Muscogee Nation v. Pruitt

• Decision Date: 28 February 2012
• Docket Number: No. 11–7005.,11–7005.
• Citation: 669 F.3d 1159
• Parties: MUSCOGEE (CREEK) NATION, a federally-recognized Tribe, Plaintiff–Appellant, v. Scott PRUITT, Attorney General of Oklahoma; The Oklahoma Tax Commission; Thomas Kemp, Jr., Chairman, Oklahoma Tax Commission; Jerry Johnson, Vice–Chairman, Oklahoma Tax Commission; Dawn Cash, Secretary, Oklahoma Tax Commission, Defendants–Appellees.
• Court: U.S. Court of Appeals — Tenth Circuit

669 F.3d 1159

MUSCOGEE (CREEK) NATION, a federally-recognized Tribe, Plaintiff–Appellant,

v.Scott PRUITT, Attorney General of Oklahoma; The Oklahoma Tax Commission; Thomas Kemp, Jr., Chairman, Oklahoma Tax Commission; Jerry Johnson, Vice–Chairman, Oklahoma Tax Commission; Dawn Cash, Secretary, Oklahoma Tax Commission, Defendants–Appellees.

No. 11–7005.

United States Court of Appeals, Tenth Circuit.

Feb. 28, 2012.

Joseph V. Messineo, Fredericks Peebles & Morgan, LLP, Omaha, NE, and Michael A. Simpson, Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., Tulsa, OK (Conly J. Schulte, Fredericks Peebles & Morgan, LLP, Omaha, NE, and Galen L. Brittingham, Atkinson, Haskins, Nellis, Brittingham, Gladd & Carwile, P.C., Tulsa, OK, with them on the briefs), appearing for Appellant.

E. Clyde Kirk, Assistant Attorney General, Office of the Attorney General for the State of Oklahoma, Oklahoma City, OK, appearing for AppelleeE. Scott Pruitt, Oklahoma Attorney General, and Larry D. Patton, Assistant General Counsel, Oklahoma Tax Commission, Oklahoma City, OK, appearing for Appellees Oklahoma Tax Commission and its Commissioners.

Before GORSUCH, HOLMES, and MATHESON, Circuit Judges.

MATHESON, Circuit Judge.

In Oklahoma, cigarette and other tobacco product sales to tribal members in Indian country are exempt from state taxes.To prevent non-tribal members from avoiding taxes on their purchases of such products in Indian country, Oklahoma adopted a tax-stamp scheme to ensure that taxes are collected for those sales.Oklahoma also requires tobacco product manufacturers either to enter into and make payments under a Master Settlement Agreement with the State or to pay a certain percentage of each sale into an escrow fund.Any brand of cigarette produced by a manufacturer that does not comply with these requirements is deemed contraband.The Muscogee (Creek) Nation (“MCN”) objects to these requirements as violative of federal law and tribal sovereignty.Supreme Court precedent holds otherwise.

MCN sued the Oklahoma Tax Commission(“OTC”), its three commissioners, and the Oklahoma Attorney General(collectively, the “State”).MCN sought declaratory and injunctive relief based on numerous claims challenging three Oklahoma statutes that tax and regulate the sale of cigarettes and other tobacco products.The OTC, along with its three commissioners, and the Attorney General brought two separate motions to dismiss.The district court dismissed MCN's claims against all defendants based on the State's Eleventh Amendment immunity or, alternatively, for failure to state a claim under Federal Rule of Civil Procedure 12(b)(6).Exercising jurisdiction under 28 U.S.C. § 1291, we conclude that the Eleventh Amendment does not preclude this suit, but we affirm the dismissal for failure to state a claim.

I.BACKGROUND

A.The Oklahoma Statutes at Issue

Before delving into the procedural history of this case, we first review the three Oklahoma statutes underlying MCN's complaint.

1. Okla. Stat. tit. 68, § 349.1—the Excise Tax Statute

Under Oklahoma's Excise Tax Statute, the OTC imposes an excise tax on the sale of cigarettes and other tobacco products.The OTC collects the tax from OTC-licensed wholesalers.SeeOkla. Stat. tit. 68, §§ 302 to 302–5; 402 to 402–3.The wholesaler must purchase stamps from the OTC to show that it has paid the excise tax.Id.§§ 302; 403.Although the wholesaler initially pays the tax when it purchases the stamp, the tax is ultimately passed down to the consumer.SeeId.§§ 302 to 302–5.

Indian tribes can choose to enter into compacts with the State to govern the collection of state taxes on cigarettes and tobacco products sold in Indian country.Seeid.§ 346(C).Tribes that enter into such compacts are deemed “compacting,” whereas tribes, such as MCN, who do not, are deemed “noncompacting.”

The Excise Tax Statute, Okla. Stat. tit. 68, § 349.1, governs the tax on cigarettes and other tobacco products sold by noncompacting tribes.Section 349.1 exempts from the tax the sale of such products by Indian tribes and tribally-licensed retailers to the tribe's own members when those sales occur in the tribe's Indian country.¹

When a tribally-licensed retailer sells cigarettes to a member of a noncompacting tribe on that tribe's Indian country, the cigarettes must bear a stamp issued by the OTC (a “tax-free stamp”) evidencing that they have been purchased free from the excise tax.Id.§ 349.1(C).The OTC distributes these tax-free stamps to OTC-licensed wholesalers that supply cigarettes to tribally-licensed retailers.Id.§ 349.1(C)(5).

The number of tax-free stamps that the OTC distributes to a wholesaler depends on the “probable demand.”Id.§ 349.1(C)(4).The OTC determines the probable demand for each tribe by multiplying the population of the tribe located in Oklahoma by the percentage of smokers in Oklahoma or the percentage of smokers in the United States, whichever is greater.Id.§ 349.1(C)(1).The OTC then multiplies this number by the average yearly consumption of cigarettes by smokers in Oklahoma or smokers in the United States, whichever is greater.Id.

After the OTC calculates its preliminary determination of the probable demand, it must furnish that calculation to the governing bodies of the tribes, which may then submit information regarding the sufficiency of the probable demand, including “a verifiable record of previous sales to tribal members or other statistical evidence.”Id.§ 349.1(C)(2).After considering this information, the OTC must make a final determination of the probable demand and furnish it to the tribe.Id.§ 349.1(C)(3).The OTC then distributes the tax-free stamps to its licensed wholesalers based on its probable demand calculation.Once a wholesaler has received its allocated share of tax-free stamps, the wholesaler may not receive more “absent good cause shown by verifiable information submitted by the wholesaler and/or that tribe or nation, which shall be considered and determined by the [OTC] on a case-by-case basis.”Id.§ 349.1(C)(5).

Different provisions apply to the sale of tobacco products other than cigarettes.Seeid.§ 349.1(D).Unlike with cigarettes, OTC-licensed wholesalers are required to affix a tax stamp to all other tobacco products, even those to be sold by tribally-licensed retailers to tribal members on that tribe's Indian country.Id.The OTC-licensed wholesalers must bear the initial incidence of the excise tax on these sales.At the end of each month, OTC-licensed wholesalers may request a refund or credit for the previous month's tax-free sales equal to the lesser of 1/12 of their allocated share of the probable demand or their verifiable tax-free sales to tribally-licensed or tribally-owned retailers.Id. at § 349.1(D)(5).The probable demand is calculated in the same manner as the calculation for cigarettes, substituting use and users of other tobacco products for use and users of cigarettes.Id.§ 349.1(D)(1).Once an OTC-licensed wholesaler has received a refund or credit for a particular month, it may not receive any further refund or credit for that month “absent good cause shown by verifiable information submitted by the wholesaler and/or the noncompacting tribe or nation, which shall be considered and determined by the [OTC] on a case-by-case basis.”Id.§ 349.1(D)(5).

2. Okla. Stat. tit. 37, §§ 600.21–600.23andtit. 68, §§ 360.1–360.9—the Escrow Statute and the Complementary Act

In 1998, Oklahoma entered into a Master Settlement Agreement (“MSA”) with leading United States tobacco product manufacturers.SeeOkla. Stat. tit. 37, § 600.21(C).The MSA requires the participating manufacturers to make settlement payments to the State to cover, among other things, health costs generated by tobacco use among Oklahoma residents.Id.§ 600.21(B), (C).To prevent the non-participating manufacturers from receiving a competitive advantage over the participating manufacturers, the State enacted the Escrow Statute.Seeid.§ 600.21(D).The Escrow Statute requires all tobacco product manufacturers selling cigarettes to consumers in Oklahoma to be an MSA member or pay specified amounts into a qualified escrow fund.Id.§ 600.23(A).

The amount that non-participating manufacturers must pay into the escrow fund is based on “units sold.”Id.§ 600.23(A)(2).“Units sold” are “the number of individual cigarettes sold in the state by the applicable tobacco product manufacturer ... during the year in question ... measured by excise taxes collected by the state on [cigarettes] bearing the excise tax stamp....”Id.§ 600.22(10).Thus, the Escrow Statute applies only to cigarettes bearing the Oklahoma excise tax stamp and not to cigarettes bearing tax-free stamps.

To aid the Attorney General in enforcing the Escrow Statute, Oklahoma in 2004 enacted the Master Settlement Agreement Complementary Act (the “Complementary Act”).Okla. Stat. tit. 68, §§ 360.1,360.2.The Complementary Act requires every tobacco product manufacturer selling cigarettes in Oklahoma to certify to the Attorney General and the OTC that it is either participating in the MSA or that it has made payments to the escrow fund as required by the Escrow Statute.Id.§ 360.4(A).

The Attorney General maintains a directory of all complying tobacco product manufacturers, participating and non-participating, and the brand families that they produce.Id.§ 360.4(B).The Complementary Act makes it unlawful to affix a tax-stamp to a package or container of cigarettes if its manufacturer or brand family is not listed on the Attorney General's directory.Id.§ 360.4(C)(1).It is also unlawful to “[s]ell, offer, or possess for sale, in [Oklahoma], or import for personal consumption in [Oklahoma]” cigarettes from a manufacturer or brand family not listed on the Attorney General's directory.Id.§ 360.4(C)(2).“[C]igarettes that have been sold, offered for sale, or possessed for sale in [Oklahoma]...