[98 NY Int. 0097]
Decided
No. 39
The present appeal represents yet another chapter in the longstanding dispute over the enforcement of New York's cigarette and motor fuel taxes as applied to sales made on Indian reservations located within the State. Having spent over a decade litigating its right to collect such taxes, the State Department of Taxation and Finance has recently changed course and adopted a policy of forbearance. This proceeding, brought by competitors of the Indian reservation retailers who have benefitted from that policy, seeks a judicial directive compelling the State to resume tax enforcement with respect to that group.
Articles 12 A, 20 and 28 of the Tax Law impose sales and excise taxes on cigarettes and motor fuel sold within the State. In general, these taxes are collected through a system of prepayments and are then passed along the distribution chain to the ultimate consumers. Preemptive federal law forbids collection of these taxes on goods sold on Indian reservations to enrolled tribal members ( Moe v Salish & Kootenai Tribes , In 1988, the State Department of Taxation and Finance promulgated a series of administrative regulations to facilitate collection of sales and excise taxes on reservation sales. Under these regulations, Indian tribes, traders and on reservation retailers were to be allotted a specific quantity of cigarettes and motor fuel for which the taxes had not been prepaid. The allotted amounts were to be based on estimates of the demand for otherwise taxable goods by reservation members ( see , 20 NYCRR §§ 336.6, .7, [cigarette excise tax], 414.6, .7 [motor fuel excise tax], 435.1, 2 [diesel motor fuel excise tax], 561.17 [prepaid sales tax on motor fuel), 562.2 [prepaid sales tax on diesel motor fuel, 564.2 [prepaid sales tax on cigarettes]). The State's efforts to implement these regulations were suspended, however, pending the disposition of litigation challenging their validity.
That litigation was finally resolved in 1994, when the United States Supreme Court held that the State's regulations were not preempted by the Federal Indian Trader Statutes ( Department of Taxation and Finance of New York v Milhelm Attea & Bros. , The following quarter passed without implementation of the regulations. In August of 1995, several non reservation convenience stores and their representative associations commenced the present proceeding. The petition sought an order directing the Tax Department "to immediately determine, assess, collect and enforce all New York State cigarette excise taxes and New York State motor fuel excise and sales taxes applicable to on reservation Indian retailers, * * * and otherwise uniformly enforce New York State cigarette and motor fuel tax laws and regulations." Petitioners alleged that both their own competitive interests and the interests of all New York State taxpayers were being impaired by the Tax Department's differential enforcement of those taxes.
Respondents promptly moved to dismiss the petition on the ground that petitioners lacked standing to assert their grievance. Supreme Court rejected respondents' arguments, however, holding that petitioners' standing could be upheld under the analysis utilized by this Court in Matter of Dudley v Kerwick ( Respondents' next motion was one for dismissal on the ground that the controversy was not justiciable. Supreme Court treated this request for relief as a motion for summary judgment ( see , On appeal, a three Justice majority at the Appellate Division agreed that petitioners had standing. However, the court based its decision on the alternative theory that the favorable treatment afforded to businesses involved in on reservation motor fuel and cigarette sales represented a "denial of equal treatment" and that this denial "establishe[s] petitioners' standing" (230 AD2d 338, 343). Finding that the Tax Department's differential enforcement policy was based upon the suspect classification of race, the court went on to hold that none of the rationales for the policy that respondents had proffered was sufficient to satisfy the government's heavy burden of showing that the policy was "'both constitutionally permissible and substantial, and that its use * * * is necessary * * * to the accomplishment of its purpose or the safeguarding of its interest'" ( id. , at 342, quoting Regents of Univ. Of Calif. v Bakke , Respondents appealed as of right pursuant to With respect to the threshold question of petitioners' standing, we agree with the Appellate Division's conclusion that their grievance was essentially an equal protection claim based on differential enforcement of the tax laws and that, as members of the disadvantaged class, petitioners have a right to seek judicial resolution of that claim ( see , Regents of Univ. Of Cal. V Bakke , supra , at 280 282 n 14 [opn per Powell, J.], cited with approval in Northeastern Fla. Ch. of Associated Gen. Contrs. v City of Jacksonville , Turning to the merits, however, we reject the Appellate Division's conclusion that the Tax Department's failure to enforce the tax laws against a particular class of transactions, i.e. , on reservation sales to non Indians, constitutes a form of race based discrimination subject to the demanding "strict scrutiny" analysis. In Washington v Confederated Bands and Tribes of Yakima Indian Nation ( Inasmuch as we conclude that no invidious racial discrimination is involved, we must turn to the question whether the Tax Department's policy of forbearance is sustainable here on a "rational basis" standard ( see , Washington v Confederated Bands and Tribes of Yakima Indian Nation , When the case was initially argued before this Court, respondents took the position that the Tax Department's policy of restraint was, in essence, a temporary measure adopted during a period of delicate negotiations in order to avoid actions that could be construed as "a direct affront" to the sovereign status of Indian nations and tribes. As the responsible state officials perceived the situation, these negotiations would be jeopardized if the State were to contemporaneously attempt to enforce its tax laws on the tribes' reservations. Additionally, the Tax Department had elected to proceed slowly, even in the face of the Milhelm Attea decision, because of its concern about the remaining "potential legal obstacles to enforcement" that were suggested in the Supreme Court's opinion. These considerations, respondents contended, provided a "rational basis" for a limited, relatively short term decision by the Tax Department not to actively enforce the laws imposing motor fuel and cigarette taxes on Indian reservations.
Several weeks after the appeal was argued, however, it was brought to our attention that, on April 28, 1998, the Tax Department repealed the regulations that were challenged in Milhelm Attea ( see , NYS Reg., April 29, 1998, Vol XX, Issue 17, Book 1, pp 22 24). Since these rules provided the only regulatory framework for enforcing the motor fuel and cigarette taxes on Indian reservations, their repeal signified that the Tax Department has committed itself to withholding active enforcement on a long term basis. As the Department stated in its Notice of Adoption, "[t]he decision to repeal the regulations was based on both the inability of the regulations to achieve the purposes of the Tax Law and also the State's respect for the Indian Nations' sovereignty" ( id. , at 23). Thus, although "the repeal * * * does not eliminate the statutory liability for taxes as they relate to sales on Indian reservations to nonexempt individuals" ( id. ), it does indicate that what was once portrayed as a temporary policy of abstention in enforcement has now become permanent.
Initially, we note our agreement with the parties that this new development, of which we must take judicial notice ( see , Having concluded that the repealer did not moot the controversy, we nonetheless recognize that the recent administrative action so alters the landscape in which the controversy is presented that it would be unwise and unsound for us to resolve it on the basis of the arguments before us ( cf. , Matter of Michael B. , Accordingly, the order of the Appellate Division should be reversed, without costs, and the matter remitted to Supreme Court for further proceedings in accordance with this Opinion.
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Order reversed, without costs, and matter remitted to Supreme Court, Albany County, for further proceedings in accordance with the opinion herein. Opinion by Judge Titone. Chief Judge Kaye and Judges Bellacosa, Smith, Levine and Ciparick concur. Judge Wesley took no part.
Decided