Keweenaw Bay Indian Community v. Rising

• Decision Date: 28 February 2007
• Docket Number: No. 05-2398.,05-2398.
• Citation: 477 F.3d 881
• Parties: KEWEENAW BAY INDIAN COMMUNITY, Plaintiff-Appellant, v. Jay RISING; Harrold Reid; Timothy Blanksvard, Defendants-Appellees.
• Court: U.S. Court of Appeals — Sixth Circuit

477 F.3d 881 KEWEENAW BAY INDIAN COMMUNITY, Plaintiff-Appellant,
v.
Jay RISING; Harrold Reid; Timothy Blanksvard, Defendants-Appellees. No. 05-2398. United States Court of Appeals, Sixth Circuit. Argued: September 11, 2006. Decided and Filed: February 28, 2007.

[477 F.3d 883]

ARGUED: Vernle C. Durocher, Dorsey & Whitney, Minneapolis, Minnesota, for Appellant. Elaine Dierwa Fischhoff, Office of the Attorney General, Lansing, Michigan, for Appellee. ON BRIEF: Vernle C. Durocher, Mary J. Streitz, Dorsey & Whitney, Minneapolis, Minnesota, John R. Baker, Baraga, Michigan, Stephen D. Turner, Clark Hill, Grand Rapids, Michigan, for Appellant. Elaine Dierwa Fischhoff, Office of the Attorney General, Lansing, Michigan, for Appellee.

Before BOGGS, Chief Judge; MARTIN, Circuit Judge; OLIVER, District Judge.^*

OPINION

BOYCE F. MARTIN, JR., Circuit Judge.

The Keweenaw Bay Indian Community is a federally recognized Indian tribe with approximately 3,300 members, 868 of whom live on the Community's Reservation in Michigan's Upper Peninsula, and roughly 500 others who live in neighboring counties. The Community is the successor in interest to the L'Anse and Ontonagon bands of Chippewa Indians. The Community brought this action against Jay Rising, Treasurer of the State of Michigan, and Harrold Reid and Timothy Blanksvard, two Michigan State Police Officers, to challenge the state's efforts to tax tobacco products sold by the Community and several searches and seizures of tobacco products shipped to the Community. The district court dismissed the Community's claims after granting two separate motions for summary judgment brought by the state defendants.

I.

The State of Michigan imposes an excise tax on the sale of tobacco products through its Tobacco Products Tax Act ("TPTA"), Mich. Comp. Laws §§ 205.421-205.436. The TPTA requires those who manufacture, transport and sell tobacco products to obtain a license to "purchase, possess, acquire for resale, or sell a tobacco product." Mich. Comp. Laws § 205.423(1). The TPTA states that its intent is to levy the tobacco tax against the consumers of tobacco products, although it is the licensee's responsibility to collect and account for the tax. Mich. Comp. Laws §§ 205.427a, 205.427(2). In light of the unique sovereign status of Indian tribes located within the state, Michigan cannot tax cigarettes sold on an Indian reservation to tribal members for their own use, unless authorized to do so by Congress. Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 126 S.Ct. 676, 681, 163 L.Ed.2d 429 (2005). At the same time, however, the state can tax sales made by a tribe to individuals who are not tribal members.

In light of these limitations, a state like Michigan is faced with a somewhat complicated collection scheme when, as a general matter, it seeks to collect an excise tax through sellers of tobacco products, which sometimes include Indian tribes. Michigan has approached this situation by entering into agreements with tribes that govern the imposition of taxes on tobacco products, as well as certain other products such as gas and diesel fuel. The Community was party to such an agreement with the state from 1977 until the state terminated it in 1997. During the late 1990s, Michigan began negotiating with eleven of the twelve federally recognized Native American tribes in the state in an effort to enter into comprehensive tax agreements covering multiple tax issues, including cigarette

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taxes. Revised agreements were reached with eight of the tribes, which give them the option of selling untaxed tobacco products to tribal members who reside within a negotiated Agreement Area under either a quota or a refund system. The state has been unable to reach agreement with the other three tribes, including the Community. Upon the termination of the previous tax agreement in 1997, the Community began to sell tobacco products on its Reservation and trust lands to all of its customers, tribal members and non-members alike, free of the Michigan tobacco products tax.

By letter dated December 8, 1999, Michigan State Treasurer Mark A. Murray informed all of the federally recognized tribes within the state that Michigan had changed the manner in which it would collect Michigan's tobacco and motor fuel taxes.

To more effectively facilitate the collection of these taxes, the State will now require all wholesalers and/or unclassified acquirers to collect these taxes at the point of sale even where the retail purchaser is an Indian Tribe or tribal-member. In addition, all packs of cigarettes sold at retail from within Indian Country will bear a special stamp applied by the wholesaler to clearly indicate that tax has been paid.... The State of Michigan fully recognizes that Indian Tribes and their members are exempt from Michigan's motor fuel and cigarette taxes where the taxed activity takes place within their respective Indian Country. Therefore, retailers located within Indian Country can file for a refund on sales to that Tribe or its members.

As set forth in the letter, the state made available a refund system for tribes that do not have a comprehensive tax agreement with the state, beginning on January 1, 2000. Under the refund system, tribes can purchase taxed tobacco products from entities that are licensed under the TPTA, and subsequently file claims for refunds of the tobacco taxes on sales to their qualified members.

Despite the refund system, the State Treasury Department began receiving numerous complaints from competitors of tribal businesses that the tribes were selling large quantities of cigarettes at a price below the wholesale cost of tax-prepaid cigarettes. The Treasury Department confirmed the complaints through multiple purchases made by its employees of unstamped, untaxed cigarettes from Native American businesses, including some run by the Community and its members. In January 2000 the Michigan State Police Tobacco Tax Team began investigating whether Michigan Indian tribes were importing untaxed tobacco products in violation of the TPTA. The state seized cargos of untaxed cigarettes from delivery trucks in transit to Native American retailers in the Upper Peninsula in 2000 and 2001. In 2001 the state seized untaxed tobacco products being transported to the Community's Pines Convenience Center.

In an effort to prevent further seizures of tobacco products purchased by the Community for retail sale, the Community began arranging to receive tobacco products through the mail rather than by truck delivery. The state police, who had been investigating other potential avenues for the importation of untaxed cigarettes after the seizures made from delivery trucks, were informed by United States postal workers in the Upper Peninsula that cigarettes were being shipped through their mail processing centers. The boxes in which the products were shipped typically contained conspicuous markings, identifying them as tobacco products of a particular brand name. The state police informed the postal inspector in Milwaukee that they were looking for untaxed tobacco products being sent to the Upper Peninsula,

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and consulted with a state Assistant Attorney General regarding the legal and regulatory requirements for searching parcels shipped through the Postal Service. The state police drafted proposed affidavits and search warrants, in consultation with the Attorney General's Office, in anticipation of seizures of tobacco products.

On January 10, 2002 — three days after contacting the Postal Service — the state police were informed that inspectors for the Kingsford Mail Processing Center near Iron Mountain, Michigan, had discovered fourteen cases of cigarettes sent from New York to addresses in the Upper Peninsula. The state police promptly obtained search warrants and seized the shipment. During this time, additional shipments arrived, which were also seized pursuant to warrants. Four searches were conducted on January 10, 14, 18, and 23, 2002, and the state seized over 180 boxes of tobacco products from the Postal Service mail processing center in Kingsford, Michigan. The boxes were addressed to Joe Waara, WCUP-FM, American Made Tubcraft Plus, Chippewa Trading Co., and Keweenaw Bay Outfitters. Each box contained between 30 and 60 cartons of cigarettes or over 20q cans of snuff. None of the addressees was licensed as an "unclassified acquirer" under the TPTA.¹ According to the Community, the seizures included 44 parcels containing 2,500 cartons of the Community's cigarettes that were intended for sale at the Community's sales facilities.

The Department of Treasury advised the Community that the cigarettes had been seized as contraband. The Community requested an administrative hearing pursuant to Mich. Comp. Laws § 205.429(3). The hearing resulted in a finding that the cigarettes should be forfeited to the state as contraband. The Community unsuccessfully sought review of this order in state court.

After the January 2002 seizures the Community began to follow the state-mandated procedure of purchasing taxed tobacco products and then requesting refunds from the state. Under this procedure, the Community's net revenues from the sale of tobacco products dropped from $556,789 in 2001, to $125,963 in 2002. The Community continued to purchase taxed tobacco products and to file tax refund claims with the Michigan Department of Treasury through April 2004. However, the Department of Treasury refused to issue refund claims totaling $138,260 for August 2003 and December 2003 through April 2004, based on its determination that the Community's sales to its members in August 2003 exceeded the amount of cigarettes that those members could reasonably have been expected to have consumed in a one-year period. The state arrived at its estimated amount based on statistics regarding the Community's population, the Surgeon General's statistics on Native American smoking...