Washington State Department of Licensing v. Cougar Den, Inc.

Issues 

Does a Washington State fuel tax violate an 1855 treaty between the Yakama Nation and the United States that protects the Yakama’s “right to travel” when the tax is applied to a Yakama corporation that uses a public highway to transport fuel into Washington?

Oral argument: 
October 30, 2018
Court below: 

In this case, the Supreme Court will determine whether the Yakama Treaty of 1855 (“the Treaty”), which guarantees to the Yakama Indians the right to travel upon Washington public highways, creates a right for tribal members to avoid the Washington State fuel tax, which imposes a tax on fuels used for the propulsion of motor vehicles on Washington highways. Petitioner Washington State Department of Licensing (“the State”) argues that the tax applies because the Treaty does not expressly preempt the tax and because the tax attaches to the possession of fuel, not the transportation of fuel. Respondent Cougar Den, Inc. contends that, according to well-established rules of Indian treaty interpretation, the Treaty preempts the fuel tax and, further, the tax is an importation tax necessarily implicating the Yakama Indians right to travel. From a policy perspective, the Court’s decision in this case will have potential implications on Washington tax revenues, environmental concerns, and competitiveness in the fuel market.

Questions as Framed for the Court by the Parties 

Whether the Yakama Treaty of 1855 creates a right for tribal members to avoid state taxes on off-reservation commercial activities that make use of public highways.

Facts 

The Confederated Tribes and Bands of the Yakama Nation (“Yakama Nation”) is an Indian Tribe recognized by the federal government. The Yakama Nation and the United States entered into a treaty (“the Treaty”) in 1855. In the Treaty, the Yakama Nation surrendered tribal territory to the United States in exchange for the security of certain rights to the Yakama Nation. The Treaty provides in pertinent part that the Yakamas were granted “the right, in common with citizens of the United States, to travel upon all public highways.”

Cougar Den, Inc. (“Cougar Den”) is a corporate entity organized under the laws of the Yakama NationCougar Den’s owner and president, Kip Ramsey, is an official member of the Yakama Nation. In 1993, Cougar Den became the Yakama Nation’s appointed sole agent to provide for the sale and delivery of petroleum products to the Yakama Nation’s members.

In 2013, Cougar Den began buying fuel in Oregon and transporting the fuel to the Yakama Reservation located in Washington where Cougar Den then sells the fuel to fuel stations. In transporting fuel via public highway from Oregon to the Yakama Reservation in Washington, Cougar Den must travel across a 27-mile gap between the Washington/Oregon state line and the entrance to the Yakama Reservation.

The State of Washington (“the State” or “Washington”), through its Department of Licensing, levies taxes on motor vehicle fuels. These taxes include a tax on wholesale fuel suppliers. Under this tax on wholesale fuel suppliers, the State taxes fuel that is brought into the State via trucks or railcars when that fuel is hauled across the State line.

However, Cougar Den did not pay taxes on the fuel brought into Washington from Oregon over the public highway. In response, the Department of Licensing assessed Cougar Den $3.6 million in taxes, penalties, and interest for Cougar Den’s transporting activities for eight months during the 2013 calendar year. Despite this, Cougar Den continued its activities without paying taxes, claiming exemption under the 1855 Treaty, and the Department of Licensing continued to assess taxes and penalties. Ultimately, the Department of Licensing assessed tens of millions of dollars in unpaid taxes, penalties, and interest.

Cougar Den appealed this tax assessment to a State administrative law judge (“ALJ”). The ALJ held in favor of Cougar Den, determining that the taxes were improper because they impermissibly restricted the right to travel granted to the Yakama Nation under the 1855 Treaty. Under Washington state law, an agency director may review orders by ALJs. Accordingly, the Department of Licensing appealed to the Director of the Department of Licensing to review the ALJ’s order.The Director rejected Cougar Den’s treaty defense, reversed the ALJ’s order, and held in favor of the Department of Licensing.

Cougar Den then appealed to State Superior Court for judicial review of the Director’s determination. The State Superior Court reversed the Director’s determination and held in favor of Cougar Den, concluding that the Director erred in interpreting the 1855 Treaty and that the tax assessment violated the 1855 Treaty. The State appealed the Superior Court decision to the Washington Supreme Court. By a 7-2 vote, the Washington Supreme Court affirmed the Superior Court’s decision that the tax assessment violated the 1855 Treaty and the 1855 Treaty preempted the fuel tax. The Department of Licensing petitioned the United States Supreme Court to review the Washington Supreme Court decision, and the United States Supreme Court granted certiorari to review the case.

Analysis 

INDIAN TREATY INTERPRETATION AND PREEMPTION

The Washington State Department of Licensing (“the State”) argues that its fuel tax applies to Cougar Den because the Yakama Treaty (“the Treaty”) does not expressly preempt the state tax. The State cites the U.S. Supreme Court’s bright-line test from Mescalero Apache Tribe v. Jones, which determines whether a state may tax an Indian tribe or its members. Generally, a state may not tax a tribe or its members within reservation land. However, outside of reservation land, a state may impose a non-discriminatory tax, according to the State. The State notes that the off-reservation tax is subject to a caveat: the federal government may preempt a state’s ability to impose its tax. However, the State argues that the preemption must be “clearly expressed” and “unambiguously proved.” Otherwise, the State maintains, courts “will not imply tax exemptions.”

Here, the State contends that the right-to-travel provision in the Treaty does not constitute an express federal preemption of its fuel tax. In support of its argument, the State cites Mescalero, a case in which the Court refused to exempt from tax income derived from tax-exempt land because the federal statute granting the tax exemption did not expressly exempt income derived from the land. Similarly, the State argues, the Treaty’s right-to-travel provision says nothing about taxes and never mentions fuel or any other goods. Thus, the State maintains that as in Mescalero, “in the absence of clear [treaty] language,” this Court should not imply a tax exemption in this case.

Cougar Den counters that the right-to-travel provision preempts the Washington fuel tax although the provision never explicitly refers to taxes. Cougar Den argues that the State’s “clear-statement rule”—that the Treaty cannot preempt a tax unless it unmistakably refers to taxes—conflicts with Ninth Circuit precedent. Cougar Den notes that in Yakama Indian Nation v. Flores, the U.S. District Court for the Eastern District of Washington held that the Treaty’s right-to-travel provision preempted the application of Washington’s licensing and permitting fees to Yakama-owned logging trucks even though the provision never explicitly mentions taxes.

Additionally, Cougar Den contends that the State’s clear-statement rule contravenes well-established canons of construction for Indian treaties. Cougar Den maintains that courts must interpret Indian treaties “as the Indians themselves would have understood them.” Cougar Den notes that, although the right-to-travel provision does not explicitly refer to taxes, the Yakama would have understood that the Treaty preempted taxes associated with treaty-protected rights, like the right to travel in this case. Further, Cougar Den explains that, unlike a federal statute, a treaty is an agreement between parties. Thus, Cougar Den maintains, the Court must consider the parties’ intent when interpreting the Treaty. Additionally, Cougar Den posits that courts must liberally construe Indian treaties and resolve any ambiguities in the Indians’ favor. Cougar Den claims that the State’s clear-statement rule is fundamentally at odds with this liberal construction principle, because, under the State’s clear-statement rule, the Court is to resolve in the State’s favor any ambiguities regarding whether the Treaty preempts taxes.

WHAT IS THE WASHINGTON FUEL TAX “ON”?

The State argues that its fuel tax does not restrain highway travel. . The State highlights that the Treaty guarantees “the right . . . to travel upon all public highways” (emphasis added). The State does not dispute this right; rather, the State claims that Cougar Den’s decision to transport fuel by highway does not convert the fuel tax into a tax on highway travel because the fuel tax attaches to fuel possession. The State notes that the tax is imposed on a per-gallon basis and “is assessed regardless of whether Cougar Den uses the highway.” For instance, the State claims that the tax also applies to fuel imported by a railcar or barge. Therefore, the State maintains, the method of transportation is irrelevant. Although the only practical way to import fuel may be by highway, the State posits that the Treaty says nothing “about preempting off-reservation taxes on possession of goods simply because the only practical way to transport them is by highway.” Further, the State argues that Cougar Den incorrectly characterizes the tax as an importation tax because the tax applies to fuel purchased both in and out of Washington, which underscores that possession and not transportation triggers the tax. Indeed, the State claims that the tax is assessed on the first possession of fuel within the State, whether withdrawn from an in-state refinery or brought into Washington by any means of transportation.

Cougar Den counters that what the tax is “on” is irrelevant to preemption. Whether the tax is “on” fuel possession or fuel transportation, Cougar Den argues that the Court must focus on whether the State is taxing a treaty-protected right. Here, Cougar Den contends that fuel possession cannot be separated from the treaty-protected right to transport goods. Cougar Den claims that to transport something, one must necessarily possess the thing being transported. Therefore, even if the tax were on possession, the Treaty would preempt the tax. Further, Cougar Den maintains that even if the case turns on what the tax is “on,” the Treaty preempts the tax because importation expressly triggers the tax. Cougar Den posits that to “import” goods is to “transport” goods. Thus, Cougar Den contends that the State must prove that Cougar Den transported goods—a treaty-protected right—to assess the fuel tax. Further, Cougar Den argues that the “first possessor” will always be the refinery (for in-state possession) or the importer; accordingly, a “first-possession” tax is a tax on importation unless the party is an in-state refinery. Additionally, Cougar Den argues that whether the tax applies to other means of transportation is irrelevant: the Treaty protects the Yakama’s right to travel on highways and whether the tax burdens Cougar Den’s highway use should determine whether the Treaty preempts the tax.

THE ROLE OF HISTORICAL UNDERSTANDING

The State argues that the Yakama Nation’s historical understanding of the right-to-travel provision does not prevent the State from imposing its fuel tax on Cougar Den. The State acknowledges that probing the parties’ historical understanding is a valuable way to discern the parties’ intended meaning of terms used in the Treaty, “but it cannot justify adding terms that are not there.” The State posits that this is especially true for off-reservation tax exemptions. Because the general rule is that a state may tax an Indian tribe or its members for off-reservation activity, the State maintains that off-reservation tax exemptions must be “clearly expressed” and “unambiguously proved.” The State notes that courts do not grant off-reservation tax exemptions by implication. Therefore, the State contends, the Yakama’s historical understanding cannot provide a basis for an off-reservation tax exemption because “unwritten understandings” cannot serve as the foundation for off-reservation tax exemptions.

Further, the State claims that, even if the Court considers the Yakama Nation’s historical understanding of the right-to-travel provision, there is no evidence that the parties intended the tribe to be forever immune from taxes relating to the purchase, sale, or possession of goods. The State argues that, although the parties agreed that the Yakama would retain the right “to go on the roads to market,” their agreement says nothing about whether transported goods are exempt from taxes. The State agrees that the Treaty was meant to preserve the Yakama way of life, including the freedom to travel and trade, but maintains that this understanding is different from “an understanding that the Yakama would be exempt from future taxes on goods if they transported those goods on interstate highways.”

Cougar Den counters that the Ninth Circuit in Yakama Indian Nation established that courts must consider the parties’ historical understanding when interpreting the right-to-travel provision. Cougar Den noted that in that case, the Ninth Circuit instructed the District Court for the Eastern District of Washington to examine holistically the Treaty language, the parties’ conduct after the Treaty was signed, and the circumstance surrounding signing. Further, Cougar Den contends that the factual findings in that case bind the State because the State never challenged those findings and the Washington Supreme Court in this case determined that the findings were preclusive.

Cougar Den further argues that the parties’ historical understanding determines the scope of the right-to-travel provision. Based on the parties historical understanding, Cougar Den alleges that the right-to-travel provision grants the Yakama nation the right to travel tax-free on all public highways. Cougar Den explains that before the Treaty, travel was ingrained in Yakama culture and was especially important for trade purposes. Cougar Den states that the Yakama were concerned about losing their way of life, evidenced by the fact that they were the only Washington tribe to negotiate with the federal government a right-to-travel provision that unconditionally secured their right to transport their goods to market. Further, Cougar Den maintains that the Treaty preserves the Yakama’s right to travel tax-free because the Yakamas enjoyed this right before the Treaty and the Treaty states that it is “securing the right” to travel.

Discussion 

ROLE AND EFFICACY OF TAXATION

The State argues that allowing the Treaty to preempt Washington’s fuel tax would result in devastating effects on state and federal taxing powers.The State claims that if the Court holds in favor of Cougar Den, then Washington could lose millions more dollars in tax revenue from Cougar Den’s conduct alone. The State also contends that if the Court rules for Cougar Den, Cougar Den could not only expand its fuel sales throughout Washington, which would reduce funding for Washington’s transportation infrastructure, but could expand its operations nationwide and evade other states’ taxes as well.

Beyond lost revenue, the State argues that accepting Cougar Den’s interpretation of the Treaty would allow the Yakama Nation to avoid more than just fuel taxes such as the hazardous substance tax and the petroleum products tax, which were passed to promote environmental clean-up and safety. Public Health Organizations, on behalf of the State, note that the Washington Supreme Court’s decision could also apply to cigarette taxes and argue that preempting the cigarette tax would circumvent the tax’s health goal—that is, discouraging cigarette use, especially by minors.Indeed, the State opines that upholding the Washington Supreme Court’s decision could lead to nationwide distribution by highway of tax-free cigarettes.

The Nez Perce Tribe, in support of Cougar Den, argues that just because Washington may not be able to collect fuel tax from the Yakama Nation does not necessarily mean that the tax will go uncollected.For example, the Nez Perce Tribe notes that it collects a fuel tax from its retailers to cover transportation-related expenses, thereby fulfilling the same purpose as the State fuel tax. The Nez Perce Tribe argues further that state tax regulations change and change often, and therefore the Court should not feel particularly inclined to uphold this narrow, specific tax regulation when that regulation conflicts with the long-established right to travel under the Treaty. Additionally, the Nez Perce Tribe contends that the State and the Yakama Nation could enter into a fuel tax agreement as many other states and tribes—including other tribes in Washington—have done to avoid any issues of tax avoidance and treaty violations.

The Nez Perce Tribe also denies the State’s claim that preempting the fuel tax would lead to the avoidance of other State laws. The Nez Perce Tribe notes that those arguments were rejected by both the majority and the dissenting opinions in the Washington State Supreme Court and argues that the Yakama clearly share an interest in public health, public safety, and conservation with the State. In response to the State and Public Health Organizations’ concerns regarding cigarette taxes, the Nez Perce Tribe asserts that it has no tobacco tax disputes and campaigns to prevent tobacco use. The Nez Perce Tribe also argues that the issue of tobacco taxes is one that involves a different and distinct set of regulatory regimes and factual inquiries, and therefore should be decided separate from the fuel tax that is at issue in this case.

ANTI-COMPETITIVE IMPACT OF PREEMPTING THE FUEL TAX

The Washington Oil Marketers Association (“WOMA”), on behalf of the State, argue that preempting Washington’s fuel tax would result in tribal businesses gaining a significant competitive advantage over their nontribal business rivals.WOMA asserts that tribal businesses, including Cougar Den, have been able to offer a gallon of gas at a rate 20 cents lower than their competitors subject to the tax. Indeed, WOMA contends that many individuals shop for the lowest price for their fuel, and tribal businesses’ lower tax-free prices will result in non-tribal businesses being driven out of the market. The State also maintains that this competitive advantage would not stop at nontribal businesses—other Washington tribes that have entered into fuel tax agreements with the State would also suffer under Cougar Den’s interpretation of the Treaty.

Cougar Den concedes that the issue of competitiveness is a legitimate one, but responds that a solution has been offered in the past: pass the tax along to the consumer instead of the distributer. Cougar Den notes that this solution has been rejected by the State because it is politically unpopular—consumers do not like to pay taxes, so the State would rather the consumer blame the gas station than blame the State for high prices. Sacred Ground Legal Services (“Sacred Ground”), in support of Cougar Den, also notes that Cougar Den transports a large majority of its oil to Yakama gas stations on the Yakama Reservation for the benefit of those persons driving on the reservation—not for the benefit of those “price shopping” for gas.Finally, Sacred Ground also contends that even if tax collection from non-tribal State citizens presents some practical and political difficulties, the State created those difficulties, and the Court should not assist the State in extricating themselves from the circumstances that the State created.

Edited by 

Acknowledgments 

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