Tribal-state tax compacts rise as a tool for tax clarity in Indian Country

For governments, tax authority is essential. No government can provide services without revenue. In Indian Country, tribal and state government tax authority can—in certain situations—overlap for the same businesses or transactions. For example, both a state and tribal government might issue a sales tax on goods purchased by non-tribal members on a reservation. Such dual taxation can impede economic development and cause legal conflict between governments.

In areas where state and tribal tax authority overlap, tools that preserve tribal and state sovereignty while ensuring the smooth and equitable administration of taxation are important. Tribal-state tax compacts have emerged as one such tool. Also referred to as tribal-state tax agreements, these are contracts between a state and a tribal nation that regulate tax collection and distribution within Indian Country.

How tribal-state tax compacts work

Tribal-state tax compacts aim to create workable tax processes that accommodate the authority of each of the governments involved and outline clear and fair tax rates for consumers and businesses. They can work in several different ways. As one example, a tribe and a state may agree to collect only one tax on transactions where dual taxation authority exists, and then split the tax evenly between them on a quarterly basis. In another scenario, one government may collect a tax and then remit to the other government a portion of that tax under a pre-set formula based on population or other factors. In some cases, a state may collect and track tax collections from specific business transactions and refund the entire amount to a tribe. Collection of taxes by a state or local government, followed by payments to a tribe in accordance with a tax compact, can benefit tribes that do not have a tax office or infrastructure to raise revenue through taxes.

As intended, compacts offer tribes, states, and tax payers clarity in tax revenue, which is important for planning fiscal budgets and funding programs and services. Governments benefit from predictable revenue estimates, and tax payers benefit when governments work well together.

Learning from existing compacts

In recent decades, tribes have entered hundreds of compacts with state governments to create smooth and efficient schemes for tax collection. But what do we know about the actual experience of tribal-state tax compacting? In practice, do these agreements equitably benefit tribal economic development and revenue growth? How are the negotiations experienced by each party? Answering these questions is challenging. Little is reported in the relevant literature about the negotiations that precede compacts, and no central, comprehensive repository exists for final agreements. Individual compacts also vary widely based on the tribe, state, and transactions involved, making it difficult to generalize about the value of tax compacting. More comprehensive study is needed, but insights can be identified from Center for Indian Country Development (CICD) policy discussion papers that explore a small number of existing compacts.

Explicit recognition of tribal sovereignty

Historically, legal challenges to tribal governments’ authority to regulate taxes have resulted in unclear and at times contradictory court decisions.¹ This lack of clarity, coupled with the risk of future litigation, gave rise to tax compacts as a practical tool for tax collection and enforcement. In this way, tribes enter these arrangements as a matter of necessity for effective government. Final agreements do not always explicitly affirm tribal sovereignty and the inherent right of a tribe to tax transactions occurring in Indian Country, but from the tribal perspective this is important. Explicitly affirming tribal sovereignty in a tax compact clarifies that the agreement should not be understood as a concession of tribal authority.

Vetted data and compact terms

The effectiveness of a compact is predicated, in part, on the quality of the data on which its terms are based and on the ability to review and verify the data. For example, a compact may require a state to collect the entire tax revenue subject to the agreement with a portion returned to the tribe. The remitted portion may depend on the tribe’s population, on a predetermined minimum or maximum percentage of the total collected tax revenue, or on an estimated percentage of the tax collected within the reservation. Both tribal and state negotiators should ensure the data upon which a compact is premised are accurate, up-to-date, and verifiable.

In navigating considerations related to data quality and availability, greater access to compacts of other states and tribes would provide valuable examples of mechanisms, terms, and definitions. In this way, a central database or collection of tribal-state tax compacts would support compact negotiators in drafting terms that can be tailored to their unique situations. CICD is considering ways to help address this need.

Consideration to flexibility of terms

Lessons learned during recent economic recessions and the COVID-19 pandemic highlight the importance of considering how compact terms could manifest in different economic circumstances. In some cases, flexible tax policies could help promote and sustain strong economic development during periods of disruption. For example, to keep current with changing prices, some agreements tie the Consumer Price Index over time into their calculation of the refund going to the state or tribal government. In other situations, static terms—such as those locking governments into tax rates for periods of three, five, or 10 years—could provide tribes a measure of stability and protection during economic downturns. In developing compacts, consideration should be given to provisions that allow the parties to meet and negotiate mutually agreeable language that accounts for changing economic conditions.

Clear lines of communication

When economic or policy conditions change over time, or when questions about compact terms arise, communication between tribes and states or local governments is crucial. A compact is, after all, a partnership. In some cases, technical questions may arise between staff of both governments. In other cases, leadership may need to collaborate on an update. The ongoing government-to-government relationship arising from tribal-state compacts requires clear lines of communication. Moreover, in the absence of a body with authority to resolve differences between the parties, it may be important to identify communication channels that are formal and expressly acknowledge tribal sovereignty.

We need to know more

For both tribes and states, a tax compact can promote clarity, certainty, cooperation, and other values that support economic development. However, the lack of information on existing compacts and their negotiations creates barriers to evaluating their fairness and effect on economic development. Without the advantage of lessons learned from other compacts, negotiators may be uncertain about the long-term tax implications or risks to tribal tax authority associated with specific compact terms.² More comprehensive analysis would provide valuable information to help tribes and states create clearer, more equitable, and more efficient agreements.

Endnotes

1 For additional information on related legal history, see Oklahoma Tax Commission v. United States, 319 U.S. 598 (1943); McClanahan v. Arizona State Tax Commission, 411 U.S. 145 (1973); and Oklahoma Tax Commission v. Sac and Fox Nation, 508 U.S. 114 (1991). For examples of disputes, see White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980) (state taxation pre-empted of a non-Indian logging company doing business on Indian lands) and Merrion v. Jicarilla Apache Tribe, 455 U.S. 130 (1982) (tribal severance tax upheld on non-Indian oil and gas lessees doing business on Indian lands).

2 Although not tax-related, see the December 13, 2021, joint statement from the Cherokee, Chickasaw, Choctaw, Muscogee, and Seminole nations for an example of a decision not to renew standing hunting and fishing compacts with tribal governments in Oklahoma, following the U.S. Supreme Court’s McGirt v. Oklahoma decision.