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Keweenaw Bay Indian Community v. Khouri

United States District Court, W.D. Michigan, Northern Division

June 30, 2017

NICK KHOURI, et al., Defendants.


          Paul L. Maloney United States District Court Judge.

         Plaintiff Keweenaw Bay Indian Community (“the Community”) is a federally-recognized American Indian tribe organized under the Indian Reorganization Act of 1934, 25 U.S.C. § 476. It has approximately 2, 625 enrolled members, and approximately 1, 044 residents on its reservation. The Community seeks declaratory and injunctive relief for Defendants' alleged violations of federal law and unlawful interference with the Community's federally-sanctioned activities. (Third Am. Compl., ECF No. 58.) The Community alleges that Defendants have enforced, and continue to enforce, the Michigan Sales Tax Act, the Michigan Use Tax Act, and the Michigan Tobacco Products Act (“Tobacco Act”) in violation of federal law. (Id.)

         The Defendants are Nick Khouri, the Treasurer of the State of Michigan, Walter Fratzke, the Native American Affairs Specialist for the Department of Treasury (“the Department”), Ruth Johnson, the Secretary of State for the State of Michigan, Sergeant Christopher Croley, an officer with the Michigan State Police, Daniel Grano, an Assistant Attorney General for the State of Michigan, and Detective Timothy Sproull, an officer with the Michigan State Police.

         The matter is before the Court on Defendants' motion for judgment on the pleadings for the official-capacity tobacco-tax claims. (ECF No. 68.) The Community has filed a response (ECF No. 73), and Defendants have filed a reply (ECF No. 75). Upon careful review of the record, the Court has decided that the motion can be resolved without oral argument. See W.D. Mich. LCivR 7.3(d). For the reasons that follow, Defendants' motion is granted in part and denied in part.


         The L'Anse band of Chippewa Indians have long occupied the area near the base of the Keweenaw Bay in Michigan's Upper Peninsula. Under the Treaty with the Chippewa at La Pointe (the “1842 Treaty”), the Chippewa Indians ceded to the United States the western half of Michigan's Upper Peninsula, including the Keweenaw Bay area (“ceded area”). Treaty with the Chippewa, Oct. 4, 1842, 7 Stat. 591, 1842 WL 6508. This treaty provided that “[t]he Indians stipulate for the right of hunting on the ceded territory, with the other usual privileges of occupancy, until required to remove by the President of the United States, and that the laws of the United States shall be continued in force, in respect to their trade and intercourse with the whites, until otherwise ordered by Congress.” Id. at art. 2. In 1854, the United States set nearly 60, 000 acres near the base of the Keweenaw Bay as an Indian reservation for the L'Anse and Lac Vieux Desert Bands of Chippewa Indians. Treaty with the Chippewa, Sept. 30, 1854, 10 Stat. 1109, 1854 WL 9483. The Community's reservation is located within this area.

         In 1977, the Community and the State of Michigan entered into a tax agreement. As part of the agreement, the State acknowledged the nontaxable status of the Community and its members with respect to state sales and use taxes. In 1997, the State terminated this tax agreement, and the parties have been unable to reach a new agreement.

         The Department has established a form process that allows tribes without a tax agreement with the State to file claims for exemption from or refund of sales and use taxes with respect to purchases, leases, rentals, use, storage, or consumption of tangible personal property or services within Indian country. Under this process, tribes and tribal members must either pay sales tax and use tax at the time of the transaction or file a claim requesting an advance determination that a particular transaction is not subject to sales and use tax. If an advance determination is not obtained, the purchaser must pay the tax at the time of sale and then submit a claim for refund of the tax paid. This refund process also applies to the tobacco tax.

         In 2003, the Community filed a lawsuit against the Treasurer of the State of Michigan, the Administrator of the Tax Policy Division of the Michigan Department of Treasury, the United States Postmaster General, employees of the United States Postal Service, and several Michigan State Police officers. (Keweenaw Bay Indian Cmty. v. Rising, No. 2:03-CV-111 (W.D. Mich. May 29, 2003), ECF No. 1) (“Rising I”). The Court granted the defendants' motion for summary judgment on several tobacco-tax claims, granted the defendants' request to dismiss claims that would extend the Community's sovereignty into the area ceded under the 1842 Treaty, and dismissed part of the Community's § 1983 claim. (Id. at ECF Nos. 96, 301.) The Sixth Circuit affirmed this decision and held that the tobacco tax was valid because the incidence of the tax fell on non-tribal consumers; that it did not impose more than a minimal burden on the tribe; that it comported with prior treaties; that the State's search of packages did not infringe the Supremacy Clause or exclusive federal authority over mail; that the tribe's sovereign immunity did not preclude search of the mail packages; and that the search warrants for the mail packages met the Fourth Amendment's particularity requirement. Keweenaw Bay Indian Cmty. v. Rising, 477 F.3d 881, 886-95 (6th Cir. 2007).

         Here, the Community alleges that, since January 1, 2013, it submitted approximately 991 claims for exemption or refund to the Department relating to purchases of tangible personal property and services. The Community objects to the necessity of participating in the Department's claim process in order to exercise its immunities from state taxation under federal law. Of these claims, the Department denied approximately 900, granted approximately 58, and has yet to rule on the 33 remaining claims. The Community also alleges that, since July 1, 2012, four Community members have submitted approximately 254 claims for exemption or refund to the Department related to purchases of a wide variety of tangible personal property and services. The Department has denied approximately 161 claims, and has granted 68 claims; 25 claims remain.

         The Community alleges that the State has unlawfully enforced the Tobacco Act, Mich. Comp. Laws § 205.427(1), which imposes a tax on the sale of tobacco products, including cigarettes, sold in Michigan. The Act requires licensed wholesalers and unclassified acquirers other than a manufacturer to remit the tobacco tax and a tax return to the Department by the twentieth day of each calendar month for products sold during the preceding month. Mich. Comp. Laws § 205.427(2) and (3). A “wholesaler” is a person who purchases tobacco products from a manufacturer, sells 75% or more of those products to others for resale, and maintains an established business where substantially all of the business is the sale of tobacco products at wholesale and a substantial stock of tobacco products is available to retailers for resale. Mich. Comp. Laws § 204.422(cc). An “unclassified acquirer” is a person who is not a transportation company or a purchaser at retail from a licensed retailer, and “who imports or acquires a tobacco product from a source other than a wholesaler or secondary wholesaler licensed under this act for use, sale, or distribution.” Mich. Comp. Laws § 205.244(z).

         The Tobacco Act provides that “a person shall not purchase, possess, acquire for resale, or sell a tobacco product as a manufacturer, wholesaler, secondary wholesaler, vending machine operator, unclassified acquirer, transportation company, or transporter in this state unless licensed to do so.” Mich. Comp. Laws § 205.423. A “transporter” means a person importing or transporting into the State, or transporting in the State, a tobacco product obtained from a source located outside of the State, or from any person not duly licensed under the Act, but does not include an interstate commerce carrier licensed by the interstate commerce commission to carry commodities in interstate commerce. Mich. Comp. Laws § 205.422(y). The Act also requires a wholesaler and unclassified acquirer to affix a stamp provided by the Department to the bottom of each individual package of cigarettes to be sold within the State before delivery, sale, or transfer of the cigarette package to any person in the State. Mich. Comp. Laws § 205.426a(2). A retailer or any person licensed under the Act is not permitted to acquire any package of cigarettes for resale unless the package has that stamp. Mich. Comp. Laws § 205.426a(3). Any tobacco products that violate the Act may be seized and confiscated by the Department. Mich. Comp. Laws § 205.429(1).

         The Community sells tobacco products on the reservation or the trust lands at several locations that are wholly owned and operated by the Community. This area is considered “Indian country” as defined by federal law.

         On December 4, 2015, the Community purchased 3, 360 cartons of Seneca cigarettes for $65, 620.80 from HCI Distribution, an economic development arm of the Winnebago Tribe of Nebraska. The Community sent a pickup truck and utility trailer, driven by John Davis, an enrolled member of the Community, to transport the cigarettes from HCI's facilities to the Community's reservation. On December 11, 2015, Michigan State Trooper Lajimodiere stopped the truck in the ceded area of Marquette County for speeding. The trooper did not issue a speeding citation. The Community alleges that the Michigan State Police were conducting an illegal surveillance investigation into the operations on the reservation. Trooper Lajimodiere contacted the Michigan State Police Tobacco Tax Enforcement Team for assistance, and several members responded to his call. They seized the Community's cigarettes, truck, and trailer.

         The Community requested an administrative hearing under Mich. Comp. Laws § 205.429(3) to contest the seizure. On January 22, 2016, the Department held a hearing to determine whether the cigarettes, truck, and trailer were lawfully seized and subject to forfeiture to the State. The Community alleges that it was not allowed to question the Department's witnesses during the hearing. The hearing referee recommended that the Department find that the cigarettes and trailer were lawfully seized and subject to forfeiture, but that the seizure of the truck was unlawful. The Department rejected the latter portion of the recommendation, and on February 5, 2016, it issued a decision and order of determination that the Community's truck, trailer, and cigarettes were lawfully seized and subject to forfeiture. The Community brought an action in state court challenging the decision and order, but is seeking a stay of the state-court proceedings pending the outcome of this case.

         On January 28, 2016, the Community purchased 184 cartons of Seneca brand cigarettes for $197, 715 from Native Wholesale Supply. The wholesaler shipped the cigarettes in two shipments of 92 cases to the Community via XPO Logistics Freight, Inc., a common-carrier trucking company licensed by the U.S. Department of Transportation Federal Motor Carrier Safety Administration. On February 9, 2016, the Michigan State Police stopped one of the XPO trucks in Marquette County, within the ceded area. The Department seized the 92 cases of cigarettes based on its determination that the cigarettes were untaxed. That same day, the Michigan State Police stopped the second XPO truck, again, within the ceded area. The Department seized the remaining 92 cases of cigarettes after determining that they were also untaxed.

         The Community once again requested administrative hearings for the February 9th seizures. On March 16, 2016, the Department held a hearing. The Community alleges that the hearing referee presumed that the Tobacco Act was constitutional, and did not allow the Community to present argument or evidence on whether the seizure violated the Constitution or federal law. Once again, the Community alleges that the referee did not allow the Community to question the Department's witnesses during the hearing. The referee found that, when an individual package of cigarettes is located in the State without the required tobacco tax stamp, there is a presumption that the package violates the Act. The referee also found that the cigarettes did not contain the required stamp, were contraband, and that the Community was acting as an unclassified acquirer without a license. The referee recommended that the Department find that the Michigan State Police lawfully seized the cigarettes and that they were subject to forfeiture. The Department accepted the referee's recommendation in its decision and order of determination. The Community also filed a lawsuit in state court to challenge this decision.

         In August 2016, the Department provided the Community with a notice of intent to assess taxes and penalties against the Community for the tobacco products seized on December 11, 2015 and February 9, 2016. In response, the Community's Tribal Council President submitted a written demand to the State Treasurer for an informal conference. The Community contested the entire amount of the alleged tax liability and penalties for four reasons: (1) the Department failed to comply with the statutory requirements under Mich. Comp. Laws § 205.21(2)(a), which are prerequisites for issuing a notice of intent to assess taxes; (2) the Department also failed to comply with Mich. Comp. Laws § 205.21(2)(b), which describes the required elements of a valid notice of intent to assess; (3) the notices of intent to assess are unlawful under the Tobacco Act; and (4) the notice, if carried out, would violate the U.S. Constitution and federal law. All of these claims are part of the state-court litigation.

         On October 4, 2016, state officials signed a felony complaint and sought arrest warrants against two of the Community's members for violations of the Tobacco Act. In response to the criminal investigation, the Community added two defendants in their individual and official capacities. These individuals are Assistant Attorney General Daniel Grano, who signed a felony complaint and sought an arrest warrant against the Community's members, and Michigan State Police Officer Timothy Sproull, who is responsible for enforcing the Tobacco Act and is the complaining witness to the felony complaint. The Community requests an injunction to prevent Defendants from taking any further actions to impose or collect Michigan's tobacco products tax, including conducting surveillance or investigations on the Community's reservation and filing or pursuing criminal prosecutions against Community members or employees.


         Under Federal Rule of Civil Procedure 12(c), “a party may move for judgment on the pleadings.” Fed.R.Civ.P. 12(c). The Court is to apply the same standard to a motion for judgment on the pleadings that it applies to a motion to dismiss under Rule 12(b)(6). Warrior Sports, Inc. v. Nat'l Collegiate Athletic Ass'n, 623 F.3d 281, 284 (6th Cir. 2010) (citing EEOC v. J.H. Routh Packing Co., 246 F.3d 850, 851 (6th Cir. 1973)). “For purposes of a motion for judgment on the pleadings, all well-pleaded material allegations of the pleadings of the opposing party must be taken as true, and the motion may be granted only if the moving party is nevertheless clearly entitled to judgment.” JP Morgan Chase Bank, N.A. v. Winget, 510 F.3d 577, 581 (6th Cir. 2007) (quoting Ohio Bank v. Merrill Lynch, Pierce, Fenner & Smith, Inc., 479 F.2d 478, 480 (6th Cir. 1973)). The Court, however, “need not accept as true legal conclusions or unwarranted factual inferences.” Morgan v. Church's Fried Chicken, 829 F.2d 10, 11 (6th Cir. 1987).

         Although the decision on the motion “rests primarily upon the allegations of the complaint, ” the Court may also consider “matters of public record, ” “orders, ” and materials in “the record of the case, ” among other things. Barany-Snyder v. Weiner, 539 F.3d 327, 332 (6th Cir. 2008) (internal citations and quotations omitted). For example, it “may take judicial notice of its own record of another case between the same parties.” Harrington v. Vandalia-Butler Bd. of Educ., 649 F.2d 434, 441 (6th Cir. 1981). Thus, the Court should grant a Rule 12(c) motion “when no material issue of fact exists and the party making ...

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