During the late 1970s, California's military base sales subsided for two reasons: voters and the Legislature had held the line on the tobacco tax rate, and another tax-exempt source had burst on the scene to replace the bases.

In May 1977, the Chemehuevi Indians began selling tax-exempt cigarettes.[193] They did not agree with the conventional legal interpretation that they could sell tax-free only to members of the tribe and that they had to collect tax from everyone else. Instead, they sold tax-free to everyone and went to court to prevent California from stopping them. During an eight-year legal battle that went to the U.S. Supreme Court, the Chemehuevi and many tribes who imitated them made a fortune selling hundreds of millions of untaxed packs, many bought by organized criminals for resale by their networks.[*], [194]


[193] J.D. Dotson, "Indian Smoke shop Tax Evasion in California," in Presentations at the 1981 Annual Meetings of the Tobacco Tax Section of the National Association of Tax Administrators (Washington, DC: Federation of Tax Administrators, 1981), 28.

[194] For a discussion of this topic see Glenn A. Bystorm, "Collection of the California Cigarette Tax on Indian Reservations," in Presentations at the 1987 Annual Meetings of the Tobacco Tax Section of the National Association of Tax Administrators (Washington, DC: Federation of Tax Administrators, 1987), 14-16.


[*] The legal dispute in this case centered on who was assumed to bear responsibility for the tax. Initially, a U.S. district court found that the tax fell on the non-Indian buyer of cigarettes, and that the transaction was therefore taxable. A U.S. court of appeals later overturned this ruling on grounds that the tax fell on the tribe and that the transaction was therefore not taxable. The U.S. Supreme Court later overturned this finding and sided with the district court.