Despite law, tribe sells 1.7 tons of cigarettes online

When Congress passed a law in 2009 effectively banning mail order deliveries of cigarettes, it was expected to snuff out entrepreneurs on New York’s Indian reservations who were selling millions of cartons, tax free, to consumers in high tax states.

But the law, called the Prevent All Cigarette Trafficking Act, didn’t stop everybody.

As recently as last spring, one group of about 20 website operators on Seneca Nation territory was still delivering 1.7 tons of untaxed cigarettes a week to destinations around the U.S., according to shipping records obtained by lawyers for New York City as part of a civil racketeering lawsuit.

The city’s efforts are part of a wider legal battle involving the ability of states to tax cigarettes sold on Indian reservations, where tribal leaders have long maintained that the state has no authority to tax anything sold on their territory.

Depositions and court documents show that after the new law barred anyone from shipping cigarettes through the Postal Service, and major delivery companies like FedEx and UPS separately agreed to end deliveries, some reservation based distributors simply turned to new networks of logistics and shipping companies to reach their customers.

Buyers still weren’t required to pay taxes. Some sites never asked buyers to prove their age, or even provide a real name. A few retailers proudly advertised that they would help protect tax scofflaws.

«NO STATE TAXES, NO REPORTS to anyone EVER and NO Surprise Tax Bills,» boasted one site, «The USA Federal PACT Act is in effect, but we beat it legally.»

New York City took the unusual step last month of suing a Virginia based delivery company, Lasership Inc., that had helped the reservation shops deliver cigarettes into the city without charging consumers the required tax of $5.85 per pack. The suit seeks $80.6 million in penalties.

That suit followed an earlier one against a Buffalo company, Regional Integrated Logistics, that helped a consortium of Seneca businesses set up a new distribution network after the PACT act took effect in July of 2010.

«We want to make it clear to the entire shipping community that anyone who participates in these illegal delivery sales into New York City will be subject to liabilities,» said Aaron Bloom, one of the attorneys handling the case for New York City’s Law Department.

Paul Joyce, a lawyer for Regional Integrated Logistics, said the company «never knowingly violated any law» and had stopped all cigarette deliveries permanently in response to a court injunction last spring. A lawyer for Lasership declined to comment.

Those two lawsuits were the latest in a string that have left the once booming reservation cigarette businesses reeling, and questioning their future.

Just a few years ago, an estimated 170 cigarette distributors on New York’s reservations were collectively purchasing many millions of cartons of name brand cigarettes each year from state licensed wholesalers, then reselling them to buyers eager to avoid sky high taxes.

But that flow of branded cigarettes such as Newport and Marlboro largely stopped after an earlier round of litigation and a change in state policy forced licensed wholesalers to halt sales of untaxed cigarettes to tribal businesses.

Reservation businesses switched to selling «native» brands manufactured in Indian territory, which curtailed demand. And now even those sales are under attack.

«They are giving us no room, as a people, to move,» said Ross John, who sits on a Seneca Nation economic development council and also owns a rapidly shrinking business in untaxed cigarettes. «They just keep punching us around.»

Pennsylvania’s attorney general sued a Seneca cigarette dealership in Salamanca, N.Y., in June, alleging that it had concocted a scheme that allowed that state’s residents to evade taxes by ordering cartons through a «buyer’s club.»

Late last year, New York’s attorney general sued an upstate business, Native Wholesale Supply, claiming the company and an affiliated manufacturer of Seneca brand cigarettes in Canada were breaking the law by shipping vast amounts of untaxed cigarettes to warehouses on Indian territory in the U.S.

The suit claimed that in one 15 month period ending last February, Native Wholesale Supply illegally received $221 million worth of cigarettes from Grand River Enterprises Six Nations, located in Ohsweken, Ontario. Investigators estimated that at least 1.5 billion cigarettes were involved in the transactions.

A lawyer for Native Wholesale supply, which has also been sued by state officials in Idaho and Oklahoma for supplying banned cigarettes to local tribes, didn’t return phone and email messages.

In addition to those civil cases, federal prosecutors in Kansas City, Mo., brought charges in August against 18 people they said had conspired to deliver 620,000 cartons of untaxed cigarettes to cigarette dealers on reservations in western New York. Businessmen in Florida, Kansas, Missouri, Virginia, Nebraska, Washington and Montreal were charged in the case, which involved $17 million worth of cigarettes purchased from a warehouse run by undercover ATF agents.

Lawyers for many of those defendants declined to comment or didn’t return several messages. But an attorney for Keith Stoldt, who operated the Totem Pole Smoke Shop on the Tonawanda Seneca Indian Reservation in Basom, N.Y., and pleaded guilty this year to illegally acquiring $4.1 million in untaxed cigarettes, said the cases are complicated by centuries old disputes over taxation and sovereignty.

«These guys were here first. They have continuously owned and occupied their patch of heaven. They’ve never accepted citizenship,» said Brad Waterman, a former tax counsel to both the Saint Regis Mohawk Tribe and the Seneca Nation. «What the Iroquois people would tell you is, ‘We traded with each other a long time before any of you guys got here.'»

John, the Seneca entrepreneur, said that cigarettes had created a new class of entrepreneurs among a people who had been impoverished for generations, but that he wouldn’t count on tobacco being part of the tribe’s economic solution for much longer.

«They’ve made it very difficult for anyone to supply to you,» he said. «I’m not in a position where it’s even viable for me right now. They’ve turned it into a criminal activity.»

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