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Cigarette Tax Battle Between OK Tax Comm. And Several Indian Nations Comes to a Head

Posted on: Monday, 20 February 2006, 21:00 CST

By Kirby Lee Davis

With one vote Tuesday, the Oklahoma Tax Commission may draw a line in the sand in its turf battle with several Indian nations over cigarette taxation.

Cherokee and Creek Nation officials have threatened legal action over the emergency rules proposed Feb. 13 - reflecting the four court fights that followed the last cigarette tax rules signed into law last month by Gov. Brad Henry.

For a good portion of Oklahoma's 202 licensed smoke shops, many of whom are small mom and pop operations, it may portend far more.

We're all probably going to go down, because we're not going to be making any money, said Lynda Burchett, one of two owners of the 82 Smoke Shop on Highway 82 near Peggs.

Her comments mirrored many other operators caught up in the controversial issue. Most refused to speak on the record.

In a situation full of catch-22s, Tony Mastin, director of the commission's Tax Policy Division, said it was not the state's intent to put people out of business.

That paralleled comments by Mike Miller, communications officer for the Cherokee Nation, who noted the tribe stood fully behind efforts to reduce consumer smoking and the resulting health risks. He said a good portion of the Nation's annual $75 million in health- care spending - raised in part from cigarette tax revenues - goes directly or indirectly to smoking illnesses.

The Creek Nation takes no pleasure in the controversy, said George Tiger, speaker of the Muscogee (Creek) National Council. But he said it also cannot stand for what it considers dictation by the state on how the tribes regulate business.

As a tribal government, we have no intention of putting our stores out of business really as a demand of the state, he said.

But Mastin also had a line to defend - the monthly loss of about $3.8 million in state revenue pinned on illegal sale of exempt rate cigarettes, funds that would not only be shared via rebate with the tribes, but would also fund health-care initiatives. The latest proposed emergency rule, like the one signed by Henry in January, takes a harder line in its attempt to halt retailer to retailer sales leading to that revenue loss.

The controversy started after the cigarette wholesale tax rates rose on Jan. 1, 2005. At that point the state offered low-tax stamps for smoke shops competing with nearby out-of-state competitors that enjoy lower tax rates. Those exemption-rate stamps were priced at 6 cents a pack, far below the seven other stamp-tax levels. But state regulators later found many retailers buying cigarettes at exemption rate stores and selling them at non-exemption rate shops, creating an unfair advantage that spurred other stores to do the same.

Obviously from what has been reported and testified to, many of these shops have been selling cigarettes at the wrong tax rate that's been agreed to by the shops in Oklahoma, he said.

Mastin said the latest rule change, proposal 710:70-2-13, would not change anything for tribal-owned stores: Those in exempt areas will still get exempt-rate stamps.

But for tribally licensed shops, said to make up the majority of Oklahoma's smoke shops, the proposed emergency rule would allow them to only buy cigarettes bearing 86-cent stamps.

They're getting the stamps to the wrong locations somehow, he said. This is an attempt to try to stop them from doing that.

The rule offers a carrot incentive for stores to buy tax stamps as directed by the commission, but that doesn't lessen tribal irritations.

It's a blatant violation of the compact to unilaterally change an agreement between the two parties, said Miller of the Cherokee compact, signed in February 2004.

He noted the state already broke its pledge to not change any applicable taxes when State Question 713 passed the following November, repealing the state sales tax on cigarettes. That move eliminated two-thirds of the smoke shop's normal business margin that the compact had been intended to preserve, Miller said.

That's how these small businesses made a living, on that 37 cents a pack, he said of the margin. The compact was designed to protect that 37 cents.

Though they agree that stores should buy the proper stamps from wholesalers, tribal leaders also see nothing wrong with a retailer buying and selling products from another retailer - just as an independent bookseller might find it cheaper to buy its inventory from Sam's Club rather than a distributor.

And they say regulating such retailer-to-retailer business falls under Indian nation sovereignty, protected by the U.S. Constitution.

The state has no power to collect sales tax in Indian Country. The emphasis on wholesaler taxes rose from the 1991 decision in Oklahoma Tax Commission vs. Citizen Potawatomi Tribe, at the suggestion of the U.S. Supreme Court. The state entered its first 10- year tribal compacts two years later. But renewal negotiations proved difficult, leading to several different compacts among the many Indian nations - some of whom, citing lack of good faith negotiations or favoritism to other tribes, have refused to re- enter such compacts.

We certainly don't fear negotiation, said Tiger, whose nation remains without a state compact, but we certainly won't accept dictation.

While neither industry observers nor state analysts, nor even the tribes themselves, seem able to paint a clear picture of the smoke shop industry sector, no one denies it is big business. From July 2004 to January 2006, the Tax Commission has sold $212.5 million in cigarette tax stamps to wholesalers. That breaks down to $27.4 million in tribal stamps and $185.1 million in regular stamps.

Even if the Tax Commission approves the emergency rule, it will not become law unless Henry signs it. He would have 45 days to consider the matter.

Burchett, an 11-year industry veteran whose Cherokee-licensed store (which had $45,000 in revenue last year) is not in an exempt- rate region, sells around 3,200 low-tax cartons each month that she buys from exempt-rate stores. Without them, we'll probably have to close up, she said, because her cigarette prices could not compete with those at other retailers.

Vicki Escoe understands that. Though her store would not be affected by the rule change, the manager of the Checotah Indian Community Smoke Shop feared her business would suffer for the same reason, as well as from reduced competition.

It would not level the playing field, but it would put us all at a disadvantage, she said of the latest tax proposal. For without lower-rate stamps, she could not compete with convenience stores that earn lower wholesale discounts due to higher sales volume. Our cigarettes would not be any cheaper than theirs.

Several smoke shop owners noted that this kind of change, with their store locations being off the beaten path, would severely damage their businesses. One smoke shop operator estimated it would cut his business by half.

You have to have an incentive for people to drive to you. We would lose that, said Escoe, a 16-year veteran of the industry. There would be no point in opening the door.

Source: Journal Record - Oklahoma City

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