Idaho Transportation

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Court: State can't tax Indian fuel sales

9th Circuit Court of Appeals slaps down tax OK'd by Idaho Legislature,
saying it violates tribal sovereignty

BOISE – A federal appellate court Thursday upheld the ban preventing the state from taxing motor fuel sold on Indian reservations.

In a 2 to 1 ruling, the U.S. 9th Circuit Court of Appeals agreed with the Coeur d'Alene, Nez Perce and Shoshone-Bannock tribes that such taxation violated tribal sovereignty and could create a barrier to interstate commerce.

Clay Smith, the attorney who argued the case for the state, said it was too soon to know if the state would seek an appeal to the U.S. Supreme Court. That decision would be made by the tax commission after consulting with Gov. Dirk Kempthorne, he said.

"I really don't have a reaction right now. It was a close case, and it's one of those decisions that could have gone either way," Smith said. "The long and the short of it is that we are really still taking a look at it."

Nez Perce Tribal Chairman Anthony Johnson said he was happy with the ruling.

"We're pleased that the court has upheld the tribes' sovereignty and has disallowed the state's intrusion on the tribes' basic governmental powers," Johnson said.

All of the tribes involved in the case own and operate gas stations on reservation land. For years the Idaho State Tax Commission imposed a 25-cent tax on every gallon of fuel delivered to those stations, and the tribes collected the tax from fuel buyers and passed it on to the tax commission.

But in 2001, prompted by a lawsuit brought by the tribes' fuel distributor Goodman Oil Co., the Idaho Supreme Court ruled the state's taxation of Indian reservations was illegal because federal law bars the imposition of tax on tribal retailers without clear congressional authorization.

Though the tax commission argued that a portion of federal law known as the Hayden-Cartwright Act allows taxes to be levied on United States military or other reservations, the Idaho Supreme Court found that "other reservations" did not automatically include Indian reservations.

After being defeated in court, state lawmakers tried a different tack: creating a new law that taxed the companies distributing fuel to tribal operators. Under that law, the fuel companies were taxed for the gas they delivered, and were expected to recoup those costs by collecting them from tribal retailers.

The Coeur d'Alene, Nez Perce and Shoshone-Bannock Tribes sued -- and won -- in U.S. District Court.
The federal court said the law was essentially a tax-and-remit scheme. The U.S. 9th Circuit Court of Appeals agreed, saying the economic reality of the law left the tribes paying the tax.

"Further, the Idaho statute imposes the tax whether or not the fuel is ever sold to the Indian retailers' customers. So it is plain that the tax buck stops with the Indian tribal retailers," wrote Circuit Judge Ronald Gould in his 41-page ruling.

Just because state legislators declared that they intended for the burden of the tax to fall on distributors did not make it so, the court found.

"Under our view of the law as declared by the Supreme Court, we conclude that we should not, under the circumstances of this case, automatically defer to the Idaho state legislature's mere say-so about where the legal incidence of its motor fuels tax lies," Gould wrote for himself and Judge Richard Tallman. "A state legislature's declaration of intent cannot be viewed as alone controlling on the federal question whether the legal incidence of a state tax falls on a sovereign Indian nation."

For the past few years, the tribes have continued to collect the 25-cent taxes from fuel sales but have held that money in an escrow account. If the matter ends with this ruling, the money will go to the tribal governments to be used as they see fit, said Julie Kane with the Nez Perce Tribe's Office of Legal Council.

"We're a government just like the state and taxation is a basic governmental power. We have a lot of basic needs that are not being met because we're not able to spend that money," she said.

Nontribal fuel station owners feared the tribes' win could put gas stations near the reservations at a competitive disadvantage. But Kane said the tribes would likely continue to tax the gas sales and use the money for things such as improving reservation roads.

Still, the Nez Perce Tribe has set its tax at 15 cents, Kane said, a dime lower than the state's tax. That could prompt some travelers to wait until they reach reservation land to gas up.

Circuit Judge Andrew Kleinfeld issued a dissenting opinion, arguing that the federal Hayden-Cartwright Act allowed the state to impose the tax regardless of its incidence.

Kleinfeld said that when the act referred to military and other reservations, Indian reservations were automatically included.

"The word 'reservation' ordinarily means and is most often used to mean Indian reservations. If the statute meant to make an exception to its 'reservations' coverage for Indian reservations, it would have said 'except for Indian reservations,"' Kleinfeld wrote. "About the only argument I can think for the Act not being 'unmistakably clear' is that the majority today makes a mistake. That logical amusement is not a sufficient reason to set aside the plain and express decision of Congress."

Rebecca Boone of the Associated Press