THOMAS P. SCHLOSSER. Mr. Schlosser is a graduate of the University of Washington and the University of Virginia School of Law. He is a director in the Seattle office of Morisset, Schlosser, Homer, Jozwaik & McGaw, where he specializes in federal litigation, natural resource and Indian tribal property issues. In 1975-79, Tom represented plaintiffs in treaty fishing rights litigation in Western Washington. Since 1979, Tom has litigated cases concerning timber, water, energy and federal breach of trust. He is also frequently involved in tribal economic development. Tom is an officer and founding member of the Indian Law Section of the Washington State Bar Association and is a frequent CLE speaker on federal Indian law topics. Tom moderates an American Indian Law discussion group for Counsel Connect, an on-line service to lawyers.
 

March, 1996

I.        STATE TAXES

          A.    BASIC CONCEPTS

          B.    INFRINGEMENT TEST

          C.    FEDERAL PREEMPTION TEST

          D.    TRIBAL TIMBER PRODUCTS

          E.    TAXATION OF INDIAN MINERALS

          F.    THE FUTURE OF THE INFRINGEMENT AND FEDERAL PREEMPTION TESTS

          G.    THE CIGARETTE TAX CASES

          H.    MARKETING RESERVATION-GENERATED VALUE

          I.    WHEN LEGAL INCIDENCE DETERMINES THE OUTCOME

          J.    WHEN LEGAL INCIDENCE IS IRRELEVANT

          K.    SHIFTING LEGAL INCIDENCE TO THE NON-INDIAN

          L.    STATE INCOME TAXES

          M.   STATE CORPORATIONS: DANGEROUS PITFALLS

          N.    TRIBALLY-CHARTERED CORPORATIONS

          O.    STATE TAXATION OF NONMEMBER INDIANS

          P.    STATE TAXATION OF INDIAN PROPERTY

II.    FEDERAL INCOME TAXATION AND INDIAN TRIBES

        A.     INDIAN TRIBES ARE NOT TAXABLE

        B.    TAX BENEFITS RELATED TO FEDERAL INCOME TAXES
 
III.    TRIBAL TAXES

        A.    INTRODUCTION: THE NEED AND THE POWER TO TAX

        B.    EXERCISING THE POWER TO TAX

        C.    ATTEMPTS TO LIMIT TRIBAL TAXING POWER
 

        A. BASIC CONCEPTS.

        1. Tribal Sovereignty. In Worcester v. Georgia, 31 U.S. (5 Pet.) 515, 561 (1832), Chief Justice John Marshall held that:

[T]he Cherokee nation . . . is a distinct community, occupying its own territory, with boundaries accurately described, in which the laws of Georgia can have no force, and which the citizens of Georgia have no right to enter but with the consent of the Cherokees themselves or in conformity with treaties and with the acts of Congress.

B. INFRINGEMENT TEST.

        1. Williams v. Lee, 358 U.S. 217 (1959). The Williams case grew out of commercial transactions between Paul and Lorena Williams, enrolled members of the Navajo Nation, and Hugh Lee, a non-Indian who operated the Ganado Trading Post within the Navajo Reservation. The Williamses bought supplies from Lee on credit and when they failed to pay their bill, Lee brought suit in the Arizona Superior Court. The Williamses filed a motion to dismiss on the ground that only the Tribal Court had jurisdiction over them, but the state court dismissed the motion and awarded Lee a judgment against them.

        The matter was upheld in the Arizona Supreme Court, but on appeal to the United States Supreme Court the case was reversed. The Supreme Court pointed out that the Navajo treaty provided that internal affairs of the Tribe would remain exclusively within the jurisdiction of the Tribe and noted that the government had steadily strengthened the tribal government and the tribal courts. Adding that the Navajo Tribal Court had specific jurisdiction over suits by outsiders against tribal members, the Supreme Court concluded, 358 U.S. at 223, that
 
        There can be no doubt that to allow the exercise of state jurisdiction here would undermine the authority of the tribal courts over Reservation affairs and hence would infringe on the right of the Indians to govern themselves.

        2. Analyzing Infringement. The Supreme Court's conclusion is easily justified by a simple example: suppose that the Williamses sued Lee in Tribal Court for selling them shoddy merchandise and obtained a Tribal Court judgment canceling their debt to Lee and awarding them an additional amount for damages. But imagine that at the same time Lee obtained a money judgment against the Williamses in the Arizona Superior Court for their failure to pay their debt. Which judgment would be proper? Or enforceable? It would obviously make no sense for the Tribal Court to seize Lee's merchandise at the Trading Post to satisfy the Williamses' judgment at the same time the Arizona Superior Court allowed Lee to seize the Williamses' automobile on the Reservation or to garnish the bank account of the Williamses off the Reservation to satisfy Lee's judgment. Such a result would obviously damage the Tribal Court's authority and make a mockery of tribal judicial proceedings. The Supreme Court's use of the term "infringe" quickly resulted in usage of the term "the infringement test."

        C. FEDERAL PREEMPTION TEST.
 
        1. Warren Trading Post Co. v. Arizona State Tax Comm'n, 380 U.S. 638 (1965). The second legal barrier to the application of state law to Indian Reservations also derived from a case involving the Navajo Indian Reservation and involved transactions at another trading post. Warren grew out of commercial transactions between enrolled members of the Navajo Nation and the operator of the Warren Trading Post within the Navajo Reservation. Arizona levied its 2% gross sales tax on retail sales to tribal members made pursuant to a federal trader's license granted to Warren by the Commissioner of Indian Affairs under the federal trader statutes.
 
        Warren's challenge to the tax on the grounds that it (1) violated art. I, § 8, cl. 3 of the United States Constitution, which provides that "Congress shall have Power...To regulate Commerce...with the Indian Tribes", and (2) was inconsistent with the comprehensive congressional plan regulating federal Indian traders, was overruled by the Arizona Supreme Court; but again the United States Supreme Court reversed the case. The Supreme Court began by noting that the Reservation was set apart as a "permanent home" for the Navajo Nation in their treaty in 1868 and that from the very beginning of our federal government, Indians have been permitted to govern themselves free from state interference.
 
        The Supreme Court underscored that through statutes and treaties, the federal government has exercised a sweeping and dominant control over federal Indian traders. The Supreme Court enumerated federal statutory restrictions on such traders, such as the kind of goods sold, prices which could be charged of Indians, required licensing procedures for Indian traders, penalties for license violations, recordkeeping, bond requirements, and provisions authorizing tribal taxes.
 
        The Supreme Court then held, 380 U.S. at 690-91:

These apparently all-inclusive regulations and the statutes authorizing them would seem in themselves sufficient to show that Congress has taken the business of Indian trading on reservations so fully in hand that no room remains for state laws imposing additional burdens upon traders.

. . . the assessment and collection of this tax would to a substantial extent frustrate the evident congressional purpose of ensuring that no burden shall be imposed upon Indian traders for trading with Indians on reservations except as authorized by Acts of Congress or by valid regulations promulgated under those Acts. This state tax on gross income would put financial burdens on appellant or the Indians with whom it deals in addition to those Congress or the tribes have prescribed, and could thereby disturb and disarrange the statutory plan Congress has set up in order to protect Indians from prices deemed unfair or unreasonable by the Indian Commissioner.

        But the United States Supreme Court reversed the case and struck down the state taxes. The Court first noted that:

Congress has broad power to regulate tribal affairs under the Indian Commerce Clause, art I, § 8, cl. 3. . . . This congressional authority and the "semi-independent position" of Indian tribes have given rise to two independent but related barriers to the assertion of state regulatory authority over tribal reservations and members. First, the exercise of such authority may be pre-empted by federal law. (citing Warren Trading Post Co. v. Arizona State Tax Comm'n.) . . . Second, it may unlawfully infringe "on the right of reservation Indians to make their own laws and be ruled by them." (Citing Williams v. Lee) . . . The two barriers are independent because either, standing alone, can be a sufficient basis for holding state law inapplicable to activity undertaken on the reservation or by tribal members.

In such cases we have examined the language of the relevant federal treaties and statutes in terms of both the broad policies that underlie them and the notions of sovereignty that have developed from historical traditions of tribal independence. This inquiry is not dependent on mechanical or absolute conceptions of state or tribal sovereignty, but has called for a particularized inquiry into the nature of the state, federal, and tribal interests at stake, an inquiry designed to determine whether, in the specific context, the exercise of state authority would violate federal law.

. . . the federal purpose of development of Indian forests by Indian people for the purpose of promoting self-sustaining communities, to the end that the Indians may receive from their own property not only the stumpage value, but also the benefit of whatever profit it is capable of yielding and whatever labor the Indians are qualified to perform.

        With respect to the roads in question, the Supreme Court pointed out that they are built and maintained by the Bureau and the Tribe and that Pinetop Logging spent substantial sums for maintaining and even building new logging roads. The Supreme Court then concluded:

In these circumstances we agree with petitioners that the federal regulatory scheme is so pervasive as to preclude the additional burdens sought to be imposed in this case. Respondents seek to apply their motor vehicle license and use fuel taxes on Pinetop for operations that are conducted solely on Bureau and tribal roads within the reservation. There is no room for these taxes in the comprehensive federal regulatory scheme. In a variety of ways, the assessment of state taxes would obstruct federal policies. And, equally important, respondents have been unable to identify any regulatory function or service performed by the State that would justify the assessment of taxes for activities on Bureau and tribal roads within the reservation.

As noted above, this is not a case in which the State seeks to assess taxes in return for governmental functions it performs for those on whom the taxes fall. Nor have respondents been able to identify a legitimate regulatory interest served by the taxes they seek to impose. They refer to a general desire to raise revenue, but we are unable to discern a responsibility or service that justifies the assertion of taxes imposed for on-reservation operations conducted solely on tribal and Bureau of Indian Affairs roads. Pinetop's business in Arizona is conducted solely on the Fort Apache Reservation. Though at least the use fuel tax purports to `compensat[e] the state for the use of its highways,' no such compensatory purpose is present here. The roads at issue have been built, maintained, and policed exclusively by the Federal Government, the Tribe, and its contractors. We do not believe that respondent's [the state's] generalized interest in raising revenue is in this context sufficient to permit its proposed intrusion into the federal regulatory scheme with respect to the harvesting and sale of tribal timber.

        While the Tribes do have an interest in raising revenues for essential governmental programs, that interest is strongest when the revenues are derived from value generated on the reservation by activities involving the Tribes when the taxpayer is the recipient of tribal services. The State also has a legitimate governmental interest in raising revenues, and that interest is likewise strongest when the tax is directed at off-reservation value and when the taxpayer is the recipient of State services. As we have already noted, Washington's taxes are reasonably designed to prevent the Tribes from marketing their tax exemption to nonmembers who do not receive significant tribal services and would otherwise purchase their cigarettes outside the reservation.  Id. at 156-57.

        As we have seen, the competing interests of the state and the tribe in such cases led the Supreme Court to take the test first articulated in Colville and to characterize it for the first time in Bracker as the "particularized inquiry." Thus, the Supreme Court laid down the rule for the future that such cases require a "particularized inquiry" into the nature of not only state and tribal, but also federal interests at stake, a clear signal that all of those interests must all be weighed to see whether one preempts another. As we shall see, however, federal and tribal interests usually fall within the same balance pan and are weighed not against each other but against competing state interests.
 
        4. Central Machinery v. Arizona State Tax Comm'n., 448 U.S. 160 (1980). In this case, the Supreme Court again struck down the Arizona transaction privilege tax which it had held invalid as applied in Warren Trading Post. This time, the tax was applied to an on-reservation sale of farm machinery by an Arizona corporation to the Gila River Indian Tribe. The corporation did not have a permanent place of business on the reservation and was not licensed by the federal government to trade with Indians. Nonetheless, the Court still found that the tax was preempted by the extensive federal regulation of persons who trade with Indians. The state argued that the tax was valid because the legal incidence of the tax fell upon the non-Indian seller and not the Indian buyer of the goods. But clearly, the economic incidence fell on the Indian tribe since the price of the farm machinery was increased by the amount of the tax. This economic incidence was important, not because an economic burden on a tribe will automatically invalidate a state tax, but because the federal government had shown by its regulation of Indian traders that it was concerned with prices paid by Indians for goods on the reservation.
 
        5. Ramah Navajo School Board v. Bureau of Revenue, 458 U.S. 832 (1982). In this case, the State of New Mexico attempted to tax gross receipts of a non-Indian corporation which contracted with the Ramah Navajo School Board to construct an Indian school on trust land in the Navajo Reservation. Obviously, New Mexico felt that setting the legal incidence of the tax on a non-Indian state corporation would avoid any unhappy entanglement with federal Indian law. The Supreme Court, however, examined the extensive federal statutes and regulations governing Indian education and the Ramah Navajo School Board, including the Snyder Act, 25 U.S.C. § 13, the Johnson-O'Malley Act, 25 U.S.C. § 452 et seq., and the Indian Self-Determination and Education Assistance Act, 25 U.S.C. § 450 et seq., and concluded that the federal regulatory scheme under which the tribal school board acted was so comprehensive as to preempt the state tax.
 
        In answer to state arguments regarding state services rendered to the state-chartered non-Indian corporation, the Supreme Court suggested that off-reservation taxes should pay for off-reservation services to the contractor. While the Court recognized that the final economic incidence of the tax would be borne by the federal government, nevertheless the tax would necessarily result in depleting the amount of money available for construction of the Navajo school and thereby frustrate the federal policy of furthering Indian education and ultimately self-determination.

        6. Marty Indian School v. State of South Dakota (1984 and 1987). The Marty School Board, Inc., a non-profit corporation under South Dakota law, sold soda pop, candy, and snacks to Indian children at the Marty Indian School on trust land inside an Indian reservation. The school was funded by the federal government through the Indian Self-Determination and Education Assistance Act and other federal programs, and was governed by extensive federal regulations and supervision of the BIA. The State of South Dakota attempted to tax sale of the snack items and argued that it had statutory authority under state law to tax a state non-profit corporation which could not claim to be an Indian tribe. Thus, the case is another example of a state's attempting to tax Indians by making the legal incidence of the tax fall upon non-Indians.

        The trial court ignored state law and found that the federal preemption of Indian education, as spelled out by the Supreme Court in the Ramah Navajo School Board case, applied in this case as well and that while, at first blush, the sale of candy and snacks might seem unrelated to the goal of Indian education and self-determination, such sales created an atmosphere conducive to positive student attitudes and a good learning environment. Thus, the preemption analysis extends not only to vital elements of Indian education, such as provision of classrooms, but to incidental items which contribute to a positive learning environment. Marty Indian School v. State of South Dakota, 592 F. Supp. 1236 (D.S.D. 1984).
 
        In 1987 the Eighth Circuit Court of Appeals applied the same reasoning to decide a suit between the same parties but involving a different tax: South Dakota's motor fuel tax. The Marty Indian School operated approximately 35 vehicles for transporting students, snow removal and other school business. Many of the vehicles belonged to and were licensed by the federal government and the school purchased fuel for its vehicles and stored it in tanks on trust land on the reservation. The court held that, despite use of the vehicles on state public highways inside the reservation and despite state expenditures on highway construction in the reservation, the state's interest in obtaining revenue for its road programs was outweighed by federal preemption of Indian education and the federally-protected right of Indians to self-determination. Marty Indian School v. State of South Dakota, 824 F.2d 684 (8th Cir. 1987).

        7. New Mexico Taxation and Revenue Department v. Laguna Industries, 855 P.2d 127 (1993). The Pueblo of Laguna obtained from Raytheon Service Company technical, training and management assistance on its reservation regarding the obtaining of federal defense contracts. New Mexico attempted to impose a gross receipts tax on income from such services on the ground that they did not constitute "trade" within the meaning of the federal trader statutes. Upon a challenge by the Pueblo to the imposition of such taxes, the New Mexico Supreme Court noted that the original Trade and Intercourse Act made express references to "boatmen" and "interpreters", thus making it clear that services were being federally regulated, as well as goods sold to Indians. The Court then noted that it must give the federal trader statutes "a sweep as broad as [their] language" and interpret them in the light of the intent of the Congress that enacted them, citing Central Machinery. Finding that nothing in the legislative history of the Trade and Intercourse Act supported the state's attempt to interpret "trade" narrowly, the Court held that trade includes services and struck down the tax as federally preempted.

    D. TRIBAL TIMBER PRODUCTS.
 
        As shown in Bracker, the federal government has a strong interest in tribal timber resource management. Bracker also makes it clear that a state tax imposed in connection with a tribal timber activity may be invalid, even though the legal incidence of the tax is upon a non-Indian. Some cases may not be as strong as Bracker because the non-Indian may not carry on its activities exclusively within the reservation. These cases, however, may have strengths of their own which must be carefully examined.
 
        An excellent example of a case involving both on-reservation and off-reservation activities is Hoopa Valley Tribe v. Nevins (1984), 881 F.2d 657 (9th Cir. 1989), cert. denied, 494 U.S. 1055 (1990). In 1976 California passed a new, comprehensive timber yield tax designed to replace its former ad valorem tax on standing timber. The philosophy of the California legislature was that a "yield" tax which takes effect upon the date of harvesting timber is more fair than an annual tax on standing timber which forces property owners to harvest timber before the optimum harvest time in order to generate money to pay the annual tax. The yield tax is measured upon the value of the timber at the time of harvest. In order to deal with timber harvested from federal forest lands, the yield tax provided that the first non-exempt owner of the harvested timber, after the date of harvest, would be liable for the tax.
 
        In 1976 the Hoopa Valley Tribe chartered the Hoopa Timber Corporation, a tribal enterprise, specifically to take     advantage of tribal timber. The Hoopa Timber Corporation obtained a number of timber sale contracts from the BIA, manufactured logs from the harvested timber, and sold the logs to off-reservation purchasers. But on the advice of counsel, the Hoopa Timber Corporation was careful to see that all incidents of the log sales took place inside the reservation. Nevertheless, California notified all state timber purchasers that the purchases of Indian timber or logs were subject to the yield tax and began enforcement proceedings in a number of instances. The State's hope was that by placing the legal incidence of the tax on the off-reservation based, non-Indian purchasers, it could get away with the tax even though it was defined as a tax upon the "yield" of the Indian forest at harvest, clearly an on-reservation activity.
 
        The Tribe filed an action in the federal district court in San Francisco and in 1984 the federal judge ruled that the California tax was preempted by the extensive timber statutes and regulations just as in Bracker and entered a judgment against California in the sum of over $600,000. The case was sustained upon appeal to the Ninth Circuit Court of Appeals and the Supreme Court denied certiorari. It is important to note that in order to obtain the court's ruling that the state tax is illegal, the Tribe was careful to demonstrate with expert testimony that the standard timber industry practice in California is for the purchaser to deduct the amount of tax from its bid upon Indian timber or logs and, thus, to make the economic incidence of the tax fall upon the Indians.

    E. TAXATION OF INDIAN MINERALS.

        A unique problem exists in the area of state taxation of Indian minerals, such as oil, gas and coal.
 
        1. Treaty-Established Reservations. A 1924 federal act authorized mineral leases of Indian land on treaty-established reservations for oil and gas production and authorized states to levy taxes on the production of those minerals. 25 U.S.C. § 398. The tax was to be paid from the royalties received by tribes from the leases.
 
        2. Executive Order Reservations. A 1927 federal act essentially extended the 1924 Act to executive order reservations.
 
        3. Comprehensive Legislation in 1938. However, in 1938, Congress enacted comprehensive legislation governing the leasing of tribal lands for mining purposes. 25 U.S.C. § 396a et seq. The Indian Mineral Leasing Act of 1938 repealed all laws which were inconsistent with it, although it did not explicitly mention the state's authority to tax under the 1924 Act or deal with the question of taxation in general.

        4. Montana, et al. v. Blackfeet Tribe, 471 U.S. 759 (1985). With respect to on-reservation, Indian-owned minerals, the United States Supreme Court finally resolved the controversy over the effect of the 1938 Act on state tax authority under the 1924 and 1927 Acts in Montana v. Blackfeet Tribe of Indians. The Court held that the State of Montana could not tax the Blackfeet Tribe's royalty interests under oil and gas leases to non-Indians pursuant to the 1938 act. The taxes were paid to the state by the lessees and then deducted from royalty payments to the Tribe. The Court said that the 1924 Act does not authorize the imposition of the Montana oil and gas taxes to leases under the 1938 Act, and that the 1938 Act does not itself consent explicitly to state taxation nor implicitly by incorporating the 1924 Act's taxing authority.
 
        The Court's opinion was grounded upon two rules of statutory construction applicable in Indian law:

         a. States may tax Indians only when Congress has clearly consented; and
         b. Statutes are to be construed liberally in favor of the Indians, with ambiguous provisions interpreted in their favor.
 
        The Court said that when the 1924 Act is construed in accordance with the second rule, its taxing authorization, if it survives at all, applies only to leases issued under the 1924 Act.
 
        5. Crow Tribe v. Montana (1987), 819 F.2d 895 (9th Cir. 1987), summ. aff'd, 484 U.S. 997 (1988). Montana sought to apply its severance and gross proceeds taxes to a non-Indian producer engaged in extracting coal from former tribal land outside the reservation under a lease from the Crow Tribe. The surface of the land had been sold by the government to non-Indians, but the government reserved to the Tribe the underlying mineral rights. The Ninth Circuit Court of Appeals found that the minerals constituted a part of the reservation, and that the 1938 Act applied. The court noted that the purposes of the 1938 Act were to: (1) revitalize tribal governments by giving them control over the leasing of their land; (2) promote tribal economic development; and (3) ensure that Indians receive the greatest return for their property. Montana argued that its taxes were not preempted by the 1938 Act, since the lessee, and not the Tribe, was the taxpayer.
 
        The court rejected that argument, finding that the taxes hurt the Tribe's economic interests by reducing the amount of royalties and impairing the marketability of the coal. The court also rejected Montana's argument that the taxes were permissible under Confederated Tribes because they were the equivalent of a tax on sales to non-Indians; the court held that the Confederated Tribes rule did not apply where the value being taxed comes from the reservation. In addition to finding that the taxes were preempted by the 1938 Act, the court also held that the taxes were invalid because they did not show a "carefully tailored relationship between the severance tax revenues and the coal-related state services", and eroded the Tribe's sovereign authority over reservation affairs.

        6. Peabody Coal v. State of Arizona, 761 P.2d 1094 (1988). In Peabody Coal v. State of Arizona, Peabody sought a refund of state tax paid on coal mined on the Navajo and Hopi Reservations and sold to non-Indian utilities. The Arizona Court of Appeals found that the tax did not burden the Tribes because the utilities reimbursed Peabody for the tax paid and the Tribes' royalties on the coal were based on Peabody's gross revenue; thus when the utilities paid tax, the Tribes made more money. The court also found that Peabody's company headquarters was located off the reservations, and that Peabody and its employees benefitted greatly from state-funded services, such as schools and health and welfare programs, upon which Arizona expended far more than it received in tax revenues from Peabody. Accordingly, the court found no federal preemption of the Arizona tax despite extensive federal regulation of coal mining on the reservations.

        7. Granite Construction Company v. Arizona Department of Revenue, 811 P.2d 345 (Az. App. 1990). In Granite Const. v. Dept. of Revenue, Granite Construction Company contracted with Peabody Coal to perform strip mine reclamation services. Arizona levied a transaction privilege tax upon Granite for such services, and Granite sought a refund of the tax in the Arizona court system, claiming the tax was preempted by the Navajo and Hopi Land Settlement Act of 1974. On appeal, the Arizona Court of Appeals held that comprehensive federal regulation of mining activities on Indian reservations did not preempt the tax because: (1) the state expended substantial revenues, as discussed above, on the reservation to support the tax; and (2) the tax increased tribal royalties inasmuch as the Tribe's lease revenues were based on Peabody's gross coal revenues, which included full reimbursement of the transaction privilege tax.

        8. Cotton Petroleum Corporation v. New Mexico, 490 U.S. 163 (1989). In Cotton Petroleum Corporation v. New Mexico a corporation was subjected to both a six percent tribal tax and an eight percent state tax on its oil and gas production on the Jicarilla Indian Reservation. The corporation argued that the tax was a violation of the Interstate Commerce Clause because the state tax was not apportioned in any way and that no credit was given for the tribal tax imposed. The corporation also argued that state taxes of $2,293,953 paid were excessive when compared with the small amount of state benefits it received, which amounted to only $89,384.
 
        The Supreme Court rejected these arguments. It noted that the corporation paid both state and tribal taxes, still made a profit, and had plans to dig additional wells on the Reservation. The Court concluded that there was no economic impact on the Tribe. Therefore, the Court found that under the traditional theory of Indian preemption, it need not strike down the state tax.
 
        The Supreme Court also rejected the Interstate Commerce Clause arguments. It found that a tribe cannot be equated to a state because the Commerce Clause draws a clear distinction between the two. Further, the Court held that so long as the state tax did not disrupt interstate commerce, it could not be required to be limited in amount to reimbursing New Mexico for the exact cost of specific services provided to the corporation. The Supreme Court held that under the traditional interstate commerce test, the state tax does not offend the Commerce Clause because it is applied to an activity with a substantial nexus with the taxing state, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the state to the corporation and to the tribe.

        The Cotton Petroleum decision is a major blow to Indian tribes who wish to preempt state jurisdiction on the reservation. The decision represents a major departure from established Indian law principles for the following reasons:

        a. The Court Distorted the Balancing Test. The Indian Mineral Leasing Act of 1938 and federal regulations govern all stages of oil and gas leasing and production on Indian reservations, including the bidding process, the setting of acreage limitations, royalty rates, methods of payment, regulation of lessees' operations, conservation of resources, prevention of waste, inspection, collection, auditing and security. In addition, the Jicarilla Tribe itself supplements federal statutes and regulations with its own which are administered by the tribal oil and gas administration. Nevertheless, the Supreme Court found the federal regulatory scheme not "exclusive" inasmuch as state law regulated well spacing and mechanical integrity of wells. The state offered no evidence as to any actual activity regarding well spacing and mechanical integrity inside the reservation, and the Tribe offered undisputed testimony that no state agent was ever on the reservation in that regard. Nevertheless, the state economist testified that since the state had provided spacing guidelines for the Tribe, some allocation of the state's expense should be made to the reservation. The BIA adopted state spacing requirements for the reservation.

        Based upon the foregoing, the Supreme Court found no federal preemption. This conclusion is clearly wrong. Earlier cases have found federal regulation of tribal timber and federal regulation of Indian education to create preemption. Federal regulation of tribal mineral leasing is easily shown to be as extensive as these activities. New Mexico had no legal authority regarding reservation well spacing and mechanical integrity of wells, nor did BIA adoption of state spacing requirements vest New Mexico with any such jurisdiction.

        b. The Court Misconstrued Congressional Silence Regarding Taxation in the Indian Mineral Leasing Act of 1938. The Supreme Court interpreted congressional silence regarding application of state taxation in the 1938 Act as essentially incorporating the states' taxing authority contained in the 1924 Act. This interpretation of congressional silence is contrary to the Supreme Court's holding in Montana v. Blackfeet Tribe of Indians, 471 U.S. 759 (1985), and contrary to the rule that requires that statutes be construed liberally in favor of Indians.

        c. The Court Ignored Federal Indian Policy Embodied in the Indian Reorganization Act of 1934. With the enactment of the IRA in 1934, federal Indian policy changed dramatically. Applying the rationale of Bracker, the Supreme Court should have held that imposition of the state tax "would threaten the overriding federal objective of guaranteeing Indians that they will receive . . . the benefit of whatever profit [their oil and gas reserves are] capable of yielding," and would "reduc[e] tribal revenues and diminis[h] the profitability of the enterprise for potential contractors." 448 U.S. at 149. Instead, the Supreme Court upheld the state tax. This constitutes a turning away from the federal Indian policy embodied in the IRA, is judicial legislation at its worst, and constitutes a substantial threat to the future of tribal sovereignty and tribal tax immunity.

        d. The Court Utilized the Existence of General State Services to Tribal Members to Support Taxing Authority. After establishing the solid principle in virtually all previous preemption analysis cases that a state seeking to justify a tax must show that the tax proceeds are used to benefit or regulate the activity taxed, the Supreme Court, for the first time, considered general state services to Indians as justification for taxing authority. Previously, the Court has looked for a connection, or "nexus", between the state's regulatory involvement on a reservation and the tax the state wished to impose.

        As we have seen, in Ramah Navajo School District, a state tax on school construction was struck down because state benefits to the Navajo Tribe were not in any way related to construction of schools on its Reservation. And in New Mexico v. Mescalero Apache Tribe, 462 U.S. 324 (1983), the Supreme Court struck down state hunting and fishing regulations and license fees on non-Indians on the Mescalero Reservation, despite state services to the Tribe, because no services were performed by New Mexico in connection with reservation hunting and fishing by non-members. Finally, in McClanahan v. Arizona State Tax Comm'n, 411 U.S. 164 (1973), the Supreme Court emphasized that conferring rights and privileges on Indians cannot affect their tax immunity. The Supreme Court well summarized this rule in Mescalero, 462 U.S. at 336:

[T]he exercise of state authority which imposes additional burdens on a tribal enterprise must ordinarily be justified by functions or services performed by the state in connection with the on-reservation activity.

        In Cotton Petroleum, the Court did not abolish the requirement of a connection between taxes and services; however, it found it significant that New Mexico provided "substantial services" to both the Jicarilla Tribe and Cotton, costing the state approximately $3,000,000 a year, although without finding any indication that these benefits were in any way related to the on-reservation activity the state sought to tax. It concluded that the value of benefits provided need not equal, nor even approximate, the amount of tax collected.

    Following Cotton Petroleum, the Ninth Circuit in Nevins adhered to the nexus standard, having been persuaded that Cotton Petroleum did not change that rule. The court stated as follows:

Although California points to a variety of services that it provides to residents of the reservation and the surrounding area, none of those services is connected with the timber activities directly affected by the tax. To be valid, the California tax must bear some relationship to the activity being taxed. See Crow Tribe, 819 F.2d at 900. Showing that the tax serves legitimate state interests, such as raising revenues for services used by tribal residents and others, is not enough. Id. at 901. "To the extent that this [coal severance] tax is not related to the actual governmental costs associated with the mining of the Indian coal . . . the state's interest in acquiring revenues is weak in comparison with the Tribe's right to the bounty from its own land." Crow Tribe v. Montana, 650 F.2d at 1117 (citations omitted). . . . .  The state's general interest in revenue collection is insufficient to outweigh the specific federal and tribal interests with which the timber yield tax interferes. The services provided by the state and county are provided to all residents . . . . California admits that there is no direct connection between revenues from the timber yield tax and the provision of services to tribal members or area residents generally. . . . .  Because the timber yield tax does not fund services that directly relate to the harvesting of tribal timber and is otherwise unconnected with tribal timber activities, the timber yield tax should be preempted.

        As the Ninth Circuit obviously understood, if there need be no nexus between the activity taxed by a state and state provision of services to reservation communities, then the basis upon which to stop almost any state tax on almost any non-Indian activity is severely weakened. Most states do provide some services--social services, education--on many reservations simply because members of Indian tribes are also citizens of the United States.
 
        e. The Beginning of Numerical Analysis. In Cotton Petroleum, the Supreme Court seems to begin a questionable practice of allowing the question of state on-reservation tax authority to turn at least partly on numerical analysis. In the absence of evidence that either the legal or economic incidence of the state's eight percent severance tax fell on the Tribe, coupled with evidence that the corporation had plans to drill additional wells on the reservation, the Supreme Court concluded that the state tax did not "impose a substantial burden on the Tribe" and decided that the tribal interest was "indirect and . . . insubstantial." Thus the Supreme Court decided that the state tax did not interfere with tribal self-government. But the tax struck down by the Supreme Court in Warren Trading Post, 380 U.S. 685 (1965), was only two percent, and the combined tax struck down by the Supreme Court in Bracker was less than one percent and, indeed characterized by the dissenters in Bracker as "relatively trivial" and "unlikely to have a serious adverse impact on the tribal business." 448 U.S. at 159.

        In Cotton Petroleum the Supreme Court bolstered its conclusion that the state tax did not burden the Tribe by pointing to the Corporation's plan to drill additional wells. But the wells planned by the Corporation are "infill" wells; that is, wells drilled between existing producing wells to increase the efficiency of drainage on leased lands. Infill wells are essentially "no risk" propositions because of almost certain production. It cannot be seriously argued that the state severance tax, when added to the tribal severance tax to produce 75% higher on-reservation than off-reservation taxes within the state, will not deter future drilling and seriously affect the Tribe's central source of income.

        f. A Warning Note. The principles of Indian preemption jurisprudence developed by the Supreme Court in the preceding cases have been undermined in Cotton Petroleum, 490 U.S. 163 (1989). That 6-to-3 decision of the Supreme Court dangerously misapplies the traditional tools of Indian preemption analysis by adopting what the dissenting opinion of Justice Blackmun termed the principle of "inexorable zero;" that is, a requirement that the state be entirely excluded from a sphere of activity and provide no services to Indians or non-Indians engaged in commerce on a reservation before federal preemption can be found to exist.
 
        In addition, the Cotton Petroleum decision totally ignores the requirement that statutes enacted to protect Indians be interpreted in their favor and, in fact, seemed to adopt a contrary principle that silence regarding state taxation in the Indian Mineral Leasing Act of 1938 should be interpreted as incorporating state taxing authority contained in a previous act. Finally, in the Cotton Petroleum decision, the Supreme Court totally ignored the philosophy of harmonizing tribal leasing with the goals of the Indian Reorganization Act "to ensure that Indians receive the greatest return from their property." Montana v. Blackfeet Tribe of Indians, 471 U.S. 759, 767 n.5 (1985).

        9. The Future After Cotton Petroleum. All in all, the above considerations make it clear that the six-person majority led by Justice Stephens may well seek to dismantle established principles of tribal sovereignty and tribal tax immunity. Justices Brennan, Marshall, White, and Blackmun have retired and have been replaced by Justices David Souter, Clarence Thomas, Ruth Bader Ginsberg and Stephen Breyer. Thus the question of how these appointees to the Supreme Court will vote on Indian law issues becomes critical.
 
    F. THE FUTURE OF THE INFRINGEMENT AND FEDERAL PREEMPTION TESTS.

        1. The "Geographical Component and the Per Se Rule".
 
        a. The Geographical Component. In White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), the Supreme Court rejected the argument that Congress must forbid a state to impose taxes on non-Indians engaged in commerce on Indian reservations before it is barred from doing so. It said that a tribe's power over its own reservation was still an important consideration in deciding whether a state tax on non-Indians was permissible. The Court held:

The Court has repeatedly emphasized that there is a significant geographical component to tribal sovereignty, a component which remains highly relevant to the preemption inquiry; though the reservation boundary is not absolute, it remains an important factor to weigh in determining whether state authority has exceeded the permissible limits. "The cases in this Court have consistently guarded the authority of the Indian governments over their reservations."

        But the Supreme Court held that when the Mescalero Apache Tribe went off its Reservation to operate a business, its receipts from the business were subject to the state gross receipts tax. For that purpose, the status of the Forest Service land seemed to make no difference. Given the fact that an Indian tribe has sovereign immunity from suit in any court, state or federal, it is difficult to see how New Mexico could enforce its gross receipts tax against the Mescalero Apache Tribe. Curiously, the Supreme Court did not mention this aspect of the case although in McClanahan v. Arizona St. Tax Comm'n, 411 U.S. 164 (1973), decided the same day, the Supreme Court, in striking down a state income tax on individual tribal members, noted that nowhere did Arizona explain how its tax could be imposed or collected, and stated that unless Arizona was willing to defend the position that it could constitutionally administer a tax system without judicial intervention, the absence of jurisdiction would seem to dispose of the case. It would also seem to dispose of New Mexico's gross receipts tax in Mescalero! Apparently the geographical component will continue to support and to insure the future effectiveness of both the interference and federal preemption tests, particularly in light of the case discussed below.

        b. The Per Se Rule. The strength of the "geographical component" was set in stone by the Supreme Court in California v. Cabazon Band of Indians, 480 U.S. 202 (1987). Although the case was not a tax case, but involved California's attempt to prohibit high stakes bingo on the Cabazon Indian Reservation in California, nonetheless, the Supreme Court took the opportunity to establish the "per se" rule with respect to state attempts to tax Indians and Indian property on their reservations. The Court stated:

In the special area of state taxation of Indian tribes and tribal members, we have adopted a per se rule. In Montana v. Blackfeet Tribe, 471 U.S. 759 (1985), we held that Montana could not tax the Tribe's royalty interests in oil and gas leases issued to non-Indian lessees under the Indian Mineral Leasing Act of 1938. We stated: "In keeping with its plenary authority over Indian affairs, Congress can authorize the imposition of state taxes on Indian tribes and individual Indians. It has not done so often, and the Court consistently has held that it will find the Indians' exemption from state taxes lifted only when Congress has made its intention to do so unmistakably clear." Id., at 765. We have repeatedly addressed the issue of state taxation of tribes and tribal members and the state, federal, and tribal interests which it implicates. We have recognized that the federal tradition of Indian immunity from state taxation is very strong and that the state interest in taxation is correspondingly weak. Accordingly, it is unnecessary to rebalance these interests in every case. In Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148 (1973), we distinguished state taxation from other assertions of state jurisdiction. We acknowledged that we had made repeated statements "to the effect that, even on reservations, state laws may be applied unless such application would interfere with reservation self-government or would impair a right granted or reserved by federal law. . . . Even so, in the special area of state taxation, absent cession of jurisdiction or other federal statutes permitting it, there has been no satisfactory authority for taxing Indian reservation lands or Indian income from activities carried on within the boundaries of the reservation, and McClanahan v. Arizona State Tax Comm'n, [411 U.S. 164 (1973)], lays to rest any doubt in this respect by holding that such taxation is not permissible absent congressional consent." Ibid. (emphasis added).

        2. The Dominance of Federal Preemption. The federal preemption doctrine has been the major tool used by courts to invalidate state taxes imposed on Indian reservations. Federal preemption has so often been the basis for invalidating state taxes imposed on reservation Indians that it can now be said that whenever the legal incidence of the state tax falls on a reservation Indian engaging in activity on the reservation or on an Indian tribe operating within the reservation, the state tax must fail.
 
        a. White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980). The federal preemption doctrine now has greater importance in cases of state taxation of non-Indians on the reservations. As we have already seen in Bracker, the Supreme Court struck down the State of Arizona motor carrier license tax and use fuel tax imposed on a non-Indian enterprise doing business within the Fort Apache Reservation. The non-Indian company felled and transported timber within the reservation under contract with the Tribe. The company's activities were performed exclusively within the reservation. The state taxes were held preempted by federal law. The court said that the federal government had completely taken over the regulation of harvesting, sale and management of tribal timber, leaving no room for additional burdens imposed by the state.

         One of the federal interests involved was in assuring that the tribe would benefit from the profits from timber sales. Bracker is important because it shows that even where the legal incidence of a state tax falls on non-Indians on a reservation, the state tax may still be invalid. The economic incidence of the tax fell on the White Mountain Apache Tribe because it increased the cost of doing business with the non-Indian company. However, the economic incidence alone was not enough to invalidate the tax. The court said:

Of course, the fact that the economic burden of the tax falls on the Tribe does not by itself mean that the tax is preempted, as Moe v. Salish & Kootenai, makes clear. Our decision today is based on the preemptive effect of the comprehensive federal regulatory scheme, which, like that in Warren Trading Post Co. v. Arizona State Tax Comm'n, leaves no room for the additional burdens sought to be imposed by state law.

        c. Oklahoma Tax Commission v. Chickasaw Nation, ____ U.S. ____, 115 S.Ct. 2214 (1995). Oklahoma's fuels tax is levied on retailers, not on distributors or consumers. The Supreme Court held the tax as applied to tribal retailers illegal, and found no need to balance federal, state and tribal interests. The Court stated:

[W]hen a State attempts to levy a tax directly on an Indian tribe or its members inside Indian country, rather than on non-Indians, we have employed, instead of a balancing inquiry, "a more categorical approach--`[A]bsent cession of jurisdiction or other federal statutes permitting it,' we have held, a State is without power to tax reservation lands and reservation Indians."

        3. Summary. The federal preemption doctrine has played a major role in protecting Indian tribes and individual Indians from state taxes whenever the taxes are imposed directly upon them. It has played an even greater role in warding off state taxes where the tax itself is imposed on non-Indians, but the economic impact or incidence of the tax is felt by the tribe. The economic impact on an Indian tribe of a state tax on a non-Indian alone, however, is not enough to invalidate the state tax. In the federal preemption cases, the tribes had to show economic impact coupled with extensive federal concern with the activity which suffers from the economic impact of the tax.

        Federal preemption has been based upon Indian treaties and general federal legislation, such as the Indian Reorganization Act of 1934, and disclaimers of jurisdiction over Indian lands found in state constitutions. These have generally been enough to support individual Indian and tribal exemptions from state taxes imposed on Indians and tribes on their reservations. Whenever the tax is imposed on non-Indians within the reservation or on tribes outside their reservations, the courts look for a much more specific intention on the part of the federal government to preempt the subject of the tax the state seeks to impose. Whenever the legal incidence of the tax is on non-Indians, it will be important for tribes to show that the federal government extensively regulates the area, as in Bracker or Ramah, or that the tribe itself has a significant interest in the transaction in which the tax is imposed which outweighs any interests of the state. If the tribe is marketing only a tax exemption, specific federal intent to preempt is required. If, however, the tribe is marketing some value that is generated on-reservation, the general federal statutes, which encourage tribal self-government and economic development and prohibit state jurisdiction over reservation Indians, may be sufficient to defeat a state tax with the federal preemption doctrine.

        The states have been actively asserting a right to tax non-Indian activity which takes place on reservations. As we have seen in the Ramah Navajo School Board case, New Mexico attempted to tax gross receipts received by the non-Indian, state-chartered contractor even out of funds specifically appropriated by Congress for construction of school facilities on the Navajo Reservation. In Mescalero Apache Tribe v. O'Cheskey, 625 F.2d 967 (10th Cir.), cert. denied, 460 U.S. 959 (1981), the Tenth Circuit Court of Appeals upheld a New Mexico gross receipts tax imposed upon several non-Indian contractors who did construction work for the Mescalero Tribe on a resort complex and other projects on reservation lands. The court found that the tax was not preempted by federal law because reservation construction work is not heavily regulated by the federal government. The court found no infringement of tribal self-government because the incidence of the tax was on the non-Indians rather than the Tribe. A similar holding occurred in Tiffany Construction Co., Inc. v. Bureau of Revenue, 629 P.2d 1225 (1981), a New Mexico Supreme Court decision.

    G. THE CIGARETTE TAX CASES.

        1. Moe v. Confederated Salish and Kootenai Tribes, 425 U.S. 463 (1976). Moe continued the principles laid down in McClanahan and struck down Montana taxes imposed upon Indian personal property located within an Indian reservation; a Montana vendor license fee imposed on Indian smokeshop operators; and the Montana cigarette sales tax as applied to on-reservation sales of cigarettes by Indians to Indians, because they were in conflict with federal law as set forth in the McClanahan case. The legal incidence of these taxes and fees was clearly upon Indians on the reservation.
 
        But it held that the cigarette sales tax, as applied to on-reservation sales of cigarettes by Indians to non-Indians, was valid. According to the Supreme Court the legal incidence of the tax was clearly on non-Indians, although the economic incidence fell on tribal Indians because non-Indians would no longer buy cigarettes from reservation smokeshops if they carried the state sales tax. The Court obviously felt that the State of Montana possessed power over non-Indians doing business within the reservation.
 
        To the Tribes' assertion that requiring Indian retailers to become involuntary agents for Montana constitutes a gross interference with the Tribes' freedom from state regulation, the Supreme Court held that the state requirement that the Indian retailer collect a tax from non-Indians is a minimal burden which neither frustrates tribal self-government nor runs afoul of congressional statutes dealing with Indian affairs.

        2. Washington v. Confederated Tribes of the Colville Reservation, 447 U.S. 134 (1980). Prior to the time Moe reached the Supreme Court, the Colville Tribes, aware of the dangers posed by the sparse facts of Moe, carefully constructed a tribal tobacco enterprise utilizing the protection of every available element of federal and Indian law. The Tribes enacted a tobacco ordinance which established the Tribes as the wholesalers of all cigarettes imported into and sold on the reservation. The ordinance required the out-of-state purchase of all cigarettes, thus utilizing applicable principles of interstate commerce. Next the ordinance required federal traders licenses of all out-of-state wholesale sellers and of retail sellers of cigarettes on the reservation, thus utilizing the federal trader statutes and the Warren Trading Post principles.

        The ordinance required that all retail sellers be enrolled tribal members and provided that their businesses were tribal businesses, which they were licensed to operate on behalf of the Tribes pursuant to tribal licenses issued under the ordinance. The ordinance adopted the federal trader regulations and added its own, including restrictions on sales to minors, a two-carton sale limit, a requirement that all retail sales outlets be on Indian trust land and a retail sales tax upon all cigarette sales to non-Indians. The ordinance provided that tax revenues be devoted, in part, to social services to tribal members, such as a home for elderly tribal members, alcohol rehabilitation and the like.

        Based upon the strength of this foundation, the Tribes were able to obtain an injunction against state imposition of cigarette taxes for almost eight years, between 1973 and 1980. But when the matter reached the Supreme Court after it had ruled on Moe, the Supreme Court again upheld a cigarette sales tax as applied to on-reservation sales of cigarettes by Indians to non-Indians. The Court held that the legal incidence of the tax was upon the purchaser, and therefore, valid as applied to sales to non-Indians. The Tribe argued that even though the legal incidence was upon the non-Indian purchasers, other factors not present in Moe invalidated the tax. The difference in this case was that the tribes had imposed their own tax on cigarette sales and further, had taken part in the marketing of the cigarettes themselves. These measures obviously gave the tribes a greater interest in cigarette sales than the tribe in the Moe case had. The belief was that this tribal interest would be enough to displace the state's right to impose its tax. The theories used were: (a) The state tax was preempted by federal statutes and policy which promoted tribal self-government and economic development; (b) The state tax infringed on the right of the tribes to govern themselves. Put another way, the state tax was preempted by tribal laws regulating and taxing cigarette sales; and (c) The state tax violated the Indian Commerce Clause because it imposed an undue burden upon Indian commerce.

        The Court rejected all three theories.
 
        3. Oklahoma Tax Comm'n v. Potawatomi Indian Tribe, ___ U.S. ___, 111 S.Ct. 905 (1991). The Supreme Court reaffirmed the principle of Moe and Confederated Tribes in Oklahoma Tax Comm'n v. Potawatomi Indian Tribe. The cigarette sales in question were conducted by the Tribe itself on tribally-owned trust land not officially designated as an Indian reservation. Oklahoma urged the Supreme Court to apply the rule of Mescalero, in which the Supreme Court held:

Absent express federal law to the contrary, Indians going beyond reservation boundaries have generally been held subject to nondiscriminatory state law otherwise applicable to all citizens of the State.

        5. Imposing "Minimal Burdens" on Indian Cigarette Sellers. In Moe, the Supreme Court said that a state could require Indian sellers to collect state tax from non-Indian purchasers as a "minimal burden" designed to insure that non-Indian purchasers pay the lawful tax. 425 U.S. at 483. Just how much of a burden a state can impose remains an open question.

        In Confederated Tribes the Court upheld a state requirement that tribes affix state tax stamps before selling to non-Indians. The Court also approved imposing recordkeeping requirements as to both non-Indian and Indian sales to the extent "reasonably necessary as a means of preventing fraudulent transactions." 447 U.S. at 160. Finally, the Court upheld the state's authority to seize shipments of untaxed cigarettes off the reservation where a tribe refuses to comply with valid state tax laws. The Court declined to decide whether states could carry out seizures within Indian reservations, noting that such action is "considerably different" from off-reservation seizures. Id.

        As a further means of enforcing their cigarette taxes, some states require that delivery of unstamped cigarettes to Indian vendors be made only in quantities approved by the state in advance. This arrangement clearly puts a state in the position effectively to deny a tribe its right to be free from state taxation. Nevertheless, the Washington Court of Appeals upheld the advance-approval requirement in Gord v. State Department of Revenue, 749 P.2d 678 (1987), 50 Wn. App. 646 (1987).

        Keeping track of an Indian cigarette retailer by requiring him to obtain a state license and permit, goes beyond the "minimal burden" authorized by the Supreme Court in Moe. In State, ex rel. Tax Comm'n v. Bruner, 815 P.2d 667 (Okl. 1991), the Oklahoma Supreme Court held that the Indian Commerce Clause in the United States Constitution limits state authority over Indian cigarette retailers operating in Indian country and prohibits the state from imposing its license and permit requirements.

        Meanwhile, the State of New York, facing similar difficulty, adopted regulations which required state cigarette wholesalers to prepay taxes on cigarettes delivered to state Indian reservations in excess of a predetermined figure calculated upon the "probable demand of qualified Indian consumers in the trade territory." The regulations required that each such wholesaler must: (1) request a copy of the prospective retailer's tax exemption certificate; (2) keep records of his sales; (3) obtain approval prior to each sale, either from the tribe or the Department of Taxation and Finance, of the quantity purchased; and (4) after completion of the sale, forward to the Department a copy of the prospective retailer's tax exemption certificate. In Milhelm Attea & Bros., Inc. v Department of Taxation and Finance of the State of New York, 615 N.E. 2d 994 (1993), the New York Court of Appeals struck down the regulations on the ground that they impose not "minimal" but "significant" burdens on wholesalers and are thus preempted by the federal trader statutes, specifically because they interfere with the statutory authority of the Commissioner of Indian Affairs to determine the kind and quantity of goods and the prices at which such goods shall be sold to the Indians.

        But on appeal to the U.S. Supreme Court, however, the case was reversed. Department of Taxation and Finance of New York v. Milhelm Attea & Bros., Inc., ____ U.S. ____, 114 S. Ct. 2028 (1994). The Supreme Court carefully considered and rejected the reasoning of the New York court by pointing out that while the broad language of Warren suggested that Indian traders are immune from state regulation reasonably necessary to the assessment or collection of lawful state taxes, the Supreme Court had undermined that proposition in the subsequent cigarette tax cases, Moe, Colville, and Oklahoma Tax Comm'n v. Potawatomi Indian Tribe. The Supreme Court then held:

In particular, these cases have decided that States may impose on reservation retailers minimal burdens reasonably tailored to the collection of valid taxes from non-Indians . . . It would be anomalous to hold that a State could impose tax collection and book-keeping burdens on reservation retailers who are enrolled tribal members, including stores operated by the tribes themselves, but that similar burdens could not be imposed on wholesalers, who often (as in this case) are not.

We have never held that individual agents or officers of a tribe are not liable for damages in actions brought by the State. See Ex parte Young, 209 U.S. 123, 28 S.Ct. 441, 52 L.Ed. 714 (1908).

        Another open question concerns a state's authority to enforce its cigarette tax laws by arresting Indian vendors on their reservation and charging them with crimes in state courts. The tribe itself should have sovereign immunity from any such enforcement actions, under the Ninth Circuit Court's 1985 opinion in California State Board of Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9 (1985). As for individual Indian vendors, the basis for state criminal jurisdiction is questionable. Even where a state has been granted general criminal jurisdiction over Indians on reservations under federal laws, such as Pub. L. 83-280, the Supreme Court's decision in California v. Cabazon Band of Indians, 480 U.S. 202 (1987), makes it clear that states generally do not possess the power to use criminal penalties to enforce regulatory laws against Indians on reservations. Arguably, the sole enforcement mechanism available to a state is the seizure of cigarettes outside the reservation. Nevertheless, in State v. Brooks, 763 P.2d 707 (1988) the Oklahoma Criminal Appeals Court ruled that implicit in the Supreme Court's decision that a state may impose its tax collecting and recordkeeping requirements on a tribe is the authority to apply its criminal laws where those requirements are not observed.

        Trafficking in contraband cigarettes also runs the risk of federal prosecution. In United States v. Baker, 63 F.3d 1478 (9th Cir. 1995), transporting unstamped cigarettes into Washington without preapproval by the Department of Revenue was held to violate the Contraband Cigarette Trafficking Act, 18 U.S.C. §§ 2341-42, and also constituted an element in violation of the Racketeer Influenced and Corrupt Organizations Act. See also United State v. Gord, ___ F.3d ___ (9th Cir., Mar. 1, 1996).

        As we have already seen in Snyder v. Wetzler, Commissioner of Taxation and Finance (1993), in the civil arena the picture is rapidly changing due to the Supreme Court's pronouncements in Oklahoma Tax Comm'n v. Potawatomi Indian Tribe. The Supreme Court did not discuss criminal penalties in that case, but by inviting suit against individual agents or officers of the tribe, the Supreme Court implied that tribal sovereign immunity does not protect them from the state.

        States, ever vigilant to legal possibilities of increasing their tax revenues at the expense of Indians, continue to seek out every possible legal advantage. In Buzzard and United Keetoowah Band of Cherokee Indians v. Oklahoma Tax Commission, 992 F.2d 1073 (1993), the Tenth Circuit Court of Appeals upheld the Oklahoma cigarette tax on cigarette sales made by the Keetoowah Cherokee Tribe on restricted land purchased in fee simple by the Tribe with its own funds. The Tenth Circuit affirmed the holding of the district court that such restricted land was not "validly set apart for the use of the Indians as such, under the superintendency of the Government" (quoting from Oklahoma Tax Comm'n v. Potawatomi Indian Tribe,111 S.Ct. at 910 (1991), and therefore was not "Indian country." The Court held that superintendency over the land requires an active involvement of the federal government, which did not exist in this case. The decision makes it clear that the courts will look for holes in the "geographical component" to allow the incursion of state taxes on Indian reservations. Perhaps the culmination of such an effort is Lummi Indian Tribe v. Whatcom County, Washington, 5 F.3d 1355 (1992), cert. denied, 62 USLW 3757 (1994).

    H. MARKETING RESERVATION-GENERATED VALUE.

        1. The General Rule. Perhaps the most important emerging legal doctrine in the area of protecting tribal tax immunity is the doctrine of reservation-generated value. The doctrine first appeared in the Supreme Court's opinion in Confederated Tribes. Unfortunately, by the time the Confederated Tribes case reached the Supreme Court, it had already decided the Moe case, in which the Salish and Kootenai Tribes had conceded legality of the state cigarette tax against non-Indians, but challenged the authority of the state to require Indian retailers to collect the tax. Given this concession, it is perhaps not surprising that the Supreme Court stretched the law, characterizing the collection requirement as a "minimal burden designed to avoid the likelihood that in its absence non-Indians purchasing from the tribal seller will avoid payment of a concededly lawful tax." At the heart of Moe was the Supreme Court's feeling that it was simply not willing to allow the non-Indian purchaser to flout his legal obligation to pay the concededly legal tax and for reservation Indians to benefit from sheer tax avoidance.

        The Supreme Court's repugnance to tax avoidance by non-Indian cigarette purchasers led it to refine its rule and conclude that the Tribes did not have a significant enough involvement with the value or product on which the state wished to impose its sales tax. The Colville Tribes and tribal members took no part in the growing of tobacco, its curing or processing, or in the manufacture of or packaging of cigarettes. Instead, the cigarettes sold under the Tribes' cigarette enterprise were manufactured in a cigarette manufacturing plant in North Carolina by North Carolina labor using tobacco grown in North Carolina. After the cigarettes were manufactured and packaged, they were shipped to the Colville Reservation and sold at retail. The Supreme Court expressed the belief that the only reason the Tribes had commerce in cigarettes with non-Indians in the first place was the potential freedom from the state sales tax. It said that all the Tribes were marketing, in other words, was a tax exemption and not a reservation-generated value.

        The lack of a sufficient Indian interest in the product subjected to the tax was fatal to the position of the Confederated Tribes, even though they had carefully crafted their tobacco ordinance and their tribal tobacco enterprise to take advantage of all aspects of tribal sovereignty, tribal tax immunities and interstate commerce law. In the aftermath of the Moe case in which the Salish and Kootenai Tribes had failed to take advantage of those legal protections, the legal structure of the tribal cigarette enterprise, standing alone, could not defeat the state sales tax.

        The growing importance of the doctrine of reservation-generated value was illustrated when, in California State Board of Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9 (1985) (per curiam), the Supreme Court shocked Indian country by summarily reversing a ruling in favor of the Tribe without even affording the parties prior notice or an opportunity to file briefs on the merits. The lower court, the Ninth Circuit Court of Appeals, had held that the legal incidence of the California cigarette tax fell upon the Indian seller and was, therefore, invalid as applied. That court reasoned that, unlike the Washington State statute in Confederated Tribes, the California statute contained no explicit provision requiring the tax to be passed on to the purchaser when the seller could not be taxed. But the Supreme Court held that no explicit statement that the tax be passed through to the purchaser was required in order for it to find that a state tax, which by its terms falls on the seller, is automatically passed on to the purchaser when the seller is untaxable. The Supreme Court arrived at this conclusion by way of a test which it said would be derived from its earlier decisions in Moe and Confederated Tribes, namely, "nothing more than a fair interpretation of the taxing statute as written and applied." 474 U.S. at 11.

        The Court said it would require a much more specific indication that the federal government wished to bar the sales tax before it would hold that state sales tax immunity was federally-preempted as part of the plan for tribal economic development and self-government encouraged by federal statutes. Id. Again, the Court said that there would be no infringement on tribal government unless the Tribes had a sufficient interest in the product, and a mere monetary interest was not enough, even if the revenue was essential for tribal government operations. Finally, the Court would not agree that the state sales tax burdened Indian commerce because the non-Indian market for reservation cigarettes:

[E]xisted in the first place only because of a claimed exemption from these very taxes. The taxes under consideration do not burden commerce that would exist on reservations without respect to the tax exemption.

        2. California v. Cabazon Band of Indians, 480 U.S. 202 (1987). The doctrine of reservation-generated value was strengthened by the Supreme Court as a major barrier to the incursion of state authority in Indian reservations in California v. Cabazon Band of Indians. The Cabazon and Morongo Bands of Mission Indians occupy reservations in Riverside County, California. Because their reservations are small and without natural resources, the Bands adopted bingo ordinances, which were approved by the Secretary of the Interior, and began high-stakes bingo operations. The bingo facilities were constructed on tribal trust land with federal grants, and guaranteed loans under the Indian Financing Act of 1974, 25 U.S.C. §§ 1451 et seq., and financial assistance from the Department of Housing and Urban Development and the Department of Health and Human Services.

        Contrasting these circumstances with the facts of the cigarette tax cases, the Supreme Court noted that the Tribes built modern facilities to provide recreational activities and ancillary services to patrons who did not simply drive onto their reservations to make purchases and depart, but to spend extended periods of time enjoying services provided by the Tribes. The Court added that the Tribes have a strong incentive to provide comfortable, clean and attractive facilities and well-run games to increase attendance, and that the games were the sole revenue source for the Tribe and the major source of tribal employment. The Court found the Tribes' interests parallel to those of the federal government in supporting tribal economic self-determination. Accordingly, the Court found that state regulation of the bingo games would impermissibly infringe upon tribal self-government.

        3. Indian Country U.S.A. v. Oklahoma Tax Comm'n, 829 F.2d 967 (10th Cir. 1987). Following the Supreme Court's lead in Cabazon, the Tenth Circuit Court of Appeals ruled in Indian Country U.S.A. that whenever an activity sought to be taxed by the state derives from reservation-generated value involving significant efforts of a tribe, a state will not be permitted to tax it. The court ruled that Oklahoma could not impose its sales tax on a bingo enterprise owned by the Creek Nation and managed under contract by Indian Country, U.S.A. Incorporated. The Tenth Circuit further found that, analogous to the Cabazon fact pattern, and unlike the cigarette tax cases, the value sought to be taxed derived solely from the Tribe's on-reservation efforts. The court rejected the state's argument that the legal and economic incidence of the sales tax was on the non-Indian purchaser of services. Interestingly, the court even refused to allow the state to tax the sale of food, bingo supplies and accessories to non-Indian purchasers.

        4. Gila River Indian Community v. Waddell, 967 F.2d 1404 (1992). The importance of the doctrine of reservation-generated value with respect to tribal economic development on tribal trust land is the basis of the Ninth Circuit Court of Appeals decision in Gila River Indian Community v. Waddell. The Gila River Reservation borders the City of Phoenix, Arizona. In order to foster tribal economic growth and provide tribal employment in the 1970s, the Tribe constructed Firebird Lake and the Sun Valley Marina on the Reservation wholly from federal funds. The Tribe then chartered Sun Valley Marina Corporation (Sun Valley) and leased it the Firebird Lake property. The lease was approved by the Secretary of the Interior pursuant to 25 U.S.C. § 415. Sun Valley subleased four pieces of land, including the lake, to a non-Indian partnership, Firebird International Raceway Park (Firebird), for boat and automobile racing. Firebird subleased a portion of the property to Compton Terrace for construction and operation of an amphitheater for the performing arts.

        Arizona attempted to assess its transaction privilege tax of 5% on Sun Valley and Compton Terrace for on-reservation activities. The Tribe filed an action in the Arizona federal district court, seeking a declaratory judgment and seeking to enjoin the imposition of state taxes. The federal district court dismissed the case and the Tribe appealed to the Court of Appeals, which reversed. The Ninth Circuit began its legal analysis by pointing out that there is "no rigid rule" governing the attempts of states to tax non-Indians conducting business on Indian reservations, but emphasized that the case be assessed on the basis of the two independent barriers to state authority: (1) federal preemption, and (2) infringement upon tribal self-government.

        The court then expounded upon the "particularized inquiry" test discussed above, weighing federal, state, and tribal interests to determine whether state interests are sufficient to justify the assertion of state authority. Central to such a particularized inquiry, the court noted, is the doctrine of reservation-generated value.

        Beginning with federal interests, the Ninth Circuit pointed out that the sublease from Sun Valley to Firebird was approved by the Secretary of the Interior and required Firebird to construct boat-racing facilities, a drag strip and other automobile racetracks, bleachers for 15,000 people, picnic facilities, restrooms and concession stands. The lease provided that all improvements belong to the Tribe and required Firebird to pay the Tribe a sizeable annual base rent plus a graduated percentage of gross receipts and tribal taxes on sale of tickets and concessions. Firebird employs a number of tribal members.

        The Ninth Circuit also pointed out that the sublease from Firebird to Compton Terrace was approved by the Secretary of the Interior and required Compton Terrace to construct a theater, restrooms and dressing facilities. The sublease provided that all improvements belong to the Tribe and required Compton Terrace to pay the Tribe a percentage of gross receipts of Compton Terrace performances and tribal taxes on sale of theater tickets, concessions and souvenirs. Compton Terrace employs a number of tribal members.

        The Court then noted that the federal leasing statute, 25 U.S.C. § 415, establishes a federal regulatory scheme governing the leasing of tribal lands similar to that described by the Supreme Court in Bracker regarding the harvesting of Indian timber. Tribal land leases must be approved by the Secretary of the Interior under regulations requiring consideration of the uses to which the land will be put, the effect of such uses on neighboring tribal property, the availability of services appropriate to maintenance of such uses, the quality and safety of structures erected pursuant to the leases, the requirement of insuring the highest economic return to the Tribe consistent with prudent management and conservation practices, provisions regarding the length of leases and the terms of lease approval. The Ninth Circuit found the scope and detail of such a federal regulatory scheme sufficient to support a tribal argument that there exists no room for additional regulation by the state.

        Turning to tribal interests in the Tribe's economic development, the Ninth Circuit noted that tribal involvement included the Tribe's working closely with Sun Valley and Compton Terrace to insure high-quality entertainment to the public; regulating and monitoring the property; enforcing tribal ordinances concerning water quality, pest control, sanitation and sewage disposal; limiting the size of audiences at performances; approving or rejecting additional construction; and coordinating law enforcement and security at events conducted on the reservation. The court noted that these tribal efforts, like those in Cabazon, involved activities characterized as reservation-generated value--auto and boat races, and theatrical and musical performances. In addition, the court noted that the Tribe alleged that its base rent, percentage of gross receipts, and tribal taxes would all suffer from imposition of the Arizona tax.

        Because the case was dismissed without trial, Arizona did not show that the state provided any services with respect to any of the on-reservation activities, or that its taxes were "narrowly tailored" to fund any such state services. See Crow Tribe of Indians v. Montana, 819 F.2d 895, 900-902 (9th Cir. 1987) (Crow II), summarily aff'd, 484 U.S. 997 (1988). Finally, the Ninth Circuit pointed out that the doctrine of tribal self-government bears a resemblance to federal preemption, and concluded by holding that the Tribe is entitled to a trial in the case to prove that federal preemption and tribal self-government, taken together, prohibit the state tax. It is unlikely that, upon trial of the matter, the state will be able to meet its burden. Even in light of the fact that the case is not finally decided, it strongly reaffirms the importance of substantial tribal involvement in economic development on tribal trust lands on the reservation as a means of protecting the Tribe's tax immunity and preventing incursions of state taxing and other regulatory jurisdiction of the reservation.

        5. Salt River Pima-Maricopa Indian Community v. Arizona, 50 F.3d 734 (9th Cir. 1995). Generating value on the reservation requires more than making leasing arrangements to use trust land and providing governmental services to non-Indian businesses. The Salt River Pima-Maricopa Indian Community established a shopping mall, known as the Scottsdale Pavilion, on individual allottees' trust land leased to a non-Indian land developer for a term of 55 years. The developer sublet the property to non-Indian businesses including Circuit City, Clothestime, Cost Plus Imports, Denny's, J.C. Penney, McDonald's, Taco Bell, Kentucky Fried Chicken and Home Depot. The Community collects a 1% tax on gross receipts from sales at the mall and provides police protection, some fire protection, health and safety inspection, zoning regulation and other services. The state collects sales and rental taxes from the subtenants and also provides services.

    The Ninth Circuit Court of Appeals upheld the state taxes against the Community's challenge that they interfered with its right to impose taxes. The Court concluded:

[I]t is clear that the balance tips in favor of Arizona's taxation. Most importantly, the goods and services sold are non-Indian, and the legal incidence of Arizona's taxes falls on non-Indians. See Colville, 477 U.S. at 151 (citing Moe, 425 U.S. at 482). Furthermore, Arizona and its agents provide the majority of the governmental services used by these taxpayers. Consequently, the state's interest is at its strongest, not its weakest . . . .

If we were to disallow the state tax, there is nothing to prevent the Community from "open[ing] chains of discount stores at reservation borders, selling goods of all descriptions at deep discounts and drawing custom from surrounding areas." [Colville, 477 U.S.] at 155.

The Gila River Community maintained an active role in the business enterprise by developing and marketing on-reservation entertainment to the general public. . . .

Gila River is clearly distinguishable from this case. The mall earns its profits simply by importing non-Indian products onto the Reservation for resale to non-Indians. . . . [T]he businesses are managed and owned by non-Indians, and the Community does not participate in business decisions and does not share in the profits. Consequently, Gila River is more akin to cases in which state taxes are preempted because an Indian resource or service is being sold, which is not the case here.

    I. WHEN LEGAL INCIDENCE DETERMINES THE OUTCOME.

        At times the aspect of legal incidence of the tax determines the outcome, as it did in Oklahoma Tax Commission v. Graham, 31 F.3d 964 (10th Cir. 1994), a case involving the Chickasaw Nation. The State of Oklahoma attempted to impose (1) beer tax on wholesale beer distributors selling beer to tribally operated stores in Indian country and (2) motor fuel tax on sales by tribal retail outlets of fuel to tribal members and non-Indians. But in the Oklahoma statutes the legal incidence of the beer tax was imposed on the wholesaler at the time of his purchase of the beer, not the retailer, the Chickasaw Nation. The statute provided that the wholesaler could only sell beer on which the tax had first been paid. On that basis alone the Tenth Circuit upheld the Oklahoma tax. But the Court added that because 18 U.S.C. § 1161 delegates liquor control to both tribes and states, Oklahoma clearly had the right to regulate beer sales in tribal outlets. Then the Court noted that the beer tax was not primarily a revenue raising measure, but a regulatory measure and did not even appear in the taxation code of the Oklahoma statutes, but in the liquor regulation section. Finally, the Court held the tax to be a valid regulatory measure.

        To the argument of the Chickasaw Nation that the wholesalers could not legally shift the economic burden of the tax to the Nation, the Tenth Circuit pointed out that in Seneca-Cayuga Tribe v. State ex rel. Thompson, 874 F.2d 709, 715 (10th Cir. 1989), it held the sovereign immunity of a tribe to be co-extensive with that of the United States and further pointed out that the Supreme Court held in South Carolina v. Baker, 485 U.S. 505 (1988), that a nondiscriminatory tax imposed on a private entity that does business with the United States and passes the cost of that tax on to the United States does not violate federal sovereign immunity. Therefore, said the Tenth Circuit, the state tax is legal.

        The Tenth Circuit's treatment of the Oklahoma fuel tax, however, was quite another matter. The Court noted that the sixteen cent per gallon fuel tax remittance procedure indicated the legal incidence of the tax to be clearly on the retailer, here the Chickasaw Nation. Even though the tax statute clearly contemplated that the economic burden of the tax be passed on to the retail purchaser, the Court held that imposition of the tax upon the Nation was preempted by federal law and struck the tax. Thus the element of legal incidence of the tax proved fatal.

        In Oklahoma Tax Comm'n v. Chickasaw Nation, 115 S. Ct. 2214 (1995), the United States Supreme Court upheld the Tenth Circuit's treatment of the Oklahoma fuel tax because the legal incidence of the tax rested on the Tribe. The Court noted that Oklahoma could accomplish its goal by declaring the tax to fall on the consumer and directing the Tribe to collect and remit it. Id. at 2221. The Tribe did not seek review of the lower court's ruling upholding the sales taxes on beer. Id. at 2218., n.3. (The Supreme Court also upheld Oklahoma's income tax on income of tribal members who work within Indian country but reside outside of it.)

    J. WHEN LEGAL INCIDENCE IS IRRELEVANT.

        An important aspect of Gila River was the need for the Tribe to show the economic incidence of the Arizona tax upon the Tribe itself. But legal incidence can become irrelevant when reservation-generated value is absent. For example, the legal incidence of Arizona's tax on cigarette sales was irrelevant in State ex rel. Dept. of Revenue v. Dillon, 826 P.2d 1186 (Ariz.App. 1991), because the Indian retailer on the Reservation was not a member of the Tribe. Harry Dillon, an enrolled member of the Puyallup Indian Tribe of Washington State, operated the Dillon Tobacco Barn inside the boundaries of the Tohono O'Odham Indian Reservation just outside Tucson, Arizona. Arizona attempted to levy and collect its luxury privilege tax upon Dillon's retail sales of cigarettes to nonmembers on the reservation.

        To Dillon's claim that the state tax was invalid because it is specifically legally incident upon the retail cigarette seller, an Indian, the Arizona Court of Appeals pointed out that in the Colville case the Supreme Court equated "non-resident Indians" selling cigarettes on a reservation to "non-Indians", thus making the concept of legal incidence irrelevant. The Arizona Court bolstered its conclusion by pointing out that the only issue in Warren Trading Post was whether Arizona could validly tax proceeds of the Trading Post's Navajo Reservation sales to enrolled Navajo Indians. Finally, the Arizona Court held that even if the state's tax on Dillon's sales destroyed his business altogether and deprived the tribe of its 5% gross sales tax, nonetheless, the tax did not interfere with the right of reservation Indians to make their own laws and be ruled by them, citing Colville.

    K. SHIFTING LEGAL INCIDENCE TO THE NON-INDIAN.

        1. Agua Caliente Band of Mission Indians v. County of Riverside, 442 F.2d 1184 (9th Cir. 1971), cert. denied, 405 U.S. 933 (1972) and Fort Mojave Tribe v. County of San Bernardino, 543 F.2d 1253 (9th Cir. 1976), cert denied, 430 U.S. 983 (1977). Agua Caliente and Fort Mojave stand for the proposition that a mere economic loss suffered by a tribe as a result of a tax paid by a non-Indian alone is not sufficient to invalidate the state tax. Agua Caliente and Fort Mojave both upheld the California possessory interest tax on non-Indian lessees of Indian trust land. The possessory interest tax was a tax on possession of land by the non-Indian lessees. Therefore, the legal incidence of the tax was on non-Indians. Although there was an economic impact on the Indian tribe, the Ninth Circuit said in Fort Mojave that federal law did not preempt the possessory interest tax. The court said that before it would find the state tax preempted, it would need a strong indication from Congress that it wanted non-Indians to be immune from the tax. The court also said that the Tribe's right to govern itself (tribal sovereignty) was not violated by the tax because the tax would only have the indirect effect of "perhaps" reducing tribal revenues.

        With great ease, the state can shift the legal incidence of a tax on reservation commerce from the Indian tribe or individual Indian to non-Indians. The California possessory interest tax, which was dealt with in Fort Mojave and Agua Caliente, is an excellent example of this shift of the legal incidence of a tax. The possessory interest tax might just as well have been a property tax, a tax on the tribe's ownership of its trust land. The two taxes would yield approximately the same amount of revenue because the possessory interest tax was based upon the value of the leasehold. But a property tax levied against the Tribe would have been unlawful because trust land is not subject to state property taxes. Therefore, in order to lay a tax on the value of the property, the state taxed the non-Indian lessee's possession of it.

        By shifting the legal incidence of a tax from an Indian tribe or individual Indian to a non-Indian, the state makes it easier to defend the tax. An example of such a shifting is illustrated in High Tide Seafoods v. State of Washington, 106 Wn.2d 695, 725 P.2d 411 (1986). The tax at issue in High Tide Seafoods was a tax levied upon purchasers of fish. The statute provided that the purchaser could deduct one-half of the tax from the price paid to the seller. Indian treaty fishermen were exempt from the tax since the State cannot tax the exercise of a treaty right. Thus, under the statutory scheme, the purchaser of Indian treaty fish ended up paying a higher tax himself than he would have if he had bought fish from non-treaty fishermen. Although the tax ends up as a tax on the treaty-guaranteed fishing right, nonetheless, because the tax itself was imposed upon the purchaser rather than upon the Indian fishermen, it withstood a court challenge in the Washington Supreme Court. The end result is that fish purchasers shifted the economic burden to the treaty fishermen by lowering their purchase prices. Had the case been considered by the United States Supreme Court, it might well have been reversed.

        Shifting the legal incidence of a state tax to non-Indians does not guarantee that it will be upheld as a valid tax. In Central Machinery v. Arizona State Tax Comm'n, 448 U.S. 160 (1980), when considering the transaction privilege tax which Arizona tried to impose on a non-Indian company selling farm machinery to an Indian tribe, the Supreme Court said:

Nor may [the State] distinguish the present case from Warren Trading Post. . . by contending that the tax at issue in this case falls upon the (non-Indian) seller of goods and not the (Indian) buyer because it is a tax on the privilege of doing business in Arizona rather than a sales tax. The tax in issue in the present case is precisely the same tax involved in Warren Trading Post. The argument made by [the State] in the present case was used by the Supreme Court of Arizona in Warren Trading Post to uphold imposition of the tax . . . . Our reversal of that decision recognized that, regardless of the label placed upon this tax, its imposition as to on-reservation sales to Indians could disturb and disarrange the statutory plan Congress set up in order to protect Indians against prices deemed unfair or unreasonable by the Indian Commissioner.

        Thus, shifting the legal burden of a tax from an Indian tribe or individual Indians to non-Indians will not save the tax if it violates the federal preemption doctrine, Indian self-government or the Indian Commerce Clause.

    L. STATE INCOME TAXES.

        1. Taxation of Indian Income.

        a. McClanahan v. Arizona State Tax Comm'n, 411 U.S. 164 (1973). In McClanahan, the Supreme Court held that the State of Arizona could not impose its personal income tax on a "reservation Indian" whose entire income was earned on the reservation. It said that by attempting to impose the tax, Arizona had interfered with matters, "which the relevant treaty and statutes leave for the federal government and for the Indians themselves." 411 U.S. at 179-180.
 
        Almost the instant it was written, the McClanahan decision stood for a proposition which clearly went beyond its own limited facts and circumstances. In reaching its decision in McClanahan, the Supreme Court examined the Navajo Treaty, the Buck Act, the Arizona Enabling Act, and Public Law 83-280 as if those laws were particularly important factors in the decisions, and as if its decision would be different if any of those factors were absent or were in some way modified. The Navajo Treaty, of course, applies only to the Navajo Tribe and the Arizona Enabling Act would affect only Indian tribes in Arizona or tribes in states with similar enabling acts. So one might think that McClanahan would be applied on a case-by-case basis, with each case turning on the particular circumstances of the tribe involved. But on the very same day that McClanahan was decided, the Supreme Court also decided Mescalero Apache Tribe v. Jones, 411 U.S. 145 (1973), which made McClanahan a general rule rather than merely a specific holding. In Mescalero the Supreme Court said:

[I]n the special area of state taxation, absent cession of jurisdiction or other federal statutes permitting it, there has been no satisfactory authority for taxing Indian reservation lands or Indian income from activities carried on within the boundaries of the reservation, and McClanahan v. Arizona State Tax Comm'n, supra, lays to rest any doubt in this respect by holding that such taxation is not permissible absent congressional consent.

        This rule apparently does not depend on the particular treaty covering a reservation, or the state enabling act, or the other laws which were considered in McClanahan. Rather, it deals with a key issue in state Indian tax questions: where is the legal incidence of the state tax? If the legal incidence of the tax falls on a reservation Indian who earns income on the reservation and who resides on the reservation the tax will fail. However, if either of the two elements is missing, the matter is less than certain. On the other hand, if both elements are missing, that is, if the Indian earns income off the reservation and resides off the reservation, the tax will succeed.

        The breadth of McClanahan is illustrated by Eastern Band of Cherokee Indians v. Lynch, 632 F.2d 373 (4th Cir. 1980). The Fourth Circuit Court of Appeals held that the State of North Carolina could not tax the reservation income of members of the Eastern Band in spite of the facts that the state had a history of exercising jurisdiction over the Band and that title to the Band's reservation was originally obtained by grant from the state.

        b. Geographical Component. Clearly, the "legal incidence" rule stated above incorporates another important factor in state Indian tax considerations: the "geographical component." The presence of the subject or activity being taxed within the reservation was an important element in the McClanahan decision. Today, the "geographical component" is still one of the first reference points used by courts in determining the scope of state and tribal powers.

        In the absence of the geographical component, that is, when an Indian earns income off the reservation and resides off the reservation, his income is subject to state income tax. This flows naturally from the Supreme Court's statement in Mescalero that "[a]bsent express federal law to the contrary, Indians going beyond reservation boundaries have generally been held subject to non-discriminatory state law otherwise applicable to all citizens of the state." 411 U.S. at 148. Citing the quoted statement, the appellate court in New York held, In the Matter of Mark D. George v. Tax Appeals Tribunal, 548 N.Y.S.2d 66 (A.D. 3 Dept. 1989), that an enrolled Onondaga Indian living off the reservation and working off the reservation was subject to New York's income tax.

        c. Bryan v. Itasca County, 426 U.S. 373 (1976). In Bryan, the Supreme Court refined McClanahan by holding that even states which had civil jurisdiction over Indian reservations under Public Law 83-280 were without authority to tax reservation Indians. It said that Public Law 83-280 did not give states regulatory or taxing jurisdiction over Indian reservations.

        d. The Scope of McClanahan: Who Are "Reservation Indians?" Since McClanahan herself was a Navajo Indian residing on the Navajo Reservation, the McClanahan decision left unanswered at least two other questions besides those mentioned above. They are discussed below:

        (1) Does "reservation Indian" mean only an Indian residing on a reservation? This question has been at least partly answered in the affirmative. It appeared in 1992 that the term "reservation Indian" meant an enrolled tribal member of the reservation in question, whether he resides on or off the reservation. In Sac and Fox Nation v. Oklahoma Tax Comm'n, 967 F.2d 1425 (10th Cir. 1992), Oklahoma attempted to levy a state income tax on earnings of tribal members who worked on tribal trust land which was not officially designated as a reservation. The district court struck down the tax on the basis of the McClanahan rule but made no effort to determine the place of residence of the tribal members involved.

        On appeal, the Tenth Circuit Court of Appeals began its legal analysis of the issue by pointing out that direct state taxation of tribal property, or tribal income earned on a reservation, is presumed to be preempted absent an express congressional authorization, citing McClanahan and Mescalero. The court then underscored that trust land is equivalent to a reservation for tribal tax immunity purposes, citing Oklahoma Tax Comm'n v. Potawatomi Indian Tribe, 111 S.Ct. 905 (1991). Finding no express congressional authorization for the imposition of state income taxes, the court struck down the state's income tax on tribal employees, regardless of their residence on or off the reservation. Because the court found residence of tribal members irrelevant, it did not remand the case to the trial court for a determination of where the tribal members in question lived. The court's logic seemed impeccable given that the Supreme Court in Mescalero tied Indian tax immunity to "activities carried on within the boundaries of the reservation" and not to the residence of the Indian wage earner. 411 U.S. at 148.

        The matter became much less certain with the Supreme Court's decision upon appeal in Oklahoma Tax Comm'n v. Sac and Fox Nation, ___U.S. ___, 113 S. Ct. 1985 (1993). The Supreme Court affirmed the presumption that Oklahoma may not tax the income of Sac and Fox tribal members who live and work on the Reservation, but reversed the lower court and ruled that, upon remand, the residence of the tribal members is important to the final determination of taxability of their income. The Court said, rather cryptically:

If it is determined on remand that the relevant tribal members do live in In