By David Kesmodel of the Wall Street Journal
(Aug 17, 2011) AKWESASNE, N.Y.—For decades, Justin Tarbell’s family has enticed smokers to visit their convenience stores on the St. Regis Mohawk Reservation here by selling tax-free cartons of Marlboro and other big cigarette brands.
Now, Mr. Tarbell is becoming an enemy of his longtime suppliers.
The 35-year-old is among a growing number of Native American entrepreneurs in New York state who are manufacturing their own cigarettes and selling them at bargain prices here and in other states, including Florida, Texas and Washington.
“We want to be in control of our destiny,” said Mr. Tarbell, whose olive-drab metal cigarette factory makes Signal and other brands.
The expansion of cigarette-making on Native American reservations in New York is, in part, an entrepreneurial response to a major shift in cigarette-tax enforcement by state authorities that has been brewing for several years.
In June, the revenue-hungry state began enforcing the collection of state excise taxes on Marlboro and other “premium” brands sold on reservations to non-Native Americans. New York had for years maintained a hands-off approach, deterred by sometimes-violent opposition to its enforcement efforts, including a 1997 protest by the Seneca nation that briefly shut down the New York Thruway.
Cigarette sales on reservations have accounted for about a third of all cigarettes sold in New York, according to state officials. Untaxed packs of mainstream brands also have long fueled a thriving bootleg market in New York City, law-enforcement officials have said.
The state’s move to start requiring the $4.35-a-pack tax—the highest in the country— has prompted tribal retailers this summer to curtail sales of mainstream brands and instead push varieties like Seneca, Buffalo and Mr. Tarbell’s Signal label. Native American manufacturers and retailers argue that cigarettes produced and sold on a reservation are beyond the reach of New York law, citing tribes’ status as sovereign governments.
State officials aren’t saying yet whether they will try to enforce tax collection for tribal brands. A spokesman for Gov. Andrew Cuomo said officials “are reviewing some aspects of the law,” but “are committed to enforcing the law to the fullest.”
Rising cigarette taxes in some states and steady price increases by big tobacco makers have created opportunities for tribal manufacturers, as strapped consumers seek out cheaper cigarettes, said J.C. Seneca, a Seneca tribe member who owns Six Nations Manufacturing in Irving, N.Y. The three-year-old company has expanded distribution of its Buffalo and other brands to California, Texas and other states.
In Texas, a state where a number of Native American brands are available off of reservations, packs of brands like Seneca and Skydancer sell for about $4 in convenience stores, compared with about $5.50 for Marlboro, according to Phil Metzinger, a vice president with Brookshire Brothers Ltd., which operates grocery, convenience and tobacco outlets. “A lot of people are buying them the way the economy is today,” he said.
The recent rise in production of tribal brands is sparking tensions with big tobacco makers such as Altria Group Inc.’s Philip Morris USA, which is angling to get states to do more to collect taxes and other fees from tribal companies. The issue has become a key part of negotiations between cigarette giants and states to resolve a $7.1 billion payments dispute under the landmark 1998 Master Settlement Agreement, in which the companies agreed to help 46 states recoup the costs of treating sick smokers.
Philip Morris USA, maker of Marlboro, is lobbying some states to write tougher rules. “We want the federal and state governments to even-handedly enforce the laws across all cigarette brands,” said David Sutton, a spokesman for the Richmond, Va., company.
Native American brands have been gaining market share in recent years, but it is very difficult to estimate the size of the category, according to industry executives.
Cigarette sales have long been part of the economic engines of U.S. tribal reservations, along with casinos and tax-free gasoline sales. The St. Regis Mohawk Tribe’s land here, which runs about six miles long and six miles wide, is sprinkled with low-slung smoke shops and convenience stores. The tribe’s Akwesasne Mohawk Casino, a key source of revenue for the long-depressed reservation, draws roughly half its customers from neighboring Canada and nearby Vermont, some of whom also snap up cartons of cigarettes in the area.
The Tarbell family’s company, Tarbell Management Group, has sold mainstream cigarettes at its Bear’s Den trading post and other stores here since 1953. Five years ago, Justin Tarbell’s father, Eli Tarbell, began manufacturing cigarettes for sale only on the reservation. The elder Tarbell produced cigarettes without a federal license, claiming tribal sovereignty. In 2010, the manufacturing operation, called Ohserase Manufacturing LLC, got a permit and paid $1.75 million to settle claims of illegal manufacturing by U.S. regulators.
Justin Tarbell runs the company as managing director and is expanding distribution around the U.S., including in stores located off reservations. This year the company began selling Signal in states such as Nevada, New Hampshire and Texas, and exporting cigarettes to South and Central America. Mr. Tarbell is expanding his plant’s production capacity by 50% and adding 60,000 square-feet of space to the current 20,000-square-feet. The number of employees recently climbed to 35.
In June, the Tarbell family’s convenience stores stopped taking shipments of Marlboro and other major brands as the state began enforcing the tax collection.
Now Native American brands dominate the shelves at the Bear’s Den. A carton of Signal sells for $23.50, compared with prices ranging from $50 to $80 for the remaining stock of mainstream brands.
Heather Burdick, 23, who lives in nearby Massena, N.Y., said she switched from Marlboro to Signal three years ago. “I like the aftertaste, the smoothness of them,” she said. “It is nice that they are cheaper.”
