JEFFREY KLEIN

80th ASSEMBLY DISTRICT

March 11, 1998

TESTIMONY BEFORE THE SENATE INDIAN AFFAIRS

COMMITTEE

ISSUES RELATING TO

NATIVE AMERICAN SOVEREIGN IMMUNITY

Good Morning, Mr. Chairman. My name is Assemblyman Jeff Klein. I represent the 80"' Assembly District in the New York State Assembly. My district includes parts of Bronx County in New York city.

I am appearing here today as a representative of concerned New York State officials who believe that the issue of Native American state excise tax evasion has reached crisis proportions in our state. I would like to begin my comments by stating that I am not advocating that states tax Native Americans. I am here to request that state governments be given absolute authorization from Congress to allow for the collection of state excise taxes imposed on non-Native Americans when these nonNative Americans purchase commodities such as cigarettes and motor fuel from Native American tribes or tribal corporations.

Two years ago, I uncovered the proliferation of illegal or bootleg cigarettes being sold throughout New York State. My investigation revealed that smuggling groups are illegally importing cigarettes from low tax states, such as North Carolina and Virginia, and selling the contraband to hundreds of illicit retailers across our state at a far lower price than legal wholesalers and retailers can provide. The New York State Department of Taxation and Finance estimated that the State loses approximately $70 million and the City $12 million in cigarette tax revenue due to this illegal trade. The State and various localities are

cigarettes. The law also requires that the Department of Taxation and Finance notify the Director of the Lottery Commission of any violations of the cigarette tax law, and states that a retailer's license to sell alcohol may be revoked as well for violating the provisions of the law. In fact, in the two years since the law took effect, the State has collected an additional $30 million in excise tax. However, the growing problem of Native American tax evasion undermines all headway this law made in the fight to stop these "buttleggers" by making it tempting to buy untaxed cigarettes sold within our own state borders.

The state will continue to be hit hard by opportunists who import cigarettes from reservations and resell them to illicit retailers throughout the State. There is no need for these opportunists to make the long trip to North Carolina or Virginia, they will only have to make a short trip to their local reservations. In fact, in some cases the drive may not even be necessary. Many Native American reservations throughout New York State advertise that they will ship tax free cigarettes via United Parcel Service anywhere in the state, and they proudly advertise that they do not report to any tax authorities. And yes, they even accept credit cards.

A 1994 United States Supreme Court ruling allows states to impose sales tax on Native American sales to non-Native American customers, this decision allows the State of New York to enforce the collection of taxes against wholesalers or distributors of gasoline, diesel fuel, and cigarettes.

It should be noted that the State of New York spent six years and an untold amount of time and money on this lawsuit and as the New York State Department of Taxation and Finance estimates we are still losing $300 million in annual tax revenue in uncollected excise tax on the sale of cigarettes and motor fuel. Approximately one-third of this loss is attributed to cigarettes and two-thirds to motor fuel.

In fact, the problem of untaxed out-of-state cigarettes I identified two years ago is mild when compared to the unabated, and accelerated growth of new Native American convenience stories, duty free warehouses, and gasoline outlets opening up all over our state doing a flourishing business selling tax-free products to Native and non-Native Americans alike.

Senator Gorton's proposal is an extremely positive development in terms of New York's plight, offering a tangible, realistic means to address this issue. In particular, Section 3 offers a ray of hope for retailers struggling to stay in business. This section would provide a state with an absolute right to sue a tribe in federal court to collect lawfully imposed state excise taxes on sales to non-Native Americans.

Under this section, a tribe would also waive its tribal sovereign immunity only to the extent necessary for a state to enforce the obligations imposed by this section. Thus, a tribe could not hide behind the veil of sovereign immunity to escape the obligation which the United States Supreme Court has sanctioned.

On behalf of New York State and the thousands of small businessmen and women who are struggling to survive against the unfair competition of untaxed sales to non-Native Americans by Native American tribes, I applaud this hearing to allow an open discussion of this very important issue and I thank Senator Gorton and his colleagues for introducing this legislation.

Mr. Chairman, I appreciate your consideration of my testimony. I would be happy to answer any questions you or the committee may have.