1. Tom Gede October 15, 2016 - Viejas Casino & Resort
California indian law association - 16TH Annual Indian Law Conference Current Taxation Issues in Indian Country – STATE ISSUES
Tom Gede
October 15, Viejas Casino & Resort

2. Tom Gede tom. gede@morganlewis. com Morgan, Lewis & Bockius LLP 415

3. Overview of topics
I. Franchise Tax Board Issues II. Board of Equalization issues III. Surface Leasing issues – pre-emption of state/local possessory interest tax

4. I. Franchise Tax Board Issues

5. I. FRANCHISE TAX BOARD ISSUES
Key questions and rulings:
California income tax exemption requirements:
FTB has examined and ruled on:
What income is exempt from state income tax?
when is tribal member “living on” or “living off” the reservation?
should a temporary absence from the reservation alter this status?
Taxation of per capita distributions from tribal gaming proceeds.
FTB-Tribal Leaders & Attorneys Working Group; Tribal Consultation Sessions

6. I. FRANCHISE TAX BOARD ISSUES
Background: California Income Tax on tribal members
California taxes income of tribal member if:
Member earns or receives income outside of Indian country. This includes income earned or received from:
Tribes of which resident is not a member.
Outside of California.
Lives outside Indian country but within California.
Is a resident with income received outside Indian country and/or California.
Is a tribal member residing on unaffiliated tribal member spouse's reservation.
Is a non-tribal member spouse residing on tribal member spouse's reservation.
Receives per capita income and does not live in member tribe’s Indian country.

7. I. FRANCHISE TAX BOARD ISSUES
Background:
Tribal members are exempt from California income tax if the member:
Is an enrolled member of a federally recognized Indian tribe.
Lives in his or her tribe’s Indian country, which includes:
Reservations.
Dependent Indian communities.
Indian trust allotments.
Earns or receives reservation source income from the same Indian country in which he or she lives and is an enrolled tribal member.

8. I. FRANCHISE TAX BOARD ISSUES
Definition of “reservation source income” subject of FTB clarification
4/12/13: FTB clarifies “income paid by any employer” “earned by a tribal member” is exempt from state income tax.
As long as income is earned by a tribal member while that member is physically located within the geographic borders of the reservation, then “reservation source income” includes income paid by any employer (public or private), not just by a tribal payor.

9. I. FRANCHISE TAX BOARD ISSUES
FTB Legal Ruling :
<< Whether a Tribal member is “Living On” or “Living Off” His or Her
Tribe’s Reservation for California Personal Income Tax Purposes >>
Question is when is tribal member “living on” or “living off” the reservation if tribe gives member (1) right to occupy dwelling on the tribe’s reservation and member (2) owns, rents or leases a second dwelling off the reservation.
FTB follows McClanahan v. Ariz. State Tax Comm’n (1974) 411 U.S. 164, that tribal member “living on” his or her own tribe’s reservation is exempt from paying a state’s personal income tax on income earned from sources within the boundaries of that reservation.

10. I. FRANCHISE TAX BOARD ISSUES
FTB Legal Ruling :
FTB relies on Closest Connection Test: derived from BOE decisions and Appeal of Stephen Bragg, 2003-SBE-003, involving appellant with ties to two states
FTB will not look at individual’s subjective intent, only objective facts
Multiple factors test:
Size and value of residences
Address used in correspondence with government agencies, financial instutitions, etc.
Utility and service provider usage
Declarations
Residence of spouse and children, location of schools of children
Location of taxpayer’s checking account, credit card transactions
Location of motor vehicle registration, driver’s license

11. I. FRANCHISE TAX BOARD ISSUES
FTB Legal Ruling :
What constitutes a “temporary absence” from the reservation?
FTB again looks to the “closest connection.”
Multiple factors test:
Regular presence and ties to reservation activities
Receipt of important correspondence
Sworn statement with sufficient detail
Departure during school year
Renovation or construction of on-reservation residence/facilities
Tribal leaders have asked FTB to develop new form specific to tribal members, individual self-declaration, subject to penalty of perjury, sufficient to verify primary residence, or a rebuttable presumption

12. I. FRANCHISE TAX BOARD ISSUES
Per capita distributions, general welfare payments
FTB follows IRS Revenue Procedure as to taxability of per capita payments to tribal members of tribal gaming revenues
Gross income under IRC § 61: subject to information reporting and withholding requirements
Tribal member’s residence determines whether or not California taxes the per capita payments
Other tribal welfare payments may be exempt: general welfare programs may be funded from casino revenues

13. II. Board of Equalization issues

14. II. BOARD OF EQUALIZATION ISSUES
BOE prescribes Sales and Use Tax Regulations
Regulation 1616 – “Federal Areas”
General rule: tax applies to sale or use of tangible personal property upon Indian reservations to the same extent that it applies elsewhere within the state
Exceptions as to:
Sales by On-Reservation Retailers
Sales by Off-Reservation Retailers
Requires Exemption Certificates (BOE forms)

15. II. BOARD OF EQUALIZATION ISSUES
Sales by On-Reservation Retailers
By Indians to Indians: No sales tax for sales of tangible personal property made to Indians by Indian retailers on reservation if purchaser resides on reservation and property is delivered on reservation
By Indians to non-Indians: No sales tax for sales by Indians to non-Indians and Indians who do not reside on the reservation if negotiated at places of business on the reservation and delivered to purchaser on the reservation

16. II. BOARD OF EQUALIZATION ISSUES
Sales by On-Reservation Retailers
By non-Indians to Indians: No sales tax for sales by non- Indians to Indians who reside on the reservation, when negotiated at places of business on the reservation and delivered to purchaser on the reservation.
By non-Indians to non-Indians: Sales or use tax applies to sales by non-Indians to non-Indians and Indians who do not reside on the reservation

17. II. BOARD OF EQUALIZATION ISSUES
Sales by Off-Reservation Retailers
No sales tax for sales to an Indian negotiated at places of business off the reservation, if delivered to purchaser on the reservation, and ownership transfers on the reservation.
Sales of most permanent improvements also exempted, including when furnished and installed by non-Indian contractors.
Use tax on vehicles, vessels and aircraft exempted when delivered to purchaser on a reservation, unless within first 12 months property used more off reservation than on.

18. II. BOARD OF EQUALIZATION ISSUES
See also: Sales to American Indians and Sales in Indian Country, BOE Publication 146 | July 2016

19. III. Surface Leasing issues –. pre-emption of state/local
III. Surface Leasing issues – pre-emption of state/local possessory interest tax

20. New Surface Leasing Regulations: Tax Implications Litigation:
III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
New Surface Leasing Regulations:
Tax Implications
Litigation:
Agua Caliente Band of Cahuilla Indians
v. Riverside County, et. al.

21. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
New Surface Leasing Regulations at 25 CFR part 162
Followed HEARTH Act amendments to Indian Long-Term Leasing Act, 25 U.S.C. 415, et seq.
HEARTH Act authorizes tribes to negotiate/enter ag and business leases of tribal trust lands (25 years & renewals) without the approval of the Secretary of the Interior.
Also, leases for residential, recreational, religious or educational purposes (up to 75 years) without the approval of the Secretary.
Participating tribes to develop tribal leasing regulations & obtain the Secretary’s approval of tribal regulations. Secretary must approve if tribal regulations consistent with leasing regulations at 25 CFR part 162

22. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
New Surface Leasing Regulations at 25 CFR part 162
Effective on January 4, 2013, AS/IA revised long- term surface leasing regulations at 25 CFR Part New subparts on:
Residential Leases (Subpart C)
Business Leases (Subpart D), and
Renewable Energy Leases (Subpart E).

23. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
New Surface Leasing Regulations at 25 CFR part 162
§ (a) provides “subject only to applicable Federal law,” permanent improvements on the leased land are not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State.
Same in (b) as to activities under a lease – no business use tax, privilege, public utility, excise, or gross revenue tax.
Same in (c) as to leasehold or possessory interests – no possessory interest tax.

24. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
New Surface Leasing Regulations at 25 CFR part 162
Preemption of state and local taxes:
Position of Dept. of Interior: “subject only to applicable Federal law” means courts will apply balancing test to determine whether state taxation of non-Indians engaging in activity or owning property is preempted.
(Refers to White Mountain Apache Tribe v. Bracker, 448 U.S. 136
(1980), for particularized examination of relevant State, Federal,
and tribal interests.)
Interior notes that “in the case of leasing on Indian lands, the Federal and tribal interests are very strong.”

25. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
Litigation: Agua Caliente Band of Cahuilla Indians v. Riverside County, et. al.
In January 2014, Agua Caliente Band sues Riverside County in USDC Central Dist., Calif., to enjoin possessory interest tax (PIT) imposed by county on lessees on tribal trust lands.
(Normally, a taxable possessory interest exists where a person
leases, rents or uses real property owned by a government
agency.)
Tribe relies on § (c) – argued tribal and federal interests stronger than state interests, and therefore PIT pre-empted.

26. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
Litigation: Agua Caliente Band of Cahuilla Indians v. Riverside County, et. al.
Riverside relies on Agua Caliente Band of Mission Indians v. Riverside Cnty., 442 F.2d 1184 (9th Cir. 1971) and Fort Mojave Tribe v. San Bernardino Cnty., 543 F.2d 1253 (9th Cir. 1976)
Those cases upheld similar PIT’s – based on lack of express
congressional intent to preempt.
Ultimately, February 2016, USDC Judge Gee denies Riverside’s motion for judgment on the pleadings.

27. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
Litigation: Agua Caliente Band of Cahuilla Indians v. Riverside County, et. al.
Court holds reasoning in Agua Caliente (1971) was repudiated in Mescalero Apache Tribe v. Jones, 411 U.S. 145 (1973)
Mescalero held sec. 465 bars tax on permanent improvements on lands owned by tribe (without using
Bracker test). Suggests same applies to use.
Bracker and its progeny also repudiate earlier cases.

28. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
Litigation: Agua Caliente Band of Cahuilla Indians v. Riverside County, et. al.
Ninth Circuit did not resolve PIT in Conf. Tribes of Chehalis Res. v. Thurston Cnty. Bd. of Equalization, 724 F.3d 1153 (2013).
Eleventh Circuit rejected Chehalis view of PIT in Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324 (2015).
So Court relies on reasoning in Mescalero and looks to (c).
Does (c) preempt by its own language or does it simply reflect Bracker balancing? (Seminole says language.)

29. III. SURFACE LEASING ISSUES – PRE-EMPTION OF STATE/ LOCAL POSSESSORY INTEREST TAX
Litigation: Agua Caliente Band of Cahuilla Indians v. Riverside County, et. al.
Court applies Bracker to (c), and finds strong federal and tribal interests and weak state interests.
Not a complete ruling on the merits, but signals where next
proceeding will head.
Matter included an intervention from Desert Water Agency, later dropped.

31. Tom Gede tom. gede@morganlewis. com Morgan, Lewis & Bockius LLP 415
Tom Gede Morgan, Lewis & Bockius LLP Sacramento Office: Morgan Lewis 980 9th St., Suite 2140 Sacramento, CA 95814