Philip Morris Says …

Cigarette Giant Reverses Stance on Selling to Reservations — For Now

By Jerry Cimisi

On July 11, Philip Morris USA said it would allow none of its cigarettes to be sold untaxed at Indian reservations. But then, on August 24, the corporate giant (which also has under its umbrella Kraft Foods) announced that “given the evolving legal environment” it was “suspending” the July 11 notice, pending further developments.

Although the Philip Morris announcement did not elaborate on the matter of the “legal environment,” it was clearly a reference to a court action in the progress of a lawsuit brought in Buffalo by a cigarette distributor against New York State. More on that in a moment.

The legal situation concerning the sale of cigarettes on Indian reservations has been coming to a head this year. Or, more precisely, every time it seems that something is about to be finalized, a legal or political maneuver leaves the issue hanging in the air.

There are two Indian Reservations on Long Island, and they are both on the East End: there are the Unkechaugs on the Poosepatuck Reservation in Mastic by Moriches Bay, and the Shinnecocks on their reservation in venerable Southampton by, of course, Shinnecock Bay.

Cigarette sales on Indian reservations are big business. A New York State Health Department survey claims that more than a third of the state’s smokers regularly indulge their habit via the tax-free sales at reservations. Moreover, 22 percent of New York smokers say the reservations are their preferred source of smokes.

But the status of that source remaining unchanged has been threatened in the past year, even if for now “it’s business as usual,” as Unkechaug Chief Harry Wallace recently said at the Poosepatuck Trading Supply and Smoke Shop.

There is a lot of confusion about this issue, about bills that have been passed by the state, bills that Governor Pataki did or did not veto, agreements by Philip Morris with the New York State Attorney General and so on.

“The problem is,” said Tom Bergin of the New York State Department of Tax and Finance, “there are three things that happened this year that people are getting mixed up.”

First there was the bill to limit sales of untaxed cigarettes sold on Indian reservations to only residents of the reservations. People coming from outside the reservation would have to pay the usual tax. Begin said, “That bill was presented to the governor last year, in 05, but he vetoed it. The bill came back to him this year; he signed it. The law was to go into effect on March 1. But the tax commissioner [Andrew S. Eristoff] wanted some amendments to it, asked the legislature to consider reworking it — and basically the commissioner did not want to enforce the law as it was, so even though the law has been in effect since March 1, no one is enforcing it.”

On the other hand, there is the comment from Marc Violette, a spokesman for the New York State Attorney General’s office, who said, “From the point of view of the attorney general’s office, it is clear and unambiguous that the law has been in effect since March 1.”

“Then,” Begin went on, “there is the other bill that Pataki vetoed this year that said cigarette manufacturers can’t sell to wholesalers or distributors who in turn sell untaxed product to Indian reservations.

“Third, there’s the lawsuit in Buffalo, brought by one of the distributors. The judge apparently felt there was a lot of confusion about this matter — and there is — and issued a temporary restraining order effective until a hearing on September 25.”

It was the temporary restraining order that prompted Philip Morris to rescind its July 11 announcement that its distributors must have New York State tax stamps affixed to all its brands sold to Indian reservations.

In fact, early in 2006, Philip Morris USA voluntarily entered into an agreement mapped out by attorney generals from 37 states, New York being among them, to curb or terminate sales to sources that would sell to customers illegally — such as violating tax laws at Indian reservations or via the Internet.

Internet sales are seen not only as a common way for buyers to avoid paying tax, but for those under the age limit (currently 19 years old in New York State) to procure cigarettes.

Philip Morris USA and Philip Morris International, along with Kraft Foods, does business under the umbrella of the Altria Group.

As of this writing, Altria is trading for just over $84 on the New York Stock Exchange, with the price of its stock this year varying from a low of $68.36 to a high of $85.

It might be safe to say that any agreement Philip Morris makes with the states, voluntary or legal, is ultimately made with financial interests in mind. That goes for the states, too.

In 2003, the abovementioned 37 state attorneys general filed a “friend-of-the-court” brief urging an Illinois court to reduce a $12 billion bond needed for Philip Morris USA to appeal a decision that awarded $10.1 billion to these states on the grounds that the cigarette manufacturer had misled the public on the health effects of light cigarettes. The states wanted their money, of course, but the court said that in order for Philip Morris to appeal the verdict it had to put up a $12 billion bond — that’s the original judgment plus interest.

Philip Morris said this would put the company in danger of bankruptcy, while the states argued this would prevent Philip Morris from making its monthly payment of $2.6 billion to the states.

Speaking of billions: in 1998, Philip Morris and other tobacco companies reached an agreement with 45 states, five U.S. territories and the District of Columbia to pay an immediate $10 billion and then, over the ensuing 25 years, pay out $200 billion. After that quarter of a century had passed, the tobacco companies would continue to make as yet to be determined payments to the states in perpetuity.

As for the immediate issue of taxed or untaxed cigarettes being sold on Indian reservations: Lance Gumbs, proprietor of the Shinnecock Indian Outpost, could not be reached for comment, though in the past he has said that the current push to control how Native Americans sell cigarettes threatened not only the economic survival of the tribes but the traditional sovereignty of Indian nations.

When asked how the Unkechaugs would react should the already passed as well as pending legislation go into effect, Chief Harry Wallace simply said, “We’ll continue to fight it, as we always have.”