Whether a state motor fuels tax that is "imposed on the use, sale, or delivery" of motor fuel may be imposed on motor fuel that a non-Indian, off-reservation distributor delivers and sells directly to an Indian Tribe at its on-reservation service station.
The 1995 amendment to the Kansas Motor Fuel Tax Act allowed the Kansas Department of Revenue to collect a tax on motor fuel distributed to Indian lands. The Prairie Band of the Potawatomi Nation sought to enjoin the State from collecting the tax, claiming that the tax was pre-empted by federal law and that it impermissibly infringed on the Potawatomi Nation's rights of self-government. As prescribed by White Mountain Apache Tribe v. Bracker, either claim can be resolved by an interest-balancing test that considers (1) whether the tax revenue derives from value generated on- or off-reservation, and (2) whether the taxpayer benefits from tribal or state services. The Court will determine whether states can impose a tax which indirectly, but almost certainly, affects enterprises that take place on Indian reservations.
Questions as Framed for the Court by the Parties
- When a State taxes the receipt of fuel by non-tribal distributors, manufacturers and importers, and such receipt occurs off-reservation, does the interest-balancing test in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), apply because the fuel is later sold by a tribe to final consumers?
- Should the Court abandon the White Mountain Apache interest-balancing test in favor of a preemption analysis based on the principle that Indian immunities are dependent upon congressional intent?
- Did the court of appeals err in applying the White Mountain Apache interest balancing test by, inter alia, placing dispositive weight on the fact that a tribally-owned gas station derives income from largely non-tribal patrons of the tribe's nearby casino?
The Prairie Band of the Potawatomi Nation ("the Nation") is a federally-recognized Indian tribe located on United States trust land in Jackson County, Kansas. Prairie Band Potawatomi v. Richards, 379 F.3d 979, 981 (10th Cir. 2004) (" Potawatomi II "). To generate economic activity on the Reservation, the Nation spent $35 million to construct a casino, which it now runs. Brief for Respondent at 3–4, Wagnon v. Prairie Band Potawatomi Nation (No. 04-631) ("Brief for Respondent"). The Nation also owns and operates a gas station (the "Nation Station"), which it financed and built to serve casino-related traffic. Id. at 4. A tribal tax on fuel sold at the Station provides the Nation with its sole source of revenue—approximately $300,000 a year—for the construction and maintenance of roads, bridges and rights-of-way on or near the Reservation. Potawatomi II at 982. This includes maintenance on the one-and-one-half mile road connecting United States Highway 75 to the Nation's casino. See Brief for Petitioner at 4, Wagnon v. Prairie Band Potawatomi Nation (No. 04-631) ("Brief for Petitioner").
The Nation brought suit in federal court against the Secretary of the Kansas Department of Revenue ("the Secretary") to challenge the 1995 amendment to the Kansas Motor Fuel Tax Act. Potawatomi II at 982. In Oklahoma Tax Commission v. Chickasaw Nation, the Court invalidated a state fuel sales tax where it found the " legal incidence " of the tax—the burden that falls on the individual who must pay the tax authority—fell on the tribal retailer. Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. 450, 461–62 (1995). Following on the heels of Chickasaw Nation, the 1995 amendment enabled the Kansas Department of Revenue to impose a tax on motor fuel distributed on Indian lands by expressly placing the legal incidence of the tax on the off-reservation distributor. Potawatomi II at 982; see also Kan. Stat. Ann. § 79–3408(c) (2004). However, distributors are allowed to pass the tax directly to retailers, such as the Nation Station. Kan. Stat. Ann. § 79–3409 (2004). The Nation argued that this amounted to an indirect tax on fuel sold on-reservation, and sought to enjoin the State from imposing the tax on fuel distributed to the Nation Station. See Potawatomi II at 982.
The District Court granted summary judgment for the Secretary and held that the 1995 amendment was not preempted by federal law and did not infringe on the Nation's right of sovereignty. Prairie Band Potawatomi Nation v. Richards, 231 F. Supp. 2d 1295, 1312 (D. Kan. 2003) (" Potawatomi I "). On appeal, the Tenth Circuit focused on two issues: first, whether federal law preempted the tax because federal and tribal interests outweighed the State's interest in the tax, and second, whether the tax infringed on the Tribe's sovereignty under the interest-balancing test from White Mountain Apache Tribe v. Bracker. Potawatomi II at 983. The Tenth Circuit found for the Nation on both issues and reversed the District Court's decision. Id. at 987. It found that the amended Kansas Motor Fuel Tax was invalid as applied to the Nation Station because the balance of tribal, federal, and state interests prohibited state taxation as a matter of law. See id . Moreover, the court held that although Kansas had a legitimate interest in raising revenue, this general interest was insufficient to justify this tax because it interfered with, and was incompatible with, strong tribal and federal interests against taxation. See id. The Secretary appealed and the case is now before the Supreme Court.
The Indian Commerce Clause grants to Congress the power to regulate tribal affairs. U.S. Const. art. I, § 8, cl. 3 ; see also United States v. Wheeler, 435 U.S. 313, 322–23 (1978). Because this congressional authority co-exists with the quasi-sovereignty of Indian tribes, two "barriers" confront state efforts to regulate tribal activity: state regulatory authority can be preempted by federal law, or it can be found to interfere with tribal self-governance. White Mountain, 448 U.S. at 142.
The Supreme Court has ruled that, unless given express authority by Congress, a state tax is invalid if its legal incidence falls on tribal members for activity within Indian Country. Chickasaw Nation 515 U.S. at 453. The amended Motor Fuel Tax Act expressly locates the incidence of the fuel tax on the distributor. Kan. Stat. Ann. § 79-3408(c) (2004). Thus, as the State argues, the balancing test should not apply where the tax falls on the non-Indian distributor whose place of work is off the reservation.
However, two aspects of the statute make it appear as if the legal incidence is in fact on the tribe. First, the statute includes a "pass through" section that enables distributors to pass on the full expense of the tax to the retailer. Kan. Stat. Ann. § 79-3409 (2004). Second, as the United States points out in its amicus brief for the Nation, the language of the statute itself suggests that the retailer bears the burden of the statute. See Brief for the United States as Amicus Curiae at 16, Wagnon v. Prairie Band Potawatomi Nation, U.S. (No. 04-631). For example, although the statute aims to tax the first receipt of the fuel by a distributor, it exempts the first receipt when the fuel is sold to a second distributor, which suggests that the targeted transaction is between distributor and retailer. Kan. Stat. Ann. § 79-3408(d)(5) ; see also Brief for the United States at 16.
If the Court finds that the legal incidence of the tax falls on non-Indians, then the court must balance the federal, state, and tribal interests to determine where the tax improperly interferes with tribal self-governance. Chickasaw Nation, 515 U.S. at 459. In White Mountain the Court called for a "particularized inquiry" into the competing state, federal, and tribal interests, and in Washington v. Confederated Tribes of the Colville Indian Reservation it provided a rubric for measuring those interests. See White Mountain, 448 U.S. at 145; see al so Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134, 156–57 (1980). When weighing the competing interests, the tribal interest in tax-based revenue is at its strongest when the revenue derives from value generated on the reservation by tribal activities and when the taxpayer benefits from tribal services. See Colville, 447 U.S. at 156–57. Alternately, the state's sovereign interest is strongest "when the tax is directed at off-reservation value and when the taxpayer is the recipient of state services." See Id. at 157.
Thus, the extent to which value is generated on- or off-reservation may be the most important question of this action. In Colville, the Court found that reservation cigarette shops did not generate any value for the reservation; they simply drew non-Indian customers with a product manufactured off-reservation that they could sell below market price. See Colville, 447 U.S. at 155. This abuse of tax-exempt status was insufficiently related to the federal policy in favor economic development. See Id. By contrast, in California v. Cabazon Band of Mission Indians, the Court held that the state's interest in regulating high-stakes bingo was secondary to federal and tribal interests in economic development when the tribe had committed time and expense to building facilities that would attract non-Indian commerce. See Cabazon Band, 480 U.S. at 221–22.
The present case falls somewhere between these two decisions. On the one hand, tribal activity adds little value to the gasoline itself. On the other, the gasoline is sold at market price to patrons and employees of the casino—patrons and employees account for approximately 73% percent of the customers at the Nation Station. See Potawatomi I at 1297–98. Under the strict definition of "value added"—"the increase in the value of goods and services brought about by whatever a business does to them between the time of purchase and the time of sale"—the Tribe does nothing to the gasoline to generate value, but it has created a market for gasoline that did not exist previously. See NACS Brief at 13 (quoting Trinova Corporation v. Michigan Department of Treasury 498 U.S. 358, 362 (1991).
The second prong of the Colville test considers whether the taxpayer benefits more from state or tribal activities. Colville at 156–57. In the State's favor, where 73% of the Nation Station's patrons come from off the reservation to use the casino, they are more likely that they benefit from state services provided to the State's roads and highways. Potawatomi I at 1297–98. However, the State does very little work on the roads within the reservation and none at all on access road between the highway and the casino. Brief for Respondent at 1. Further, whereas revenue on Nation Station sales amounts to one tenth of one percent of the State's infrastructure revenue, it is the Tribe's sole source of infrastructure revenue. Brief for Respondent at 12. This is another example of the Tribe's dependency and interest in maintaining their sales.
Finally, the State argues that the White Mountain test fails to provide clear guidelines regarding jurisdictional limits and rules of application, and produces inconsistent results. Brief for Petitioner at 20. Instead of a balancing test, the State proposes a straightforward preemption standard comparable to the standard extended to government contractors, allowing states to impose otherwise nondiscriminatory taxes on distributors even though the economic burden of the tax might ultimately fall on the Tribes. See Id. at 22.
Through various judicial decisions, federal statutes, and executive orders, the federal government has established a broad federal policy in favor of tribal self-sufficiency and economic development. See White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 144 (1980). At issue here is the scope of that policy—both what it should include and how it should be measured.
The State has two principal concerns. First, by interpreting tribal immunity to protect tribal interests that are only indirectly affected by a state tax, the Tenth Circuit's decision could theoretically extend any tribe's immunity from taxation well beyond the borders of its reservation. See Brief for Petitioner at 7. Second, the Tenth Circuit's decision could extend tax immunity to non-Indian private corporations who sell to tribes. Id.
Extending tribal immunity from tax in this way also threatens to place non-Indian gas stations at a disadvantage. See Amicus Curiae Brief of the National Association of Convenience Stores at 3, Wagnon v. Prairie Band Potawatomi Nation (No. 04-631) (" NACS Brief "). Although the Nation sells its fuel at a price within two cents of the local market rate, the NACS points out that, according to consumer research, price differentials of one or two cents are enough to motivate consumers to shop elsewhere. Potawatomi II at 982; NACS Brief at 3. Thus if tribes in areas less remote than the one in this case were to open stations that fall within the purview of services related to tribal gaming enterprises, they could have a strong impact on comparable services in neighboring, off-reservation communities.
On the other hand, the Tribe has a substantial sovereignty concern in this case. Principally, revenues from the tribal tax levied on fuel sales at the Nation Station are the Tribe's sole source of support for its transportation infrastructure. See Potawatomi II at 982.
This decision could also impact the role of casinos on Indian land. In the Indian Policy Statement of January 24, 1983, President Reagan stated that gaming (specifically bingo) was an appropriate means for Indian tribes to achieve self-sufficiency. See California v. Cabazon Band of Mission Indians, 480 U.S. 202, 218 (1987); see also Indian Gaming Regulatory Act, 25 U.S.C. § 2702 (2005). Presuming that Indian casinos fall within the scope of federally-encouraged economic development, it remains unclear whether a service such as the Nation Station also falls within the reach of that policy.
Finally, the State raises the issue of whether the balancing test should be abandoned altogether, arguing that taxation, because it is so fundamental to a sovereign's ability to provide services, requires a bright-line standard that would be less likely to result in confusion and litigation. See Brief for Petitioner at 20. The State makes a compelling argument: that it tried to amend its Motor Fuel Tax Act in keeping with Chickasaw Nation, only to have the amended tax invalidated because it failed to satisfy an arguably unpredictable interest-balancing test. Id. at 8. However, it is unlikely that the Court would reach a decision that would cause it to abandon a test that has resolved issues of Indian law for thirty years. Brief for Respondent at 47.
The Supreme Court's decision will determine whether the interest-balancing test established in White Mountain Apache Tribe v. Bracker is applicable in cases where the interest of the state could potentially conflict with the sovereignty and entrepreneurial endeavors of Indian tribes. Primarily, the Court's decision will determine whether states can impose a tax which indirectly affects business endeavors on Indian reservations. The White Mountain test weighs tribal and federal interests against state interests by considering whether the tax revenue derives from value generated on- or off-reservation, and whether the taxpayer benefits from tribal or state services. If the Supreme Court finds that the Court of Appeals was correct in holding that the Kansas tax is preempted because incompatible with and outweighed by strong tribal and federal interests, then the Court will uphold the appellate court's decision. This would result in an effective bar of state taxes which indirectly impact an Indian reservation. However, if the Court finds that the balancing test does not apply because the legal incidence of the tax falls on non-tribal distributors, the Court will reverse. This would result in a victory and new source of income for the state, but would certainly impact any future attempts of Indian tribes in their pursuit of sovereignty and self-sufficiency.
Written by: Theresa Concepcion & Miles Norton