Kansas can't collect tribal fuel tax
ST. LOUIS - A decision that may have a nationwide ripple effect to uphold
tribal sovereignty favored the Prairie Band Potawatomi and allows the tribe
to collect its own motor fuel taxes at a reservation business.
The 10th Circuit Court of Appeals reversed the decision of the lower United
States District Court of Kansas finding for the state of Kansas.
The court considered tribal sovereignty and the unique relationship between
tribes and federal government and had to decide in whose best interest the
collection of the motor fuel tax was greater, the state or the tribe. The
court opinion favored the tribe. The written opinion stated: "The Nation's
interests are particularly strong. Tribes have a recognized interest in
raising revenues for essential government programs, that interest is
strongest when the revenues are derived from value generated on the
reservation by activities involving the tribes and when the taxpayer is the
recipient of the tribal services."
The Nation Station, as it is called, is located next to the tribal casino
and most of the patrons that purchase fuel are casino customers and tribal
members. Seventy-three percent of the fuel customers are casino patrons or
casino employees and another 11 percent live or work elsewhere on the
The court determined that the tribe did not advertise discount motor fuel
to attract customers and that the station was not located where it would
attract passersby. The cost of the fuel is just two cents lower than most
other motor fuel operations and the tribe imposes its own tax.
"The tribe is collecting $200,000 to $300,000 per year in taxes. The
nation's tax is 20 cents for gasoline and 22 cents for diesel. The state
tax is 23 and 25 cents," said David Prager, attorney for the Prairie Band
"This decision supports compacts for all tribes with full tax credit if it
is used for government purposes. This is a nationwide decision," Prager
The motor fuel tax collected by the nation is used for road and bridge
construction and repair. The tribe maintains about two thirds of the road
system on the 121-square-mile reservation while the county maintains the
remainder. No funds are given to the county for road maintenance.
The state argued that is lost revenue because the nation did not collect
the taxes. The state collects approximately $300 million in motor fuel
taxes each year.
In 1995 the state of Kansas rewrote the tax law to put the burden of the
tax on the non-Indian distributors to Indian country and the retailer would
then add the cost of the tax to the cost of the fuel at the pump.
The nation filed a lawsuit against the state asking the court to prevent
the state from imposing the tax. The lower court ruled in the state's
In that decision the U.S. District Court of Kansas stated that the tribe
failed to show that the state tax substantially affected its ability to
offer government services or in any way affect self-government. The lower
court also determined that any profit from products sold by the Nation
Store that were imported by non-Indian distributors was not a value
generated on Indian lands.
The higher court disagreed.
The Appeals Court found the motor fuel sales were dependent on the value
generated on the reservation as an integral and essential part of the
casino operation. Fuel sales are not independent and do not promote the
business as a state tax-free business. The Nation Station, the court
determined, existed only because of the casino.
"We balance the competing interests by viewing the Nation's fuel revenues
as being derived primarily from value generated on its reservation," the
10th Circuit opinion stated.
The state argued that the nation could collect both the state and tribal
tax. The nation countered with the argument that two taxes are mutually
exclusive and only one could be collected without destroying the business.
Two elements led to the appellate court decision: The interests of the
tribe and federal government superseded those of the state and the tax
infringes on self-government or sovereignty.
The Prairie Band Potawatomi told the courts that by imposing a tax on its
enterprises the state precluded the tribe from imposing its own tax which
would be beneficial to the tribe. The court agreed with the fact that
constitutionally the tribes should be able to impose the tax. The
constitution gave Congress the power to regulate commerce with foreign
nations and with Indian tribes. The court considered the unique origins of
tribal sovereignty and how it differed from that of state sovereignty in
making its decision.
The nation argued that the Nation Station adds value to the reservation and
area because of the convenience store and food service elements. There is
no other such facility near the reservation that provides meals for
employees and visitors and also sells fuel. The argument from the nation is
that the facility adds value to the reservation.
The weakness in the Kansas argument was the fact that its main interest was
tax revenue, the court concluded. Also in the opinion, the fact that the
state does not provide any financial assistance in maintaining the road
system was seen as a negative.
"Under these facts, Kansas' generalized interest in raising revenues is
insufficient to justify the tax," the 10th Circuit Court of Appeals found.