Sunday, February 18, 2001

Business

State, tribes propose deal on cigarettes
Taxes may be added to reservation sales

Richard Roesler
Staff writer

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OLYMPIA _ The Squaxin Island Tribe's tiny reservation sits at the far southern reaches of Puget Sound, where finger-like waterways peter out among mudflats, streams and moss-covered forest.

You can buy gas, oysters, Indian souvenirs and Black Hills gold at the Kamilche Trading Post, a shop nestled with the tribal casino alongside Highway 101.

You can also buy cigarettes. When a reporter visited the shop recently, many of the cigarettes bore no state tax stamp, meaning they could be legally purchased only by tribal members.

That's not uncommon on reservations. There are at least 58 tribal smoke shops in Washington, and Indians can legally buy untaxed cigarettes for their own use. Those packs are supposed to bear a special tribal stamp; virtually none do.

The problem, as state officials see it, comes when those untaxed cigarettes are sold to non-Indians. And, each year, statewide, millions are.

Because state tobacco tax agents have no enforcement authori
ty on Indian reservations, they can only try to stop the untaxed cigarettes en route to the reservations or to catch non-Indian buyers as they drive off the reservations. Washington spends more than a million dollars a year on tobacco tax enforcement.

People have been trying to dodge the cigarette tax since Washington first imposed a penny-a-pack tax back in 1935. But at 82.5 cents a pack today -- one of the highest state cigarette taxes in America -- the stakes are much higher. The state Department of Revenue estimates that Washington lost more than $63 million last year from non-Indians illegally buying untaxed cigarettes at Indian smokeshops.

Washington has been trying to collect taxes on cigarette sales on reservations for more than two decades "without significant success," a Revenue report said in 1995.

Now, after years of inconclusive court battles, property seizures and frustrating cat-and-mouse games between state agents and cigarette smugglers, state officials and a dozen of Washington's 28 tribes want to try an unusual solution.

They want Gov. Gary Locke to negotiate a deal between the state and the 12 tribes, all from Western Washington. No East Side tribe has yet signed off on the deal, although one has expressed interest.

The state would abandon its claim to taxing cigarettes sold on the 12 reservations. In exchange, the tribes would agree to charge an equally large tribal tax. The tribes would spend it on things like housing or health care.

The proposal is contained in two bills before the Legislature: Senate Bill 5372 and House Bill 1201. Supporters include state retail and food groups, whose members have long complained that they can't compete with cheap, untaxed cigarettes illegally purchased on reservations.

"It's kind of a win-win," said Bob Whitener, executive director of the Squaxin Island Tribe. Such a tax could help pay for a bus transportation hub, a day-care center, starting up an oyster company and buying land.

"At least some government will end up getting the money and providing services comparable to the state's," said Leslie Cushman, legislative counsel with the state Department of Revenue. "And both governments get rid of this tension between us."

Enforcing the law now falls on the shoulders of the state's Liquor Control Board, which inherited the job four years ago from the Revenue Department.

Revenue was anxious to give it up.

"We're auditors and accountants, not law enforcement officers," said Gary O'Neil, Revenue's assistant director of special programs.

The offices of the Liquor Control Board are crowded with bootlegging souvenirs. A large display of illegal booze bottles greets visitors, and cigarette boxes seized in raids dominate a corner of the office of M. Carter Mitchell, who manages tobacco tax enforcement. The agency has seized more than a million packs of untaxed cigarettes in the past four years.

Asked about illegal cigarettes, Mitchell pulls out half a dozen packs -- Sixty 1s from the Philippines, Smokin Joes from New York, One Premium Menthols from Indonesia. He's seen Marlboros from Russia, Switzerland, Latvia and China.

"The interesting thing is that they put the surgeon general's stamp on them, even though they're made outside the country," chuckled Al Anderson, senior liquor and tobacco enforcement agent.

Not every tribal smokeshop sells untaxed cigarettes to non-Indians. State revenue agents canvassed 61 smokeshops in 1994. Only about a third were selling unstamped cigarettes.

Also, many untaxed cigarettes have nothing to do with Washington's Indian tribes. The state cannot tax federal agencies, for example, so people buying at military base exchanges or commissaries don't pay state tax.

To discourage black marketing, the military sets its cigarette prices within 5 percent of the cheapest local competitor. Nonetheless, the state Revenue Department estimates that nearly 11 million packs of untaxed military cigarettes were illegally sold or given to nonmilitary smokers in Washington last year. That's 11 percent of the total suspected contraband cigarettes statewide.

Casual smuggling, with people bringing in cigarettes from other states with lower taxes, accounts for about 29 percent.

But by far the largest percentage -- 60 percent -- of the untaxed cigarettes bought illegally in Washington come from tribal smokeshops, according to Revenue estimates.

North Idaho smokeshops -- particularly those on the Coeur d'Alene and Nez Perce Indian reservations -- are a major source of millions of untaxed cigarettes brought into Washington each year, state officials say.

In the first four months of last year, Mitchell said, one smoke shop in Plummer, Idaho, took delivery of 607,419 cartons of cigarettes.

"There are 880 people in the whole town," he said. "It comes to 690 cartons per man, woman and child in that four-month period. The question that you've got is, `Who's buying the cigarettes?"'

Washingtonians are, judging by the agents' surveillance. State officials have estimated the flow at about 10 million illegal cigarettes a month from North Idaho into Washington.

"We've run into complaints about people in their 70s, loading up their car with five or six cases (60,000 to 72,000 cigarettes)," Anderson said. "It's a nice way to supplement your income."

Sometimes agents lie in wait for such buyers, nabbing them as they drive off reservations or over the state line. If caught, they face big fines and criminal charges. But it's not a very efficient way to catch tax-dodgers.

"In terms of staff time, it's horrendous," Mitchell said. "You may spend three or four hours and only get 10 or 20 cartons of cigarettes."

So most of the enforcement focuses on trying to stop and seize untaxed cigarettes before they make it to a reservation. State agents often spend months developing leads and tailing cigarette shipments down remote stretches of highway.

The most recent seizure happened Dec. 7. A few hours after dark, Liquor Control Board agents and Washington State Patrol troopers swooped down on a Chevrolet pickup as it neared Ellensburg.

Guns drawn, they arrested the driver and a passenger. In a trailer the truck was towing, the officers found 4,093 cartons of unstamped cigarettes -- Newports, Winstons, Marlboros, Camels -- worth $85,000 plus nearly $34,000 in never-paid taxes.

The cigarettes had been loaded up at Thunderbird Wholesalers, a cigarette warehouse on the Nez Perce Indian reservation in Idaho, according to search warrant paperwork the agents filed with a Thurston County judge. They had tracked the truck on similar runs past Colfax, Othello, Leavenworth and Wenatchee, finally ending up at Frank's Landing and the Thunder Chief, two tribal smokeshops near Tacoma and Olympia.

The December bust paled in comparison to one two years earlier, when agents and troopers stopped a semi-truck with nearly 300,000 packs of untaxed cigarettes. The driver, a Tulsa, Okla., trucker named Eddie Robertson, told police he'd made 17 such runs in the past eight months for the Yakama Indian Nation. His truck was seized, and the cigarettes auctioned off. Robertson is still fighting the seizure in the state Supreme Court.

But even such big busts are just the tip of the iceberg, state officials concede. Agents describe stopping one load only to watch helplessly as the next one breezes by.

The smugglers have also grown more sophisticated, using hollowed-out campers, false floors in pickup trucks, and horse trailers complete with horses to haul the cigarettes. As taxes have risen, so has the profitability of smuggling, and Mitchell said that the state is starting to see hijackings, fake tax stamps and other techniques that have been largely Midwestern or East Coast problems up to now.

The smoke shops are a sticky issue even in Indian country. Many tribal members object to selling an addictive, health-damaging product. Others point out that the businesses bring in badly needed jobs and money.

"It's difficult at best," said John McCoy, director of government affairs for the Tulalip Tribe, north of Seattle. "We even have tribal members that strongly oppose the casino."

The Tulalips have run a single smoke shop for more than 20 years. About 20 tribal members work there. They charge the state tax to all non-Indian buyers, largely to avoid the enforcement headache, McCoy said.

"It's a hassle we choose not to have to deal with," he said. "We charge all the appropriate taxes that the state charges, and we mail the check in."

The tribe could impose a tribal tax on top of that, he said, but it wouldn't make business sense. Their cigarettes would cost more than those at off-reservation stores.

Replacing the state tax with a tribal tax would give the tribe a stable tax base to pay for health care, water and sewer projects, roads, education and law enforcement, he said.

"This is all in our effort to become self-governing and self-sufficient," McCoy said. "We're a real government. We should be able to tax, just like any municipality, city or county."

"This is the first time the Legislature is saying, `All right, we are giving you the (taxing) authority and walking away,"' said Michael Moran, government relations director for the Muckleshoot Tribe, another of the 12 proponents. "It isn't so much about the money. It's about the principle."

Such an agreement would only work well for tribes that run their own smoke shops. Because the tribe keeps the tax, the shops don't have to make a big profit. In fact, the tribes expect a dip in sales, due to the higher price. They feel it would be offset by their keeping the 82.5 cents tax per pack, and no longer having to worry about state agents chasing their cigarette shipments or buyers.

But many tribes, like the Puyallups and the Yakamas, allow entrepreneurs to run private smoke shops on the reservation. Those shops depend on bulk sales -- albeit many of them to customers who aren't buying legally. Adding 82.5 cents to the price of every pack would certainly cut into their sales.

"Taxation in Indian country isn't easy," Whitener said. "You've got to start with the simple and move to the complex."

The tribes bring significantly more money to the state than vice versa, according to a recent study by students at Evergreen State College in Olympia.

The state's 28 tribes are responsible for about $1 billion in revenue, including casinos, natural resource businesses and federal aid, said Alan Parker, a faculty member at Evergreen. That translates into about $135million in taxes per year going into state coffers, he said. For its part, the state spends about $20 million helping with tribal programs.

"Obviously, the state is getting a great deal," said Parker.

None of the Spokane region's three tribes -- the Spokanes, the Colvilles or the Kalispels -- are among the 12 tribes definitely interested in signing a tax agreement with the state. A Colville spokesman couldn't be reached for comment, and the Spokanes declined comment through their attorney.

The Kalispels, who now sell packs of cigarettes only at their Airway Heights casino, might be interested, said David Bonga, their attorney. The closest thing to tax revenue the 331-person tribe has now, he said, is the money from access permits for hunters and anglers on tribal land.

"I think the Kalispels would really look at it seriously," he said. "It would be a step in the right direction."


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