OMAHA -- The state of Nebraska's efforts to regulate the Winnebago Tribe's production of tobacco products on its reservation are not only unconstitutional, a federal lawsuit says, but are an attack on the tribe's sovereignty and an effort by large tobacco manufacturers to use state laws to "bootstrap" a federal tobacco settlement to Indian tribes.
HCI Distribution Inc. and Rock River Manufacturing Inc. -- both subsidiaries of Ho-Chunk Inc., the Winnebago Tribe's economic development arm -- say tribal commercial activities are protected by federal law, and Nebraska has no regulatory authority over the tribe's cigarette operations that take place on tribal land.
The lawsuit, filed Friday in U.S. District Court in Omaha against Nebraska Attorney General Doug Peterson and Tax Commissioner Tony Fulton, is meant to protect the tribe's sovereignty against Nebraska's steps to regulate tribal tobacco production, Winnebago Tribal Chairman Frank White said in a news release.
"This attack has damaged our tribal economy and in turn threatens our sovereignty, self-determination and self-governance," White said.
HCI Distribution and Rock River are seeking a judge's declaration that Nebraska's tobacco laws may not be enforced against the companies for activity that takes place on the Winnebago Reservation and that the state may not take action against them.
The attorney general's office had no comment on the lawsuit, spokeswoman Suzanne Gage said.
Nebraska Department of Revenue spokesman Jim Bogatz referred questions to the U.S. Attorney's Office. A spokesman in that office could not be reached for comment.
Federal agents in January raided four sites owned by Ho-Chunk in Winnebago and seized records related to the tribe's tobacco operations. White said in the wake of the raid that the action was spurred by state regulators in an attempt to gain an upper hand in an ongoing tax dispute with the tribe.
The lawsuit alleges that Nebraska and the 45 other states that reached a 1998 settlement of lawsuits against the largest American tobacco manufacturers are being pressured by those "Big Tobacco" manufacturers to expand their jurisdiction onto Indian reservations. Tribal manufacturers were not party to the settlement.
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Annual settlement payments by the tobacco companies to the states are dependent on the states' enforcement of fees against companies that were not part of the settlement, the lawsuit said. Those adjusted fees were enacted as a way to keep companies not party to the settlement from underselling the big manufacturers. In 2017, Nebraska received a $37.7 million settlement payment, according to the lawsuit.
Big tobacco manufacturers threaten to withhold millions in dollars in settlement payments, the lawsuit said, to coerce states like Nebraska to use state laws to unlawfully regulate tribal tobacco operations, a violation of federal law that enables Indian tribes as sovereign nations to regulate their own activities on tribal territory.
"Big Tobacco, a wealthy and powerful industry, has effectively coerced one sovereign, Nebraska, to threaten another sovereign, the economic and political subdivisions of the tribe, with myriad penalties to achieve one goal: to protect Big Tobacco's profits and cripple the tribe's economy," the lawsuit said.
Established in 1997, HCI Distribution is currently the largest tribal cigarette and tobacco distributor in the United States, according to its website.
Since 2014, Ho-Chunk has operated Rock River Manufacturing, a 15,000-square-foot factory that makes its own Fire Dance and Silver Cloud brands of cigarettes in Winnebago. The Rock River products are on the Winnebago reservation and 11 other states.
The tribe collects its own tobacco taxes that fund health, education and infrastructure programs. White said those taxes, which totaled $122,658 in 2017, have helped 40 families buy new homes through a down payment assistance program in recent years.
In March 2014, the Nebraska Department of Revenue issued tax assessments against several reservation-based cigarette retailers, claiming they made sales subject to state cigarette tax laws. That action led to compact negotiations to settle a dispute over whether Nebraska laws apply to HCI Distribution and Rock River's manufacture, sale and distribution of cigarettes. Negotiations on the compact broke down in 2016.
Since then, HCI and Rock River have been "operating under a cloud of uncertainty" because the threat of penalty and retaliation by the state has impeded business operations, the lawsuit said.
Ho-Chunk spokesman Sam Burrish said the cigarette plant continues to operate, but at a reduced output since the January raid. In March, plant director Adam Bowen said operations had been reduced from 40 hours per week to 30 hours, and the work force had dropped from nine employees to five. Some had quit after the raid.
Ho-Chunk also has been in conflict with government entities over whether certain record-keeping provisions of the Contraband Cigarettes Trafficking Act apply to tribal entities, and a May ruling that certain records fall under the ATF's jurisdiction is under appeal.