YAKIMA — The long-standing taxation issue between King Mountain Tobacco Co. Inc. and the federal government took a sudden turn late last week when the company filed for Chapter 11 bankruptcy protection.
The Yakama cigarette maker said it was forced to file after the federal Alcohol and Tobacco Tax and Trade Bureau sent a final notice to King Mountain on Aug. 25, demanding repayment of $75 million in outstanding excise taxes, interest and late fees. In that notice, the bureau threatened to levy against the company's assets if payment was not made within 30 days.
With the company unable to make the entire payment on short notice, filing bankruptcy was the only means to prevent closure and the loss of 66 jobs, King Mountain CEO Jay Thompson said in a phone interview Monday.
It would be devastating to the Yakama Nation, which has had to contend with poverty and high unemployment, he said.
"The clock was ticking," Thompson said. "We needed to protect our business and protect our employees, and this was the only way to do this."
According to a declaration filed by Thompson in U.S. Bankruptcy Court, the company employs 63 full-time and three part-time employees.
King Mountain has maintained that the tribal-owned enterprise should be exempt from federal excise taxes because it operates on tribal land held in federal trust, and taxation is barred under the 1855 Yakama Treaty.
However, in 2014, the U.S. District Court ruled in favor of the federal government and said King Mountain must pay $58 million in federal excise taxes and fees dating back to 2009. The court ruled that cigarettes are a manufactured product, not derived directly from the land, and therefore subject to taxes. That ruling was upheld by the Ninth Circuit Court of Appeals.
In 2019, the U.S. Supreme Court denied King Mountain's request to review the case further.
In his declaration, Thompson wrote that the company reached settlements over unpaid taxes with other state and federal agencies, such as the U.S. Department of Agriculture. The company, through attorneys, has also been in communication with the Department of Justice in hopes of resolving unpaid taxes with the Alcohol and Tobacco Tax and Trade Bureau.
Thompson said the company disclosed financial records to explain cash flow and its ability to pay. Those records showed that the company's gross revenues in 2019 were $30 million. Thompson also pointed out that King Mountain has been current on federal excise taxes charged since April 2013.
On Monday, Thompson said communication had become less frequent in recent months, but he chalked that up to the COVID-19 pandemic.
So when Thompson received the notice, he said he was in shock.
"We thought we were in good faith negotiating with them," he said.
Lawsuit seeks refund
The company also filed a complaint in U.S. District Court last week seeking a refund of $26 million in federal taxes. The company says the taxes were collected on cigarettes manufactured for sale to tribal members, and from tobacco grown on tribal reservation land.
In the complaint, the company contends that it should not be charged for cigarettes that remain inside the Yakama Nation or are sold to other tribal nations.
This latest lawsuit seeks to make points not brought up in the previous U.S. District Court case, said Jack Fiander, a Yakima attorney representing King Mountain in the U.S. District Court case.
One question raised in the lawsuit is whether it's lawful for the federal government to charge taxes on a product that is made on tribal land and purchased and used by members of tribal nations.
Fiander points out that cigarette companies are not charged excise tax when exporting product to other countries.
"Is it discriminatory to treat a tribal nation differently?" he said.
For Trina Wheeler, chair of King Mountain's board of directors, the sudden payment notice, the bankruptcy filing and the recent federal lawsuit are the latest in a tiring battle for the federal government to honor the provisions of the Yakama Treaty.
Wheeler's husband, Delbert Wheeler, was working on an appeal of the U.S. District Court ruling against King Mountain when he died in 2016.
"We're constantly battling it out in court for the U.S. government to honor our treaty like they do with other nations," she said.