Spitzer proposed to stop the tax-free sales at the manufacturing level in the cigarette- distribution chain. 

About a third of New York’s smokers now turn to Indian retailers, bootleggers, cross-border outlets and the Internet. 

“There’s no question the extra $1.25 is going to send smokers to Indian outlets,” said Assemblyman William Magee, D-Nelson. 

“Customers are going to go elsewhere because government has artificially raised the price of the product, and we don’t have a level playing field,” said Dan Shanahan, chief financial officer of Wilson Farms, a 196- store upstate convenience store chain. 

A half-dozen Indian tribes in New York sell tax-free cigarettes in some fashion, but the Seneca Nation has long been considered the king of the tax-free tobacco market. Through online sites and independently owned smoke shops, the Senecas supply smokers in Western New York and also do a brisk business in other areas, including New York City. The Big Apple adds another $1.50 per pack in local taxes on top of the new $2.75 state tax, bringing the total excise tax there to $42.50 per carton. 

Seneca Nation President Maurice A. John Sr. declined an interview request. In a written statement, he sought to downplay the tax increase’s effect on Seneca merchants’ finances, saying cigarette sales are “not overly significant” to the tribe’s increasingly diverse economy. 

“It would be erroneous for anyone to think that this tax increase is some sort of windfall for Indian nations,” he said. “Due to our sovereignty, the state’s tax burden on its residents does not affect us.” 

Still, the managers at two Cattaraugus territory smoke shops, who asked not to be named, said they are anticipating an increase in business. 

“We’ll get a lot of business,” one of them said. “Nobody wants to pay that extra $12.50 a carton.” 

Health groups praised the decision to raise the tax, but health lobbyists recognize that with the higher tax, the cigarette tax-evasion problem is now going to worsen. 

“My concern is that, obviously, New York’s high taxes have encouraged a lot of tax avoidance. More taxes will encourage more tax avoidance, and we think, from a public health point of view, that is unfortunate,” said Russell Sciandra, director of the Center for a Tobacco Free New York. 

Spitzer came into office vowing to end the tax-free sales. But like governors before him, he backed down, and his tax department did not enforce a law already on the books that makes it illegal for wholesalers to supply cigarettes to tax-free outlets. That law was slapped with an injunction last year when the tax agency failed to distribute coupons to Indians to obtain tax-free cigarettes for their own consumption. 

But Spitzer put into his January budget proposal a plan to make it illegal for manufacturers to supply wholesalers who sell to retailers that fail to collect the excise tax. The Senate embraced the plan, but the Assembly rejected it. 

The administration of Gov. David A. Paterson has declined on repeated occasions — and again Thursday — to say what it intends to do regarding the tax-free issue. 

Though the state has declined to enforce the tax collection law that has been on the books for several years, that did not stop the State Legislature and Paterson from counting on revenues from new tax collections in the budget approved Wednesday. 

The budget anticipates getting $120 million from collection efforts involving cigarettes now sold tax-free, according to Jeffrey Gordon, a spokesman for Paterson’s budget office. But Gordon said the administration has not yet decided how the taxes will be collected. 

In addition, the state anticipates getting an additional $265 million for the higher cigarette taxes. 

But those sums are now in question. 

Critics say the new administration, like ones before it, will not collect the tax, but wanted to put a revenue number in the budget as a way to justify spending increases in the budget for the fiscal year that began April 1. 

Magee has long criticized tax-free tobacco sales. “It’s time we realize we’ve got to move forward,” Magee said. “The courts have said we could and should collect the taxes.” 

For many smokers, the tax increase will drive them to do something the tax department says is illegal: avoid paying taxes on cigarettes. 

When New York residents file their their state income tax returns, they are required, by law, to pay any sales and excise taxes that they did not pay over the course of the year through Internet sales. 

Additionally, there are criminal penalties for possessing untaxed cigarettes, including a felony level for possession of more than 50 cartons. 

A lawsuit brought by Assemblyman David R. Townsend Jr., R-Sylvan Beach, seeking to require the state to collect the cigarette taxes is scheduled for oral arguments in State Supreme Court later this month. 

James Calvin, executive director of the New York Association of Convenience Stores, said, “It’s ludicrous to have a law in place and for an agent of state government to blatantly refuse to enforce it.” 

NY Times  - December 5 , 2007  
Much of Suit Aimed at Indian Cigarette Sales is Dismissed  

A federal judge has dismissed all but one charge in a lawsuit, filed last year by a supermarket mogul who hopes to be the next mayor of New York City, that challenged two Long Island Indian tribes over their longstanding practice of selling tax-free cigarettes from reservation smoke shops.  

John A. Catsimatidis, whose holdings include the Gristedes supermarket chain, claimed in the suit that the two tribes illegally undercut his business, and he sought to force Indian retailers to buy cigarettes from wholesalers at the taxed price. He also asked for $20 million from the two tribes’ cigarette retailers, the amount he claims he has lost. 

Leaders from the tribes, the Shinnecock and Unkechaug Indian nations, responded by moving to have the claims dismissed. 

In a decision rendered on Friday and announced yesterday, Judge Carol Bagley Amon of Federal District Court in Brooklyn dismissed the claim that the non-tax sales “created, fostered and nourished a thriving black market in illegally discounted cigarette sales” and also dismissed charges of corrupt business dealings and unfair competition. 

Harry Wallace, chief of the Unkechaug nation and a lawyer who owns a smoke shop on a reservation in Mastic, said yesterday that his tribe was pleased with the ruling. 

But Judge Amon did not dismiss the entire suit, finding that advertisements calling the cigarettes tax-free were misleading because cigarette sales are not actually tax-free under state law, and that they were “likely to mislead the consumer into believing that he or she need not pay taxes on purchased cigarettes.” 

Mr. Catsimatidis said he would persevere with the suit. “Everyone has to pay their taxes, and Indians must charge tax on cigarettes when they sell to non-Indians,” he said. 

The state sets minimum price levels for retailers and imposes a sales tax of $1.50 a pack. But historically, the state has not collected cigarette taxes from tribes within its borders because they are considered sovereign nations, so Indian-owned smoke shops have long sold cigarettes at far lower prices than non-Indian competitors. 

Reuters  - October 19, 2007  
Educated NY Smokers Dodge Cigarette Taxes--Report  

New York City's smokers dodged as much as $43 million of cigarette taxes last year, and the worst offenders were "the more highly educated," a new report said on Friday. 

Another $105 million was siphoned off by New York state, because in 2002 it required the city to give up 46 percent of all of its cigarette tax revenues in return for agreeing to let New York City hike the tax to $1.50 a pack. 

That increase was one of Mayor Michael Bloomberg's first anti-smoking measures; he also made headlines by banning smoking in bars and restaurants. 

New York City smokers pay one of the highest cigarette tax rates in the nation, a total of $3.00 a pack, because the state matched the city's tax increase. 

Even so, the rest of the state surpassed city folks when it came to ducking the tax. 

Only 27 percent of city smokers said they bought no-tax or low-taxed cigarettes in a 2006 state survey, according to new report by the Independent Budget Office. In contrast, some 34 percent of other state residents said they got "under-taxed" smokes via the Internet or Indian reservations. 

The tax-dodging divide was even more vivid when city dwellers were compared based on their education. "Twenty percent of smokers without high school diplomas reported evading cigarette taxes, compared with more than 60 percent for those with college degrees," the report said. 

The worst offenders lived in the borough of Queens, added the report by the Independent Budget Office, which mirrors the Congressional Budget Office but on a local level. 

An Independent Budget Office spokesman was not immediately available to explain why Queens might have the most tax-avoiders, though these residents tend to rely more on cars for transportation than in any other borough except Staten Island, and thus might have more choices. 

While the state this year rejected Bloomberg's bid for another 50-cent-per-pack hike, the report noted more increases might drive more smokers to buy "under-taxed" cigarettes. 

"There is considerable evidence that supports the mayor's enthusiasm: increases in cigarette excise taxes result in reduced rates of smoking among adults and by an even greater margin among youth," the report said. 

But it concluded: "The availability of under-taxed and therefore cheaper cigarettes undermines the city's efforts to reduce smoking and deprives the city of funds that would be otherwise directed towards public health initiatives." 

The extra tax dollars the state gets help pay for health care, the report noted. 

Local prosecutors have gone after smokers who ducked taxes by buying cigarettes over the Internet, for example. The report did not examine this possible deterrent though it noted city residents with more than two cartons of untaxed cigarettes must pay the equivalent of the regular cigarette tax.  

Democrat & Chronicle - April 3, 2007  
Proposed Bill Takes on Cigarette 'Buttleggers'  

ALBANY — Legislators have announced a drive to stop the illegal sale of untaxed cigarettes, a practice they say costs the state hundreds of millions of dollars annually.  

One proposal would require the use of high-tech tax stamps that can be read like bar codes and another would compel Native-American tribes to share revenue with the state. The sale of untaxed cigarettes could be costing the state more than $700 million a year, and it allows minors to smoke and often funds organized crime, the sponsors claimed.  

"The health and safety of New York's families are threatened by ruthless cigarette smugglers," said Sen. Dale Volker, R-Depew, Erie County, sponsor of the tax-stamp bill. "From dangerous cigarettes illegally imported from China to international terrorists profiting from illegal cigarette smuggling rings, our homes and families are threatened by this black-market trade."  

According to a memo accompanying the bill, which is sponsored in the Assembly by Dennis Gabryszak, D-Cheektowaga, Erie County, sources of unstamped cigarettes could include "crime organizations, terrorist groups, North Korea, China and Vietnam."  

The measure comes three weeks after Sen. Jeff Klein, D-Bronx, released a report claiming so-called "buttleggers" take $460 million a year from the state. Legislation he proposed would compel Indian tribes to share tax revenue.  

The state's current tax on cigarettes outside of New York City is $1.50 per pack, the 13th highest in the country. New Jersey charges the most at $2.57 while South Carolina charges seven cents.  

California started using the stamps in 2004 and saw a $120 million increase in tax revenue in the first 20 months of the program, according to the Los Angeles Times. Now New York may become the second state to use them.  

Cigarette manufacturers would have to pay a licensing fee of one cent per pack sold. Volker spokeswoman Kathie Sorel said this would cover "a good portion" of the program's cost while bringing in millions of dollars to the state. Advocates also say the stamps can help cut down on smoking.  

"Tax evasion and bootlegging cut the cost of cigarettes and encourage people to smoke," said Peter Slocum of the American Cancer Society. "The high-tech tax stamp can be an important tool in stopping contraband trafficking of cigarettes and, not incidentally, will help reduce the prevalence of cigarette use and the diseases cigarettes cause."  

Klein said the measure would help curb stamp counterfeiting and the recurrence of organized crime syndicates banking off untaxed cigarettes, but that it does nothing to stop untaxed sales on Indian reservations that cost the state $270 million a year.  

He said he would introduce legislation to compel Indian tribes to collect taxes on all sales and split revenues with the state. Most of the missing $270 million is earmarked for a fund set up in 2000 that grants health insurance to more than 1.3 million people.  

Associated Press - March 22, 2007  
Gov. Spitzer Urged to Collect Cigarette Tax  

Dr. Michael Cummings wouldn’t mind seeing a $10-per-pack tax on cigarettes — enough, he says, to defray the medical costs of the damage they cause.  

That wouldn’t be great for business at the convenience stores Jim Calvin represents.  

But when the two stood side by side Wednesday, it was on common ground. Both urged Gov. Eliot Spitzer to stick to his plans to collect sales tax on cigarettes sold by Indian businesses in New York to non-Indian customers.  

The unlikely alliance was the latest public airing in the crescendoing debate over tax collection that Spitzer, who took office in January, has vowed to settle.  

Although his administration has yet to decide on a tax-collection plan, a spokeswoman indicated this week that the state was open to a proposal that would provide for collection of the tax while sharing the revenue with tribes. The measure would end tribes’ price advantage over non-Indian retailers obligated to collect the state’s $1.50 per pack tax.  

The New York Association of Convenience Stores, led by Calvin, has long complained that the group’s 7,000 stores are unable to compete with tribal competitors’ reduced-price cigarettes and that state and local governments have lost hundreds of millions of dollars in revenue.  

Cummings said the losses from a public health perspective may be even greater. The availability of reduced-price cigarettes encourages smoking, he said, raising the incidence of cancer and heart disease. The public cost of treating smoking-related illnesses amounts to $1,000 per year for every household in the state, he said.  

‘‘We’ve created a situation where we’re making smoking more affordable than it should be,’’ said Cummings, who spoke with Calvin at the office of Erie County Executive Joel Giambra, a former smoker who survived throat cancer.  

Last week, members of the Seneca Indian Nation — the leaders of reservation cigarette sales — gathered in much larger numbers to try to sway Spitzer in the other direction. About 500 members traveled from their Allegany and Cattaraugus reservations in western New York for a show of force outside Buffalo City Hall. 

‘‘We would like to make a statement to the newly elected governor of New York State, Eliot Spitzer,’’ Seneca President Maurice John announced. ‘‘We will not become tax collectors for New York state.’’  

"New York has added multiple and high taxes to a pack of cigarettes," John said on Wednesday. "The Seneca Nation has chosen not to add to the price of cigarettes to those smokers who want them. New Yorks so-called sin tax has nothing to do with the sovereign Seneca Nation." 

The Senecas contend federal treaties dating to the 1700s shield the nation from state taxation. The state’s attempts to collect tax a decade ago resulted in violent clashes between Senecas and state police.  

Tribal leaders said their smoke shops and gas stations support hundreds of jobs held by Senecas and non-Senecas.  

Calvin said the contribution is appreciated, ‘‘but being an economic force does not excuse any entity from abiding by duly enacted standards for conducting commerce with New Yorkers, and that includes taxation.’’ 

The Buffalo News - March 18, 2007  
Focus: Taxing Cigarette Sales. 
The State and the Senecas: Who Will Blink First?  

With tough new leaders on both sides and old problems festering, a State-Seneca confrontation is brewing. 

Retired State Police Capt. David O’Connor remembers when tire burnings and clashes on the Thruway a decade ago disrupted traffic as Senecas went up against state police over the Native American taxation issue. 

“It was the worst situation I was ever in,” said O’Connor, who suffered a knee injury in physical confrontations with Seneca protesters when the state last tried, in 1997, to collect tobacco taxes from reservation businesses. 

Given the current climate, there’s concern that history will repeat itself. 

The looming confrontation between the state and the Seneca Nation over cigarette tax collections comes at a time when the two governments have been taken over by tough, new leaders intent on protecting very different interests. 

As far apart as they are on the tax stalemate, Gov. Eliot L. Spitzer and Seneca President Maurice A. John have similarities that could shape the situation’s outcome — for better, or, some fear, for worse. Both men can be stubborn. 

Both are under pressure to hold fast to their positions. 

And both have proven they can deliver on promises. 

“There’s got to be some give and take on both sides. I’d just say be careful and keep everyone’s tempers under control,” O’Connor said, adding that the time for the state to have acted on ending tax-free sales by Indian tribes has long since passed. 

“Possibly if [the state] had done something early, but it’s grown so big and there’s a lot of money involved,” he said. 

During the campaign last year and since he became governor Jan. 1, Spitzer has vowed the state will resolve the long-standing tax dispute under his watch and end what he says are the “not legal or appropriate” tax-free cigarette sales by Indian retailers. 

John, citing Seneca sovereignty and centuries-old treaties, insists the Senecas will never be party to a deal seeing Indian retailers serving as tax collectors for another government. 

“I don’t think he is going to back down at all. He’s the kind of guy that is going to stand up and fight and not back down,” said Sally Snow, who co-chairs the Seneca Nation’s Free Trade Association. 

At last week’s Niagara Square rally, John insisted he does not want to see violence. 

“Our people feel very strongly about this issue [but] we do not want violence. Violence is what we are trying to avoid, but I can’t even get the governor to meet with me,” he said. 

Spitzer has made it clear violence from the Senecas will not resolve the dispute. 

“It’s counter-productive even to foment the discussion about it on their part, so I certainly hope that is not what folks are doing because it’s not the best way to get a resolution here certainly,” he said. 

A tougher governor?  

But following a boisterous Seneca rally last week in Buffalo, in which protesters held signs comparing the Jewish governor to Adolf Hitler, tensions have begun to rise. 

Spitzer isn’t the first governor to try to collect taxes from the Senecas. Mario Cuomo tried in 1992. George E. Pataki tried in 1997. 

Both attempts ended in violence. Both governors backed down. 

In Spitzer, the Senecas are dealing with a governor who, unlike Cuomo or Pataki, has a long track record of trying to end the tax-free sales before he even became governor. 

As state attorney general for the past eight years, Spitzer took a series of steps that, while not ending the tax-free sales, made them harder. 

He convinced carriers such as Federal Express to stop shipping Seneca Internet sales of cigarettes, pushed credit card companies to stop processing the sales and brought pressure upon wholesalers who supply the Senecas with cigarettes. 

In his first three months in office Spitzer has shown himself to be a man who not only refuses to shy away from confrontations but relishes them. He has battled some of Albany’s most potent special interests and personally has taken on legislative leaders to make his points. 

“It’s clear from the first almost 90 days of his administration that Spitzer is focused, that Spitzer is principled and that Spitzer is tenacious and does not back down,” said James Calvin, executive director of the New York Association of Convenience Stores, the most vocal lobbying group in Albany over the years pressing for an end to the tax-free sales. 

Health groups pushing Spitzer, who has made reducing tobacco use among his public health priorities, say the governor’s motivation is more than just money and leveling the playing field between Indian and non-Indian retailers. 

“He wants the state to get the money, but I do think there is also some appreciation of the public health benefits in doing this, and some recognition that reducing smoking rates ties into his other major effort, which is reducing health care costs,” said Russell Sciandra, director of the Center for a Tobacco Free New York. 

Indeed, Spitzer’s 2007 budget plan counts on collecting nearly $124 million in taxes from Indian cigarette sales. The State Senate has issued an even more optimistic revenue outlook, figuring the state could count on getting an additional $160 million. 

Steadfast traditionalist  

Three hundred miles away from the Capitol, “Moe” John is viewed by his fellow Senecas as a traditionalist, admired for standing up for the nation’s sovereignty. 

John was arrested in the late 1980s for ripping up surveyor stakes when the Southern Tier Expressway went through the Allegany Reservation. He then filed a federal suit, saying the City of Salamanca had no right to require permits because his business was on Seneca territory, and thus not subject to the city’s rules. A judge disagreed. 

One of the first Senecas to sell tax-free gasoline and cigarettes on the Allegany Reservation, John was jailed for contempt of court in 1990 for refusing to tell a federal judge how much gas he sold. When eventually released, he described himself as a prisoner of war. 

“And as such,” he said, “I gave my name, Ha Nang Gan Go, and that I am an Indian, and I always will be an Indian.” 

John also has refused to pay taxes on the millions of dollars he made selling tax-free gasoline, and he and his wife owe the Internal Revenue Service a combined $9.1 million, plus interest, that they have refused to pay, according to publicly filed judgments. 

He wears his federal tax lien like a badge of honor — which is how many other Senecas also view it. 

“We’re pretty strong on our treaties and we feel we have the right to sell tax free,” said Snow, operator of one of the biggest Seneca gasoline and tobacco retail outlets. 

Hard lines  

Whether a middle ground can be found has yet to be seen. 

“We’ll talk to them,” Spitzer said. “We always welcome conversations. If they’re open to a meaningful compromise, that would be great, but we’ve got to move forward.” 

Asked to elaborate, he talked of “many creative ideas that could be out there,” but he offered no specifics. 

But there’s no question the governor remains convinced the state has the legal right to collect taxes from Indian retailers. 

“I know that there is some upset on the part of the [Seneca] Nation. But, having said that, I keep coming back to this point that we are anomalous not because we are seeking to collect the taxes but because we don’t,” Spitzer said of other states, including Washington, that have resolved the Indian tax issue. 

“There is a factual and legal reality that we have the right to collect them. Everybody else does. So, I’m not terribly sympathetic to the notion that they should get an advantage that nobody else has,” Spitzer said in an interview last week with The Buffalo News. 

John declined to be interviewed for this report, but addressed the issue at last week’s rally. 

“We are a sovereign nation,” he said. “Taxing us would be like taxing Canada. The Seneca people feel very strongly about this issue.” 

NY Post - March 4, 2007  
Pol Signals Smoke-Tax Health Aid 

Millions in proposed state health-care cuts could be restored - and then some - if New York could recoup the lost tax revenue from cigarettes sold on Indian reservations, a new report shows.  

The report from state Sen. Jeffrey Klein (D-Bx./W'chester) maintains that $270 million of uncollected tax revenue is lost to tribal sellers - more than enough to restore Gov. Spitzer's proposed $219 million proposed cuts to programs funded through the Health Care Reform Act of 2000.  

Those funded programs provide health care for more than 1.3 million uninsured New Yorkers, as well as provide added prescription-drug coverage for seniors and funding for a variety of health and smoking-prevention activities.  

"It is estimated the amount of state revenue lost to the state as a result of purchasing untaxed cigarettes at between $436 million and $576 million in 2004," the report states.  

"Recent estimates from an internal New York state Senate document attribute more than $270 million of those lost cigarette tax revenues to Native American sellers operating on reservations and on the Internet."  

New York already has a law banning most cigarette sales via the Internet or by telephone or mail to state residents, and online cigarette merchants can no longer legally accept credit cards.  

But forcing tribal sellers to collect taxes has been more difficult, the report notes.  

"Gov. Spitzer inherited a dysfunctional system of cigarette-excise taxation whose provision are still entirely unenforced on tribal sellers despite a 12-year-old Supreme Court decision upholding that enforcement," the report states.  

The report recommends the governor resume negotiations with tribes to share tax revenue. Klein said he will introduce legislation requiring tribal merchants to collect cigarette taxes - but providing those revenues be evenly split between the state and tribal governments. 

NY Post - February 12, 2007  
Cig-tax Dodgers Spared  

Thousands of cigarette-tax cheats are off the hook after city officials determined that it didn't pay to pursue them, The Post has learned.  

The Finance Department is giving a pass to about 21,500 smokers who made cigarette purchases over the Internet without paying the $1.50-a-pack tax.  

Owen Stone, a department spokesman, said lists of tax evaders obtained last year from two Web sites included 20,000 buyers who owed less than $500 each and about 1,500 who made one-time purchases resulting in $15 tax liabilities.  

Deciding it would have cost more to hunt down the smokers than the city could get back, officials decided to concentrate on the top 4,000 tax dodgers - who ducked a total of $5.8 million in taxes.  

"We succeeded in raising awareness on the issue and determined we were at the point that the resources needed to research the data, track down buyers and collect cigarette taxes from smaller purchasers who were not likely to be reselling cigarettes were better put to use on other enforcement alternatives," Stone said.  

The big buyers have forked over about $2.3 million so far.  

The department's action comes after City Councilman David Weprin (D-Queens) complained that constituents socked with high tax bills deserved some leeway because they weren't aware they were breaking the law. 

WNBZ Radio - December 7, 2006  
Cigarette Tax Suits Against Day Wholesale Dismissed  

A state judge has dismissed two of three lawsuits filed against Day Wholesale of Tupper Lake and other tobacco wholesalers who provide tax-free cigarettes to Native American retailers. 

Seneca County, the New York Association of Convenience Stores and New York City had all filed lawsuits against the wholesalers, the governor and the state Tax Department, for failing to collect sales tax on cigarettes and gasoline sold to non-natives in Indian-owned shops. 

The convenience store group said failing to collect the sales tax violated a law approved by the Legislature that took effect March1 of this year.  It also is costing residents $450 million a year in lost tax revenue and putting businesses near tribal reservations at a competitive disadvantage, they said.   

But Albany County State Supreme Court Judge Michael Kavanagh dismissed the suits brought by Seneca County and the Association of Convenience Stores on the same day – November 17. 

In both cases, the judge said the plaintiffs had no standing to bring an action against the Tax Department to compel it to enforce general tax laws.  

Judge Kavanagh said the court had already ruled against convenience store group when they brought a similar case.  “A final judgment in that proceeding found the decision not to collect these taxes from Native Americans was lawful,” he wrote. 

Peter Day, owner of Day Wholesale, was confident the remaining New York City lawsuit will also be dismissed. “Our belief from the beginning was that we would be vindicated because the cases had no merit,” he said.  “There’s one case remaining and we believed that will be dismissed because it has no merit.” 

The issues surrounding the sale of untaxed gasoline and cigarettes to non-natives in Native American stores have been the subject of litigation in the state and the country for decades.  Day said the debate will probably continue. “The state of New York has an obligation to try and address these issues,” he said.  “But the courts have upheld the rights of the Iroquois Confederacy to sell tax free products.” 

Asked about the ruling, Jim Calvin, President of the New York Association of Convenience stores said they were “puzzled.”  Their case wasn’t decided on its merits, he said.  “If the chief elected officer of the state doesn’t feel like enforcing a law duly enacted by the legislature, and the attorney general defends that defiance of the state constitution, who does have the standing to challenge it in court.” 

Calvin said they haven’t decided whether to appeal the decision.  “But the quest for tax fairness will continue,” he said. 

Day Wholesale and another co-plaintiff are counter-suing the state and the Attorney General’s Office to try and block enforcement of the March 1 statute requiring the collection of taxes on sales to non-Natives. 

Queens Chronicle - September  14, 2006  
Up In Smoke: City Wants Cigarette Money 

Numerous city residents, including many from Queens, are being asked by the city to ante up thousands of dollars in cigarette taxes—or face the threat of garnishment of wages and liens on property.  

Letters to 16,000 city residents went out in August to people who previously bought cigarettes over the Internet, where no payment of city or state taxes were required.  

Although the sales were made in 2002 and 2003, there was no prior warning or notification to the online cigarette purchasers. Councilman David Weprin (D Hollis), chairman of the Finance Committee, said he is outraged by the city’s heavy handed action and plans to do something about it.  

He was accompanied on Tuesday in his district office by a constituent, Joseph Maletzky of Bayside, who was charged $1,155 for purchasing 77 cartons of untaxed cigarettes in one year. “These are scare tactics,” Weprin said. “I am in favor of collecting taxes, but not on the backs of senior citizens and others who didn’t know they were doing anything wrong.”  

Maletzky, 53, is disabled and unable to work. He counts on his disability check every month. “I’d be in big trouble if they (checks) are garnished,” he said. “The cigarette Web site never mentioned city or state taxes.”  

Weprin will hold a news conference on the steps of City Hall Sunday at 11 a.m. where he will call for the Department of Finance to make several changes. He will first ask for a 30 day moratorium by the agency on collecting the back taxes. During that time, the councilman will meet with officials to come up with an equitable resolution.  

He also believes each case should be handled individually. “Someone who buys 77 cartons a year is obviously not selling them in a store and should not be punished,” Weprin said. “The cigarette buyers were acting in good faith and if it’s for personal use, they shouldn’t have to pay.”  

In other cases, he believes people should pay a reduced amount or work out a payment schedule. The city is demanding the tax money be paid within 30 days. “It’s absurd to have to pay up so quickly,” Weprin added.  

He also wants to give the Department of Finance time to alert the public about current and future cigarette sales that are subject to taxes. Online cigarette sales are no longer legal in New York state. “People should be able to go down on an interview to discuss their cases and not to have to pay interest or penalties,” Weprin said.  

If interest and penalties were applied to Maletzky, it could double his payment—something that he doesn’t want to contemplate. “My wife and I just can’t afford it,” he added.  

The city is hoping to take in $6.95 million in unpaid cigarette taxes. Penalties for non payment will be assessed at up to $200 per carton. The city’s tax is $1.50 per pack of cigarettes.  

Owen Stone, a Department of Finance spokesman, said his agency is standing behind its policy. “The letter people got is the warning. If they want to work out a payment plan, they can do so,” he added.  

But Weprin said his office has gotten dozens of calls from residents who had no idea they were breaking the law and now are being penalized without any warning. Many, such as senior citizens, are on fixed incomes and bought cigarettes over the Internet to save money.  

The city got the names of online purchases from the companies after filing a lawsuit against 30 such firms. While the case was pending, 15 of the companies settled with the city, paying fines and giving up lists of their New York City customers. Many of the companies then went out of business. Although the city eventually lost the case on a technicality, it is appealing. 

For Maletzky, who now has respiratory problems in addition to other health concerns, he is still purchasing online to save money. He buys through Indian reservations, which are exempt from collecting taxes. “I know I have to quit smoking,” Maletzky added.  

Jill Perrone, of Rego Park, also got a letter from the city saying she owed $1,230 for purchasing 82 cartons of cigarettes. “I was shocked at the letter and scared to death not to pay,” she said.  

Perrone added that she purchased them for personal use. “It’s okay to pay taxes if you bought them in the city, but outside, you shouldn’t owe,” she said.  

NY  Post - August 10, 2006  
Cough Up Web Cig Taxes: City  

If you ordered cigarettes from, expect to find a bill from the city for unpaid taxes in your mailbox soon. 

The Finance Department is mailing out bills to more than 16,000 people telling them to pay cigarette sales taxes -- or face fines of up to $200 a carton. 

The city hopes to collect up to $7 million in unpaid taxes from sales to the Kentucky-based company, which is no longer in business, as part of a settlement from a 2003 lawsuit. 

"There's no such thing as a tax-free cigarette," warned Finance Commissioner Martha Stark. 

The city has also billed 12,012 customers of for $4,484,010 in unpaid taxes; 2,313 customers of for $956,340; 136 customers of for $120,845; and 1,221 customers of for $277,695. 

NY Daily News - August 10, 2006  
City to smokers: Cough up 7M in owed Net taxes 

More than 16,000 New Yorkers who bought cheap cigarettes over the Internet are now tax targets of the city. 

City officials announced yesterday that they intend to go after the smokers - who bought from, a now-defunct Web site - for nearly $7 million in unpaid cigarette taxes. 

The city obtained the names of the smokers through a legal settlement with the former Kentucky-based firm. 

The sellers ignored a state law barring the sale of tax-free cigarettes to New York State residents. 

Violators face a potential civil liability of three times the uncollected taxes if the city eventually wins its suits. 

This is the fifth and largest such settlement the city has won since filing a series of federal civil suits in 2003 against some 40 Internet tobacco merchants, according to attorney Eric Proshansky of the city's Law Department. 

The four prior settlements involved a combined $4.5 million in unpaid city cigarette taxes owed by 15,682 buyers. 

So far, more than $800,000 in unpaid taxes has been collected from smokers who opted to pay within 30 days after getting dunning letters - rather than risk penalties of up to $200 for each untaxed carton they had bought. 

Collection efforts, which could include filing property liens or salary garnishees, are still in the works for buyers who haven't coughed up their unpaid cigarette taxes. 

"We have an obligation to collect all taxes owed to the city and create a level playing field for local retailers who properly collect the cigarette tax," asserted Finance Commissioner Martha Stark. 

The buyers in the latest settlement made their Internet buys from 2000 to mid-2003.  

Associated Press - August 7, 2006  
Tobacco Wholesalers Mull Suit Over NY Cigs  

BUFFALO, N.Y. — Tobacco wholesalers frustrated by mixed messages from the state over whether they are still allowed to supply Indian retailers with untaxed, unstamped cigarettes are ready to ask a court to intervene. 

At issue is a law that went on the books March 1 that bars wholesalers from selling cigarettes to reservation retailers who sell them tax-free. Attorney General Eliot Spitzer says the law is in effect; the state Department of Taxation and Finance says it is not yet being enforced. 

The conflicting positions have meant headaches for businesses like Day Wholesale in Franklin County, which finds itself scrambling to preserve its supply of cigarettes for reservation and non-reservation customers. 

According to a lawyer for Day, Philip Morris USA has given wholesalers that supply New York Indian tribes until noon Wednesday to promise to stop selling unstamped cigarettes on reservations or provide written proof that such sales are legal. Otherwise, a July 11 letter said, Philip Morris would stop shipping cigarettes. 

The wholesalers say they are in the middle of a political fight between the attorney general's office and the Pataki administration's Department of Taxation and Finance over an issue that has sparked violence in the past. 

"It's the state of New York that doesn't seem to have everybody together as to what they're supposed to do," said attorney Margaret Murphy, who represents Day Wholesale. 

The letter from Philip Morris came two weeks after an attorney from Spitzer's office sent letters to tobacco companies, including Philip Morris, telling them that Day and other wholesale clients were continuing to sell tax-free cigarettes to Indian retailers in violation of state law. 

"By this letter, we are putting you on notice of this conduct and asking for your cooperation in ending it," the letter from Assistant Attorney General David Weinstein, said. 

Philip Morris USA spokesman Bill Phelps declined to comment Monday except to say that the company supports the legislation governing sales by wholesalers to reservations. 

Murphy said a lawsuit to be filed this week will seek to end the uncertainty. In the meantime, she said, her client will stop selling unstamped cigarettes to avoid being shut off by Philip Morris. 

"We're bringing a lawsuit against the state of New York, against the attorney general, asking a court to resolve the issue," Murphy said. "Is the law in effect? What is the obligation of licensed wholesalers?" 

Murphy contended the legislation is not active because certain provisions _ including the issuance of coupons that would allow Indian retailers to sell untaxed cigarettes to tribal members while taxing other customers _ have not been met. 

A spokesman for Spitzer said that doesn't matter. 

"The sale in New York of unstamped cigarettes is a clear violation of the law, regardless of who is doing it," Marc Violette said, "regardless of whether it's a private individual or an Indian nation or anybody else." 

A spokesman for the Department of Taxation and Finance did not return a call for comment Monday. 

The law aimed at wholesalers is among the latest attempts by the state to collect millions of dollars of tax revenues on cigarettes sold by Indian retailers to non-Indian customers. 

Tribes such as the Seneca Indian Nation, which operates numerous smoke shops in western New York, say centuries-old treaties shield them from having to collect taxes on their sovereign territories. That allows them to sell at lower prices than their non-Indian competitors. Seneca retailers sold $347.5 million worth of tobacco products in 2003. 

A 1997 attempt by the state to collect tax on reservation sales resulted in violent clashes between state police and tribal members in western New York. 

Adirondack Daily Enterprise - August 5, 2006  
Cigarette Tax Dispute Leaves Day Wholesale Facing Lawsuits  

TUPPER LAKE — Day Wholesale is facing several lawsuits seeking damages against cigarette wholesalers who sell untaxed cigarettes to non-natives on Indian reservations in the state. It’s a fight that’s pitting cigarette wholesalers, the city of New York, Indian reservations and the state’s tax and finance authority against each other, with a string of unlikely alliances. 

Attorneys for the city of New York said a 2005 city Department of Health survey found that about 15 percent of all smokers consume untaxed cigarettes. In 2004, a state DOH study projected that the state loses as much as $576 million in lost tax revenue through the sale of untaxed cigarettes, the city’s lawsuit said. 

“The claim against (wholesalers) is that they’re simply selling untaxed cigarettes,” city lawyer Eric Proshansky told the Enterprise. The reason the city is aggressively pursuing the case now is to enforce legislation passed in March requiring cigarette taxes and tax stamps on all cigarettes sold within New York state, he said. 

Peter Day, owner of Day Wholesale in Tupper Lake, says his company has done nothing wrong and is following the legal advice of the agency that regulates state cigarette tax, the Department of Taxation and Finance. 

“The law hasn’t really changed,” Day said.  

In fact, it’s this authority in charge of regulating cigarette taxes that is — indirectly — rising to the defense of wholesalers. In a legal opinion released March 16 by the Department of Taxation and Finance, wholesalers were advised that the department, “has no intention to alter its long-standing policy” regarding the sale of untaxed cigarettes on Indian reservations. The new law, the legal opinion said, needs to be amended to respect Indian sovereignty and “avoid excessive entanglement in Indian commerce.” 

Taxation and Finance spokesman Tom Bergin said he couldn’t comment because of the litigation involved, but he confirmed that his department is advising cigarette wholesalers that the law is not being enforced until the law is amended to the satisfaction of the commissioner of Taxation and Finance.  

“We said we’re not going to enforce this law,” Bergin said. “We’re going to consider some amendments” before directing wholesalers to change their business practices. 

Proshansky said the city takes issue with the Department of Taxation and Finance’s selective enforcement of laws. 

“We believe, regardless of what an agency does, it’s on the books,” Proshansky said. “It’s a law; you have to obey it — regardless of whether an agency enforces it.” 

But Day said he and other wholesalers will continue to follow the advice of the Tax and Finance commissioner, and he expects the lawsuits against wholesalers to be thrown out of court. 

Day, who employs 22 people in Tupper Lake, said he’s been doing business with the Indian reservations for 18 years and is confident that he’ll prevail in court. About 80 percent of his revenue is from the sale of cigarettes and tobacco products to Indian reservations, Day is quoted as saying in a deposition with Seneca County attorneys. 

Day said the whole issue is the result of rising taxes, which naturally increases demand for tax-free products. With the state collecting $15 per carton in excise tax and $3.60 in sales tax, it is the state that profits the most from the sale of cigarette sales, Day said. And New York City collects even more, with an additional $1.50 per pack. 

“The simple solution is for state government to reduce onerous excise taxes on cigarettes, tobacco and motor fuel,” Day said. “Then there would not be the incentive for people to go shopping on the reservations. But all they want is to get the Indians out of the cigarette business.”  

In the federal lawsuit, which the wholesalers are expected to answer by the end of the month, the City of New York seeks damages from the wholesalers, including city excise and sales taxes lost as a result of alleged violations of the March statute requiring that cigarettes to non-Indians be taxed.  

The lawsuit is also asking the court to cease the practice of selling unstamped cigarettes and tobacco products in the state. This lawsuit, filed in U.S. District Court in Brooklyn last month, was preceded by two similar lawsuits, brought by Seneca County and the New York Association of Convenience Stores. 

Day said he’s confident these lawsuits will be thrown out as they impinge on tribal sovereignty, which only the U.S. Congress can legislate. 

“The Indian nations have rights and treaties in this state that go back to colonial times,” Day said. “These nations were never defeated; they entered into treaties. They were looked on to be brothers and equals with the Europeans. All we’re asking is that these treaties be recognized and be allowed to have commerce as they’ve always had it 

NY Sun - July 25, 2006  
Law Department Sues Cigarette Wholesalers  

The city's law department has sued seven cigarette wholesalers for not paying taxes on tobacco sold on Native American reservations across the state. The lawsuit was filed yesterday in Brooklyn and goes after six New York vendors and one in Vermont, the city's corporation counsel, Michael Cardozo, said in a statement."Although smoking is never encouraged, since it is legal, the city must ensure that all laws are followed appropriately," Mr. Cardozo, said. "By making cheap cigarettes available, the wholesalers' practices also cut into the efforts by all levels of government and the private sector that are aimed at reducing smoking by children and teenagers." 
(Also see Press Release) 

WXXI (PBS) - June 27, 2006  
Groups Ask Pataki To Sign Back-Door Bill To Collect Cigarette Taxes 

ALBANY -- A coalition of anti-smoking groups and convenience store owners is urging Governor Pataki to sign a bill passed by the state legislature that would prevent the sale of untaxed cigarettes in New York. 

New York has a law on the books that requires the collection of the sales tax on cigarettes sold to non- Indians on reservations. But Governor Pataki has refused to enforce the statute, saying he still wants to try to negotiate complex settlements with tribes over issues like land claims and gambling casinos. Many Native American tribes say they don't have to collect the tax, because they are a sovereign nation. 

The legislature, which has been budgeting the additional tax money for spending items for several years, passed new legislation in the final days of the 2006 session that would create a back door mechanism for collecting the tax. 

The bill aims to stem the supply of illegal cigarettes to wholesalers who then sell to Indian reservation stores or other bootleg outlets without collecting the tax. 

The State Tax Department, Attorney General, or City of New York would have the authority to name the black market wholesalers to cigarette makers. Manufacturers would no longer be allowed to sell the cigarettes to the wholesalers who are breaking the law, effectively cutting off the source of untaxed cigarettes. 

Adding the Attorney General Eliot Spitzer's office to the list of authorities that could carry out the law is key, because Spitzer, unlike Pataki, supports collecting the tax. 

The Coalition for a Tobacco Free New York's Russ Schiandra says 500 lives could be saved in the first year if the tax were uniformly collected. The group estimates, based on past data connecting higher cigarette taxes to the number of smokers who quit, that 50,000 fewer New Yorkers would smoke if they had to pay the full $1.50 per pack tax upstate, or the $3.00 per pack tax in New York City. 

Jim Calvin, with the New York Association of Convenience Stores, also wants the tax collections to be enforced. Calvin admits that his group makes for strange political bedfellows with the American Cancer Society and Lung Association, but he says they have a common interest. The convenience stores are not against selling cigarettes, they want a level playing field with the stores on Indian reservations. Calvin says if the state has made a decision, that for public health reasons, it is going to charge high taxes on cigarettes, then the law must be enforced fairly. And he commends lawmakers for coming up with an alternative. 

"What a shame, what a disgrace, that the legislature has to go around the governor to get a law enforced that the governor himself signed," said Calvin. 

Calvin says convenience stores lose an estimated $1 billion dollars a year in cigarette sales because of the easy availability of untaxed cigarettes. 

Governor Pataki is going to be leaving office at the end of the year, and all of the major party candidates for governor to replace him, including Eliot Spitzer, a Democrat, and Republican John Faso, favor collecting the tax on Indian reservations. But the groups say they can't wait until then. At the very least, they say, the law should be enforced sooner because the state is losing around $1 million dollars in tax revenue a day. 

The Buffalo News  - June 22, 2006 
Senecas blast new law cutting tobacco supply 

Seneca Nation of Indians President Barry E. Snyder Sr. called the passage of a state law to cut off the supply of tax-free cigarettes to Indian businesses a "back-door effort" to get Seneca tobacco stores to collect state taxes.  

"The State Legislature has once again taken action to undermine our sovereign right to consume and trade tobacco products in our territory," Snyder said. "The nation, as well as individual Senecas, cannot be denied the ability to purchase tobacco products, because we are not subject to state taxes.  

"As always," Snyder added, "we will contemplate any and all options that may be necessary to protect our economy and defend our sovereignty."  

Star-Gazette - June 22, 2006  
Senate Approves [Cigarette Tax Measure]  

Another issue legislators took up Wednesday was cigarette taxes. They said they've found another way to end American Indians' practice of selling tax-free cigarettes: threaten to cut off their wholesalers. 

The Senate passed a measure late Tuesday to prohibit cigarette manufacturers from selling smokes to wholesalers who sell to tax-free merchants. Effectively, this would force wholesalers to impose New York's steep taxes before selling them to Indian retail shops -- or face losing their supply. 

The Legislature has for several years passed bills to force the state to collect sales taxes cigarettes and gasoline sold to non-Indians on Indian reservations. However, Pataki has vetoed measures, ignored the idea when the Legislature made it part of the state budget, and his Tax Department has deployed technicalities to delay the implementation. 

Pataki officials have tried to negotiate "parity" deals in which tribes would voluntarily raise the prices of gas and cigarettes to match what nearby non-Indian stores charge -- without paying state taxes. But tentative agreements -- sometimes included as part of a way to settle long-standing Indian land-claim lawsuits and open Indian-run casinos -- have always fallen through. 

The Legislature's new tactic would take the issue out of the governor's hands -- if he signs the bill -- a good move, according to anti-smoking groups who believe that high prices encourage smokers to quit. 

Legislators have long complained that the state is losing $300 million or more annually because of reservations sales and that the practice hurts competing convenience stores. 

"By collecting the taxes directly from tobacco companies when they sell cigarettes to distributors including Native American tribes, we are leveling the playing field for all businesses in New York State," said Sen. Michael Nozzolio, R-Fayette, Seneca County, who pushed the bill through the Senate. 

Jim Calvin, head of the New York Association of Convenience Stores, said he doesn't think Pataki would sign the bill. Pataki aide Saleem Cheeks said only that the governor would review the legislation. 

[The bill was sponsored in the assembly by William Magee, and it was approved there last week.] 

Associated Press - May 3, 2006 
Group Sues State to Overturn Law Banning Internet Tobacco Sales 

ALBANY, N.Y. -- A group of cigarette distributors and sellers filed a lawsuit against the state Wednesday seeking to overturn a law banning Internet, telephone and mail order tobacco sales. 

The suit by the Association of Responsible Cigarette Sellers, filed in Erie County Supreme Court, contends the 2000 state law violates the Commerce Clause of the U.S. Constitution. 

David McNamara, the group's lawyer, said his case was bolstered by last year's U.S. Supreme Court ruling striking down laws in New York and Michigan that banned wine shipments from out-of-state producers. The Constitution prohibits states from passing laws that discriminate against out-of-state businesses. 

The group, based in Salamanca near where the Seneca tribe is based, claims the law also violates the Indian Commerce Clause, which gives the federal government the sole right to regulate commerce with Indian tribes. Many Internet sellers are located on tribal reservations in western New York. 

In January, Attorney General Eliot Spitzer said Philip Morris USA, the nation's biggest tobacco company, agreed to end shipments of any of its products to customers, Indian tribes and enterprises that states deem illegal, as part of an agreement with attorneys general for 37 states and territories. 

The action was the third prong of the states' efforts to curb the sale of cigarettes to minors over the Internet and by mail order. In March 2005, major credit card companies agreed to stop processing payments from Internet retailers. Shippers DHL and UPS Inc. agreed to stop shipping packages from the vendors. 

Authorities consider Internet cigarette sales to be illegal because they violate state and federal laws aimed at collecting sales taxes and stopping sales to underage smokers. 

The lawsuit seeks to keep Spitzer from enforcing the agreements with the shippers and credit card companies. 

Attorney general spokesman Marc Violette said his office had not yet seen the lawsuit and declined to comment. 

The 2nd U.S. Circuit Court of Appeals ruled in 2003 against such a challenge to the law, saying the statute treats in-state and out-of-state businesses equally. 

Margaret Murphy, a lawyer representing the cigarette vendors, said that decision has "been brought into question" by last year's Supreme Court decision and that her clients are challenging the law on different grounds. 

On Tuesday, convenience store operators sued Gov. George Pataki to compel him to enforce a new state law requiring tax collection on tobacco products and gasoline sold to Indian businesses. 

The New York Association of Convenience Stores says Pataki's failure to collect taxes on the goods before they reach the reservations, as required under a law that took effect March 1, costs taxpayers $450 million a year and costs businesses $1 billion a year. 

Businesses located near reservations say they suffer a competitive disadvantage because they must charge substantially higher prices. A carton of cigarettes bought from a tribe can retail at $15 less than at off-reservation retailers. 

Utica Observer Dispatch  - May 3, 2006 
Convenience Stores Plan To Sue Pataki  

ALBANY — A coalition of convenience stores said Tuesday it is suing Gov. George Pataki over his decade-long refusal to collect taxes on tobacco and gasoline sold by American Indian merchants. 

Pataki has flouted his constitutional duties by ignoring laws that command the state to collect the taxes, according to the coalition. In doing so, he's "aiding and abetting" an "epidemic" of people skirting the tax laws by going to Indian reservations for smokes or buying cigarettes through the Internet, it said. 

"The constitution says the governor shall faithfully carry out all laws," said James Calvin of the New York Association of Convenience Stores. "He doesn't get to pick and choose which laws to enforce." 

Verona business owner George Eggen of the Verona Hotel said he doesn't think the state government will enforce the law, even if a lawsuit is brought against the governor. 

"The governor is just going to leave it in the hands of somebody else until January," Eggen said. Pataki is not running for re-election in November. 

The Oneida Nation in Verona has applied to the Indian Bureau of Federal Affairs for land-in-trust status, which, if granted, means Nation property would not be subject to paying taxes. If successful, that move would legally circumvent the U.S. Supreme Court's February 2005, ruling that the land was subject to local taxes and regulation. 

Calvin's group was joined in the lawsuit by two convenience-store chains headquartered near Indian reservations in Central and Western New York: Canastota-based Nice N Easy, which operates about 60 stores, and Amherst-based MWS Enterprises, which runs 40. 

Pataki said he won't direct the state Tax Department to collect the taxes this year, instead working to make a deal, or compact, with the tribes. 

"I've always said from the beginning the best way to do this is through compacts, by consensus," he said. "We're going to continue to strive to do that." 

Besides Pataki, the lawsuit names five cigarette distributors that supply the reservations with untaxed cigarettes, including Frank Colucci Inc. of Niagara Falls. 

The long-running tax issue is no small matter: hundreds of millions of dollars are at stake. On the one side are convenience stores that compete with reservation stores and state legislators who view the taxes as a way of helping to pay for the state budget. Joining them are anti-smoking groups that want to see cigarettes made more expensive. 

On the other are customers who enjoy cheaper prices and Native American tribes that insist the law would intrude on their sovereignty. 

Last year, the state Legislature again passed a law demanding the Pataki administration begin collecting the taxes on March 1 of this year. The state's per-pack tax on cigarettes is $1.50; it charges about 30 cents per gallon of gasoline. 

Courts have ruled that states can impose taxes on sales to non-Indians. The state could do so by collecting tax payments from cigarette distributors. Reservation stores would then raise prices, but Native American customers would be eligible for rebates, legislators said. 

But Pataki's Tax Department disregarded the March 1 mandate. Legislators considered passing a similar mandate this year, attaching it to the state budget, but in the end decided not to. 

Anti-smoking activists have been convinced that Pataki, who is stepping down at the end of the year, will simply ignore the issue the rest of his term. 

When Pataki raised the sales-tax issue in 1997, about 1,000 members of the Seneca Nation burned tires and shut down Interstate 90 between Hamburg and Silver Creek south of Buffalo. There was a melee, triggering the arrest of 11 people. 

The issue faded away until 2003 when the recession prodded legislators to pass a law demanding the collection of the taxes. They passed similar laws in 2004 and 2005. 

Pataki officials have repeatedly said they want to address the issue through "cooperation not confrontation." 

They have tried to negotiate "parity" deals in which tribes would voluntarily raise the prices of gas and cigarettes to match what nearby non-Indian stores charge — without paying taxes to the state. 

But tentative agreements — sometimes included as part of a way to settle long-standing Indian land-claim lawsuits and open Indian-run casinos -- always have fallen through. 

Convenience Store News - April 29, 2006 
NY Lawmakers Seek to Halt Tax-Free Cigarette Sales 

ALBANY, N.Y.--In an effort to force Indian retailers to halt the sale of tax-free cigarettes, New York legislators are pushing to make it illegal for tobacco manufacturers to do business with wholesalers that don't charge taxes on cigarettes supplied to Indian merchants, reported 

Frustrated by Gov. George E. Pataki's 10-year refusal to collect taxes on cigarettes sold by Indian retailers, lawmakers have introduced a bipartisan measure in the Assembly and State Senate that largely would remove collecting the tax from the hands of the governor and make it more a matter for law enforcement, according to the report. 

Targeting large tobacco companies would be an effective and simple way of cutting off the supply of tax-free tobacco products to Indian retailers, reported 

Lawmakers said in the report the state's failure to collect the $1.50 per pack excise tax on reservation sales costs the state $400 million a year. 

Officials of the Seneca Nation of Indians maintain that treaties dating back two centuries protect them from taxation. 

The legislation was proposed after the state Department of Taxation and Finance refused to start collecting the tobacco tax March 1, as required by a law enacted last year. 

All sides seem to believe that Pataki does not intend to collect the tax--and risk another round of violence on reservations like the Senecas, according to the report. 

The proposed legislation would end what had been an attempt to target wholesalers--the middlemen in the tobacco distribution chain who purchase cigarettes from manufacturers and sell them to retailers, including Indian-run businesses, reported 

Officials with Philip Morris and RJR, the nation's biggest tobacco companies, said in the report they were reviewing the new bill and would not comment. 

James Calvin, executive director of the New York Association of Convenience Stores, said in the report his group is open to what he described as "a creative approach" to ending the stalemate over collecting the taxes. 

"It's just unfortunate that something like this needs to be considered when the easiest, most direct, best answer to this situation is for the governor to enforce the existing law," he told 

Indian Country Today - March 24, 2006 
Cigarette Tax Issue Smolders in New York State  

MASTIC, N.Y. - The taxation of reservation sales of cigarettes is burning hotter than ever as a New York state political issue, weeks after Republican Gov. George Pataki tried to stub it out until after he left office.  

Democratic State Attorney General Eliot Spitzer, a leading candidate to succeed Pataki in this year's elections, seems determined to keep it alive, with the help of assorted allies. Spitzer is calling for enforcement of the state Legislature's budget mandate to collect the tax as of March 1. Pataki vetoed an earlier version of the legislation two years ago and called for a one-year extension of the deadline in his budget message in February.  

But state tribes have encountered increasing pressure from several directions. Responding to statements from Spitzer, the main cigarette distributor to the Seneca reservations temporarily suspended deliveries. (They resumed after the State Department of Finance and Taxation provided the distributor with a protective letter.) Spitzer enlisted the senior U.S. senator from New York, Charles Schumer, a Democrat, to introduce a bill prohibiting the U.S. Postal Service from delivering cigarettes purchased over the Internet, a major business for Seneca Nation entrepreneurs. And on March 20, the New York supermarket chain Gristede's Foods Inc. threatened to sue the two state-recognized Indian nations on Long Island and their senior tribal officials for undercutting its own cigarette sales.  

Chief Harry Wallace of the Unkechaug Indian Nation, a main target of the suit, promised a vigorous counterattack. ''We are exploring all possible responses to this suit, including an aggressive countersuit for these outrageous claims by this multi-billion-dollar corporation,'' he told Indian Country Today.  

Gristede's released a draft of its complaint to New York metropolitan newspapers several days before it was filed in the U.S. District Court in Brooklyn.  

The draft complaint alleged: ''The illegal trade in these discounted Indian-sold cigarettes has spawned, with the defendants' knowledge and active participation, a thriving black market of discount cigarettes that funds gangs, organized crime and international terrorist groups such as Hezbollah, and which promotes juvenile and teen smoking.'' It supported the charge with several out-of-context quotes from a recent New York Times series on smuggling through reservations, which was widely criticized in Indian country. The quote, among other things, said that Indians were building ''their own violent Mafia-like enterprises.'' 

The complaint listed the U.S. civil Racketeering Influenced and Corrupt Organizations conspiracy statute as its federal cause of action. It specifically named the Unkechaug Nation, which is based on the Poospatuck Reservation in Mastic; Wallace; and the nation's main enterprise, the Poospatuck Smoke Shop and Trading Post. It also named the Shinnecock Indian Nation in Southampton; three past and present tribal leaders; and Shinnecock Ltd., a tribally affiliated business that sells cigarettes.  

In a significant ploy, it also included 100 John Does as defendants, explaining that these presently unknown parties were ''smoke shops, individuals and businesses that sell cigarettes in New York to non-Indians, who are not authorized resellers, without charging State and local excise and sales.'' This wide net, according to the complaint, included sales both on and off Indian lands. Gristede's said it would amend the complaint ''to allege their true names and capacities when ascertained.''  

The presence of this open-ended list of John Doe defendants allowed Gristede's to tar the named defendants with allegations of every form of ''black market'' illegality, such as counterfeiting cigarette tax stamps and funding ''organized gang activity, organized crime and international terrorism.'' These allegations referred ambiguously to ''the defendants'' without specifying whether they were the named or fictitious ones.  

Wallace denounced the complaint as ''slanderous'' and questioned whether it would go anywhere in court. He said that tribal sovereign immunity was ''absolutely'' a defense. He also detected the hidden hand of Spitzer behind the well-publicized release of the draft.  

Gristede's Foods is a unit of the Red Apple Group, which owns several chains of supermarkets and convenience stores as well as a subsidiary, United Refining, which distributes fuel to gasoline stations throughout New York state. Its president, John Catsimatides, is a major Democratic Party contributor with an intricate relationship with Spitzer.  

Spitzer was openly a factor in the week-long interruption of cigarette deliveries to Seneca Nation retailers. The wholesaler, Milhelm Attea & Bros. Inc., cited uncertainty over its immunity from liability for state sales tax collection. The state system relies on wholesale ''stamping agents'' to affix tax stamps to cigarette packs before they are shipped to retailers. The law exempts transactions the state is constitutionally barred from taxing, such as reservation sales to Indians.  

The Attea company, a registered Indian trader and the major supplier to Seneca businesses, was the defendant in the 1994 U.S. Department of Taxation & Finance of New York v. Milhelm Attea & Bros. Supreme Court case, which upheld the state tax department's plan to collect taxes on reservation sales to non-Indians.  

The state tax department resolved the crisis within days by issuing a letter protecting Attea from prosecution, but Indian-owned retailers on Seneca territory had nearly exhausted their stocks and were rationing sales to customers. The suspension, said Wallace, was a ''wake-up call'' to Seneca leaders.  

Seneca President Barry Snyder Jr. issued a statement March 15 promising steps to develop a ''Nation-protected wholesale supply.''  

''In recent days, it has become obvious that the Nation must do more to protect its economy,'' Snyder said. ''We have relied on the good word of Governor Pataki that our treaties and sovereignty would be respected and that the Nation's economy would not be harmed. But the actions of Attorney General Spitzer to threaten and intimidate wholesalers is interfering with official State policy.  

''We are left with no choice but to develop a protected source of tobacco products to ensure that the Nation and its people are not denied the ability to consume and trade these products on our territory. We will work in partnership with our business community to develop the business and regulatory approach necessary to ensure that our treaty-protected right to the 'free use and enjoyment' of our lands is secured.''  

Although Snyder did not spell out a strategy, federal courts have held that items with value added through on-reservation processing are not subject to state wholesale taxation. The manufacture of cigarettes has emerged as a booming reservation business. Snyder's statement was his second within a week in response to Spitzer's actions. On March 10, he denounced Spitzer and Schumer for sponsoring a bill to keep tobacco products from being shipped via the U.S. mail. Spitzer had earlier pressured private delivery services to stop shipping cigarettes from Seneca Nation suppliers.  

''That Attorney General Spitzer and Senator Schumer would call Senecas who sell cigarettes as being part of a 'massive criminal enterprise' is to malign the entire Seneca Nation and its people,'' said Snyder.  

''Despite the Attorney General's misrepresentations, selling tobacco products in Seneca nation territory does not violate any law.  

''On behalf of the Seneca people, I believe that Attorney General Spitzer and Senator Schumer owe us an apology for their inappropriate and disrespectful attack on our good name.''  

NY Sun - March 22, 2006 
Council Wants Indian Tribes to Pay State Cigarette Taxes  

The City Council is weighing in on the side of business owners in a dispute over a new state law that requires the collection of taxes from Indian tribes that sell cigarettes. 

The chairman of the council's Finance Committee, David Weprin, said yesterday that he would hold hearings this spring on a resolution calling on the state to enforce the law, which took effect March 1. The state Department of Taxation and Finance said late last week it will not enforce the law, which requires wholesalers to collect taxes up front from Indian businesses that have historically sold cigarettes duty-free. 

"I think it's outrageous that the governor is not enforcing the law," Mr. Weprin said. A hearing on the resolution, introduced earlier this month, will be held after the council finishes its negotiations over the city budget, he said. 

City business owners contend the sale of tax-free cigarettes by Indian tribes fosters a black market. Alleging racketeering, the supermarket chain Gristede's filed suit against two Long Island tribes on Monday. The issue is pitting Governor Pataki against the state attorney general, Eliot Spitzer, who is running for governor. While a spokesman for Mr. Pataki says the governor prefers to resolve the dispute with Indian tribes "through cooperation instead of confrontation," Mr. Spitzer has said the law should be enforced. The governor's spokesman, Kevin Quinn, said yesterday that courts have given enforcement jurisdiction to the Department of Taxation and Finance, not the attorney general. A spokesman for Mr. Spitzer, Marc Violette, declined to comment. 

By ignoring the new law and continuing negotiations with the Indian tribes on the issue of cigarette taxes, the state is seeking to avoid a repeat of the massive demonstrations that followed the state's last attempt to collect taxes from the tribes, in 1997, an administration official, speaking on the condition of anonymity, said yesterday. 

The strategy drew criticism yesterday. "I don't believe it's appropriate to succumb to that," the sponsor of the council resolution, Lewis Fidler of Brooklyn, said. "I don't believe you negotiate the enforcement of a statute when it's legal and on the books." 

Niagra Falls Repoter - March 21, 2006 
State's Latest Sales-Tax Grab Jeopardizes Rez Businesses  

Last Thursday afternoon, Randy Chrysler looked around his property on Upper Mountain Road on the Tuscarora Reservation and described the small empire that tax-free cigarette sales built.  

There's the bottled-water business run by his brother Roger. Another brother, Joe, runs a sneaker shop. And cars line up to buy gas as he talks.  

"The smoke shop covered the payroll while they were getting started," Randy Chrysler said. "I employ 30 people here. They have wives and kids."  

All that, along with the dozen or so other stores selling tax-free tobacco, gasoline and other products on the Tuscarora Reservation hung in the balance for several tense days last week, after a Buffalo tobacco wholesaler notified owners that it would stop delivering unstamped cigarettes.  

Milhem Attea and Bros., the largest supplier to the reservation stores, pointed to statements by state Attorney General Eliot Spitzer and his spokesman that warned of fines and even license revocations for anyone who provided the unstamped smokes.  

Shelves emptied quickly at Randy's Smoke Shop and most other stores. Piles of tires and wood pallets piled up near many shops on the Tuscarora and Seneca nations, a not-so-subtle warning of civil unrest to come.  

After three days of rising tensions, New York Gov. Pataki's office and the state Department of Taxation and Finance announced that wholesalers could start shipping again, without fear of punishment, while negotiations with the state Legislature continued.  

Spitzer's stance and an Assembly budget bill threatened reversal of an Albany charade that's been going on for more than a decade.  

Each year, the state Legislature includes language in the budget legislation that says, in effect, "OK, this year we're really going to start collecting sales tax from stores on the reservations."  

Then Pataki says, "Yes, we will. Next year."  

And almost everybody is happy. Legislators keep collecting contributions from the group representing convenience-store owners, the reservation shops stay in business and Pataki doesn't have to play the heavy.  

The last time he tried on that role, in 1997, tire fires burned at reservations throughout Western New York, with protesters clogging the New York State Thruway where it passes through the Seneca Nation, forcing its closure.  

A Pataki administration source pointed to the financial impact of a rerun. Aside from an estimated $5 million per week for State Troopers needed to keep roadways clear, traffic interruption would muffle interstate commerce and possibly hamper homeland security efforts.  

The Senecas brandish an additional hammer since the last sales-tax standoff -- casinos in Niagara Falls and Salamanca that generate millions for Albany annually (even if none of it seems to be finding its way back to Niagara Falls).  

Surveys have consistently shown an overwhelming majority of New Yorkers oppose taxing the reservation stores. A Zogby poll earlier this month showed 79 percent supported the governor's non-enforcement policy.  

Those numbers make the stance taken by Spitzer, the front-runner to succeed Pataki, particularly curious.  

About the only people unhappy with the status quo are the non-reservation convenience store owners, who cite figures purporting to show how much revenue New York state is supposedly "losing" via non-enforcement.  

Their figures, though, ignore the fact that almost half of reservation sales are made to non-New Yorkers. Many smokers would also switch to cheaper cigarettes if the discounted reservation cigarettes became unavailable, further cutting into the estimated windfall.  

Then there's the question of whether you can really lose something you never had to begin with.  

To Chrysler, the dizzying conflict of numbers is beside the point. Attempting to collect taxes from the shops now, reversing a policy that's been in place for decades, would decimate a system that's created almost all the viable businesses on the Tuscarora and other reservations.  

"For us, this isn't about gas and cigarettes -- this is about sovereignty," said Chrysler, who is 41 and has run his store for 16 years. "It's about giving our people opportunities like every other race has -- the opportunity to support a family, to be a working mother or father."  

Chrysler employs 30 people. After Attea notified him on Tuesday that it wouldn't be shipping any more cigarettes, he started laying off workers, about a dozen in all, many of them relatives.  

"To have to lay off your cousins ..." Chrysler said, his voice trailing off. "This is a good business. We pay our bills. Now we have to lay them off because they won't deliver to an Indian nation. The toughest thing was to have to tell my mom's nieces who have kids, 'You've got no job.'"  

Chrysler, who is also one of the top drivers at Ransomville Speedway, said he's worked to make an impact in the community beyond the reservation as well.  

Like many reservation stores, Randy's Smoke Shop sponsors youth sports teams and is one of the first stops for anyone raising money for just about any charitable cause.  

"The press always comes out here when there's trouble," Chrysler said. "But look at everything else we do. The volunteer fire departments can't go to NOCO and ask for money."  

Asked when the pile of rubber and wood across Upper Mountain Road might catch fire, Chrysler smiled and shrugged.  

"Whenever I get cold," he said.  

A day later, on Friday, Attea announced it would resume shipping, but to Chrysler and most other Indian merchants, there's a big difference between a delay and a resolution.  

It got pretty cold Friday night, and several hundred Tuscaroras attended the bonfire on Upper Mountain Road.  

"It doesn't change anything for us," Chrysler said when asked about the state's announced non-action on Friday. "We're still on pins and needles around here."  

NY Daily News  - March 20, 2006 
Supermart is Smokin' Mad 
Sues L.I. Indians Over Sale of Cigs  

A city supermarket chain is suing two Long Island Indian reservations, saying their illegal cigarette sales are cutting into profits. 

Lawyers for Gristedes Foods are expected to file the suit today in Brooklyn Federal Court, charging two Indian nations helped spawn "a thriving black market of discount cigarette sales." 

The suit contends that Gristedes, which operates 45 grocery stores in the metropolitan area, has "lost in excess of $20 million in cigarette sales revenue and lost ancillary sales" from illegal competition. 

The action seeks an injunction, punitive damages and the grocer's share of what it considers illegal profits. 

Gristedes boss John Catsimatidis said he decided to file the suit because the state Taxation and Finance Department is not enforcing the law.  

State and federal statutes allow cigarette retailers on Indian reservations to skip taxes for Indian customers, but duties must be collected from non-Indian customers, whether in person or online. 

"I'm not taking the law in my own hands," Catsimatidis said. "But we're losing a lot of business, and so are a lot of small businesses." 

The Unkechaug Poospatuck Tribe of Mastic and the Shinnecock Indian Nation in Southampton, both in Suffolk County, are named in the suit. 

Critics have accused Gov. Pataki of dragging his feet on collecting cigarette taxes on Indian reservations, despite a legislative budget directive this year. His spokesmen contend the governor is trying to work out agreements to collect the taxes "in a way that makes sense." 

A pack of cigarettes sold in the city now carries a $3 tax - $1.50 each for the city and state. Mayor Bloomberg has proposed a 50-cent hike. 

Also named are Poospatuck Chief Harry Wallace, who operates the Poospatuck Smoke Shop and Trading Post, and several leaders of the Shinnecocks, including Lance Gumbs, the tribe's former board chairman. 

Told of the impending suit, Wallace, who is also a lawyer, said that private individuals "have no authority to sue an Indian nation or its subsidiaries." 

Gumbs called the suit "frivolous" and said it was "intended to deprive the tribes of their economic engine" that is used to pay for needed services on the reservation. 

Gristedes lawyer William Wachtel countered that "the lion's share" of money made on reservation cigarette sales is not being used to improve tribal conditions. 

"A lot of money is ending up in the Cayman Islands [banks]," he charged.  

The Buffalo News  - March 19, 2006 
Indians See Tax Battle With Spitzer  

A resumption of cigarette deliveries to Native American smoke shops does not mean business as usual so long as State Attorney General Eliot Spitzer remains a candidate for governor.  

Seneca leaders and a Tuscarora businessman predict they are headed for a confrontation with Spitzer, who has strongly advocated collecting cigarette taxes on the reservations at the direction of the State Legislature.  

"It ain't over yet with Spitzer. He's brought us together," said Cyrus M. Schindler Jr., a tribal councilor and member of a Seneca committee studying ways to thwart the state's recent effort to collect taxes on Indian-sold tobacco.  

Joseph "Smokin' Joe" Anderson, a smoke shop owner on the Tuscarora Reservation in Niagara County, said his lawyers are working the tax issue. "This is what I say to the government: Don't step on our rights," Anderson said. "They've burned us out and put us on reservations. We came up with ways to manufacture and sell goods, and now they want to take that away from us. It's not going to happen."  

Many Seneca leaders remain angry with Spitzer's statement earlier last week, describing nation retailers shipping cigarettes over the Internet as a "massive criminal enterprise."  

Some say they are looking at ways to spend as much as $5 million to make their anti-tax case to the public during the gubernatorial campaign in the hopes of damaging Spitzer's chance at election.  

One way to raise that money might be to raise the price of a carton of cigarettes and use that extra money for an anti-Spitzer campaign fund.  

The state Tax Department on Friday appeared to back down from a law that passed both the Senate and Assembly, requiring state taxes be charged on cigarettes sold from the reservation. The Tax Department notified a major wholesaler of cigarettes that it could ignore the law, and tobacco shipments resumed Friday.  

Seneca businessmen and leaders aren't certain that the conflict is over, though, and they are discussing other strategies. One is the possibility of the Seneca Nation buying cigarettes directly from tobacco manufacturers, said Anna Ward, who runs Big Indian, one of the Senecas' largest retail operations.  

"That would strengthen our commerce," said Ward, Schindler's daughter. "The Seneca Nation might also deal with other Indian nations that have direct relationships with cigarette manufacturers."  

Schindler, who negotiated a casino compact with Republican Gov. George E. Pataki, described Spitzer's efforts to collect taxes from American Indians as a "bullying tactic" that goes against a promise made by Pataki when he agreed to allow Indian-run casinos in New York State.  

"When we were negotiating the [casino] compact, Pataki said we were sovereign and he wouldn't collect taxes from us," Schindler said, adding that treaties between the tribe and the federal government protect the nation from taxes.  

The U.S. Supreme Court, however, ruled in 1994 that the state could collect taxes on sales of cigarettes to non-Indians.  

Native Americans on the Tuscarora Reservation, though, still feel the tax issue is one of sovereignty. "How are they going to enforce that?" Anderson asked. "Are non-Indians going to have stars on their foreheads? This is not about taxes or politics, it's about human rights."  

Billie Twogun, who lives on Tuscarora land, said it reminds him of the Deep South in the 1950s. "They want us to have a native price and a white-boy price," he said.  

Jim Printup, who works at Jay's Place, an Indian smoke shop on Walmore Road on the Tuscarora Reservation, also expressed resentment at the effort to collect the taxes on the reservation. "How can you tax another nation?" he said. "This is never going to fly."  

"We plan to be in the tobacco business for another 100 years," said Anderson, who owns cigarette, gasoline, gift shop and food market complexes on the reservation.  

Schindler hinted he and other Senecas are not afraid to return to the tactics of the 1990s, when angry Senecas and their supporters closed down the New York State Thruway with massive protests and fires in response to the state's effort to collect taxes.  

NY Daily News  - March 19, 2006 
Pols Fume as Cig Tax is Ignored  

The Pataki administration is refusing to enforce a new law that effectively shuts down the lucrative sale of untaxed cigarettes by the state's Native American tribes - costing the city and state $500 million this year. 

Pataki administration sources concede the governor's decision to defy the Legislature is motivated by politics. 

The state is in delicate negotiations with the tribes, led by the Seneca nation, over its land claims and the proposed construction of casinos upstate. 

Enforcing the new cigarette law could cripple those talks - and Pataki also wants to avoid a repeat of the violence that broke out nine years ago when untaxed cigarette sales were banned temporarily and Native Americans rioted for days, blocking the state thruway near Buffalo, sources said. 

Pataki spokesman Kevin Quinn told the Daily News, "Our goal has always been to solve this matter through cooperation instead of confrontation." 

But state Attorney General Eliot Spitzer, Assembly Speaker Sheldon Silver, Senate Majority Leader Joe Bruno and Assemblyman Pete Grannis are demanding Pataki enforce the law. 

"The administration is being a scofflaw on carrying out the law that we're emphatically arguing should be enforced," said Grannis (D-Manhattan). "There are hundreds of millions of dollars at stake." 

Native American tribes sold more than 475 million packs of untaxed smokes in New York last year. The tribes enjoy tax-free commerce because of their sovereign nation status. 

Selling the tax-free tobacco has brought millions of dollars a year to the tribes, which hawk cigarettes over the Internet and at stores on reservation land. 

Seneca nation President Barry Snyder has railed against the new law, arguing it breaks treaties and is an economic assault on the tribes' sovereignty. 

If it's enforced, Snyder said, "hundreds of Seneca-owned businesses would be forced to close, putting 1,000 Senecas and non-Senecas out of work."  

"Doing so would wreak havoc on both the nations and western New York economy," he added. 

The sale of tax-free cigarettes has been contested in numerous court cases involving the tribes, rival retail stores, trade associations, the Legislature and the city for more than a decade. 

Pataki has proposed changing the new law in his budget and wants to hold off enforcing it while the Legislature considers several amendments. 

Pataki also wants to cut the Legislature out of any negotiations with the tribes over land claims, casino operations and cigarette taxes. That would please the tribal leaders, who prefer to deal one on one with the governor, sources said.  

The new law, which went into effect March 1, requires wholesalers to collect taxes from tribes as well as other retailers before tobacco products are sold. The taxes are then turned over to the Department of Taxation and Finance. 

The tribes would have to pass the new taxes along to their customers to avoid losing profits, essentially killing their tremendous pricing advantage over other retailers. 

For example, Seneca tribe businesses are selling untaxed cartons of Marlboros over the Internet for $29.99 each, while the taxed retail store price per carton in the city is about $70. 

More than 20 Internet sites and 500 smoke shops are run by tribes in the state. They include the Tuscarora, Tonawanda Seneca, Cayuga, Onondaga, Oneida, Akwesasne Mohawk and Ganiehkeh Mohawk nations, which all are located upstate. The Poospatuck and Shinnecock nations in Suffolk County also sell untaxed cigarettes.  

Associated Press - March 18, 2006 
Tax Officials' Advice Eases Tension Over Indian Cigarette Sales  

The state Department of Taxation and Finance has advised a Buffalo cigarette wholesaler it can ignore a new law requiring tax collection on tobacco products sold to Seneca Nation and other Indian businesses.  

That eased tensions on Indian reservations in western New York where nervous suppliers cut off shipments to smoke shops earlier in the week. Indians accuse the state of ignoring their sovereignty. In 1997, the last time the state tried to collect the tobacco taxes, confrontations between Senecas and state police closed a section of the Thruway.  

 By noon Friday, supplier Milhem Attea & Bros. resumed shipping cigarettes to Seneca smoke shops, spokeswoman Rosemary Saffire said. "We have it in writing, so we can take it to a judge and say, "Look, we have permission,"' she said.  

In the letter, the Tax Department said it had a "long-standing policy of allowing untaxed cigarettes" to be sold to Indian retailers. The agency noted Gov. George Pataki had proposed changing the law that kicked in March 1.  

One idea was to delay implementation. The State Senate and Assembly earlier this week rejected that.  

State Attorney General Eliot Spitzer has warned wholesalers that, no matter what the Tax Department claims, the cigarette tax collection law is in effect. His aides have said wholesalers who ship untaxed cigarettes to Indian retailers face possible prosecution.  

Spitzer said Friday during a stop in Buffalo, "You can't announce to the world that a law will simply be ignored and not enforced." He said he would talk to the Pataki administration and that he would "act in a very measured, careful manner, hopefully in conjunction with the executive" branch.  

Joseph Crangle, counsel to the Senecas, said the Tax Department disagrees with Spitzer, "and they're the ones in charge of saying what the state tax law is, not the attorney general." Richard E. Nephew, chief executive officer of the Seneca Nation, said the Tax Department letter "sounds like probably a temporary fix."  

The Senecas have long maintained that 19th century treaties protect them from the state taxing the nation's products. The U.S. Supreme Court, however, ruled in 1994 that the state could collect taxes on sales to non-Indians.  

On the Cattaraugus Reservation, where dozens of smoke shops are located near the Thruway, several shop owners and workers said they were optimistic.  

On the Tuscarora Reservation, residents gathered by a bonfire Friday night near Randy's Smoke Shop with signs urging passing motorists to support treaties.  

The Buffalo News - March 17, 2006 
Indian Protests of Cigarette Law Limited for Now  

Operators of smoke shops on Indian reservations are blaming the state for recent increases in the prices they charge - but the protests were limited to a few signs Thursday.  

If smokers are worried about a shortage of tax-free cigarettes, it wasn't evident at the smoke shops on the Cattaraugus Indian Reservation, where more clerks than customers were in evidence during a visit.  

Two of the four shops visited had signs saying there was a $5 increase for a carton of cigarettes. But only one, First American Tobacco, was restricting sales with a five-carton limit. A clerk said no more cigarettes would be arriving, but she didn't know why.  

At Seneca One Stop, customers with complaints about the $5 increase for a carton and $1 for a pack were advised to take it up with Attorney General Eliot Spitzer. "It's out of Seneca One Stop's hands," according to the sign.  

At Seneca Hawk and Triple J's, there were no indications that prices had risen or of any limits on sales.  

At the Tuscarora Reservation in Niagara County, Randy's Smoke Shop sported a handwritten sign saying, "Price Increase. Due to NYS Government. There Are No More Cigs Coming In. This Is It. You Can Thank Your NYS Government."  

Another sign said there was a one-carton limit until further notice.  

The tension on the reservations stems from a new state law that kicked in March 1 requiring wholesalers to pay state excise taxes - $1.50 per pack - on cigarettes they ship to Indian retailers to be sold to non-Indians. But Gov. George E. Pataki's administration, which for a decade has fought efforts to collect the tax, said it would not have its tax department enforce the new law while Pataki tried to negotiate with legislators for a one-year delay.  

But Spitzer warned wholesalers that, despite the Tax Department's decision, the law is in force and they risked prosecution if they continued selling tax-free cigarettes to Indian retailers. And this week, the State Legislature said it would not go along with Pataki's call to delay the law until after he leaves office at the end of the year.  

In response, wholesale tobacco executives say at least several companies, fearing legal consequences, have stopped shipping to the Indian-owned retailers. Only one tobacco company, Attea Milhelm & Bros., has confirmed a suspension of sales.  

On Thursday, the Pataki administration did not comment on the latest wrangling. State Police were monitoring the situation as Tax Department lawyers met through the day to figure out a next step for the state to take.  

Wholesalers have asked the tax agency to make clear that the law doesn't yet apply because of Pataki's decision to delay enforcement; Spitzer said the tax agency can't do that because the law is already on the books.  

At the Allegany Reservation near Salamanca, tobacco merchants and other Senecas met Wednesday night and did a lot of "venting," according to sources.  

There was talk of blocking highways and also of launching a public relations campaign against Spitzer, they said. Some of the tobacco Web sites were down or had messages saying "Internet Store Closed." [on this date carried such a message] 

The Buffalo News - March 16, 2006 
Key Tobacco Supplier Halts Sales to Senecas 
Indian Retailers Struggle to Keep Cigarette Trade Flowing in Wake of New Tax Law  

ALBANY - The major supplier of cigarettes to Seneca Nation smoke shops has halted shipments to the reservations.  

Milhem Attea & Bros., a Buffalo firm whose business is almost exclusively supplying Indian retailers with cigarettes, said it can't risk being forced to pay cigarette taxes if state or local prosecutors try to enforce a new law that went on the books March 1.  

But the company is considering a suit against the state to keep its tobacco sales flowing to Seneca and other Indian retailers, such as the Tuscarora Nation in Lewiston. Such a legal move could delay a resolution to the tax dispute.  

The suspension of sales by Attea was seen Tuesday as a major development by those trying to end the tax-free cigarette sales.  

"This might be the break that finally puts an end to this issue," said Russell Sciandra, director of the Center for a Tobacco Free New York.  

Other cigarette suppliers also have stopped shipping to the Seneca retailers in the past several days, state officials and executives in the wholesale tobacco industry say. Those suppliers did not return calls for comment.  

If true, industry sources said, the Seneca retailers could find themselves running short on tobacco products by next week.  

The situation has left Seneca and Tuscarora retailers scrambling to keep the tobacco trade flowing.  

The tobacco business has made many Native American businessmen wealthy, appealing to smokers trying to avoid the state's cigarette taxes that add $1.50 per pack before local sales taxes.  

A lawyer for Attea said the sales could resume if the state Tax Department sends a new signal that the law is not in force.  

A spokesman for Attorney General Eliot Spitzer said Wednesday that wholesalers risk possible criminal prosecution if they continue the sales.  

"The tax department can say whatever it wants, but the law is in effect," said Darren Dopp, a spokesman for Spitzer, who has insisted the tax collection law became effective March 1 whether or not the tax agency implements its provisions.  

Seneca President Barry Snyder Sr., in a prepared statement, accused Spitzer of threatening and intimidating wholesalers in a move that is "interfering with official state policy" of the Pataki administration.  

"It has become obvious that the [Seneca] Nation must do more to protect its economy," Snyder said.  

"We are left with no choice but to develop a protected source of tobacco products to ensure that the nation and its people are not denied the ability to consume and trade these products in our territory," Snyder added.  

He did not elaborate and did not return calls for comment, but tribal leaders are looking into setting up some sort of Seneca-owned tobacco business to keep state tax collectors away.  

The Legislature last year inserted into the state budget a provision requiring the state Tax Department to collect the taxes on cigarettes sold by Indians to non-Indians by getting the tax from wholesalers before the products are shipped to retailers.  

Gov. George E. Pataki's tax department, however, said it would not enforce the new March 1 law because the governor was trying to negotiate a one-year delay in its implementation.  

The recent move by Spitzer has angered employees of cigarette stores on the Tuscarora Indian Reservation.  

Although employees were tight-lipped late Wednesday at the Smokin' Joe's complex on Saunders Settlement Road, Lewiston, a female employee - who would not give her name - said she expects tensions to escalate by Friday.  

"I'm leaving New York State. This is the final straw," said the woman, who also said she feared for her job.  

Smokers buying cigarettes Wednesday discovered the price rose by $6 a carton and 60 cents a pack.  

The clerk at Smokin' Joe's said a carton of Marlboros regularly sold for $22.95. On Wednesday, the price was $28.95.  

Crystal R. Avery, a clerk at Smokin' Joe's Indian Hill location, said even the Smokin' Joe's brands, which are made on the Tuscarora Reservation, have increased $6 a carton. Efforts to reach Joseph "Smokin' Joe" Anderson or a business representative were unsuccessful Wednesday.  

NY Times - March 8, 2006 
Settlement Reached to Pursue Online Cigarette Sales Taxes  

Mayor Michael R. Bloomberg yesterday announced a settlement with an online cigarette vendor that will allow the city to pursue residents for up to $33 million in unpaid excise taxes. It was the largest such settlement, officials said, since the city sued dozens of companies and individuals in 2003 for illegally selling cigarettes over the Internet to city residents. 

A 2000 state law banned direct sales of cigarettes over the Internet and by telephone or mail. Tobacco companies challenged the ban, but a federal appellate court upheld it in February 2003. The state began enforcing the law that June. 

Officials acknowledge, however, that online cigarette sales are still commonplace, and say that when they occur, the state and city are unfairly cheated of tax revenues. 

Even while the state ban was being challenged, the city began its own effort in January 2003 to pursue Internet cigarette vendors for failing to report sales and excise taxes. It has filed four lawsuits against about 35 companies and individuals, alleging that they had failed to file federal Jenkins Act reports, which are intended to alert state tax authorities to out-of-state cigarette purchases so that the purchases can be subject to local taxes. 

The most recent settlement was filed last Wednesday in Federal Bankruptcy Court in Tampa, Fla. The online cigarette vendor, eSmokes, agreed to give the city an electronic database of all its sales to addresses in New York State from 2000 to mid-2003. The company also agreed to stop selling cigarettes to customers in New York State. The company, which began operations in 1999, filed for bankruptcy protection last May.  

Eric Proshansky, deputy chief of affirmative litigation for the city's Law Department, said that eSmokes had turned over seven spreadsheets containing records on about 140,000 sales. However, many of the records may be duplicates.  

The city's Finance Department will sort the data and send tax bills to city residents. In the past, such collection efforts have yielded 65 percent of the taxes owed; efforts continue to collect the remainder.  

Associated Press - February 23, 2006 
Spitzer: Pataki Administration Poised to Violate Law March 1  

ALBANY, N.Y. -- Come Wednesday, state government will be breaking the law and begin costing taxpayers millions of dollars by choosing not to enforce legislation that would end the huge sales advantage that Indian tribes have over taxpaying competitors off reservations, said Attorney General Eliot Spitzer.  

"The current tax laws are being ignored," said Spitzer, the state's lawyer. "The new law goes into effect automatically on March 1 ... regardless of what the tax department does." 

"This is a dangerous precedent," said state Sen. Raymond Meier, a Utica Republican whose district includes the Oneida tribe's Turning Stone Casino. "If people are able to say that `We are going to ignore the law and try to negotiate a different legal framework with the state,' it's an invitation to anarchy.  

"I know of no other body of law where the executive branch would say the Legislature is considering something, so we will ... suspend the law in the meantime," Meier said Thursday.  

In 2005, 9.5 billion packs of cigarettes were sold in New York state without being taxed or stamped. That was up from 4.3 billion in 2000, according to Spitzer's staff. It estimates lost taxes to the state and New York City total about $300 million a year, while costing off-reservation retailers untold customers.  

The state Department of Taxation and Finance said it won't enforce the new law requiring Indian tribes to pay the state's rising cigarette taxes for sales to non-Indians through its massive Internet site and at reservation stores. Instead, Commissioner Andrew Eristoff said he'll wait to see if the Legislature agrees with Gov. George Pataki to again delay enforcement by a year _ a delay the Democrat-led Assembly already rejects.  

Nonetheless, officials on all sides figure nothing will happen Wednesday. And for some who fear a reprise of 1990s violence by Indians the last time the state tried to collect taxes, that's just as well.  

As written, the law this time is aimed not at the tribes _ whose leaders say they are shielded from collecting state taxes as sovereign nations _ but at the large commercial tax and stamping agents licensed by the state.  

The wholesalers are compelled by the law to stop selling untaxed, unstamped cigarettes to tribes. The Pataki administration's role under the law is to provide coupons, already printed up, that would allow Indians to avoid taxes on the cigarettes they buy for their own personal use.  

The Pataki administration refused to say what, if anything, it has told the wholesalers to do as of Wednesday. Tax Department spokesman Tom Bergen said Tuesday he didn't know if the cigarette wholesalers will adhere to the law and stop providing untaxed, unstamped cigarettes to tribes _ the biggest Indian customer being the Senecas in western New York.  

Normally, the state Taxation and Finance Department would take action against those lucrative licenses if a wholesaler failed to follow state law.  

The next tier of action after Wednesday could be lawsuits, by non-Indian retailers against the state or by the state Attorney General's Office against wholesalers, but either courses would be lengthy.  

"The tax stamping agents are required to comply with the law" when it takes effect automatically Wednesday, said Spitzer, who is the front-runner in the governor's race. "If they don't, then the tax department should initiate proceedings to pull their stamping licenses."  

A major tax stamp company, Harold Levinson Associates of Farmingdale, didn't respond to a request for comment on what the company will do. Seneca spokeswoman Susan L. Asquith said the tribe feels the law doesn't begin Wednesday and doesn't know what wholesalers will do.  

"We do not expect to begin enforcement on March 1," Eristoff stated in testimony before the Legislature at a Feb. 15 budget hearing. "As a matter of practical administration, we think it would be premature to begin implementing at the same time that the Legislature is reviewing substantive amendments to the law."  

But the Legislature apparently isn't.  

"No one is considering it seriously," said Assemblyman Alexander "Pete" Grannis, a New York City Democrat and the chamber's leader on the issue. "March 1, they are violating the law," he said of the Pataki administration.  

"We believe this new approach is a workable, legal, nonintrusive approach as it relates to the sovereignty of the Indian Nations," Grannis said.  

NY Post - February 3, 2006 
Web Buyers Smoked Out  

Price-conscious smokers who thought they landed fantastic bargains on the Internet have been hit by the city with bills totaling nearly $1.4 million, officials said yesterday.  

A crackdown on tax-free cigarette sales on the Web hauled in $695,479 from 2,156 puffers out of the $1,354,880 demanded in the first round of bills sent out to 3,780 New York City residents through May.  

A second round in August took in another $169,990 out of $507,000 due.  

Now, officials say, they're ready to get really serious and impose a $100-a-carton penalty — plus the $1.50-a-pack tax.  

"We want voluntary compliance," said Finance Department spokesman Sam Miller. "Now that we've sent out three notices, it's not so voluntary anymore."  

The Buffalo News - January 18, 2006  
Pataki Seeks 1-Year Delay in Ending Indians' Tax-Free Cigarette Sales  

Gov. George E. Pataki said Tuesday he will seek to delay for a year implementing a state law that ends tax-free sales of cigarettes by Indian retailers to non-Indians. Legislators, health groups and non-Indian retailers have been trying to have the taxes collected for more than a decade.  

Pataki's effort to delay enforcement of the law - due to take effect March 1 - came on the same day he formally proposed a $1-per-pack cigarette tax increase. Critics say delaying the reservation tax collection at the same time the tax is increased is certain to increase tax evasion and bootlegging.  

Not surprisingly, Indian leaders praised the two seemingly contradictory proposals, which were contained in Pataki's 2006 state budget plan. Over the years cigarette sales have become a major business for Seneca Nation shops and Internet operations, with smokers from around the state turning to Seneca retailers to avoid state taxes. The governor's new tax plan would take the level to $2.50 per pack.  

"The Seneca people commend the governor for his consistent position over the years of recognizing the unique, legal sovereign status of the Seneca Nation," said Seneca President Barry Snyder Sr.  

Non-Indian retail groups said the governor is sending mixed messages by raising the tax but not doing more to reduce bootlegging and Indian tax-free sales. "This is an act of breathtaking cynicism," said James Calvin, president of the New York Association of Convenience Stores.  

"Let's drive tens of thousands more smokers to the unlicensed, unregulated, untaxed side of the street no matter how harmful it is to public health, state and local treasuries, or neighborhood convenience stores," he said.  

Health groups criticized the governor's delay. "It's a mistake," said Russell Sciandra, director of the Center for a Tobacco Free New York. "We think failing to collect the tax will reduce the public health impact of the tax increase." 

NY Times - May 29, 2005 
Post Office Sidesteps Fray on Illicit Sales of Cigarettes 

As they move to thwart the illegal trade of cigarettes over the Internet, state officials have joined colleagues from around the nation in persuading the major credit card companies to stop processing payments for online cigarette sales. Additionally, the state has enacted a law prohibiting the shipment of cigarettes to its residents and banned private carriers, like FedEx, from shipping cigarettes. 

But as state officials fight illegal online cigarette sales, one operation is not falling into line - the United States Postal Service, which officials say delivers the bulk of illegally purchased cigarettes to New Yorkers.  

The Postal Service, citing concerns about the privacy of the mail and wary of putting postal clerks in the position of deciding which packages to accept and which to reject, is resisting the growing calls that it stop shipping cigarettes.  

Its stance is exasperating law enforcement officials. "It is outrageous that the federal government - through the United States Postal Service - is knowingly acting as the delivery arm for these criminal enterprises," New York's attorney general, Eliot Spitzer, said in a statement.  

The role of the post office in shipping illegally sold cigarettes is also attracting attention across the nation. Last month the National Association of Attorneys General asked the Postal Service to "adopt a firm policy prohibiting transportation of packages that the carrier knows or reasonably should know contains cigarettes sold illegally on the Internet." In Oregon, an online cigarette seller was charged in January with unlawful distribution of cigarettes and racketeering; the post office was not charged but was named in the indictment as part of the racketeering enterprise. Congress has considered legislation that would ban the mailing of cigarettes. 

Postal officials say that they are committed to fighting illegal activities conducted through the mail, but complain that their hands are tied. They note that Priority Mail, which officials say is most frequently used to ship cigarettes, cannot be inspected without a search warrant or the consent of either the sender or the recipient. 

The post office's investigative arm, the Postal Inspection Service, has worked to stop illegal cigarette shipments in a number of cases, but has only about 1,970 inspectors in the whole country, charged with investigating everything from the anthrax mailings to all suspicious packages to the distribution of child pornography. And postal officials say that postal clerks cannot be expected to figure out what people are shipping, and whether cigarette retailers are complying with obscure laws like the Jenkins Act, which requires cigarette sellers to keep lists of customers for tax collection purposes. 

"Tobacco is a legal, mailable product," Mary Anne Gibbons, the Postal Service's general counsel, wrote last month in a response to the association of attorneys general. "It would be impracticable for postal acceptance clerks to make determinations on any given mailer's compliance with state excise or tax law or Jenkins Act filings." 

But state officials reject this argument, pointing out that at least in New York State, public health laws prohibit direct sales of cigarettes by mail. They acknowledge that the state cannot bar the post office, a federal entity, from shipping cigarettes in New York, but say that since online merchants often violate tax laws, shipping their cigarettes violates federal mail fraud statutes and therefore should be stopped.  

"Instead of complying with federal law, the Postal Service is taking a head-in-the-sand approach, by claiming that they have no idea what is in the packages being delivered - even if they are being mailed by Internet operators that sell nothing but cigarettes," Mr. Spitzer said in a statement. "That is an absurd argument that we would never accept from a private defendant." 

And several law enforcement officials said that in small upstate communities like Salamanca, N.Y., which are dotted with smoke shops advertising the tax-free cigarettes sold from Indian reservations, the post office willingly accepts delivery of truckloads of cartons of cigarettes for delivery. 

But Anthony Alverno, the post office's chief counsel for customer protection and privacy, said in an interview that the post office's research indicated that the smoke shops doing business in New York sold other items beside cigarettes, including "novelty items," so some packages they ship might not be cigarettes. "We would need to get a search warrant to make the determination," he said. 

The Postal Inspection Service joined other federal and local law enforcement agencies to seize 300,000 cartons of illegal cigarettes last November at Kennedy International Airport. Mr. Alverno said that blocking overseas shipments was easier, because they must pass through customs. He added that the Postal Service would continue to discuss civil or criminal actions that could be taken with law enforcement agencies. 

Not just government officials, but also antismoking advocates are trying to stop the mailing of cigarettes. And some see signs of progress. 

John F. Banzhaf III, the executive director of Action on Smoking and Health, an antismoking organization that has warned the Postal Service that it could face legal liability for shipping illegally purchased cigarettes, said that the service was finding itself increasingly isolated, especially since credit card companies stopped processing the payments for such sales earlier this year.  

"It may be more trouble - both from a legal and public relations point of view - than the benefits of the revenue that comes in," he said. 

Several online cigarette sellers shut down after the credit card companies stopped processing their transactions; others are struggling. One Web site,, which says it is run from western New York, complains on its site that it is "perpetually targeted by the state of New York," and says that it is not bound by state or federal laws because it is owned and operated by the Seneca Nation of Indians.  

The Web site says that it ships cigarettes by Priority Mail, that they are tax-free, and that the company will not share its customer lists with the government. But state officials say the company is flagrantly violating tax laws.  

Mr. Spitzer said that the Postal Service should stop carrying illegally sold cigarettes. "The entire law enforcement community - attorneys general, the federal Bureau of Alcohol, Tobacco and Firearms, police officers, state tax officials, and even the Postal Inspection Service - is united in trying to stop these illegal sales," he said. "The postmaster general should be instructing the 'delivery side' of his office to join us in this effort, rather than facilitating illegal conduct." 

Buffalo News - April 6, 2005 
Regulations in works to collect taxes on Indian sales of cigarettes, gas  

ALBANY - The state tax commissioner said Tuesday his agency is moving ahead with regulations to collect taxes on Indian sales of cigarettes and gasoline, a move the head of the Seneca Nation believes will never happen.  

Tax Commissioner Andrew S. Eristoff told lawmakers his proposed regulations mirror a similar rule his agency killed last year over the opposition of the State Legislature, health groups and non-Indian retailers. The new rules, which have not yet been publicly released, are also similar to legislation passed last week as part of the state budget, ordering Eristoff's agency to collect what lawmakers believe is at least $400 million a year in taxes from sales by Indian smoke and gasoline shops and Internet sites. The new budget provision is the third straight year that the Legislature has ordered Gov. George E. Pataki to collect the tax - an edict the governor, citing Indian sovereignty, has ignored.  

In January, Eristoff surprised both sides in the debate by saying his agency was drafting new rules to collect taxes at the wholesale level before the products reach Indian retailers. Some lobbyists saw the move as a negotiating tactic by the Pataki administration in trying to deal with ongoing casino and land claims issues.  

On Tuesday, in a hearing on Indian casino and taxation issues, Eristoff said his agency has completed drafting the rules and that they are now under review. It is not clear when they might take effect.  

Seneca President Barry E. Snyder Sr., who skipped his planned testimony before the legislative panel on Tuesday, said he believes Pataki will not try to collect the taxes.  

"If he's a man of his word, we should have no problem," Snyder said, noting Pataki's longtime public vow not to upset relations with Indian tribes by going after the taxes that Native American leaders say they don't have to pay under long-standing treaty rights.  

Snyder said he hopes to meet with Pataki soon to discuss various issues, including the tribe's possible interest in a Catskills casino and the taxation dispute.  

"He's held our sovereignty very close. Probably no other governor has recognized as much that the Seneca Nation is a sovereign nation," Snyder said.  

NY Times - April 4, 2005 
Trouble For Online Vendors of Cigarettes  

Not since the dot-com bust have so many sites gone south so quickly. 

Two weeks after credit card companies announced they would no longer accept payment for tobacco products bought online, scores of Internet cigarette merchants have effectively lost the means to do business profitably, and are either limping along or have shut down their operations altogether. 

Visa International, MasterCard International, American Express, eBay's PayPal service and others cut off the online tobacconists last month after being told by a coalition of states and representatives of the federal Bureau of Alcohol, Tobacco and Firearms that virtually all such sales were illegal. Government officials said that merchants had not done enough to comply with age verification practices or to register sales with governments to insure the collection of state taxes. 

Now, most merchants are reduced to accepting electronic or paper checks, and fewer customers may be willing to wait for those checks to clear before their orders are shipped. Meanwhile, some online merchants say they have been wrongfully singled out by authorities. 

Maxine Jimerson, owner Ron's Smoke Shop in Allegany, N.Y., recently shut down the online part of her business and laid off 120 of her 160 employees. As a member of the Seneca Nation Indian tribe, she is entitled to sell cigarettes free of state tax. 

"Most everybody else around here is going out of business too," said Ms. Jimerson, who will keep her retail shop open but has sold her Web address to another merchant who operates on Seneca territory. "We're talking about probably 30 businesses, and between 1,500 and 2,000 employees being laid off." 

Ms. Jimerson said her company had gone to great lengths to verify customers' ages, contracting with a special vendor and requiring buyers to send in a copy of a government-issued picture ID, with age and signature, before a purchase could be made. Customer signatures at the time of delivery had to match the signatures on file. 

But federal and state authorities said that online cigarette merchants did not do enough to insure the collection of taxes. In particular, they did not comply with the Jenkins Act, a federal law that requires sellers to register purchases in states where customers live. Like many other online sellers operating on Indian territory, Ron's Smoke Shop did not comply with such strictures because it argued that the law did not apply to it.  

If there were online companies that complied with all state and federal regulations, "it's news to us," said Marc Violette, a spokesman for the office of Eliot Spitzer, the attorney general of New York, where all online cigarette sales are considered illegal. 

"It's good public relations to say you're bending over backwards to comply with the law, but the fact is, they're engaged in an illegal industry, and on their face, these transactions are illegal," Mr. Violette said. 

State officials had for years tried unsuccessfully to collect cigarette tax revenues from online merchants, and had redoubled such efforts as budget deficits skyrocketed in recent years. By using the credit card companies as leverage, though, they appear to have made progress in the fight. 

The credit card company embargo "will significantly curtail cigarette sales over the Internet, to the advantage of the major cigarette manufacturers as well as state governments," wrote Robert T. Campagnino, an analyst with Prudential Equity Group, an investment firm, in a report late last month. 

Mr. Campagnino estimated in his report that in 2004, $1 billion worth of cigarettes were sold online, or about 3.1 percent of the industry's total volume. Many of those sales were made to customers in states with particularly high cigarette taxes like New York, where offline merchants must charge $15 or more in taxes for each carton. New York bars direct shipment of tobacco products to its citizens, but many online merchants ignored that law. 

Some established tobacco sellers, like Nat Sherman, a cigar and cigarette manufacturer based in New Jersey that also sells its products online, strenuously object to the government actions.  

"They're throwing the baby out with the bathwater," said Joel Sherman, the company's chief executive. "We have over 70 licenses to sell directly to customers around the country - every state, and many municipalities. And we have a whole series of proofs in place for age verification." 

Mr. Sherman said that credit card companies "have not gotten around to shutting us off yet," so his site still accepts plastic. But he said that since his customers can find Nat Sherman products at retailers throughout the country - at lower prices, since customers do not pay for shipping - his business will not be as deeply affected by a credit card embargo as others. 

In theory, at least, law-abiding online tobacco sellers could avoid the credit card embargo. Joshua Peirez, a senior vice president at MasterCard, said that banks that issue his company's brand of credit cards may provide MasterCard with documentation if they believe one of their merchant customers is selling tobacco online legally. 

"But if there's any doubt, banks have the obligation not to contract," said Mr. Peirez, who estimated that his company has so far cut off about 100 of the biggest online tobacco sellers. 

Some online cigarette sellers, who spoke on condition of anonymity, said they were exploring ways to create their own credit cards, perhaps in association with other online tobacco sellers. They would then battle government regulators in court to determine the legality of their practices. 

Still other online sellers are engaged in more creative practices.  

Richard Johnson Jr., who until late last year sold foreign, duty-free cigarettes through, said he was in the process of reviving that site so he could sell domestic cigarettes to United States consumers. Mr. Johnson said he planned to establish credit card accounts with foreign banks, which he said were not bound by United States laws. 

Because some Internet cigarette sellers continue to accept credit cards, this practice is possibly already being adopted. Mr. Peirez, of MasterCard, said the company's policy applied to any bank whose merchants sell to United States customers. "So no, we wouldn't allow them to process those transactions," he said. 

Meanwhile, Ms. Jimerson of Ron's Smoke Shop said she hoped to use her company's former warehouse for a new party supplies and candle business,, which she began developing months ago.  

"I could retire," she said. "But I don't like to be forced into anything." 

Buffalo News - April 4, 2005 
Internet Cigarette Sales Take A Hit  
Retailers on Cattaraugus Indian Reservation feeling impact as credit card companies stop participating in transactions 

The nation's biggest Internet cigarette sales industry is showing signs of decline following concerted pressure by several states to shut off tobacco customer access to credit cards.  

Several retailers on the Cattaraugus Indian Reservation who operate Internet smoke shops selling tax-free cigarettes are laying off workers, closing or attempting to retool their operations.  

The decline follows credit card companies' decisions to cooperate with law enforcement authorities from across the nation. The credit card companies no longer are participating in Internet tobacco transactions, following a meeting last month with law  
enforcement officials who explained that Internet tobacco sales violate several laws.  

In addition, Seneca sellers face a barrage of threatening letters and, in some cases, subpoenas aimed at recovering unpaid tax revenues.  

Seneca Maxine Jimerson's response was to sell her lucrative online business.  

"They were harassing me. They sent me a subpoena asking me to forward all of my records, lists of employees, customers' names and who owned the business," Jimerson said of authorities in several states. "The letters kept getting more and more 
aggressive listing the laws we were breaking."  

She received the subpoena from Indiana and letters from tax officials in New York City, Pennsylvania and Washington State and has received many other notices in the past from tax officials around the country.  

"I don't feel I have to comply with them," she said. "I'm on an Indian reservation, and they don't have rights on the reservation." 

No exact figures  

It is not easy to get exact figures on how many people were laid off or how many businesses closed, because many of these Internet businesses are mom-and-pop operations in homes with family members and a handful of employees.  

But with the sale of Jimerson's business to another Native American, it is estimated that as many as 80 workers lost their jobs, according to Gregg Prockton, who serves as Jimerson's chief operating officer. 

Jimerson, who still runs a smoke shop on the Allegany Reservation, was one of the biggest online merchants from the Seneca Nation, which comprises one of the largest blocs of Web cigarette sellers.  

For years, New York State has gone back and forth on the issue of collecting taxes on Native American cigarette and gasoline sales to non-Indians.  

In 1997, Gov. George E. Pataki backed away from attempts to collect taxes following violent Native American protests. Three times the State Legislature has adopted laws ordering the collection of taxes, including a new measure in the just-adopted state  

A lot of money is at stake.  

More than 90 percent of the $347.5 million worth of cigarettes and other tobacco products sold by Senecas in 2003 was generated through telephone and Internet transactions.  

Senecas have a huge price edge over non-Indian retailers when it comes to selling untaxed cigarettes for as low as $9 a carton - about $15 less than cigarettes sold off reservation lands.  

Question of sovereignty 

State governments claim that the Internet crackdown is about stopping sales of cigarettes to minors, halting the flow of black market cigarette profits to criminal enterprises and complying with laws governing the sale of tobacco products.  

Senecas see different issues.  

They say it is all about collecting billions of dollars in lost tax revenue that, if successful, will come at the expense of the Seneca Nation's sovereignty, which they insist makes them immune to state taxes.  

But Seneca President Barry E. Snyder Sr. has said the Internet sales dispute is outside the realm of native sovereignty rights - a stance that has upset the tribe's online retailers.  

By failing to take up their cause, the merchants say it is only a matter of time before state government once again attempts to force collection of sales taxes on tobacco and gasoline sales involving customers who drive onto Seneca reservations.  

"We are a sovereign nation, and the nation has to back us up. It can't say you guys are out on your own," said Suzanne Smith, who works at a family-owned Internet smoke shop. "The nation has to draw the line."  

Snyder, at a Tribal Council meeting last week, said he plans to set up a meeting with State Attorney General Eliot L. Spitzer to discuss the credit card ban.  

But if the state succeeds in shutting down Internet businesses, Smith says, it will destroy the economic progress Senecas have made in recent years and hurt the overall Western New York economy as Internet workers lose their jobs. 

Senecas estimate their Internet tobacco businesses employ as many as 1,500 people, many of them non-Indians, though that number is now dropping because of the credit card prohibition. They note these jobs pay above minimum wage, sometimes as 
much as $10 or more an hour.  

"Most of us are just small businesses trying to make a dollar, and New York State is coming in and telling us they want the business and we can't have it," said 22-year-old Joseph Campbell, a shipping clerk at an Internet smoke shop. "I'll probably go  
to Tops or Wal-Mart looking for work."  

In the fight to stay in business, Irene and Gerald "Chief" Jimerson say they have diversified and now are selling pet food and bottled Native American water for walk-in sales at their shop on Richardson Road.  

An older couple, they opened their business in 1999 to create an economic opportunity for their younger son, who had not gone to college.  

"A small amount of our business comes over the Internet," Irene Jimerson said. "We're here in our shop seven days a week, 12 hours a day. It's not an easy life. I don't believe the government should be involved in anyone's livelihood."  

A different strategy  

Other Seneca Internet sellers say they are attempting to find ways around the credit card ban by making use of money orders and financial services that guarantee checks written by customers or verify that there is enough money in the customers' checking accounts to cover the purchases.  

But this strategy has generated concern among customers, according to Smith, who says some of her customers have expressed reluctance in switching over to checks and banks.  

"Customers have asked if authorities could come in and see our business records. We tell them no one sees our records, and the reason we say that is we are a sovereign nation," Smith said.  

For buyers who switch over to money orders or checks, the state considers that an illegal practice as well, according to Marc Viollette, a spokesman for Spitzer.  

"The payment mechanism is irrelevant. It's an illegal act," Viollette said. He declined to say what legal steps Spitzer is taking to ensure compliance of halting Internet tobacco sales.  

And while some Native Americans believe they are being racially discriminated against, Viollette says the efforts against tobacco credit card sales by state attorneys general are not only nationwide, but also aimed at blocking cigarette bootleggers abroad.  

"This extends beyond U.S. borders. In October we seized a planeload of cigarettes at (Kennedy) Airport that came in from Switzerland," he said.  

Attorney Joseph Crangle, who represents Seneca retailers on tax issues, said that the Seneca's online businesses will ultimately "persevere and succeed."  

He blamed convenience store owners, in part, for the push to deprive Senecas of the Internet business they have built up in recent years. 

When told that it appeared the credit card ban was shutting down Internet sales of cigarettes, James Calvin, president of the New York Association of Convenience Stores, welcomed the development.  

"It's encouraging that there is movement toward the level playing field we have been seeking all these years," Calvin said. "American society simply won't accept sales of cigarettes without proper taxation and age verification."  

Convenience store operators, Calvin added, want state law requiring collection of taxes at reservation stores enforced. 

Buffalo News - March 18, 2005 
Senecas cry foul on stymied cigarette sales 
Call ban on credit sales on the Net 'interference' 

Local Seneca Nation leaders are calling Thursday's agreement between the government and credit card companies that bars cigarette smokers from buying their tobacco over the Internet with credit an "interference with commerce."  

The agreement, which is effective immediately, was struck Thursday between the credit card companies, U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives and several state attorneys general, including Eliot Spitzer of New York.  

It results in almost all credit card companies ceasing participation with Web sites that sell cigarettes and tobacco in every state, according to Spitzer.  

The companies also agreed to take action against Internet sellers - the Senecas are among the top sellers - that authorities identify as violating state and federal laws regulating cigarette sales.  

Seneca Nation leaders called the pact a clear "interference with commerce" but downplayed the notion that it violated native sovereignty rights.  

"Taxation is a sovereignty issue," said Seneca Nation President Barry Snyder. "As far as Internet sales go, it's really outside of the realm of the sovereignty issue.  

"We have to look at what position we have to take. We can't just throw our sovereignty around, we have to be very cautious." 

However, Snyder said that doesn't mean that the tribe won't attempt to fight the measure.  

"It bothers me in the sense that we're talking about commerce. We'll have to deal with it," Snyder said. "They say it's a health issue . . . that's a cover. The real issue is the state of New York is hurting and trying hard to tax more."  

Sales by Seneca Nation members comprise one of the largest blocs of Internet cigarette sellers.  

The nation sold $347.5 million worth of tobacco products in 2003, more than 90 percent by telephone or Internet. Untaxed Seneca Nation cigarettes sell for as little as $9 a carton, about $15 less than non-Indian retailers.  

Government officials contend that it's not about taxing more so much as collecting the lost tax revenues and preventing proceeds from Internet sales from being funnelled into criminal organizations.  

States lose more than $1 billion a year in tax revenue from Internet tobacco sales, according to Sheree Mixell, a spokeswoman for the ATF.  

Michael Bouchard, ATF assistant director for field operations, added: "ATF investigations show that millions of dollars each year in illegal sales of cigarettes are diverted to fund terrorists and criminal organizations."  

The effort is also important because enforcement has been difficult even though in many states, including New York, the Internet sale of tobacco products is illegal, officials said.  

The trade undercuts traditional business operators, often avoids sales tax for states and localities, and can be a way for underage consumers to buy cigarettes and chewing tobacco before they turn 18.  

Smokers can still buy cigarettes over the Internet, but they would have to use checks, money orders or some other payment system that would likely delay receipt in the Internet business built on speed. Operators of cigarette Web sites didn't immediately respond to requests for comment.  

Attorneys general from California, Oregon, Colorado, Idaho, Louisiana, Maryland, Pennsylvania, Vermont and Wisconsin were also involved in the negotiations.  

In September, the Senecas agreed with state officials to label packages so that the person receiving them must be of legal age to purchase tobacco products. Ironically, that policy also began Thursday.  

New York's ban on Internet cigarette sales was the first in the nation. But opponents argued the law wasn't about minors smoking, but about state tax revenue. The state's tax on a pack of cigarettes is $1.50, pushing the total price to around $5.  

Lower prices are offered on the Internet and in mail-order catalogs by tax-exempt Indian merchants and retailers in states with lower taxes.  

In January, a federal judge tossed out racketeering charges against a group of online cigarette sellers. New York City had sued 16 cigarette Web sites to require taxes be paid on Internet sales. The city, which estimates it loses as much as $100 million a year because of the unpaid cigarette sales taxes, continues to seek to recover $15 million.  

Associated Press - March 18, 2005 
Deal Aims to Prevent Web Cigarette Sales 

ALBANY, N.Y. (AP) -- Major credit card companies will refuse to participate in Internet sales of cigarettes nationwide under a government agreement made Thursday. 

The U.S. Bureau of Alcohol, Tobacco, Firearms and Explosives, the companies and state attorneys general agreed to work together to prevent the long unchecked use of credit cards to buy cigarettes over the Internet across state lines. The agreement is effective immediately. 

The result is that virtually all credit cards will no longer participate with Web sites based in the United States and abroad that sell cigarettes and tobacco products in every state, said New York Attorney General Eliot Spitzer. The card companies also agreed to take action against Internet sellers that authorities identify as violating state and federal laws regulating cigarette sales. 

States lose more than $1 billion a year in tax revenue from Internet tobacco sales, said Sheree Mixell, ATF spokeswoman. 

The effort is important because enforcement has been difficult, even though in many states, including New York, the Internet sale of tobacco products is illegal. The trade undercuts traditional business operators, often avoids sales tax for states and localities, and can be a way for underage consumers to buy cigarettes and chewing tobacco before they turn 18. 

``By working with all the major card companies, we will severely restrict the availability of the Internet retailers to make these illegal sales,'' said Spitzer, one of the lead attorneys general in the partnership sealed Thursday. 

The negotiations were also led by California Attorney General Bill Lockyer and Oregon Attorney General Hardy Myers. Attorneys general from Colorado, Idaho, Louisiana, Maryland, Pennsylvania, Vermont and Wisconsin also participated. 

``ATF investigations show that millions of dollars each year in illegal sales of cigarettes are diverted to fund terrorists and criminal organizations,'' said Michael Bouchard, ATF assistant director for field operations. ``Through today's initiative, we are addressing the problem of illegal sales across multiple jurisdictions with tremendous support from the country's largest credit card companies. We welcome the help.'' 

Earlier this month MasterCard International issued a bulletin to its member banks on ``the need to comply with rules governing the Internet sale and shipment of tobacco.'' 

``MasterCard does not tolerate illegal activities of any kind,'' the statement said. 

The agreement announced Thursday also includes American Express, Visa, Discover, Diners Club and the Internet financial transaction service PayPal, which is owned by eBay Inc. 

Joshua Peirez, senior vice president at MasterCard, told The Associated Press the policy basically meant the card couldn't be used for Internet purchases of tobacco ``because at this point, no merchants are complying with all of these laws.'' 

Smokers can still buy cigarettes over the Internet, but they would have to use checks, money orders or some other payment system that would likely delay receipt in the Internet business built on speed. Operators of cigarette Web sites didn't immediately respond to requests for comment. 

New York's ban on Internet cigarette sales was the first in the nation. But opponents argued the law wasn't about minors smoking, but about state tax revenue. The state's tax on a pack of cigarettes is $1.50, pushing the total price to around $5. Lower prices are offered on the Internet and in mail-order catalogs by tax-exempt Indian merchants and retailers in states with lower taxes. 

In January, a federal judge tossed out racketeering charges against a group of online cigarette sellers. New York City had sued 16 cigarette Web sites to require taxes be paid on Internet sales. The city, which estimates it loses as much as $100 million a year because of the unpaid cigarette sales taxes, continues to seek to recover $15 million. 

U.S. Newswire Press Release - March 16, 2005 
Internet Cigarette Sales Spark Enforcement Meeting, Possible Crackdown; Postal Service Meets With Attorneys General on Thursday 

WASHINGTON, March 16 /U.S. Newswire/ -- The U.S. Postal Service will meet with representatives of various state attorneys general on Thursday to discuss how the Service can avoid legal liability for its role in delivering cigarettes sold illegally on the Internet. The result could be an agreement to curtail delivery of such cigarettes, or requirements that the sellers take steps such as verifying the age of purchasers, insuring that state cigarette taxes are paid, etc. 

The meeting was sparked by a letter threatening the postal service with civil -- and possibly even criminal -- liability if it continues to deliver cigarettes purchased over the Internet. The nation's attorneys general have concluded that "virtually all" online tobacco retail sales are illegal, and several other companies which facilitate these sales have taken steps to reduce their potential legal liability by requiring Internet cigarette sales sites to provide proof that they fully comply with the law. 

The letter to the Postal Service which sparked the meeting was sent by Action on Smoking and Health (ASH), a national antismoking organization. It warned that "under several legal theories which have already been sustained in court and/or resulted in settlements -- companies selling cigarettes on the Internet appear to be guilty of crimes and also may be civilly liable. Those who facilitate the illegal sales -- e.g., by delivering them - may share in that liability as co-conspirators, accomplices, and/or accessories." 

ASH's letter warned that if the Postal Service "provides delivery services for these purchases, or otherwise facilitates them, it may share in the potential legal liability, as well as the public embarrassment likely to result if the company is charged with such conduct 1/8e.g. under the RICO statute 3/8 after it has been put on notice by the Attorneys General of the illegality of the sales and its role as facilitator." 

ASH was advised of tomorrow's meeting in a letter faxed to it today by the General Counsel of the U.S. Postal Service. The Postal Service's letter states in part: 

"This is to acknowledge the receipt of your letter dated March 9, 2005, wherein you express concern about Internet sales of cigarettes ... We take this matter very seriously and intend to respond to the substance of your letter once we have had the opportunity to consider the legal representations you assert in your correspondence ... I wish to assure you that we are sensitive to the concerns raised by you and state attorneys general concerning practices by certain cigarette retailers." 

NY Post - March 9, 2005 
'Net Cigs Master-Barred 

MasterCard yesterday became the first major credit-card company to warn financial institutions against processing payments to tax-free Internet cigarette companies.  
MasterCard said such transactions should be approved only if there is documented evidence that Internet companies are complying with all federal, state and local laws, including the collection and payment of sales taxes.  

"We put out the bulletin to remind our global membership that MasterCard does not tolerate illegal activities of any kind," said MasterCard Senior Vice President Joshua Peirez.  

State Attorney General Eliot Spitzer applauded the decision and urged other credit-card companies to follow suit.  

The Post reported in January that Spitzer warned credit-card companies and their processors to block orders from tax-free online tobacco companies because many of them skirt state tax laws and do not check the age of customers.  

At least two Web-based tobacco companies, and, have already begun restricting shipments to customers in New York.  

USA Today - March 8, 2005 
Online tax bill due for smokers  
Officials try to recoup revenue  

William Blakemore is a pack-a-day smoker in Hightstown, N.J., who started buying cigarettes online several years ago. His goal: avoid his state's cigarette tax, which has tripled since 2002 to $2.40 a pack, the nation's second highest. 

But the bill suddenly came due last week when Blakemore opened his mail and found a claim from New Jersey for $1,842.79 in back taxes from his Internet purchases. 

Blakemore, 55, an unemployed computer programmer, has been buying Benson & Hedges online for $29 a carton, compared with the $50-$60 he would have paid at a convenience store or supermarket. The tax notice, he says, “kind of raised the adrenaline level. That got my dander up.”  

Blakemore is one of thousands of smokers getting letters from state and local tax collectors demanding they pay up for their Internet purchases.  

The governments want the taxes to support budgets that are stretched thin and to level the playing field for conventional retailers, who must collect taxes on every pack sold. 

Smokers increasingly are turning to the Internet because state and local taxes in some areas account for more than half the cost of cigarettes. 

People who evade cigarette taxes by buying online are part of a broader pattern in Internet commerce. 

According to a study last year by economists at the University of Tennessee, state and local governments in 2003 lost an estimated $15.5 billion in taxes that went uncollected from Internet sales. 

As e-commerce expands, that loss is expected to grow to $21.5 billion to $33.7 billion by 2008, the study predicted.  

“Despite the fact the e-commerce boom tended not to be as robust as people thought, it still amounted to a significant revenue loss for the states,” says William Fox, professor of economics at the university and co-author of the study. 

Collecting sales taxes on goods bought from mail-order and Internet businesses has frustrated state and local governments for more than a decade. The Supreme Court ruled in 1992 that states could not force businesses outside their borders to collect their sales taxes unless the companies have stores or headquarters in those states. The ruling spared such businesses from having to comply with the tax codes of 45 states — and the District of Columbia — that levy sales taxes. 

Many states are collaborating on a uniform tax system that would make it easier for online retailers to collect sales taxes on goods they sell. The Streamlined Sales Tax Project would let retailers determine the proper state and local tax rates by entering the customer's ZIP code. The project has been enacted or partially enacted in 20 states.  

Government's power to find people who thought they had surreptitiously purchased cigarettes without paying taxes dates to a 1949 federal law. The Jenkins Act requires vendors that ship cigarettes to another state to provide customers' names and addresses to taxing agencies in the receiving state, which then can levy taxes. 

Most Internet cigarette vendors do not comply with the Jenkins Act, says Kurt Ribisl, an associate professor at the University of North Carolina School of Public Health who studies tobacco marketing on the Internet. Ribisl says he found 775 Internet sites selling cigarettes. 

Among states and cities targeting online buyers: 

•The Pennsylvania Department of Revenue sent letters to 63 people last month, demanding payment of $1.35 per pack they bought from two websites, spokeswoman Stephanie Weyant says. By Friday, 44 had paid. 

•The Ohio Department of Taxation sent letters to 25 customers of one Internet vendor, seeking unpaid taxes ranging from $400 to $800, spokesman Gary Gudmundson says. Tax collectors there plan to send 1,000 more letters. 

•New York City mailed bills in January to 3,700 people. By Friday, 2,010 had paid $680,000 of $1.2 million owed. That's a small amount in a city that collects $18 billion in taxes every year.  

“But this is not so much about the money as it is about our local retailers, who are put at a competitive disadvantage” if they have to collect the taxes and Internet vendors don't, Finance Commissioner Martha Stark says.  

In addition to a $1.50 state tax per pack, the city adds another $1.50, making cigarettes in New York City the nation's most expensive.  

Sheila Hansen of Manhattan says she got a letter from the city demanding $900 in unpaid taxes on 50 cartons of Kool Milds she bought over three years. Hansen says the city reduced her bill to $750 after she pointed out record-keeping errors. But last week, she got another bill — a $525 claim from New York state. 

“I was totally shocked,” she says. Hansen says she stopped buying cigarettes online and quit smoking before she got the first bill.  

“My biggest beef is, unless they go after every single person that buys anything on the Internet and doesn't pay taxes, it's not fair,” she says. “Right now, they're only targeting smokers.” 

Chicago Tribune - March 7, 2005 
Smokers feeling unexpected burn 
States demand taxes on sales via Internet 

The one-page greeting from the Michigan Department of Treasury came out of the mailbox, but to Julia Sidebottom it may as well have come from the moon. Tucked amid the legalese was the line that said her boyfriend owed the state $4,797.87 in unpaid cigarette taxes. 

"I was totally flabbergasted," Sidebottom said. "At first you don't know what to think. . . . I thought it was some kind of a joke." 

Michigan, Illinois and other states are giving smokers who buy cigarettes over the Internet a lot to think about, in the form of letters notifying them that they owe thousands of dollars in taxes on bargain-priced smokes. More than 530 Michigan residents received tax bills in the past two weeks, with the average individual liability being $3,200. 

In Illinois, about 1,300 people who bought cigarettes over the Internet are about to be notified that they must pay the state's 98-cent-per-pack tax, an Illinois Department of Revenue spokeswoman said. 

The collection effort is part of a stepped-up campaign by states, including New York, Pennsylvania, Ohio and Oregon, to capture millions of dollars of unpaid cigarette tax revenue--as much as $2 billion annually--from hundreds of thousands of people who buy the cheap smokes over the Internet and avoid dramatically higher cigarette taxes in their home states. 

In January, New York City's Department of Finance notified about 3,700 people that they had skirted the city's $3-per-pack tax by purchasing over the Internet. Some owed as much as $10,000 in unpaid taxes. Ohio has targeted 1,000 people for non-payment of cigarette taxes. 

In Michigan, where thousands more cigarette purchasers soon will be notified, treasury officials referred the names of 121 people to the state police for criminal investigation because they bought more than 300 cartons of cigarettes over the Net tax-free, presumably to resell them. 

"We're learning more about this, and we're getting a little better sense of the operation," said state Treasury Department spokesman Terry Stanton, adding that investigators have targeted 13 Internet sites and are obtaining the sales records in pursuit of Michigan residents who avoided the state's $2-per-pack tax. 

Tax collection a problem 

The collection of taxes for goods sold over the Internet is increasingly problematic for state and local governments. Recent studies project that they are losing tens of billions of dollars annually because many sales evade taxation. Tobacco sales are only a small part of the picture, but they are important because states increasingly rely on cigarette taxes to mend budget holes. 

In recent years some states, such as California, tried--to little effect--to recover cigarette tax revenue, shut down Internet operations or prevent the smokes from being delivered. Now, driven by huge state budget deficits, 44 state attorneys general will meet in Washington this month to discuss the problem of tobacco sales over the Net and what they can do about the hundreds of Internet operations with such names as, and 

By going after the buyers of cigarettes, said Jeff Cohen, assistant chief counsel for the federal Bureau of Alcohol, Tobacco, Firearms and Explosives, the "word is getting out" about big tax liabilities. 

"I think most people realize that something must be fishy if they buy something at a fraction of the cost," Cohen said. 

Sidebottom, who lives with her boyfriend in the northern Detroit suburb of Waterford, disputes that claim, arguing that she thought the cigarettes were a low-priced deal, as are many items sold on the Internet. 

That doesn't matter to Michigan treasury officials; the tax is owed, they say. And they're putting the muscle on cigarette buyers and using them as public examples in efforts to cripple the sale of tax-free cigarettes. 

The aggressive enforcement comes as more state legislatures are pushing even higher cigarette taxes to plug budget holes and pay for state programs such as public education and Medicaid. 

Illinois Gov. Rod Blagojevich has proposed boosting the state's 98-cent cigarette tax by 75 cents. Iowa lawmakers are weighing an 80-cent increase in the state tax, currently at 36 cents per pack. Indiana lawmakers are considering a boost of as much as 40 cents in the state's 55 1/2-cent tax. In Ohio, the 55-cent tax could rise to $1. 

Thirty-four states have raised cigarette taxes since 2002--by as little as 8 cents to as much as 75 cents--and as those levies have jumped, tobacco sales over the Internet have exploded, as have the number of online cigarette sites, estimated to number 800 to 1,000. New York has estimated it loses $500 million to $600 million annually from cigarette sales through the Internet, toll-free phone operations and American Indian reservations. 

"As taxes go up, Internet sales go up," said Dana Bolden, a spokesman for Philip Morris USA, the giant cigarette manufacturer. Indeed, online buyers can save 50 percent or more depending on the tax level where they live. 

One private study projected that online cigarette sales could reach 14 percent, or more than $5 billion, of total U.S. sales by the end of this year. 

Austan Goolsbee, an economist at the University of the Chicago who co-authored a study last fall on cigarette taxes and Internet sales, forecast that tobacco tax collections would be diluted by 25 percent to 40 percent as a result of online competition. Goolsbee said the "root of the problem for the states is that it is hard for them to enforce" a 1949 federal law that requires dealers who ship cigarettes across state lines to individuals to report the sale to the buyer's home state. 

State enforcement is further complicated because most Internet cigarette operations are based on American Indian reservations, where state jurisdiction often is unclear. 

Federal responsibility remains scattered, although the General Accounting Office recommended in a 2003 report that jurisdiction for handling Internet cigarette operations be given to the Bureau of Alcohol, Tobacco, Firearms and Explosives, an arm of the U.S. Justice Department. 

States adopt strategy 

For now, though, a growing number of states are attacking the problem by subpoenaing the sales lists of Internet operations. In that regard the effort resembles the moves of the recording industry's fight several years ago against Napster, the former pirate music downloading service. 

Sidebottom, who said her boyfriend is in the early stages of Alzheimer's disease, complained that there was no warning from the state. 

"When there was the big issue with Napster, at least there was some indication so you knew not to do it, so you stopped," she said. 

Stanton, the Michigan treasury spokesman, said the state issued warnings after it raised the cigarette tax to $2 a pack in 2002. 

Sidebottom argued that smokers are being persecuted while billions of dollars of retail sales over the Internet go untaxed. 

"It's not politically correct for anyone to be a smoker right now, so they'll come after us," Sidebottom said. 

"And this is just the tip of the iceberg. We're only in the first wave. I know any number of people who have purchased [cigarettes] online, and I tell them to be prepared because they're coming after you. They're scared to death, scared to death." 

- - - 

Tax collectors fired up 

To boost tax revenues, some states have begun cracking down on cigarette sales over the Internet. Thirty-four states have increased their cigarette excise taxes since 2002 


Original tax, Increase since 2002, Current tax 

(Includes map) 


- $2 or more 

R.J.: $2.46 

N.J.: $2.40 

Mich.: $2.00 

- $1.00-$1.99 

Mont.: $1.70 

Alaska: $1.60 

Conn.: $1.51 

Mass.: $1.51 

N.Y.*: $1.50 

Wash.: $1.43 

Hawaii: $1.40 

Pa.: $1.35 

Vt.: $1.19 

Ariz.: $1.18 

Ore.: $1.18 

Okla.: $1.03 

D.C.: $1.00 

Maine: $1.00 

Md.: $1.00 

* New York City adds an additional $1.50 excise tax 

- Under $1.00 

All other states 


For fiscal year 2003 

Calif.: $1.03 billion 

N.Y.: $993.1 million 

Pa.: $827.8 million 

Mich.: $816.5 million 

Illinois: $642.8 million 

Total for all states: $10.6 billion 

Note: State average tax is 84 cents. There is also a federal excise tax of 39 cents per pack. 

NY Post - February 23, 2005 
Albany's Smoking Out Puffers For Online Taxes 

Smokers who got socked with tax bills from the city for buying cigarettes online are now hearing from another party with its hands out — the state.  

State officials have just sent out 2,200 letters to customers who bought smokes on the Internet but failed to pay the state tax on them.  

"Because the vendor did not collect and remit the appropriate taxes to New York State, you are responsible for the unpaid taxes," the letter says.  

Tax-collectors took addresses from a lawsuit against an online cigarette sales company in Virginia.  

"The addresses are wide and varied, not just New York City," said Tom Bergin, spokesman for the State Department of Taxation and Finance.  

City officials used the same list recently to send out 3,100 letters to city residents who tried to dodge the city tax.  

"The message we would like to get across to people who buy cigarettes on the Internet is that there is no such thing as a tax-free cigarette," Bergin said.  

The state hopes to collect about $1 million in unpaid cigarette taxes.  

Buffalo News - February 17, 2005 
Indians' cigarette, gas sales targeted  
Pataki tax proposal would be 'about-face' 

ALBANY - Sales of cigarettes and gasoline by Indian retailers would be subject to state taxes under a proposal being drafted by the Pataki administration, reversing its long-held position of ignoring calls to target the lucrative businesses.  

At the same time, the state Department of Taxation and Finance is sending out invoices to more than 2,000 state residents demanding that they remit unpaid sales and excise taxes on thousands of cartons of cigarettes they purchased tax-free from an Internet firm based in Virginia.  

Last November, Gov. George E. Pataki vetoed legislation that would require him to end the flourishing business of tax-free sales to non-Indians. He called the measure "an assault on tribal sovereignty."  

There is uncertainty in some quarters over whether the new move to collect the taxes is real or just a negotiating tactic to use with the tribes, especially the Seneca Nation, that are trying to get state permission to locate a casino in the Catskills.  

Word of the new proposal came from state Tax Commissioner Andrew S. Eristoff, who during testimony before two fiscal committees of the State Legislature examining the Pataki administration's proposed 2005 budget, briefly mentioned the idea of collecting taxes on cigarette and gasoline sales to non-Indians. He did not offer details.  

Just last year, the tax department let die a set of rules ordered by the Legislature to begin taxing the Indian sales at the wholesale level - an approach designed to bypass Indian retailers' refusal to collect the taxes.  

Eristoff surprised all sides in the debate by saying his agency would release new regulations in the next several weeks to begin collecting the taxes.  

The new effort comes after Pataki announced "price parity" arrangements with several tribes that would somewhat level the playing field between Indian and non-Indian retailers.  

But none of those tribes are major sellers of tobacco and gasoline - indeed, some don't sell any of the products in New York, but acquiesced as part of an agreement to let them locate a casino in the Catskills.  

Tax officials later insisted that the proposed rules being drafted are not part of any change in direction, but rather an attempt to comply with a 2003 law mandating the collections.  

"It's not a change in policy. It's just continuing existing policy," said Thomas Bergin, a tax department spokesman.  

However, others on both sides of the issue saw the tax commissioner's remarks as a sharp turn for an administration that has steadfastly refused to collect the taxes.  

Though tax officials deny it, the new tax-collection effort appears to target Seneca retailers who through more than 100 Internet sites and smoke shops, are, by far, the biggest Indian tobacco sellers in the state.  

Seneca officials say their retailers are protected by federal treaty rights against the tax collections.  

"This is certainly an about-face regarding our discussions with Gov. Pataki, who has always maintained that the Indian sales are immune from state taxation," said Seneca President Barry E. Snyder Jr.  

The state charges $1.50 excise tax; New York City adds $1.50 on top of that. And then there are sales taxes. Indian retailers charge no taxes, which allows them to cut the price of a carton of cigarettes by half or more.  

Non-Indian retailers reacted cautiously Wednesday.  

James S. Calvin, president of the New York Association of Convenience Stores, said, "Up to now, in defiance of the state constitution, they have refused to execute that law. Perhaps this signals a long-overdue change in posture by the tax department. Time will tell if it's a sincere step towards tax fairness or a cynical ploy to prop up the governor's land-claim legislation."  

Health groups expressed surprise at the Pataki administration's apparent about-face. "Better late than never," said Michael Bopp, an American Cancer Society lobbyist.  

Meanwhile, the tax department is sending letters to 2,200 state residents who bought tax-free cigarettes online at a now-defunct Internet company in Virginia. It wants the buyers to pay the state $1.50 for every pack of cigarettes purchased.  

Asked whether the letter is part of a broader effort to target Internet sales of cigarettes, Bergin said, "This is just one component of an ongoing enforcement effort."  

NY Post - February 14, 2005 
354G In Ash Cash 

More than 1,000 smokers caught buying cigarettes on the Internet have coughed up $354,000 to settle tax claims by the city, The Post has learned.  [That's only about 1/3 of the people who received letters] 

And more checks are in the mail. 

"We're still getting about 100 letters a day," Finance Department spokesman Sam Miller said last week. [So they say] 

Armed with lists of buyers obtained under court order, the Finance Department last month sent out 3,100 letters demanding payments totaling $1.2 million from residents who ducked the city's $1.50-a-pack tax since July 2002.  

Those who didn't pay within 30 days — the deadline was yesterday — were threatened with a draconian penalty of $200 a carton.  

The largest single check was $3,075, representing the taxes owed on 205 cartons. Some smokers entered into installment plans.  

Miller said no one was offered a discount, although double-billing errors were corrected.  

"There are no deals," he declared.  

Andrew Hoffer, a Queens utility worker among the first to get slapped with the tax shocker, decided after contacting a lawyer to reluctantly write the city a check for $1,005.  

"I wasn't gonna pay," he said. "But if I didn't, the penalty was $13,500. The lawyer asked me, 'Do you want to risk that?' I wanted to get it out of the way."  

Hoffer also said he's cut down on his smoking and has stopped using the Internet to buy cigarettes.  

"I'm not going to make that mistake again," he said.  

But other smokers might.  

Numerous online tobacco retailers continue to advertise that their products are "tax-free."  

Indian Smokes Online was offering a carton of Marlboros for $25.75 yesterday. That's about half the price charged by shops in the city.  [Excuse me?  It's more like one third the price!] 

NY Times - February 12, 2005 
New York Hits Online Sellers of Cigarettes 

Concerned about the booming trade in online cigarette sales, New York state officials have begun using a variety of techniques to clamp down on the trade, saying New York City alone is losing more than $75 million a year in uncollected tax revenues because of the sales.  

In recent weeks, Attorney General Eliot Spitzer has been pushing local postal officials and private carriers to stop delivering cigarettes bought online. His office has also recently begun negotiations with credit card companies to block transactions of online cigarettes. 

These efforts were given added push recently as local officials from the federal Bureau of Alcohol, Tobacco, Firearms and Explosives met with credit card executives to alert them to the various ways in which these transactions are illegal. 

"The tone was very cordial and unthreatening," said a city official who participated in the presentation three weeks ago at the bureau's office in Brooklyn. "But in the end they made it crystal clear that now that the credit card companies understood the law, they would be held accountable for processing these transactions." 

Mr. Spitzer emphasized that the effort has as much to do with health as money. "These sales present a significant threat to public health because they provide easy access to cheap cigarettes, which increases smoking rates, particularly among children," he said. "These illegal sales also evade state tax requirements." 

Whatever their motivation, city and state officials are broadening their efforts to eradicate the business.  

Two weeks ago, a judge ruled in one of the city's four lawsuits against online sellers that the city can file a revised racketeering lawsuit against Internet cigarette sellers. The ruling was the first time a federal judge has indicated that Internet sellers can be charged under federal racketeering law, said Eric Proshansky, the city's chief lawyer on the case.  

After gleaning the names and the addresses from a Virginia lawsuit against one online cigarette company, the city began sending letters last month to more than 2,600 New Yorkers who officials say bought tax-free cigarettes. The letters, sent to those who bought cigarettes online from July 2002 to April 2004, give the alleged violators 30 days to pay or face interest and penalties of up to $200 a carton. 

In November, local law enforcement seized 300,000 cartons of illegal cigarettes at Kennedy International Airport. Joseph G. Green, a spokesman for the A.T.F., said that the seizure was the culmination of a yearlong investigation jointly conducted by the Queens district attorney's office; federal Bureau of Alcohol, Tobacco, Firearms and Explosives; postal inspectors; and city and state tax and finance officials. 

Sam Miller, a spokesman for the city's Department of Finance, said that the city loses more than $75 million a year as people duck local taxes by purchasing online. But the crackdown has drawn some criticism. 

"New York is simply trying to engage in economic protectionism by limiting cigarette sales to brick-and-mortar sellers," said James L. Bikoff, a lawyer who represents several Internet tobacco sellers. "Most of the folks who are in the online cigarette business are small outfits and they typically advise the consumer to check with their own city and state's laws regarding tax rules."  

New York City smokers pay the highest cigarette taxes in the country, as the state charges a $1.50 tax per pack and the city adds an additional $1.50 tax per pack. A carton of cigarettes in the city costs about $70, including $33.30 in excise and sales taxes. Online, cigarettes cost as little as $15 a carton. 

Thus far, the city and the state have met with mixed results in their efforts to control the online traffic in cigarettes. 

Some banks that process MasterCard transactions have begun blocking sales from certain Internet tobacco sites to customers, said Joshua Peirez, a senior vice president at MasterCard. But other banks do not. American Express currently has no policy that blocks Internet cigarette sales, said Christine Elliott, a spokeswoman for the company. 

After sending a letter to credit card executives in August, Mr. Spitzer joined several other state attorneys general to send another letter pressing credit card companies to stop the transactions. 

Both letters cited several reasons for the failure of Internet tobacco sellers to comply with applicable laws, including that they make no effort to verify the age of their customers and fail to report shipment of cigarettes to the tobacco tax administrator of the state into which shipments are made. 

While the United Parcel Service and other private carriers have been more open to the idea of blocking the delivery of these packages, postal officials have balked at pressure from Mr. Spitzer's office, claiming that they do not have the legal authority to stop the shipments, according to city officials who have been part of the discussions. But Mr. Spitzer's office contends that the postal service indeed has the authority under federal laws that prohibit mail fraud schemes, according to a letter sent by the office.  

New York State passed a law that took effect in 2003 prohibiting online and mail-order sales of cigarettes to its residents. The law was largely intended to curb tax evasion and under-age smoking, since many online cigarette sites do virtually nothing to verify the age of customers.  

Efforts to stop online sales are complicated, since Internet sites are sometimes based abroad and are therefore difficult to prosecute. City officials estimate that about 80 percent of the online cigarette sales come from sites that claim Indian affiliation, which for sovereignty reasons claim immunity from laws like the Jenkins Act.  

NY Daily News - January 28, 2005 
Cig suit snuffed, city may relight 

A federal judge stubbed out a $15 million lawsuit Mayor Bloomberg filed two years ago to get Internet smoke shops to reveal the names of their New York customers.  

In her ruling, Manhattan Federal Court Judge Deborah Batts said the city's fraud claims had no merit, but that its federal civil racketeering claims could be refiled.  

Bloomberg accused 15 Internet smoke shops of failing to report New Yorkers' cigarette purchases, costing the city millions in unpaid taxes.  

But Batts didn't buy the city's argument that the shops were defrauding customers by not telling them they are legally obligated to pay local cigarette taxes.  

The judge seemed to open the door to the city's claim that the shops were in cahoots with each other to help customers avoid taxes, but she said the city must name individuals as defendants, not just companies.  

City lawyers said they did not consider Batts' ruling a defeat.  

"It validates our legal theory" on the racketeering claim, said Assistant Corporation Counsel Eric Proshansky.  

He said the task of refiling the lawsuit was just a matter of "reordering the names of the defendants."  

But lawyers for the other side said the city was just blowing smoke.  

"I don't believe the city will ever be able to replead a racketeering claim against our clients," said John Rogers, attorney for the popular Web site "Obviously you can plead whatever you want, but if you don't have the facts to support your pleading you are not going to get very far."  

The smoke shops that were sued advertise on their Web sites cartons of cigarettes for about $25 - $55 less than the price of a carton sold at a brick-and-mortar store in the city.  

The city has three more lawsuits against two dozen more Internet tobacco shops.  

Two weeks ago the city sent letters to city residents who bought tax-free smokes on the Internet, warning of severe penalties if they didn't pay taxes owed.  

(Visit NYC C.L.A.S.H. 2005 News page for similar reports by other sources) 

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