Federal Indian Tax Law: The Supreme Court Writes Policy When Congress Won’t

In light of the recent end of the United States Supreme Court’s term, a time when the most controversial or consequential decisions are announced, MBPC would like to highlight several U.S. Supreme Court rulings that have had widespread and lasting impacts on American Indian tribes and their taxation authority.

The power to tax is an inherent right of self-government and is one of many rights still retained by American Indian tribes. While tribal governments once held exclusive taxation authority on their reservations, including over non-Indians, the absence of comprehensive federal Indian tax policy has opened the door for state and local governments to repeatedly challenge this. As a result, over the past few decades, tribal taxation authority over non-Indians on reservations has been heavily contested and significantly limited by a series of United States Supreme Court rulings.

When litigated, the resolution of these disputes generally depends upon the specific details of each case. It also requires the weighing of federal and tribal interests against those of the state and/or county according to a complex and sometimes seemingly contradictory set of “tests” developed by the U.S. Supreme Court. Thus, it is important to note that in the absence of clarifying Congressional legislation, this area of tribal law is fluid and dynamic and very much affected by the evolving makeup of the U.S. Supreme Court and state and tribal leadership. With this in mind, below is an overview of current tribal, state, and local taxation authority in Indian Country.

Tribal Taxation Authority Over Tribal Members on Reservations

Due to their sovereign status, tribal governments can unilaterally impose taxes on their own members residing on their reservation. However, there are very few tribes that tax their member populations. You can learn more by reading MBPC’s report, Policy Basics: Taxes in Indian Country Part 1: Individual Tribal Members.

Tribal Taxation Authority Over Non-Indians on Reservations

In 1981, in Montana v. United States, an important case involving the Crow Tribe and the state of Montana, the court formalized the extent of tribal authority over non-Indians on reservations across America. These resulting “Montana exceptions,” when applied to taxation, provide that tribes can impose taxes on non-Indians through commercial transactions that occur on reservation trust land. These transactions include purchases of tobacco and alcohol, as well as natural resource production leases, among other things such as tribal hotel or lodging and utility taxes.

Tribes can also impose taxes on non-Indians via commercial transactions occurring on reservation fee (or privately owned, non-trust) land when:

  • the non-Indian individual or entity being taxed has entered into a consensual contractual agreement with a tribe or tribal member; or
  • the activity being taxed threatens or has some direct effect on the political integrity, economic security, or health or welfare of the tribe.

State Taxation Authority Over Indians on Reservations

States cannot tax tribes or tribal members on their own reservations, in accordance with federal law and U.S. Supreme Court rulings, including: Lone Wolf v. Hitchcock; Oklahoma Tax Commission v. Chickasaw Nation; Oklahoma Tax Commission v. Sac & Fox Nation; Moe v. Confederated Salish & Kootenai Tribes; Lummi Indian Tribe v. Whatcom County; Standing Rock Sioux Tribe v. Janklow.

Although political status, or tribal membership, matters, so does land status, as the U.S. Supreme Court found in County of Yakima v. Confederated Tribes and Bands of the Yakima Nation. That ruling stated that states and counties can tax on-reservation fee land even when it is owned by a tribe or tribal member. Likewise, with the exception of income derived directly from allotted trust lands or treaty fishing rights, states may tax the income of tribal members living on-reservation whenever the income is derived from off-reservation sources.[1]

State Taxation Authority Over Non-Indians on Reservations

Although states cannot impose taxes on tribes or tribal members on their reservations, the U.S Supreme Court found in Washington v. Confederated Tribes of the Colville Indian Reservation that states can levy certain taxes on non-Indians in Indian Country when:

  • federal law does not explicitly prohibit the tax; and
  • the tax does not interfere with the tribe’s ability to perform its governmental functions.

Examples of these taxes are discussed at length in Policy Basics: Taxes in Indian Country Part 2: Tribal Governments.

Concurrent State-Tribal Taxation Authority on Reservations

Adding to the complexity of jurisdictional questions, the U.S. Supreme Court found in Cotton Petroleum Corp. v. New Mexico that in certain circumstances both tribal and state governments have the right to tax the same transactions or purchases and leases noted above.

This finding has resulted in numerous complications, including dual taxation. For non-tribal members doing business on reservations, having to pay tribal and state taxes on the same activity results in higher costs, which can drive away businesses and reduce much needed commercial activity on reservations. It also limits tribes’ ability to develop a tax base to sustain reservation infrastructures, economies, and essential tribal government functions and services, thus increasing tribes’ reliance on federal dollars. You can read more about these issues and resolutions in Montana in Policy Basics: Taxes in Indian Country Part 2: Tribal Governments.

As seen in the current complexities regarding federal Indian tax law, the U.S. Supreme Court has played an outsized role in crafting rulings that have significantly limited the once-exclusive on-reservation taxation authority of tribal governments; the lack of comprehensive federal Indian tax policy has effectively shifted this particular law-making opportunity from Congress to the courts.

[1] U.S. Department of the Treasury, Internal Revenue Service, Employment Tax for Indian Tribal Governments, Publication 4268 (Rev. 12-2016); Yule Kim, Federal Taxation of Indian Tribes and Members, Congressional Research Services, October 26, 2007, http://congressionalresearch.com/RL34220/document.phpstudy=Federal+Taxation+of+Indian+Tribes+and+Members.

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