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Current Taxation Issues in Indian Country: State Issues

This conference explores current taxation issues in Indian Country, with a focus on state issues. Topics include franchise tax board issues, board of equalization issues, and surface leasing issues.

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Current Taxation Issues in Indian Country: State Issues

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

  2. Tom Gedetom.gede@morganlewis.comMorgan, Lewis & BockiusLLP415.442.1240

  3. Overview of topics I. Franchise Tax Board IssuesII. Board of Equalization issuesIII. 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 taxesincome 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 anyemployer” “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 2015-01: << 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 offthe 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 2015-01: • 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 2015-01: • 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 2014-35 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 deliveredto 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 possessory interest tax

  20. 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 - 2012 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 162. 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 • § 162.017(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 § 162.017(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 taxon permanent improvements on lands owned by tribe (without using Brackertest). Suggests same applies to use. • Brackerand 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 162.017(c). • Does 162.017(c) preempt by its own language or does it simply reflect Brackerbalancing? (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 Brackerto 162.017(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.

  30. Tom Gedetom.gede@morganlewis.comMorgan, Lewis & BockiusLLP415.442.1240Sacramento Office:Morgan Lewis980 9th St., Suite 2140Sacramento, CA 95814

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