In McGirt v. Oklahoma, the U.S. Supreme Court decided that Congress never disestablished the Muscogee (Creek) Nation’s reservation. Although McGirt was specific to the Muscogee (Creek) Nation, the Oklahoma Court of Criminal Appeals has now applied the ruling to recognize that Congress likewise never disestablished the Cherokee, Chickasaw, Choctaw and Seminole reservations. Under federal law, these reservations—encompassing the majority of Eastern Oklahoma—are “Indian Country.” Even though most of this land is privately owned by non-Indians, this designation carries a host of tax implications. As discussed below, the greatest impacts will be on tribal members and state and local tax revenues, with non-members largely unaffected by the expanded understanding of Indian Country.
State Tax Exemptions for Certain Tribal Members
Oklahoma cannot impose income tax on earnings of tribal citizens who work and reside in their tribe’s Indian Country. Businesses operating in Indian Country are not permitted to collect state and local sales tax from members of the tribe from that Indian Country. When Indian Country was perceived to be of limited scope, these tax exemptions were not particularly meaningful, but the expanded understanding of Indian Country makes these exceptions highly impactful.
In a recent report, the Oklahoma Tax Commission appears to accept that McGirt applies for state and local tax purposes. The report estimates McGirt will reduce state income tax collections by $72.7 million per year, and tribal citizens will be eligible for income tax refunds for the past three years totaling $218.1 million. The estimated annual loss of state and local sales taxes will be $132.2 million.
Tribal Authority to Tax Their Members
Due to their sovereignty, tribal governments can impose virtually any taxes on their members, regardless of whether the members live and work in their Indian Country. Thus, if tribes wish to impose new taxes on their members in recognition of the fact that many members might be exempt from state and local taxes, they have the legal authority to do so. That said, any new tribal income or sales taxes may be politically unpalatable among the membership.
Limits on the Power of Tribes to Tax Non-Members
The U.S. Supreme Court previously determined that tribal taxes on non-members are presumptively invalid, and are only allowed in cases where (i) non-members enter into consensual relationships with the tribe or its members, (ii) necessary to regulate conduct that threatens the political stability or welfare of the tribe or (iii) useful to protect tribal self-government or control internal tribal relations. None of these standards would be satisfied with respect to income or property taxes on non-tribal members, thus non-Indians do not have to worry about tribes taxing their property or income.
A tribal sales tax on purchases from businesses owned by tribal members would likely be valid because the customers who bear the economic burden of such taxes would be entering into voluntary contractual relationships with the sellers. The scope of tax would be self-regulating as consumers could simply avoid the tax by shopping with non-tribally owned businesses. Tribes cannot force non-Indian business owners to collect tribal sales tax, so consumers should not be concerned that the tribes might impose a broadly-applicable sales tax in Indian Country.
140 S. Ct. 2452 (2020)
Oklahoma Tax Commission: Report of Potential Impact of McGirt v. Oklahoma
(September 30, 2020) (the Report).