Opinion ID: 4436314
Heading Depth: 2
Heading Rank: 1

Heading: The State Tax Preemption Issue.

Text: A. Absent a federal statute permitting it, “a State is without power to tax reservation lands and reservation Indians.” Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 458 (1995) (quotation omitted). If the legal incidence of a state tax falls on a Tribe or its members for sales made within Indian country, like the state motor fuels excise tax at issue in Chickasaw Nation, the tax is categorically unenforceable, without regard to its “economic realities.” Id. at 458-60. In this case, however, it is undisputed that the legal incidence of South Dakota’s use tax falls on nonmember purchasers of goods and services at the Casino and at the Store.3 Thus, the per se rule against state taxation of reservation Indians does not apply. When a State seeks to impose a nondiscriminatory tax on the actions of nonmembers on tribal land, its authority is not categorically limited. Instead, the Supreme Court applies a flexible analysis to determine whether state taxation of nonmembers on Indian land is proper, often called the “Bracker balancing test,” a 2 The parties define Casino amenities as including food and beverage services, the Casino’s hotel and RV park, live entertainment events, and a gift shop. 3 The complementary use tax applies only to transactions not subjected to the State’s sales tax, the incidence of which falls on the seller. See Black Hills Truck and Trailer, Inc. v. S.D. Dep’t of Revenue, 881 N.W.2d 669, 674 (S.D. 2016). -3- reference to the Court’s decision in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980). Each case “requires a particularized examination of the relevant state, federal, and tribal interests.” Ramah Navajo School Bd., Inc. v. Bureau of Revenue of N.M., 458 U.S. 832, 838 (1982). In most cases, because Indian tribes are dependent sovereigns, the issue turns on whether federal legislation has preempted state taxation of nonmember activity on Indian land, which is “primarily an exercise in examining congressional intent.” Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163, 176 (1989). However, because of the long-recognized importance of tribal sovereignty, “questions of pre-emption in this area are not resolved by reference to standards of pre-emption that have developed in other areas of the law, and are not controlled by ‘mechanical or absolute conceptions of state or tribal sovereignty.’” Cotton, 490 U.S. at 176, quoting Bracker, 448 U.S. at 145. Instead, Indian tax immunity jurisprudence relies heavily on the “significant geographical component of tribal sovereignty,” which “provides a backdrop against which the applicable treaties and federal statutes must be read.” Wagnon v. Prairie Band Potawatomi Nation, 546 U.S. 95, 112 (2005) (cleaned up). Federal preemption is not limited to cases in which Congress has expressly preempted the state tax. Cotton, 490 U.S. at 176-77. Generally, “a State seeking to impose a tax on a transaction between a tribe and nonmembers must point to more than its general interest in raising revenues.” New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 336 (1983). Applying these principles, the Supreme Court has upheld some state taxes on nonmembers engaging in commercial activities on Indian lands, and held that other taxes were preempted. In Bracker, for example, the Court held that a State’s use fuel tax on a nonmember’s logging activity on tribal land was preempted by federal statutes and programs comprehensively encouraging and regulating logging on federal lands held in trust for Indians. In Ramah, the Court held that a State’s gross receipts tax on a nonmember’s activity in building a reservation school was preempted by the comprehensive federal regulation and financing of Indian education -- the tax was based on a general desire to increase state revenues and provided no specific offsetting -4- benefit to Indian education. By contrast, in Cotton, the Court upheld a State’s severance tax on oil and gas produced by nonmember lessees from wells on reservation land because state regulation provided substantial services to the tribe and the lessees, no economic burden fell on the tribe, federal regulation was extensive but not exclusive, and there was no evidence the tax affected the tribe’s ability to attract lessees. And in Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134 (1980), the Court upheld both the tribe’s sovereign power to tax cigarette sales to nonmembers on the reservation, and a state excise tax on vendors who provided cigarettes for on-reservation sales to nonmembers. The value of Indian sales to nonmembers was not generated by tribal activities, the Court explained, only by the exemption of such sales from state tax; neither principles of federal Indian law nor any federal statute preempted the State from taxing this “artificial competitive advantage over all other businesses in a State.” Id. at 155. B. In this case, the federal legislation most relevant to the use tax at issue is the Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701 et seq. In California v. Cabazon Band of Mission Indians, 480 U.S. 202 (1987), the Supreme Court held that a California law limiting bingo could not be applied to high stakes tribal bingo and card games played predominantly by nonmembers at reservation facilities.4 The facilities were financed and the gaming approved by the Secretary of the Interior to promote tribal economic development. The Court concluded that the federal and tribal interests in promoting Indian gaming outweighed the State’s interest in preventing organized crime. 480 U.S. at 207-22. In response, States sought federal legislation permitting state regulation of tribal gaming. Congress passed IGRA the next year “to provide a statutory basis for the operation of gaming by Indian tribes as a means of promoting tribal economic development, self-sufficiency, and strong tribal governments,” and to establish an “independent Federal regulatory authority for gaming on Indian lands, 4 The state laws at issue in Cabazon were regulatory, rather than state taxes imposed on nonmember commercial activities on a reservation. -5- [and] Federal standards for gaming on Indian lands.” 25 U.S.C. § 2702(1), (3). IGRA sought to balance the competing federal, state, and tribal interests by giving each sovereign a role in the regulatory regime. IGRA divides gaming into three classes of increasing regulatory significance. Class I games -- social games and traditional forms of Indian gaming -- are left to the exclusive jurisdiction of the Indian tribes. See 25 U.S.C. §§ 2703(6), 2710 (a)(1). Tribes may engage in Class II games -- most forms of bingo and card games -- if they are authorized by and played in conformity with state law, subject to federal licensing and extensive regulation by the National Indian Gaming Commission. See 25 U.S.C. §§ 2703(7), 2710 (b)-(c). All other forms of gaming are Class III games, which include casino table games and slot machines, the forms primarily involved in this case. See § 2703(8). A tribe may conduct Class III gaming on Indian lands only pursuant to, and in compliance with, a federally approved compact that the tribe has negotiated with the surrounding State. See § 2710(d)(1)(C); Michigan v. Bay Mills Indian Cmty., 572 U.S. 782, 785 (2014). A State receiving a request to negotiate a tribal-state compact governing Class III gaming activity “shall negotiate with the Indian tribe in good faith to enter into such a compact.” 25 U.S.C. § 2710(d)(3)(A). A tribal-state compact negotiated under subparagraph (A) “may include” provisions relating to six specific subjects, including two relating to State and tribal fees and taxation: (iii) the assessment by the State of such [gaming] activities in such amounts as are necessary to defray the costs of regulating such activity; (iv) taxation by the Indian tribe of such activity in amounts comparable to amounts assessed by the State for comparable activities. -6- 25 U.S.C. § 2710(d)(3)(C). IGRA contains no provision authorizing State taxation of Class III gaming. Thus, it provides no legislative exception to the per se rule against state taxation of tribes and their members. Subsection (d)(4) made clear that no such exception was intended: (4) Except for any assessments that may be agreed to under paragraph (3)(C)(iii) of this subsection, nothing in this section shall be interpreted as conferring upon a State or any of its political subdivisions authority to impose any tax, fee, charge, or other assessment upon an Indian tribe or upon any other person or entity authorized by an Indian tribe to engage in a class III activity. Here, the Tribe and the State entered into and maintain a gaming compact governed by IGRA, which provides the terms under which the Tribe is authorized to conduct gaming activities on the Reservation. The compact allows for the operation of Class III gaming activity at the Casino and provides guidance for various facets of the Tribe’s gaming operations. It does not address whether the State may impose its use tax on nonmember purchases of goods and services at the Casino and the Store. In concluding that IGRA expressly preempts the use tax, the district court reasoned that the prohibition on state taxation in 25 U.S.C. § 2710(d)(4) “applies to nonmembers on the Casino floor authorized to gamble, which includes the costs of associated activities, i.e., gamblers and what they spend on gambling, alcohol, food, rooms, and other merchandise from the Casino” (the amenities). But subsection (d)(4) is a lack of authorization, not a prohibition. Here, the State seeks to exercise its authority under prior Supreme Court cases to collect use taxes on nonmembers for their purchases of amenities at the Casino, not for their Class III gaming activity that is authorized by IGRA and by the federally approved compact, which is silent on the subject of state taxation. In Bay Mills, the Supreme Court noted that “‘class III gaming activity’” is “what goes on in a casino -- each roll of the dice and spin of the -7- wheel.” 572 U.S. at 792. Thus, subsection (d)(4) does not preempt state taxation of nonmember activity, other than “what goes on in a casino.” The Tribe further argued, and the district court agreed, that the State’s imposition of its use tax on nonmember purchasers of amenities at the Casino is a subject that may be included in a tribal state compact because it falls within subsection (d)(3)(C)’s “catchall” provision, “any other subjects that are directly related to the operation of gaming activities.” 25 U.S.C. § 2710(d)(3)(C)(vii). The Tribe argues that the Casino’s gift shop, hotel, RV park, food and beverage services, and live entertainment events would not exist but for the Casino, nor could the Casino operate without the existence of these amenities. Therefore, the amenities “are directly related to the operation of gaming activities,” and the use tax at issue is expressly preempted by IGRA because it was not authorized by the Tribe’s compact with South Dakota. We reject this interpretation of the statute for related textual reasons. First, and most obviously, amenities such as a gift shop, hotel, and RV park are not directly related to Class III gaming activity as defined by the Supreme Court in Bay Mills -- “what goes on in a casino -- each roll of the dice and spin of the wheel.” “Directly related to the operation of gaming activity” is narrower than “directly related to the operation of the Casino.” We agree with the Tenth Circuit’s interpretation of Bay Mills: “Class III gaming activity relates only to activities actually involved in the playing of the game, and not activities occurring in proximity to, but not inextricably intertwined with, the betting of chips, the folding of a hand, or suchlike.” Navajo Nation v. Dalley, 896 F.3d 1196, 1207 (10th Cir. 2018). Second, § 2710(d)(3)(C) lists subjects that a tribal-state compact authorizing Class III gaming may include. But it does not address the legal effect of noninclusion. It is not surprising that the Tribe and South Dakota did not address in their gaming compact whether the State may impose its use tax on nonmembers for nongaming activities at the Casino and the Store. That issue was not relevant to -8- regulating the Casino’s Class III gaming. And even if the Tribe agreed, a provision that the Tribe would collect and remit a non-gaming state tax on nonmembers would risk disapproval of the compact by the Secretary of the Interior based on “[t]he very real concern . . . that a state may use its leverage over Class III gaming to exact a favorable resolution of issues unrelated to Class III gaming.” Kevin Washburn, Recurring Issues in Indian Gaming Compact Approval, 20 Gaming L. Rev. & Econ. 388, 392 (2016). Both parties could sensibly conclude that state taxation of nonmembers should be left to existing federal law governing this issue, as it may be impacted by IGRA. Thus, the absence of a compact provision addressing the State’s non-gaming use tax does not, standing alone, reflect that IGRA has expressly preempted the tax. C. For these reasons, we conclude that the question of federal preemption in this case must be determined by conducting the analysis mandated by Bracker to determine whether the State’s interests in imposing the tax outweigh the relevant federal and Tribal interests. Accord Mashantucket Pequot Tribe v. Town of Ledyard, 722 F.3d 457, 469-71 (2d Cir. 2013); Barona Band of Mission Indians v. Yee, 528 F.3d 1184, 1193 (9th Cir. 2008). “Salient factors include the extent of federal regulation and control, the regulatory and revenue-raising interests of states and tribes, and the provision of state or tribal services.” Felix S. Cohen, Handbook of Federal Indian Law 707 (2012), citing Cotton, 490 U.S. at 176-77, 186-90; Cent. Mach. Co. v. Ariz. State Tax Comm’n, 448 U.S. 160, 161-63 (1980); and Bracker, 448 U.S. at 150-51. Of great relevance are the broad policies that underlie IGRA and the history of tribal independence in the operation of gaming and gaming facilities. See Cotton, 490 U.S. at 176. “State jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority.” Mescalero Apache Tribe, 462 U.S. at 334; see Harrah’s Entm’t, 243 F.3d at 437. -9- The history of tribal sovereignty over a subject “serves as a necessary backdrop” to the preemption question. Cotton, 490 U.S. at 176. As the Supreme Court explained in Cabazon, there is a long history of tribal resistance to state regulation of their independent operation of gaming activities. Before Congress enacted IGRA in 1988, Cabazon confirmed that tribes were free from non-criminal state regulation of tribal gaming on reservations. IGRA endorsed substantial tribal independence and protected tribes from state interference in the operation of gaming activity, except for limited state regulation through Class III gaming compacts. The stated purposes of IGRA include “promoting tribal economic development, selfsufficiency, and strong tribal governments . . . ensur[ing] that the Indian tribe is the primary beneficiary of the gaming operation [and] protect[ing] such gaming as a means of generating tribal revenue.” 25 U.S.C. § 2702. Even if the amenities at issue are not “directly related to the operation of gaming activities” within the meaning of § 2710(d)(3)(C)(vii), the summary judgment record established that the amenities contribute significantly to the economic success of the Tribe’s Class III gaming at the Casino. The Tribe submitted evidence that over 90% of its sales tax revenues are generated by the 6% sales tax on transactions at the Casino and the Store. Casino departments offering the amenities operate at a loss, suggesting that goods and services are sold below cost to attract patrons and encourage gaming. The Tribe provided evidence that increases in patronage at one amenity is directly tied to increases in gaming activity itself. The Tribe also submitted evidence of the Casino’s significance in promoting tribal economic development and self-sufficiency. Of the net revenues generated from the Casino and the Store, 40% is distributed by individual per capita payments; 35% of the remainder goes toward Tribal economic development, 15% toward Tribal government operations, 5% into a minors trust fund, 4% into a community assistance fund, and 1% into a local government revenue sharing fund. -10- The State’s taxation of the Casino amenities would raise their cost to nonmember patrons or reduce tribal revenues from these sales. Even if gaming was not thereby reduced, the impact would be contrary to IGRA’s broad policies of increasing tribal revenues through gaming and ensuring that tribes are the primary beneficiary of their gaming operations to promote economic development, selfsufficiency, and strong tribal governments. The State argues that any negative impact on the Tribe’s finances is insufficient to preempt the tax, citing Cotton and Colville. We disagree. In Cotton, the trial court found that the State regulated aspects of the onreservation oil and gas development at issue and provided substantial services to the tribe and its lessee, and that “no economic burden falls on the tribe by virtue of the state taxes.” 490 U.S. at 185-87 (cleaned up). The Court concluded that this indirect impairment of the federal policy favoring on-reservation oil and gas production “is simply too indirect and too insubstantial to support [the] claim of pre-emption.” Id. at 187. Similarly, in Colville, no federally regulated tribal activity was involved, and the only benefit provided nonmembers by the tribe was a state tax exemption for their on-reservation cigarettes purchases. 447 U.S. at 154-59. Here, nonmembers benefit from the Casino’s federally regulated gaming activities operated by the Tribe, and from amenities provided by tribal facilities such as the hotel, RV park, and gift shop. We conclude the Tribe’s on-reservation Class III gaming activity is analogous to the nonmember logging activity on tribal land at issue in Bracker, and to the nonmember activity in building a reservation school at issue in Ramah. In both cases, the Court held that state taxes whose economic burden fell on the tribes were preempted by federal statutes and programs comprehensively encouraging and regulating the nonmember activities, where the States did not have a “specific, legitimate regulatory interest” in the activity taxed, Ramah, 458 U.S. at 843, only a “generalized interest in raising revenue” that is insufficient to permit “intrusion into the federal regulatory scheme,” Bracker, 448 U.S. at 150. The State’s interest in -11- raising revenues to provide government services throughout South Dakota does not outweigh the federal and tribal interests in Class III gaming reflected in IGRA and the history of tribal independence in gaming recognized in Cabazon. As in Bracker, “this is not a case in which the State seeks to assess taxes in return for governmental functions it performs for those on whom the taxes fall.” 448 U.S. at 150. Accordingly, we affirm the district court’s conclusion that imposition of the South Dakota use tax on nonmember purchases of amenities at the Casino is preempted by federal law.