Native Tribes And State Tax And Regulatory Authority: The Waters Remain Murky

The law on the limits of state tax and regulatory authority regarding Native American tribes is complicated. The law may seem clear, yet there are instances in which a different interpretation is applied, as with the Ninth Circuit’s decision in Big Sandy.

Setting the Scene

California has comprehensive regulations designed to reduce illegal trafficking in cigarette and tobacco products. Distributors of these products are defined as persons engaged in the sale of untaxed cigarettes and tobacco products, or their “use and consumption,” which means they exercise any right or power over the products that are incidents of ownership. The regulations consider distributors as engaged in the sale of untaxed cigarettes and tobacco products because the goods are not subject to the excise tax when purchased from the manufacturer.

However, cigarettes and tobacco products cannot be sold to others without the tax being paid; thus, distributors pay the state’s excise tax on cigarettes by purchasing stamps which must be affixed to each pack before distribution.

The regulations allow for the exemption from the state’s excise tax of cigarettes sold by a tribal establishment to tribal members on tribal lands. For sales of untaxed cigarettes, the tribal seller must collect the excise tax from a non-Native or non-tribal member purchaser and remit the tax to the state.

The state also imposes an annual licensing requirement on manufacturers, importers, wholesalers, distributors, and retailers of cigarettes and tobacco products.

Manufacturers and distributors are prohibited from selling to unlicensed entities except for persons exempt from regulation under federal law, generally, the tribes.

Distributors are also subject to recordkeeping requirements, including submitting monthly reports to the revenue agency and maintaining receipts, invoices, and transaction records.

California regulates cigarette and tobacco product manufacturers under the 1998 master settlement agreement between four major manufacturers and 46 states, the District of Columbia, and five U.S. territories. The agreement participants are required to make annual cash payments to the settling states and territories in perpetuity.

In return, the manufacturers are released from past, present, and select future claims against them. To avoid a reduction in payment from the lost market share of nonparticipating competitors, California enacted a statute requiring that these nonparticipating manufacturers deposit funds into an escrow account in amounts calculated based on the number of cigarettes sold in the state in the previous year.

Further, the statute requires the attorney general to maintain a directory of tobacco manufacturers and brand families approved for sale in the state. A listing in the directory requires an annual certification from participating manufacturers that the amounts owed have been paid, and for nonparticipating manufacturers, that they have made the requisite escrow payments and have current licenses.

The Big Sandy Rancheria of Western Mono Indians is a federally recognized tribe in Auberry, California. Rather than adopt a tribal constitution under 25 U.S.C. section 5123(a), the tribe chose to exercise its inherent sovereign power to adopt governing documents under section 5123(h).

Big Sandy Rancheria Enterprises is a federally chartered tribal corporation owned and controlled by the tribe. The corporation is a tobacco distributor, whose purpose is to foster economic development on the rancheria and create economic opportunities for tribal members.

Although the corporation has four subdivisions, only two are active, both of which are the subject of this litigation. BSR Distributing Inc. is a wholesale distributor of tobacco products to Native American tribes and Native-owned entities on tribal lands. Big Sandy Importing imports tobacco and tobacco products onto the Big Sandy Rancheria.

Both entities purchase tobacco products for non-retail resale exclusively from Native manufacturers. BSR resells these cigarettes to tribal government-owned and tribal member-owned retail establishments operating within their own reservation, and to tribal establishments on other reservations in California.

Before receiving its federal charter, the tribe applied for a state distributor’s license, but never completed the application process. The state attorney general subsequently charged that the tribal corporation was selling cigarettes not listed in the directory of approved tobacco products to non-tribal members within California without a state license and without collecting the excise tax.

Exercising Federal Court Jurisdiction

As it sometimes happens, the first task for the Ninth Circuit was to determine whether the tribal corporation’s lawsuit was barred by the federal Tax Injunction Act.

While the TIA generally bars state tax suits if a plain, speedy, and efficient remedy can be had in the courts of such states, section 1362 of the act excepts state tax suits brought by federally recognized tribes. Challenged by the attorney general that the corporation, although tribally owned, was not a tribe for purposes of section 1362, the tribe amended its complaint, alleging that the corporation itself was a tribe.

The district court rejected this argument and dismissed the claim for lack of subject matter jurisdiction under the TIA.

The Ninth Circuit agreed with the district court that the TIA barred federal court jurisdiction over the corporation/tribe’s suit. It went through an exhaustive analysis of federal statutory, regulatory, and case law concerning tribal status, and concluded that the corporation could not be characterized as a tribe.

For support, it pointed to section 16 of the 1934 Indian Reorganization Act, which expresses the intent that tribes “revitalize their self-government through the adoption of constitutions and bylaws, and through the creation of chartered corporations, with the power to conduct the business and economic affairs of the tribe.”

A corporation created by a tribe, the appellate court said, acts as a waiver of immunity from suit for the corporation, but “in no way affects the sovereign immunity of the tribe as a constitutional or governmental entity.”

Further, the term tribe, as ordinarily used in federal law, denotes a political relationship that the federal government has established with a designated group of Native people. The appellate court pointed to the House report accompanying the bill enacted as the Federally Recognized Indian Tribe List Act of 1994, which states that “federal recognition . . . permanently establishes a government-to-government relationship between the United States and the recognized tribe.”

The statutes and the legislative history of the act support the conclusion that a tribal corporation cannot be the tribe itself. Thus, section 1362 of the TIA deprives the federal courts of jurisdiction in this case.

It is impossible to say that based on this analysis, the Ninth Circuit is incorrect. However, it then makes a curious rejection of the argument that the tribe and the tribal corporation are one and the same.

In Mescalero, a tribe owned and operated an off-reservation ski resort. New Mexico tried to impose its gross receipts tax on the resort’s personal property. After several losses in state court, the tribe appealed to the U.S. Supreme Court.

The Court noted that it was “unclear from the record whether the tribe actually incorporated itself as an Indian chartered corporation, but the question of tax immunity cannot be made to turn on the particular form in which the tribe chooses to conduct its business.”

Subsequently, the Ninth Circuit rejected the Court’s statement, and decided in Navajo that the tribe could not invoke the section 1362 exception for the taxes passed through from the state’s electricity generating plant located on a reservation, where the electricity was purchased by the tribe-created utility service corporation.

Then, in Big Sandy, the appellate court ruled that Mescalero is of no assistance because in that case, “the tribe initiated the litigation . . . in state court,” which speaks only to tax immunity and not federal jurisdiction.

If in Mescalero, it was the tribe, not the resort, that filed suit in state court, why would federal court jurisdiction turn on that point? For whatever reason, the tribe chose to sue in state court, and it makes no sense that the tribe, as a governmental entity, could not have brought the same case in federal court.

To be sure, this is a small point that has no bearing on the outcome of Big Sandy. But it is nevertheless a puzzling one, and it would be interesting to learn the reasoning behind the appellate court’s declaration.

Do California’s Regulations Apply or Not?

The appellate court discussed at length the Supreme Court’s jurisprudence concerning the circumstances under which a state may exercise regulatory authority over tribal activities.

In Bracker, the Court said that there are “two independent but related barriers to the assertion of state regulatory authority over tribal reservations and members.

First, a state action may not burden the right of reservation Indians to make their own laws and be ruled by them, [that is,] Indian tribes retain attributes of sovereignty over both their members and their territory.” However, tribal sovereignty does not extend “beyond what is necessary to protect tribal self-government or to control internal relations.”

The second barrier is Congress’s broad preemptive power. Congressional preemption need not be stated explicitly, and ambiguities that may be present in federal law are generously construed to “comport with traditional notions of sovereignty and with the federal policy of encouraging tribal independence,” the Court said.

If congressional intent to preempt is not clearly expressed, we look to whether the tribal activity is governed by a comprehensive, detailed, and pervasive federal regulatory scheme. Even in this circumstance, the Court said, the applicable regulatory interest of the state must be considered.

From Bracker, the circuit court said, emerges a three-part analytical framework against which a state law must be analyzed to determine whether it encroaches on tribal sovereignty, which essentially depends on who is being regulated and where he is being regulated.

First, in instances when on-reservation conduct involves only Natives who are tribal members, state law is preempted because the state’s interest in regulating such activities is likely minimal, while the federal interest in encouraging tribal self-government is at its strongest.

To illustrate, the appellate court pointed to the Court’s decision in Moe, when it invalidated Montana’s vendor license fee as applied to a reservation Native conducting a business for the tribe, as well as the sales tax on cigarette sales to Natives on the reservation.

Second, in some circumstances a state may assert regulatory authority over non-Natives engaged in reservation activities. The appellate court explained that determining whether the state law is preempted requires a court to make a particularized inquiry into the activities, and balance the state, tribal, and federal interests at stake. If the interest of the state is sufficient to justify an interference or an incompatibility with federal and tribal interests, preemption does not occur.

The sufficiency of a state interest depends upon whether the tribe plays an active role in generating value on its reservation with the assistance of non-Natives. If so, it is indicative of a tribe’s strong interest in preserving those activities from state interference.

Third, because a state’s interest in regulating activities beyond the reservation is at its strongest, when a tribe or tribal members act outside the reservation, they are subject to nondiscriminatory state laws that apply to all citizens in the state. Tribes that have business operations outside the reservation are subject to state regulation, as are tribal businesses that sell goods to non-Natives and Natives who are not tribal members. 

However, the appellate court pointed out the Bracker Court’s warning that in cases involving off-reservation activity, it is inappropriate to apply the balancing test because the analysis is “inconsistent with the special geographic concerns that gave rise to the test.” It was this final criterion that the appellate court applied to Big Sandy and concluded that its activity of selling tobacco products to other tribes in California constituted business operations outside the reservation, and thus the state’s interest in asserting its regulatory authority over the tribe’s activities was permissible.

Here too, the appellate court’s application of the Supreme Court’s jurisprudence to Big Sandy is not patently wrong. Yet it seems there could be another way to evaluate Big Sandy’s activities under the analytical frameworks set forth by the Ninth Circuit.

The appellate court’s opinion contained no information on how Big Sandy carried out its operations. It is possible that it exported and imported tobacco products in its own vehicles, but it is equally possible, and perhaps more probable, that it employed a common carrier of some kind.

Is it unreasonable to say that Big Sandy was actively engaged in generating value on the reservation with the assistance of a non-Native partner and thus does not set foot off the reservation? Or does the non-Native partner stand in the shoes of Big Sandy? If not, it is under the second analytical framework, not the third, that Big Sandy’s activities should be adjudged. In this case, it is likely that California’s regulations would not apply.

It could also be said that Big Sandy’s business should be evaluated in light of the Court’s opinion in Milhelm Attea. There, the Court upheld New York’s regulations as applied to a wholesaler of cigarettes to Native tribes, and imposed recordkeeping requirements. 

Milhelm Attea & Bros. Inc. was a licensed trader under the Indian trader statutes and asserted that the state’s regulations were preempted because the statutes “bar any and all state-imposed burdens on Indian traders.” The Court said that the statutes preempt state regulations only insofar as they “dictate the kind and quantity of goods and the prices at which such goods shall be sold to the Indians.” California’s regulations, like New York’s, do not dictate the kind, quantity, and prices of tobacco products sold to Native tribes.

The difference, however, is that Milhelm Attea is a non-Native wholesaler and Big Sandy is not. Thus, if the second analytical framework applies, California could not require that Big Sandy obtain a license.

Of course, all the above is speculative. However, that a different interpretation of the matter can be made is an indication that perhaps the Ninth Circuit should have given its reasoning more thought.

Conclusion

The laws concerning the governmental relationship between states and Native tribes are complex. The laws governing the tax and regulatory relationship between the state and the enterprise seem to be clear at first glance, but a case could be made that they are not. In deciding such cases, perhaps a federal court should tread carefully.