The sale of cigarettes and gasoline on New York State's Indian reservations will continue to be tax-free, after Gov. George E. Pataki vetoed a bill yesterday that would have allowed the state to charge taxes.

The bill, which was passed by the Legislature in June amid concern over finding badly needed new sources of revenue, would have gone into effect Jan. 1, and could have resulted in tax receipts of an estimated $800 million annually, according to its supporters.

Mr. Pataki said in an interview yesterday that he preferred negotiating with individual tribes to make arrangements for voluntary payments of about the same amount each would owe in taxes.

"One of the important things I've strived to do is reflect the sovereignty as guaranteed by state and federal treaties, and to negotiate in good faith," Mr. Pataki said. "I believe we can do this through consent, where we can reach agreement with the tribal nations."

In 1997, when Mr. Pataki tried to collect taxes on a Seneca reservation, about 1,000 tribal members blocked traffic on the New York State Thruway in protest.

The governor is involved in a series of talks with Indian tribes that are pressing land claims against the state and would like to open casinos. Last week, the state agreed to allow the Seneca-Cayuga Tribe of Oklahoma to open a casino in the Catskills after it agreed to drop a $247.9 million land claim. The agreement requires the approval of Congress and the State Legislature.

Off-reservation retailers had pushed for the tax, saying that without it Indian vendors have an unfair pricing advantage, especially in the wake of recent increases in the cigarette tax. In New York City, a pack of cigarettes costs $7 on average, $2 more than one bought on a reservation.

Richard Lipsky, a spokesman for the Neighborhood Retail Alliance, a lobbying group for vendors, said that since Indian businesses do not have to report sales, the amount of taxes that would be owed is unknown.

"It's unfair to the legitimate retailer and it's unfair to the taxpayers," he said of the governor's veto.

ALBANY — In an extraordinary extension of Indian tribal immunity, an appellate panel yesterday rejected an effort to compel New York State to enforce its tax laws pertaining to sales of motor fuel and tobacco products on reservations.

The Appellate Division, Third Department, unanimously held that New York's tax statutes cannot be effectively enforced without the cooperation of Indian tribes, and found that there is essentially nothing New York can do to get the Indians to cooperate. Significantly, the court found that immunity extends to retailers.

"Because of tribal immunity, the retailers cannot be sued for their failure to collect the taxes in question, and State auditors cannot go on the reservations to examine the retailers' records," Justice D. Bruce Crew III wrote for the court in Matter of New York Association of Convenience Stores v. Urbach, 86684.

Justice Crew noted that the Pataki Administration's attempt to negotiate a settlement failed, and its effort to interdict shipments of cigarettes and gasoline to impose a tax prior to delivery to a reservation resulted only in "civil unrest, personal injuries and significant interference with public transportation."

Consequently, the court said, there is a "rational basis for the differential treatment" afforded Indians and non Indians.

Yesterday's ruling is another setback for business owners, who claim they are perpetually undercut by Indians who do not charge sales and excise taxes on tobacco and motor fuel.

Convenience store owners have long complained that they cannot compete with the Indians because they have to collect sales and excise taxes. They say the situation has only grown worse in recent months, since the cigarette tax was raised March 1 from 56 cents to $1.11 per pack.

"We are disappointed with the result and are in the process of exploring our options, which would include an appeal to the Court of Appeals," said David M. Cherubin, of Crane, Greene & Parente in Albany, counsel for the Association of Convenience Stores.

It is also a setback for New York State, which apparently will continue to lose out on an estimated $100 million in annual tax revenues.

But the attorney for St. Regis Mohawk Tribunal and other Indian interests filing as amici curie said the extension of immunity to tribal retailers is crucial and groundbreaking. Joseph F. Crangle, of Block & Colucci in Buffalo, said the decision upholds the concept of Indian sovereignty and is supported by case law that says New York's civil laws do not extend to reservations.

"This is not a question of an exemption," said Mr. Crangle, "this is a question of immunity. The tax cannot be levied."

Series of Tax Rulings

The decision is the latest in a series of rulings relating to the imposition of sales and excise taxes on fuel and cigarettes sold on Indian reservations to non-Indians.

Federal law forbids the collection of such taxes on goods sold on Indian reservations to members of the tribe. However, under Washington v. Confederated Tribes, 447 U.S. 134 (1980), taxes can be collected when sales are made to non-Indian customers.

The dispute giving rise to Thursday's ruling is rooted in a regulation adopted by the State Department of Taxation and Finance a dozen years ago.

In 1988, the Department adopted a regulation that allowed Indians to purchase a limited amount of untaxed fuel and tobacco, based upon use estimates, while subjecting the remaining allotments to state taxes. Under the regulation, the tax would be imposed on non-Indians, off the reservation and would not require Native Americans to function as state tax collectors. Rather, the tax would be collected from traders.

Native Americans challenged the regulation all the way to the U.S. Supreme Court.

The Justices in Washington ruled against the Indians in the 1994 case of Department of Taxation & Finance v. Milhelm Attea & Bros., 512 U.S. 61, a Commerce Clause decision that said the State could impose on Indian traders the burden of collecting a tax. But the Tax Department made no effort to enforce the law.

Settlement Tried

Convenience store owners attempted to require New York to either enforce the tax law equally or not at all, and won a favorable decision in 1996 from now-deceased Supreme Court Justice Joseph Harris in Albany. After Justice Harris's decision, the State attempted to negotiate a settlement.

In 1997, some Native American nations agreed to a proposal that would have led to minimum pricing of tobacco sold at reservation stores, and would have curtailed gasoline sales at some Indian outlets. However, the proposal split the Indian nations, with several refusing to take part, and that plan fell through.

Later, the State attempted interdiction, seizing untaxed cigarettes destined for reservations and blocking deliveries. Governor Pataki abandoned that attempt after it provoked a violent confrontation between Indians and authorities, leading to one death, numerous demonstrations, tire-burnings and other disturbances.

Mr. Cherubin then initiated a proceeding under Article 78 of the Civil Practice Law and Rules to compel the State to enforce its tax laws. His petition was rejected by acting Supreme Court Justice Conrad H. Lang Jr. in a decision upheld yesterday.

The Third Department held, in essence, that New York is powerless to enforce its tax laws with regard to Indian sales of motor fuel and cigarettes, even though there seems to be little disagreement that a taxable event occurs with those sales.

"The record here...makes plain that the statutes cannot effectively be enforced without the cooperation of the Indian tribes," Justice Crew wrote.

In addition to Justice Crew, the panel included Justices Karen K. Peters, Carl J. Mugglin, Robert S. Rose and John A. Lahtinen.

The State was represented in the case by Assistant Solicitor General Andrew D. Bing.

Governor Pataki Acts to Bring Fairness to Indian Nations
May 22, 1997

Legislation Respects Sovereignty of Indian Nations, Resolves Tax Dispute

Governor George E. Pataki today took a series of steps designed to bring fairness to Indian Nations by resolving the historic tax disputes that have divided New Yorkers and Native Americans for generations.

"For more than two and half years, I have worked to balance my oath of office to uphold the laws of our state with my profound respect for the rights of all people and for the sovereignty of the Indian Nations," the Governor said.

"We have demonstrated that commitment through our good-faith negotiations with the Indian Nations. We sat down with the Indian leaders, listened to their concerns, worked on our differences, attempted to come together," the Governor said.

"And we did have some significant success. We reached agreements with six of the Nations -- sending a message to all New Yorkers and Native Americans alike that we have entered a new era of peaceful cooperation.

"The federal Department of Tribal Justice praised these agreements, calling them fair and creative pacts that respected the sovereignty of the nations and my obligation to uphold the law," Governor Pataki said.

"But as we have seen in recent weeks, this issue remains extremely complex and continues to divide us. Various Supreme Court and other court rulings have only added to the confusion and polarized entire communities.

"That is not the resolution we have sought, nor is it one that I will accept," the Governor said. "And it is not the solution that our Indian Nation partners have sought.

In an effort to resolve this issue, Governor Pataki today directed the State Department of Taxation and Finance to repeal its regulations governing the collection of taxes from gasoline and cigarette sales at reservations stores.

In addition, the Governor today sent to the State Legislature a bill that would amend the State Tax Law to allow reservation stores to sell tax-free gasoline and cigarettes. "These steps will allow the Indian Nations to manage these enterprises on their own, as they have for decades," the Governor said. "Let me make my message to all Indian Nations clear: It is your land, we respect your sovereignty and, if the Legislature acts as I am requesting, you will have the right to sell tax-free gasoline and cigarettes free from interference from New York State.

"For centuries, the people of New York have lived side by side with their Native American neighbors; working together, raising families together, going to school together," Governor Pataki said. "It should be a relationship of mutual respect, but history teaches us that this has not always been true.

"No New Yorker wants to see their neighbor suffer the indignity that comes with the loss of hope and opportunity," the Governor said. "No New Yorker wants to see their neighbor struggling to find work, struggling to provide for their family, struggling to build a better life for their children. All of us want to build a better future for our State -- and, I believe, that includes the Indian Nations, who, though sovereign nations, are our neighbors."

Governor Pataki urged the State Legislature to act quickly on his bill in order to restore fairness to the Indian Nations and bring peace to the entire region.

"For the sake of unity, for the sake of sovereignty, for the sake of fairness, I strongly urge the Legislature to pass this historic bill now," the Governor said. "Make no mistake about it: The Indians' needs are real and all New Yorkers must be sensitive to them."

Governor Pataki said he will continue to work with Indian Nations to resolve outstanding issues and improve the relationship on a government-to-government basis.

"When I took office, I inherited a series of problems that, on their face, seemed so intractable that they were beyond resolution," Governor Pataki said. "No issue was more complex than our relationship with the sovereign Indian Nations, who have had to overcome discrimination, economic inequities, and perhaps worst of all, that their calls for help and fairness fell on deaf ears.

"I have sought to improve our relationship with the Indian Nations. I resolved that we would not ignore their needs, that we would look for ways to find common ground," the Governor said. "We have made real progress in resolving this issue, but as we have seen in recent weeks, this issue remains extremely complex and continues to divide us.

"We have pledged in our conversations today with Indian Nation leaders that this is a continuation of our partnership, a continuation of our effort to come together and build a better life for New Yorkers and Native Americans alike," the Governor said. "Our strength comes from mutual respect, from finding common ground, from listening to one another, from walking arm in arm. The result will be a better future for all of us."