Tribe Can’t Contractually Create Tax Shelter for Contractors
Construction Practices Newsletter
In Barona Band of Mission Indians, et al. v. Betty T. Yee, et al., the Ninth U.S. Circuit Court of Appeals held that a non-Indian contractor who purchases construction materials from non-Indian vendors that are delivered to a construction site on Indian land is not exempt from state sales tax.
The Barona Band of Mission Indians (Tribe) entered into a contract with Hensel Phelps to construct a $75 million expansion to a casino, only five years old at the time. Hensel subcontracted with Helix Electric to perform electrical work. The prime contract and subcontracts required deliveries of materials from non-Indian vendors to occur on tribal lands and for title of the materials to transfer upon delivery. With this contract language, the Tribe intended to shield Hensel and its subcontractors from California state sales tax.
The California State Board of Equalization demanded that Helix pay the sales tax. Helix sought indemnification from Hensel, and Hensel sought indemnification from the Tribe. The Tribe sued the Board for declaratory relief. The court granted the Tribe’s motion for summary judgment, finding that although the sales tax was not per se improper, it did fail the balancing test set forth in White Mountain Apache Tribe v. Bracker.
The Board appealed to the Ninth Circuit, which reversed the district court’s grant of summary judgment and remanded for judgment to be entered in favor of the Board. The Ninth Circuit agreed that the California state tax was not per se invalid. But the court also held that the Bracker balancing test did not invalidate the state tax where the Tribe invited the commercial transaction on its land to avoid the tax, which otherwise would have been paid by the subcontractor.
A state tax is unenforceable and per se invalid if its "legal incidence" falls on a tribe or its members for sales made on Indian land. Legal incidence is determined by who the state is taxing and where. The one who bears the legal incidence may differ from who ultimately bears the "economic burden" of the tax.
The Tribe tried to equate economic burden with legal incidence by designating the subcontractors as "purchasing agents" for the tax-exempt Tribe. The Court refused to recognize this fiction and concluded that Helix was the "consumer of materials" furnished to a client under a construction contract.
Under the Bracker balancing test, the court measured the state’s interest in raising revenue against that of the Tribe’s and federal government’s interest in the Tribe’s autonomy and economic self-sufficiency.
A tribe has a paramount right to autonomy within its territory and an interest in respecting its tribal sovereignty. But here, the Tribe "significantly compromised" its autonomy by inviting the transaction on its land for the sole purpose of providing a "tax shelter for non-Indian businesses." Thus, this case is factually distinguishable from cases analyzing taxation on non-Indians performing work on Indian land.
The impact to the Tribe’s economic self-sufficiency carried very little weight with the court because the tax would have been incurred by Helix, not the Tribe, but for the contract language requiring the Tribe to indemnify Hensel and Helix. "[T]he state has a parallel interest in preventing the manipulation of its tax laws to aid a casino in shopping tax exemptions to local businesses who otherwise would remit sorely needed revenue to the state."