Rejecting Balancing Tests and Limiting Indian Tax Immunity

INTRODUCTION: In Wagnon v. Prairie Band Potawatomi Nation,

the Supreme Court considered the validity of a Kansas motor fuel

tax imposed on a non-Indian distributor providing fuel to an

Indian owned and operated reservation gas station. Asserting

that this application of the fuel tax was an “impermissible

affront to its sovereignty,” the Prairie Band Potawatomi Nation

(“Nation”) filed suit in federal district court to enjoin Kansas

from levying the tax on fuel sold to the Nation. However, the

district court granted summary judgment in favor of the state.

On appeal, the Tenth Circuit reversed and invalidated

Kansas’ tax as applied to fuel distributed to the Nation. After

balancing state, tribal, and federal interests, the court

reasoned that “Kansas’ generalized interest in raising revenues

[was] insufficient to justify its tax” in light of the federal

and tribal interests in “promoting tribal economic development,

tribal self-sufficiency, and strong tribal governments.”

However, the Supreme Court ultimately reversed, holding that

Kansas’ tax as applied to the fuel distributors is valid and does

not infringe upon the Nation’s sovereignty. Furthermore, the

Court determined that the interest-balancing test relied on by

the lower courts is inapplicable when the challenged tax is

directed at the off-reservation activities of non-Indians.

BACKGROUND: The U.S. Constitution specifically grants

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Congress the power to regulate commerce with Indian tribes.

Thus, Congress’ specific grant of power, together with the

inherent sovereignty of Indian tribes, creates distinct barriers

of federal preemption to states attempting to exercise regulatory

functions over Indian reservations and tribal members. Modern

jurisprudence addressing the tension between Indian sovereignty

and states’ regulatory powers can be traced back to Williams v.

Lee. In Williams, the Court held that Arizona could not exercise

jurisdiction over a non-Indian’s claim arising from an on-

reservation business transaction with an Indian. Attempting to

develop a framework for evaluating the scope of state power vis a

vis the Indians, the Court reasoned that allowing jurisdiction

would encroach on the right of Indian self-government. However,

in Mescalero Apache Tribe v. Jones, the Court distinguished off-

reservation tribal activities and held that the tribal operation

of an off-reservation ski resort was subject to New Mexico’s

gross receipts tax.

As the case law evolved, the Court recognized the need for a

more “particularized inquiry into the nature of the state,

federal, and tribal interests at stake . . . to determine

whether, in the specific context, the exercise of state authority

would violate federal law.” Therefore, in Indian tax cases:

[T]he initial and frequently dispositive question . . .

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 tribal members for sales made inside Indian country, the
tax cannot be enforced absent clear congressional
authorization. But if the legal incidence of the tax
rests on non-Indians, no categorical bar prevents
enforcement of the tax; if the balance of federal, state,
and tribal interests favors the State, and federal law is
not to the contrary, the State may impose its levy[.]

The application of this interest-balancing test frequently

results in a judgment against the state when the incidence of a

tax or regulation is directed at on-reservation activities.

Nevertheless, a state’s legitimate interest in a tax directed at

non-Indians may still outweigh tribal interests, even if that tax

indirectly burdens on-reservation activity.

Furthermore, the legal incidence of a tax is not immutable,

and the Court has signaled that state legislatures can amend

existing law to shift the incidence of a tax. The Court has also

implied that such a shift may yield a more permissive result for

the state. In light of this suggestion, Kansas amended its motor

fuel tax, and shifted the legal incidence of the tax to fuel

distributors. However, this modification did not foreclose lower

court applications of the Bracker interest-balancing test in

cases where the legal incidence of the tax fell on the off-

reservation receipt of fuel by distributors.

ANALYSIS: The Court granted certiorari in Wagnon to

determine whether Kansas’ fuel tax on a non-Indian distributor’s

off-reservation receipt of fuel should be subject to the Bracker

interest-balancing test when that fuel is subsequently sold on-

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reservation to an Indian fuel station. In an opinion by Justice

Thomas, the Court holds that the Bracker balancing test should

not be applied to the Kansas fuel tax. However, prior to

determining the applicability of the balancing test, the Court

considers the Nation’s assertion that the Kansas tax is imposed

on the distributor’s “on-reservation sale and delivery” of fuel,

and not on the off-reservation receipt of fuel.

While the Court acknowledges that a tax imposed on a non-

Indian seller may be pre-empted “if the transaction giving rise

to the tax liability occurs on the reservation and the imposition

of the tax fails to satisfy the Bracker interest-balancing

test[,]” the Court determines that due to the “dispositive

language” of the statute, the triggering event for the Kansas tax

is the distributor’s receipt of fuel, not the subsequent delivery

of that fuel. Furthermore, the Court determines that

notwithstanding certain tax deductions and refunds available to

the distributor under the statute, the distributor’s tax

liability is determined by the amount of fuel received by the

distributor in a given month, and not on the amount of fuel sold

by the distributor. Therefore, the Court rejects the Nation’s

first claim that the incidence of the tax is directed at the

distributor’s on-reservation sale and delivery of fuel.

The Court then holds that the Bracker interest-balancing

test is inapplicable to the Nation’s case, and refuses to extend

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the application of the balancing test to situations where a state

exercises “its taxing authority over non-Indians off the

reservation.” The Court reasons that by limiting the Bracker

interest-balancing test to on-reservation transactions, the Court

is both progressing toward the development of a bright-line

standard in the area of Indian tax immunity jurisprudence, and

reaffirming the importance of “special geographic sovereignty

concerns that give rise to the test[.]” Finally, the Court

rejects the Nation’s claim that the tax is “impermissibly

discriminatory” because tax exemptions are provided to fuel sold

to other sovereigns. In holding that the tax is not

“impermissibly discriminatory,” the court reasons that the Nation

is similarly situated to all Kansas retailers effected by the

tax, and that the Nation benefits from state highway programs

funded by the tax.

In dissent, Justice Ginsburg, joined by Justice Kennedy,

challenges the Court’s refusal to apply the Bracker balancing

test. Proposing a much broader interpretation of the test,

Ginsburg asserts that the Court should query whether the ultimate

economic burden of the tax falls on the Nation, not whether the

activity giving rise to the tax occurs on or off the reservation.

Ginsburg also maintains that “Kansas’ placement of the legal

incidence of the fuel tax is not as clear and certain as the

State suggest and the Court holds.” By focusing on the

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application and exemptions of the tax, Ginsburg proposes that the

Kansas legislature has not truly shifted the burden of the tax

from the Indian retailer to the distributor.

Moreover, Ginsburg contends that even if the legislature had

shifted the entire tax burden to the distributor, the Court’s

decision in Chickasaw mandates that such a shift “trigger-not

foreclose-interest balancing.” Furthermore, Ginsburg argues that

the majority’s purported “bright-line” standard will only provide

states with greater power to burden on-reservation activities and

will dilute the principles of tribal sovereignty and self-

government. Finally, after applying the Bracker balancing test

to the Kansas tax, Ginsburg determines that invalidating the tax

would lead to a more equitable disbursement of tax revenue for

road maintenance in the State of Kansas.

EVALUATION: The Court’s opinion in Wagnon yields to the

development of manageable standards in an area of law commonly

criticized as inconsistent and unpredictable. Through careful

application of prior precedent, the Court properly restricts the

Bracker interest-balancing test to the review of on-reservation

activity and creates a bright-line rule for lower courts to

follow. Moreover, the Court’s decision to limit the Bracker

test’s applicability will ultimately curtail the flow of

litigation and encourage tribes to seek other avenues of redress.

In light of the dispositive language of the Kansas statute,

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and the Court’s prior suggestion in Oklahoma Tax Commission v.

Chickasaw Nation, the Court properly determined that the

incidence of the motor fuel tax was on the distributor and not on

the Nation retailer. While the Nation is arguably effected by

the imposition of the tax, the Court’s determination properly

distinguishes the legal incidence from the indirect burden of a

tax. Furthermore, if the Court had accepted the notion that an

indirect burden should be equated with the incidence of a tax,

the Court would have effectively abrogated the holdings of

Washington v. Confederated Tribes of the Colville Indian

Reservation and Cotton Petroleum Corp. v. New Mexico, which

permit the indirect burden of on-reservation activities.

Moreover, the Court appropriately recognizes that the

Bracker balancing test was developed in an effort to address

special concerns of Indian geographical sovereignty and self-

government. Therefore, the Court reaches a logical conclusion in

determining that the Bracker test should not be extended to

activity occurring outside of the geographical bounds of the

reservation. The Court’s refusal to extend the test is further

consistent with its ruling in Chickasaw, which confirms that

tribal members do not receive the same protections against the

state outside of the reservation.

Furthermore, while Justice Ginsburg may favor ad hoc

litigation, the majority’s bright-line rule limiting the scope of

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the Bracker test achieves several important objectives. First,

the Court’s holding provides guidelines for litigants, thus

increasing efficiency and reducing the flow of litigation.

Additionally, the Court’s refusal to extend the Bracker test is

illustrative of the notion that Congress is better suited than

the Court to balance tribal, state, and federal interests. As

one commentator notes, “Congress has never specifically addressed

the problem of state taxation of Indian reservation land and

activities.” Perhaps in light of the Court’s decision, Congress

will take the initiative to enact regulatory measures, such as

federal Indian tax credits, to address the burdens of indirect

state taxation on Indian tribes. Moreover, the Court’s decision

may encourage tribes to take a proactive role in negotiating and

executing tax agreements, or tax compacts, with states to protect

their sovereign interests.

CONCLUSION: Although the outcome of Wagnon may seem unduly

harsh from the perspective of the Nation, the Court’s rejection

of the Bracker interest-balancing test was a necessary

progression toward Indian tax law uniformity. The Court’s

holding is entirely consistent with prior decisions and

reinforces the notions of on-reservation sovereignty and self-

government. Furthermore, while the Court’s decision may

foreclose judicial balancing of off-reservation taxation schemes,

tribal communities burdened by such schemes are not left without

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a remedy and may still look to Congress, or alternatively to

states, to effectuate their interests.