Reversing a district court order that would have preempted the imposition of local taxes on personal property located on Indian reservations and utilized by an Indian tribe, the U.S. Court of Appeals for the 2nd Circuit has held that the Town of Ledyard, Conn., can tax slot machines owned by non-Indian gaming machine companies and leased by the Mashantucket Pequot Tribe. Mashantucket Pequot Tribe v. Town of Ledyard, 12-1727-cv (L).
The court held that neither the federal Indian Trader Statutes nor the Indian Gaming regulatory Act (IGRA) expressly bar the imposition of a local property tax imposed on the non-Indian owners of personal property located on an Indian reservation. It further held that federal law does not implicitly bar the tax — even when the property is used for tribal operations — because state and town interests in applying the tax outweigh the federal and tribal interests reflected in federal statutes. The Ledyard decision burdens tribes by significantly diminishing the strength of their claimed interests in tax preemption cases.
The Mashantucket Pequot Tribe entered into equipment lease agreements with various gaming manufacturers, including Atlantic City Coin & Slot Co. and WMS Gaming, Inc. Each of the leases between the manufacturers and the tribe was negotiated and executed on the reservation, and each provided that the tribe would reimburse the manufacturer for any tax imposed on the leased equipment. The Town of Ledyard sought to impose its property tax on the equipment placed at the Mashantucket Pequot casino on tribal lands. The tribe filed an action in federal court against the defendant town and state challenging the property tax. The parties filed cross-motions for summary judgment. In a uniquely comprehensive order issued March 27, 2012, Senior U.S. District Judge Warren W. Eginton (District of Connecticut) held that the Town of Ledyard could not tax the slot machines owned by non-Indian gaming machine companies and leased by plaintiff Mashantucket Pequot Tribe. (See our April 2, 2012, alert about this ruling.) Last week, the 2nd Circuit reversed that order.
First, the 2nd Circuit held that the tribe had standing to pursue its claim. It then held that the federal Tax Injunction Act, which normally bars an individual’s state tax challenge in federal court, does not apply to the tribe’s action because the action touches upon an alleged encroachment upon aspects of tribal sovereignty protected by the Indian Trader Statutes and IGRA. The court also held that comity does not preclude federal jurisdiction.
The 2nd Circuit then moved to a detailed discussion of federal preemption of state taxes, concluding that neither the Indian Trader Statute nor IGRA preempts the tax expressly or by plain implication, and that the town and state interests in the tax, as applied to the vendors, outweigh the tribe and federal interests. The court concluded that the tax is not preempted.
The court first examined whether the Indian Trader Statutes, 25 U.S.C. §§261-264, preempt the imposition of Ledyard’s tax. These statutes give the federal government exclusive authority to regulate non-Indians trading with Indians on reservations. Citing Dep’t of Taxation and Fin. Of N.Y. v. Milelm Attea & Bros., Inc., 512 U.S. 61 (1994), the court held that the Indian Trader Statutes and their regulations do not wholly immunize Indian traders from state regulation that is reasonably necessary to the assessment or collection of lawful state taxes. Rather, preemption under the Indian Trader statutes involves a particularized inquiry into the nature of the state, federal and tribal interests at stake. In other words, the court held that where they are implicated, the Indian Trader Statutes require a balancing analysis similar to that articulated in White Mountain Apache v. Bracker, 448 U.S. 136 (1980). The court further found that this is "particularly true" where the incidence of the tax falls on the non-Indian’s ownership of property rather than on the transaction between the tribe and the non-Indian. Accordingly, the court held that the Indian Trader Statutes do not preempt Ledyard’s personal property tax either expressly or by plain implication.
The opinion also held that the Indian Gaming Regulatory Act does not preempt the tax either explicitly or by implication. Citing various provisions in IGRA, it posited that nothing in the Act explicitly forbids the state to apply its personal property tax to the vendors. The 2nd Circuit also found that courts dealing with the question of whether a state tax imposed on a third party is preempted by IGRA’s occupation of the field of Indian gaming have been "quick to dismiss challenges to generally-applicable laws with de minimis effects on a tribe’s ability to regulate its gambling operations." Based on this observation, the court concluded that any preemption to the field of gaming regulations is not at issue here, where the state tax on property is not — in the court’s view — targeted at gaming.
The court then turned to the Bracker balancing test. Bracker requires a balancing of federal and tribal interests against those of a state when a state attempts to assert of jurisdiction over on-reservation, non-Indian activity. The state action is preempted if it interferes with or is incompatible with federal and tribal interests as expressed in federal law, unless the state has interests sufficient to justify its jurisdiction. Acknowledging the federal government’s regulation of Indian gaming, the court found that the federal interest in regulating such gaming focused on promoting tribal economic development, preventing criminal activity relating to gambling and ensuring that gaming activities are conducted fairly and concluded that the tax at issue is likely to have only a minimal effect on any of the federal interests articulated in IGRA. It further concluded that the tax would have a minimal effect on the tribe’s economic interests and only a moderate effect on tribal sovereignty. In contrast, the court concluded that the town’s interests would be heavily affected.
The court’s analysis of the town’s interests marks a departure from the analysis typically performed under Bracker to date. Specifically, the court held that the town’s economic interests in the tax exceed the value of the taxes on slot machines insofar as a ruling favorable to the tribe could invite other non-Indian owners of personal property on the reservation to initiate similar actions. Further, the court held that the legality of the tax cannot hinge on the extent to which the taxed property is used by the tribe for its federally authorized gaming, because such a position would require the town to take careful account of the use to which property owned by non-Indians on the reservation was put, and this level of analysis would further frustrate the town’s revenue collection and render the state’s tax more difficult and expensive to administer. The court noted that the town provides educational services to tribal children, maintains roads to and on the reservation and provides generalized functions from which the tribe benefits. Finally, the court noted that the state has an interest in the uniform application of its tax code and a sovereign interest in being in control of, and able to apply, its laws throughout its territory. The court concluded that the town and state have more at stake than the tribe, and that the balance of equities favors the town and state.
Jurisprudential Significance of the Decision
This case recognized, and gave credence to, state and local interests that typically do not contribute to the Bracker interest-balancing test. Specifically, the court’s willingness to consider potential future litigation costs as a legitimate component of the town’s interest in taxation is a new development in the context of Bracker balancing that tips the scales in favor of state interests and against tribal interests. Similarly, the court’s unwillingness to hold that an otherwise applicable property tax may be preempted based upon the manner of use of that property — even if federal law requires such an analysis — because it would be "difficult" for the state to conduct the requisite analysis, represents a highly questionable approach to preemption jurisprudence that burdens tribes. Finally, the court’s opinion that state and local interests in the integrity and uniform application of their tax system suffice to outweigh federal and tribal interests is far broader than (and arguably inconsistent with) the opinions in prior case law. It is so broad, in fact, that it may render the entire Bracker balancing test superfluous in favor of states. Whether the 2nd Circuit's positions remain valid will depend on future judicial developments.
Practical Significance of the Decision
This case makes it easier for state and local governments to tax the on-reservation activities of Indian tribes by taxing the tribes' business partners. Tribes concerned about the imposition of state and local taxes on their governmental operations may want to consider the following issues:
- Structuring. Tribes seeking to avoid payment of state and local tax should be mindful of this opinion in constructing their business relationships and on-reservation operations, and should structure their projects accordingly. For example, tribes may want to consider owning slot machines or other personal property rather than leasing them — particularly in states where the incidence of the property tax is deemed to fall on the owner. This will vary from state to state.
- Analysis of tax exposure/liability. This case effectively challenges the Bracker balancing test’s validity, skews its implementation and raises significant questions about Bracker’s ability to protect tribal interests. If federal courts adopt the approach introduced in Ledyard and apply it in other situations, tribes relying on the Bracker test will be exposed to increased state and local tax liability. Tribes may want to analyze their exposure in anticipation of new challenges by states and local governments.
- Need for a federal legislative solution. Because the Bracker analysis has proven to be so unreliable in slowing the rising tide of state taxation on Indian reservations, it may be time for Congress to seriously review the economic impact of state taxation on reservation economies and revisit the need for a federal legislative solution in this area.