Cloverdale fuming over tax-free tobacco shop

A new tobacco shop in Cloverdale is prompting complaints that its American Indian owners enjoy an unfair advantage by not charging sales tax.
When Native Tobacco 101 opened this month, it not only brought cheap cigarettes to Cloverdale, it also touched on a national controversy over Indian smoke shops and the taxes they sometimes avoid.
The shop manager confirmed he does not charge any state or other taxes, such as the 7.75 percent sales tax his competitors are required to levy.
“It seems to me an unfair business practice,” said Cloverdale Mayor Carol Russell, who worries about the effect the new business may have on several “mom and pop” stores that sell tobacco.
“What is it about tobacco that allows one group not to pay taxes and another group to pay?” she said. “It puts other retailers at a disadvantage.”
Chuck Gerken, manager of Native Tobacco 101, said the owners are working with a Native American company licensed to use the land and operate the tobacco business, but he declined to provide more detail.
Most of the tobacco he sells is made by Indians on Native American lands in the states of Washington and New York, he said.
A pack of Smoking Joes, for example, advertised at $2.75, “is $2.75 out the door,” he said, with no additional taxes.
“People are very happy,” Gerken said. “For those who elected to smoke or chew (tobacco) in today’s times, we make it affordable.”But his competitors are not pleased.
“We work hard and pay part of sales taxes they don’t have to. That’s not fair,” said Ravi Singh, owner of Quick Pick Liquors, on the other side of the freeway.
As his store, a pack of cigarettes goes for $3.95, plus 7.75 percent sales tax, bringing the total to $4.26.
A state tax official said tribes that sell cigarettes on Indian land to non-reservation members are required to collect a “use tax” equal to a sales tax.
But experts say the state can’t force tribes to collect it and the responsibility technically lies with the customer to pay the tax.
“It’s difficult to enforce because Indian reservations operate under different rules than other retailers,” said Anita Gore, a spokeswoman for the state Board of Equalization.
The rules differ from state to state, and the stakes can be high.
In New York, officials have pending lawsuits against tribes to force them to pay taxes the state says are lost to bootleg sales of cigarettes, tobacco bought on reservations or through the Internet. The lost revenue may have been as high as $576 million in 2004 alone, according to New York.
In Cloverdale, Native Tobacco 101 is on a frontage road next to Highway 101 at the south end of town. It sells mostly Native American cigarettes, not premium national brands.
The plain-looking building and its banner advertising “discounted cigarettes and tobacco products,” is clearly visible from Highway 101.
The business is on a remnant of the former Cloverdale Rancheria owned by the survivors of John Santana, a Pomo elder and postmaster who was allotted the land more than 40 years agoafter the rancheria was dissolved.
Some residents thought the tobacco store opening signaled the impending construction of a proposed Indian casino, but that is likely years away, assuming federal and state approvals are obtained.
The restored Cloverdale Rancheria Band of Pomo Indians, who are proposing the casino, have distanced themselves from the smoke shop. Tribal leaders said they have no connection with it and the tobacco business is not tied to the casino project planned on nearby property.
In a letter published in the Cloverdale Reveille newspaper, the tribal council said the smoke shop is not on land belonging to the tribe.
But the parcel is still held in federal trust as Indian land belonging to Santana’s heirs, which exempts it from local zoning regulations and clouds the issue of sales taxes collection.
Even though Native Tobacco 101 doesn’t offer major cigarette brands, it does have bulk and chew tobacco that other local stores sell, such as Copenhagen and Skoal.
A 1.2-ounce tin of Copenhagen, for example, sells for $3.75 — with no taxes — at Native Tobacco 101.
But at Quick Pick Liquors, it goes for $3.95, plus 7.75 percent tax, bringing the total to $4.26.
Holding up a small tin of Copenhagen, Singh said, “I used to sell a lot of these guys — 50 rolls a week. Now, not even 10.”
He said his sales have dropped off dramatically because he can’t compete with the Native American business.
Les Marston, a Ukiah attorney who litigated a pivotal U.S. Supreme Court case in the mid-1980s involving tobacco sales by a California tribe, said the court made it clear tribes have an obligation to collect and remit state tax on the sale of cigarettes to non-tribal members.
But he said when it comes to tribes around the country, federal law requires an examination of state law as to who has the obligation to pay the tax — the buyer or the seller.
“Every state is different,” he said.
Marston said he represents a half-dozen tribes in California that sell tobacco, typically as part of their casino operation.
“I do know all the tribes I represent are collecting and remitting state tax on cigarettes,” he said.
But if Indian tobacco shops don’t send in the tax, it’s not simple for the state to enforce collection.
Marston said the state can’t sue the tribe nor file a lien on real or personal property on the reservation, seize off-reservation bank accounts or come onto the reservation for judicial or administrative enforcement.
Basically, the responsibility in California falls on the consumer to pay the tax. It’s similar to making a purchase on the Internet, in which consumers are not charged sales tax but are supposed to remit the equivalent tax to the state.
But Cloverdale Mayor Russell, worries that when an Indian cigarette retailer doesn’t collect the tax, the health programs that rely on the revenue will suffer.
Other taxpayers will “eventually have to take care of people who are ill because they smoke cigarettes,” she said.