Flandreau Santee Sioux Tribe Receives Partial Victory in South Dakota Tax Case

Holland & Knight LLP

Holland & Knight LLP


  • In a recent case before the U.S. District Court for the District of South Dakota, Flandreau Santee Sioux Tribe v. Gerlach, the Flandreau Santee Sioux Tribe (Tribe) won a partial, but significant, victory in preventing the state of South Dakota's imposition of a use tax on purchases by nonmembers of goods and services at the Tribe's on-reservation casino and related amenities.
  • The case also has further potential implications for tribal-state gaming compacting and alcohol regulation in Indian country.
  • The reasoning in this case may be informative for other courts or regulatory bodies charged with determining which amenities at a tribal casino are "directly related" to tribal gaming operations so as to require compacting for any regulation of those amenities.

In a recent case before the U.S. District Court for the District of South Dakota, Flandreau Santee Sioux Tribe v. Gerlach, Case No. 14-4171 (D.S.D. Sept. 15, 2017), the Flandreau Santee Sioux Tribe (Tribe) won a partial, but significant, victory in preventing the state of South Dakota's imposition of a use tax on purchases by nonmembers of goods and services at the Tribe's on-reservation casino and related amenities. The case also has further potential implications for tribal-state gaming compacting and alcohol regulation in Indian country, including:

  • an expansive interpretation of which ancillary businesses are gaming-related for Indian Gaming Regulatory Act (IGRA) purposes
  • a narrow interpretation of the Bracker balancing test that declines to recognize a tribe's significant investment in gaming as value-added when evaluating the sale of products in an ancillary structure, such as a convenience store near (but not in) a tribe's casino
  • judicial refusal to allow states to hold tribal liquor licenses hostage when a tribe refuses to collect state sales taxes unrelated to liquor sales


The Tribe owns and operates the Royal River Casino & Hotel (Casino) and an affiliated, but separately constructed, convenience store and gas station (Convenience Store) on the Tribe's reservation. The Casino operations are governed by a Tribal-State gaming compact (Compact), but it is silent as to the imposition and collection of South Dakota's use tax on nonmember activity at the Casino as well as application of the state's alcohol regulatory laws. South Dakota issued separate alcoholic beverage licenses to the Tribe for the Casino, the Convenience Store, and a now-defunct bowling center. Pursuant to South Dakota law, the licenses' renewals were conditioned on the Tribe's remittance to South Dakota of the use tax for nonmember purchases. The Tribe did not remit the tax, and when it sought renewal of the licenses, South Dakota denied the requests. The Tribe instituted a state administrative hearing and filed this federal court lawsuit to review the denials.

The Court's Analysis

The court held, based on pre-emption of South Dakota law by the Indian Gaming Regulatory Act, 25 U.S.C. §2710 et seq. (IGRA), that the South Dakota use tax could not be imposed on nonmember purchases at the Casino or related amenities that are "directly related to the operation of gaming activities," as contemplated in IGRA, unless negotiated and included within a tribal-state gaming compact (which had not occurred in this case). The Casino-related amenities at issue included a gift shop, hotel, RV park, food and beverage services, and live entertainment events. The court found those amenities to be "directly related" to tribal gaming operations because the only significant purpose of the amenities is to facilitate gaming activities, as shown by their complementary nature (i.e., increases in demand for an amenity such as alcohol are directly tied to increases in demand for gaming activities) and by the fact that the Casino and the amenities are mutually dependent upon one another for their existence. The Tribe did not present sufficient evidence, however, to show that nonmember purchases at the Convenience Store are sufficiently complementary to gaming or that such purchases were necessary for the Casino's existence so as to preclude the tax by means of IGRA pre-emption.

Though it ruled that use taxes on Convenience Store purchases were not pre-empted by IGRA, the court considered whether the use tax on nonmember Convenience Store purchases might be otherwise pre-empted by federal law according to the Supreme Court's balancing of federal, tribal, and state interests in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980). The court held that the use tax was not pre-empted under Bracker and therefore South Dakota could insist on its collections from nonmember consumers at the Convenience Store.

In its balancing of interests, the court noted that the Tribe's interest in raising revenue is strongest when derived from value generated on the reservation by activities involving the Tribe and when the taxpayer is a recipient of Tribal services. The court asserted that the Tribe must serve as more than "a conduit for the products of others" to generate on-reservation value and must do so by activities in which the Tribe has a significant interest. However, the court found the federal and Tribal interests in supporting tribal sovereignty and economic development insufficient by themselves to preclude South Dakota's generally-applicable tax from being imposed on nonmember purchases. It also determined the comprehensive federal regulation of tribal gaming by the National Indian Gaming Commission to be only tangentially connected to the Convenience Store and not so extensive as to completely crowd out state regulation. Furthermore, the use tax imposed on the Convenience Store's nonmember patron purchases will be placed in South Dakota's general fund, and the court asserted that South Dakota residents (including Tribal members) will benefit generally from services provided by that fund. The court deemed South Dakota to have an inherent interest in the uniform application of its tax laws. It also said the use tax as applied to on-reservation nontribal members would not interfere with the Tribe's power to regulate tribal enterprises or contravene Tribal self-government because nonmember patrons are not Tribal constituents. Based on the foregoing, the court concluded that under Bracker, South Dakota's interests outweigh those of the federal and Tribal governments and held that federal law does not pre-empt the imposition of the use tax on nonmember purchases at the Convenience Store.

Notwithstanding the Bracker balancing test outcome, the Tribe scored another victory when the court determined that even though South Dakota could impose its use tax on nonmember purchases at the Convenience Store, it could not condition the renewal of the Tribe's alcoholic beverage licenses on the collection and remittance of that tax. Federal law effectively delegates congressional authority over liquor regulation in Indian country concurrently to tribes and states. In theory a state could impose virtually any of its laws on tribes by superficially connecting compliance with such laws (in this case, the collection of a general use tax) with alcohol regulation. But the court in this case determined that a state's conditions placed on the renewal of an alcohol license must be reasonably necessary to further the state's interest in alcohol regulation. Although South Dakota had an interest in regulating alcohol within its borders because of the potential for off-reservation impacts, conditioning the Tribe's license renewals on collection of a use tax entirely unrelated to alcohol did not further South Dakota's alcohol-related interest. (This finding coincides with a similar finding by the U.S. District Court for the Western District of Oklahoma in Citizen Potawatomi Nation v. State of Oklahoma, Case No. 5:16-cv-00361-C (memorandum and order filed June 21, 2016), holding that a tribe's failure to report or collect state sales taxes could not serve as a basis for the state to revoke the tribal casino's alcohol permits when the tribal-state gaming compact failed to mention any such taxes. That case is currently on appeal to the U.S. Court of Appeals for the Tenth Circuit.)

Potential Impact of the Court's Decision

While not controlling outside of the South Dakota district court, the reasoning in this case may be informative for other courts or regulatory bodies charged with determining which amenities at a tribal casino are "directly related" to tribal gaming operations so as to require compacting for any regulation of those amenities. The district court favorably cited the U.S. Court of Appeals for the Ninth Circuit's test for determining direct relation by examining whether an amenity's "only significant purpose" is to facilitate patronage of gaming activities. The district court's extension of this test to rely upon the economic concept of "complementary goods" – those in which increased demand for one ties directly to increased demand for another – may also provide guidance to tribes as to how the significant purpose test may be fulfilled and what subject matter must be part of a tribal-state gaming compact. That in turn will provide tribes with guidance as to what areas a state will have to provide meaningful concessions as part of compact negotiations.

The court's determination that the Tribe simply had not presented enough evidence to conclude that nonmember purchases at the Convenience Store were "directly related" to tribal gaming operations, and therefore the use tax not pre-empted by IGRA, left an opening to expand the scope of "directly related" activities in future cases. But this shortcoming also left open the door for the court's disappointing application of the Bracker balancing test. When the court asserted that the Tribe must serve as more than "a conduit for the products of others" to generate on-reservation value, it rejected a key part of the Ninth Circuit Court's statement in Cabazon Band v. Wilson as to on-reservation value generation in the gaming context: "It is sufficient that the Bands have made a substantial investment in the gaming operations and are not merely serving as a conduit for the products of others." The court buttressed its one-sided focus on the second part of that statement by referencing the U.S. Court of Appeals for the Second Circuit's determination in Mashantucket Pequot Tribe v. Ledyard that tribal sovereignty is not sufficient by itself to outweigh a state's interest in a generally-applicable tax on non-Indian purchases on reservations. In addition, the district court extended the Ledyard analysis – without explanation – by stating that even tribal sovereignty and economic development together are insufficient interests. This extension seems unsupported in view of the fact that Congress has explicitly found that "a principal goal of Federal Indian policy is to promote tribal economic development, tribal self-sufficiency, and strong tribal government." (25 U.S.C. §2701).

Notwithstanding the court's faulty application of the Bracker balancing test, tribal governments and their attorneys will applaud the limits the court placed on a state's ability to withhold tribal alcohol licenses based on the tribe's compliance with other state laws. The court determined that a state's insistence on tribal compliance with laws unrelated to alcohol or its potential for substantial off-reservation impacts must be reasonably necessary to further the state's interest in alcohol regulation. A state's insistence on tribal collection of an unrelated general use tax (and presumably by extension, most other taxes of general application) as a pre-condition for a finding of tribal alcohol compliance (and license issuance) will not pass muster.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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