State Taxation in Indian Country Could Face Supreme Court Scrutiny

Background
The Fort Mohave Indian Tribe is a federally recognized tribe whose reservation consists of approximately 33,000 acres of desert land across portions of Arizona, California and Nevada. All of the tribe’s land is held by the U.S. Secretary of the Interior in trust for the benefit of the tribe. The tribe leases approximately 320 acres of its land in Mohave County, Arizona, to South Point for the development of a 500-megawatt natural gas power plant (the “Plant”). Under the terms of the lease, South Point owns the Plant and makes certain lump-sum payments to the tribe in lieu of normal tribal leasehold taxes (which the tribe would otherwise assess).

The State of Arizona and Mohave County have assessed and collected from South Point ad valorem property taxes on the Plant itself, based on the assessed value of the Plant. Since 2010, these taxes have totaled over $20 million. South Point brought an action in Arizona state court to challenge the State’s authority to impose and collect these taxes under § 5108 and Mescalero Apache Tribe v. Jones, 411 U.S. 145, 158 (1973), and to recover the taxes it has paid. Following years of litigation, the Arizona Court of Appeals held that federal law did not prohibit the state from imposing these taxes, and the Arizona Supreme Court declined review.

Taxation and Federal Preemption in Indian Country
South Point’s petition focuses on principles of federal preemption—to wit, that in certain situations, federal law prohibits a state from imposing a regulation or tax. In some cases, a state is prohibited from taking an action per se because the state lacks the inherent authority to take the action or because federal law expressly prohibits it. For example, the Indian Reorganization Act of 1934 (IRA), codified at 25 U.S.C. § 5108 (formerly § 465), expressly provides that lands held in trust for Indian tribes are exempt from state and local taxation. Similarly, the Indian Gaming Regulatory Act expressly prohibits states from imposing taxes on gaming activities taking place on tribal lands. 25 U.S.C. § 2710(d)(4). States are also prohibited from imposing their income taxes on Indians for income earned entirely on tribal lands; even without a federal statute expressly saying as much, the Supreme Court has confirmed that states inherently lack the sovereign authority to impose their taxes on Indians within Indian Country without their consent. See McClanahan v. Arizona State Tax Comm’n, 411 U.S. 164 (1973). See also Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450 (1995), holding that a state tax on motor fuels could not be collected from tribal retailers, because the “legal incidence” of the tax (i.e. the ultimate liability for the tax) fell upon the tribal retailers operating on tribal lands.

In other cases, state action is preempted because the action in question is incompatible with, or in conflict with, the structure and substance of applicable federal law—this is known as “implied pre-emption.” For cases involving state taxation or other regulation in Indian Country, courts attempt to balance the specific state, federal and tribal interests at play to decide if the state can impose its tax or other regulation. Where the interests of the state are outweighed by the interests of the tribe and/or the federal government, the state may not impose the regulation. The Supreme Court first articulated this balancing test in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), where the Court held that the State of Arizona was prohibited from imposing certain fuel taxes on a non-Indian logging company operating on tribal land. The Court reasoned that the state’s collection of those taxes would undermine the important federal policy of ensuring that revenues from timber sales accrued to the tribe’s benefit, outweighing the state’s generalized interest in revenue collection.

The preemption concept is not exclusive to matters involving tribes and their lands, but the doctrine has a special application in Indian Country. “The unique historical origins of tribal sovereignty make it generally unhelpful to apply to federal enactments regulating Indian tribes those standards of pre-emption that have emerged in other areas of the law.” Bracker at 143. “Preemption analysis in fields where states traditionally have broad authority often begins with a presumption against preemption. In Indian law, this presumption is reversed because ‘[t]he policy of leaving Indians free from state jurisdiction and control is deeply rooted in the Nation’s history.’” 1 Cohen’s Handbook of Federal Indian Law § 7.03 (citations omitted).

South Point’s Preemption Arguments

Express Preemption
South Point asserts that both express and implied preemption apply to Arizona’s efforts to tax the Plant. The express preemption argument enters on IRA § 5108 which generally prohibits states from imposing property taxes on tribal lands. The Supreme Court has long interpreted this exemption to apply not only to the land itself but also to permanent improvements thereon. In Mescalero Apache, the Court held that permanent improvements built on tax-exempt tribal land are likewise protected from state taxation because the use of the improvements “is so intimately connected with use of the land itself that an explicit provision relieving the latter of state tax burdens must be construed to encompass an exemption for the former.” South Point argues that this protection should apply to improvements built on tribal trust lands even if the improvements are owned by a non-Indian entity. Who owns the improvements should not matter, South Point explains, because the tax is ultimately assessed against the property itself, not the owner.

South Point’s position has already been endorsed by federal appellate courts. In Confederated Tribes of Chehalis Reservation v. Thurston County Bd. Of Equalization, 724 F.3d 1153 (9th Cir. 2013), the Ninth Circuit held that buildings constructed on tribal trust land were exempt from Washington state property taxes, even though the buildings were co-owned by a non-tribal entity. Similarly, in Seminole Tribe of Fla. v. Stranburg, 799 F.3d 1324 (11th Cir. 2015), the Eleventh Circuit held that § 5108 prohibited the State of Florida from imposing a gross receipts tax on rent payments made by certain non-Indian entities to the Seminole Tribe. The Stranburg court reasoned that, just like the tax at issue in Mescalero, Florida’s gross receipts tax amounted to a tax on the “bundle of privileges that make up property or ownership of property,” and fell under the prohibition articulated in § 5108.

Bracker Balancing
South Point also argues that the Arizona courts incorrectly applied the Bracker balancing test and that, even absent a finding of express preemption, Arizona’s taxation of the Plant is impliedly preempted by federal law because the federal and tribal interests (in avoiding taxation) outweigh the state interest (in taxation).  

First, South Point points to the federal government’s strong interest in regulating permanent improvements on tribal trust land. Indeed, there is an extensive regime of federal regulation relating to leasing and use of tribal lands, including permanent improvements attached thereto. South Point notes that the federal government was required to, and did, approve the South Point lease for the Plant, including the various modifications to the lease over time. The Arizona courts disagreed, holding that the federal regulatory scheme over leasing of tribal lands was irrelevant because the federal government does not directly regulate (or tax) the Plant itself. But, as South Point explains in their petition, the Supreme Court has held that a “pervasive” federal regulatory scheme may be evidence of a strong federal interest under Bracker, even if the federal government does not directly regulate the specific activity being taxed by the state. Ramah Navajo Sch. Bd. v. Bureau of Revenue of N.M., 458 U.S. 832 (1982).

Second, South Point asserts that Arizona’s own interest in assessing the tax is limited. Under Ramah and Bracker, a state’s generalized interest in raising revenue is not a sufficiently compelling interest to justify the burdens that the tax would impose on the federal regulatory scheme, or on the tribe’s interest in self-government. Bracker balancing instead requires that a state’s revenue collection in Indian Country be related to governmental services that the state provides to the taxpayers in question—i.e., that the state hold “duties or responsibilities” with respect to the matter or property being regulated before imposing its own taxes. See Ramah at 843-845. The petition explains that South Point’s Plant demands very few direct services from the State of Arizona or Mohave County, and in fact that the county has conceded to providing no services to the Plant whatsoever. The State of Arizona argued in the lower courts, and those courts agreed, that the state provides general services from which the tribe and South Point benefit—such as maintaining roadways and law enforcement services—and that these services justified the state’s collection of taxes from South Point. South Point disputes that analysis and asserts that Arizona’s only justification for imposing the tax is its interest in collecting revenue to provide general services throughout the state—a justification that fails under Bracker.

Last, the petition argues that the Arizona courts improperly discounted the interests of the Fort Mohave Indian Tribe, on whose lands the Plant sits. The state courts concluded that the legal incidence of the tax in question fell on South Point, not the tribe or any Indian person or entity, and accordingly the tribe lacked a meaningful interest in the taxation. But, as South Point explains, the “legal incidence” of the tax does not control the Bracker balancing test for implied preemption. Even though the tax in Bracker was levied against a non-Indian logging company operating on tribal land, the Bracker court nonetheless held that the White Mountain Apache Tribe would face a meaningful economic and regulatory burden if the State of Arizona were allowed to impose its tax on the company. Similarly, Arizona’s imposition of the tax on South Point can be seen to undermine the tribe’s ability to collect revenue and provide services to the Plant. South Point and the tribe (in its own amicus brief) confirm that virtually all relevant governmental services for the Plant are provided by the tribe itself, including law enforcement, emergency response and utilities. In addition, imposition of state taxes on top of the tribe’s own fees and taxation could lead to dual taxation of non-Indian businesses (i.e., taxation by both the state and the tribe). Dual taxation puts tribes at a disadvantage in attempting to attract investment from outside businesses, chilling tribal economic development and constraining the tribes’ sovereign ability to use taxing power as a policy tool.

Broader Implications
Whether the Supreme Court decides to take up the South Point case, and how the Court resolves the case if it grants review, could have significant implications for tribes, businesses and states going forward. If the Court takes the case and rules in South Point’s favor, Arizona and other states could see a significant source of tax revenue (or potential revenue) disappear, affecting state services and programs. On the other hand, a ruling against South Point (or a decision not to grant the petition at all) could heighten the uncertainty for tribes and businesses about what taxes might and might not apply to projects on tribal lands. Heightened uncertainty could negatively impact tribal economic development and limit business opportunities for non-Indian enterprises.

Though this case does not present a traditional “circuit split,” where appellate courts in different circuits have reached contradictory holdings, South Point does observe in its petition that the holdings of the Arizona courts, if allowed to stand, could create a challenging jurisdictional inconsistency for tribes within Arizona. Arizona lies within the Ninth Circuit, meaning that in any action brought in federal court in Arizona, § 5108 is deemed to expressly preempt state taxation on permanent improvements built on tribal lands. Chehalis. But in state court, as a result of the decisions below in this case, the opposite is true. This creates uncertainty for tribes and businesses with existing leases in Arizona, and for any tribes or businesses who may contemplate entering into a lease in the future. Further complicating matters, some Arizona tribes, including the Fort Mohave Tribe, have trust lands that span across state borders, meaning that even within the sovereign boundaries of a single tribe, different taxation rules may apply.

The South Point case presents an opportunity for the Supreme Court to further refine, or significantly alter, how the doctrine of preemption applies in Indian Country. Preemption of state taxation on tribal lands is a complex area of law and has evolved over time. If the Court grants the petition, will it make an express preemption ruling like the Ninth Circuit did in Chehalis? Will the Court use Bracker balancing? Or will the Court adopt a new test for implied preemption?