Legal Sidebari

Second Circuit Rules on the Legal Framework
for Cigarette Sales Between Indian
Reservations
January 21, 2020
A November 8, 2019 federal appellate decision likely will have a significant financial effect on how
Indian tribal cigarette companies sell cigarettes manufactured on their home reservation to retailers on
out-of-state Indian reservations. Prior to this decision, it was unclear if such companies had to comply
with the registration and filing requirements of the Prevent All Cigarette Trafficking Act (PACT Act) or
pay applicable state cigarette taxes for “reservation-to-reservation” cigarette sales. According to the U.S.
Department of Justice, “such reservation-to-reservation sales” are “commonplace, . . . represent[ing] a
substantial proportion of interstate cigarette sales throughout the United States.”
In the case, New York v. Mountain Tobacco Co., the U.S. Court of Appeals for the Second Circuit held that
King Mountain Tobacco Company’s (King Mountain) cigarette shipments from the Yakima Reservation
in Washington State to Indian reservations in New York State are “interstate commerce” and must comply
with the PACT Act’s registration and reporting requirements. In addition, the court ruled that King
Mountain must also comply with certain New York laws that, among other things, tax cigarette sales to
persons who were not tribal members.
This Sidebar first outlines two federal laws that combat cigarette smuggling—the PACT Act and the
Contraband Cigarette Trafficking Act (CCTA)—and the New York State cigarette tax regime governing
cigarette sales on Indian reservations at issue in the case. Then, the Sidebar describes King Mountain’s
operations, analyzes the issues in the case, and presents some considerations for Congress.
Legal Framework of State Taxing Authority on Cigarettes Sold on Indian
Reservations
Because the federal Constitution gives Congress “plenary” authority over Indian affairs, states have
limited authority over Indians in “Indian country,” a term that includes Indian reservations, absent
congressional authorization. Several Supreme Court decisions have interpreted the limits of state taxing
authority over tribal Indians and their activities and property in Indian country. Although the Supreme
Court has noted that “Indian tribes and individuals generally are exempt from state taxation within their
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own territory,” the Court has held that states have concurrent jurisdiction to tax on-reservation sales of
cigarettes to persons who are not tribal members in a series of cases, including Moe v. Confederated
Salish & Kootenai Tribes, Wash. v. Confederated Tribes of the Colville Indian Reservation, and Okla.
Tax’n Comm’n v. Citizen Band of Potawatomi Indian Tribe. Moreover, in 1994, in Dep’t of Taxation &
Fin. N.Y. v. Milhelm Attea & Bros. Inc., the Supreme Court rejected a facial challenge to New York’s
system of collecting cigarette taxes from wholesalers marketing cigarettes to tribal retailers, holding that
the taxes impose “minimum burdens reasonably tailored to the collection of valid taxes from non-
Indians.”
The PACT Act. The PACT Act imposes registration and reporting requirements on persons selling
cigarettes in “interstate commerce.” It requires “[a]ny person who sells, transfers, or ships for profit
cigarettes . . . in interstate commerce . . . into a State . . . taxing the sale . . . of cigarettes” to comply with
various registration and reporting requirements and to comply with “all . . . laws generally applicable to
sales of cigarettes . . . within the specific State.” The PACT Act defines “interstate commerce” in three
ways, none of which specifically refers to commerce between reservations in different states. The three
definitions are: “commerce between a State and any place outside the State”; “commerce between a State
and Indian country in the State”; and, “commerce between points in the same State but through any place
outside the State or through any Indian country.” The statute provides enforcement authority for state
attorneys general to seek civil penalties, damages, and injunctive relief in federal court.
The CCTA. The CCTA criminalizes knowingly shipping 10,000 or more cigarettes that “bear no evidence
of the payment of applicable State . . . taxes in the State or locality where the cigarettes are found, if the
State . . . requires a stamp . . . to evidence payment of cigarette taxes.” The statute provides authority for
state attorneys general to bring enforcement actions in federal court to prevent “any person” from
violating the statute, subject to an exemption for “an Indian tribe or an Indian in Indian country.
New York Cigarette Tax Law. New York State taxes on-reservation cigarette sales to persons who are not
tribal members; requires that tax stamps be affixed to cigarette packages; makes tax stamps for sales to
tribal members available for free; specifies various methods for paying such taxes, including the use of
tax agreements; provides an Indian tax exemption coupon system; and allows pre-payment of taxes by an
agent who affixes the required tax stamp. Under an administrative regulation, cigarettes sold by agents
and wholesale dealers to Indian nations or tribes or by reservation cigarette sellers located on Indian
reservations must bear a tax stamp.
New York v. Mountain Tobacco Co.: Background and Decision
King Mountain is a company organized under the tribal law of the Yakima Nation and owned by a Yakima
tribal member. It grows tobacco on the Yakima Indian Reservation, combines it with tobacco from North
Carolina, manufactures cigarettes, and ships them from the Yakima reservation to Indian reservations in
New York State for sale to tribal members and non-members free of state taxes and tax stamps. In another
case, the U.S. Court of Appeals for the Ninth Circuit held King Mountain liable for $58 million plus
interest for delinquent federal cigarette manufacturing excise taxes.
In New York v. Mountain Tobacco Co., King Mountain appealed a decision from the U.S. District Court
for the Eastern District of New York, which held that King Mountain violated state laws on cigarette
sales. The district court also held that King Mountain’s cigarette shipments did not constitute “interstate
commerce” within a plain reading of the PACT Act’s distinct definitions of “State,” “Indian country,” and
“interstate commerce.” On appeal to the Second Circuit, King Mountain argued, among other things, that
New York State’s regulation of commerce between Indian nations violated federal Indian protections. The
State argued on appeal that King Mountain’s cigarette deliveries constitute “interstate commerce” under
the PACT Act, and that the CCTA’s exemption for “Indians in Indian country” did not apply to King
Mountain as an Indian-owned, closely held company organized under tribal law.

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In a unanimous decision, the Second Circuit reversed the district court on the PACT Act interpretation,
holding that King Mountain’s reservation-to-reservation cigarette sales were in “interstate commerce.”
The court based this conclusion on the “plain meaning and statutory context,” noting that the PACT Act
defines “State” as “each of the several States of the United States . . . ,” a definition that “as a general rule
includes Indian reservations within the States.” This interpretation, moreover, according to the court,
avoids the absurdity by which “a transaction touching one State and one Indian reservation would be
reportable ‘interstate commerce’ [because of the explicit statutory definition of “interstate commerce” as
“commerce between a State and Indian country in the State”], whereas a delivery traversing more than ten
States and two Indian reservations . . . would not be.”
On the CCTA issue, the court, agreeing with the district court, ruled that King Mountain qualified for the
“Indians in Indian country” exemption as “an entity wholly owned by a member of the Yakima Nation,
located on the Yakima reservation, and organized under the laws of that nation.” The court noted that
“[t]he CCTA does not define ‘Indian’; but neither does it define ‘person,’ which under the Dictionary Act
includes ‘corporations, companies, associations . . . as well as individuals.’”
Considerations for Congress.
The potential profit from selling cigarettes that are free from sizable state taxes—New York
State’s tax is $4.35 per 20 cigarettes—may lead to litigation by King Mountain or other
reservation-based cigarette manufacturers in other states. To clarify how the PACT Act applies,
Congress may amend the statute to specify whether cigarette sales and shipments between Indian
nations in different states are “interstate commerce” under the PACT Act. Congress could also
clarify whether the CCTA exemption for “an Indian in Indian country” applies to an “Indian
entity or corporation” or to Indian tribes and individual Indians. Congress could also investigate
whether encouraging tribal-state cooperative cigarette-tax revenue sharing agreements would
curb tax avoidance and cigarette smuggling.

Author Information

M. Maureen Murphy

Legislative Attorney





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