American Indian Law Deskbook, Third Edition

Chapter 11 - Taxation in Indian Country

379 Taxation in Indian Country Taxation has been a frequent source of controversy between states and Indian tribes. Freedom of a sovereign government from taxation by another sovereign has been recognized as an important aspect of our federal system ,1 and this concept has been extended to activities of Indian tribes and members within their reservations. Indian reservations continue to be parts of the states in which they are located, however, so state sovereignty over the same geographic areas exists. State authority in this respect is particularly relevant when taxation of nonmembers for activities or transactions within Indian country is involved. The tension that exists when state and tribal sovereignty apply to the same parties and activities has given rise to considerable litigation over the last 30 years and continues to do so today. While that litigation has served to clarify many of the basic rules governing the respective powers of states and tribes, the proper application of those rules continues to challenge federal and state courts. I. TRIBAL TAXATION AUTHORITY Indian tribes are governments that have long been recognized as possessing the power to impose taxes within their jurisdictions, although until recently this power was often unused.2 In Washington v. Confederated Tribes of Colville Indian Reservation,3 the Supreme Court confirmed that a tribe’s inherent authority to regulate activity occurring within the boundaries of its reservation was not limited solely to internal matters among tribal members, but that a tribe’s inherent authority included the power to tax nonmember cigarette purchases from tribal vendors occurring on the reservation. The Court held that “[t]he power to tax transactions occurring on trust lands and significantly involving a tribe or its members is a fundamental attribute of Chapter 11 Taxation in Indian Country 379 1 McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). 2 Felix S. Cohen, Handbook of Federal Indian Law 142–43 (1941). 3 447 U.S. 134 (1980). 379 Taxation in Indian Country Taxation has been a frequent source of controversy between states and Indian tribes. Freedom of a sovereign government from taxation by another sovereign has been recognized as an important aspect of our federal system ,1 and this concept has been extended to activities of Indian tribes and members within their reservations. Indian reservations continue to be parts of the states in which they are located, however, so state sovereignty over the same geographic areas exists. State authority in this respect is particularly relevant when taxation of nonmembers for activities or transactions within Indian country is involved. The tension that exists when state and tribal sovereignty apply to the same parties and activities has given rise to considerable litigation over the last 30 years and continues to do so today. While that litigation has served to clarify many of the basic rules governing the respective powers of states and tribes, the proper application of those rules continues to challenge federal and state courts. I. TRIBAL TAXATION AUTHORITY Indian tribes are governments that have long been recognized as possessing the power to impose taxes within their jurisdictions, although until recently this power was often unused.2 In Washington v. Confederated Tribes of Colville Indian Reservation,3 the Supreme Court confirmed that a tribe’s inherent authority to regulate activity occurring within the boundaries of its reservation was not limited solely to internal matters among tribal members, but that a tribe’s inherent authority included the power to tax nonmember cigarette purchases from tribal vendors occurring on the reservation. The Court held that “[t]he power to tax transactions occurring on trust lands and significantly involving a tribe or its members is a fundamental attribute of Chapter 11 Taxation in Indian Country 379 1 McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). 2 Felix S. Cohen, Handbook of Federal Indian Law 142–43 (1941). 3 447 U.S. 134 (1980). 380 American Indian Law Deskbook, Third Edition sovereignty which the tribes retain unless divested of it by federal law or necessary implication of their dependent status.”4 The Supreme Court elaborated on the source of tribal authority to tax in Merrion v. Jicarilla Apache Tribe.5 Merrion involved a tribal severance tax, which had been approved by the Secretary of the Interior pursuant to a requirement under the tribe’s constitution and bylaws, imposed on oil and gas leases executed as far back as 1953 under the 1938 Indian Mineral...