Daniel Cappellazzo for The New York Times
Smoke shops on Indian reservations are exempt from taxes. The Internet has allowed Indian entrepreneurs to take their business to a new level, provoking a stampede of protests.
Posted on 09/26/2004 9:50:22 PM PDT by neverdem
IRVING, N.Y. - Many people would love to put Larry Ballagh out of business. All antismoking groups, for instance. The National Association of Convenience Stores, too.
New York lawmakers would happily close him down. So would the attorneys general of most states.
The reason for all this animosity is that Mr. Ballagh, a hefty 65-year-old of half-Irish, half-Seneca American Indian stock, sells cigarettes nationwide over the Internet, free of state excise and sales taxes that can add as much $3 a pack to the cost of smoking.
The bustle in his offices on the Cattaraugus territory of the Seneca reservation here attests to the brisk growth of his business. There's the new extension to the warehouse, the high stacks of cigarette cartons, the huge piles of empty "Priority Mail" boxes waiting to be loaded and dispatched.
But as his venture has grown, so has the opposition to his trade. Fast-growing online sales of untaxed cigarettes - available for less than $25 a carton over the Internet compared with about $65 in New York City - are provoking a stampede of protests from a disparate collection of antitobacco groups, cash-strapped state governments and local retailers. These groups are hard at work in the courts, legislatures and in Washington to try to end the practice.
Earlier this year, the New York state legislature passed a law intended to force collection of excise taxes on tobacco and fuel sold by Native Americans to non-Indians. New York City, which estimates it loses hundreds of millions of dollars a year from untaxed cigarettes, is cobbling together a legal strategy that it could use against Indian tribes by characterizing the Internet sales as mail fraud. The revenue department of Washington State - which has successfully sued nontribal online vendors - is mulling lawsuits against Indian retailers.
The campaign has marshaled forces on Capitol Hill as well. Last December, the Senate passed a bill to stamp out untaxed cigarette sales over the Internet, and the organization representing state attorneys general is urging the House to do the same.
The trade group for convenience stores, meanwhile, has been lobbying intently for a different House bill that would take a harsher stance, explicitly allowing states to take Indian nations to court.
The widespread government hostility, however, has not dented the Ballagh family business. "We are adding about 80 to 100 new customers a month," said Charles Ballagh, Larry Ballagh's son and partner. At that rate, their venture would double in size in about two years.
Larry Ballagh's business remains hard to crack because it operates behind tribal sovereignty. States are generally barred by treaties from taxing Indian tribes or enforcing other laws against their activities. Businesses operated by American Indians have long taken advantage of this protection to sell tax-free tobacco products in reservation shops to non-Indians.
But the Internet has allowed the Seneca entrepreneurs to take their business to a new level. That has intensified the debate over the legality of such commerce, which has taken off in recent years as many states have sharply increased taxes on cigarettes.
Today, Mr. Ballagh regularly advertises in "Pennysaver" shopping sheets in states with high excise taxes. From Web sites like Mr. Ballaghs's travelingsmoke.com, and others like Senecahawk.com and Senecatabacco.com, smokers can buy cartons of Marlboro and Camel for as little as $24.25, compared to about $58 in a Hoboken, N.J., convenience store and $49 at a supermarket in Seattle.
At least a decade worth of rulings, ranging up to the Supreme Court, have determined that while states cannot tax Indian commerce, they can collect taxes on purchases by non-Indians from Native American businesses. States have limited power to enforce these decisions, however. Some tribes in other parts of the country defused the issue by negotiating deals with state governments to collect tribal taxes and eliminate their retailers' competitive advantage.
By contrast, the 7,500 Seneca, most of them living on the Allegany and Cattaraugus reservations in western New York, have dug in their heels. "Cigarettes have raised our standard of living," said Rickey Armstrong Sr., the president of the Seneca nation.
Even armed with a favorable court decision, Gov. George E. Pataki pulled back from a New York State plan in 1997 to tax Indian sales of cigarettes and gas after Seneca tribal members blocked traffic on the main state highway near their reservation. "We were out there, nose to nose, with state troopers," Mr. Ballagh said.
The Seneca are prepared for a long fight. Besides their official legal status, they also claim to have a unique exemption from taxes written into their treaty with the United States in 1842. They have recently launched marketing campaigns and hired lobbyists in Washington and Albany to defend their position.
"Break a treaty, break a law," reads a billboard on State Highway 86 on the Allegany reservation.
There are no precise figures on the size of the online tobacco market, but it is clearly growing rapidly. A report by Robert Campagnino, an analyst for Prudential Securities, estimated that about 2 percent of the 20 billion packs of cigarettes sold in 2002 were purchased over the Internet; Mr. Campagnino said that the figure today is probably around 3 percent.
Six percent of New York City smokers buy their cigarettes online, according to a 2003 survey by the city's health department. Eric Proshansky, a lawyer for the city who has been pursuing online cigarette retailers, said that one large Internet operation sold 41 million cartons of cigarettes nationwide in a little over four years. Somewhat under 10 percent of those, he estimated, were sold in New York City, costing the city and state over $160 million in lost tax revenues.
Not all of these cigarettes come from Indian reservations. Non-Indian entrepreneurs in low-tax states like Virginia, where the excise tax on cigarettes is 20 cents a pack, have made a hefty profit selling cigarettes to smokers in high-tax states.
Foreign suppliers have also jumped into the business, shipping duty-free cigarettes to American customers. Officials in New York suspect that some non-Indian online retailers operate under the guise of Indian outfits. And illegal sales of untaxed cigarettes, run by criminal gangs, are not uncommon.
Yet sales from Indian reservations, particularly from the Seneca lands, clearly account for a big portion of the growing business. A study commissioned by the Seneca tribal government found that Seneca cigarette sales totaled $347 million last year. About 95 percent were sold via the Internet or phone; the balance was accounted for by sales from the smoke shops that dot Seneca lands.
And they are much harder to curb than non-Indian businesses. Washington State's attorney general has taken nontribal online cigarette retailers to court, but he has so far avoided suing Indian operations. "With tribal sellers, we have in the first instance taken a diplomatic, government-to-government approach," said David Horn, an assistant attorney general for the state.
Philip Morris has sued foreign and nontribal Internet tobacco retailers, but no Indian ones.
A project led by Kurt M. Ribisl of the University of North Carolina's School of Public Health found 725 English-language Web sites selling cigarettes last January. He tracked 403 to specific locations: 42 percent were American Indian sites, 33 percent nontribal sites in the United States and 25 percent foreign-based. Of the 168 Web sites operating from tribal lands, New York Seneca entrepreneurs ran at least 126.
Among the most vociferous opponents of the online retailers are the nation's 130,000 or so convenience stores; cigarettes account for about 40 percent of nongasoline sales. Stores along the borders of reservations have complained of the Indians' tax advantage for years. The Internet spread the pain.
"It changed the dynamic," said Lyle Beckwith, senior vice president for government relations at the National Association of Convenience Stores. "Now it affects retailers all over the country, not just in some states."
The amount of commerce bypassing state taxes is growing fast. Since 2002, 35 states have sharply increased their excise taxes to shore up their budgets and as a public health measure to encourage more smokers to quit.
Connecticut, for instance, increased its tobacco excise tax twice, from 61 cents to $1.51 a pack. In July, Michigan increased its tax from $1.25 to $2.
When taxes were raised in the past, most smokers would pay the increased price and keep smoking. Some quit. But today, according to a forthcoming research paper by Austan Goolsbee, an economist at the University of Chicago, and Joel Slemrod, a professor at the University of Michigan, many more smokers, rather than pay up or give up smoking, buy untaxed cigarettes online instead.
In 2002, New Jersey raised its tobacco excise tax from 80 cents to $1.50 a pack, one of the highest rates in the country at the time. The share of smokers who said they had bought cigarettes online jumped to 6.7 percent from 1.1 percent two years earlier, according to a survey by researchers at the University of Medicine and Dentistry of New Jersey.
In the end, though, the online tobacco business may be stamped out - or put under tighter control - by the combined weight of its opponents.
There is already a law on the books that could curtail the practice. The Jenkins Act requires retailers who ship cigarettes to smokers in other states to provide state governments with a list of their customers so they can collect excise taxes directly. Properly enforced, it would eliminate incentives to buy cigarettes online.
The law is mostly ignored by retailers, though, and rarely enforced by the federal government.
Last December, the Senate unanimously passed a bill to strengthen it by barring cigarettes from being mailed, along with other provisions. To obtain the support of Native American tribes, the bill explicitly said it would not affect Indian nations' sovereign status.
"We think it's a pretty good bill," said John Dossett, general counsel of the National Congress of American Indians. "There are sections in there that protect our interests."
But the legislation's future is uncertain. The House has failed to act on it. Carriers like U.P.S. oppose a provision requiring them to check whether a package includes tobacco. And the association of convenience stores, hoping to win support for a tougher bill, objects to the clause protecting Indian sovereignty.
"If you don't deal with the Indians,'' Mr. Beckwith said, "you don't solve the Internet tobacco problem."
Daniel Cappellazzo for The New York Times
Smoke shops on Indian reservations are exempt from taxes. The Internet has allowed Indian entrepreneurs to take their business to a new level, provoking a stampede of protests.
Let me know if you want on or off my New York ping list.
I think it's hilarious and know a lot of people buying tobacco from the Senecan tribe...go get'em Irish Native Americans!
Go Indians!
Hmmm...white man see Smoke Signals...must use Internet now...
www.discount-cigarette.com
The convenience store is happy--the tribe's happy, and I'm happy. What's the problem with that? LOL!
Maybe when some of the parasites see no money to get paid, they'll screw together some self-respect and go out and do something useful with their lives.
To hell with sin taxes! lol
I don't smoke, but I sure support the Indians in this and anybody who buys from them.
Strangle BSG BTTT! Go Indians!!
Please add me to your ping list. Thanks
PING! about cigarettes on the net!
I always bought my cigarettes on Indian land. I refused to pay any additional taxes than I already do to any government, state or federal.
I don't smoke anymore, but I still feel a flare of outrage whenever a bunch of Liberals (Demoncrats and RINO pubbies) think they have a right to tax a man's simple, legal pleasure.
This is still a non fascist country right?
Right?
The greedy, wasteful state governments and their crooked attorneys are no different from organized crime in this regard, raping the pocket books of it's own citizens. Illinoi$ Governor Rod R. Blagojevich (a Democrap) recently signed a law similar to one in New York banning shipments of cigarettes into the $tate from Internet resellers. The Illinoi$ law was intended to stop Internet sales of cigarettes to minors, but instead stops sales to everyone. Several online resellers have stopped shipping to Illinoi$ in order to comply, but some are still shipping anyway (too freaking bad, Blago! You, Madigan and the boys in Crook County can get their retirement money off of someone else's back!)
Thumbs up to the Native Americans who actually deserve the money instead of worthless politicians and crooked $tate$ that don't have to be competitive since they can simply steal what they want from their own people.
Nope. Exorbitant and discriminatory taxation spread the pain. The internet was the cure.
Tobacco production is being offshored to India? When did this happen?
/sarcasm
RIGHT ON~
He'll get even more business if the government bankrupts MO and RIA like they seem to be fixing to.
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