Construction Contracting on Tribal Lands in Arizona: Both the State Tax and a Tribal Tax May ApplyPage 1
of 7 SALES TAXATION OF CONSTRUCTION CONTRACTING ON TRIBAL LANDS IN ARIZONA: BOTH THE STATE TAX AND A TRIBAL TAX MAY APPLY Randal T. Evans*
Arizona is home to 22 federally-recognized Indian tribes. Tribal lands comprise over a quarter of Arizonaâ€™s land base. As a result, a significant amount of construction activity in Arizona takes place on tribal lands, including recent and ongoing large-scale development projects. Contractors performing services on tribal lands in Arizona are faced with the somewhat daunting task of determining what taxes apply to each particular project. In Arizona, this inquiry involves two separate questions: (1) does the Arizona transaction privilege tax apply, and (2) does a tribal tax apply? Both of these questions require an analysis of state or tribal tax law and federal Indian law, but the two questions must be analyzed independently. In many situations, a contractor performing services on tribal lands may be subject to both a state and
a tribal tax, as Indian tribes and states are recognized as having concurrent taxing authority over non-Indian transactions on Indian lands, except in limited circumstances. Further, this inquiry must be done on a project-by-project basis, as the law in this arena is particularly fact-based, still evolving, and filled with nuances, subtleties, and complexities. This article briefly addresses each of these questions, focusing on some of the more significant federal and state court cases and the Arizona Department of Revenueâ€™s ruling dealing with transactions involving tribal lands. This article is intended as an introduction only. Contractors performing services on tribal lands will need to undertake a careful analysis of what tax laws apply for each particular project, working closely with their legal counsel and/or a state and local tax professional with experience in this particular area of law. Arizonaâ€™s Transaction Privilege (Sales) Tax on Construction Contracting Differs Significantly From Other States
In place of a traditional sales tax, Arizona imposes a Transaction Privilege Tax (TPT) on specified business activities, including retail sales, personal property rentals, and construction contracting, among others. The Arizona transaction privilege tax is commonly referred to as a sales tax; however, the tax is imposed on the business engaged in a taxable activity, and is not a true sales tax. Although the transaction privilege tax is usually passed on to the consumer, the legal burden (incidence) of the tax is on the seller. Arizonaâ€™s tax treatment of construction contracting is significantly different than that of other states. In most other states, sales of building materials are taxable, and there is no sales tax on a contractorâ€™s receipts from construction services. Arizona is just the opposite. In Arizona, sales of building materials to contractors generally are exempt from the retail sales tax, and a â€œprime contractorâ€™sâ€ gross receipts from construction contracting are subject to the transaction privilege tax. See
A.R.S. 42-5061(A)(27), 42-5075. As of March 1, 2014, the combined state and county tax rates for construction contracting range from 5.85% to 7.6%. See www.azdor.gov/Business/TransactionPrivilegeTax/TPTRates.aspx
. There are many nuances to how the Arizona sales tax applies to different construction contracting variations, such as speculative build, design-build, owner-build, construction manager, and other types of contracting arrangements. These nuances in the state tax structure are often amplified when the construction takes place on tribal lands. In Some Situations, Arizona Sales Tax May Apply to Construction Services on Tribal Lands
Historically, the U.S. Supreme Court held that states had no jurisdiction within the territory of an Indian tribe. Indian tribes are still recognized as sovereign entities under federal law (see the very recent U.S. Supreme Court holding in Michigan v. Bay Mills Indian Cmty
, __ U.S. __ (2014), affirming that Indian tribes are â€œâ€™domestic dependent nationsâ€™ that exercise â€˜inherent sovereign authorityâ€™â€ and upholding a tribeâ€™s sovereign immunity from suit). Notwithstanding, federal courts â€œlong agoâ€ departed from the view that â€œâ€˜the laws of [a State] can have no forceâ€™ within reservation boundaries.â€ White Mountain Apache Tribe v. Bracker
, 448 U.S. 136, 141 (1980). Even so, states do not have unlimited regulatory authority over activities that take place on tribal lands. See Nevada v. Hicks
, 533 U.S. 353 at 362 (2001). In the context of state taxation, the general rule now is that states may impose a tax on transactions that occur on tribal lands, unless the federal government has expressly prohibited state taxation (that is, unless federal law preempts the state tax), or the state tax would unduly interfere with significant federal and tribal interests. See Cotton Petroleum Corp. v. New Mexico
, 490 U.S. 163, 188-189 (1989). There are several situations, discussed below, where federal law may prohibit the state from imposing a tax on construction services performed on tribal lands. Arizona Sales Tax Does NOT Apply to On-Reservation Services Performed by the Tribe or a Tribal Member
Under federal preemption principles, state sales taxes may not be imposed on the business activities of an Indian tribe, a tribe-owned entity, or an enrolled member of the tribe, if the activities take place on that tribeâ€™s reservation. See
, White Mountain Apache Tribe v. Bracker
, 448 U.S. 136, 144 (1980) (â€œ[w]hen on-reservation conduct involving only Indians is at issue, state law is generally inapplicable, for the stateâ€™s regulatory interest is likely to be minimal and the federal interest in encouraging tribal self-government is at its strongestâ€). The Arizona Department of Revenue, in Transaction Privilege Tax Ruling (TPR) 95-11, details its position regarding the taxability of construction work performed on an Indian reservation. TPR 95-11 recognizes that Arizona sales tax does not apply to the gross proceeds derived from contracting activities performed on a reservation by the Indian tribe, a tribal entity, or an enrolled member of that tribe. TPR 95-11 I.A, C. Arizona Sales Tax Does NOT Apply to the On-Reservation Services of a Non-Member Contractor Performing Services Under Contract with the Tribe, a Tribal Entity, or a Tribal Member
The Arizona sales tax also does not apply to construction services performed under a contract with an Indian tribe, a tribal entity, or an enrolled tribal member, if the construction activities take place within that tribeâ€™s reservation. Where a non-tribal member makes a sale or performs a service on tribal lands, federal courts generally apply a â€œbalancing testâ€ to determine whether state sales tax applies, weighing on one hand federal and tribal interests, and on the other, the stateâ€™s interests. See
, White Mountain Apache Tribe v. Bracker
, 448 U.S. 136 (1980). This analysis is referred to as the â€œBracker balancing test,â€ named after the Supreme Court case that established the test. In Bracker
, the Supreme Court applied this test and determined that Arizona could not impose motor carrier and use fuel taxes on a non-Indian logging and hauling company hired by a tribe for on-reservation logging operations. In that case, the state was prohibited from imposing its taxes because the interests of the federal government and the tribe, as reflected in federal regulations, outweighed Arizonaâ€™s general interest in tax revenue. Bracker
, 448 U.S. at 144-53. Two years after the White Mountain Apache
case, the Supreme Court applied the Bracker
test in holding that New Mexico could not impose its gross receipts tax on a contractorâ€™s proceeds from the construction of a school built on the Navajo Indian reservation by a local school board which had been formed by a chapter of the Navajo Nation. Ramah Navajo School Board, Inc. v. Bureau of Revenue
, 458 U.S. 832 (1982). As for Arizonaâ€™s sales tax, TPR 95-11 recognizes that the Arizona tax does not apply to proceeds from a construction project performed on an Indian reservation by a non-affiliated Indian or non-Indian prime contractor, if one of the following conditions apply: 1. The activity is performed for the tribe or a tribal entity for which the reservation was established; or 2. The activity is performed for an individual Indian who is a member of the tribe for which the reservation was established. TPR 95-11 I.C. Under Ramah
and TPR 95-11, in order to be exempt from the Arizona tax, the contract must be with the Indian tribe, a tribal entity, or an enrolled member of the tribe. As illustrated by the two cases discussed below (Blaze
), if the contract is with a federal or state agency, the project generally will be subject to the state tax, even though the project ultimately benefits the tribe or tribal members. Arizona Sales Tax Generally DOES Apply to Construction Services Performed on Tribal Lands Under Contract with a Federal or State Agency
Under the Supremacy Clause of the U.S. Constitution, states are not permitted to impose a tax directly on the federal government. See United States v. New Mexico
, 455 U.S. 720, 733 (1982). This limitation applies only when the tax is imposed directly on the federal government or a federal agency or instrumentality, but does not apply to federal contractors in states such as Arizona, where the legal incidence of the tax is on the contractor. Id
. at 735-36; see also Depâ€™t of Revenue v. Blaze Constr.
, 526 U.S. 32 (1999) (receipts from BIA contract for the construction of roads on six Indian reservations in Arizona subject to Arizona TPT because the legal incidence of the tax fell on the contractor, not the government purchaser); Tucson Mech. Contracting, Inc. v. Arizona Depâ€™t of Revenue
, 175 Ariz. 176, 854 P.2d 1162 (App. 1992) (Arizona contractors subject to TPT on federal contracts; mandatory receipt provision in contracts did not shift the legal incidence of the tax to the government purchaser). In the Blaze
case, the U.S. Supreme Court held that for federal contracts involving construction on tribal lands, the Bracker
balancing test (discussed above) does not apply. Rather, courts apply the general rule established in United States v. New Mexico
, that federal contractors may be subject to state sales tax if the legal burden of the tax is on the contractor. See Blaze Constr. Co.
, 526 U.S. 32. The same rule applies to contracts with state agencies for construction projects on tribal lands. In a 1995 case, the Arizona Court of Appeals affirmed the taxability of a construction contract with an Arizona school district (a subdivision of the State of Arizona), even though the work was performed on an Indian reservation and ultimately benefitted tribal members. Depâ€™t of Revenue v. M. Greenberg Constr.
, 182 Ariz. 397 (App. 1995). TPR 95-11 establishes Arizonaâ€™s position that â€œ[t]he gross proceeds derived from construction projects performed on Indian reservations by non-affiliated Indian and non-Indian prime contractors for all other persons [other than for an Indian tribe, a tribal entity, or an enrolled tribal member], including the federal government, are subject to the imposition of Arizona transaction privilege tax.â€ Arizona Sales Tax MAY Apply to the Receipts of Tribe-Owned and Tribal Member-Owned Contractors Performing Services Off-Reservation, Including Other Tribesâ€™ Reservations
The Supreme Court has held that tribes and tribal enterprises may be subject to state taxation for off-reservation business activities. Mescalero Apache Tribe v. Jones
, 411 U.S. 145, 148-9 (1973). This is a general rule, and there are exceptions where the state tax may be prohibited by federal law or treaty rights. In Arizona, tribe-owned or tribal member-owned contractors generally will be subject to state sales tax for off-reservation activities, including services performed on another tribeâ€™s reservation. In a 1999 case, the Arizona Board of Tax Appeals upheld the application of the Arizona tax to the receipts of a construction contracting company owned by members of the Cherokee Nation for services performed under contract with the Tuba City Unified School District, a political subdivision of Arizona, located on the Navajo Nation. Flintco Inc. v. Depâ€™t of Revenue
, No. 1801-99-S (Oct. 19, 1999). Although, unlike Greenburg
, the contractor was an Indian-owned business, the board followed a line of federal cases treating a non-member Indian the same as a non-Indian for jurisdictional purposes, and thus concluded that the Arizona tax was not prohibited by federal law. A Tribeâ€™s Tax May Also Apply
Independent of whether the Arizona sales tax applies, a tribeâ€™s tax may also apply to the receipts of a construction contractor performing services on tribal lands. Indian tribes have the authority to levy taxes on activities that take place within their reservation and may impose tax on non-Indians. See
, Kerr-McGee Corp. v. Navajo Tribe
, 471 U.S. 195 (1985); Merrion v. Jicarilla Apache Tribe
, 455 U.S. 130, 137 (1982). The following analysis may be used to determine whether a construction contractor is subject to tribal tax: 1.Has the Tribe Passed a Tax Ordinance? The first step in determining whether a tribal tax applies is to determine whether the tribe has been authorized by its constitution, charter, or other governing instrument to impose taxes and whether the tribe has passed a tax ordinance pursuant to such authority. The best way to determine whether a particular Indian tribe has a tax ordinance in place is to contact the tribe itself. The Arizona Commission of Indian Affairs maintains a list of Indian tribes in Arizona, with contact information for each tribe, at http://www.indianaffairs.state.az.us/tribes/tribes.html
. 2.Does the Tribal Tax Apply to Construction Contracting? Assuming that the Indian tribe has enacted a tax code, the next step is to determine whether the tax applies to construction contracting activities. Below are a few examples of tribal taxes that apply to contracting services performed within the Indian nation or community.
- The Navajo Nation imposes a sales tax on all sales of goods or services within the Navajo Nation, including construction services. See 24 NNC 607. Effective January 1, 2013, the Navajo Nation Sales Tax Rate is 5%. See www.NavajoTax.org. The Navajo Nation also imposes a Business Activity Tax (BAT) that is subject to certain business transactions that fall outside the scope of the Navajo Sales Tax. In November 2013, the Office of the Navajo Tax Commission issued a Public Ruling on the Taxability of Pre-Construction Activities Under the Navajo Nations Sales Tax and Business Activity Tax. See navajotax.org/public_rulings_directory.
- The Salt River Pima-Maricopa Indian Community imposes a privilege license tax on business activities, including contracting, conducted within the Community. See Salt River Pima-Maricopa Indian Community Code 15-51, 15-52. The tax is structured similarly to the Arizona transaction privilege tax, with the tax computed on 65% of the prime contractorâ€™s receipts for construction services performed within the Community. See Code 15-52(a). The tax rate depends on the ownership of the business. The tax rate for businesses owned and operated by non-Community members is 1.65%, while the rate for businesses owned and operated by Community members is 7.95%. This difference in rates follows the rule discussed above, that transactions conducted by Community members within the Communityâ€™s reservation are not subject to the Arizona transaction privilege tax. See www.srpmic-nsn.gov/government/treasurer.
- The Gila River Indian Community imposes a license privilege tax on business transacted by persons on account of their activities on the Reservation. See Gila River Indian Community Law and Order Code, Title 13 (Business Licenses and Taxation), Chapter 3 (Imposition of Privilege Taxes). The Gila River tax on construction contracting is also structured similarly to the Arizona transaction privilege tax, allowing for a 35% standard deduction. See Code 13.311(A) (Construction contracting). Effective December 1, 2013, the tax rate is 6%. Id. If the project is subject to the Arizona transaction privilege tax, a deduction equal to 75% of the gross proceeds may be taken when computing the Gila River tax; however, this deduction only applies where the contract is between the
contractor and a tenant in areas designated by the Community for the promotion of economic development. Code 13.311(C). See www.gilariver.org
> Departments > Revenue/Internal Audit Department. 3.Is the Project Located on Indian Lands? The final step to determine whether tribal tax applies is to confirm that the construction project is fact on land that is part of the Indian reservation or community. A tribeâ€™s power to tax non-Indian business activity extends to reservation lands (lands held in trust for the tribe), as well as trust allotments of tribal members and other lands that are considered part of â€œIndian Country,â€ as that term is defined by federal law. Mustang Production Co. v. Harrison
, 94 F.3d 1382 (10th cir. 1996), cert. den., 117 S.Ct. 1288 (1997) (tribe may impose a severance tax on non-Indian oil and gas producers operating on trust allotments outside of the tribeâ€™s reservation). Except in limited circumstances, a tribeâ€™s authority to tax generally does not extend to non-Indian fee land (or the equivalent of fee land), even if that land is within the exterior boundaries of the reservation. See Montana v. United States
, 450 U.S. 544, 565 (1981) (with limited exceptions, Indian tribes lack civil authority, including taxing authority, over the conduct of nonmembers on non-Indian fee lands); Atkinson Trading Company, Inc. v. Shirley
, 532 U.S. 645 (2001) (applying Montana
and holding that the Navajo Nation did not have the authority to impose its Hotel Occupancy Tax on a hotel located on fee land situated within the exterior boundaries of the Navajo Reservation). Conclusion
The tax treatment of construction contracting on tribal lands in Arizona involves the overlap of three distinct areas of law: (1) Arizonaâ€™s tax treatment of construction contractors, which differs significantly from most other states; (2) tribal law governing the taxation of activities conducted on tribal lands; and (3) federal Indian law issues relating to the taxation of Indian tribes, tribal members, and those doing business with them. Each is a complex arena filled with nuance, subtleties, and complexities. Together, they create a perfect storm that churns up unique legal issues and requires careful and individualized analysis at the outset of each construction project involving services performed on tribal lands.