Cig spat smolders between state, Leech Lake tribe

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The Minnesota Department of Revenue is withholding tax revenue that it shares with the Leech Lake Band of Ojibwe after seizing hundreds of cigarette packs bound for the reservation because cigarettes lacked state tax stamps, said Myron Frans, revenue department commissioner.

On April 18, the agency seized 2,810 packs without a state tax stamp signifying that the distributor had paid Minnesota’s $2.83-per-pack tax, which includes a $1.60 increase that took effect last year, Frans said. The tribe hired St. Cloud-based Spee-Dee Delivery to transport cigarettes that Leech Lake bought from a tribe in Nebraska to sell at a lower price than nearby stores.

By avoiding the tax, the Revenue Department estimates that tribal businesses on the north central Minnesota reservation, headquartered in Cass Lake, could sell the cigarettes at $3.50 per pack instead of $6 to $9 per pack. Frans said that’s not fair to other businesses that are paying the tax.

“We just felt that we couldn’t continue this,” he said.

Minnesota’s 11 American Indian tribes are sovereign powers over which the state has only limited authority. Federal law generally exempts the tribes from state taxes, said Joel Michael, a tax expert at the Minnesota House of Representatives’ House Research Department.

But state excise taxes like those on cigarettes are not imposed directly on the tribe; they’re imposed upstream on the distributor, Michael said. Unless that distributor is a tribal distributor, the state has the authority to impose taxes and punish those who don’t follow the law, he said.

That appears to be what happened with the April 18 seizure. State law makes it illegal to transport cigarettes that haven’t been taxed, Frans said. The Revenue Department seized the cigarettes from Spee-Dee Delivery, a third-party company unaffiliated with the tribe, and Frans noted that the agency could have seized the vehicles used to transport the cigarettes. After the seizure, the company promised to no longer transport untaxed cigarettes.

But Lenny Fineday, in-house counsel for the tribe, said revenue officials are misapplying a federal law that was only intended to allow state oversight of cigarette sales over the Internet. By contrast, this is a transaction between Leech Lake and Ho-Chunk Inc., which is owned by the Winnebago Tribe of Nebraska. Both are sovereign entities and have the right to make such arrangements under the Indian Commerce Clause, which gives Congress the sole power to regulate trade among the tribes.

Excise and other upstream taxes create what Michael called an “uneasy relationship” between the state and the tribes. So the parties often sign agreements in which the state agrees to share some of the tax revenue and the tribes agree to abide by certain state tax provisions.

“These agreements are sort of a compromise,” he said.

The Revenue Department has tax-sharing agreements with all 11 tribes for products such as alcohol and petroleum, as well as for sales taxes. In 2013, the department shared $4.25 million in tax revenue with Leech Lake, Ryan Brown, a department spokesman, told Finance & Commerce in an email.

But Leech Lake is the only one of the 11 tribes that has not agreed to a deal on cigarette taxes, Frans said, and the agency decided to cancel all tax sharing until the two sides reach a deal. The agency is also withholding $830,000 in combined cigarette tax and sales tax on cigarette sales from 2013 until the state and tribe can reach agreement, Brown said.

Fineday counters that there’s no mechanism in the agreement that allows the state to withhold money promised to the tribe; the state could only cancel the agreement.

The tribal government has a budget of approximately $75 million. It has recently been using the tax-sharing money to provide $200 tax refunds for members at the end of the year, Fineday said. With the cancellation of the tax-sharing agreement, the tribe will have to review whether that can continue, he said.

Leech Lake Chairwoman Carri Jones said the seizure is an act of bad faith at a time when talks were still taking place between tribal leaders and the revenue department.

“I just feel they’re forcing us to the table, not negotiating with us,” she said. “I thought we were having good dialog with the state.”

Frans said he personally spoke with Jones about the seizure and that he’s willing to meet with her and the tribal council to discuss the issue further.

“I’m available to talk to them any time to continue these negotiations. We take this very seriously. We respect their sovereignty,” Frans said. “It’s all about trying to be fair and working with them on this issue.”