Opinion ID: 221996
Heading Depth: 3
Heading Rank: 3

Heading: State, Federal, and Tribal Interests

Text: Against this backdrop, we must weigh the state, federal, and tribal interests at stake in order to determine whether the New Mexico taxes are preempted. Cotton Petroleum, 490 U.S. at 176-77, 109 S.Ct. 1698; Ramah, 458 U.S. at 838, 102 S.Ct. 3394; Bracker, 448 U.S. at 145, 100 S.Ct. 2578. As discussed infra, the facts demonstrate that this case falls more in line with Cotton Petroleum than Bracker and Ramah. Therefore, we concludeeven when considering the relevant legislation and historical backdropthat the five challenged taxes are not preempted by federal law in this instance. As previously noted, in assessing the relevant federal and tribal interest, the Supreme Court has looked primarily to the extent of the federal (and, if applicable, tribal) regulatory scheme. In Cotton Petroleum, the Supreme Court found that although the federal regulations governing oil and gas operations on the reservation were extensive, they [were] not exclusive, as were the regulations in Bracker and Ramah.  490 U.S. at 186, 109 S.Ct. 1698 (footnote omitted). See also Ramah, 458 U.S. at 839, 843, 102 S.Ct. 3394 (noting that the comprehensive and pervasive federal scheme left the State with no duties or responsibilities); Bracker, 448 U.S. at 149, 100 S.Ct. 2578 (stating that the pervasive and comprehensive federal scheme left no room for [state] taxes, especially since respondents were unable to identify any regulatory function... performed by the State). The Supreme Court's conclusion in Cotton Petroleum that the federal regulations were not exclusive was based on the finding that the State regulated the spacing and mechanical integrity of the wells located on the reservation. Id. at 186-87, 109 S.Ct. 1698. As Justice Blackmun explained in dissent, under the applicable regulatory scheme, at least in terms of well spacing, state law applie[d] not of its own force, but only if its application [was] approved by the [BLM]. Id. at 206 n. 9, 109 S.Ct. 1698 (Blackmun, J., dissenting). Moreover, in Cotton Petroleum it was undisputed that the federal regulations in force also addressed well spacing. See id. at 186 n.16, 109 S.Ct. 1698 (stating that the applicable federal regulations address the spacing, drilling, and plugging of wells and impose reporting requirements concerning production and environmental protection (citing 43 C.F.R. §§ 3160.0-1 to 3186.4 (1987))). The State, therefore, did not have direct authority to regulate well spacing; it regulated well spacing only in the sense that the federal government, which had direct authority to regulate in that area, would often adopt state standards. [25] In other words, although the federal government had ultimate authority to regulate well spacing, the State and the federal government, in practice, had a cooperative regulatory relationship with regard to well spacing. In Cotton Petroleum, the State's contribution to this cooperative relationship was enough to support a conclusion that the federal regulations were not exclusive, although they were extensive, and therefore did not necessarily preempt the state taxes. The relevant federal regulatory scheme governing oil and gas operations in this case is largely the same as the regulatory scheme at play in Cotton Petroleum. [26] Notably, under the federal regulatory scheme at issue, the State still plays a supporting regulatory role in that BLM often adopts the State's well-spacing and setback standards and other NMOCD decisions; the district court's findings likewise acknowledge the existence of this cooperative regulatory scheme. See R. at 234 (noting that the State of New Mexico regulations are adopted by the BLM); id. at 193 (explaining that BLM and NMOCD entered into a memorandum of understanding, in which BLM adopted the state standards for well spacing and setbacks on Indian lands); id. at 229 (Acceptable well-spacing programs include not only ones which conform with State rules and orderswhen approved by the BLMbut `any other program established by' the BLM (quoting 43 C.F.R. § 3161.3-1(a))). This is precisely the type of state regulation that was before the Supreme Court in Cotton Petroleum. [27] Therefore, even though the federal regulations governing oil and gas operations on the Ute Reservation are extensive, they are not exclusive for purposes of our analysis, as understood by the Supreme Court in Cotton Petroleum. [28] Next, we look to the economic burden of the tax. In Bracker, Ramah, and Cotton Petroleum, the Supreme Court found that the economic burden fell on the entity that was directly responsible for the amount of taxes paid to the State. [29] For example, the Court found that the economic burden fell on the tribes in Bracker and Ramah because the tribes were obligated in both of those cases to fully reimburse the non-Indian entities for the amount of taxes paid to the State. In other words, the cost of the taxes had been passed directly on to the tribes and they were not ultimately paid by the non-Indian entities. See Ramah, 458 U.S. at 835, 102 S.Ct. 3394 (explaining that the contractor had included the state gross receipts tax as a cost of construction in [its] bid, and therefore the company was reimbursed by the [tribe] for the full amount [of taxes] paid); Bracker, 448 U.S. at 140, 151, 100 S.Ct. 2578 (stating that the economic burden of the asserted taxes will ultimately fall on the Tribe, because the Tribe had agreed to reimburse the company for all expenses incurred in connection with its operations, including the state taxes). By contrast, in Cotton Petroleum, the economic burden fell on the non-Indian operators because they paid the taxes, without protest, and the tribe did not reimburse or compensate the operators in any way for those payments. 490 U.S. at 168, 173 n. 9, 185, 109 S.Ct. 1698. The Jicarilla Apache Tribe argued that it bore the burden of the taxes at issue because they interfered with the tribe's ability to raise its own taxes on oil and gas operations and would diminish the desirability of on-reservation leases. In response, the Cotton Petroleum Court stated: [i]t is, of course, reasonable to infer that the New Mexico taxes have at least a marginal effect on the demand for on-reservation leases, the value to the Tribe of those leases, and the ability of the Tribe to increase its tax rate. Any impairment to the federal policy favoring the exploitation of on-reservation oil and gas resources by Indian tribes that might be caused by these effects, however, is simply too indirect and too insubstantial to support Cotton's claim of preemption. To find pre-emption of state taxation in such indirect burdens on this broad congressional purpose, absent some special factor such as those present in Bracker and Ramah Navajo School Bd., would be to return to the pre-1937 doctrine of intergovernmental tax immunity. Any adverse effect on the Tribe's finances caused by the taxation of a private party contracting with the Tribe would be ground to strike the state tax. Absent more explicit guidance from Congress, we decline to return to this long-discarded and thoroughly repudiated doctrine. Id. at 186-87, 109 S.Ct. 1698 (footnote omitted). In other words, in rejecting the tribe's argument for preemption in that case, the Court concluded that the indirect burdens on the tribe's ability to raise its own taxes or attract new leasesas opposed to the more direct burden of ultimately bearing the cost of the taxes paid to the Statewere insufficient to establish that the economic burden of the taxes fell on the tribe. In this instance, the five state taxes are paid by the non-Indian operators and, as in Cotton Petroleum, those costs are not passed directly on to the Tribe; that is, the Tribe does not reimburse or compensate the operators for the amount of taxes paid to the State. See R. at 203 (The leases and agreements do not directly pass the cost of the five New Mexico taxes on the [Tribe].). Furthermore, as in Cotton Petroleum, the district court found that regardless of the status of the five state taxes (and Resolution No. 3874), the Tribe has the authority to increase severance taxes on existing leases and agreements it has entered into with operators, or to enact a third [tribal] tax. R. at 203 (emphasis added); cf. id. at 206 (There is no record evidence that the imposition of the five New Mexico taxes substantially interferes with the [Tribe's] ability to govern itself.). Therefore, the economic burdenas it was viewed by the Supreme Court in Bracker, Ramah, and Cotton Petroleum falls on the non-Indian operators, not on the Tribe. Nevertheless, the district court found that, even though the taxes were paid directly by the non-Indian operators and were not passed on to the Tribe, the economic burden of the taxesas a real-world matterfell on the Tribe because the evidence shows that the taxes impair, in practically one-to-one proportion, the ability of the [Tribe] to impose additional taxes. Id. at 226; see also id. at 227 (stating that in the absence of the five state taxes, the Tribe could implement Resolution No. 3874 to increase its severance tax andassuming the market for oil and gas remained stableraise an additional $1,300,000 in revenue, an increase of approximately $650 per enrolled member per year); id. (indicating that even if the resolution was rescinded, absent the five state taxes, oil and gas production on the [Reservation] would become more attractive relative to oil and gas production elsewhere in New Mexico, which would result in increased production and therefore an increase in revenues from royalties and current taxes). However, these indirect economic burdens on the Tribe's ability to increase its own taxes and attract new leases are akin to the indirect burdens that the Supreme Court dismissed in Cotton Petroleum. See 490 U.S. at 186-87, 109 S.Ct. 1698. [M]arginal effect[s] on the demand for on-reservation leases, the value to the Tribe of those leases, and the ability of the Tribe to increase its tax rate are impacts that are simply too indirect and too insubstantial to support [a] claim of pre-emption. Id. at 187, 109 S.Ct. 1698. [30] The fact that the Ute Tribe has enacted a resolution providing for a contingent increase in taxes does not materially change this result; the crux of the district court's conclusion still centers on the indirect burden imposed on the Tribe's ability to raise taxes or attract new leases, albeit through the implementation of Resolution No. 3874. In any event, as stated above, the district court found that regardless of the status of the five state taxes and the resolution, the Tribe's authority to raise its own oil and gas taxes is not impaired. [31] Accordingly, the economic burden relied upon by the district court, at least for present purposes, is not a proper justification for finding that the taxes are preempted. Lastly, we must consider the State's interestmore specifically, the State's asserted justifications for imposing the taxes. In order to justify a state tax on non-Indian actors operating on Indian land, the State generally must be able to show that it seeks to assess [the] taxes in return for governmental functions it performs for those on whom the taxes fall. Bracker, 448 U.S. at 150, 100 S.Ct. 2578. A generalized interest in raising revenue is not sufficient to justify the state taxation in this context. Id.; see also Ramah, 458 U.S. at 845, 102 S.Ct. 3394 (stating that the generalized desire to collect revenue was not a proper justification for imposing the state tax). In Bracker and Ramah, the Court noted that it was unable to identify any legitimate regulatory function or service [that the state] performed ... that would justify the assessment of [the] taxes. Cotton Petroleum, 490 U.S. at 184, 109 S.Ct. 1698 (emphasis added) (quoting Bracker, 448 U.S. at 148-49, 100 S.Ct. 2578) (internal quotation marks omitted). Those cases involved complete abdication or noninvolvement of the State in the on-reservation activity. Id. at 185, 109 S.Ct. 1698 (emphasis added). On the other hand, in Cotton Petroleum, the State provided substantial services to both the Jicarilla Apache Tribe and the non-Indian operator, costing the State approximately $3 million per year, id., which served as a sufficient justification for the taxes. In this case, the district court itself acknowledged that the State is not absolutely uninvolved in the oil and gas operations on the [Reservation]. R. at 234. As the district court noted, the services provided to the oil and gas operators on the Reservation include a hearing process for resolving disputes between operators, publicly available geologic records, publicly available production records, and records of sales and transfers, as well as plugging of abandoned wells and environmental cleanup and site inspection. Id. at 199. However, because the evidence demonstrated that these services were rarely, if ever, utilized by the oil and gas operators or the Tribe in connection with the on-reservation activity, the district court found that these services only were offered in theory and only provided a  de minimis  benefit. Id. at 201, 232-33. Based on this reasoning, the district court concluded that the State's interest was minimal. Id. at 233. We disagree. First, as previously discussed, the State plays a supporting regulatory role in the regulation of well spacing, setbacks, and non-standard well location. This specific, legitimate regulatory interest serves as a partial justification for the imposition of the state taxes. Ramah, 458 U.S. at 843, 102 S.Ct. 3394; see Bracker, 448 U.S. at 144, 100 S.Ct. 2578 (stating that any applicable regulatory interest of the State must be given weight (citing McClanahan v. State Tax Comm'n of Ariz., 411 U.S. 164, 171, 93 S.Ct. 1257, 36 L.Ed.2d 129 (1973))). We also afford some weight to the services, enumerated by the district court, that are provided on the Reservationsuch as a hearing process and the provision of recordsdespite the fact that the Tribe and the lessees scarcely utilize them. In other words, this is not a caselike those before the Supreme Court in Bracker and Ramah involv[ing] complete abdication or noninvolvement of the State in the on-reservation activity. Cotton Petroleum, 490 U.S. at 185, 109 S.Ct. 1698. However, the more important state serviceand the one that primarily justifies the New Mexico taxes at issueis the offreservation infrastructure used to transport the oil and gas after it is severed. Oil extracted from the Reservation is transported by truck through New Mexico to refineries outside the [Reservation] on highways that are constructed and maintained by the State. R. at 184, 200. Natural gas extracted from the Reservation is transported through gathering pipelines in the [Reservation] to main lines in New Mexico. Id. at 184, 201. The State regulates these pipelines in that it, inter alia, provides the power [and] authority to the pipeline companies to condemn property... to construct the pipelines and inspects the pipelines for safety purposes. Oral Argument at 11:05; see also, e.g., Pipeline Safety Act, N.M. Stat. Ann. §§ 70-3-1 to -22; Gathering Line Land Acquisition Act, N.M. Stat. Ann. §§ 70-3A-1 to -7. The district court found that [t]he State provides substantial services by regulating the off-reservation infrastructure that makes transport of oil and gas possible. R. at 201 (emphasis added). In fact, the evidence presented at trial made clear that [w]ithout the off-reservation infrastructure in New Mexico to transport oil and gas, the economic value of the oil and gas produced on the [Reservation] would be substantially less.  Id. (emphasis added). The State's counsel highlighted this point during oral argument: The gas only takes on significant economic value when it is processed. It is processed in New Mexico, off the Reservation. It travels from the Reservation to the processing plant on gathering lines and pipelines that are regulated by the State of New Mexico and whose existence is made possible by New Mexico statutes. .... ... We're dealing with natural gas, which only obtains its valuea value which drives the value of the royalty enjoyed by the Tribe, the tribal taxes, and the income of the non-tribal lesseesthrough [the lessees'] utilization of this whole infrastructure New Mexico has made available. Oral Argument at 9:33, 12:03. We conclude that this substantial service provided by the Statewhich substantially contributes to the economic value of the resources extractedserves as a legitimate and important justification for the imposition of the State's taxes. [32] The State's asserted interest amounts to much more than a general desire to raise revenue. Ramah, 458 U.S. at 839, 102 S.Ct. 3394; Bracker, 448 U.S. at 150, 100 S.Ct. 2578. In other words, this is clearly not a case in which the State has had nothing to do with the on-reservation activity, save tax it. Cotton Petroleum, 490 U.S. at 186, 109 S.Ct. 1698. [33] The district court concluded, as the Tribe argues on appeal, that Ramah prohibits any consideration of the off-reservation infrastructure in the analysis. In Ramah, the Supreme Court concluded that the state services provided to the non-Indian contractor for its activities off the reservation could not serve as a justification for taxing the on-reservation activity. 458 U.S. at 843-44, 102 S.Ct. 3394. The Court posited that the state tax revenues derived from [the contractor's] off-reservation business activities [were] adequate to reimburse the State for the services it provide[d] to the contractor off the reservation. Id. at 844 n. 9, 102 S.Ct. 3394. Therefore, Ramah conceivably could be readas the Tribe urges us to read it hereas categorically barring the consideration of off-reservation services provided to non-Indian actors as the predicate for taxes imposed on on-reservation activity. However, what the Ramah Court stated was that the off-reservation services provided to the non-Indian entity could not serve as a legitimate justification for a tax whose ultimate burden [fell] on the tribal organization.  Id. at 844, 102 S.Ct. 3394 (emphasis added). In other words, because the economic burden ultimately fell on the tribe, the services that the state provided to the contractor for activity off the reservation were not a sufficient justification. Cf. Bracker, 448 U.S. at 150, 100 S.Ct. 2578 (noting that a state generally may seek[] to assess taxes in return for governmental functions it performs for those on whom the taxes fall ). In the present case, unlike in Ramah, the economic burden of the tax falls on the non-Indian operators, not the Tribe. Furthermore, there is no indication that the asserted off-reservation services provided to the non-Indian contractor in Ramah in any way related to the on-reservation activity the state sought to tax. In contrast, the services provided off the reservation in this instance substantially benefit and relate to the on-reservation activity being taxed. In fact, without the off-reservation infrastructure, the economic value of the resourceswhich drives the value of the royalty enjoyed by the Tribe, the tribal taxes, and the income of the non-tribal lessees, Oral Argument at 12:08would be substantially less.  R. at 201 (emphasis added). This case, therefore, can be distinguished from Ramah. The Supreme Court's decision in New Mexico v. Mescalero Apache Tribe could also be read to permit the consideration of state services or functions as long as they are connected to the on-reservation activity in some substantial way, regardless of whether those services or functions are carried out on or off the tribal reservation. In that case, the issue was whether the State of New Mexico could regulate the hunting and fishing activities of non-Indians on the tribe's reservation. Mescalero Apache Tribe, 462 U.S. at 325, 103 S.Ct. 2378. At the outset, the Court noted that [t]he exercise of State authority which imposes additional burdens on a tribal enterprise must ordinarily be justified by functions or services performed by the State in connection with the on-reservation activity. Id. at 336, 103 S.Ct. 2378 (emphasis added) (citing Ramah, 458 U.S. at 843-44 & n. 7, 102 S.Ct. 3394; Bracker, 448 U.S. at 148-49, 100 S.Ct. 2578). In concluding that New Mexico's authority was preempted by federal law, the Court noted that the State ha[d] pointed to no services it ha[d] performed in connection with hunting and fishing by nonmembers which justif[ied] imposing a tax in the form of a hunting and fishing license, and stated that the State's general desire to obtain revenues [wa]s simply inadequate to justify the assertion of concurrent jurisdiction. Id. at 343, 103 S.Ct. 2378 (emphasis added); see also Barona Band of Mission Indians v. Yee, 528 F.3d 1184, 1193 (9th Cir.2008) (We recognize that the state interest strengthens where there is a nexus between the taxed activity and the government function provided .... (citing Ramah, 458 U.S. at 843, 102 S.Ct. 3394)). The off-reservation services that the State provides in this instance are undoubtedly connected to the on-reservation activity being taxed. The district court's contrary determination that off-reservation infrastructure and services provided by the State should play no part in the analysis, R. at 234, was based on two observations. First, the district court stated that  Ramah instructs that services provided outside the reservation are not to be taken into account in Bracker balancing. Id. As discussed supra, however, the Supreme Court's decision in Ramah does not categorically bar consideration of off-reservation services provided to the taxed entity. And we have further distinguished Ramah from the instant case because here the off-reservation services that the State provides substantially benefit and relate to the on-reservation activity being taxed. The district court's refusal to consider the off-reservation infrastructure was also based on its observation that [i]n Bracker, the economic value of the tribal timber would likely have been minimal in the absence of Arizona state roads outside the White Mountain Apache Reservation to transport the timber to market, but those state roads played no part in the analysis. Id. (citing Bracker, 448 U.S. at 146-52, 100 S.Ct. 2578). However, in Bracker the Supreme Court indicated that the timber was harvested, processed, and sold on the reservation. See 448 U.S. at 139, 100 S.Ct. 2578 (stating that the logging company's activitieswhich included fell[ing] trees, cut[ting] them to the correct size, and transport[ing] them to [the tribe's] sawmill in return for a contractually specified feewere performed  solely on the Fort Apache Reservation,  and that the timber was manage[d], harvest[ed], processe[d], and s[old] ... on the reservation.  (emphasis added)). Therefore, contrary to the district court's statement, it appears that the timber harvested from the reservation in Bracker took on its economic value on the reservation without the required use of any off-reservation infrastructure provided by the state. By contrast, the mineral resources severed from the Ute Reservation only take on significant economic value when they are processed off the Reservation, which is only made possible by the off-reservation infrastructure. And furthermore, we also note that in Bracker, unlike the present case, the economic burden of the tax fell on the tribe. Accordingly, we cannot agree with the district court's decision to disregard the substantial services provided to the lessees off the Reservation. R. at 201. In sum, the Supreme Court has not instructed that the type of off-reservation services presently before usthat substantially relate to and benefit the on reservation activity and that benefit the entity that directly bears the economic burden of the taxcannot be considered under Bracker, Ramah, and Cotton Petroleum. What the Supreme Court has made clear, however, is that we are to conduct a particularized examination that is sensitive to the particular facts and legislation involved. Cotton Petroleum, 490 U.S. at 177, 109 S.Ct. 1698. In this specific situation, where the burden of the tax falls on the non-Indian lessees and the off-reservation infrastructure substantially benefits the on-reservation activity, we think it is appropriate for us to consider the off-reservation infrastructure as part of the equation. In conclusion, the evidence presented, particularly in light of the Supreme Court's decision in Cotton Petroleum, demonstrates that (1) the federal regulatory scheme is not exclusive, although it is indeed extensive; (2) the economic burdenas that concept was applied by the Supreme Court in Bracker, Ramah, and Cotton Petroleum falls on the non-Indian operators, not on the Tribe; and (3) the State has asserted a sufficient justification for imposing the taxes. Furthermore, although there is an historical backdrop of relevant tribal sovereignty in this area, which was not present in Cotton Petroleum, this backdrop is not so strong as to completely tip the scales in the Tribe's favor. Therefore, under the flexible preemption analysis applied in Bracker, Ramah, and Cotton Petroleum, we hold that the five state taxes are not preempted by federal law, even when considered in light of the purposes of the relevant legislation and the history of tribal sovereignty in the field.