United States Supreme Court Justice, John Marshall, famously stated in McCulloch v. Maryland, that “the ...power to tax...[is] the power to destroy.” So goes the current trend with states and the IRS, finding unique and interesting ways of taxing Indian tribes, and tribally owned business. Below is a sampling of the various ways the state and IRS are taxing tribal resources.
Taxation of Gaming Revenues
The Indian Gaming Regulatory Act, 25 U.S.C. §2701 et. seq. (IGRA) generally prohibits the taxation of Indian tribal gaming revenues. However it does provide for reimbursement of gaming regulatory activities undertaken by a state. In California, however, during the Schwarzenegger administration, it was not uncommon for the Governor’s office to demand twenty-five (25) percent of a tribes net gaming revenues just to enter compact negotiations for a Class III gaming compact. The revenues, however, were not used for regulatory purposes, or alleged gaming impacts, but placed in the state’s general fund-to be used at the Governor’s discretion – including funding budget gaps and pet projects.
Demanding 25 percent of revenues, in many instances, made it economically unfeasible for small tribes to enter the gaming business because they cannot service their casino financing debt and remain profitable. As a result, some tribes decided to forgo gaming, and in doing so, much needed local revenue, and area employment was lost. One tribe, the Rincon Band of Luiseno Indians, said they’d had enough and filed suit against the State of California after it would not negotiate a reasonable gaming compact.
The Ninth Circuit Court of Appeals ruled in the Tribe’s favor, finding the Governor acted in “bad faith” during compact negotiations, the Governor’s offer of gaming “exclusivity” provided no benefit to the Tribe and the revenue payment, that went directly into state coffers, was nothing more than a tax that is prohibited by the IGRA. The case, Rincon Band of Luiseno Indians v. Arnold Schwarzenegger and State of California, was recently denied review by the United States Supreme Court; their denial upholds the 9th Circuit court ruling finding in the Tribe’s favor.
While California Governor, Jerry Brown, has yet to negotiate a compact observing the 9th Circuit’s “no tax rule” he has shown a willingness to compromise on these issues and I hope that he continues the dialog, especially concerning funds directed towards gaming impacts. In my opinion, tribe’s should have the freedom to negotiate with and direct impact funding where it is needed most—to local governments.
Taxation of Tribal Motor Fuel Sales
Perhaps the most innovative and aggressive means of taxing tribes also comes from California. It is established law that Indian tribes are free from state taxation unauthorized by Congress. In Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450 (1995), the United States Supreme Court held that a state could not tax a tribe’s sales of motor fuel. However, the Court did permit the state of Oklahoma to tax a non-tribal fuel supplier. In a recent California Board of Equalization (BOE) legal opinion, the Board’s legal counsel reasons that it is perfectly legal to tax an out of state tribal fuel supplier, supplying fuel to instate tribes selling fuel on reservation lands. The Board reasons that because the fuel did not enter the state, via reservation lands, and entered via a state highway, the fuel is subject to tax.
Further, says the BOE, tribal suppliers, who also happen to be retailers, operating fuel stations on reservation lands, are not exempt from fuel excise taxes because they are designated as “enterers” subject to tax under California’s tax scheme. The Board’s reasoning is illogical because irrespective of a tribe’s position as retailer or supplier, or both - the fact still remains it is tribal taxation of motor fuel sales that occur on Indian lands. Moreover, the state fuel tax is unauthorized by Congress as held in established Supreme Court precedent. The Board’s motor fuel tax opinion, No. 10-475, has yet to pass legal muster. Stay tuned as this issue awaits further development.
IRS’s Refusal to acknowledge a tribal FUTA tax exemption, leads to—you guessed it—more taxation
Even the IRS is getting in on the tribal taxation action. In the early 2000’s, Congress Amended the Federal Employment Tax Act (FUTA). The amendment provided a tribal exemption from collection of federal unemployment taxes. In short, tribes and tribal businesses under the FUTA amendment were provided the same FUTA tax exemption as states and local governments and were to be treated the same for FUTA tax purposes. In reliance on the express Congressional language providing the exemption, the Blue Lake Rancheria, a Northern California tribe, created a tribal staffing business, Mainstay Business Solutions, Inc.
Mainstay provided temporary staffing and payroll services for small and medium sized businesses with fluctuating staffing needs. The business flourished, with Mainstay recently being named one of the most successful Indian owned businesses in the country. However, the IRS did not view Mainstay’s use of the FUTA exemption in the same light, denying Mainstay’s request for reimbursement of over $2 million in FUTA taxes previously paid by the Tribe. Why? Because allegedly Mainstay’s business model relegated them a “statutory employer” as opposed to a “common law” employer required under the IRS’s FUTA analysis.
The irony here is that the State of California found Mainstay’s employment status consistent with the State’s Unemployment Tax Act and granted the Tribe an exemption from State unemployment taxes. The Tribe recently won its 9th Circuit court appeal, however the IRS has yet to send the Tribe a refund check. Unfortunately for Mainstay, the check will do little to revive Mainstay, because of recent State of California Employment Development Department (EDD) action, again alleging the Tribe owed a $16 million dollar assessment to EDD, Mainstay shuttered its operations – A sad thing for one of last year’s winners of “Best Native American Business” in the Country.
As outlined above, tribes must be on guard to protect their rights and must hire the best legal and political experts to protect them. In the case of generating revenue for increasingly dry state and IRS coffers, it appears states and the IRS are increasingly focusing on tribes and their economic successes and are willing to stop at nothing to tax them down to the bone. These taxes result in destruction of tribal enterprise, ingenuity and self-reliance.
Jack Duran is a descendant of the Ysleta Del Sur Pueblo, a tribal attorney and owner of Duran Law Office, a Roseville, California-based Indian law and policy firm.