States Take Tax Revenue Vital for Funding Tribal Services

This article was originally published by the Center for Public Integrity, a nonprofit investigative news organization based in Washington, D.C. This story is published in partnership between the Center for Public Integrity and ICT (formerly Indian Country Today).

Osage Nation — On a crisp November morning, Teresa Bates Rutherford gazed at the construction site of her future home — her mind on her tax struggle with the state of Oklahoma.

The trust land she is building on has passed down through generations of her family on the Osage Reservation, located in northeastern Oklahoma. The state and county have limited jurisdiction on her land — a protection that should extend to taxes, but too often doesn’t.

Rutherford knows the tax laws better than most. She sits on the Osage Nation’s Tax Commission Board. Every month, she and two other Osage women pore over tax records for the tribe. Many of those records deal with the state, she says, which always wants more tax revenue.

For instance, Oklahoma makes vendors charge Rutherford state sales taxes on the materials for her home until she can provide them with proof that she qualifies for a tax exemption. There are no instructions available to apply for the exemption, she said, and she doesn’t know yet if the state will approve her request. She suspects most Osage citizens aren’t even aware they don’t have to pay these taxes.

“There’s always problems with taxation and the state,” said Rutherford, who has long dreamed of building this home for herself and her daughters. “The state just cannot accept us as a sovereign nation.”

An investigation by the Center for Public Integrity in partnership with ICT (formerly Indian Country Today) found that many state and local governments infringe on tribal nations’ taxing authority, siphoning billions of dollars in tax revenue from reservations over the past few decades alone.

It’s a modern version of wealth extraction, treating tribes as lesser entities whose sovereignty can be ignored. And it reduces the money tribal governments can spend on services in their communities, where poverty rates are often higher than in surrounding areas.

After enduring centuries of stolen land and seized resources, many tribes have been seeking economic recovery through commercial ventures. Tax policies are a major obstacle to further progress, tribal leaders say.

“Quite simply, we are asking for parity in the federal tax code and to be treated as other sovereigns in this country as reflected in the U.S. Constitution and numerous federal laws, treaties and federal court decisions,” said Mashantucket Pequot Chairman Rodney Butler during 2020 congressional testimony. “Without question, tax parity for tribal governments will allow for greater self-determination, economic growth and self-sufficiency for Indian Country.”

States are not allowed to tax economic interactions between tribal citizens and their governments. But courts have protected states’ ability to tax most economic interactions between tribal-run entities and non-tribal companies or individuals, precisely where most of the revenue opportunities lie.

Imagine if California made this demand of Nevada: When our residents visit, you have to charge our sales tax on their purchases and hand it over to us.

That’s effectively what states and counties do to tribal governments, and not only with sales taxes.

No national estimates exist for the total amount tribes have lost due to these tax policies. But court cases, reports and interviews with tribal leaders, attorneys and advocates compiled by the Center for Public Integrity and ICT show the scope is at least in the hundreds of millions of dollars each year. For instance:

• Since 2008, North Dakota has collected more than $2.5 billion in tax revenue from the oil and gas industry on the Fort Berthold Reservation, according to Mandan, Hidatsa and Arikara Nation Chairman Mark Fox.
• A recently settled lawsuit in Washington said the state was collecting more than $40 million annually in various taxes from a shopping center the Tulalip Tribes built to help generate revenue for the tribal government. The state and county collected another $20 million in taxes on the Tulalip Reservation in 2015 that was not disputed in the lawsuit.
• In 2019, courts upheld Riverside County’s right to collect $23 million in annual tax revenue from non-tribal entities or people leasing trust lands from the Agua Caliente Band of Cahuilla Indians in California.
• Montana collected more than $347 million from taxes on alcohol, tobacco and fuel sales and natural-resource development on reservations statewide in 2016. The state sent less than $11 million of that to tribal governments.
• California and San Diego County collect more than $400,000 in property taxes every year from a wind-power project on the Campo Indian Reservation. The state also took $4 million in sales taxes when the turbines were installed.

When states and counties tax non-tribal businesses and customers on reservations, tribal governments face a thorny decision: Do they add their own taxes on top, which can drive economic activity away because it increases costs? Or do they forgo that, losing a source of critical revenue needed for government operations?

Many tribes have either not imposed their own taxes or reduced what they were charging, according to interviews with tribal leaders and records reviewed by Public Integrity and ICT. Some entered revenue-sharing agreements, often with the state or local government taking at least half of the tax revenue earned on tribal lands.

These outcomes largely keep tribal governments from using tax policy to attract business development in ways that cities, counties and states routinely tap.

And many tribal leaders say states, after collecting taxes from tribal economic activity, provide minimal services that benefit tribal citizens on reservations.

“It’s a real inhibitor of economic opportunity,” said Robert Odawi Porter, former president of the Seneca Nation and managing principal of the Capitol Hill Policy Group, a government relations firm that works with tribes. “The tribal government should have the same right to determine its tax policies as a state, local and federal government.”

The backdrop to this dynamic: Nearly all states tax in ways that take a greater share of income from people with less money and a lesser share from people with more. That increases economic inequality while reducing the revenue that states can collect, a Public Integrity investigation found.

Several states said they collaborate with tribal governments on taxation, though they gave little detail on the services they provide on reservations in exchange for the taxes they collect.

“New Mexico has made a concerted effort in recent years to work as cooperatively as possible on taxation issues with tribal governments in recognition of their sovereignty,” Charlie Moore, spokesman for the state’s Department of Taxation and Revenue, said by email.

Mike Nowatzki, a spokesman for North Dakota Gov. Doug Burgum, said by email that the administration works with tribes “to avoid a patchwork of taxation that might discourage economic development.”

Oklahoma officials did not respond to requests for comment.

In lawsuits about the matter, many states argue that they should be collecting tax revenue from economic activity on tribal lands because they provide services off-reservation — such as highways — that the customers and companies involved in on-reservation businesses need.

The U.S. Department of the Interior, the primary agency carrying out the United States’ obligation to protect tribal rights and assets, and to which tribes have turned to urge action on the taxation issue, declined to comment. Its reasoning: It didn’t “have anything to add on this.”

Looking to Tribes for “Free Money”

Tribal nations — and their lands — possess immunity from taxation by the U.S. and state governments.

Hundreds of treaties state this. So does the U.S. Constitution, which put it this way: “Indians not taxed.”

“It has been litigated and debated for many, many years as to what those words mean,” said Gabe Galanda of the Round Valley Indian Tribes of California and managing lawyer at Galanda Broadman, an Indigenous rights law firm in Seattle, Washington. “I just know that sitting here today, you know, 200 or more years from when that law was written, that unless you have clear indication in federal statute or treaty that what is being sought to be taxed should not be taxed, it more than likely will be taxed.”

The shift first began after the Indian Citizenship Act of 1924. Federal courts concluded that because Native people were now U.S. citizens, they had to pay federal income taxes.

There was no concurrent effort by the U.S. government to restore land and resource wealth stripped from most tribes after the continent was colonized.

“A lot of us feel strongly that we paid our taxes through the land that we ceded,” said Henry Cagey, councilmember and former chairman of the Lummi Nation. “Why do we as Indian people have to pay taxes to the United States when the land that we gave up is their tax base? The property taxes, the business taxes, all the income that they generate and run their government is based on the land we ceded.”

The development of tribal enterprises got a boost in the 1970s in part from federal programs, grants and loans.

That’s when state tax collectors came calling.

“Unfortunately, cash-strapped states continued to look at on-reservation resources and activity as potential ‘free money’ and subsequent cases proved disastrous,” Gavin Clarkson of the Choctaw Nation, who served as deputy assistant secretary for Indian Affairs at the Interior Department during the Trump administration, wrote in a 2020 Federal Lawyer article.

As states tried taxing tribal economic interactions with non-tribal customers or companies, federal judges gave them the greenlight to keep doing it.

In a 1976 case, the U.S. Supreme Court ruled that states could tax cigarette sales to non-Native customers on reservations and upheld a state of Montana requirement that tribes keep records of such sales, reasoning that these requirements amounted to a “minimal burden.” The court noted that tribal citizens were also Montana citizens, voting in local elections and benefiting from state-funded services like roads and schools.

In 1989, the Supreme Court decided in Cotton Petroleum Corp. v. New Mexico that states could charge their taxes on non-tribal businesses operating on reservations. In its majority opinion, the Supreme Court found that the state provided “substantial services … that justify the tax” — pointing in part to services off the reservation — and said the tax “imposes no economic burden on the Tribe.”

Tribes with resources to sue have challenged these tax policies. But federal judges — only seven of which in the country’s history have been Native American — often favor states.

An October 2022 ruling by the 8th Circuit Court of Appeals is among the most recent, finding that South Dakota could impose its excise tax on work performed by a non-tribal contractor hired by the Flandreau Santee Sioux Tribe for a renovation and expansion of its casino and hotel.

“In these cases, the argument is often that the issue is really about a tax avoidance or scheme, rather than the economic development of tribes and how they’re using their revenues,” said F. Michael Willis, a non-Native attorney with Hobbs Straus Dean & Walker, who works with tribal councils on these types of cases. “But tribes use these economic development programs to generate revenue for their citizens. Tribes are coming up with any models they can to generate revenue to overcome a history of hundreds of years of asset deprivation in their communities.”

State Gets Taxes, the Tribe Gets the Bill

One after another in the last decade, oil and gas companies operating on Ute Mountain Ute lands in the Four Corners region have declared bankruptcy.

“They abandon their pollution,” said Peter Ortego, general counsel for the Ute Mountain Ute. “They abandon their machines and pumps and everything else they have on the reservation, and they basically wash their hands and say, ‘We’re done with it.’”

The subsequent cleanups that fall to the tribe have added to a list of needs that leaders there must address. Ortego said they would have more resources to deal with these issues if New Mexico weren’t taking more than $1 million in state taxes from oil and gas operators on Ute Mountain Ute lands every year.

“The tribe is kind of struggling to get the funds and everything to clean that up,” Ortego said.

In 2009, the Ute Mountain Ute sued New Mexico over five taxes the state was imposing on oil and gas operators on the reservation, including a severance tax generally intended to help mitigate damages caused by extraction.

The tribe said that the state had no right to collect this money and was inflicting an economic burden on its people.

The state argued that the tribe and the oil and gas producers it contracted with didn’t operate in an economic silo.

“The activity conducted on the reservation by the nontribal taxpayers is simply the first step in the creation of profits for the taxpayers and royalties and taxes for the Tribe,” the state’s attorneys wrote in a brief. “The subsequent steps take place off the reservation, in New Mexico. The producers take full advantage of the infrastructure made possible by New Mexico law.”

Texas could say the same of oil and gas activity that starts in New Mexico and crosses state lines. But if a company refines New Mexico oil in Texas, Texas couldn’t tax the operator for the extraction that happened elsewhere.

Nearly 40% of the roughly 2,000 Ute Mountain Ute lived below the poverty line at the time, court documents noted. The per-capita income of tribal members was $8,159 during the previous decennial census, approximately half the average for residents in neighboring counties, and the unemployment rate among tribal members was around 11%, far higher than the surrounding counties.

The tribal government tries to help its members by providing payments every year. According to court documents filed by the tribe, if the New Mexico taxes were found unlawful, the tribe would collect an additional $1.3 million in severance taxes annually and all of that money would go to its members — an extra $650 per person each year.

A district court agreed that the state didn’t have the right to take those taxes. But the 10th Circuit Court of Appeals reversed that decision in 2011.

In a dissent to the majority ruling, 10th Circuit Judge Carlos F. Lucero noted the additional $650 per tribal member would be “no small sum for a tribe whose yearly per capita income is a scant $8,159.”

New Mexico still collects those taxes.

That court ruling came before the rash of oil-company bankruptcies. Today, one in four Ute Mountain Ute Reservation residents live in poverty and, accounting for inflation, per-capita income hasn’t improved.

Moore, with the New Mexico Department of Taxation and Revenue, said by email that the state cannot share the tax revenue with the Ute Mountain Ute without legislative action.

A portion of all severance tax revenues in the state is used to finance bonds for capital projects, and 4.5% of that bonding capacity is earmarked for tribal infrastructure, Moore said. The state also offers at least two tax credits to oil and gas producers who operate on tribal lands to soften the impact of double taxation on the companies.

In Fort Berthold, North Dakota, which provides more than 2% of the country’s domestic oil production, the MHA Nation faces a similar issue. Since 2008, the state has collected more than $2.5 billion in tax revenue from oil and gas production on the reservation, according to the tribe.

“As far as I’m concerned, that creates a shortfall,” said Fox.

Between 2008 and 2013, the tribe got only one-third of the revenue. That’s gone up since, with the current agreement resulting in the tribe keeping roughly 60% over the past couple of years.

On average each year, the MHA Nation collects about $100 million in royalties from oil and gas producers and an additional $250 to $350 million in taxes. Roughly 90% of the royalties go toward providing health care and health insurance for its people, both on and off reservation, and cash distributions for every citizen. The oil and gas tax revenue, Fox said, funds the regulation and mitigation of drilling and other necessities such as roads and schools.

But the tribe still faces major budget and infrastructure deficits.

In 2020 alone, the nation needed $1.6 billion for road construction and maintenance, according to congressional testimony Fox gave that year.

With a population increase on the reservation has come a dire need for housing — Fox estimated costs of more than $1.1 billion for new and rebuilt homes required between now and 2030.

Asked how much of the tax revenue collected from the reservation goes toward services and infrastructure there, North Dakota Deputy Tax Commissioner Sandy McMerty replied by email, “Dollars collected from the varied tax types go to fund a variety of government and local services that impact all citizens of North Dakota.”

Fox said in an interview that not being able to collect the full tax revenue earned on the reservation keeps the MHA Nation — and many tribes — dependent on federal funding to meet many of their needs.

“As long as we depend on the federal government, we’ll never build ourselves out of this social economic poverty,” Fox said.

“You’re Taking Tax Revenue”

When the Tulalip Tribes sued Washington state and Snohomish County in 2015 over taxes, the federal government intervened — on behalf of the tribes.

At issue was more than $40 million the state and county were collecting annually from the tribes’ Quil Ceda Village shopping center while leaving the Tulalip with the bill for typical government functions.

The Tulalip invested approximately $153 million in physical infrastructure to support commerce, including roads, freshwater and sewage treatments, electrical lines, highway interchanges and a fiber telecommunication system.

The county, meanwhile, didn’t provide business licensing or inspections, building permitting or code enforcement, land use planning, roads or road maintenance, animal control services, or fire marshal services with the disputed tax revenue, according to the plaintiffs. Nor did the state provide, for example, food, health, and safety inspections, drinking water regulation and monitoring, or environmental permitting that it typically handles elsewhere.

The plaintiffs said Quil Ceda Village visitors, businesses and employees rely entirely on the Tulalip and the United States for all that.

“We, of course, said, ‘Hey, wait a second, you’re taking tax revenue that’s generated within our own city, within our own boundaries, and it’s not even coming back to make improvements,’” said Cameron Reyes, property manager for the Consolidated Bureau of Quil Ceda Village.

Of the few services the state does provide there, “virtually none of them are funded by the disputed taxes,” the tribes’ counsel noted in its post-trial brief.

Federal lawyers in their intervening complaint wrote that the state and county taxes “completely preclude Tulalip and the Village from imposing and enforcing their own like tribal taxes, and deprive the Tribe of the tax base that other sovereigns use to fund important government activities.”

“The State and County provide extensive government services benefitting the non-Indian taxpayers in return for the taxes collected,” wrote the defendants in their post-trial brief. They cited clean air and education as examples.

One of the state and county’s other arguments was that the tribes didn’t appear to need the additional tax revenue because, in constructing infrastructure for a resort, casino and shopping center, the Tulalip had expenses more like a “typical developer” than a government.

“No such argument could succeed against a non-tribal sovereign,” the plaintiffs responded in their post-trial brief. “The Tulalip people, with the support of the United States, have fought against overwhelming odds to reclaim a measure of the economic self-sufficiency that was their historical trademark.”

After a five-year legal battle, the parties settled. Under a revenue-sharing agreement, the Tulalip will get $500,000 of the sales tax going to the state each year until the 2023-to-2025 state budget cycle. At that point, the tribes can receive half of all the sales tax receipts — but only if they have obtained a site and permits for a $35 million facility to address mental health and addiction.

Not all tribes have the resources to take states to court, said Rutherford, the Osage tax commissioner in Oklahoma.

“Anytime we try to tax, they want to come in and say, ‘Well, a share of that belongs to us,’” she said.

She gave the example of the Osage Nation’s tobacco compact with the state. It dictates that Oklahoma is due half the taxes from non-Native customers on tobacco, food and other retail items in smoke shops owned by tribal citizens on reservation land.

“They don’t go to the other side of the hand and say, ‘Well, we should consider that all Natives who buy cigarettes from QuikTrip or Love’s, that portion should go back to the tribes.’ They never offer that,” Rutherford said. “No, that’s not even mentioned.”

Of the half-share of sales taxes the Osage reservation collects, the Osage Nation government keeps 30% and returns the remainder to the smoke shop owners.

“They put tribes between a rock and a hard place, knowing that litigation is going to take a lot of money if the tribe wants to fight it,” Rutherford said. “So, unfortunately tribes end up having to do these compacts that are not fair.”

A Tax War and Ongoing Negotiations

Hundreds of protestors from the Seneca Nation took to the streets in the summer of 1992. A court had just ruled that the state of New York could impose its sales tax on non-Natives who bought gas and cigarettes on reservations.

The court ruling meant the state could collect an estimated $50 million annually from tribes. For the Seneca, it was a blow to their sovereignty.

The tax war — as it was referred to at the time by the Seneca and news outlets — escalated to violence after New York sent state troopers to stop the protestors. Both Seneca protestors and troopers were injured. For about a week state troopers commandeered the highway near the reservation, stopping and questioning drivers who sought to enter it.

The clash ended when the state agreed to defer collection of the taxes as the issue made its way through appeals. The Seneca have maintained their right to choose how to tax cigarettes since, opting to not tax them.

“We fought hard, our men, women, elderly and young, to preserve our immunity from any external taxation,” said Porter, the former Seneca president.

h tribal and non-tribal members, charging the same tax rate as the state and county.

“We’re not a political subdivision of the state,” Mazzetti said. “Anything generated in the reservation should stay on the reservation in terms of taxation.”

California still gets something out of it. The tribe pays the employer share of payroll taxes for employees working in its gaming operations, hotel and other ventures. The band’s revenue also helps fund services that non-tribal residents on and off the reservation benefit from, including a fire department that helps respond to wildfires in the region.

The tribe’s gaming operations provide jobs to tribal citizens and non-citizens alike, Mazzetti said, all of whom spend money outside the reservation, generating tax revenue for the county and state.

Indeed, studies from other states, including Oklahoma and Washington, show that tribal ventures help tribal and non-tribal economies around them.

“We’re not talking about the state losing out on the economic benefit of these dollars,” Porter said. “No tribe has a truly self-sustaining economy. The revenues are going to get taxed by the state anyway as the dollars get spent off-reservation. The way I view it is, ‘Please, can’t the Indians just touch the money once?’”

Washington state has the best gaming compacts, according to Sammy Mabe, councilman for the Suquamish Tribe. The now largely positive relationship between Washington and the Suquamish took time and work to build.

“My biggest advice to people is be open-minded, to dialogue with the non-Native counterparts, because it’s real easy to hold grudges and let historical trauma get in the way of progress,” Mabe said. “But if you’re not working with the state that you’re in, and fighting for your sovereignty but also fighting for collaboration, then you’re always going to run against opposition.”

Litigating these tax disputes “results in ‘winners’ and ‘losers,’” Washington State Department of Revenue spokesman Mikhail Carpenter said in an email, whereas negotiated compacts can mean wins for both parties.

“Historically compacts are proven tools in settling disputes between the Tribes and the state on complicated issues,” Carpenter said. “Tribal Nations are recognized as separate sovereigns from states, and their rights and actions must be respected and balanced with the state’s own rights and actions.”

After a 2016 report from Harvard University and the University of Arizona found that the system of state taxation on reservations was “deeply flawed,” the Interior Department began gathering feedback on whether to change the federal law on trade with tribes. That effort appears to have stalled.

“A clear statement by the Secretary of the Interior is necessary to preempt concurrent state taxation of Indian commerce in Indian country,” the director of the National Indian Gaming Association wrote in support of the proposal at the time. A U.S. Treasury Department advisory committee made up of tribal leaders also urged the federal government in 2020 to fix the taxation issue.

Porter now advocates in Washington, D.C., for fixes to double taxation. He thinks he needs more data to show that states will benefit fiscally from additional tribal economic activity without encroaching on tribal taxing authority.

Some tribes take the stance that Congress has the power to give them absolute tax immunity, undoing the impact of court decisions to the contrary. A simpler tweak by Congress that could help counteract state taxation: Give all tribal citizens credits for any federal income tax they pay.

“There’s not a huge amount of income taxes going from Indian Country to the federal government,” Porter said. “But for a family to save $5,000 a year is a huge amount of money that could affect what you could do for your children. Every dollar really counts, and it can’t be said enough.”

Thousands of Tax Protests

The biggest unresolved tax fight between a state and tribes is playing out in Oklahoma. The U.S. Supreme Court ruled in 2020 that the state must recognize several tribes in eastern Oklahoma and their reservation territory, which the state said were disestablished at its conception.

McGirt v. Oklahoma had to do with criminal jurisdiction, but the repercussions spilled into taxation for the Cherokee, Chickasaw, Choctaw, Muscogee and Seminole nations, whose reservations were reaffirmed by the ruling. The state has been collecting income taxes from tribal citizens who earned income on tribal lands involved in the McGirt case.

A 2020 report from the office of the executive director for the Oklahoma Tax Commission estimated that if these regions are considered Indian Country for taxing purposes, it could reduce state income tax collections by nearly $73 million per year and state sales and use tax collections by about $132 million annually.

Since the ruling, the state has faced thousands of administrative tax appeals and requests for exemptions, only some of which have moved to more formal hearings, the Oklahoman reported.

But in October, the Oklahoma Tax Commission ruled that it can keep collecting these taxes from citizens of the tribes in eastern Oklahoma despite McGirt. Commissioners said that the McGirt ruling did not expand to tax jurisdiction and noted that the 2020 report was published by a former executive director without their review or approval.

“This results in millions of dollars of overpayment by tribal citizens who are unlawfully subjected to Oklahoma income taxes,” Stacy Leeds of the Cherokee Nation, who teaches federal Indian law at Arizona State University, wrote in her own protest to the state over her income taxes. “This over-taxation occurs, in large part, because Oklahoma knowingly misrepresents the law.”

The state tax commission and governor’s office did not answer questions about the impact of McGirt on taxes or Rutherford’s unrelated battle over sales taxes with the state, which is still ongoing.

In 1906, the U.S. government divided the Osage Reservation into 2,229 parcels of land, one for each Osage citizen. Rutherford is building her home on her family’s original allotment.

The land is in restricted status, the federal government holding it in trust to protect it for Rutherford. But she still has to prove that she can build on the land without the state intruding.

She submitted documents to the state to apply for an exemption for sales and use tax that would cover supplies for her new home. Now she is waiting to see whether she’ll be reimbursed for the taxes she already paid the state and exempted from taxes on future materials she’ll need as she moves forward with construction.

Since she is a restricted Osage landowner, she said, all the purchases she made for that new home should be free from state taxes.

“There are laws to back that up,” Rutherford said. “The state does have the right to tax in certain situations, but not this one. But as you know, Oklahoma doesn’t give that up very easily.”