July 18, 2008
On June 18, 2008, the United States Court of Appeals for the 9th Circuit decided Barona Band of Mission Indians v. Yee, in which it held that a non-Indian subcontractor who purchased materials which were later delivered to a construction site on Indian land – under a lump sum contract and as a “purchasing agent” for the Tribe – was liable for state sales taxes.
Impact of Decision
This decision demonstrates the 9th Circuit’s willingness to weigh the state’s interests over a tribe’s sovereign interests and further evidences the trend toward erosion of tribal sovereignty. There exists in the wake of this decision the potential for the Court to find in favor of the state on purely policy grounds – regardless of whether a tribe’s contracts are structured within the letter of the law.
Summary of Holding
In its holding, the Court rejected Barona’s argument that the sales tax was invalid per se because its incidence fell upon the Tribe, which cannot be taxed. It held, instead, that the subcontractor, acting pursuant to a lump sum contract, was the consumer of the materials so that the incidence of the tax was upon him and not upon the Tribe. The Court likewise rejected Barona’s argument that under the balancing test adopted in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), the tax was inapplicable. And finally, the Court disagreed with Barona that the Indian Gaming Regulatory Act preempted the California sales tax.
The case involved a dispute over the state of California’s attempt to impose a sales tax on the purchase of construction materials used to expand and renovate the Barona Valley Ranch Resort and Casino. In 2001 the Barona Band of Mission Indians hired general contractor Hensel Phelps Construction Company – under a lump sum contract – to expand its casino on its reservation. The Tribe designated Hensel Phelps and its subcontractors as purchasing agents for the procurement of construction supplies and required that they negotiate on behalf of the Tribe to:
- purchase construction supplies
- issue procurement contracts as the Tribe’s purchasing agent
- ensure that all contracts separately state the prices for materials, fixtures and installation
- ensure that all construction materials be delivered on the Barona Indian Reservation
The prime contract and subcontracts further provided that no sale is complete until accepted by the Tribe on the reservation.
To carry out the project, Hensel Phelps entered into a series of lump sum subcontracts. At issue was the nonpayment of sales tax by one of the subcontractors.
Per Se Invalidity: The Court recognized that on the narrow question of whether a state can tax Indian activity on an Indian reservation, the law is clear that “a State’s excise tax is unenforceable if its legal incidence falls on a Tribe or its members for sales made within Indian Country.” Oklahoma Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 453 (1995). Thus, the Court found that the dispositive question in this case, for purposes of a per se analysis, is who is the state taxing and where.
The Court turned to an analysis of the underlying California statutes, noting that under California law a construction contractor is the consumer of materials furnished later to a client pursuant to a construction contract, and that either sales or use tax applies with respect to the sale of the materials to or the use of the materials by the construction contractor. The Court further noted that under Cal. Admin. Code tit. 18 § 1521(a)(8) the lump sum contract entered into by the parties is a regular type of construction contract that falls within the taxing ambit of § 1521(b)(2)(A)(1). Thus, the Court agreed with the district court that the legal incidence of the California sales tax falls on Helix.
Bracker Balancing Test: Next, the Court turned to the Bracker test which calls for careful attention to the factual setting of each case and requires a “particularized inquiry into the nature of the state, federal and tribal interests at stake, an inquiry designed to determine whether, in the specific context, the exercise of state authority would violate federal law.” Bracker, 448 U.S. at 145. The Court noted a line of authority that it thought was helpful in its analysis: “The Court has previously expressed disfavor toward tribal manipulation of tax policy to gain an artificial competitive advantage over all other businesses in a State.” Barona, 2008 WL 2440528 at *5, -- F.3d at 7068, citing Washington v. Confederated Tribes of Colville Indian Reservation, 447 U.S. 134, 155 (1980).
While the Court recognized the Tribe’s interest in its right to autonomy within tribal territory as a valid interest, it stated that this right is significantly compromised by “the Tribe’s invitation to the nonIndian subcontractor to theoretically consummate purchases on its tribal land for the sole purpose of receiving preferential tax treatment.” Barona, 2008 WL 2440528 at *5, -- F.3d at 7069. The Court also cited the Tribe’s interest in profitability, but held that this alone does not bar the imposition of a tax on nonIndians. Finally, the Court held that the Tribe’s interest in self-sufficiency carries minimal weight in the context of a $75 million casino expansion. Thus, the Court found the Tribe’s interests to be weak.
The federal interests triggered by the tax were similarly deemed minimal because, first, the federal government did not purport to regulate tax on construction materials. Second, the Court found that the government’s interest in the Tribe’s self-sufficiency does not defeat an otherwise legitimate state tax. And third, it found that the governments interest fades even further when a tribe’s commercial activity is “rigged to trigger a tax exemption.” Barona, 2008 WL 2440528 at *7, -- F.3d at 7071.
In short, the court found that the Bracker analysis tips in the Board of Equalization’s favor where “the state levies a neutral sales tax on nonIndians’ purchases which – but for contractual creativity – would have occurred on nonIndian land.” Barona, 2008 WL 2440528 at *7, -- F.3d at 7071. The Court deemed the state’s interest in raising revenue to provide general governmental services a legitimate state interest that is greater than the combined federal and tribal interests. The Court also cited the state’s interest “in preventing the manipulation of its tax laws to aid a casino in shipping tax exemptions to local businesses who otherwise would remit sorely needed revenue to the state.” Barona, 2008 WL 2440528 at *7, -- F.3d at 7072. Thus, the Court concluded that California’s tax of Helix is a valid exercise of state power under the Bracker test.
Preemption by IGRA: The Court found that IGRA does not occupy the field with respect to sales taxes imposed on third-party purchasers of equipment used to construct gaming facilities.
Whether Barona will seek review of this case by the United States Supreme Court remains to be seen. It will also be interesting to see whether the Board of Equalization, emboldened in the wake of this decision, will attempt to seek payment of sales tax by tribes under different forms of construction contracts. We will continue to monitor developments in this area and keep you apprised.
About the Authors:
Allyson G. Saunders is a partner in Holland & Knight's Indian law practice group. She has extensive experience in the area of Tribal economic development and financing. Saunders has advised tribes and their economic development entities as outside special and general counsel.
Zehava Zevit practices in the area of Indian Affairs at Holland & Knight. She is experienced in constitutional law, campaign finance and election law, litigation and transactional work.