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Native Sun News: Tribes preparing for PACT Act consultation

The following story was written and reported by Jesse Abernathy. All content © Native Sun News.

WASHINGTON, DC -- In a continuing crusade against Native American tribal sovereignty, states are of late purposely distorting the intent of a federal law originally meant to preclude the illegal trafficking of cigarettes.

The Prevent All Cigarette Trafficking Act, which was signed into law by President Barack Obama in March of 2010 and put into effect in June of that same year, is targeted at curbing the illicit sale of cigarettes and smokeless tobacco products via the Internet or other mail-order sites.

Additionally, by “reducing the availability of tax-evading, low-cost cigarettes over the Internet – and stopping Internet sales of cigarettes to kids – the PACT Act will also prevent and reduce smoking and its many harms and costs,” according to information contained on the Campaign for Tobacco-Free Kids website.

The PACT Act is regulated and enforced by the Bureau of Alcohol, Tobacco, Firearms and Explosives (ATF), a division of the U.S. Department of Justice. According to many Native nations, the act -- primarily due to the ATF’s interpretation, or misinterpretation -- has alarmingly given states further cause to impinge upon tribal sovereignty despite the supposed safeguards originally attached to the legislation by Congress.

“Tribes throughout the United States sent letters (to Congress) stating this was the first step in giving the states federal authority over tribes and is an encroachment on tribal sovereignty,” said attorney O.J. Semans of the Rosebud Sioux Tribe. “We were told (by Congress) that was not the case, that tribal sovereignty would not be diminished,” he said.

“What we know now is that this was not true. It is being shown firsthand to us now but it gets even worse: The PACT Act affects all tribes, not just tribes in tobacco commerce," Semans said. “The PACT Act does allow states to enforce their (tobacco) tax laws within Indian country."

Responding to the issues raised by tribes, the DOJ has invited tribal leaders from across the nation to participate in a consultation session regarding the PACT Act. The session is scheduled to be held in Washington on December 14 at 1:30 p.m. EST.

At the behest of Semans, and in advance of the consultation session, a seven-page blanket letter of concern for tribes was drafted by several prominent attorneys from Indian country. The form letter is addressed to James Ficaretta, program manager for the ATF and reads, in part:
“As tribal leaders, we are gravely concerned with the manner in which the (ATF) has interpreted the PACT Act ... ATF’s interpretation of the PACT Act violates the sovereignty of all tribal governments – not only those involved in tobacco commerce. Tribal sovereignty, at its core, includes the right of tribal governments to be ruled by their own laws and govern their own economies. But ATF, by inviting states and state law into Indian country, has made clear its intent to enforce the Act in a way that will gut tribes’ inherent right to self-govern and chill Indian economic growth.”

The letter goes on to state that “DOJ is establishing a dangerous precedent; one under which the federal government will pass federal laws allowing states to extract previously unavailable value from tribal economies and causing DOJ to become the states’ enforcement arm in Indian country.”

In early 2010, U.S. Sen. Herb Kohl (D-Wis.) introduced the version of the act that was ultimately passed into law. The senior senator’s legislation was initially aimed at terrorists and organized crime groups.

In a prepared statement issued at the time of the PACT Act’s passage in March of 2010, Kohl said, “The cost of tobacco smuggling to Americans is not merely financial. Internet tobacco sales have been used by terrorist and organized crime groups to raise millions of dollars to support their illicit activities. This new law will help us ensure that we no longer continue to enable terrorist organizations to exploit the weaknesses in our tobacco laws to their advantage, allow states to lose tax revenue and provide children with easy access to tobacco products sold over the Internet.”

Lynn Becker, a spokeswoman for Sen. Kohl, said the legislation was never intended to be a direct attack on Native American sovereignty rights.

“The PACT Act was carefully drafted, with the involvement of the National Congress of American Indians, to ensure that it would be strictly neutral with regard to tribal sovereignty and tribal immunity rights,” said Becker.

“In other words, the PACT Act was drafted to ensure that it would neither expand nor contract the current scope of tribal sovereignty and immunity and to make sure that the passage of the PACT Act into law could not be used in support of any legal arguments to expand, contract or otherwise change the scope of tribal sovereignty and immunity,” she said.

U.S. Sen. Tim Johnson (D-SD) echoed Kohl’s sentiment with regard to the PACT Act.

“The legislation strengthens enforcement against the illegal interstate trafficking in cigarettes, which has denied some states tobacco revenue and helped finance terrorist activities,” Johnson stated in an email to Native Sun News. “It was carefully crafted to ensure that it fully respects tribal sovereignty and immunity rights and does nothing to reduce or expand the scope of these rights,” he said.

In the same email, Jeff Gohringer, deputy communications director for Sen. Johnson, highlighted Section 4(c)(B) of the act, which states, “Nothing in this Act shall be deemed to abrogate or constitute a waiver of any sovereign immunity of a State or local government or Indian tribe against any unconsented lawsuit under this Act, or otherwise to restrict, expand, or modify any sovereign immunity of a State or local government or Indian tribe.”

NCAI’s general counsel, John Dossett, calls the PACT Act a “fairly complex issue” which the organization does not see as affecting issues of tribal sovereignty.

“It’s been interpreted by states that way, and that’s what the argument is about right now,” said Dossett. “…(I)t amended the Jenkins Act, an old statute regarding shipment of – small shipments of – cigarettes over state lines, and it’s different from wholesale, for large shipments of cigarettes, which are regulated under the Contraband Cigarette Trafficking Act,” he said.

Enacted by Congress in 1949, the Jenkins Act established reporting requirements for the interstate sale of cigarettes. It requires that any person who sells and ships cigarettes across a state line to a buyer – other than a licensed distributor – to report the sale to the buyer’s state tobacco tax administrator.

Currently, shipping cigarettes directly to consumers in South Dakota is prohibited under state law. In accordance with the intrinsic nature of tribal sovereignty, however, state law does not necessarily apply to the reservations located within South Dakota.

When contacted for an interview regarding the PACT Act and its implications for tribes in South Dakota, Mike Houdyshell, director of the property and special taxes division – which encompasses cigarette taxation – for the South Dakota Department of Revenue said, “To be up front…in regards to any of the tribal sovereignty issues, I’m not really in a position to comment on that.”

According to Dossett, the PACT Act has almost completely eliminated the Internet cigarette trade – a move which tribes also oppose.

“Now state governments are interpreting licensing provisions of the act to mean that some tribes who are engaging in manufacturing and wholesaling of cigarettes have to get licensed under state law, and then trying to condition those licenses on compliance with state tax laws and the tribes disagree with that. One of the exceptions to state taxation is that it doesn’t apply to products that are manufactured on a reservation. What NCAI is arguing is that the act doesn’t apply to manufacturing (of cigarettes) at all,” he said. “State governments are trying to make the argument that it does apply, and we disagree with that.”

“It’s a classic case – states and tribes are always disagreeing about matters of sovereignty,” Dossett said. “That’s kind of the heart of the issue right now.”

The PACT Act certainly does impinge upon the rights of tribal sovereignty, said attorney Lance Morgan, CEO and president of Ho-Chunk Inc., an economic development corporation owned and operated by the Winnebago Tribe of Nebraska.

“What happened is tribes have developed their own (cigarette) manufacture and distribution network to bypass state control,” Morgan said.

“The problem with the PACT Act is it was supposed to stop Internet and mail-order cigarettes but the Department of Justice has interpreted some of the provisions to require normal tribe (cigarette) commerce to be reported to the state, and the state really can’t be trusted with that information (because) they’re going to use that (information) to try to enforce something called the Master Settlement Agreement between the states and the tribes,” he said.

The Tobacco Master Settlement Agreement (MSA) was entered in November 1998, originally between the four largest U.S. tobacco companies – Altria Group, owner of Philip Morris USA, Reynolds American, Loews subsidiary Lorillard Tobacco Co. and Vector Group’s Liggett unit – and the attorneys general of 46 states, including South Dakota. The states settled Medicaid lawsuits against the tobacco industry for recovery of tobacco-related health care costs.

Tobacco companies agreed to pay a minimum of $206 billion to states over the first 25 years of the agreement. In exchange for the payments, the companies avoid legal liability for future health-related lawsuits. According to Morgan, when the tobacco industry was sued, states essentially agreed to a surreptitious tax in the wholesale price of cigarettes that consumers absorb. States retain this hidden revenue rather than split it with tribes, even though many states and tribes have legally binding state-tribal cigarette tax compacts in place.

“There’s certain unfairness to this,” Morgan said. “The states won’t share that money because they say it’s not a tax, but it’s been integrated into the wholesale price (of cigarettes).”

What the states are going to do with this hidden information is use it to go after the tobacco manufacturers to sue them – to put pressure on them so that they won’t sell cigarettes to the tribes and if they don’t sell to the tribes, then the states can re-exert control over cigarette tax monies and basically get their Master Settlement payments, which amounts to about five dollars a carton of cigarettes that they don’t have to share with the tribes, said Morgan. It’s sort of a money grab and a bit of a scam, he said.

A telltale modicum of purposeful, vacillating blackmail exists between the two entities – states and tobacco companies – in Morgan’s estimation.

“There’s some collusion between the states and the tobacco companies and this information reporting that’s required by the PACT Act basically just gives the ammunition to the states to try to isolate the tribes by suing the (tobacco) manufacturers," he said. "Right now the states don’t know what’s being sold from one tribe to another – but they desperately want to know.”

“The states can’t do anything to a tribe directly but the way they control tribes is by suing or threatening those who sell to tribes, so they need this information (about intertribal commerce) in order to go after the manufacturers,” Morgan said. “The PACT Act is going to give them the ammunition to sue the manufacturers to isolate tribes,” he said.

Among some tribes and their legal representatives, the PACT Act is now jocularly referred to as the “Master Settlement Agreement Enforcement Act,” which really is a very serious issue for tribes and tribal sovereignty, he indicated.

In support of Dossett’s claim, Morgan said that the act has effectively put an end to online cigarette sales. However, the act continues to spark controversy because states are trying to use intertribal commerce information to appease the tobacco companies, he said.

“If the market share of a tobacco company drops one percent, they can drop their payments under the (MSA) by three percent, so there’s a 300 percent penalty built into these agreements and a lot of these states have issue bonds,” said Morgan. “I think there’s close to $20 billion in bonds out there, and the payments on these bonds are paid for by the (MSA), so there’s a lot of pressure on states to come down on tribes in order to make these bond payments and that’s why they can’t share the money either,” he said.

Issue bonds are loans investors such as privately owned, for-profit corporations and individuals from the private sector make to cash-strapped states to pay for public projects and other government activities. These bonds are generally tax-free.

“The states have made this deal with the tobacco companies, and then (the states) sold off the cash flow stream to solve their budget crises and now the hole in the system is tribal (cigarette) manufacturers and retailers,” Morgan said. “Philip Morris, the tobacco company, is withholding money from the states right now until they go after tribes,” he said.

“There’s a huge arbitration going on in Chicago, and there has been for over a year. (Cigarette companies are) withholding hundreds of millions of dollars until the states promise to collect (cigarette taxes) from the Indian tribes. The states are attempting to get the intertribal cigarette commerce information from the PACT Act reporting in order to enforce the MSA to appease (tribal) competitors – the big, big tobacco companies.”

“It’s a very sinister sort of thing,” said Morgan.

Tribes in South Dakota are getting a large portion of the cigarette tax back, but they’re not getting a penny of the MSA money, and they also gave up the right to sell the Indian cigarettes and there’s no economic incentive to come to the reservation to buy cigarettes anymore, he said.

“All (state-tribal) tax compacts are essentially out-of-date for tobacco products because they don’t take into account this extra stream of revenue that the state is determined to protect at all costs,” Morgan said. “When tribes signed these agreements this Master Settlement didn’t exist and they agreed to put the (state cigarette) tax stamp on the cigarettes,” he said.

“Now the states have passed laws that say it’s illegal to put the tax stamp on any cigarette that’s not on their approved list, and the only way to get on the list is to pay the Master Settlement money. In South Dakota, it is technically illegal to sell an Indian brand (of cigarettes) because they don’t pay in to that extra pool of money to the state – the same money that the state won’t share.”

“The tribes are getting a decent amount of money but they’re also leaving a large amount of money on the table, and they’ve basically given up a huge amount of sovereignty without even knowing it,” said Morgan.

Philip Morris USA is pressuring states to be more aggressive in controlling the cigarette industry in Indian country, according to Morgan. “The states now basically work for the tobacco giant, (Philip Morris),” he said.

Brandon Phelps, a representative of Philip Morris USA, said that the tobacco company does not provide any state with duplicitous surtax monies. “Philip Morris does not engage in illegal activities,” he said.

“When the Master Settlement was started (in 1998) there was no tribal (cigarette) manufacturing company so it wasn’t anticipated to be an issue – no one expected tribes to be able to start manufacturing cigarettes and using their sovereign immunity to protect themselves from states,” he said. “But since it’s happened, tobacco companies are blaming (tribes), they don’t blame the fact that the states raised (cigarette) taxes a bunch of times; everything’s the Indian’s fault.”

Many Native American tribes have created economic value with the advent of tobacco commerce and, according to Supreme Court precedent with regard to tribal sovereignty, no taxes apply, indicated Morgan.

In a stunning move, Chief Judge Royce Lamberth of the U.S. District Court for the District of Columbia granted a preliminary injunction that bars federal authorities from enforcing taxation provisions of the PACT Act on a Seneca Nation of Indians smoke shop, according to Indianz.Com. The Seneca Nation of Indians is based in New York state.

In the Dec. 5 ruling, Lamberth said the provision which requires tobacco retailers to be in compliance with tax laws in state and local jurisdictions likely violates the Due Process Clause of the U.S. Constitution.

“The PACT Act appears to impose a new, independent duty on the delivery seller by requiring that they ensure that the applicable state and local taxes are paid” even if the retailer does not have a “substantial connection” with each of those state and local jurisdictions, he said in the 28-page decision.

However, Lamberth upheld another PACT Act provision that prevents the U.S. Postal Service from delivering tobacco products. Tribal tobacco retailers say the act has effectively ended their businesses. Robert Gordon, who owns the Seneca Nation smoke shop, shipped 95 percent of his tobacco through the U.S. mail, according to Lamberth’s decision. Gordon now uses a shipping company that can only deliver products to certain zip codes in six states.

“It’s a complex issue,” Morgan said.

“This matter strikes at the heart of every tribe and we need help,” said Semans.

(Contact Jesse Abernathy at

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