Amicus Curiae Brief — Department of Taxation and Finance of NY v. Milhelm Attea & Bros.

a EILED

i

NO. 93-377 | O16 es

Se ie ERK

IN THE :

SUPREME COURT

OF THE

UNITED STATES

OCTOBER TERM, 1993

DEPARTMENT OF TAXATION AND FINANCE OF THE STATE OF

NEW YORK AND JAMES W. WETZLER, COMMISSIONER OF

TAXATION AND FINANCE OF THE STATE OF NEW YORK and the

TAX APPEALS TRIBUNAL OF THE STATE OF NEW YORK,

Petitioners,

Vv.

MILHELM ATTEA & BROS. INC., a/k/a MILHELM ATTEA &

BROTHERS, INC., a/k/a MILHEM ATTEA & BROTHERS, INC.,

Respondent.

JAMES W. WETZLER, as Commissioner of Taxation and

Finance of the State of New York; THE DEPARTMENT OF

TAXATION AND FINANCE OF THE STATE OF NEW YORK and the

TAX APPEALS TRIBUNAL OF THE STATE OF NEW YORK,

Petitioners,

Vv

ELIAS H. ATTEA, JR..

Respondent.

ON WRIT OF CERTIORARI TO THE COURT OF

APPEALS OF THE STATE OF NEW YORK

BRIEF OF THE STATES OF WASHINGTON,

_ ARIZONA, CALIFORNIA, FLORIDA, IOWA,

MONTANA, NEVADA, NORTH DAKOTA, OKLAHOMA,

OREGON, RHODE ISLAND, SOUTH DAKOTA,

UTAH, WISCONSIN AS AMICI CURIAE IN

SUPPORT OF PETITIONERS

CHRISTINE O. GREGOIRE

State of Washington

Counsel of Record

PO. Box 40100

Additiona! counse! va, Washington 98504-0100

on inside cover (ue) 708-4900

BEST AVAILABLE COPY!

GRANT WOODS

General of Arizona

1276

Phoenix, Arizona 85007-0000

(602) 542-5025

DANIEL E. LUNGREN

General of California

1615 K Street

Sacramento, California 954 14

(916) 324-6437

(515) 261-6164

JOSEPH P. MAZUREK

2300 North Lincoln Blvd Suite 112

Oklahoma Oklahoma 73105-4894

(406) 621-3921

(606) 773-3215

QUESTION PRESENTED

Whether, to prevent the avoidance of state cigarette

taxes by non-Indian consumers, the State of New York may

limit the number of tax exempt cigarettes that suppliers

may provide to tribal retailers on the reservation to an

amount no greater than the quantity tribal members might

legitimately consume and also impose upon such suppliers

reasonable record-keeping and reporting requirements.

TABLE OF CONTENTS

Page

ey SEE crrnceseevcsncesservenscessussrerenssnemmnesuente i

ig EE 2

INTRODUCTION AND SUMMARY ......00.......cccccccceeseesennees 4

I cctenscecemnesnemememmneaemsemennsspemmmeumenseaese 7

STATE REGULATIONS, WHICH ARE DESIGNED

TO INSURE COLLECTION OF TAXES FROM NON-

TRIBAL MEMBERS AND REASONABLY ACCOM-

MODATE STATE AND TRIBAL INTERESTS, DO

NOT IMPINGE UPON INTERESTS PROTECTED BY

THE INDIAN TRADER STATUTES AND ARE NOT

PREEMPTED THEREBY.

A. New York's Cigarette Tax System For Reservation

Sales to Non-Members is Fully Consistent With

The Regulatory Authority Allowed The States Un-

der This Court's Decigions. ...........0:.......ssescssssssscesesees 7

B. Neither the Off-Reservation Nor On-Reservation

Provisions of New York's Law Touch Upon the In-

terests that are the Concern of the Indian Trader

Statutes (25 U.S.C. §§ 261-264) so as to Warrant

Their Preemption by Federal Law. ............................ 13

I csnesenstnnenmntenemateninmemmicmenmnssnsvommtmseansenses 21

iv

TABLE OF AUTHORITIES

Page

CASES:

Central Machinery Co. v. Arizona State Tax Comm'n,

I 6, 14, 15, 16

Confederated Salish & Kootenai Tribes, Mont. v. Moe,

392 F.Supp. 1297 (D. Mont. 1975) .............ccccccceeeseeeeees 8

Confederated Tribes of Colville v. State of Wash., 446 F.

Supp. 1339 (E.D. Wash. 1978) .0............cccccccceseseeeeeees 13

Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163

ES ESSE naan ee ee 6, 16, 18

Moe v. Confederated Salish and Kootenai Tribes, 425

| 5 ESRC Ure ar or 4, passim

New Mexico Taxation & Revenue Dep't v. Laguna

Indus., Inc., 855 P.2d 127 (N.M. 1993) .............c00000+. 14

Oklahoma Tax Comm'n v. Citizen Band Potawatomi

Indian Tribe of Oklahoma, 498 U.S. 505

i renicchdeeieaicieniienatiaritiaittaetetiiiiaiaiaeiieales 9, 10, 13, 15, 19, 20

Rockbridge v. Lincoln, 449 F.2d 567 (9th Cir. 1971)......... 18

U.S. ex rel. Keith v. Sioux Nation Shopping Center,

488 F.Supp. 496 (D. S.D. 1980), aff'd, 634 F.2d 401

8 RE A EES ee 18

United States v. McGowan, 302 U.S. 535 (1938).............. 18

United States of America v. Feist, et al., CR 92-42-M-

ESA ad eee ea ao 4

Warren Trading Post v. Tax Comm'n, 380 U.S. 685

TSS a 6, 14

Washington v. Confederated Tribes of Colville

Reservation, 447 U.S. 134 (1980).................... 2, passim

White Mountain Apache Tribe v. Bracker, 448 U.S. 136

TABLE OF AUTHORITIES (Continued)

Page

STATUTES:

TTR ae ane 12

I 4

25 U.S.C. $§ 261-264 (1988)..................cccccecsceesssssereneeees 5,13

nT 14, 16

DE CR Tl 6,17

Act of August 15, 1876, 19 Stat. 200 ..............:ccccccceeeeseeees 16

A Be ictcrecesnscemnecsscscccsvnevenccnensansenesssnssesnesanseunes 17

1993 Wash. Laws, ch. 492, § 307 .0............cccccsseseeeeeeeeeeeeees 4

SL, | nner 3

Wash. Rev. Code § 82.24.250..............ccccccccssscccccseccsssescevessees 11

MISCELLANEOUS:

Ia errrenmnnieeannialaintin 2

ne 17

International Gaming & Wagering Business, 18

I os inccrnsneticsintnnsgegnssengnseienmanonmeceersetes 4

REPORT OF THE LEGISLATIVE BUDGET COMMITTEE TO

THE WASHINGTON LEGISLATURE, CIGARETTE

OE hittdedihinesiessnne 10

NO. 93-377

LSE

IN THE

SUPREME COURT

OF THE

UNITED STATES

OCTOBER TERM, 1993

DEPARTMENT OF TAXATION AND FINANCE OF THE STATE OF

NEW YORK AND JAMES W. WETZLER, COMMISSIONER OF

TAXATION AND FINANCE OF THE STATE OF NEW YORK and the

TAX APPEALS TRIBUNAL OF THE STATE OF NEW YORK,

‘ Petitioners,

MILHELM ATTEA & BROS. INC., a/k/a MILHELM ATTEA &

BROTHERS, INC., a/k/a MILHEM ATTEA & BROTHERS, INC.,

Respondent.

JAMES W. WETZLER, as Commissioner of Taxation and

Finance of the State of New York; THE DEPARTMENT OF

TAXATION AND FINANCE OF THE STATE OF NEW YORK and the

TAX APPEALS TRIBUNAL OF THE STATE OF NEW YORK,

Petitioners,

Vv.

ELIAS H. ATTEA, JR.,

Respondent.

ON WRIT OF CERTIORARI TO THE COURT OF

APPEALS OF THE STATE OF NEW YORK

BRIEF OF THE STATES OF WASHINGTON,

ARIZONA, CALIFORNIA, FLORIDA, IOWA,

MONTANA, NEVADA, NORTH DAKOTA, OKLAHOMA,

OREGON, RHODE ISLAND, SOUTH DAKOTA,

UTAH, WISCONSIN AS AMICI CURIAE IN

SUPPORT OF PETITIONERS

INTEREST OF THE AMICI

Washington and the other named states submit this

brief as amicus curiae in support of the petitioner, New

York, which seeks the reversal of the judgment of the Court

of Appeals of the State of New York. This brief is submitted

on behalf of Washington, Arizona, California, Florida, Iowa,

Montana, Nevada, North Dakota, Oklahoma, Oregon,

Rhode Island, South Dakota, Utah, and Wisconsin by their

attorneys general. Accordingly, consent to its filing is not

required. SUP. CT. R. 37.5.

The issue before the Court is whether New York may

apply its cigarette tax regulations to minimize evasion of

those taxes, which decisions of this Court have allowed New

York and other states to collect, without the preemption of

such regulations by federal statute.

The amici are states within whose borders are found

many of the nation's Indian reservations and other geo-

graphical areas constituting Indian country. Tribes or their

licensees carry on significant commercial sales activities in

Indian country, marketing cigarettes to non-members as

well as to tribal members in Indian country.! This commod-

ity and other products sold in Indian country, such as motor

vehicle fuel and liquor, represent merchandise on which

states have traditionally imposed excise taxes significantly

exceeding any general sales tax.”

‘Non-members of the tribe on whose reservation cigarettes are

sold, like non-Indians, are subject to the state tax. Washington v. Confed-

erated Tribes of Colville Reservation, 447 U.S. 134, 160-61 (1980) (herein-

after Colville). The distinction between tribal members and non-

members is maintained throughout this Argument.

2The current rate for Washington’s cigarette tax, for example, is

$5.40 per carton (200 cigarettes). The State’s general sales tax rate of

6.5% would produce a tax of $1.15 based upon a median price of $17.70

per carton currently found in the market.

3

The states have customarily provided for the prepay-

ment of the levies from the wholesaler or other supplier or

have made other provision for passing the economic burden

to the ultimate consumer where the legal incidence of the

tax is otherwise on the supplier of the product.? Precisely

such prepayment requirement, a nondiscriminatory feature

of the states' tax systems, has been invalidated by the Court

of Appeals.

If allowed to stand, the decision of the Court of Appeals

would dismantle compliance systems such as New York's

and facilitate widespread tax evasion. Non-members are

attracted to Indian country by the prospect of significantly

lower prices on cigarettes and other products, created by the

failure to collect the state tax. Retailers in Indian country

resist collecting the tax; the market for these commodities

does not otherwise exist. The proximity of many reserva-

tions to large population centers encourages non-member

travel to these sites.*

Economic factors magnify the urgency of the collection

problem confronting the states. Excise taxes placed on cig-

3New York places the ultimate incidence and liability for its tax

upon the consumer. Pet.App.11. Washington imposes its tax at the time

and place of the first taxable event occurring in the state, which would in-

clude possession or handling by a licensed distributor. Wash. Rev. Code §

82.24.080. Under Washington’s system, where the legal incidence of the

tax in fact falls will depend upon the fact pattern in each specific case. See

Colville, 447 U.S. at 142, n.9 for an explanation of the Washington sys-

tem. This difference between the New York and Washington systems,

however, is of no legal significance in the case at bar.

“The Agua Caliente Reservation in California includes a substan-

tial portion of the city of Palm Springs. The Puyallup Reservation in

Washington is located, in part, within one of the state’s largest cities,

Tacoma. Albuquerque, New Mexico is bordered on the north by the San-

dia Reservation and on the south by the Isleta Reservation.

4

arettes and motor vehicle fuel fund crucial state programs.”

The sharp increase in development of gambling casinos and

other gaming activities in Indian country bring the prospect

of increased markets for sales of cigarettes, motor vehicle

fuel, and liquor to non-member consumers frequenting

these venues.® Taken together these considerations render

the position of the Court of Appeals far more than an isolat-

ed aberration. Both the result and the reasoning of the de-

cision seriously concern the states.’

INTRODUCTION AND SUMMARY

1. In Moe v. Confederated Salish and Kootenai Tribes,

425 U.S. 463 (1976), the Court established a narrow but im-

portant exception to the general rule that state laws, includ-

ing state tax laws, do not apply to Indians when on their

own reservation. Under that exception, states may impose

upon tribal members who make on-reservation sales to non-

members the legal obligation to collect and remit to the

state a tax imposed upon those non-member customers.

Stated otherwise, the members have no right under federal

State gasoline taxes will continue to be a primary source of fund-

ing for critically needed repairs and additions to the highway and bridge

infrastructure. Earlier in 1993 the Washington legislature increased the

state’s cigarette excise tax from $3.40 to $5.40 per carton to partially fund

a major health care measure. 1993 Wash. Laws, ch. 492, § 307. Proprosals

before Congress for federal health care legislation contemplate increases

in the current federal cigarette excise tax.

®The market share of Class III Indian games and casino gambling,

as reported for 1992, more than tripled from its level in the previous year.

International Gaming & Wagering Business, 18 (September 1993).

In addition to the direct impact upon the states’ own regulatory

systems, the decision of the Court of Appeals may frustrate prosecutions

under the federal contraband cigarette statutes conducted by the United

States as an aid to state tax enforcement efforts. See 18 U.S.C. § 2342.

There is already one reported instance where the New York court’s deci-

sion has been raised as a defense to indictments brought under this fed-

eral statute. United States of America v. Feist, et al., CR 92-42-M-CCL (D.

Mont.).

5

law to "market an exemption" to their non-member custom-

ers, and to thereby frustrate the states’ efforts to collect tax-

es validly imposed upon those customers. Colville, 447 U.S.

at 155.

This does not mean, however, that "anything goes” in

the states’ efforts to collect their taxes. In decisions after

Moe, the Court has attempted to strike a balance, which ac-

commodates both the states’ interest in collecting their le-

gitimate taxes and the tribal members’ interest in

on-reservation immunity from state law. Specifically, the

Court has shown in those decisions a concern about the pos-

sibility of state tax collectors coming onto reservations and

seizing member owned property there. And this concern

has implied a preference, also shown in those decisions, for

enforcement mechanisms which operate outside the res-

ervation and which focus upon the non-member supplier

rather than the tribal retailer.

2. The New York system invalidated by the Court of

Appeals is, ironically enough, exactly the sort of enforce-

ment system explicitly preferred by this Court. It is direct-

ed to the supplier, and largely to what the supplier does

outside the reservation. By invalidating that system, the

Court of Appeals completely upsets the balance this Court

has been attempting to strike. It upsets the balance by at-

tributing to Congress an intent, which it finds in the Indian

trader statutes, 25 U.S.C. §§ 261-264, to prohibit states

from utilizing just those types of enforcement mechanisms

which best accommodate the tribal interest by minimizing

interference from state law. Such a result would be unfor-

tunate, for it would force the states—and ultimately this

Court—to consider the more intrusive enforcement mecha-

nisms which the states have sought to avoid.

3. Such a result is also legally unsupportable, as an ex-

amination of the Indian trader statutes and proper preemp-

tion principles will show. The preemption analysis by the

Court of Appeals was wooden and mechanical. Seizing upon

6

statements by this Court in other contexts that the federal

regulatory system under the Indian trader statutes should

be regarded as “comprehensive,” the court uncritically ap-

plied what it felt to be the controlling principle to hold that

any and all burdens imposed by the state on the supplier

were automatically preempted by federal law.

The court overlooked, however, two fundamental

points. First, under proper preemption analysis, the tribal

interests embodied in the relevant federal statutes must be

identified, and then weighed in balance with the competing

interests of the state. (See e.g., Cotton Petroleum Corp. v.

New Mexico, 490 U.S. 163, 176-77 (1989); White Mountain

Apache Tribe v. Bracker, 448 U.S. 136, 144-45 (1980)). Sec-

ond, the relevant statutes here, the Indian trader statutes,

have been enacted to protect the interests of tribes and their

members; any protection afforded the traders themselves

derives from, and is purely ancillary to, the protection af-

forded those tribal interests. (See e.g., 25 U.S.C. § 262, au-

thorizing the Commissioner of Indian Affairs to permit

persons to trade with Indians "under such rules and regula-

tions as [he] . . . may prescribe for the protection of said In-

dians.")

4. What, then, is the purpose and scope of that protec-

tion? The purpose is to protect Indian customers from eco-

nomic exploitation. As applied by this Court in the context

of state taxes upon the Indian traders themselves, the trad-

er statutes prohibit a tax which could be passed on to Indian

retail customers, i.e., consumers, and which would thereby

impair the comprehensive regulation of the retail price

structure which Congress has provided for those Indian

consumers. Warren Trading Post v. Tax Comm’n, 380 U.S.

685 (1965); Central Machinery Co. v. Arizona Tax Comm'n,

448 U.S. 160 (1980). But neither the test of the trader stat-

utes, nor their legislative history, nor the regulations pro-

mulgated under them, nor any court decisions dealing with

them, evidence any similar concern for the Indian retailer

as middleman, marketing a tax exemption to non-members.

7

The upshot is that essentially the same process of anal-

ysis and balancing of interests that the Court has already

utilized in Moe and its progeny should also be the process

used here. For that reason, the outcome should be the same

as well.

Otherwise, the absurdities produced by the flawed and

confused preemption analysis utilized by the Court of Ap-

peals will persist. In Moe and its later cases, this Court has

already authorized the states to require the Indian middle-

man to collect the taxes imposed on the non-member con-

sumer. New York State has reduced even this burden on the

middleman, by moving the collection obligation back one

step in the distribution chain, from the middleman to the

supplier. Yet the Court of Appeals, in its alternative hold-

ing, has determined that a burden found by this Court to be

"minimal," and thus permissible when placed upon the In-

dian middleman, becomes "substantial" and thus impermis-

sible when placed upon the non-Indian supplier. Proper

preemption analysis produces no such absurdity.

ARGUMENT

STATE REGULATIONS, WHICH ARE DESIGNED

TO INSURE COLLECTION OF TAXES FROM NON-

TRIBAL MEMBERS AND REASONABLY ACCOMMO-

DATE STATE AND TRIBAL INTERESTS, DO NOT IM-

PINGE UPON INTERESTS PROTECTED BY THE

INDIAN TRADER STATUTES AND ARE NOT PRE-

EMPTED THEREBY.

A. New York's Cigarette Tax System For Reserva-

tion Sales to Non-Members is Fully Consistent

With The Regulatory Authority Allowed The

States Under This Court's Decisions.

Prior decisions of this Court confirming the right of

states to impose taxes on certain kinds of commercial trans-

actions conducted on Indian reservations by non-members

8

have accorded the states the related right to take reason-

able collection actions which do not unnecessarily intrude

on core tribal interests. Colville, 447 U.S. at 162. The

Court's prior holdings clearly sanction—if they did not ex-

pressly pass upon—the regulatory approach taken by New

York as a balanced accommodation of state and tribal inter-

ests. Nevertheless, the Court of Appeals’ characterization

of New York's regulations on off-reservation cigarette sup-

pliers (wholesalers or distributors) as significantly burden-

some provides further reason for the Court to revisit once

more the issue of permissible state regulatory activity

which seeks to avoid widespread evasion of the tax obliga-

tion of non-member cigarette purchasers.®

The imposition of the tax collection obligation on the

Indian reservation retailer by the state was upheld in Moe

v. Confederated Salish and Kootenai Tribes, 425 U.S. 463

(1976), against the charge of gross interference with the

tribes’ freedom from state regulation. Id. at 482. Subse-

quent cases focused upon the mechanisms that the state

may properly use to enforce that collection obligation. Thus,

Colville, the first of these cases, endorsed Washington's re-

quirement that reservation smokeshop operators affix tax

stamps to cigarette packages as evidence of payment of the

tax prior to their sale to non-members. The obligation thus

entailed prepayment of the tax to the state by the tribal re-

tailer.? The Court affirmed in Colville the right of a state to

impose “detailed” record-keeping requirements on the re-

tailer to distinguish between nontaxable sales to Indians

The decision below first holds that the Indian trader statutes fore-

close any regulation of suppliers. Pet.App. 7. However, as an anchor to

windward, the Court of Appeals proceeds to find New York’s regulations

infirm because of their significantly burdensome nature. Pet.App. 11.

*While not specifically addressed by the Court in Moe, Montana’s

law, in fact, required prepayment of the tax by the retailer to its distrib-

utor, who then remitted the tax to the state. See Confederated Salish &

Kootenai Tribes, Mont. v. Moe, 392 F. Supp. 1297, 1308 (D. Mont. 1975).

9

and taxable transactions with non-members. 447 U.S. at

160. Off-reservation cigarette seizures by the state were ap-

proved by the Court as an adjunct to the on-reservation

compliance program. Colville, 447 U.S. at 161-62.

The Court has more recently returned to the issue of

the appropriate enforcement mechanisms. In Oklahoma

Tax Comm’n v. Citizen Band Potawatomi Indian Tribe of

Oklahoma, 498 U.S. 505 (1991), the Court identified en-

forcement options available to the states when it reaffirmed

their right to look to the tribes and their officials for assis-

tance in the collection of taxes. Recourse to damage actions

against tribal officers or agents and to assessments against

cigarette suppliers are highlighted and approved in the de-

cision. Jd. at 514.

It should be noted that in none of these decisions did

the Court have occasion to consider the ability of the states

to apply on the reservation the whole range of enforcement

measures that would logically attend the collection and

record-keeping requirements for reservation operators ap-

proved in Moe and Colville. These additional compliance ac-

tivities, which are an integral part of any state's

off-reservation tax collection program, include registration,

periodic or special audits of taxpayer records, filing of re-

turns and other information, subpoenas and their enforce-

ment for the production of records when necessary, and

collection through levies or seizures of taxpayer assets.!°

In the aftermath of Moe, Colville, and Potawatomi and

in the absence of instruction from the Court about the full

scope of enforcement alternatives, states like New York

which sought to actively address contraband cigarette traf-

fic in Indian country consciously considered and chose be-

tween two primary compliance policies. The first would

incorporate measures directly related to the approved right

101m Colville the Court expressly reserved the question of a state's

right to conduct on-reservation seizures of cigarettes to enforce the tax

obligations. 447 U.S. at 162.

10

of a state to look to Indian retailers for tax collection and

record-keeping. A continuing audit and supplemental col-

lection process, contemplated by this option, is direct, tradi-

tional, and provides administrative efficiencies. The policy

would also mean a pronounced state presence in Indian

country. Its implementation might spawn extended litiga-

tion and serve to exacerbate problems in the state-tribal re-

lationship.

The second alternative, supported by Moe, Colville,

and Potawatomi, emphasizes off-reservation compliance

measures and activities, imposing only acceptable burdens

on reservation retailers consistent with this Court's deci-

sions. As a policy choice for a state, the merits and demerits

of this alternative are the mirror image of the first option.

Advantages lie in lowering state-tribal tensions and reduc-

ing litigation over state regulatory prerogatives. Converse-

ly, an off-reservation enforcement emphasis, marrying

innovative and traditional compliance mechanisms, would

likely lead to inefficiencies and leakage in untaxed sales in

the face of committed contraband activities on the reserva-

tion.

New York has obviously elected the second regulatory

alternative. The validity of the features of its program is an

issue of intense interest to the amici states which must sim-

ilarly police against deliberate evasion of its taxes not only

in the area of cigarette transactions but in respect to other

consumer sales, notably motor vehicle fuel purchases.

The underlying objectives of New York's off-reservation

enforcement emphasis are to maximize taxation of ciga-

‘1A greater state presence on the reservation, represented by the

first enforcement option, would tend to lessen the incidence of contraband

activity. Conservatively estimated, the state of Washington, whose com-

pliance system parallels New York’s, loses $8.9 million in tax revenues

annually from such activity. REPORT OF THE LEGISLATIVE BUDGET

wry TO THE WASHINGTON LEGISLATURE, CIGARETTE Tax STUDY

1, 4(1990).

ee

11

rettes destined for resale to non-members while ensuring

fully an available supply of the untaxed tobacco product for

tribal member consumption. The requirement of prepay-

ment of a tax from licensed wholesalers or distributors of

products such as cigarettes or motor vehicle fuel has been a

traditional, nondiscriminatory collection mechanism uti-

lized by states through the years. Payment of the tax by

such persons, because of a statutory prepayment obligation

upon suppliers, was an integral part of the Montana and

Washington tax systems approved for application to reser-

vation transactions in Moe and Colville.

The prepayment requirement imposed on the off-reser-

vation supplier, of course, moves the payment of the tax one

step back in the chain of distribution, i.e., away from the

reservation seller upon whom the obligation to affix stamps

and prepay the tax was authorized in Moe and Colville. In

this respect, the burden on the reservation retailer is actu-

ally lessened.

The other central feature in New York's regulatory sys-

tem is the provision which monitors the legitimate traffic of

unstamped, i.e., untaxed, cigarettes to the reservations for

sale to tribal members. Sufficient quantities are ensured by

a flexible set of rules which liberally allow for an aggregate

amount that is the product of tribal membership and statis-

tical per capita consumption, with leave given to sellers to

demonstrate a larger market for tribal member consump-

tion. The accompanying requirements on suppliers to ob-

12Where unstamped cigarettes may permissibly be transported or

possessed within the state, as, for example, when a reservation merchant

might choose to transact business with an out-of-state supplier, state law

will likely require record-keeping and other arrangements for payment of

the tax. See Pet.App. All. See also, e.g., Wash. Rev. Code § 82.24.250. Off-

reservation seizures pursuant to applicable state law will occur when

persons in possession of unstamped cigarettes choose not to comply with

these requirements or when there is evidence of “wholesale evasion” of

the state tax. See Colville, 447 US. at 162.

12

tain exemption certificates from their wholesale or retail

customers on the reservations and to maintain accurate

records of such transactions are rational adjuncts to the ba-

sic mechanism that insures the legitimate movement to the

reservations of cigarettes which should properly be sold un-

taxed.) The traffic is regulated in a manner which does not

intrude upon core tribal interests.

In summary, New York's law, which seeks to minimize

the loss of taxes attributable to reservation cigarette sales

to non-member purchasers by accommodating the relevant

reservation interest of tribal sovereignty and the state's

own concerns by an emphasis on off-reservation compliance.

While New York's regulations represent a variation on the

tax enforcement systems directly considered in Mve and

Colville, their features fall clearly within the minimum bur-

den limitations outlined by the Court, insofar as reservation

interests are affected. !4

However, the Court of Appeals concludes, rather para-

doxically, that the requirements imposed on off-reservation

persons, however they might lessen the burden on reserva-

tion sellers which are otherwise permissible under this

Court's decisions, are preempted by federal law. We turn

now to this contention.

13This type of obligation is neither onerous nor unfamiliar. Under

federal law cigarette distributors must file periodic returns with the

states, reporting untaxed cigarettes sold and delivered into another juris-

diction. See 15 U.S.C. § 376.

‘4New York’s rules also allow for the tribes to grant or withhold ap-

proval for the quantities of untaxed cigarettes that a supplier seeks to

distribute to qualified sellers. Pet_App. 13. It should be further noted that

the thrust of the State’s regulations applied to off-reservation suppliers

would have the propensity for reducing the need for detailed record-keep-

ing by Indian retailers, the minimum burden contemplated by Moe and

Colville.

13

B. Neither the Off-Reservation Nor On-Reservation

Provisions of New York's Law Touch Upon the In-

terests that are the Concern of the Indian Trader

Statutes (25 U.S.C. §§ 261-264) so as to Warrant

Their Preemption by Federal Law.

There is much in the trilogy of Moe, Colville, and Pota-

watomi to support the conclusion that the Court has already

held that regulatory schemes, like those of New York, are

not preempted by the Indian trader statutes. 25 U.S.C. §§

261-264. .

The Court of Appeals acknowledges the existence of

that support in its alternative holding which seeks to distin-

guish this Court's earlier decisions. Thus, New York's reg-

ulations are found to place “significant” burdens on

off-reservation suppliers as Indian traders, whereas the

regulatory systems earlier in issue before this Court pre-

sumably did not.!© The opinion of the Court of Appeals is

devoid of any discussion regarding the comparison of these

obligations on suppliers with the minimum burdens on In-

dian retailers approved by this Court. Pet.App. Al1-12.

In its opinion the Court of Appeals observes that "Moe

-- and Colville involved burdens placed on Indian retailers

dealing with non-Indians, rather than on wholesalers deal-

ing with Indians, a significant difference . . ." Pet.App. A8.

The court appears unaware that the Indian retailers in

Colville, subject to state regulation, were themselves li-

censed Indian dealers. See Confederated Tribes of Colville

v. State of Wash., 446 F. Supp. 1339, 1347 (E.D. Wash. 1978).

Similarly, Montana's regulations at issue in Moe re-

quired suppliers to prepay the cigarette excise tax. See su-

pra n.9. Most important perhaps is the Court's approval,

first in Colville and more recently in Potawatomi, of off-res-

\5The position taken by the New York court, previously expressed

in its earlier decisions, holds that the Indian trader statutes do not allow

regulation of traders for any purpose. Pet.App. A7.

14

ervation seizures of suppliers’ cigarette shipments. Those

suppliers would be regarded as Indian traders for purposes

of the federal statute under this Court's decision in Central

Machinery Co. v. Arizona State Tax Comm'n, 448 U.S. 160

(1980). The regulatory impact of seizure transcends in sig-

nificance any of the other burdens which New York has

placed on suppliers and which the Court of Appeals consid-

ered as fatal under the federal statute. For whatever rea-

son, the decision below fails to note any of these

considerations.

There is thus ample evidence that the Court, by clear

implication if not expressly, has already permitted the oper-

ation of state law directly upon Indian traders, notwith-

standing the broad preemptive language employed by the

Court i in another context in Warren Trading Post, 380 U.S.

685.1° The position is sound and is additionally supported

by underlying considerations which inhere in the Indian

trader statutes themselves.

Each of the cases in which this and other courts have

found preemption of state tax laws because of the Indian

trader statutes presents a situation where the economic

burden of the tax imposed on the Indian trader was passed

on to the tribal member. Warren Trading Post, 380 U.S. 685;

Central Machinery, 448 U.S. 160; New Mexico Taxation &

Revenue Dep't v. Laguna Indus., Inc., 855 P.2d 127 (N.M.

1993).17 By increasing the cost of the goods and services

16The fact patterns underlying the decisions in Moe and Colville

thus justify and explain the earlier remand of the instant case for recon-

sideration.

17The holding of the state court in the last of these decisions, apply-

ing the statutes to the provision of services, represents a questionable ex-

tension of the law, given the plain language of 25 U.S.C. § 261 which

provides:

The Commissioner of Indian Affairs shal] have the sole power and

authority to appoint traders to the Indian tribes and to make such

rules and regulations as he may deem just and proper specifying

the kind and quantity of goods and the prices at which such goods

shall be sold to the Indians. (Emphasis added).

15

sold to the Indians, these state tax provisions were inconsis-

tent with the provisions of the Indian trader statutes pre-

serving to the Commissioner of Indian Affairs the power to

set the price of goods sold to Indians. The vice of these state

laws, however, was the burden imposed on the Indians, not

the burden imposed on the Indian trader.

The New York tax regulations at issue herein are care-

fully tailored to avoid imposing any tax burden on tribal

members. The only passed-on economic burden of the tax is

that which is borne by the non-members retail purchaser.

This Court in Moe, Colville, and Potawatomi has already

authorized state tax systems that require the Indian retail-

er to collect tax from the non-member purchaser.

In short, the core concern of the federal law is the pro-

tection of the ultimate tribal member customer (as the trad-

er's purchasers or sellers) on the reservation from “fraud

and imposition." Central Machinery, 448 U.S. at 163. Must

the federal law, however, be considered to foreclose the op-

eration of state law upon transactions of the nature now un-

der review when the ultimate purchasers are non-members

and the tribal presence is represented by a retailing inter-

mediary? The Court has, of course, impliedly rejected this

notion in Colville, 447 U.S. at 155-56 ("The Indian trader

statutes . .. incorporate a congressional desire comprehen-

sively to regulate businesses selling goods to reservation In-

dians for cash or exchange . . ., but no similar intent is

evident with respect to sales by Indians to non-members of

the Tribe.") (Citations omitted).

Absent some persuasive identification of a tribal inter-

est that is at risk through New York's regulations, it would

be anomalous to conclude that a state's right to protect itself

against a reservation-marketed tax exemption (Colville,

447 U.S. at 155) is nonetheless circumscribed by concepts of

reservation immunity whether expressed as a function of

16

tribal sovereignty or general federal preemption.!® The lat-

ter principle is not to be applied uncritically as the Court

has only recently admonished. Cotton Petroleum, 490 U.S.

at 176 ("We have applied a flexible preemption analysis sen-

sitive to the particular facts and legislation involved. Each

case requires a particularized examination of the relevant

state, federal and tribal interest.")

Relevant to a flexible preemption analysis is the histor-

ical fact that the present Indian trader statutes had their

origins in the beginning of the nation and their precursors

were conceived for a period when reservations were to be

treated as isolated and separated from the states within

whose boundaries they might be found.’9 Ingress and con-

trol over commercial relations within the reservation were

to be the province of the federal government to insure

against the exploitation of the reservation residents. The

18The Court of Appeals merely speculates that New York’s regula-

tions might disrupt Congress’ statutory plan to prohibit unfair or unrea-

sonable prices. Pet.App. Al2. The opinion points to the cigarette tax

prepayment by the Indian trader supplier as the kind of disruptive finan-

cial burden the federal statute was intended to protect against.

19The earliest Indian trader licensing laws enacted by Congress are

chronicled in Central Machinery, 448 U.S. at 160. The language found in

the principal provision of current law (25 U.S.C. § 261) which assigns to

the Commissioner of Indian Affairs authority over “appointment” of trad-

ers and for the regulation of goods and their prices was first contained in

the Act of August 15, 1876, 19 Stat. 200.

_t

17

Indians’ sale of goods indigenous to the reservation or its

way of life were also the focus of the trading statutes.7°

The present day reality reflects the non-member's in-

creased access to the reservation, at times at the invitation

of its tribal residents and, as this Court's cigarette tax case

decisions from Moe to the instant case amply document,

with the enticement of avoiding a tax obligation that would

be otherwise owing. The concept of a congressional intent

to establish reservations as tax havens for non-members

cannot be gleaned from the trading statutes either in their

evolution or their present day context.

The Indian trader statutes, in general language, direct

the federal government to authorize trade with reservation

Indians only under such rules and regulations as may be

prescribed “for the protection of [reservation] Indians." 25

U.S.C. § 262. If there were some immunity to be derived by

the Indian trader which acts as a supplier to tribal retailers

who, in turn, sell to non-members, one might expect to find

some suggestion of this tribal interest in the regulations

adopted under the statute. 25 C.F.R. part 140. There is not

a hint of such a concern in the generally stated rules or oth-

er indication that the thrust of the regulatory requirements

is other than the historical focus, that of protecting the

200f particular interest is an earlier provision in the Indian trader

statutes, first enacted in 1834 and repealed in 1953, which was directed

at activities of non-tribal purchasers on the reservation and provided:

Every person, other than an Indian, who, within the Indian coun-

try, purchases or receives of any Indian, in the way of barter, trade,

or pledge, a gun, trap, or other article commonly used in hunting,

any instrument of husbandry, or cooking utensils of the kind com-

monly obtained by the Indians in their intercourse with the white

people, or any article of clothing, except skins or furs, shall be liable

to a penalty of fifty dollars.

R.S. § 2135. Beyond the fact of its absence from current law, this prior

prohibitory provision was in no way directed at products imported into

Indian country for resale to non-Indians—with the exception of the im-

provident sale of specified items for the Indians’ subsistence.

18

Indian with whom the licensed trader is ultimately deal-

ing.24 Acknowledging the opening of the reservations for

commercial dealings with non-members and the implication

of state interests because of those dealings, the modern de-

cisions reject the assertion that state regulation is perforce

precluded on the reservation or preempted where there is a

federal statute in place particularly addressing Indian con-

cerns.2” The particularized examination of federal, state,

and tribal interests which the Court (e.g., Cotton Petroleum,

490 U.S. at 176-77) holds must attend the issue of preemp-

tion leads inevitably to the conclusion that state tax regula-

tion of transactions of non-members on the reservation is

not foreclosed.

What remains to be considered is the alternative hold-

ing of the Court of Appeals that the regulations adopted by

New York are preempted because they represent a substan-

tial burden on the Indian trader suppliers. Pet.App. All.

Central to the court's construct is its shift of this Court's in-

quiry in Moe and Colville into the nature of this burden on

tribal retailers to an analysis of the obligation placed upon

suppliers.

21 The vigilance of the Bureau of Indian Affairs in adopting rules to

carry out this mandate or even in enforcing existing regulations has been

brought into question in the past. See Rockbridge v. Lincoln, 449 F.2d 567

(9th Cir. 1971) (Language in Indian trader statutes authorizing Commis-

sioner of Indian Affairs to adopt regulations “as he may deem just and

proper” does not immunize from judicial review failure to adopt and en-

force rules on the Navajo Reservation). See also, U.S. ex rel. Keith v. Sioux

Nation Shopping Center, 488 F. Supp. 496 (D. S.D. 1980), aff'd, 634 F.2d

401 (8th Cir. 1980) (Non-Indian deemed to be in substantial compliance

with Indian trader statutes by obtaining tribal permit where licenses

were “almost” impossible to obtain from federal agency).

2Cf. United States v. McGowan, 302 U.S. 535, 539 (1938) (“enact-

ments of the federal government passed to protect and guard its Indian

wards only affect the operation, within the [reservation] of such state

laws as conflict with the federal enactments.”)

19

In the progression from Moe through Colville this

Court found plainly acceptable a tax collection requirement

(and accompanying prepayment obligation) on tribal retail-

ers. The same approbation was given to the "detailed"

record-keeping requirement for retailers to delineate tax-

able and non-taxable sales. Colville, 447 U.S. at 159-60. As

we have earlier demonstrated, New York's regulations shift

the prepayment obligation to the supplier; record-keeping

obligations on the suppliers have the same objective of dis-

tinguishing between taxed and untaxed transactions.

The opinion of the Court of Appeals fails altogether to

explain how this transfer of obligation from tribal retailers

to the respondent suppliers necessitates invalidating the

New York approach.“ It is protection of tribal members,

not non-members, from exploitation which is the concern of

the Indian trader statutes. If there is no transgression upon

that concern in the setting of Moe and Colville, there should

be none in the present context either. It would indeed be

anomalous to restrain the state authority to a greater de-

gree when a non-tribal, non-reservation entity bears the

challenged regulatory burden than when a tribal, reserva-

tion-based person does. For these reasons, the position of

the Court of Appeals is unsupportable even when its own

test is applied.

The ramifications of the decision of the Court of Ap-

peals are extremely serious for the states. They have been

earlier identified. Increased incidence of contraband activi-

ty and tax evasion on the reservation in the future is a cer-

23The opinion reads too narrowly the decision in Potawatomi,

which sanctions the right of states to assess suppliers for the cigarette

tax, by concluding that assessments can be made only after the sale of un-

stamped cigarettes to tribal retailers. Even if this constricted reading is

followed, a supplier would be no less likely to take its ultimate obligation

for payment of the tax into its calculation of the price to be charged to the

retailer. Pet.App. Al0-11. The financial burden of the tax, which the

Court of Appeals found unacceptable, would remain.

20

tainty as the principle of the decision below is extended to

marketable commodities other than cigarettes and the

states are denied the right to regulate the Indian trader

when sales are made to non-members. Increased surveil-

lance and compliance efforts are similarly inevitable, occa-

sioning expenditures which should be unnecessary.”4

Further litigation can be predicted as the states pursue oth-

er allowable enforcement options on the reservation.

There is one final consideration, appropriate for men-

tion. Consistent with the Court's suggestion in Potawatomi,

a number of states and tribes have sought, with some suc-

cess, to negotiate compacts for the collection and distribu-

tion of cigarette taxes. It may fairly be inferred that these

agreements were reached as the parties evaluated what is

-the law under Moe and later decisions of this Court. Other

negotiations in the area of cigarette taxes and motor vehicle

fuel are continuing. This case, therefore, presents the op-

portunity for the Court to impart certainty and accuracy on

an important issue of regulatory jurisdiction, thus allowing

tribes and states alike to assess rights and responsibilities

to be brought to their continuing relationship.

24Prohibitions on state regulations which require suppliers to pre-

pay the tax and maintain records of exempt and taxable sales would par-

ticularly aggravate the enforcement problem in the case of motor vehicle

fuel sales. Unlike the situation with cigarettes which can be made to bear

a tax stamp, there is no equivalent identifier for motor vehicle fuel. Thus,

detecting the extent of contraband activity for this product would be ren-

dered extremely difficult, if not impossible.

21

CONCLUSION

The judgment of the Court of Appeals for the State of

New York should be reversed.

Respectfully submitted,

CHRISTINE O. GREGOIRE

Attorney General

State of Washington

Counsel of Record for the

Amici Curiae

NARDA PIERCE

Solicitor General

LELAND T. JOHNSON

Assistant Attorney General

P. O. Box 40100

Olympia, Washington 98504-0100

(206) 753-6200

December 15, 1993

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