Testimony of Susan M. Williams
On Behalf of the National Congress of American Indians
On the Collection of State Transactions Taxes
by Tribal Retail Enterprises
 
Before the United States House of Representatives
Committee on Resources
October 12, 1999


Members of the Committee, my name is Susan M. Williams. I am a shareholder in the law firm of Williams, Janov & Cooney, P.C., of Albuquerque, New Mexico. Our firm represents many Indian tribal governments throughout the country and has extensive experience working with tribal governments on taxation issues. I appear today on behalf of the National Congress of American Indians (NCAI). As the oldest and largest national Indian advocacy organization in the United States, NCAI is dedicated to advocating on behalf of its 245 member tribal governments on a broad range of issues affecting the health, welfare and self-determination of Indian Nations.

The issue before the Committee today is the collection of state taxes applicable to retail sales on Indian lands. I would like to begin with a few prefatory remarks that will set the stage for my testimony. First, with all deference to the Committee, the "problem" of lack of enforcement of state taxes in Indian country is simply not of the magnitude that private interest groups such as the petroleum marketers and convenience store operators suggest, and a federal legislative solution cannot be justified by the facts. Nothing has really changed since NCAI appeared before this Committee last Spring to offer testimony in opposition to H.R. 1168. NCAI has initiated meetings with the associations representing petroleum marketers and convenience store operators in an effort to identify states where there is a significant tax collection problem with the aim of developing local solutions. However, these efforts have failed to produce evidence of any major problems. We remain willing to lend our support to efforts to correct particular problems at the state level.

Second, rather than focusing on the narrow, and largely hypothetical, issue of collection of state taxes in Indian country, we believe that it would be much more productive to deal with the much larger problem from which this issue arises. That is, how can the competing needs and interests of tribal, state and local governments with partially overlapping taxing jurisdiction be accommodated. In our view, the real issue is the problem of dual taxation. This problem has no application to the states, but it threatens to cripple tribal economies. Contrary to some of the testimony you will hear today, the burden of unfair competition falls not on off-reservation businesses but on reservation enterprises saddled with both state and tribal taxes.



II. Taxation of Retail Sales in Indian Country

Indian tribal governments provide services to tribal members in the same manner as other governments. Services such as education, transportation infrastructure, housing, and law enforcement require an adequate stream of revenue to the tribal government, and federal funding has never been adequate to fulfill the needs. As a result, many tribal governments have imposed retail sales taxes to provide governmental revenue, and many also are engaged in tribal revenue generating ventures that retail commodities such as cigarettes and motor fuels. The power of Indian tribes to impose their own taxes is beyond dispute.(1) The revenues that accrue to tribes from these sources are absolutely critical to the provision of essential government services to some of the poorest communities in the United States.

Tribes' ability to rely on retail sales tax revenues is clouded, however, by competing state sales taxes. The Supreme Court has adopted a per se rule that, except where authorized by Congress, tribes and tribal members on reservations are exempt from state sales and other taxes.(2) The rule regarding state taxation of transactions between Indian sellers and non-Indian buyers is more complex. In these cases, the test is dependent on the specific facts presented in the case concerning the impacts of a state tax on federal and tribal interests and on the purposes of the particular state tax.(3) In sales of goods such as cigarettes and motor fuels, if the legal incidence of the tax falls on the tribe, the tax is barred.(4) If the incidence of the tax falls on the non-Indian purchaser, the Supreme Court has held that the state tax is lawful, even though the sale took place on an Indian Reservation, and that tribes may be required to make reasonable efforts to assist in collection of the tax.(5)

Tribal governments fundamentally disagree with this interpretation of the relative taxing authorities of the tribes and states. The current test requires tribes to choose between their need to tax on-reservation transactions, which results in double taxation when the state also imposes its tax and impairs the tribes' ability to be competitive in attracting businesses to the reservation, or forgo the tax, and with it an important revenue stream. As this paradox demonstrates, with any state tax, the true incidence of the tax falls on tribal governments regardless of where the legal incidence is found to lie. It is important to note that states, in the exercise of their inherent authority, may choose not to collect an otherwise valid tax. As a result, a number of states have opted not to collect the taxes, sometimes with the requirement that the tribal government collect a similar tax in order to promote price parity.

Indian tribes also object to the imposition of state taxes because it contributes to the loss of revenue from reservations to state coffers. On most reservations, there are few retail stores; tribal members go off reservation and pay state taxes on everything they buy. Nationwide, this amounts to $246 million annually in tax revenues to state governments, while states expend only $226 million annually on behalf of reservation residents.(6) The Supreme Court's rulings requiring tribes to collect state taxes on cigarette and motor fuels when non-members purchase these goods on the reservation exacerbate this situation. This approach provides no parity for tribal governments and adds to the many institutional pressures that keep Indian reservations among the poorest communities in the country.

State taxes on Indian lands have been effectively handled through negotiated agreements at the tribal-state level for many years because the states have adequate legal remedies to pursue in collecting taxes on sales to non-tribal members that occur on Indian lands. These remedies have grown even stronger in recent years, particularly in motor fuels taxation, as the federal government has led the states in a movement toward the pre-collection of taxes at the highest levels of the distribution chain.

In Oklahoma Tax Commission v. Citizen Band of Potawatomi, 498 U.S. 505 (1991), the Court identified a number of ways that a state can collect a lawfully imposed tax:

There is no doubt that sovereign immunity bars the state from pursuing the most efficient remedy, but we are not persuaded that it lacks any adequate alternatives. We have never held that individual agents or officers of a tribe are not liable for damages in actions by the state. And under today's decision, states may of course collect the sales tax from cigarette wholesalers, either by seizing unstamped cigarettes off the reservation, or by assessing wholesalers who supplied unstamped cigarettes to tribal stores. States may also enter into agreements with the tribes to adopt a mutually satisfactory regime for the collection of this sort of tax.

1. Pre-collection of Taxes

As pointed out in the Potawatomi decision, state governments have the option to collect taxes from wholesalers of tobacco or motor fuels, and pre-collect any taxes before the product reaches the Indian retailer. Many states, even those without tribes, are shifting to this type of tax collection because of its efficiency and effectiveness. In addition, the federal government is now leading the states in a movement toward pre-collection of taxes at the highest levels of the distribution chain, at the "terminal rack" for motor fuels, and at the manufacturer for cigarettes. These methods of tax collection are extremely effective at stopping many forms of tax evasion, including interstate smuggling. In addition, these methods leave discretion in the hands of state governments and do not single out Indian tribes for disparate treatment.

For motor fuels, the federal government since 1994 and more states each year have been shifting to "terminal rack" tax collection for motor fuels in order to stop smuggling and misuse of tax exemptions.(7) A "terminal rack" is the point where barges and shiploads of motor fuels are transferred into truck size tankers. There are about 1200 such terminal racks in the United States. The federal government collected an additional $1.2 billion in 1994 after implementing terminal rack collection. Of the thirty-three states that have federally recognized tribes, at least twenty-seven states have enacted terminal rack or first sale from distributor collection laws.(8) In either event, all motor fuel is taxed prior to it reaching an Indian reservation.

The IRS and states that have passed "terminal rack" statutes are now working in a unified fashion. The Internal Revenue Code requires that a terminal owner collect federal motor fuel taxes and information from each tanker. This information, including the destination state, is documented in the motor fuel shipping papers and on a federal computer network. When the receiving state imposes a terminal rack tax, the terminal collects this tax as well and remits the tax to the state government listed on the bill of lading. Enforcement of the tax is a simple matter of checking the shipping papers on roadways within the state. It is common for the state terminal rack collection statutes to provide for long-arm jurisdiction and the ability to enforce the statute's provisions against an out of state terminal that sells gasoline bound for distribution in that state. As this system develops, the laws in various states will dovetail, creating a seamless network of collection and enforcement, utilizing the framework supplied by the federal taxing scheme. The BESTEA Federal Highway Funding law contains provisions giving states additional resources to implement this system. A "terminal rack" tax pre-collects the tax at the top of the distribution chain and eliminates avoidance of legally imposed taxes by anyone, including Indian tribes.(9) The "terminal rack" tax is very effective. However, it must be noted that in several states there is no effective way for tribal members to recoup their pre-collected tax. Without an effective refund mechanism, those states are ultimately imposing an illegal tax on the tribal consumer.(10)

For cigarettes, the federal government has shifted to collecting excise taxes at the manufacturer level, and most states shifted to a system of wholesale level tax collection and tax stamping many years ago. In the future, if tobacco taxes continue to rise as is expected, the federal and state governments are likely to develop a shared network of tax collection at the highest levels in the distribution chain as well.

Because this movement is already well underway, it is highly likely that any remaining tribal-state tax issues will be resolved through this new tax collection framework without the need for intervention by Congress. Indian tribes should not be singled out for punitive legislation when the states have available to them a method of tax collection that can be applied uniformly to require all parties to pay the appropriate taxes. Tax collection at the wholesale level is a solution that stops "evasion" in all sectors of society.

2. Intergovernmental Agreements or Compacts for Tax Collection

Most states and tribes have resolved their disputes about the application of state sales and other taxes by entering into intergovernmental agreements or compacts. According to a report issued by the Arizona Legislative Council, in 1995 more than 200 tribes in 18 states had created successful state-tribal compacts that were mutually satisfactory to both parties.(11) Most of these agreements adopt one of the options suggested in the Supreme Court tax cases by either 1) exempting all on-reservation sales to Indians from state tax, but agreeing to the imposition and collection of taxes on sales to non-Indians, or 2) agreeing that the tribe will subject all sales on the reservation to a tax equivalent to that imposed by the state, and the tribe and state will share this "single tax" on a negotiated basis--frequently the ratio of sales to Indians and sales to non-Indians. The states have taken a variety of approaches to taxing on-reservation sales to non-Indians. Some states have chosen to recognize tribal sovereignty and exempted such sales from state taxes altogether. Others have entered into cooperative agreements for the collection and distribution of taxes. With growing frequency, states are turning to pre-collection of taxes. In conclusion, the states have adequate remedies to collect taxes attributable to on-reservations sales to non-Indians. A federal solution is not warranted and would be an unnecessary intrusion upon tribal/state relations.

III. Legislative Proposals to Resolve Tribal/State Disputes

Although this hearing is not scheduled to address any particular measure pending before Congress, a number of proposals for legislative solutions have been circulated for consideration. As in previous years, Representative Istook has sponsored such a bill, H.R. 1814, "to provide incentives for Indian tribes to collect and pay lawfully imposed State sales taxes on goods sold on tribal lands and to provide penalties against Indian tribes that do not collect and pay such State sales taxes." The incentives that H.R. 1814 offers is priority in the award of federal grants to tribes that certify that retail establishments within their jurisdiction are collecting and paying all qualified state retail taxes. These "incentives" penalize non-complying tribes. The penalty for failure to collect state taxes is that tribal land on which the offending retail establishment is located shall be subject to losing its trust status and its immunity from state taxation. While H.R. 1814 is more narrowly tailored than legislation previously offered by Representative Istook,(12) the proposed penalty is still draconian. On a finding by the Secretary of an isolated incidence of non-payment of state retail taxes, a tribe could lose the ability to exercise adjudicative and regulatory jurisdiction over the property where the enterprise is located. Once removed from trust status, the only way the land could be restored to tribal jurisdiction is for the state to certify that the tribe has been in compliance with state law for a period of one year. There is no mechanism provided for a tribe to initiate the procedure when a recalcitrant state refuses to do so. NCAI is adamantly opposed to H.R. 1814 and urges the members of this Committee to work against its passage.

Another legislative approach has been circulated by private retailers, including the National Association of Convenience Stores (NACS) and the Society of Independent Gasoline Marketers of America (SIGMA). In their "Concept Outline for Native American Tobacco and Motor Fuels Excise Tax Legislation," NACS/SIGMA would make tribal retail enterprises agents of the state for the purpose of collecting state taxes. If the retailer fails to collect the tax, then, at the request of the state governor, the United States Department of Justice is to collect the tax (the Department is also given enforcement authority). The Justice Department is permitted to deduct a fee from taxes collected to cover its administrative costs and then is to remit the tax to the appropriate tribe to be used for limited governmental purposes, or to the state if Justice cannot assure itself that the funds will be expended on tribal commercial operations. This proposal appears to give tribes two unappealing options. A tribe can collect the state tax and remit it to the state which, as discussed above, undercuts the tribe's ability to implement its own tax. Alternatively, it can allow the Justice Department to collect the tax, which effectively becomes a de facto tribal tax because the funds collected (less Justice's administrative fee) are returned to the tribe so long as the tribe uses the funds for governmental purposes.

Tribes have significant objections to this proposal. First, it is unclear whether Congress can compel tribal retailers to act as "agents for the state." Second, Indian tribes do not need further federal involvement in tribal affairs, either through unilateral imposition of a tribal tax or federal collection and enforcement, and such an approach is inconsistent with the Congressional goal of tribal self-determination. Finally, the federal government has better things to do than act as a tax collector for the states, and any federal efforts should be directed towards effectuating the Congressional goal of Indian economic development, which would only be further hindered by this proposal. NCAI strongly opposes the NACS/SIGMA proposal as unnecessary and overbroad.

In our view, a more fruitful legislative enterprise would encompass an attempt to deal with the underlying problem of dual taxation. One example of such an approach was proposed in the 102nd Congress by Representative Richardson. H.R. 2823 would have provided a federal tax credit to non-Indian entities doing business in Indian country equal to any severance tax or personal property tax imposed by a tribe when a state or local government imposes a similar tax. A related approach would preempt state taxes, making them inapplicable if a tribe imposes a tax on transactions occurring in Indian country and that tax is equivalent to, and equal to or greater than, the tax imposed by the state on such transactions.

 

IV. Conclusion

A fundamental principle of sound federal policy making is to avoid federal intrusion whenever local parties are already working towards agreement. Each state has the necessary authority to resolve its taxation issues with tribal governments. Federal intervention under these circumstances would be inconsistent with the long-standing policy of tribal self-determination. New federal legislation in this area could also cast doubt on the validity of many existing agreements and create new burdens and turmoil in many states. The federal government should allow the current process to continue its successful course.

NCAI would like to extend its sincere thanks to the Chairman and Vice-Chairman and the many other members of the Committee for this hearing and for their efforts to understand the complex issue of tribal taxation in the context of tribal self-governance. As the Committee considers the issues that have been raised today, NCAI would encourage the Committee to bear three points in mind. First, broad generalizations and one-size-fits-all solutions have a tempting ease, but have proven to have disastrous effects when applied to the diverse Indian Nations in this country. A comprehensive review of the variety of circumstances and specific issues is far more likely to lead to workable solutions. NCAI is greatly encouraged that the Committee has already begun such a review. Second, many of the issues that have been raised today involve matters of purely local concern that can be resolved on the local level among the tribes, states, and individuals. The role of the federal government in these instances should be to encourage local cooperation, rather than to create new legislation that could have broad, unintended consequences. Third, and finally, any solutions should be guided by the principle that it is the federal government's role to protect and encourage tribal self-government. NCAI is looking forward to working on these challenges with the Committee.



1. McClanahan v. Arizona State Tax Comm'n, 411 U.S. 16 (1973).

2. California v. Cabazon Band, 480 U.S. 202, 215, n. 17 (1987).

3. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 145 (1980).

4. Oklahoma Tax Comm'n v. Chickasaw Nation, 515 U.S. 450, 458-59 (1995).

5. New York Tax Dep't. v. Milhelm Attea & Bros., 512 U.S. 62 (1994); Confederated Colville Tribes v. Washington, 447 U.S. 134 (1980); Moe v. Confederated Salish & Kootenai Tribes, 425 U.S. 463 (1976).

6. Prepared Statement of Robert F. Robinson, President, The Center for Applied Research, Senate Committee on Indian Affairs Economic Development Hearing, April 9, 1998.

7. Tax Administration: Diesel Fuel Excise Tax Change (Letter Report, 01/16/96, GAO/GGD-96-53), "Revenue Enhancement Through Increased Motor Fuel Tax Enforcement" U.S. Department of Transportation, Federal Highway Administration, Washington D.C., January 1996; State Taxation of Gasoline Table, January 1, 1996.

8. Alabama, Alaska, Colorado, Connecticut, Florida, Idaho, Iowa, Kansas, Louisiana, Maine, Massachusetts, Michigan, Minnesota, Mississippi, Nevada, New Mexico, North Carolina, North Dakota, Oklahoma, Oregon, South Carolina, South Dakota, Texas, Utah, Washington, Wisconsin, and Wyoming.

9. Proponents of the various measures to forcibly collect state taxes on Indian lands have repeatedly cited a $13 million "tax evasion" loss in Oklahoma to tribes of motor fuel taxes in 1996. This statistic is clearly deceiving, because Oklahoma switched to "terminal rack" tax collection late that year. In 1997, Oklahoma collected an additional $26 million in fuel taxes and ended all tax avoidance by tribes. In addition, failure of tribes to pay state taxes in 1996 was clearly legal under a Supreme Court decision that had struck down the Oklahoma motor fuel tax statute as unconstitutional as applied to tribes.

10. California, Colorado, Connecticut, Idaho, Michigan, Mississippi, South Dakota, and Texas.

11. "STARTED: State-Tribal Approaches Regarding Taxation & Economic Development," Arizona Legislative Council, November, 1995 at 8; see generally, id; 81-105. The testimony offered today by Kevin Wadzinski, Esq., Dorsey & Whitney LL, updates the STARTED report.

12. H.R. 1168 offered in the 105th Congress would have prohibited the Secretary of the Interior from taking any land into trust for the benefit on an Indian tribal government unless the tribe had entered into a written agreement with state and local governments for payment of state and local excise taxes on any retail sale to a non-member of the tribe.