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Indian Trust Land: Taxation of Leases and Permanent Improvements

October 30, 2017

Overview

Over the last few years, the Department of Interior Bureau of Indian Affairs (BIA) has updated the federal regulations on leases and rights-of-way on Indian trust land. Important tax provisions were included in the new regulations. These tax regulations change the way leases and rights-of-way are taxed.

Indian trust land is defined as any property that is held in trust or restricted status by the United States for the benefit of an individual Indian or Indian tribe. Congress created the Indian trust land system in 1887, upon passage of the General Allotment Act. Under the General Allotment Act, reservation lands were parceled out into individual allotments, title to which was to be held in trust by the United States for a period of 25 years. Fee patent could be issued at the end of the trust period, or to any Indian the Bureau of Indian Affairs (BIA) deemed competent. The General Allotment Act resulted in the massive loss of reservation lands. Indian land loss finally subsided when Congress passed the Indian Reorganization Act in 1934, which included provisions that stopped the allotment programs and extended the trust period for remaining allotments indefinitely.

Indian trust land is governed by federal statutes and regulations, and is not subject to state and local property taxes. Prior precedent, however, allowed states and local jurisdictions to assess certain taxes on Indian trust land, such as possessory interest tax and permanent improvements tax. Possessory interest tax, or rental tax, is a tax assessed on the leasehold owner for the privilege of holding the lease or right-of-way. Permanent improvements were subject to state and local taxation, if the permanent improvements were constructed, or “owned,” by a non-Indian.

The 2013 BIA leasing regulations and 2015 BIA rights-of-way regulations marked a change in the assessment of these taxes by states and local jurisdictions by including an express prohibition against their assessment. Under the new regulations, 25 C.F.R. § 162.017 and 25 C.F.R. § 169.11, possessory interests, permanent improvements (without regard to ownership), and activities under leases or rights-of-way on Indian trust land are not subject to state taxation. Leases and rights-of-way are, however, subject to tribal laws, and any applicable federal law. Tribes have full tax and regulatory authority on Indian trust land on the reservation.

The tax provision of the leasing regulations has been tested in litigation in federal courts in Florida and California, with mixed results. In the Florida case, the state historically assessed a possessory interest tax and a utility tax on Seminole tribal trust land. The tribe filed suit to prevent the state from assessing the possessory interest tax on leases on tribal trust land, and from assessing the utility tax on accounts located on trust land. The federal court of appeals held that the state’s possessory interest tax on leases on Indian trust land was pre-empted by federal regulations. The utility tax was upheld because, under the language of the statute, the utility was in theory obligated to pay the tax, even though in practice the utility passed the tax on to the lessee. Meanwhile, in California, the Agua Caliente Tribe filed a similar suit to prevent the county from assessing a possessory interest tax. In that case, the federal district court found that the possessory interest tax was not pre-empted.

Even though parts of these tax regulations have been challenged in the courts, the regulations are an important tool that can be used in conjunction with certain federal tax incentives to drive economic development on reservations nationwide.

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