The Second Circuit Court of Appeals held today that a provision of the Prevent All Cigarette Trafficking (“PACT”) Act is likely unconstitutional and upheld an injunction halting enforcement of the new law against Red Earth. The Second Circuit’s decision in Red Earth v. USA signals federal courts’ willingness to scrutinize the federal governments’ scorched-earth approach to tribal tobacco economies. Critically, it was not a tribal tax rule that halted enforcement, but rather the most basic tenet of Constitutional law: due process. Putting it even more simply, the PACT Act wasn’t fair. Red Earth d/b/a Seneca Smokeshop (“Red Earth”), a tribal-member owned tobacco retailer on Seneca’s Cattaraugus Indian Reservation in New York, prevailed against the United States at the trial court level earlier this year. The U.S. District Court for the Western District of New York held in July that the PACT Act’s provision requiring out-of-state tobacco sellers to pay state excise taxes regardless of their contact with that state violated due process. The court explained clearly, and not controversially, that due process requires an out-of-state seller to maintain minimum contacts with a state before the state can subject it to taxation. This isn’t even basic Indian tax law, but basic tax law – even basic Constitutional law. The district court found that the PACT Act’s mandate that delivery sellers pay state taxes without regard to their contact with that state effectively “legislate[d] the due process requirement out of the equation.” Red Earth LLC v. United States, 728 F. Supp. 2d 238, 252 (W.D.N.Y. 2010). Today, the Second Circuit agreed, noting that Congress does not have the power to authorize violations of the Due Process Clause of the U.S. Constitution. If the case goes forward, expect it to hinge on whether a single sale into a taxing forum is sufficient to satisfy the requirements of due process.
Regrettably, the Second Circuit rejected Red Earth’s claims that the PACT Act was motivated by discriminatory animus toward Native Americans and that its application results in a discriminatory effect. Red Earth’s claim was not a throwaway discrimination argument. As the district court observed, the PACT Act would have a grossly disproportionate effect on Tribal business, which comprises at least 80 percent of delivery sellers targeted by the PACT Act. In addition, Red Earth has presented evidence that when a letter from the Seneca Nation was introduced into the PACT Act congressional record, there was laughter in the gallery. The Second Circuit was nearly as dismissive, relying on the black letter of the law to find that “Congress’s intent in passing the PACT Act was to curtail what it believed to be improper assertions of Native American sovereignty, not to purposefully discriminate against Native Americans as a group.” It’s difficult to discern the distinction.
In a portion of the Second Circuit’s decision that may have no role in the case itself, the court confirmed a potentially significant channel for challenging federal involvement in state taxes. The trial court had rejected Red Earth’s argument that by attempting to levy state and local taxes, Congress is acting outside its enumerated powers in violation of the Tenth Amendment. But while the case was pending, the U.S. Supreme Court made clear that an individual business can have standing to pursue a Tenth Amendment claim. Again, although Tenth Amendment standing may play no role in the outcome of Red Earth, it remains absolutely critical as states and the federal government join forces to fight tribal economic development. As cash-starved states know, they lack plenary taxing authority in Indian Country. Their solution, all too often, is to come to Indian Country in sheep’s (federal) clothing, and take the taxes they believe they are owed through federal might. Now, at least the Second Circuit will entertain challenges to this practice. When tested Congress’s attempts to apply state and local taxes in Indian Country, especially without Tribal consultation and approval, should be rejected.
In all, Red Earth v. USA presents a significant if preliminary win for tribal sovereignty and the ability of tribal governments to sustain economic development absent state and federal interference.
Anthony Broadman is a partner at Galanda Broadman PLLC. He can be reached at 206.321.2672, firstname.lastname@example.org, or via www.galandabroadman.com.