FEATHER SMOKE SHOPS LLC v. OKLAHOMA TAX COMMISSION (2009)

OPINION

¶ 1 In this case we are asked to determine whether the trial court exceeded its jurisdiction and abused its discretion when it entered a temporary injunction against the State of Oklahoma, by and through the Oklahoma Tax Commission (OTC). The Plaintiff is Feather Smoke Shops, LLC, (Feather) an Oklahoma limited liability company with its principal place of business located in Osage County, Oklahoma. Feather is a tribally licensed retailer of the Osage Nation (Tribe) with a license to sell cigarettes and tobacco products for resale. It is also a holding company for three smoke shops in Osage County¹ and for other shops in different counties. The injunction entered by the trial court prevents the OTC from collecting and enforcing a payment in lieu of excise tax on the sale of cigarettes and tobacco products at Feather's Osage County shops at the rate of $8.58 per carton (.8575 per pack), instead of $2.58 per carton (.2575 per pack), which Plaintiff contends is the correct rate. We find the trial court was without jurisdiction to enter the injunction. We vacate the injunction and remand for further proceedings.

BACKGROUND AND THE ENACTMENT OF 68 O.S. 346

¶ 2 The dispute in this case arises out of the rights and duties of the parties under the “Tobacco Tax Compact Between the State of Oklahoma and the Osage Nation” (Compact), which became effective December 16, 2003.² The authority for the Compact derives from the State Legislature's enactment of 68 O.S. Supp.1992 346,(amended 2004),³ following the United States Supreme Court's decision in Oklahoma Tax Commission v. Citizen Band Potawatomi Indian Tribe of Oklahoma, 498 U.S. 505, 111 S.Ct. 905, 112 L.Ed.2d 1112 (1991).⁴ The Court considered whether the State of Oklahoma could legally sue the Tribe for taxes on sales of cigarettes and tobacco products, sold either to members or nonmembers of the Tribe, at its tribal stores within Oklahoma. The Court found the doctrine of tribal sovereign immunity prohibited the State from bringing a lawsuit against the Tribe to collect state taxes on sales to either members or nonmembers of the Tribe, absent the Tribe's waiver of immunity or Congressional abrogation of the doctrine. Oklahoma Tax Commission v. Citizen Band Potawatomi Indian Tribe of Oklahoma, 498 U.S. 505, 510, 111 S.Ct. 905, 910, 112 L.Ed.2d 1112. However, the Court held the Tribe's sovereign immunity did not deprive the State of its authority to tax sales to nonmembers of the Tribe at the Tribe's store. 498 U.S. at 512, 111 S.Ct. at 911. Moreover, the Court reiterated that tribal sellers have an obligation to assist the State in the collection of valid state taxes on sales to nonmembers at Indian stores on reservation lands. Id., citing Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134, 100 S.Ct. 2069, 65 L.Ed.2d 10 (1980) and Moe v. Confederated Salish and Kootenai Tribes of Flathead Reservation, 425 U.S. 463, 96 S.Ct. 1634, 48 L.Ed.2d 96 (1976). Additionally, the Court suggested alternative methods for collection of taxes on sales to nonmembers of the Tribe. One such method was the adoption by the State and Tribe of “a mutually satisfactory regime for the collection of this sort of tax,” Oklahoma Tax Commission v. Citizen Band Potawatomi Indian Tribe, 498 U.S. at 514, 111 S.Ct. at 912, citing 48 Stat. 987, as amended, 25 U.S.C. § 476. In response, our Legislature enacted 68 O.S. Supp.1992 346. See § 346(A)(3).⁵

THE COMPACT

¶ 3 The Compact, effective December 16, 2003, provides the Tribe will pay 25% of all applicable excise taxes⁶ which were effective as of January 1, 2003, and 100% of all increases enacted by the State after January 1, 2004, with exceptions noted. At the time the Compact was executed, the 25% rate was $2.58 per carton of ten packs ($.2575 per pack). See Compact, ¶ 3.⁷ However, the compact provided that the Tribe would not be required to pay the increase in Oklahoma taxes after January 1, 2004, in the following cases:

1. At any of its retail businesses within 20 miles of the Kansas state line until Kansas increases its taxes on tobacco products [emphasis added];

2. At its existing retail business on Highway 99 in Pawhuska and at a future retail business to be located “on the corner of 15th Street and Highway 99 in Pawhuska until Kansas increases its tax on tobacco products;8 [emphasis added] and

3. On products bought and sold at any of its retail businesses within 10 miles of a retail business which:

(a) was in operation on January 1, 2003,

(b) was owned by a tribe subject to a compact,

(c) under which the Tribe was obligated to pay only 25% of all applicable excise and sales taxes,

until such tribe's compact terminates or is cancelled by mutual agreement of the parties. [emphasis added].

Compact, ¶ 3.

¶ 4 Another provision of the Compact which could affect the rate required from the Tribe is paragraph 16, informally referred to as the “favored nation clause,” (FNC). It provides:

16. Should the State at some future date enter into a tobacco tax compact with another Indian tribe with terms more favorable to the other Indian tribe than those in this compact, such more favorable terms may, at the option of the Nation, automatically be incorporated herein.

¶ 5 After the Compact became effective, the Tribe, through its Principal Chief Jim Gray, sent a letter dated December 3, 2004, via FAX to the OTC, advising it of more favorable provisions included in later executed compacts. These compacts contained a lower tax rate for the other tribes which were located within 20 miles of another state's border, as well as more favorable terms for shops within 10 miles of other tribes' shops. In particular, the Chief noted Choctaw Nation smoke shops located within 20 miles of the Texas border, pay $.58 per carton. Because the Choctaw Nation's Compact contains savings clauses identical to those in the Osage Compact,⁹ the Chief asserted the Tribe's right to pay the tax at the $.58 per carton rate ($.0575 per pack).

¶ 6 Also noted in the letter were references to later executed compacts between the State and the Cherokee Nation, the absentee Shawnee Tribe, the Iowa Tribe and the Seminole Nation. The alleged “more favorable” provision in the later compacts related to the distance between shops of different tribes, similar to the Osage Compact's provision saving the Tribe from incurring Oklahoma's 2004 tax increase.¹⁰ The Chief advised the OTC that the 10 mile provision in its Compact was enlarged to 35 miles in the compacts mentioned. The letter, admitted as Defendant's Exhibit 6 at the hearing on the injunction, provided as follows:

[S]ubsequent to the execution of the Osage Compact, several tribes signed Compacts under which the ten-mile barrier was extended to thirty-five miles. In particular, the Cherokee Nation Compact executed on February 9, 2004, extends the ten-mile barrier to thirty-five miles for twenty-eight Cherokee smoke shops, presumably because these smoke shops could not come within the ten-mile limit. In addition, the absentee Shawnee Tribe's Compact executed January 14, 2004 also provides for a thirty-five mile barrier for its facility located in Norman, Oklahoma. The other two Shawnee smoke shops are within the ten-mile barrier. I note as well that both the Iowa Tribe and Seminole Nation have thirty-five mile barriers for designated smoke shops. It is our position that the thirty-five mile barrier is automatically incorporated into the Osage Compact pursuant to Section 16 11 of the Compact ․ [emphasis added].

․

Accordingly, the Tribe is automatically incorporating the thirty-five mile barrier into its Compact for those shops that are unable to come within the ten-mile barrier.

¶ 7 At the hearing, OTC's witness testified, and it is stated in its briefs, that the OTC considered Exhibit 6 an amendment to the Compact, thus incorporating the exception rate ($.58 per carton) and the 35-mile barrier between shops into the Compact.¹² This apparently continued until July 17, 2008, at which time the OTC notified Plaintiff that the applicable rate for Feather and its shops would change from the exception rate ($.0575/pack, $.58/carton) to the “new compact rate” ($.8575/pack, $8.58/carton). The stated reason for the change was the termination of the Pawnee Tribe's compact which resulted in the “non-compact” ($.7725/pack) rate for the Pawnee Tribe.

¶ 8 Plaintiff then filed this declaratory judgment action, pursuant to 12 O.S. Supp.2004 §§ 1651-1657, alleging the OTC's actions violated the U.S. and Oklahoma Constitutions. Plaintiff also sought injunctive relief, asking the court to order OTC to apply the tax rate of 25% of all applicable excise taxes, Plaintiff's last legal compact rate.

¶ 9 Feather contends OTC's actions violate the compact under the favored nation clause (FNC) provision of the Compact, which would entitle the Tribe's shops to the most favorable tax rate enjoyed by another tribe. Feather contends the most recent such compact is the Kaw Nation Compact.

SUBJECT MATTER JURISDICTION

¶ 10 The above discussion about the Compact is necessary to consider our jurisdictional issue. The OTC alleges the trial court lacked subject matter jurisdiction to enter the injunction and that federal arbitration is required instead. Plaintiff argues the state district court properly exercised jurisdiction and correctly found that the relief ordered was necessary. Oklahoma's jurisprudence undoubtedly acknowledges arbitration as a valid means of settling disputes, as well as the jurisdiction of our state district courts to issue an injunction. In this case, however, the Compact contains an agreement between the Tribe and the State which determines this jurisdictional question.

¶ 11 Paragraph 11 of the Compact provides the following:

Any dispute arising in the interpretation or performance of this Compact, which is not resolved by good faith negotiations within thirty (30) days, shall be subject to binding arbitration. Arbitration may be invoked by either party following the negotiation period should the dispute remain unresolved. Arbitration shall be the exclusive means of resolving such disputes subject only to review by the United States District Court having jurisdiction and venue. When arbitration is invoked, a panel of arbitrators consisting of three (3) members shall be appointed. One shall be appointed by the nation and one by the State. A third shall be appointed by the other two members. The expenses of arbitration shall be born equally by the parties. The arbitrators shall adopt their own procedural rules regarding the arbitration process in conformity with the rules of the American Arbitration Association. [emphasis added].

¶ 12 The role of this Court is to determine whether there is a valid, enforceable agreement to arbitrate the dispute which is governed by principles of state law. Rogers v. Dell Computer Corporation, 2005 OK 51, 138 P.3d 826, citing Wilkinson v. Dean Witter Reynolds, Inc., 1997 OK 20, ¶ 9, 933 P.2d 878, 880. [citations omitted]. No evidence exists that the agreement itself to arbitrate certain disputes is invalid. The Federal Arbitration Act, 9 U.S.C. §§ 1-16 (2000) (FAA), applies to contracts affecting interstate commerce. See Allied-Bruce Terminix Companies, Inc. v. Dobson, 513 U.S. 265, 269, 115 S.Ct. 834, 130 L.Ed.2d 753 (1995). Under the FAA, the question of the contract's validity as a whole is submitted to arbitration. Rogers v. Dell Computer Corporation, 2005 OK 51, ¶ 13, 138 P.3d 826, 829, citing Prima Paint Corp. v. Flood & Conklin Mfg. Co., 388 U.S. 395, 405, 87 S.Ct. 1801, 18 L.Ed.2d 1270 (1967). The FAA does not preempt state law unless the Congressional purposes and objectives embodied therein are frustrated. Rogers v. Dell Computer Corporation, ¶ 12, at 829, citing Volt Information Sciences, Inc. v. Board of Trustees of Leland Stanford Junior University, 489 U.S. 468, 477, 109 S.Ct. 1248, 103 L.Ed.2d 488 (1989).

¶ 13 In this case, the parties appear to differ as to how to interpret a compact which has incorporated more favorable terms from the compact of another Tribe when the other Tribe's compact has terminated. The OTC contends the assessed tax increase for the Osage Tribe is due to the termination of the Pawnee Nation's compact. At different times the OTC has argued the exception rate ($.58/carton) and the extended mileage barrier (from 10 miles to 35 miles) between shops were incorporated into the Osage compact because of the Pawnee Nation's Compact. However, OTC witness McConville stated the OTC considered the mileage barrier in the Osage Compact to have been amended by Exhibit 6 which incorporated the terms of the Cherokee compact. Exhibit 6 itself purports to amend the tax rate to $.58/carton because of the Choctaw compact. Feather contends the Kaw Nation's most recent compact of July 24, 2008, with a rate of $.2575/pack, $2.58/carton, should determine its rate.¹³ Does the tax rate return to the original rate in the compact, or may the compact be affected by the termination of a totally different Tribe's compact? The proper tax rate issue also certainly affects the Tribe's performance under the compact, as Feather, a licensed retailer, alleges it is unable to compete with shops paying only $.58 per carton, as opposed to its assessment of $8.58 per carton. Moreover, we note the Tribe's compact does not terminate on its own terms until 2013¹⁴ and that the State and the Tribe have not cancelled the compact by mutual agreement. There was also testimony that Kansas had not raised its taxes on tobacco products, a factor which avoids raising the Tribe's rates under the compact. Therefore, a possible interpretation of the Compact is that the original price of $2.58 per carton should be resumed.

¶ 14 As to OTC's other jurisdictional allegations, it argues that it is not the real party in interest because it does not set or levy the tax due; it only collects and enforces the payment of the tax due. It also claims that White Feather, a shop allegedly cancelled on January 18, 2008 at Feather's request, is not the appropriate party to bring the action. However, as noted above, Feather, the Plaintiff, is the holding company for three Osage shops which are affected by OTC's actions. Feather is an Osage licensed tribal retailer, operating by and through its principal, under the jurisdiction of the Osage Nation, and the Compact applies to the Osage Nation's licensees, known as Tribal Retailers. Additionally, the OTC represents the State in this case as the party which enforces the appropriate tax rate. It is, in fact, specifically mentioned in 68 O.S. 346, in which wholesalers are required to forward to the OTC all invoices of their sales to retailers. Additionally, the amendment to § 346 provides that the OTC “shall” regularly conduct audits of those selling cigarettes and tobacco to the tribes.

¶ 15 We find the resolution of this case is governed by the terms of this Compact. Section 11 requires submitting issues related to the “interpretation or performance” of the Compact to federal arbitration. We therefore hold the trial court did not have jurisdiction to enter the temporary injunction. The Tribe and the State agreed to federal arbitration under these circumstances, and we will not rewrite the compact. In fact, the letter of December 3, 2004, from Chief Gray to the OTC contains an acknowledgment that arbitration is a possibility. The letter provides in the last paragraph, in part:

[I]f you do not agree with our analysis as set forth in this letter, please let me know immediately so that we can attempt to come to a consensus and negotiate in good faith in accordance with Section 11 15 of the Compact ․ [emphasis added.]

¶ 16 The injunction is vacated, and this case is remanded to the trial court for further proceedings in accordance with the views expressed in this opinion.

VACATED AND REMANDED FOR FURTHER PROCEEDINGS.

¶ 1 I agree that the majority opinion has focused on the pertinent provisions in the Osage Nation Tobacco Tax Compact that are dispositive of the tax rate dispute between the parties. I likewise agree that the majority opinion has identified the circumstances under which disputes arising under the Compact are subject to arbitration. I disagree, however, with the majority's conclusion that the dispute in question is subject to arbitration as provided in the Compact.

¶ 2 I believe the “dispute” is not subject to arbitration because it is not one “arising in the interpretation or performance of th[e] Compact.” I reach this conclusion because the undisputed material facts show that the State, through the actions of the Oklahoma Tax Commission, is simply in breach of the unambiguous “favored nations” provision of the Compact. This provision grants the Osage Nation the “option” to “automatically ․ incorporate” more favorable terms of a tobacco tax compact with another Indian tribe into the Osage Nation Compact. The State, through the Oklahoma Tax Commission, admits that the Osage Nation exercised this “option” and chose to incorporate the favorable terms of the State's compacts with the Cherokee Nation and Choctaw Nation, inter alia. The Oklahoma Tax Commission recognizes that this action constituted an amendment to the Compact, including the “exception rate” of $.58 per carton. Nothing in the Compact ties or burdens such amendment of the Compact to the continuation of any comparable terms that may have been previously incorporated from another compact, like the Pawnee Compact in question.

¶ 3 In my opinion, there is no uncertainty about the meaning of any term in the Compact, nor any doubt about the performance due under any term. There is simply unjustified refusal of the Oklahoma Tax Commission to perform its ministerial duties under the Compact and a suit in district court for injunctive relief is one of the appropriate remedies for such a breach of contract. Under the record presented, I do not believe the trial court either exceeded its jurisdiction or abused its discretion in issuing the injunction.

WATT, J.

EDMONDSON, C.J., TAYLOR, V.C.J., HARGRAVE, OPALA, KAUGER, WATT, WINCHESTER, COLBERT, JJ., concur. REIF, J., concurs in part, dissents in part.