By: Nick Marinelli
As sovereign governments, Indian tribes have the power to levy taxes. In the same vein, states also possess the power to levy taxes on income earned within their jurisdiction. If both powers were to levy taxes on non-Indians earning income on an Indian reservation within a state’s jurisdiction, the resulting double-taxation would possibly deter future income generated in these locations. While not necessarily illegal, double taxation is a frowned-upon social policy that many entities prefer to avoid for fear of deterring future revenue streams. Athletes and entertainers, for example, are taxed both in the state in which they reside as well as the states in which they earn income. To offset this double taxation, the states in which they reside will provide tax credits in the amount paid to the other states. Under this concept, it is possible, however, to allow both powers to levy taxes and still avoid controversial policy decisions.
Historically, Indian tribes have been recognized as retaining the power to levy taxes on non-Indians earning income on their reservations. This taxation power has allowed the Indian tribes to generate revenue for the cost of providing governmental services to their people, just as the states do. While Indian sovereignty is well established, jurisprudence concerning Indian taxation laws is still in flux. The Supreme Court in Williams v. Lee established a balancing test when taxes by either entity were challenged: the State could protect its interests to the point where tribal governments would be affected in any way. This balancing test allows for both entities to protect their interests through taxation and generating revenue without adversely affecting the other in a significant way.
One jurisdiction, Connecticut, is home to the Mohegan Tribe that owns and operates the Mohegan Sun Arena in Uncasville, CT. The arena is located both on the Mohegan reservation and within the jurisdiction of Connecticut. The arena is home to both professional sports as well as entertainers from around the country. Under Connecticut tax law, performers and athletes who earn income in their state are subject to a five percent tax rate. The Mohegan tribe, while retaining the power to levy taxes on these performers, does not impose such a tax. In an effort to aid their government and economy, the Mohegan tribe would be able to levy a tax on the performers at a rate equal to or lesser than surrounding state tax rates, a commonly-held policy by many Indian tribes. Concurrently, the state of Connecticut could still impose their five percent tax rate but give the performers a tax credit in the amount that was paid to the Mohegan tribal government. While double taxation still occurs, this policy would effectuate the Williams balancing test to the extent that both entities could generate revenue without either’s interest adversely affecting the other.
All in all, the revenue generated on an Indian reservation that is within a state’s jurisdiction should be available to both entities to tax accordingly because it would not follow for one sovereignty to reap the benefits of taxes levied when both entities had a hand in the revenue’s generation.
Source: Drew K. Barber, Note: The Power of Indian Tribes to Tax the Income of Professional Athletes and Entertainers who Perform in Indian Country, 41 Conn. L. Rev. 1785 (2009).