Just cheap butts, or an equal protection violation? New York's failure to tax reservation sales to non-Indians.

• Author: Folster, Karen L.

The failure to enforce the Tax Laws against some to whom they apply, to the detriment of others, is unconstitutional. The unconstitutionality lies not on the face of the statute but in its unequal enforcement. Such is the meaning of the doctrine, "a government of laws."(1)

--Judge Joseph Harris

1. INTRODUCTION

   In May of 1997, New York Governor George Pataki made a political decision not to enforce a taxation scheme which the state had spent six years and hundreds of thousands of taxpayer dollars defending.(2) After recognizing that New York taxpayers were actively evading sales and excise taxes on cigarettes and gasoline by making tax-free purchases on Indian reservations, tax regulations were passed under then-Governor Mario Cuomo.(3) The new regulations provided a mechanism for the collection of such taxes from non-Indians making purchases on Indian reservations.(4) When the regulations were attacked as being a violation of Indian sovereignty, the State fiercely fought this allegation, a fight which culminated in a 1994 United States Supreme Court decision that upheld the regulations.(5) Protests by reservation Indians and negotiations between state officials and Native American leaders postponed enforcement of the taxation scheme,(6) and after Governor Pataki took office he criticized former Governor Cuomo for not enforcing the plan.(7) Pataki worked side-by-side with non-Indian small businesses in New York State (which suffer a severe competitive disadvantage from tax-free sales on nearby reservations) promising that the taxation plan would be implemented.(8) As an election year approached and political pressure mounted, however, Pataki shifted gears and halted all efforts aimed at enforcement.(9) He has since repealed the regulations.(10)

   As a consequence of Pataki's decision, retailers in areas surrounding the reservations are losing their customers to nearby reservation stores.(11) These retailers are now claiming that the state's failure to enforce the taxation scheme is tantamount to a selective enforcement of the law, which results in a violation of their equal protection rights.(12) This selective enforcement is somewhat atypical, in that it has had a disparate impact upon a majority group, while providing a benefit to a group that is not only a racial minority, but one which also comprises a sovereign nation.

   This Comment will address the equal protection claim now made by those disparately impacted, exploring the constitutional implications of this unique situation. This Comment will then attempt to sort through the complexities of the equal protection claim and determine the legal and constitutional ramifications of the situation. Part II will provide an historical overview of the situation, from 1988 when the regulations were first drafted until the present day.(13) It will provide a factual and procedural background to the promulgation of the regulations, the selective non-enforcement, and the effects of such non-enforcement. It will also explore the legal efforts of the affected retailers to compel the State to begin enforcement.

   Parts III, IV, and V analyze the retailers' equal protection claim under the U.S. Constitution,(14) focusing on the foundation for a constitutional claim and the level of scrutiny that should be applied. Since the Equal Protection Clause of the New York Constitution(15) does not provide any broader protection than that of the U.S. Constitution,(16) the analyses are intended to encompass claims under both constitutions. Relevant New York case law is included where applicable, in addition to federal case law interpreting the U.S. Constitution.

   More particularly, Part III will discuss the elements of an equal protection claim for selective enforcement.(17) Part IV will discuss the factors affecting a determination of the proper level of scrutiny that courts should apply in this case, and will analyze the New York Court of Appeals' conclusion(18) as to what standard should be applied.(19) Part V will analyze the state's purposes for the selective enforcement under both strict scrutiny and the rational basis test.(20)

2. FACTUAL BACKGROUND

   1. The Regulations

      New York State imposes an excise tax on cigarettes at the rate of twenty-eight cents per every ten cigarettes (fifty-six cents per pack).(21) The tax is to be levied on "all cigarettes possessed in the state by any person for sale ... except that no tax shall be imposed on cigarettes sold under such circumstances that this state is without power to impose such tax."(22) Although the "ultimate incidence of ... the tax shall be upon the consumer,"(23) the tax is pre-paid by a wholesaler or distributor via the purchase of tax stamps which are affixed to the cigarette packages.(24) The tax is passed down throughout the distribution chain(25) and is ultimately added to the purchase price paid by the consumer.(26) Similar statutes impose an eight-cent per gallon excise tax on the sale of motor fuel,(27) plus state and local sales taxes generally equivalent to 7% of the purchase price.(28)

      Indians and Indian tribes are exempt from state taxation by virtue of their status as sovereign nations.(29) Thus, tribal Indians are permitted to purchase "unstamped" cigarettes from wholesalers,(30) which are earmarked to be sold to tribal members.(31) Non-Indian consumers are required to pay taxes on reservation purchases of cigarettes and motor fuel.(32) However, Indian retailers have never attempted to collect such taxes from non-Indian consumers, resulting in a form of tax evasion which state officials estimate to be costing the state anywhere from $65 to $300 million per year.(33)

      In an attempt to remedy this situation, new tax regulations which provided a method of collection of such taxes were promulgated under then-Governor Cuomo in 1988.(34) These regulations required reservation dealers to register with the Department of Taxation and Finance,(35) which would, in turn, issue tax exemption coupons enabling them to purchase tax-free cigarettes from the wholesalers.(36) The coupons would bear a pre-printed maximum quantity of tax-free cigarettes the retailer could purchase, an amount calculated by taking the New York average consumption per capita and multiplying it by the number of enrolled members of the registered tribe.(37) Under this regulatory scheme, wholesalers were not permitted to sell more than the pre-printed quantity of unstamped cigarettes to the retailer.(38)

      The tax-free cigarettes could be purchased by enrolled tribal members only and could "not be sold to non-Indians ... under any circumstances."(39) The regulations also required that reservation retailers "establish and maintain a system to identify and record such sales,"(40) and maintain log books recording specific information about tax-free sales, including the name and address of the purchaser.(41)

      However, before enforcement of these new regulations could go into effect, a group of wholesalers licensed by the Bureau of Indian Affairs (BIA) instituted a legal challenge to the regulations,(42) alleging that they were preempted by the federal Indian Trader Statutes.(43) After bouncing back and forth throughout the courts for over four years,(44) the U.S. Supreme Court finally ruled that the taxation scheme was valid and did not infringe upon tribal sovereignty.(45) The Court held that "Indian traders are not wholly immune from state regulation that is reasonably necessary to the assessment or collection of lawful state taxes,"(46) and further reasoned that New York's proposed tax scheme would not place any undue burdens on Indian traders.(47) Thus, the Court concluded, the "regulations do not, on their face, violate the Indian Trader Statutes."(48)

      This decision was consistent with others made by the Supreme Court regarding similar taxation schemes in other states This issue was first addressed in Moe v. Confederated Salish and Kootenai Tribes(49) in which tribal nations in the State of Montana challenged the state's efforts to collect taxes on all reservation sales. The Court concluded that while tribal sovereignty precludes the imposition of any taxes on Indian consumers making purchases in reservation stores, such taxes can be validly levied and collected on reservation sales to non-Indians.(50) The Court reasoned that since the ultimate incidence of the tax is upon the consumer, to allow reservation retailers to sell tax-free goods to non-Indian consumers would be to facilitate tax evasion on behalf of these consumers.(51) The Court further found that requiring reservation retailers to collect taxes from non-Indians is a "simple expedient"(52) imposing a "minimal burden,"(53) and saw "nothing in this burden which frustrates tribal self-government."(54)

      Similar decisions by the Court have been made upholding such taxation plans in Washington(55) and Oklahoma.(56) The Court has consistently held that such tax schemes are valid because they seek only to prevent tax evasion by non-Indian consumers who are validly subject to taxation,(57) and because the burden of collecting is a minimal burden on the reservation retailers.(58) Consistent with this approach, the regulatory scheme at issue in New York was deemed to validly serve legitimate state interests without infringing on tribal sovereignty.(59)

   2. History of Non-Enforcement

      Although this decision upholding the regulations was made in June of 1994,(60) the regulations went unenforced for nearly four years before ultimately being repealed in April 1998.(61) Previous tax regulations were scheduled to expire February 23, 1996,(62) but when Tax Commissioner Michael Urbach made an announcement in December 1995 that enforcement of the new regulations would begin upon the expiration of the old regulations, aides to Governor Pataki claimed that Urbach "misspoke."(63) Pataki conceded at that time that the regulations could be enforced beginning in February 1996, but said that a definite decision had not...