A new case, dated September 5, 2014, out of the Southern District of Florida provides additional support for tribal taxation without state tax interference and for upholding new provisions in the Bureau of Indian Affairs’ (“BIA”) residential and commercial leasing regulations which assert preemption of state and local taxes assessed related to property under BIA leases. In the Confederated Tribes of the Chehalis Reservation v. Thurston County, 724 F3d 1153 (9th Cir 2013) case, the Ninth Circuit Court of Appeals held that 25 USC § 465 preempted state and local taxes of improvements on tribal trust land, regardless of ownership. This case in effect affirmed the BIA regulations set forth in 25 CFR § 162.017(a) which addressed preemption of state and local taxes directly on permanent improvements, themselves.
In the current case, Seminole Tribe of Florida v. State of Florida, Civil Action No. 12-62140-Civ-Scola, the Seminole Tribe of Florida filed a lawsuit challenging two Florida taxes: (1) a utility tax imposed by the Florida Department of Revenue through the servicing energy utility’s billings (“Utility Tax”), and (b) a rental tax on leases held by non-tribal entities pertaining to tribally owned trust property (“Rental Tax”). The Rental Tax question is relevant to additional BIA regulations set forth in 25 CFR § 1602.017(b-c) which pertain to taxes on activities under a lease and on leasehold or possessory interests.
Rental Tax. The Florida District court held that the Rental Tax was invalid on two bases. The first was, similar to the Chehalis case, based on 25 USC § 465, which prohibits taxation of tribal trust land, including the improvements thereon. Mescalero Apache Tribe v. Jones, 411 US 145 (1973). Florida’s Rental Tax was a “use” tax, and the court held that use of property and the right to manage property and receive income from property are among the bundle of privileges that make up property or the ownership of property. Therefore a tax on the lease and/or use of the property was a tax on the property itself. Because the property was owned in trust by the Tribe, the tax therefore ran afoul of 25 USC § 465 which clearly prohibits a tax of tribal trust property.
The second basis for invalidating the tax was under the leasing statute, 25 USC § 415. The court evaluated the Rental Tax under the principles of the Indian Commerce Clause and the sovereign status of Indian tribes, both of which prohibit state taxes on non-Indians on Indian reservations if the tax is either preempted by federal law or it interferes with a tribe’s ability to exercise its sovereign functions. White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 142 (1980); Ramah Navajo Sch. Bd., Inc. v. Bureau of Revenue of N.M., 458 U.S. 832, 837 (1982).
Here, the court’s discussion directly addressed the BIA leasing regulations in which the Secretary of Interior (“Secretary”) concluded that “the very possibility of an additional State or local tax has a chilling effect on potential lessees as well as the tribe that as a result might refrain from exercising its own sovereign right to impose a tribal tax to support its infrastructure needs.” 77 Fed Reg 72440, 72448 (December 5, 2012). The court noted the clear delegated authority for the Department of Interior to promulgate regulations under 25 USC § 415. Because of this clear delegation, the historical and daily involvement with Indian tribes, the complex and extensive history of tribal relations, and the comprehensive and thorough analysis of the Secretary, the court gave significant deference to the Secretary in evaluating the factors that are relevant to the Bracker and Ramah tests. In summary, the court relied on the BIA regulations to invalidate the tax because the Secretary’s preemption analysis was thorough and persuasive in explain that the federal regulatory scheme regarding leases of restricted Indian land was “so pervasive that it precludes the additional burdens imposed by Florida’s Rental Tax.” In particular, the court noted that BIA’s “new regulations have changed the landscape in this area of the law, specifically regarding the issue of preemption.”
Importantly, the court distinguished this situation from the Cotton Petroleum Corp. v. New Mexico, 490 US 163 (1989), line of oil and gas lease cases, which set forth a more significant test to justify preemption based on the burden on the tribe of the state tax. The court contrasted the lack of comprehensive analysis performed by Interior in that case with the comprehensive analysis in the BIA land lease regulations and noted the different leasing schemes as well as the evidence of Congressional approval of taxes in the oil and gas lease schemes. In summary, the court concluded that the Secretary’s careful description of the comprehensive nature of the statutory scheme set forth in the land leasing statute context, 25 USC § 415, as well as any lack of Congressional evidence of the approval of state taxes under these land leases distinguished the holding in the Cotton Petroleum cases from this situation.
Utility Tax. The Florida District Court also held that Florida’s Utility Tax was invalid. The Utility Tax was imposed on gross receipts from utility services delivered to the retail customer. The tax was billed to and paid by the customer, including the Tribe, in its monthly utility bill. Under federal law, a state may not directly tax an Indian Tribe on an Indian reservation unless a federal statute expressly permits the tax. Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 458 (1995). Courts will undertake an inquiry on the “legal incidence” of a tax to determine if a state is impermissibly taxing an Indian tribe. Here, the court found that the legal incidence was on the Tribe and not on the utility, since a) the tax was built into the monthly bill to the Tribe; b) the Tribe would pay the bill including the tax; and c) there was no evidence in state law that the utility would be liable for paying the tax if the Tribe did not pay the bill or the tax.
In summary, while the Florida District Court case is not controlling precedent in Oregon (unlike the 9th Circuit Chehalis ruling which is controlling), it nevertheless is a significant example of how a court will directly address and/or rely on the BIA leasing regulations in a preemption analysis and it provides further evidence that the landscape on state and local taxation related to tribal trust assets may be changing to help facilitate tribal taxation and self-determination.