Cigarette maker may face $30M tax bill

A Yakama tribal cigarette manufacturer could be on the hook for some $30 million in federal tobacco taxes under a recent federal court ruling.

Delbert Wheeler, owner of King Mountain Tobacco in White Swan, along with the Yakama Nation, sought an order in January of last year in U.S. District Court blocking the Alcohol, Tobacco and Trade Bureau from assessing federal excise taxes on cigarettes and other tobacco products he manufactures on tribal land.

Held in federal trust, tribal land and products directly derived from it are exempt from federal and state taxes. Wheeler argues that his business is also exempt because it’s situated on tribal land deep within the Yakama reservation, where he grows a portion of his tobacco.

But on Feb. 11, U.S. District Judge Rosanna Malouf Peterson in Spokane ruled that King Mountain products are subject to federal taxes because they are not directly derived from tribal land. Wheeler blends his tobacco with off-reservation tobacco and uses other products not derived from tribal land to manufacture his products, Peterson said in her ruling.

“When taking into account the manufacturing process and the amount of nontrust-land tobacco that is used in King Mountain’s products, the court finds that the cigarettes and roll-your-own tobacco produced by King Mountain are not principally generated from the use of reservation land and resources,” she wrote.

Wheeler’s dispute over federal taxes began when Federal Bureau of Investigation agents raided his business on Feb. 16, 2011, and seized company records and computer equipment. Responding to the raid, the tribe sued the federal government, seeking an order requiring the FBI and the Department of Justice to notify the tribe before entering the reservation and unspecified compensation for punitive damages.