On September 23, the Ninth Circuit Court of Appeals held that amendments to Washington State’s cigarette excise tax did not alter the conclusion reached by the Supreme Court in 1980 in Washington v. Confederated Tribes of the Colville Indian Reservation, that the cigarette tax and its requirement that tribal retailers collect and remit the tax from retail customers who are not tribal members was valid. Confederated Tribes and Bands of the Yakama Indian Nation v. Gregoire, – F.3d – (9th Cir. 2011). Specifically, the Ninth Circuit held that changes to the cigarette excise tax were not sufficient to change the conclusion reached by the Supreme Court in Colville that the legal incidence of the tax does not fall on Indian retailers. The legal incidence of a tax is on the entity or person who bears the ultimate legal obligation to pay the tax. As a general rule, where the legal incidence of an excise tax rests on a tribe or on tribal members for sales of cigarettes made inside Indian Country, the tax cannot be enforced without clear congressional authorization.
In 1980 the U.S. Supreme Court, in Washington v. Confederated Tribes of the Colville Indian Reservation, upheld the validity of Washington’s cigarette tax as applied to on-reservation sales to non-tribal-member customers, as well as its requirement that tribal retailers collect and remit the tax from those customers. In that case the Court determined that the legal incidence of the Washington cigarette tax, as then written, fell on the cigarette customers as opposed to the retailers and thus the collection burden placed on Indian retailers was valid.
In 2004, the Yakama Nation entered into a cigarette tax compact with the State of Washington which required the Nation to impose and maintain a tribal tax on the retail sales of cigarettes equal to the amount of State and local sales taxes. However, disputes arose, and in 2008 the compact was terminated. The State then informed Yakama Nation that it was reinstating the cigarette tax on sales of cigarettes to nonmembers of the Nation and that it would require cigarette tax stamps to be affixed to all such sales.
The Yakama Nation brought suit claiming that amendments to Washington State’s cigarette tax since the Colville case changed the legal incidence of the tax by unfairly burdening tribal retailers. Specifically, the Nation argued that the legal incidence of the cigarette tax was shifted to Indian retailers because of (1) absence of an express “pass through” provision requiring that the retail purchase price include the taxes prepaid by the retail sellers; (2) the inability of retailers to defer payment of the cigarette tax; (3) the absence of compensation for collecting the tax; (4) the liability Indian retailers face for unsold products; and (5) the recordkeeping requirements of the amended tax.
The Ninth Circuit Court of Appeals disagreed. Instead the Court determined the changes were administrative in nature and did not shift the legal incidence of the tax to Indian retailers.
Importantly, the Court noted that a person bearing an economic burden from an excise tax is not necessarily the person bearing the legal incidence of the tax. The Court stated “[w]hile a party bearing an economic burden, perhaps as the result of reduced sales, may also bear the legal incidence of the tax, the Supreme Court has clarified that an economic analysis of the ‘realities’ of taxation [i.e., the economic burdens] should not be a substitute for legal-incidence analysis.” The Court stated that Washington’s amendments at most affect the economic burden of the cigarette tax, but do not change the Supreme Court’s analysis in Colville, that the legal incidence of the Washington tax falls on the non-tribal-member customer rather than on the Nation or its cigarette retailers. The Court stated that it could find no scenarios in which an Indian retailer would be more than a transmittal agent for the state tax collectors and thus, in sum, the tax does not contravene established principles of Indian tax immunity.
One of the three judges concurred in the decision but wrote separately to acknowledge the economic hardship placed on tribal retailers. He said a review of the economic realities would likely reveal that the cigarette excise tax does impose an economic burden on such persons, but that the law requires an analysis through a prism that blocks economic reality. The Yakama Nation has 90 days to petition the Supreme Court to review the decision, but there is no indication yet whether it will do so.
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