Not For The Faint Of Coronary heart

Young Native American woman dancing in traditional dress


Tax cases involving Native Americans are complex, highly fact-intensive, and if required, a court must weigh the competing interests of the tribe, the federal government, and the state to determine if the tax stands or falls. 

There are instances in which a court, in order to reach the correct result, must examine the original treaty document between the tribe and the United States, all of which were executed well over a century ago.

Indeed, Congress ended treaty making in 1871, when it passed a rider in a Native American appropriations bill, stating that “no Indian nation or tribe . . . shall be acknowledged or recognized as an independent nation, tribe, or power with whom the United States may contract by treaty . . .” 

Since then, Native American affairs have been regulated through federal legislation which, unlike treaty making, does not require the consent of the tribe or tribes involved.

The fundamental rule governing state taxation regarding Native Americans is simple enough. Without express congressional authorization, a state is powerless to tax Native American reservation lands, enrolled members of the tribe which occupies that land (whether income or excise taxes), and income derived from the land, whether retained by the tribe or distributed to individuals.

Whether a state tax is valid depends upon the person or entity that bears the legal incidence of the tax. Regarding excise taxes, a state tax is per se invalid if the legal incidence falls on the tribe or tribal members. If, however, the legal incidence of the excise tax falls on a non-Native contractor, the tax stands.

One other source of state tax preemption should be mentioned: the Indian Trader statutes. The first statute was enacted in 1790 and reenacted periodically by successive Congresses until it was made permanent in 1834. 

Today, the law requires non-Native persons and businesses to obtain a license from the Bureau of Indian Affairs before entering into commercial relations with the tribes. The Supreme Court has ruled that a state cannot impose tax on revenues earned by a non-Native trader operating on tribal lands because such traders are federally licensed and subject to extensive federal regulations.

However, a state can require a non-Native trader to collect and remit cigarette taxes from non-tribal member purchasers.

Beyond this fundamental rule and the Indian Trader statutes, the tax waters become deep and murky, partly because U.S. Supreme Court precedent in this area has been anything but clear. Thus, probing further into the permutations and nuances of the law is far beyond the scope of this article.

Indian Gaming and Regulatory Act

To the surprise of some (or perhaps none), the rule that unless expressly preempted, a state is free to tax the activities of a non-Native enterprise on reservation land is not ironclad. Courts have found that even where a federal statute is silent on state tax authority, an implied preemption can nevertheless exist.

The federal Indian Gaming and Regulatory Act (IGRA) is a case in point. Enacted in 1988, IGRA is a comprehensive regulatory structure providing federal oversight of games of chance operated by Native enterprises on reservation lands.

Gaming is divided into three classes. Class I is governed wholly by the tribe and without federal oversight, and consists of social games solely for prizes of minimal value or gaming connected with tribal celebrations or ceremonies.

Class II, also governed by the tribe but with a greater degree of federal oversight, is played in the state outside the reservation and conforms with state law regarding the hours of operation and limits on wagers and pot sizes.

Class III includes all other games not falling within the other gaming classes, and consists of casino games, such as slots, baccarat, blackjack, and the like. These games have the greatest degree of federal oversight; in addition, the tribe must enter into a gaming compact with the state before commencing operations.

Placing Bets

Stock photo of a diverse group of people gambling at a roulette table in a casino. Focus on mans … [+] hand in center of table.


Litigation Under IGRA

Most of the state/tribal tax litigation under IGRA involves casinos and usually some type of excise tax. For example, the matter might involve the imposition of use tax on amenities purchased by nonmember casino patrons, or an excise tax on a casino’s construction or renovation by non-Native contractors.

If the federal statute does not contain an express preemption of state tax authority, a lower federal court is required to apply the Supreme Court’s Bracker balancing test, which requires “a particularized examination of the relevant state, federal, and tribal interests.”

This inquiry is not simply an application of mechanical or absolute conceptions of state and tribal sovereignty. Rather, it requires a lower court examine the immunity question against the “significant geographical component of tribal sovereignty” that “provides a backdrop against which the applicable treaties and federal statutes must be read.” Therefore, “a state seeking to impose a tax on a transaction between a tribe and nonmembers must point to more than its general interest in raising revenues.”

What’s interesting is how a lower federal court — sometimes the same court — can apply the Bracker balancing test in two IGRA cases implicating the same sovereignty and revenue interests, yet come to diametrically opposed conclusions.

This is not to say the balancing test should always favor one party over the other, but one has to question the court’s analysis in each case when, in finding for or against preemption (although admittedly on a different set of facts), the particular state and tribal interests do not appear to have been given the same weight. This observation is illustrated by the Eighth Circuit’s opinions in Noem and Haeder, decided on the same day.

In Noem, the circuit court determined whether IGRA preempted South Dakota’s use tax on sales of casino amenities, such as food and beverage services, hotel, live entertainment, and the like, to nonmember patrons.

The tribe argued that these amenities would not exist except for the casino, and thus were directly related to the operation of the casino. IGRA preempts the state’s tax, the tribe said, because the gaming compact between the tribe and the state does not expressly authorize it.

The appellate court said that IGRA does not preempt the tax because the federal statute is concerned only with activities that relate directly to gaming, that is, the playing of games, and not activities that occur in proximity to, but not inextricably intertwined with, the roll of the dice, the spin of the wheel, and the betting of chips.

Moreover, the circuit court said, if the compact between the tribe and the state included a provision that the tribe would pay the use tax, it most likely would have been rejected by the Department of the Interior’s National Indian Gaming Commission, based on the concern that a state might have used its leverage over Class III gaming to force a favorable resolution of issues unrelated to Class III gaming.

Thus, the appellate court said tax preemption must be determined by application of the Bracker balancing test in light of IGRA’s objectives.

IGRA’s objectives are to promote tribal economic development, self-sufficiency, and strong tribal governments by ensuring the tribe is the primary beneficiary of gaming operations and protecting such as a means of generating tribal revenues.

To this end, IGRA supports substantial tribal independence in gaming operations and protects them from state interference, except for limited state regulation through Class III gaming compacts.

Moreover, while the amenities were not directly related to gaming activities, the record showed the sale of these amenities made a substantial contribution to the casino’s success, in that the increases of patronage at one amenity, such as the food and beverage service, was directly tied to the increases in gaming itself.

The state’s use tax on these amenities, the court said, would either increase their cost to nonmember patrons or reduce tribal revenues. Even if it did not, the tax contravenes the broad policy of increasing tribal revenues through gaming and ensuring that tribes are the primary beneficiaries of their gaming operations.

Finally, the circuit court said, while in general the state does have some authority to impose taxes on the activities of non-Natives on tribal lands, such authority is curtailed where the state does not have a specific, legitimate, regulatory interest in the activity taxed.

The state’s generalized interest in raising revenue does not outweigh the federal and tribal interests in Class III gaming. In other words, the circuit court said, “this is not a case in which the state seeks to assess taxes in return for the governmental functions it performs for those on whom the taxes fall.”

Thus, the appellate court found, South Dakota’s tax on amenities sold to nonmember casino patrons was preempted by federal law.

Haeder involved the legitimacy of South Dakota’s contractor excise tax imposed on a non-Native contractor hired by the tribe to perform extensive renovations, including substantial upgrades and expanded capacity, to its casino located on reservation land.

The legal incidence of the tax falls on the contractor, which may or may not pass the tax through to the customer. Here, the tax was passed through to the tribe, thereby causing it to shoulder the economic burden of the tax.

The purpose of the tribe’s substantial investment was to better compete with a newer casino that opened in Iowa, to which it was losing market share.

For the reasons expressed in Noem, the appellate court concluded that IGRA does not expressly preempt the state’s excise tax.

The circuit court then applied the Bracker balancing test and concluded the tax is not preempted. It said that unlike the ongoing use tax at issue in Noem, here, the contractor excise tax is a one-time imposition “that hardly implicates the federal and tribal interests.”

In addition, the court said, the tribe presented no evidence that the tax will impede the tribe’s gaming activities. The tax is only a small fraction of the revenue the tribe earns from its gaming operation, and there was no showing that imposition of the tax would reduce demand for the casino’s activities. Absent such a showing, the circuit court said, “the indirect financial burden is simply too indirect and too insubstantial to support the tribe’s claim of preemption.”

Male croupier holding card at Blackjack table, close-up

Male croupier holding card at Blackjack table, close-up


The appellate court also said the federal interests reflected in IGRA and the history of tribal independence “are not implicated by an excise tax that does not regulate casino construction or gaming activities.”

The circuit court then turned to examining the state’s interest in imposing the tax. The tribe explained that a state’s interest in raising revenue is strongest when the tax is directed at off-reservation value and when the taxpayer is the recipient of state services.

Here, the casino’s gaming activities provided on-reservation value, and none of the services the state provides from its general fund have a nexus with the casino’s construction and the government services the state may otherwise provide.

The circuit court disagreed. The services provided by the state in this case include those provided to the non-Native contractor off the reservation, as well as on it.

Moreover, the appellate court said, the state has an interest in applying its “generally applicable excise tax throughout its territory. Thus, the absence of a more specific nexus, while relevant, is not controlling.”

The circuit court concluded that considering the tax has only a minimal impact on the federal and the tribe’s financial interests, the state’s legitimate interest in raising revenue for services that benefit the non-Native contractor-taxpayer and the state’s interest in its ability to apply its generally applicable contractor excise tax throughout the state are sufficient justification to impose the tax on the non-Native contractor.

Did the Eighth Circuit Get It Right?

The Haeder court’s application of the Bracker analysis is not necessarily incorrect, as far as it goes. However, it seems the court gave rather short shrift to the federal and tribal interests in light of IGRA.

First, the court may have been correct that the tax is a one-time imposition rather than the ongoing imposition of the use tax in Noem, which may, in turn, prompt the casino to raise its prices or take a loss. That one-time imposition, however, may cause the tribe diminished revenues in other ways.

The tax money could have been used to further expand the casino’s gaming activities through the purchase of additional slot machines, gaming tables, or the like. The additional revenue generated by such an expansion surely implicates the strong federal and tribal interests as expressed in IGRA.

Second, while one might agree that IGRA and tribal independence are not implicated by an excise tax that does not regulate casino or gaming activities, neither does the use tax at issue in Noem. It is hard to see how the circuit court reached this conclusion regarding Haeder’s contractor excise tax, but not Noem’s use tax.

As for the appellate court’s conclusion that the excise tax is justified by the protections and services the non-Native contractor receives off reservation, that does not take into account the economic burden of the tax that falls on the tribe, which is ultimately paying for state protections and services from which it receives no benefit. This is no different than a state’s imposition of a similar tax for the construction of an on-reservation school, which was struck down by the Supreme Court in Ramah.

The Eighth Circuit reversed the district court’s decision in Haeder and remanded for reconsideration. On remand, the district court wrote a 121-page opinion that reads like a not-so-subtle rebuke to the appellate court.

The opinion goes into excruciating detail on Supreme Court precedent in this area, the contractor excise tax and what government services it funds, and chronicled the near-total lack of South Dakota’s involvement in the construction project, which showed that the state provided no services to the tribe and its project that would justify imposing the tax on the non-Native contractor. The matter is now on appeal before the Eighth Circuit.


The intersection of tribal and state sovereignty in tax matters makes for a difficult road to navigate. The cases are fact-intensive and sometimes require an examination of century-old treaties to determine the treaty maker’s intent.

A court faced with such a challenge must weigh the interests of the three parties — the tribe, the federal government, and the state — in reaching a conclusion of whether a state tax will survive or fail. The test developed by the Supreme Court to balance these three interests requires a particularized inquiry into the interests that are implicated, but a court may not give the inquiry the scrutiny it deserves.

What these considerations reveal is that the journey into the realm of tribal state tax matters is not for the faint of heart.