Opinion
2011-000714.
Decided June 8, 2011.
Carol E. Heckman, Esq., David T. Archer, Esq., Harter Secrest Emery, LLP, Buffalo, New York, Attorneys for Plaintiff.
Andrew D. Bing, Deputy Solicitor General, Darren Longo, Assistant Attorney General, Buffalo, New York, Attorneys for Defendants.
MEMORANDUM DECISION
This Memorandum Decision addresses the Seneca Nation of Indians' ("SNI") motion for summary judgment filed April 25, 2011 and defendants, State of New York, the New York State Department of Taxation and Finance, Thomas H. Mattox, Acting Commissioner of the New York State Department of Taxation and Finance, and Eric T. Schneiderman, New York State Attorney General's ("State") cross motion for summary judgment filed May 20, 2011.
Procedural Background
The SNI commenced this action for declaratory and injunctive relief against the State on February 10, 2011. The defendants filed their answer on February 28, 2011, and issue was joined.
A temporary restraining order of this court dated May 10, 2011 restrains and enjoins implementation and enforcement of NY Tax Law § 471(1)(2)(5) and 20 N.Y.C.R.R. § 74.6 which relate to the taxation of cigarettes on Indian territory.
The parties have stipulated that for completeness, the defendants' Answer shall be incorporated into the submitted papers for consideration by this court.
Dispute
In this action for declaratory and injunctive relief, SNI seeks to enjoin the State from enforcing permanent Rule 20 N.Y.C.R.R. § 74.6 (the "Rule") published in the State Register and effective on November 10, 2010, which implements amendments of Tax Law §§ 471 and 471-e (the "2010 Amendments"). SNI contends that the New York State Department of Taxation and Finance ("DTF") violated certain procedural requirements of the State Administrative Procedure Act ("SAPA") rendering the Rule invalid as a matter of law, and further in the absence of a validly adopted rule, the amended tax law cannot be enforced.
The State contends that DTF has substantially complied with the procedural requirements of SAPA in enacting the Rule and further contends that SNI's challenge to the permanent Rule is essentially identical to the challenge SNI brought before this court last year. Day Wholesale, Inc. v. State of New York, I2006-7668 (NY Sup. Ct. August 30, 2010). In Day Wholesale, SNI as an intervenor-plaintiff was unsuccessful in its challenge to the SAPA procedures followed by DTF in promulgating Emergency Rule 20 N.Y.C.R.R. § 74.6 published on July 7, 2010. As such, the State cross-moves for summary judgment.
The parties agree that the permanent Rule 74.6 published November 10, 2010 is essentially identical to the Emergency Rule published on July 7, 2010.
Statutory Background
On June 21, 2010, the New York Legislature amended Tax Law §§ 471 and 471-e regarding the distribution and sale of cigarettes to Indian nations and tribes and on qualified reservations. The statute provides a mechanism for collecting tax on all cigarettes sold on an Indian reservation to non-members and non-Indians while still providing for a sufficient quantity of tax-free cigarettes for tribal-member consumption.
The statute requires stamping agents to pre-pay the tax and affix stamps on all cigarette packs sold in New York, including those intended for re-sale to qualified Indians on the reservations. See, Tax Law § 471(2). However, to ensure the availability of a sufficient quantity of tax-free cigarettes for tribal consumption, the statute allocates to each tribe a quantity of tax-free cigarettes equivalent to the "probable demand" of the tribes' members for personal consumption. See, Tax Law §§ 471(5)(d) and 471-e(2)(b). It further prescribes how the probable demand is to be calculated. See, Tax Law §§ 471-e(2)(b)(i) and (ii). The statute sets forth two alternative methods for Nations and members to obtain tax exempt (albeit stamped) cigarettes limited to the tribes' probable demand for its own use and members' consumption: a coupon system and a prior approval system.
Tribes can elect to use the coupon system which requires the DTF to distribute tax-exempt coupons each quarter for the tribal government to control and allocate. See, NY Tax Law § 471-e(2)(a)-(b). If the tribes do not elect to use the coupon system, the statute requires agents and wholesalers to use the prior-approval system. Under the prior approval system, stamping agents and cigarette wholesalers secure DTF approval to sell tax-exempt cigarettes to Indian tribes or retailers within the probable demand amount allocated to a tribe. The cigarettes must be stamped, but the seller can secure a refund of the tax paid through the stamp. See, NY Tax Law § 471-e.
The statute instructs DTF to grant agents and wholesalers prior approval in "a manner and form" to be determined by the Department and as may be prescribed by regulation. See, Tax Law § 471(5)(b). The 2010 Amendments also instruct DTF to promulgate rules and regulations and to take any other actions necessary to implement the new law within 60 days after enactment. The statute required that the new system was to take effect September 1, 2010.
Since the enactment of the 2010 amendments, there have been legal challenges in both federal and state courts to both the Tax Law and the regulations promulgated by DTF in response to the Legislature's statutory directive. On August 30, 2010, this court was called upon to rule on the validity of Emergency Rule 74.6 promulgated by DTF in response to the legislative amendments. In Day Wholesale, Inc. v. State of New York, this court found that DTF properly invoked the Emergency Rule-making provisions of SAPA and substantially complied with the procedural requirements of SAPA. Day Wholesale, Inc. v. State of New York, 2006-7668 (N.Y.Sup. Ct. August 30, 2010).
See, e.g. Seneca Nation of Indians v Cuomo, ___ F.3d ___, 2011 W.L. 1745008 (2d Cir. May 9, 2011)
Contentions
In seeking a declaration that the permanent Rule violates the procedural mandates of SAPA, SNI contends that DTF (1)failed to prepare any Job Impact Statement; (2)failed to prepare a sufficient Regulatory Impact Statement; and (3)failed to prepare a sufficient Regulatory Flexibility Analysis. Therefore, SNI asserts that DTF failed to substantially comply with SAPA and seeks to be excused from that compliance by asserting that it is the legislation rather than the rule which has an impact. SNI argues that SAPA and the case law interpreting it do not provide for such an exception. The State counters that the legislation, not the Rule, is the focus of SNI's complaints and that it substantially complied with SAPA in the adoption of the Rule.
As it did with its challenges to the Emergency Rule and in their formal comments submitted in response to the proposed permanent Rule, SNI maintains that DTF violated SAPA in failing to prepare a Job Impact Statement which addressed the devastating employment, economic and regulatory effects of the Rule on Indian Nations, reservations and related businesses. SAPA § 201-a(2)(b) mandates "[w]hen it is apparent from the nature and purpose of the rule that it may have a substantial adverse impact on jobs or employment opportunities, the agency shall issue a job impact statement . . .".
Here, SNI argues that it is the agency's discretionary implementation of a particular manner and form of prior approval and the mechanics of the interactive Web application which will have an adverse impact on jobs and employment opportunities for Indian Nations, reservations and related businesses. They argue that the Rule creates adverse impacts, including a potential for both monopolization of the quota allotment and inflated prices. SNI concludes that by failing to include a Job Income Statement, the regulation was adopted in violation of SAPA and is, therefore, invalid, null and void and further that in the absence of a validly adopted regulation, the amendments to the Tax Law cannot be enforced. Medical Soc. of the State of NY v. Levin, 185 Misc 2d 536 (Sup. Ct. NY Cty., 2000) aff'd. 280 AD2d 309 (1st Dept. 2001); Long Island College Hosp. v. New York State Dept. of Health, 203 AD2d 292 (2d Dept. 1994) (improperly promulgated rule is ineffective)
In response, the State contends that DTF determined that the Rule would not have a substantial adverse impact on jobs and employment opportunities and as such, complied with SAPA § 201-a(a)(2) by including in the Notice of Proposed Rule Making the following: "A Job Impact Statement is not being submitted with the rule because it is evident from the subject matter of the rule that it could have no impact on jobs and employment opportunities". It is the State's position that it is the Tax Law itself that is responsible for any job impacts since the Rule's limited function is to provide specifics to "flesh out" the statute, and thus, no Job Impact Statement is required. See, Industrial Liaison Committee of Niagara Falls Chamber of Commerce v. Williams, 131 AD2d 205 (3d Dept. 1987) (agency analysis unnecessary when statute as opposed to Rule has the ultimate impact).
SNI's second SAPA challenge is the failure of DTF to prepare an adequate Regulatory Impact Statement. SAPA § 202-a(1) required DTF, to the extent consistent with the amended Tax Law, to consider approaches designed to avoid undue deleterious economic effects or overly burdensome impacts upon persons directly or indirectly affected by the Rule or upon the economy or administration of state or local governmental agencies.
SNI contends the strict quota system imposed by the Rule will adversely affect 200 Seneca businesses, their 3,000 employees and the Western New York regional economy. Medical Soc. of the State of NY v. Levin, 185 Misc 2d 536 (Sup. Ct. NY Cty., 2000) aff'd. 280 AD2d 309 (1st Dept. 2001) SNI claims that DTF failed to provide a Regulatory Impact Statement detailing the proposed costs for implementation of, and compliance with, the Rule to regulated persons, as well the agency, and state and local governments as required by SAPA § 202-a(3)(c)(i)-(ii). SNI further faults the Regulatory Impact Statement for failing to include alternative approaches. See, SAPA § 202-a(3)(g).
The State counters this challenge by stating that it prepared a lengthy Regulatory Impact Statement and further that the SNI's complaint about the strict quota system is not related to the Rule but is imposed by the amended Tax Law. DTF argues that Tax Law § 471(5)(b) and § 471(e)(2)(b) dictate the probable demand quota and how it is to be calculated. The State argues that the Tax Law gave DTF no opportunity to consider any significant alternative to that system.
DTF contends that what SNI seeks is consideration of alternatives which are inapposite to the 2010 Amendments. Any attempt by DTF to modify the strict quota system would be inconsistent with the legislative directive.
Finally, SNI challenges DTF's failure to prepare an adequate Regulatory Flexibility Analysis. In developing the Rule under SAPA § 202-b(1), DTF was required to consider utilizing approaches that will accomplish the objectives of the applicable statutes while minimizing adverse economic impact of the Rule on small businesses and local governments. SNI contends that DTF's Regulatory Flexibility Analysis lacks any details as to how this Rule will impact the Indian businesses and the 28 Nation licensed wholesalers and the 172 Nation licensed retailers on the Seneca territories, or for that matter, on the retailers on territories of other Indian nations across the State.
The State contends that SNI's complaints relate to the underlying statutory scheme, not the proposed Rule. The Rule at issue here involves a repetition of a specific statutory standard, which is factually distinguished from the cases cited by SNI. Industrial Liaison Comm. v. Williams, 131 AD2d 205, aff'd 72 NY2d 137, 145; Matter of Medicon Diag. Labs, Inc. v. Perales, 145 AD2d 167 (3d Dept. 1989). DTF was not required to evaluate the effect of the underlying legislation. Furthermore, SAPA only requires that a Regulatory Flexibility Analysis consider those persons and entities that are directly affected by the Rule, not on all small businesses that might experience some indirect economic effect of the Rule because of the application of the Rule to others. See, Pacific Salmon Unlimited v. New York State Department of Environmental Conservation, 208 AD2d 241 (3d Dept. 1995). The State contends that the Rule directly impacts only State-licensed agents and wholesalers, and imposes no burden on Indian tribes or retailers.
Decision
The legal battle over the State's attempts to collect tax on reservation sales to non-Indians dates back to 1988. The taxing policy of the State is required to strike the difficult balance between the State's objectives with regard to the sovereignty of Indian nations and the general welfare of the People of the State of New York. The State has encountered significant difficulty in implementing a taxing policy which meets these dual objectives. An excise tax on cigarettes purports to serve two purposes: (1) to promote the public health at large and (2) to collect tax revenue. It is estimated that the State loses approximately $110 million per year in uncollected sales tax revenue for on-reservation sales to non-Indians.
Over the years, there have been significant court battles waged, both in state and federal courts. The Second Circuit Court of Appeals recently lifted preliminary injunctions precluding the State from implementing and enforcing the amended Tax Law. The scope of this court's involvement is limited to the question of whether or not the Department of Taxation and Finance substantially complied with the State's Administrative Procedure Act. The standard of review is one of substantial compliance. SAPA § 202(8); Matter of Med. Soc. of the State of NY v. Serio, 100 NY2d 854 (2003). In our review, we are required to give deference to agency findings. Pacific Salmon Unlimited, supra. If the State has substantially complied with the State's Administrative Procedure Act, the Rule must stand.
The 2010 Amended Tax Law sets forth in significant detail the means and methodology by which the State shall collect taxes on Native American cigarette sales to non-members. The significant detail and directive in the legislation left DTF with little flexibility or discretion, and DTF adopted regulations that in our view, involved interstitial rule making.
In preparing its Job Impact Statement, Regulatory Impact Statement and Regulatory Flexibility Analysis, the Department of Taxation and Finance was only required to analyze the impact of the Rule and not the statute. We believe the Department of Taxation and Finance substantially complied with the requirements of the State Administrative Procedure Act, as it did at the time of the Emergency Rule Making. The negative impacts cited by the Seneca Nation of Indians are directly related to, and flow from, the 2010 Legislative Amendments to the Tax Law. The New York State Legislature declared and dictated this taxing scheme, not the Department.
Based on the foregoing, the Seneca Nation of Indians' motion for summary judgment is denied and the defendants' cross motion for summary judgment is granted. The Seneca Nation's request for injunctive relief is mooted by this Decision, and the Temporary Restraining Order of May 10, 2011 is hereby lifted.
This is the Decision of the Court. Submit Order and Judgment.