Although many states have a longstanding position that they have the right to assess the possessory (or leasehold) interests that non-Indian entities have in tribal lands, a federal regulation recently went into effect to clarify that such taxation, as well as the imposition of many other charges by state and local governments (such as gross receipts and excise taxes for activities taking place on leased tribal lands), is prohibited by federal law.
As set forth in section 162.017 of Title 25 of the Code of Federal Regulations, which went into effect on January 4, 2013 to address the taxes applicable on leased Indian land, "permanent improvements on the leased land, without regard to ownership of those improvements, are not subject to any fee, tax, assessment, levy, or other charge imposed by any state or political subdivision of a state." (25 CFR 162.017(a)[emph. added].) Plus, the "leasehold or possessory interest" that non-Indian entities hold in leased Indian lands "are not subject to any fee, tax, assessment, levy, or other charge imposed by any state or political subdivision of a state." (25 CFR 162.017(c).) Moreover, the new regulation states that "activities under a lease conducted on the leased premises are not subject to any fee, tax, assessment, levy, or other charge (e.g., business use, privilege, public utility, excise, gross revenue taxes) imposed by any state or political subdivision of a state." (25 CFR 162.017(b).) Thus, although federal law still allows Indian tribes to tax property interests and/or business activities taking place on tribal lands, the new law expressly prohibits such taxation by state and local governmental entities—an issue that has been a major concern for energy providers and other developers that have either already established facilities on Indian land or are planning such projects in the near future.
Generally, federal regulations have no less pre emptive effect than federal statutes. Where Congress has directed an administrative agency to exercise its discretion, the agency's judgments are subject to judicial review only to determine whether the agency has exceeded its authority or acted arbitrarily. Although the U.S. Constitution, treaties entered into between the United States and Indian tribes, executive orders, statutes, and other federal laws recognize the tribes"inherent authority and power of self-government, the courts have struggled with many laws purporting to regulate or tax activities on tribal land due to vague or ambiguous federal enactments. Thus, when determining whether state taxation of non-Indians engaging in activities or owning property on tribal land is preempted by federal law, the courts have generally applied a balancing test to weigh the relevant interests.
When determining whether a new regulation was warranted to address which taxes may apply to leased Indian land, the Bureau of Indian Affairs ("BIA") examined the relevant state, federal, and tribal interest, and found not only that the federal statutes and regulations governing the lease of Indian lands (as well as related statutes and regulations concerning business activities) occupy and preempt the field of Indian leasing, but also that such federal statutes and regulations preclude state taxation. Specifically, the BIA found that the federal regulatory scheme was pervasive and left no room for state law. Thus, there should be no doubt that the federal law is intended to prohibit all state and local efforts to tax leasehold and possessory interests held by non-Indian entities on Indian lands, as well as activities under such leases conducted on the land.
As indicated above, many state and local jurisdictions have argued that leasehold and possessory interests in tribal lands held by non-Indian entities is subject to state or local taxation. For example, in Fort Mojave Tribe v. County of San Bernardino, 543 F. 2d 1253 (1976), a dispute arose over whether California's possessory interest tax would apply to a resort and housing project, as well as a possible nuclear power facility, on tribal land that the Fort Mojave Indians were planning with various non-Indian entities. Due to the absence of any specific federal law indicating that an exemption applied to non-Indian lessees of Indian land, the Ninth Circuit upheld the County's imposition of the tax. Yet, the Court stated that "[w]hen such a signal is given, the state and local governments must retreat." (Id. at 1256.) The new regulation not only provides the signal for state and local governments to retreat from their efforts to impose property and business activity taxes on Indian land leased by non-Indian entities, but—importantly—the BIA also characterized the regulation as a clarification of existing law. Thus, the regulation arguably is an interpretive rule with retroactive effect.
Consequently, non-Indian entities that have been paying possessory interest taxes, business use taxes, privilege taxes, public utility taxes, excise taxes, and/or gross revenue taxes to state and local governments for their property interests and/or business activities on leased Indian land should contact counsel familiar with the new regulation to assure that their specific interests and/or activities are now exempt from state and local taxation. In addition, it would be prudent for such taxpayers to file claims with the state or local governmental entities to which such taxes have been paid to obtain refunds to the maximum extent provided by law. In many states, such claims are limited to three or four years from the date of payment. Therefore, affected taxpayers should act quickly to preserve their rights.