Judge halts collection of Indian cigarette tax

ALBANY - The Oneida Indian Nation will continue to sell cigarettes tax-free under a temporary order issued by a federal judge , a setback for Gov. David A. Paterson's administration, which wants to tax cigarette sales on tribal lands.

The decision by the court in Utica helps the Oneidas' argument that forcing a tax collection would result in irreparable harm to them. The cigarette trade, in small stores and online, is worth millions of dollars a year to tribes in New York.

The state argues that under federal law, Indians don't have to pay taxes on cigarettes they buy to smoke themselves, but must pay taxes on cigarettes they sell to non-Indians.

Tribes have long argued they are exempt from taxes as a matter of sovereignty. In its latest effort, the state sought to avoid the sovereignty issue by requiring cigarette wholesalers to prepay the sales taxes before supplying American Indian stores. Wholesalers would pass along the charge to tribal retailers, who in turn would have to raise their prices and lose their competitive edge over off-reservation convenience stores.

"The Oneida Nation is pleased that the federal district court has halted an attempt by New York State to circumvent the nation's sovereignty," said the tribe's spokesman, Mark Emery.

The federal decision continued to delay a definitive resolution. State tax officials had planned to tax reservation sales to non-Indian customers beginning Sept. 1.

The court order sends the state and Oneida Nation into mediation, with another court date set for Dec. 17. Another court decision involving other tribes could come Friday, a state official familiar with the case said.