Native Americans Do Pay Taxes
Taxation can be a divisive line between tribes and surrounding states
The question has lingered for decades, maybe even centuries: Do Native Americans pay taxes? They do and they don't. The devil is in the details.
There’s a major distinction between the terms “Native American” and “Native American tribe.” Adding that one word—tribe—differentiates between an individual and a sovereign entity. As a sovereign entity, a tribe governs itself. It’s effectively an independent nation, even though it's located on American soil.
Native American tribes aren't obligated to pay taxes to the U.S. government, but the same rule doesn't apply to tribe members.
Federal Income Taxes
Native American tribe members have been granted U.S. citizenship since 1924, and they must pay taxes on their incomes. But there are some exceptions, just as there are for non-Indian citizens.
Native Americans don’t pay taxes sources of income that derive from government benefits. This income must represent “general welfare” payments provided for by a governmental program, such as Welfare or Social Security Supplemental Income. Payments can't be made in exchange for services of any kind. They become taxable if they are. American Indians who have earned income must pay taxes like anyone else.
Native Americans do not receive financial assistance from the federal government based simply on the fact that they're Native Americans.
The Debate Over State Sales Taxes
Sales taxes on goods and services sold on Native American reservations have been an issue of some dispute for a while now, and the issue seems to be heating up.
As sovereign entities, tribes are entitled to impose their own sales taxes on their own grounds, taxing not only their tribe members but anyone else who passes through as well. Not all 550-plus recognized Native American tribes impose taxes, but some do.
If you purchase goods or services on tribal land, there might be a sales tax, or there might not be. This has become a thorn in the sides of many states because as sovereign nations, tribes are exempt from collecting sales taxes imposed at the state level, just as they’re exempt from paying income taxes to the Internal Revenue Service.
This enables them to sell things like tobacco and gasoline much cheaper than that convenience store or gas station across the tribal territorial line, particularly in states that have "extra" gasoline and tobacco taxes over and above their regular sales tax. If you lived in one of these areas and you had a choice, where would you buy your cigarettes or fuel up your car?
Logically, many non-Indian consumers cross over onto tribal lands to make these purchases when it’s at all feasible, and states take the position that this cheats them out of sales tax revenues.
A good many tribal nations operate casinos, which bring non-Indians onto their lands in droves, and they buy gas and tobacco while they’re there.
How States Have Adjusted
At least one state—New York—has revised its tax code to allow it to levy sales taxes on tobacco products sold on Seneca and Cayuga tribal lands. The state can’t impose the tax on tribe members who purchase there, but it takes the position that it can tax non-members who buy tobacco products on these reservations. A federal U.S. District Court judge agreed in January 2018.
And then there’s Nebraska. The Winnebago tribe makes its own tobacco products. The facility was the subject of a raid by the Bureau of Alcohol, Tobacco and Firearms (ATF) on Jan. 20, 2018, based on the terms of the Contraband Cigarette Trafficking Act (CCTA). The raid was intended to gather documents and information relating to the distribution and taxation of Winnebago tobacco products.
The federal government took the position that the CCTA mandated that the Winnebago tribe must turn these records over. The tribe disagreed, stating that it wasn't subject to federal law, and it refused to turn over the documentation, resulting in the raid.
The Winnebago Nation believes that the State of Nebraska instigated the ATF action and investigation and it sued the state in April 2018. The finer details of that case as of early 2019, although the District of Columbia District Court of Appeals got involved in July 2018 when it ruled that tribal businesses must indeed comply with federal laws.
By far, the most significant revenues on Native American lands come from their casinos. This has been the case going back at least 30 years and it’s prompted federal legislation.
The Supreme Court ruled in 1987 that tribes could run gaming establishments on their own lands without interference by state governments. Then, in 1988, the U.S. government passed the Indian Gaming Regulatory Act (IGRA) to nail down some regulations and guidelines for this practice, charging the National Indian Gaming Commission with oversight. This blurred the lines somewhat between the federal U.S. government and Native American sovereign nations.
These gaming operations are typically owned and operated by their tribes, but the old rule didn’t change. Tribes still don’t have to pay federal or state income tax on their revenues, including those generated by gaming.
Native Americans employed by the casinos must pay income taxes on their earnings, and if the tribes transfer or distribute any of their gaming revenues to tribe members, these “per capita” payments are subject to federal income tax as well. But many states exempt any payments that come from an individual's own tribe.
State Income Tax Issues
Tribes are also exempt from state income taxes because they’re sovereign—they’re not technically part of the states that abut their reservation lands. The IGRA prohibits states from levying income taxes on the tribes themselves, but tribes are free to negotiate their own contracts with their surrounding states to allow taxation of the gaming institutions themselves—a gray area indeed.
Most states tax Native Americans on income earned off their reservations, although money earned from their tribes is typically tax exempt at the state level. California codified this position with effective January 2018, but this state requires that the taxpayer actually reside on Native American land to qualify for exemption.
So What's Taxable and What's Not?
- Native American tribes are not subject to state or federal income taxes.
- Tribes can and do set their own sales taxes for products purchased from them on their lands.
- Native Americans must pay federal income tax on their personal incomes.
- The general rule in most states is that income is taxable when a Native American individual earns it off his reservation. Should a tribe member work at a job off the reservation, she would be subject to state and local taxes income there.