The state’s plan does make exceptions for cigarettes sold to tribal members, estimating, based on the population of an Indian reservation, what portion of the sales are made to them. Taxes are charged on the remaining packs, on the assumption that they are bought by customers who are not Indians.In fact, this does not make reservations for tribal members. Vendor prices should be the same for all cigarettes, sold to Indians on reservation or not. The reason is that it appears stamps must be on all cigarette packs--there is no "dual supply" problem. In this case, vendors will raise the price of all cigarettes by whatever the tax is (recognizing competition and constant returns to scale production) and simply take the tax cut as pure producer surplus. The supply-and-demand equilibrium before and after is depicted below (click to enlarge). The upper blue-to-red supply line depicts the taxed supply. The red line depicts supply without tax. As we can see, because of the law of one price, producers have in effect been given a lump sum transfer, which will not be reflected in their prices.
The structure of taxation will make this effectively a tax on on-reservation Indian consumption of cigarettes.