'A critical source of revenue'Raid of tribal tobacco operations at issue in new lawsuit
By Kevin Abourezk
@Kevin_Abourezk WINNEBAGO, Nebraska – With his dying words, Chief Little Priest implored his people to seek a better future for their children. “Be strong and educate my children,” he said. His words inspired the Winnebago Tribe to establish Little Priest Tribal College on the tribe’s northeast Nebraska reservation in 1996. Maunka Morgan, the college’s president, still quotes the phrase as he attempts to describe the college’s mission. “It’s part of this long vision that our ancestors had for us to be self-sufficient and independent and not beholden to others,” he said.
Like so many institutions on Winnebago Reservation, the college works to make the tribe more independent by educating future leaders and workers. In order to do so, however, the college leans on revenue generated by tribal tobacco taxes. For the fiscal year ending June 30, 2017, the tribe provided $151,029 in tobacco tax revenue to the college. And while that amounted to only about 2.1 percent of the college’s general fund, it is a flexible revenue source that allows the college to fund its priority programs, Morgan said. He said both the federal government and state of Nebraska fail to equitably fund the college compared to non-reservation-based colleges, and the college has been historically underfunded as a result. “Utilizing these resources in our own tribal economies, it’s vital,” he said. “It’s vital to the survival of the tribal college and fulfilling its mission.” But the tribe’s tobacco taxes have come under attack in recent years, culminating in a January 30 raid by federal agents on the offices of Ho-Chunk Inc. (HCI), the tribe’s economic development corporation.
Morgan said the college expects to see a nearly $40,000 loss in tobacco tax revenue as a result of the raid. “It’s a conservative number,” he said. “We don’t really know.” But the Winnebago Tribe is fighting back. On Friday, two HCI-owned subsidiaries, HCI Distribution and Rock River Manufacturing, filed a lawsuit against the state of Nebraska seeking to prevent the state from forcing the tribe to abide by a legal agreement between the state and a variety of tobacco manufacturers. The lawsuit stems from the raid, during which nearly 50 armed agents of the Bureau of Alcohol, Tobacco, and Explosives confiscated dozens of boxes of documents, office equipment and cigarettes. HCI Distribution purchases tobacco products from tribal-based manufacturers and resells those products exclusively to reservation-based wholesalers and retailers. Rock River is a federally licensed cigarette manufacturer whose products are distributed by HCI Distribution and other national distributors to retailers throughout the country. The lawsuit, filed Friday in U.S. District Court in Omaha, alleges the raid constituted an attack on the tribe’s status as a sovereign nation. It names Nebraska Attorney General Doug Peterson and Tony Fulton, state tax commissioner, as defendants. In a January 31 statement, Winnebago Tribal Chairman Frank White said the tribe believes the state of Nebraska convinced the ATF to investigate Ho-Chunk Inc. in order to “gain advantage in an ongoing tax dispute.”
The lawsuit alleges the state of Nebraska has sought to force the Winnebago Tribe to participate in a 1998 settlement between the four largest tobacco manufacturing companies and 46 states, which had sued those tobacco companies in order to recover healthcare costs related to smoking. The resulting legal agreement, known as the Tobacco Master Settlement Agreement (MSA), required the tobacco giants to make payments to the states each year. Other tobacco manufacturers later became participants to the agreement. The tobacco giants became concerned that the payments they were being forced to make to states would require them to increase the price of their products, and that price increase would cause them to lose market share as their product prices soared higher than those of tobacco products being manufactured by companies that weren’t required to make payments to states. As a result, the tobacco giants renegotiated the MSA in order to require states to force all tobacco manufacturers that operate within their borders to either participate in the agreement or begin paying fees in order to sell cigarettes in the state. States that failed to do so would face the threat of losing their sizeable settlement payments. For Nebraska alone, that payment was $37.7 million in 2017. Fees paid by tobacco manufacturers who weren’t participants in the MSA were meant to ensure price parity with manufacturers who were participating in the agreement. To meet the requirements of the renegotiated MSA, states – including Nebraska – drafted legislation imposing fees on tobacco manufacturers who aren’t participants of the MSA. “From the perspective of Big Tobacco, the MSA is essentially a federated agreement ensuring that Big Tobacco enjoys a level playing field across the MSA-settling states despite their previous bad actions,” the lawsuit states.
However, neither states’ attorney generals nor the big tobacco companies invited tribes to participate in the MSA, and they also failed to seek the involvement of Congress, which exercises “exclusive and plenary control over sovereign tribes within its borders independent of state jurisdiction,” according to the lawsuit. Despite these failures, states have attempted to force tribes to abide by the requirements set forth in the MSA and the state legislation they’ve enacted to enforce that agreement. “As a result, Big Tobacco has exerted pressure on states to continue to pursue unlawful regulation of tribal tobacco trade in Indian Country,” the lawsuit states. “Indeed, Big Tobacco has improperly withheld payments from many states alleging failure to ‘diligently enforce’ their MSA Laws with respect to the Indian Country activities of tribes.” No federal statute currently gives states the power to regulate tobacco in Indian Country, the lawsuit states. Indeed, federal statutes that address tribal tobacco routinely reassert tribal independence from state tobacco regulatory authority, including the Prevent All Cigarette Trafficking Act of 2009, according to the lawsuit. The Winnebago Tribe has exercised its “retained sovereignty to regulate tobacco” on its reservation, creating its own Universal Tobacco Settlement Agreement that imposes fees on participating tobacco manufacturers and distributors. In 2017 alone, that agreement generated $31,681 in fees and $122,658 in cigarette taxes for the tribe. In March 2014, Nebraska issued tax assessment against several reservation-based cigarette retailers, prompting HCI Distribution and Red Rock Manufacturing to begin negotiating a possible tobacco compact. But those negotiations ended in June 2016 when the two sides failed to agree on a compact that would protect the Winnebago Tribe’s right to regulate tobacco sales on its own reservation, the lawsuit states. HCI Distribution and Red Rock Manufacturing have operated under a cloud of uncertainty since March 2014, the lawsuit alleges. “This uncertainty and threat of penalty and retaliation has created a serious impediment to their business operations and, thus, the ability to expand economically,” the lawsuit states. The two companies are asking the U.S. District Court to prevent the state of Nebraska from attempting to force the Winnebago Tribe from abiding by terms of the MSA.
White, the tribe’s chairman, said the state’s efforts to impose the MSA on the tribe is an attack on the tribe’s sovereignty. “This attack has damaged our tribal economy and in turn threatens our sovereignty, self-determination and self-governance,” he said in a statement. Ho-Chunk Inc. was launched in 1994 to spur economic development activity on the tribe’s reservation, and Indianz.com is one of its subsidiaries. HCI said in a statement Monday that tobacco sales and regulation have helped generate significant revenue for the tribe, which has struggled for decades to establish a healthy economy. The tribe’s tobacco sales and tax revenue have provided funding to community development efforts, scholarships, internships and educational endowments. Tribal institutions such as Little Priest Tribal College, the Community Development Fund, Tribal Health Department and Language Revitalization Department, as well as the tribe’s roads, have benefited from those revenues. Maunka Morgan, Little Priest Tribal College president and a tax commissioner for the tribe, said tax revenue has helped the tribe build all of its institutions. “We have been pretty good at implementing specific types of tribal taxes, such as the tobacco taxes, and then putting them toward our strategic initiatives to help fund our institutions,” he said. “It’s a tool in the nation-building tool box.”
Tobacco taxes even helped 40 families purchase new homes through a down payment assistance program in recent years, according to HCI. Ann Marie Bledsoe Downes, vice president for community impact and engagement for HCI and a board member for the award-winning Winnebago Community Development Fund, said the fund has provided matching funds to projects ranging from infrastructure for the Ho-Chunk Village commercial and housing development to language preservation projects, renewable energy expansion and community gardening efforts. “It has been a critical source of revenue to make sure we can bring outside dollars to our reservation and maximize the dollars we do have to improve the lives of our tribal members,” she said. “It is concerning to think that all our progress could be slowed because tobacco sales on our own reservation would be further restricted for reasons we still don’t fully understand.”
In addition to the new lawsuit, HCI is suing the federal government in connection with its tobacco business. As part of the dispute, the corporation agreed to hand over records related to its sales to non-Indian individuals or entities. But the government contends the Contraband Cigarette Trafficking Act requires tribes to hand over all of their tobacco sales records. In May 2016, a federal judge agreed and ruled that HCI must comply with the law. HCI has mounted an appeal of the decision. Oral arguments took place on March 15 before the D.C. Circuit Court of Appeals, with judges agreeing that the case represented a novel legal issue. "Not once, until now, have they sought records from my clients, instrumentalities of the Winnebago Tribe of Nebraska," attorney Ben Fenner, who is representing HCI and its tobacco companies, told the court last month. "Not once, to our knowledge, have they sought records from any tribal instrumentality." A decision is pending from the D.C. Circuit. Ho-Chunk Inc. owns Indianz.Com. The website is operated by a different subsidiary and is not involved with the tobacco operations.
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