United States: State, Local Taxes On Tribal Leases Vulnerable After California Court Order

Steven D. Gordon is a Partner and Kenneth W. "Ken" Parsons is an Associate in our Washington, D.C. office.


  • A California district court recently issued an order that signals it is likely to invalidate Riverside County's imposition of a possessory interest tax on lessees of trust lands within the reservation of the Agua Caliente Band of Cahuilla Indians.
  • The court analyzed several previous cases, the Bureau of Indian Affairs (BIA) leasing regulations and the Bracker balancing test, which is designed to determine whether the exercise of state authority violates federal law.
  • As a result of the changing landscape, tribes are now in a position to argue that many lease-related state and local taxes are preempted by federal law even if those taxes have been upheld by courts in the past.

Indian country may be close to another victory against state and local taxes. On Feb. 8, 2016, a California district court issued an order that signals it is likely to invalidate Riverside County's imposition of a possessory interest tax on lessees of trust lands within the reservation of the Agua Caliente Band of Cahuilla Indians (the Tribe). The case is Agua Caliente Band of Cahuilla Indians v. Riverside County, et al, Case. No. ED-CV-14-007-DMG (C.D. Calif. 2014).

The Dispute

Riverside County assesses a possessory interest tax on the lessees of the Tribe's trust lands. The tax is a general revenue-generation tax, which the Tribe alleges has no direct nexus with services provided by Riverside County to the Tribe or its members.

On Jan. 2, 2014, the Tribe filed a complaint against Riverside County seeking to invalidate the tax. Although Riverside County assesses the possessory interest tax against lessees, the Tribe alleges that the economic burden of the tax falls at least in part on the Tribe and its members. In particular, the Tribe alleges that the levy of the possessory interest tax lowers the lease value of its trust lands and costs the Tribe tax revenue. (The Tribe foregoes the imposition of a tribal tax on lessees of its trust lands in order to prevent double taxation.)

On July 28, 2014, Riverside County filed a motion for judgment on the pleadings. The court denied this motion on Feb. 8, 2016. Although this ruling does not finally decide the case, the court's reasoning indicates that it is likely to invalidate the tax when it does issue a final decision.

The Court's Analysis

Bracker Abrogates Earlier Cases

The court began its analysis by discussing the Supreme Court's decision in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980). In Bracker, the Supreme Court established a test for assessing the validity of state laws taxing the conduct of non-Indians on tribal land. When a state asserts authority over the conduct of non-Indians engaging in on-reservation activity, Bracker calls for a "particularized inquiry into the nature of the state, federal, and tribal interests at stake." This inquiry – the Bracker balancing test – is designed to determine whether the exercise of state authority violates federal law.

Prior to the Bracker decision, the U.S. Court of Appeals for the Ninth Circuit twice held that a possessory interest tax on non-Indian lessees of trust land was not preempted by federal law. In the first case, Agua Caliente Band of Mission Indians v. County of Riverside, 442 F.2d 1184 (9th Cir. 1971), the Ninth Circuit upheld the possessory interest tax because it found no congressional action forbidding the tax. In the second case, Fort Mojave Tribe v. County of San Bernardino, 543 F.2d 1253 (9th Cir. 1976), the Ninth Circuit examined Public Law 280, which prohibits the "alienation, encumbrance, or taxation of any real or personal property ... belonging to any Indian or any Indian tribe." The court found, however, that the burden of the tax at issue fell on the lessees, not the Tribe, and therefore the tax did not constitute a clear violation of the statutory prohibition on taxation.

The district court found that Bracker and other decisions issued since 1976 have abrogated Agua Caliente and Fort Mojave. In Bracker, the court noted, the Supreme Court "rejected the proposition that in order to find a particular state law to have been preempted by operation of federal law, an express congressional statement to that effect is required." Rather, in the Indian law context, state law is preempted not only by explicit congressional statement, but also if the balance of federal, state and tribal interests favors preemption. Because "the legal landscape has changed since Agua Caliente and Fort Mojave were decided," the court concluded it is "not bound by those decisions."

BIA Leasing Regulations

The court also examined regulations issued by the Bureau of Indian Affairs (BIA) in November 2012 addressing the leasing of rights in Indian lands. Those regulations provide, in part, that:

Subject only to applicable federal law, the leasehold or possessory interest is not subject to any fee, tax, assessment, levy, or other charge imposed by any state or political subdivision of the state. Leasehold or possessory interests may be subject to taxation by the Indian tribe with jurisdiction.

In the preamble to the regulations, the BIA states that the federal statutes and regulations governing leasing of Indian lands "occupy and preempt the field of Indian leasing" and that the federal statutory scheme is "comprehensive" and "pervasive," such that it "precludes state taxation." The preamble also asserts that "[a]ssessment of state and local taxes would obstruct federal policies supporting tribal economic development, self-determination, and strong tribal governments."

Although the court noted that it is not required to defer to the BIA's "proclamations of preemption," it also found that the BIA's authority to promulgate regulations is broad, and Riverside County had not convinced the court that the regulation goes beyond the scope of that authority:

In this case, the regulation at issue plainly states that a possessory interest in reservation land is not subject to any state tax. To the extent that Defendants assess, levy, and collect a possessory interest tax on the lessees of the reservation trust lands, the federal and state laws are in direct conflict. Given the broad scope of the authority granted to the BIA, and its historic role in regulating the use of Indian reservation lands, particularly leases, Defendants have not presented convincing arguments that this regulation goes beyond the scope of the BIA's authority.

Bracker Balancing Test Applies

Although the court found Riverside County's possessory interest tax to be in direct conflict with the BIA's leasing regulations, it concluded that the Bracker balancing test must still be applied to determine whether the county's tax is preempted. In applying this test, the court looked to the interests of the federal government, the tribe and Riverside County.

  • With respect to the federal interest, the court found the purposes of the relevant federal laws, the comprehensiveness of the regulatory scheme and the BIA's analysis of the issue all weighed in favor of a strong federal interest in promoting uniformity in the governance of tribal leasing.
  • The court found that the facts alleged by the Tribe (including declining to collect its own taxes so as to avoid double taxation on its lessees in light of the possessory interest tax) constituted a strong tribal interest that would be frustrated by the imposition of the possessory interest tax.
  • The court found Riverside County's generalized interest in raising revenue insufficient to "overcome the strong tribal and federal interests at stake."

Ultimately, the court found that, for purposes of deciding the motion before it, the possessory interest tax on lessees of the Tribe's land is preempted under the Bracker balancing test.

Next Steps

The court's ruling signals that it is likely to rule in the Tribe's favor at trial. However, discovery in the case will continue and a trial remains possible. In its order, the court raised two areas in which further factual development would be appropriate as the case moves forward.

The first area is the financial burden the tax imposes on the Tribe. The court noted:

The full extent of the financial burden on the Tribe cannot be assessed without a more developed factual record, but the facts as alleged are that the Tribe and its members have entered into thousands of leases providing considerable financial support to the Tribe, and that it is forbearing the imposition of its own taxes on these leases pending a determination of the issues presented in this case.

The second area is how Riverside County currently spends the tax revenues. The court noted:

According to the Complaint, the [possessory interest tax] at issue is a general revenue-generating tax that has no apparent connection to any services provided by Riverside County to the Tribe or its members. The majority of the revenues from the PIT are spent outside of the Tribe's Reservation, and a substantial percentage is spent outside the Coachella Valley altogether.

The court indicated that evidence would need to be developed that either proved or disproved these allegations.

Changed Landscape Offers Opportunities for Tribes

The application of state and local taxes to Indian country is a complicated and intricate area of the law. But the legal landscape has been changed by the Supreme Court's decision in Bracker, coupled with the publication of the BIA leasing regulations in 2012. As a result, tribes are now in a position to argue that many lease-related state and local taxes are preempted by federal law. Even if those taxes have been upheld by courts in the past, those prior rulings may no longer be good law. Accordingly, tribes that find themselves burdened by lease-related state and local taxes should consult with counsel to determine whether those taxes can be successfully challenged.

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.

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