Tax Issues on the Navajo Nation

by Snell & Wilmer

Recent Updates
Effective January 1, 2013, the Sales Tax for goods and services delivered on the Navajo reservation increased from 4% to 5% of gross receipts. Services are so broadly defined that, unlike many states, the Navajo Nation (the Nation) taxes legal services when the lawyers are providing those services on the reservation. The Navajo Tax Commission, however, issued some private rulings in December 2012 that may provide relief from the Sales Tax for certain businesses doing business on the Navajo reservation. In particular, companies providing services on goods to the Navajo Generation Station in Page, Arizona should review the private letter ruling to determine whether they are still required to pay sales tax. The Navajo Sales Tax is discussed in more detail in the overview below.

The Nation is an independent tax-levying governmental entity and imposes seven taxes. All are administered by the Navajo Tax Commission. Those taxes are the: (1) Possessory Interest Tax (PIT); (2) Business Activity Tax (BAT); (3) Oil & Gas Severance Tax; (4) Tobacco Tax; (5) Hotel Occupancy Tax; (6) Fuel Excise Tax; and (7) Sales Tax. The most broadly applied are the PIT, BAT and Sales Tax.

The PIT is equivalent to a property tax. It is computed by multiplying the taxable value of a possessory interest on the assessment date by the tax rate. The taxable value is determined by capitalizing the income stream from a lease. There are five classes of property with different assessment ratios ranging from 10 to 100 percent. Those who have leases to sever natural resources or produce electricity have the highest assessment ratio of 100 percent. The current tax rate is 3% of the assessed value.

The BAT applies to the gross receipts from sales of all personal property produced, processed, or extracted within the Nation, including coal, oil, uranium, gas and other natural resources. It also applies to the gross receipts from services performed within the Nation, including the transport or transmission by whatever means of coal, oil, uranium, gas, other natural resources and electrical power. The tax rate is currently 5% of gross receipts. If, however, the Sales Tax and BAT would both apply to a particular transaction, then the Sales Tax must be paid and the seller may exclude the transaction from any reporting due under the BAT. The BAT contains certain exclusions, exemptions and credits, most notably a deduction for salary paid to members of the Nation.

The Sales Tax is imposed for the privilege of doing business within the Nation and is imposed on the gross receipts of a person. Gross receipts are amounts actually received by any person from the sale or leasing of real or personal property of any kind, the sale of services of any kind, and any other productive activity of any kind, whether for profit or not, conducted wholly or partially within the Nation.

The Sales Tax Regulations further clarify that when a taxpayer provides services-some of which occur within the Nation and some outside the Nation-the taxpayer is responsible for Sales Tax only on the gross receipts received for the portion of the work when the taxpayer is physically located within the Nation. For sales of personal property, the Sales Tax applies when the transfer of ownership or risk of loss occurs within the Nation; the Sales Tax does not apply to the sale of goods if the sale takes place outside the Nation-even if the product will be brought into or used in the Nation. The Sales Tax does apply, however, to sales of goods when the sale occurs within the Nation-even if the goods will be taken or used outside the Nation.

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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