In 2011, state and local governments will aggressively attempt to tax tribes. Forty-six states are facing a total of $112 billion in budget deficits, leaving them grasping for novel sources of tax revenue. Make no mistake: state and local officials are already looking to Indian country to replenish state coffers.
Federal law provides several clear rules: Tribes and tribal members are exempt from state taxation within Indian territory. Indian trust land is non-taxable. Indian gaming activities cannot be taxed. Still, the state taxmen cometh, with new theories and novel machinations for siphoning value from on-reservation economic development.
Despite the states’ best efforts, courts have repeatedly barred state and local attempts to tax in Indian country. Recently, a federal court stopped California from demanding a percentage of a tribe’s gaming revenues, holding that a revenue-sharing demand constituted not only bad faith, but an illegal tax on Indian gaming.
Still, as long as Indian gaming is profitable, “rational actors” in state government will attempt to snatch tribal gaming revenues. Despite the Indian Gaming Regulation Act’s (IGRA) per se bar on Indian gaming taxation, the temptation is too great. Circumventing states will instead seek to impose “fees” on tribal gaming vendors, even though such fees, resembling Indian gaming taxes, have been struck down.
States will also look to tax Indian gaming per capita income wherever possible. The California Franchise Tax Board, for example, brazenly targets the per capita income of tribal members living off reservation. Likewise, the board seeks to tax income generated by tribal enterprises operating off of tribal lands, such as Internet server-based businesses.
States will also seek to tax Indian gaming revenues once those dollars are leveraged in corollary tribal economic development, as intended by IGRA. Whether the subject of state taxation is tribal tobacco, fuel, hotel rooms, concessions—you name it—states will attempt to tax the tribes’ non-Indian business partners and customers, ignoring various court decisions that have struck down state taxes on non-Indians transacting in Indian country.
Meanwhile, counties are more zealously than ever assessing taxes on fee lands owned by tribes. These little siblings of state government do not care about the incongruity of governments taxing other governments’ property. They also do not care that counties, cities and towns are already overcompensated for any services they provide to tribal members; under the economics of “tax exporting,” it is frequently tribal governments—not state or local governments—that bear a disproportionate financial burden associated with taxation vis-à-vis local services rendered.
New York is currently a hotbed for Indian property tax disputes. Madison County, which has tirelessly sought to tax Oneida Nation fee lands, has taken its case to the Supreme Court. Last month the court remanded the county’s appeal to a federal circuit appeals court. Seneca County is threatening to foreclose on fee lands owned by the Cayuga Indian Nation. For now, sovereign immunity protects tribes against incursion by states’ little siblings.
States and counties bear little to no pecuniary risk in their “tax-first” approach, especially because the Supreme Court has prevented tribes from suing state actors for the “deprivation of any rights, privileges, or immunities secured by the Constitution and laws” under federal civil rights laws like 42 U.S.C. 1983. Emboldened by that legal reality, state and local officials are all too glad to sort out taxation legalities—or illegalities—after the fact, especially before sympathetic federal and state court judges.
Too many state and local governments also ignore the solution provided by the Supreme Court for resolving inter-local tax disputes: compacts. Currently, there are over 200 state-tribal tax agreements in effect nationwide, by which tribes and their neighboring governments have nipped various potential tax disputes in the bud. For example, the Southern Ute Indian Tribe and La Plata County, Colorado, have compacted to resolve property tax issues associated with various tribal non-trust properties.
Yet rather than entering into symbiotic arrangements under which tribal monies are actually paid into county coffers, many counties are expending taxpayer dollars to litigate over taxes that they can never collect at law. As tax accords provide economic benefit that tax litigation does not, local taxing bodies like Madison and Seneca Counties must have non-financial motives.
For all of these reasons, tribal governments and their business partners must redouble their efforts to prevent taxation by the state and its little sibling. Indian leaders should reevaluate the terms of their revenue allocation plans and business partnerships, and related tax laws, to ensure tribal intramural and external dealings are insulated from non-tribal taxation. Tribal laws should be amended and business deals restructured as necessary. Policies of tribal taxation, or not, should also be reexamined, insofar as tribal excise taxation of various reservation-based economic activities will create factors that militate against state or local taxation.
In 2011, the state taxman cometh. Indian country, be prepared.
Gabriel S. Galanda is a law partner at Galanda Broadman, PLLC, in Seattle. He is an enrolled member of the Round Valley Indian Tribes.