Skip to main content

The State Tax Man Cometh -- Redux

Earlier this year I warned Indian Country that the state tax man cometh. I urged tribal communities to be prepared to defend against state tax collectors looking to balance multi-billion dollar state budget deficits on the backs of Indians. Since then, the states’ financial situation has gone from bad to abysmal.

State tax revenues, especially local property tax monies, have steadily declined over the last four years. Now, the Republican-hijacked Congress has added insult to the states’ injury by gutting federal aid for education, health care and transportation. And Congress’ so-called Super Committee will inflict more damage, almost certainly slashing federal funding for state Medicaid programs. Beyond the direct impact the loss of Medicaid funding, for example, will have on tribal communities, these federal-state dynamics will cause state and local tax collectors to find new targets for taxation, including Indians.

Meanwhile, Indian gaming, after a modest decline in national revenues from 2008 to 2009, held steady in 2010 at $26.5 billion. But state and local tax collectors see a $26.5 billion tribal target. As IGRA categorically prevents state taxation of Indian gaming activities, those tax collectors are looking to assess anything and anybody on the periphery of tribal casinos and reservations. In other words, as soon as a tribal dollar can be found beyond the safe refuge of Indian gaming or tribal lands, state taxes will be assessed.

Tragically, federal courts are increasingly sanctioning state tax collection from Native America. Take two federal appellate court decisions that were handed down in the last few weeks: Fond du lac Band of Lake Superior Chippewa v. Myron Frans, No. 10-1236, 2011 WL 3518182 (8th Cir. Aug. 12, 2011), and Ute Mountain Ute Tribe v Rodriguez, No. 09-2276, 2011 WL 3134838 (10th Cir. July 27, 2011). Both decisions resulted in tribal losses (at least for the time being) that serve to allow states unprecedented access to Indian Country for purposes of general revenue raising.

In Fond du lac, the appeals court upheld Minnesota’s efforts to tax the retirement income of Charles Diver, a Chippewa Indian who was relocated to Ohio in 1960 under the federal relocation program. He worked in Ohio as a dockworker until 1998, when he retired and returned home to the Fond du Lac Reservation in Minnesota. The court ruled that Minnesota could tax his pension earned in Ohio and drawn on the reservation because his “Minnesota citizenship created a constitutional nexus for the taxation.”

The lone dissenting judge best explains his court’s irrational approach: “Diver has never earned income while working off the reservation as a citizen of Minnesota. His pension was earned entirely in the state of Ohio, where he lived and worked for thirty years. Minnesota could not have taxed his wages as he received them because the state did not have the required nexus. Now that Diver has retired and returned to the Fond du Lac reservation, tribal sovereignty precludes Minnesota from imposing a tax on a pension earned . . . in Ohio. Just as Minnesota could not tax Diver’s preretirement Ohio wages simply because he now resides on a reservation located in the state, the same is true for the pension tied to those wages.”

Scroll to Continue

Read More

In Ute Mountain, the appeals court affirmed five specific state taxes on oil and gas extracted from tribal lands by oil and gas operators that per leases and development agreements with the tribe, pay the tribe royalties and taxes used for essential tribal services and per capita distributions to tribal members. The state provides no absolutely no services to the operators on the reservation, in large part because the tribe has barred all state agents from entering tribal lands. Instead, the court justified the state taxes on the basis that New Mexico “provides substantial services by regulating the off-reservation infrastructure that makes transport of oil and gas possible."

The court’s consideration of off-reservation roads to justify the taxation of on-reservation activity is unprecedented, and potentially disastrous for Indian Country.

The court did not “purport to hold that off-reservation infrastructure or services may be considered in every instance where they provide a benefit of any magnitude to the on-reservation activity” (emphasis in original). Still, if Ute Mountain withstands further appeal, beginning with the tribe’s petition for en banc review, Indian Country (or at least those tribes in the Tenth Circuit) should brace for increased state tax assessment when even the most attenuated connection between off-reservation infrastructure or services and on-reservation economic success, can be alleged by state and local tax collectors.

Fond du lac and Ute Mountain illustrate the desperate lengths to which state and local governments will go to replenish their tax coffers. The decisions show that tribes’ “neighbors” will stoop to all-time lows in terms of taxing Indians and stealing the fruits of on-reservation labor.

This is no time for tribal complacency or status quo. Indian Country cannot rest on its laurels or age-old federal Indian tax exemption notions. Tribes must re-revaluate the source of every on-reservation income stream flowing amongst or between the tribe, tribal members and non-tribal business partners – from contracts to leases to non-contractual relations, to per capita to employment to retirement plans.

Make no mistake about it: the state tax man cometh to Indian Country. Are you ready?

Gabriel S. Galanda, an enrolled member of the Round Valley Indian Tribes, is a partner at Galanda Broadman, PLLC, a Seattle law firm dedicated to representing tribal interests. He can be reached at (206) 691-3631 or