Tribal Taxes: Benefitting the Bottom Line

So it’s April—that brings to mind a myriad of symbols and events … cherry blossoms, Easter bunnies, the annual National Indian Gaming Association conference … and yes, that dreaded tax deadline. But taxes don’t have to be a negative blip on the calendar. Tribal taxes actually pose an incredible opportunity via tribal governments’ inherent rights to claim exemption from certain taxes and impose others. The net effect can powerfully impact the bottom line of tribal enterprises, including gaming resorts and their extended business footprint entities such as hotels, travel/fuel centers, tobacco shops, gift stores and retail outlets.

One attorney shared with me that during law school, if she needed to fall asleep at night, she would simply start reading tax law briefs. Taxes and their associated laws are considered by most to be boring, mundane and complicated. And yet, the imposition of taxes brings out fierce emotions and dramatic protests like no other topic (case in point: the Boston Tea Party). American Indian tribal government taxes carry their own unique set of laws, regulations, oversight and complexities, but similarly, the topic brings out the same severe reactions. Recently, the Seattle Times ran a front page article suggesting that tribes in Washington state should be taxed more to help pay for some of the state’s budget deficits. The article claimed the tribes don’t seem to pay their fair share of taxes. The article drew a flurry of heated responses and blog postings, my personal favorite being a response letter to the editor from Paul Talbert of Seattle, which said:

The Seattle Times is opposed to “a big new tax,” but does not hesitate to suggest taxing the tribes. [“State’s gas-tax refunds to tribes under fire,’ page one, Jan. 13]. Since tribes are sovereign nations and the Indian Gaming Regulatory Act specifically prevents states from imposing taxes on them, it is unclear what the legal basis for such taxation would be, but taxing other governments to pay for ours is a grand idea. Why stop with our local tribes? Why not tax Canadians, Albanians and Bolivians? Maybe we could wave the Times’ “just fix it” motto in front of the Chinese and Germans and compel them to pay for our “unfunded” educational mandates, which are unfunded precisely because the legislature suspended paying for them.1

However, reaction to unfair taxation rises beyond emotional outcries and blog postings. When the Blue Lake Rancheria, a Northern California tribe, felt they had been unfairly taxed, they took their case (claims for refunds due) all the way to federal court. In a recent groundbreaking decision handed down in the Ninth Circuit U.S. Court of Appeals, the tribe won a favorable judgment in their suit: Blue Lake Rancheria; Blue Lake Rancheria Economic Development Corp., plaintiffs-appellants, v. United States of America, defendant-appellee. At issue was federal unemployment (FUTA) taxes imposed on a tribal corporation (Mainstay Business Solutions, an employee leasing company wholly owned by the tribe) and paid to the federal government. The tribe claimed exemption under federal law and the U.S. fought it. Initially, an earlier court decision favored the U.S., but on appeal, the tribe prevailed. At issue was whether this business qualified for the tribal exemption due to the question of Mainstay’s common-law employer status. The takeaway however, is that tribal sovereignty was upheld, the tribe is owed a nice refund and tribal businesses can feel confident in their inherent right to exemption from FUTA tax imposition. The case judgment is lengthy, but the final paragraph, the conclusion, says it all:

Services performed “in the employ of an Indian tribe” are excepted from FUTA’s definition of “employment” by§ 3306(c)(7) only where a tribe or its instrumentality is a common-law employer of the worker performing the services. Because Mainstay was a common-law employer of its leased employees during the years in question, it was not required to pay FUTA taxes with respect to those employees. We reverse and remand with instructions to enter judgment for the Tribe. REVERSED and REMANDED2.

At the January 2012 Western Indian Gaming Conference and California Nations Indian Gaming Association (CNIGA) meeting, Eric Ramos, president of the Blue Lake Rancheria Economic Development Corp. proudly announced the tribe’s victory, and from the responses in the room, this was perceived as a very important decision and Blue Lake is an appreciated role model to many other California tribes. I applaud the Blue Lake Rancheria’s firm action and encourage all tribes to fully explore tax exemptions to which they are entitled.

One can view tribal tax exemptions as a defensive position; that is the act of aggressively exploring and realizing savings through not paying certain taxes via exemptions allowed under federal law. So then perhaps even more interesting is the offensive position—that of aggressively exploring and realizing added revenue to the tribal government by imposing and collecting taxes.

Tribal governments have the authority to collect taxes on transactions that occur on tribal lands. Some tribes collect sales, excise, fuel and lodging taxes. Unlike state and local governments, Indian tribal governments do not, as a rule, levy income or property taxes on their reservations. Tribal governments’ rights to collect taxes and establish tribal tax commissions are unequivocal; however how these rights intersect with state and local governments’ rights regarding collection from non-tribal members is where the law gets a little fuzzy. In most cases, the law is interpreted to convey that both governments have the right to impose and collect taxes on non-tribal member customers on reservation lands. This then implies double taxation. Obviously, businesses cannot sustain credibility or viability with double taxation assessment, so the solutions are to negotiate agreements on a case-by-case basis. This means that each tribe wishing to impose taxes such as lodging, fuel, retail sales or excise needs to individually negotiate the collection process and any potential tax-share formula with the state or local governments in order to uphold their rights and preserve a reasonable taxation rate.

Some states have been very cooperative. Louisiana allows the tribes to keep the majority of the taxes collected in an extremely supportive agreement. Minnesota, Wisconsin, Oregon, Michigan and New Mexico all have some form of tribal-state tax share agreements in place. It appears that California and Arizona are the toughest states with the most aggressive tax collection departments and have yet to create much in the way of tribal-state cooperative tax sharing.

It is logical and progressive for states and tribes to work together in a collaborative manner. In her article, “Piecing Together the State-Tribal Tax Puzzle,” Judy Zelio asserts3:

Depending on the type of arrangement, both states and tribes have found benefits in cooperative tax arrangements that may result in:
• Predictable revenues for both tribe and state,
• Economic advantages for tribes and local governments,
• More equality for tribal and nontribal sellers,
• Non-Indian purchasers meeting their tax obligations,
• An end to expensive and time-consuming litigation,
• New or expanded programs and services, and
• More amicable relations among Indian and non-Indian neighbors.

A steady tax revenue stream should not be underestimated. Most local and state governments, and of course, our federal government, depend on tax revenues for the majority of their fiscal budgets and credit worthiness. Once a tax basis is established historically and consistently, a tribal government can use projected tax revenue to secure loans, establish credit and finance projects. Every tribe should be encouraged to explore and pursue its governmental tax exemptions and its taxation authority to the fullest extent possible. Not only is there the obvious benefit of additional bottom line cash, but as a political strategy, perhaps even more importantly, this strengthens government operations and affirms tribal sovereignty.

1 The Seattle Times Northwest Voices | Letters to the Editor Tribes and Taxes, Jan. 16, 2012.
2 No. 10-15519 D.C. No. v. 3:08-cv-04206-SC OPINION Appeal from the United States District Court for the
Northern District of California Samuel Conti, Senior District Judge, presiding.
3 “Piecing Together the State-Tribal Tax Puzzle,” Judy Zelio; National Conference of State Legislatures, 2005.

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