AP IMPACT: Indian smoke shops are feeling the heat

[September 16, 2009]  NEW YORK (AP) -- After doing time for possession and an accidental killing, crack dealer Rodney Morrison decided he was finished with drugs. He threw himself a "retirement" party in 1993 and got into a new line of work: tax-free cigarettes.

It was a business operating in a gray area of the law, and the riches were enormous.

Within a decade, the smoke shop Morrison opened on Long Island's little Poospatuck Indian Reservation had become one of the state's biggest dealers in untaxed cigarettes. Other drug dealers soon took note and followed him into the business.

By 2007, one in every seven packs sold in New York state came from either Morrison's shop or three others on the reservation, all four managed by people with a history of drug dealing, The Associated Press found in a review of court and business records.

Those four stores sold 9.9 million cartons of cigarettes that year, or enough to supply every smoker in New York City with a pack a day for 3 1/2 months.

Now, it may all be going up in smoke for the cigarette kingpins of the Poospatuck reservation.

Dismayed by the lost tax revenue, New York City has waged a legal battle that could put shops like Morrison's out of business. This month, Poospatuck stores may have to begin collecting taxes for the first time because of a federal judge's ruling that untaxed sales to non-Indians are illegal.

Morrison, 42, is in deeper trouble. He could get up to 30 years in prison when he is sentenced Sept. 25 in a case in which federal prosecutors set out to blame him for a murder but wound up convicting him of illegally trafficking in cigarettes.

Other states have also struggled with the sale of untaxed cigarettes at reservation smoke shops, and federal prosecutors have filed smuggling charges in recent years against a few dealers in Idaho and Washington. But the cigarette trade on New York's reservations dwarfs the business in other states, with 304 million packs sold in 2007 alone.

The Poospatuck case is being watched closely. If the court decisions are applied to all reservation smoke shops statewide, they could doom a $6 billion-a-year business in Indian tobacco that now accounts for a third of New York's cigarette sales.

The Poospatuck reservation covers just 55 acres at the edge of a suburban neighborhood in the town of Mastic, about 60 miles from New York City. Fewer than 300 people live there. The centuries-old preserve of the Unkechaug tribe has long been impoverished, with many residents living in trailers.

It has about a dozen smoke shops in all, for one major reason: Indian sovereignty.

Because the state doesn't collect sales taxes on Indian land, cigarettes bought there can cost less than half of what they do in New York City, which has the nation's highest tobacco taxes. In the city, a carton of Marlboros costs about $95, including $42.50 in state and local taxes.

As a result, "buttleggers" -- operating, investigators say, with the assistance of some store owners -- buy large quantities of cigarettes on the reservation and resell them in the city at a big markup. Some of those packs wind up on the shelves of convenience stores and bodegas. Others are sold on the street by "$5 men."

"There's no difference between the cigarette business and the drug business. It's the same type of individuals involved," said Kyron Hodges, a former drug dealer from Brooklyn who joined legions of street hustlers transporting tax-free cigarettes from the Poospatuck reservation to the city. "I took all of my street knowledge and applied it to cigarettes."

Technically, New York law allows reservation merchants to sell tax-free tobacco only to members of the tribe for their personal consumption. And in recent years, police have arrested at least 220 people leaving the Poospatuck reservation with loads of cigarettes.

But until now, the rule has never been enforced against the smoke shops themselves, despite the loss of more than $700 million a year in state and local tax revenue. Since the mid-1990s, New York governors fearful of stirring up tribal unrest have instructed state tax officials to leave the smoke shops alone.

And so, as state authorities looked the other way, Morrison's business boomed, grossing $172 million in one 4 1/2-year period, according to bank records. He bought homes, land and businesses throughout the U.S. and Latin America, stashed $30 million in foreign banks and collected $1.7 million worth of luxury watches.

Morrison's lawyer, Billy Murphy, said his client's transformation from drug dealer to entrepreneur should be viewed as a success story.

When Morrison was 20, he killed a 6-year-old boy while blasting off shotgun rounds in a friend's yard. He pleaded guilty to criminally negligent homicide and was sentenced to probation. Later, he got a year in jail for drug possession.

"Rodney decided to give it up and go legit," Murphy said. "He retired from the drug business and went into the cigarette business because he thought it was legal."

Prosecutors, though, said Morrison didn't change his methods. He kept a gun in his office. He talked tough. And when a wave of violence swept the reservation, people began pointing fingers.

The car of one smoke shop owner was firebombed. Another shop owner was beaten and robbed. Armed men burst into a tribal council meeting and threatened the chief's life. Then, in 2003, a former Morrison employee with a rival cigarette business, 23-year-old Sherwin Henry, was shot to death on a Brooklyn rooftop.

After the incident at the tribal council meeting, Morrison seemed pleased people were afraid of him, an employee later told prosecutors. "Every now and then you have to bite people," he said, according to the worker.

Meanwhile, Morrison held himself out as a respectable businessman, joining the local Chamber of Commerce.

Morrison wasn't the only person on the reservation with a checkered past.

His estranged half-brother, Shawn, began managing The Golden Feather smoke shop after finishing a seven-year prison term in 2004 for drug dealing. The Smoking Arrow Smoke Shop was managed for a time by a former member of Morrison's drug crew. And Monique's Smoke Shop was run by a man who served six months for drug dealing in the 1990s.

None of the men are Indian, but all of them are married or connected romantically to Indian women, and that entitled them to run businesses on the reservation.

During hearings over a lawsuit brought by New York City, a former smuggler and an undercover state tax investigator testified that many of the Poospatuck stores welcomed illicit business.

Some were lookouts, watching for police patrols. Others split large orders into smaller transactions to hide big deals. There were tales of late-night meetings in parking lots where cash was exchanged for garbage bags filled with cigarettes.

Morrison was arrested in 2004 and indicted on federal racketeering charges accusing him of Henry's murder and a string of other violent crimes. Prosecutors said he paid $15,000 to have Henry killed because he was stealing customers away.

At trial, Morrison's lawyer argued that most of the charges were concocted by jealous competitors. The jury acquitted Morrison last year on most counts, including the murder, but found him guilty of racketeering for selling untaxed cigarettes to non-Indians.

The verdict came as a shock to scores of reservation smoke shops across the state engaged in a nearly identical business.

Morrison's lawyers have appealed his conviction, saying the state's policy was "so hopelessly confused ... it is impossible for a citizen to know the law."

In denying Morrison bail last week, U.S. District Judge Denis R. Hurley, who will sentence the cigarette dealer, called him "a cunning individual with dangerous proclivities" and said that, despite the verdict, he believed Morrison had "set up the scenario" that resulted in Henry's murder.

Since the trial, state courts have continued to send conflicting messages about the smoke shops' legal obligations. As recently as July, a state appeals court threw out a case against a Cayuga Nation store in western New York, saying it could not be prosecuted for selling untaxed cigarettes.

Things could come to a head in the next few weeks. In her Aug. 25 ruling in the city's lawsuit, U.S. District Judge Carol Bagley Amon ordered the Poospatuck stores to start collecting taxes on sales to non-Indians in 30 days.

Shawn Morrison recently decided to close. Rodney Morrison's store is still in business, but like the others is in limbo. Philip Morris, the maker of Marlboros, ordered wholesalers last year to stop selling its products to shops on the Poospatuck reservation because of the smuggling.

The Unkechaug chief, Harry Wallace, blames a few "dirty dealers" for ruining the business.

"The unscrupulous guys come in, and all they care about is building their own personal fortune and then engaging in quasi-legal activity," Wallace said. "All of a sudden, we are all criminals. We are getting blamed for someone else's actions."

[Associated Press; By DAVID B. CARUSO]

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