By COREY KILGANNON
Published: December 13, 2008
MASTIC, N.Y. — Down by the lapping waters of Great South Bay, the Indian chief stared up at the trees swaying in the wind. Then he squinted: Was that a surveillance camera on top of that utility pole?
Probably not, but Harry Wallace, chief of the Unkechaug Nation, says he has good reason to be watching his back — and his tribe’s — closely.
He and several other owners of shops that sell cigarettes on the tiny Poospatuck reservation on the South Shore of Long Island, where the Unkechaugs are based, have been sued by the City of New York. The city claims that this Indian enclave — the closest reservation to New York City — has become a “tax evasion haven” and a drain on the city’s coffers.
The Bloomberg administration says the city and the state lose more than $1 billion a year in tax revenue because of what it calls bootleg cigarettes distributed on Indian reservations in New York. Of that amount, the administration contends, $195 million represents the city’s share, and officials blame the Unkechaug Nation reservation for most of that.
New York City officials say millions of cartons of untaxed cigarettes are sold every year by Poospatuck retailers to bootleggers who smuggle them into the city to resell for about $5 a pack, not the $8 or $9 charged by New York retailers who pay the state and city taxes of $4.25 a pack.
As part of their legal challenge, city lawyers have asked a federal judge to block the smoke shops from selling untaxed cigarettes to non-Indians without collecting state and city taxes from them.
Answering these claims is the Unkechaug chief, Mr. Wallace, 55, who was born in Queens, went to Dartmouth and was a lawyer in private practice in Manhattan before moving to the reservation and opening the Poospatuck smoke shop.
But he has been outspoken in defending his tribe, arguing that cigarette sales are the only viable economic engine on the 55 acres of sovereign territory. He calls the city’s suit an attack on legitimate Indian livelihood, and the result of elected officials feeling the economic pinch and blaming budget woes on the smallest reservation in the state.
“They’re picking on us because they think we’re this little tribe with no means to defend ourselves,” he said. “Bloomberg needs a scapegoat, so he blames us for the city’s deficit, instead of criticizing the financial markets.”
Lawyers for the smoke shop owners have requested a dismissal of the suit, arguing that the court does not have jurisdiction in sovereign territory, Mr. Wallace said. He is not a defendant in the suit, though he was named in a similar suit that was filed in 2006 by the owner of the Gristedes supermarket chain.
Though Mr. Wallace grew up in the Bayside and Little Neck sections of Queens, his family nurtured his Indian identity, taking him often to visit his uncles on the reservation. He chose Dartmouth, he said, because it had as its founding mission the education of Indians, and he helped establish a group on campus called Native Americans at Dartmouth.
Later, at New York Law School in Manhattan, he helped found the Indian Law Committee and wrote a thesis on Indian land claims. In the 1980s, he worked as a lawyer concentrating on cases involving landlord-tenant disputes, real estate, personal injury and American Indian discrimination issues.
Mr. Wallace said he grew more interested in Indian issues after marrying Margo Thunderbird, a daughter of Chief Thunderbird of the Southampton-based Shinnecock Nation. The couple have two daughters. In 1991, he moved to a plot of land belonging to his mother on the Poospatuck reservation, nestled on the banks of the Mastic River. “It changed my life because I knew I was going to get into issues affecting the reservation,” he said.
Mr. Wallace opened the reservation’s first full-service smoke shop, to “show the community that we could develop an economy separate and distinct from the state and that it could be done the right way.”
Other reservation residents followed his lead and also opened shops, transforming cigarette sales into a booming business as state and local taxes have driven up the cost to smokers. Of the 450 Poospatuck tribe members, 275 live on the reservation, a network of narrow streets with small houses, tidy modular homes and ramshackle trailers.
On a recent weekday, the reservation looked like a bustling cigarette shopping outlet. Signs for smoke shops were posted everywhere, and discounted cartons were sold from drive-through windows. An employee held a huge sign and directed a line of traffic to parking spots.
According to state law, nontribe members who buy cigarettes on reservations are supposed to report and pay the taxes on those purchases. Legislators have been trying for years to force tribal smoke shops to collect taxes on sales to non-Indians, but the tribes have refused, citing their status as sovereign nations.
The State Department of Taxation and Finance says the Poospatuck cigarette trade grew to 11.3 million cartons in 2007, from 406,000 cartons in 1996.
Mr. Wallace calls the estimates by the city and state drastically inflated.
Mr. Wallace, who said the number of smoke shops on the reservation has increased to 14 from 6 in the past couple of years, said he could not provide specific sales and revenue figures for the shops because he does not monitor each store’s accounting.
Mr. Wallace said his own sales of untaxed cigarettes had declined in recent years, but would not provide specific numbers.
Eric Proshansky, the city’s lead lawyer on the lawsuit, said the city’s estimates were “absolutely solid.”
Mr. Wallace said he and the tribal council are working to establish ground rules to curb abuses, such as barring phone or Internet cigarette sales and prohibiting residents of the reservation from selling cigarettes unless they have a store. He has also proposed setting sales limits and monitoring sales volume by working with the cigarette wholesalers that sell to the reservation.
But in the end, he says, tribal leaders lack strong enforcement powers over the smoke shops, partly because they do not have their own police department.
While he has called the Suffolk County Police to help with lawbreakers on the reservation in the past, he said he is reluctant to do so now because of heightened tensions between the tribe and the county. “We can’t ask them help us enforce our council decisions, because now all they care about is tobacco and taxation — they just want to come in and shut everything down,” he said.
As he spoke, Mr. Wallace moved aside a candle he lights to mask the smell of cigarettes. Though he himself is a smoker perpetually trying to quit, he explained that cigarettes are helping to breathe economic life back into his tribe. The tribal leaders require cigarette retailers to pay into a fund that goes to improve housing for tribal members and to provide money for college.
Mr. Wallace calls the challenges to cigarette sales the latest in the historical shortchanging of his tribe and its attempts at economic self-sufficiency. Though hundreds of acres of land has been taken from the Unkechaug Nation, he said, it has managed to retain a foothold because of longstanding political and cultural ties and strong trading and intertribal relationships.
As other commercial enterprises have fallen away, about the only things tribe members have left are their sovereignty and the right to conduct tax-free business, he said. “For Bloomberg, this is about his budget deficit, but for us, this is survival,” he said. “This is sovereign territory, and they are not going to collect a nickel without our consent.”
