The lieutenant governor of San Ildefonso Pueblo co-owns an Albuquerque smoke shop raided earlier this week by federal agents for allegedly selling cigarettes without paying state taxes.

However, the case against Paul Rainbird — who in the mid-1990s headed the organization that sponsors the annual Santa Fe Indian Market — is better characterized as a tax squabble centered on Internet sales and an unclear portion of federal law, Rainbird's attorney said Wednesday.

"He thought it was legal," the attorney, Peter Schoenburg, said. "This was all done in the open."

The federal Bureau of Alcohol, Tobacco and Firearms as well as the U.S. Attorney's Office believe otherwise, search warrants show.

In their opinion, Rainbird's business, the Silvercloud Smokeshop on Lomas NW in Albuquerque, cheated state tax collectors out of $6.3 million since 2003, according to court documents.

The state usually receives 91 cents a pack for cigarettes sold in New Mexico, the warrants state. American Indians who acquire cigarettes for sale or use on a reservation in which they are an enrolled member are exempt from the state law, the warrants say.

But Rainbird's business — co-owned with June Ortiz — was not located on tribal land, the warrants state, and the business should have notified each state to which it sent cigarettes and paid taxes in those states. The business had sold more than $20 million in cigarettes since 2003, according to the warrants.

Suppliers who sold Rainbird's business the nontaxed cigarettes told federal agents they thought they were selling them to a reservation business, the federal documents state.

Schoenburg said Rainbird's Albuquerque smoke shop did not sell to walk-up customers on Lomas Boulevard and only peddled the tax-exempt cigarettes to customers through a Web site.

"If they do business on the Internet, with no walk-ups, and it's based in cyberspace but is wholly owned by tribal members, does it really matter where (the cigarettes) are packaged and sent to customers?" the lawyer said, noting that both Rainbird and Ortiz are San Ildefonso tribal members.

Schoenburg said the law governing the sales is unclear, and the issue has been the subject of legal action in other states during the last decade. "The government tries to make it look like the law is clear, and it's not," he said.

Norm Cairns, spokesman for the U.S. Attorney's Office, didn't return a phone message Wednesday seeking comment.

Schoenburg said ATF agents this week seized all the cigarettes and computers at the Silvercloud Smokeshop, which essentially closed the business.

Documents indicate agents also seized a 2001 Chevrolet Corvette and a 2004 Infiniti FX from Rainbird's home on San Ildefonso Pueblo, located north of Santa Fe.

No one has been arrested or charged in connection with the case, Schoenburg said.

Rainbird ran the Southwestern Association for Indian Arts, which puts on the Santa Fe Indian Market each August, from 1995 to 1998. He was elected lieutenant governor of San Ildefonso Pueblo in February.

Contact Jason Auslander at 986-3076 or :jauslander@sfnewmexican.com.