United States: To Incorporate or Not to Incorporate?
Taxation of State-Chartered Tribal Businesses

I read the article by Phillip Katzen and Cory Albright in the February 2004 Indian Law Newsletter with interest. Messrs. Katzen and Albright discussed the application of the balancing test contained in WAC 458-2-192 ("Rule 192") to pre-empt state sales tax of on-reservation sales to nonmembers. Section 5 of Rule 192 is another important provision providing tax relief to Indian business owners. Section 5 addresses the state taxation (e.g., B&O and public utility tax) of Indian-owned corporations and partnerships formed under Washington state laws. Rule 192 exempts tribal-owned entities from state tax if they meet the following two criteria.

1. Solely Owned: The corporation or partnership must be solely owned by Indians. Owners can meet this requirement in one of two ways: (a) All the owners of the corporation/partnership must be enrolled members of the tribe where the business is conducted; or (b) Where the composition includes a family member who is not a member of the same tribe, the business will be meet the criteria if at least half of the owners are enrolled members of that tribe. WAC 458-20-192 (5)(d).

2. Activity Conducted in Indian Country: The business activity must be conducted within Indian country. The State excludes from this rule fishing activity already exempt by treaty, federal executive order, or act of Congress. B&O, public utility tax, and retail sales tax all apply to business conduct outside of Indian country. The State also requires Indian-owned businesses operating outside of Indian Country to register with the Department of Revenue as required by RCW 82.32.030; WAC 458-20-192 (6).

It is the responsibility of the Indian-owned corporation to maintain suitable records so that the Department can distinguish between taxable and nontaxable activities. Corporations meeting the exemption criteria in Rule 192 remain obligated to collect and remit retail sales tax from sales to nonmembers unless such tax is preempted. See P. Katzen and C. Albright, "The Implementation of Tax Rule 192 in Indian Country," at p. 12. Retail sales tax is ultimately born by the purchaser and therefore remains unaffected by this provision. Procedures for collecting retail sales tax may be administered via an agreement between the Department and the tribe.

As with most sections of Rule 192, no published decisions exist focusing on how a court might analyze the respective positions of litigants. Nevertheless, issues arising under Rule 192 are likely to become more prominent as tribal economic development expands and Indian-owned businesses interact more frequently with material suppliers and other vendors existing outside of Indian country. A recent decision from South Dakota Supreme Court provides helpful information to the legal practitioner seeking to protect Indian-owned businesses from state taxes.

In Pourier d/b/a Muddy Creek Oil and Gas, Inc. v. South Dakota Dept. of Revenue, 2003 S.D. 21, 658 N.W.2d 395 (2004) the South Dakota Supreme Court addressed whether Muddy Creek, a corporation owned by tribal member Loren Pourier, was exempt from South Dakota’s tax on fuel importation and retail distribution. Muddy Creek imported gasoline from out-of-state and distributed it throughout the Oglala Reservation. Ninety percent of the business’s customers were tribal members residing on the reservation.

South Dakota maintained its right to tax Muddy Creek’s activity on the basis that the company could not meet the "solely owned" criteria, because a corporation does not have a racial identity and therefore could not avail itself of the tax exemption available only to Indians.

The South Dakota court began its analysis by reciting established law, that "[i]f the legal incidence of a tax falls upon a Tribe or its members for sales made in Indian country, the tax is unenforceable unless there is clear congressional authorization for the tax." Id. at 21, 658 N.W.2d at 403 (citing Oklahoma Tax Commissioner v. Chickasaw Nation, 515 U.S. 450, 459, 115 S. Ct. 2214, 2220, 132 L.Ed.2d 400, 409 (1995). With regard to the racial identity of an Indian owned corporation, the Court dismissed the State’s position, stating "a corporation owned by the tribe or an enrolled tribal member residing on the Indian reservation and doing business on the reservation for the benefit of reservation Indian is an enrolled member for the purpose of protecting tax immunity." Id.

In support of its holding, the Pourier court cited a number of federal decisions demonstrating a consistent willingness to go beyond the corporate fiction and to reach the people behind the corporate veil. The court also recognized the fact that Congress enacted the Indian Business Development Program to "establish and expand profitmaking Indian-owned economic enterprises." 25 USC § 286.3. The regulations under this program require that an eligible corporation must be at least 51% owned by Indians or Indian tribes. Id. Therefore, the court concluded the identity of the corporation’s owners is germane to the qualification of the entity itself. Pourier, 2003 S.D. 23-24, 658 N.W.2d at 404-405.

Furthermore, in a far reaching public policy statement, the Court indicated:

Congress’ primary objective in Indian law for several decades has been to encourage tribal economic independence and development. By finding that incorporation under state law deprives a business of its Indian identity, we would force economic developers on reservations to forgo the benefits of incorporation in order to maintain their guaranteed protections under federal Indian law. This could hinder economic development. Id.

Later in the decision, the Pourier court found that Muddy Creek bore only a small portion of the legal incidence of the disputed tax because it had passed the increased cost on to consumers. Id., 2003 S.D. at 24-25, 658 N.W.2d at 405-6. The Court remanded the case to the trial court to determine the amount of the tax refund owed Muddy Creek and reservation Indian consumers. Id., 2003 S.D. at 38, 658 N.W.2d at 407.¹ Pourier is significant because it provides a well-reasoned opinion wherein a state’s highest court unambiguously sustained the right of a corporation to avail itself of state tax exemptions previously reserved exclusively to Indian business owners, in their individual capacity. The Pourier analysis provides a useful guide to resolving similar disputes that arise in Washington under Rule 192(5).

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.