Big Sandy Rancheria Enters. v. Bonta

• Citation: 1 F.4th 710
• Decision Date: 16 June 2021
• Docket Number: No. 19-16777,19-16777
• Parties: BIG SANDY RANCHERIA ENTERPRISES, a federally-chartered corporation, Plaintiff-Appellant, v. Rob BONTA, in his official capacity as Attorney General of the State of California; Nicolas Maduros, in his official capacity as Director of the California Department of Tax and Fee Administration, Defendants-Appellees.
• Court: United States Courts of Appeals. United States Court of Appeals (9th Circuit)

1 F.4th 710

BIG SANDY RANCHERIA ENTERPRISES, a federally-chartered corporation, Plaintiff-Appellant,

v.Rob BONTA,^* in his official capacity as Attorney General of the State of California; Nicolas Maduros, in his official capacity as Director of the California Department of Tax and Fee Administration, Defendants-Appellees.

No. 19-16777

United States Court of Appeals, Ninth Circuit.

Argued and Submitted November 19, 2020 San Francisco, California

Filed June 16, 2021

Tim Hennessy (argued), John M. Peebles, and Michael A. Robinson, Peebles Kidder Bergen & Robinson LLP, Sacramento, California, for Plaintiff-Appellant.

Michael John von Loewenfeldt (argued), Wagstaffe von Loewenfeldt Busch & Radwick LLP, San Francisco, California; James V. Hart (argued) and Peter F. Nascenzi, Deputy Attorneys General; Karen Leaf, Senior Assistant Attorney General; Attorney General's Office, Sacramento, California; for Defendants-Appellees.

Before: Sidney R. Thomas, Chief Judge, and Mary M. Schroeder and Marsha S. Berzon, Circuit Judges

Concurrence by Judge Berzon

THOMAS, Chief Judge:

This appeal presents the question whether California cigarette tax regulations apply to inter-tribal sales of cigarettes by a federally chartered tribal corporation wholly owned by a federally recognized Indian tribe. We conclude that they do, and we affirm the judgment of the district court. We have jurisdiction under 28 U.S.C. § 1291.

Specifically, this case involves Big Sandy Rancheria Enterprises ("the Corporation"), a federally chartered tribal corporation wholly owned and controlled by the Big Sandy Rancheria of Western Mono Indians ("the Tribe"). The Corporation sought declaratory and injunctive relief against the Attorney General of California ("Attorney General") and the Director of the California Department of Tax and Fee Administration ("Director").

The district court dismissed the Corporation's challenge to California's cigarette excise tax as applied to the Corporation's wholesale cigarette distribution business, for lack of subject matter jurisdiction, and dismissed the Corporation's remaining challenges to other regulations governing cigarette distribution in California, as applied to the Corporation's business, for failure to state a claim.

I

A

"Since 1959 California has imposed an excise tax on the distribution of cigarettes." Cal. State Bd. of Equalization v. Chemehuevi Indian Tribe , 474 U.S. 9, 10, 106 S.Ct. 289, 88 L.Ed.2d 9 (1985) (per curiam); see also Cigarette and Tobacco Products Tax Law ("Cigarette Tax Law"), Cal. Rev. & Tax. Code §§ 30001 – 30483. "Distribution" includes, in pertinent part, "[t]he sale of untaxed cigarettes or tobacco products in th[e] state" or "[t]he use or consumption of untaxed cigarettes or tobacco products in th[e] state." Cal. Rev. & Tax. Code § 30008.¹ "Use or consumption" means "the exercise of any right or power over cigarettes or tobacco products incident to the ownership thereof." Id. § 30009. However, "use or consumption" excludes the "the keeping or retention" of such products "by a licensed distributor for the purpose of sale." Id. § 30009. The "sale of cigarettes or tobacco products by the manufacturer to a licensed distributor" is not subject to the excise tax. Id. § 30103.

Distributors pay the excise tax by purchasing stamps from the state to affix to each package of cigarettes before distribution. Id. §§ 30161, 30163(a). California's scheme recognizes that the state may not tax certain distributions. For example, "cigarettes sold ... by a Native American tribe to a member of that tribe on that tribe's land" are "exempt from state excise tax pursuant to federal law." Cal. Health & Safety Code § 104556(j) ; see also Wagnon v. Prairie Band Potawatomi Nation , 546 U.S. 95, 101–02, 126 S.Ct. 676, 163 L.Ed.2d 429 (2005) ("States are categorically barred from placing the legal incidence of an excise tax on a tribe or on tribal members for sales made inside Indian country without congressional authorization." (quotation marks omitted; emphasis removed)); Montana v. Blackfeet Tribe , 471 U.S. 759, 764, 105 S.Ct. 2399, 85 L.Ed.2d 753 (1985) ("Indian tribes and individuals generally are exempt from state taxation within their own territory."). In such instances, a "user or consumer," who is "obligated to pay the tax," owes the tax, and the exempt distributor is responsible for collecting the tax from such purchasers and remitting it to the state. Cal. Rev. & Tax. Code §§ 30008(b), 30107, 30108(a), 30184 ; see also Chemehuevi , 474 U.S. at 11, 106 S.Ct. 289 ("[ Section] 30107 clearly seems to place on consumers the obligation to pay the tax for all previously untaxed cigarettes." (citation omitted)).

The excise taxes "provide funding for local and state programs, including health services, antismoking campaigns, cancer

research, and education programs." Cal. Bus. & Prof. Code § 22970.1. To facilitate the collection of taxes, California requires all distributors to obtain two state-issued licenses, one of which must be renewed annually. See Cal. Rev. & Tax. Code § 30140 ; see also Cal. Bus. & Prof. Code § 22975(a). California enacted the annual licensing requirement in 2003, see Cigarette and Tobacco Products Licensing Act ("Licensing Act"), Cal. Bus. & Prof. Code §§ 22970 – 22991, upon a finding that "[t]ax revenues ha[d] declined by hundreds of millions of dollars per year due, in part, to unlawful distributions and untaxed sales of cigarettes and tobacco products," id. § 22970.1(b). To "help stem the tide of untaxed distributions and illegal sales," California imposed licensing obligations on manufacturers, importers, wholesalers, distributors, and retailers. Id. § 22970.1(d). Under the Licensing Act, distributors and wholesalers may not sell to unlicensed entities. See id. § 22980.1(b)(1). Violations of the Licensing Act are misdemeanors punishable by a $5000 fine, one year of imprisonment, or both. See id. § 22981. The Licensing Act does not apply to any person "exempt from regulation" under federal law. Id. § 22971.4.

Additionally, California imposes reporting and recordkeeping requirements on cigarette distributors. They must file monthly reports with the California Department of Tax and Fee Administration respecting their distributions both taxable and exempt. See Cal. Rev. & Tax. Code §§ 30182(a), 30183(a) ; 18 Cal. Code Regs. § 4031. Distributors must also "keep ... records, receipts, invoices, and other pertinent papers with respect" to their cigarette dealings, which the state may examine. Cal. Rev. & Tax. Code §§ 30453, 30454 ; 18 Cal. Code Regs. §§ 4026(a), 4901. Similarly, under the Licensing Act, distributors must retain copies of transaction records to assist the state's auditing and collection efforts. See, e.g. , Cal. Bus. & Prof. Code §§ 22978.1, 22978.5 (requiring distributors and wholesalers to maintain sale records, including invoices and receipts, "during the past four years" and to make such records available upon the state's request).

In addition to collecting taxes, California regulates cigarette manufacturers pursuant to a 1998 settlement agreement between four major cigarette manufacturers and 46 states, the District of Columbia, and five United States territories. See King Mountain Tobacco Co., Inc. v. McKenna , 768 F.3d 989, 991 (9th Cir. 2014). The Master Settlement Agreement ("Agreement") requires manufacturers that are signatories to the Agreement—"participating manufacturers"—"to make substantial annual cash payments to the settling states and territories, in perpetuity, to offset the increased cost to the health care system created by smoking." Id. ; see also Agreement § IX(c).² In return, participating manufacturers obtained "a release of past, present, and certain future claims against them." Cal. Health & Safety Code § 104555(e) ; see also Agreement § XII. The parties to the Agreement further negotiated the "Non-Participating Manufacturers Adjustment." See Agreement § IX(d). Under that provision, a participating manufacturer may substantially reduce its payment to a state if it has lost market share as a result of competition from non-participating manufacturers. However, a state may avoid that result if it enacts and "diligently enforce[s]" a "[q]ualifying [s]tatute," under which non-participating manufacturers must deposit money into an escrow account based on the number of cigarettes sold in a state the prior year. Id. § IX(d)(2)(B).

California's qualifying statute is the California Reserve Fund Statute ("Escrow Statute"), Cal. Health & Safety Code §§ 104555 – 104558. In enacting the Escrow Statute, the California Legislature found:

It would be contrary to the policy of the state if non-participating manufacturers could use a resulting cost advantage to derive large, short-term profits in the years before liability may arise without ensuring that the state will have an eventual source of recovery from them if they are proved to have acted culpably. It is thus in the interest of the state to require that these manufacturers establish a reserve fund to guarantee a source of compensation and to prevent those manufacturers from deriving large, short-term profits and then becoming judgment proof before liability may arise.

Id. § 104555(f) ; see also King Mountain Tobacco , 768 F.3d at 991 (explaining that because not all tobacco manufacturers were parties to the Agreement, "[t]he states feared that these non-participating manufacturers ... would become insolvent against future liability for smoking-related health care costs").

The Escrow Statute requires non-participating manufacturers to either become participating manufacturers under the Agreement or to place funds annually into an escrow account at a specified rate for each "unit[ ] sold" in California during the previous year. Cal. Health & Safety Code § 104557(a). "Units sold" refers to "the number of individual cigarettes sold to a consumer in the state by the applicable tobacco product manufacturer, whether directly or...