The Unfulfilled Promise of the Indian Commerce Clause and State Taxation

Abstract

The Constitution gives Congress the right to “regulate Commerce . . . with the Indian tribes.” Has the Indian Commerce Clause achieved its purpose? Have the Courts interpreted the Clause consistent with Congressional intent? I argue that the answer is, disappointingly, “no.”

The Supreme Court has emasculated and denigrated the Indian Commerce Clause, preventing implementation of the Founders’ vision. The Court has refused to use the Clause as a shield against state taxation.

Chief Justice John Marshall had the opportunity in 1832 in Worcester v. Georgia to shape the Clause into a powerful doctrine. As a ratifier, he was privy to the debates over the Clause. Instead of making the Indian Commerce Clause the centerpiece of his opinion, he used the case as a platform for an eloquent and courageous defense of Indian sovereignty — a thumb in President Jackson’s eye who had initiated the Removal Act of 1830 — just two years before Worcester.

Despite the long discussion in Worcester describing and defending the pre- and extra-constitutional sovereignty doctrine — immunizing the Cherokees from Georgia’s laws — Chief Justice Marshall was apparently worried about resting the opinion on that ground. The jurisdictional constraints on the Court imposed by the Judiciary Act of 1789 required that the case be grounded in the Constitution itself. He needed narrower grounds than the grandiose and sweeping pre- and extra-constitutional concept of Indian sovereignty, especially in a case involving penal laws. It was not enough that the laws of Georgia violated the sovereignty of the Cherokees, he had to show that they were repugnant to the “constitution, laws, and treaties of the United States.”

With an economy of language (and lack of verve) inconsistent with the fervor of his earlier discussion of sovereignty, Marshall satisfied the Judiciary Act’s requirement with a compact and conclusory reference to Georgia’s laws being repugnant to the “constitution, laws, and treaties of the United States.” Although he did not fully unbundle this reference, the “constitution” encompassed the Indian Commerce Clause. This lack of a resounding and explicit endorsement of the Clause, however, led to its being overshadowed by that part of the opinion in which Marshall championed Indian sovereignty, arguably dicta. Ironically, that part of the opinion which Marshall apparently feared would not satisfy the Judiciary Act came to characterize Worcester and initially took center stage, while the Indian Commerce Clause receded into the wings.

Worcester set in motion the course of subsequent litigation. Tribes understandably feel passionately about their sovereignty. The briefs involved in the tax cases discussed in this Portfolio show that arguments based on sovereignty, at least early on, figured more prominently than those based on the Indian Commerce Clause. This was similarly true of arguments based on treaties, federal statutes, and state enabling acts. In some cases, this ordering of arguments might have reflected concerns about whether sufficient “commerce” existed to trigger the invocation of the Clause, but more generally it seemed to reflect the Clause’s lack of prominence in Worcester.

The Court’s early opinions ignored the Clause. For example, the 1867 cases, The Kansas Indians, and The New York Indians, emphasized the sovereignty of the tribes and the existence of a treaty. The Indian Commerce Clause was not cited (perhaps because of concerns that “commerce” might not have existed). The 1885 case of Utah & Northern Railway also ignored the Clause (even though commerce was clearly implicated). In 1886, the Kagama Court rejected the Clause as the source of Congress’s right to enact the Major Crimes Act, although the rationale in that case was the lack of “commerce” and not that the Clause had no relevance at all.

In the 1898 case of Thomas v. Gay, there were no federal statutes, treaties, state enabling acts or the like to serve as a shield against state taxation. “Commerce” clearly existed. The case was thus perfect for an Indian Commerce Clause argument. But instead of breathing life into the Clause, the Court disposed of the case with ipse dixit reasoning and a retreat into formalism. The Court also erroneously claimed that the Clause had been rejected earlier in Utah & Northern Railway. By the end of the 19th century, the message to litigants was clear.

There were no major state tax cases implicating the Clause in the early part of the 20th century. The Solicitor General took up the cause in the early part of the 1980s, attempting to resurrect the Clause. In an intense short period of time, starting with Colville (1980), continuing with Central Machinery (1980), and reaching its zenith in Ramah (1982), the government was an aggressive advocate for using the Clause to create a tax-free zone on a reservation, exactly what Thomas v. Gay refused to do.

Inexplicably, Justice Thurgood Marshall, one of the Indians strongest allies, did not even acknowledge the Solicitor General’s brief in Central Machinery. Less surprising was that Justice Rehnquist (and White) also failed to mention the government’s brief in Colville. In Ramah, the Solicitor General filed two briefs — the second of which was a sweeping endorsement of the Clause. Justice Marshall, responding only to the first brief and ignoring the second, rejected the government’s efforts, arguing that current law apart from the Indian Commerce Clause was adequate to protect the Indians’ interests. If an ally of the Indians felt this way, it is not surprising that the government would retreat from its sweeping views.

A more robust Indian Commerce Clause would have reversed the results in many of the cases discussed above. The states would have been the clear losers. But Congress would have been expected to have intervened in some manner to establish a new order. How that would have played out would be conjecture. It would also be sheer speculation on whether the Roberts Court will provide a fresh opportunity to raise the Indian Commerce Clause going forward.

If the Indian Commerce Clause has not fulfilled its promise, at least I can try to fulfill my promise in the Introduction to help negotiate the “labyrinth of unpredictability,” which characterizes state-Indian taxation. As a start, the transactions discussed in this Portfolio can be arrayed along a continuum. At one end of the continuum are those transactions taking place on a reservation without any direct connection to off-reservation activities: the facts in McClanahan.

McClanahan immunized from state income taxation an Indian who worked and lived on a reservation, having no direct off-reservation activities. Chickasaw teaches that a state cannot impose a tax whose legal incidence falls on a tribe (or an Indian) if the taxed activity takes place on a reservation. McClanahan would seem to be an application of Chickasaw (which had not yet been decided, although the cases upon which it relied had been), but Chickasaw went on to draw a line between Indians who work and live on a reservation and those who work on a reservation but live off-reservation, and holds that a state can impose its income tax on the latter. The Court justified this distinction by relying on international custom and practice. Although the Court did not explain the rationale for this custom and practice, presumably it is rooted in the notion beneficiaries of public goods and sectors can be made to contribute to the fisc. Presumably the Indians living off-reservation benefited from state-provided goods and services in a way that on-reservation Indians did not, and that difference was enough to distinguish McClanahan, notwithstanding that the legal incidence of a personal income tax is on the individual.

In the case of cigarette excise taxes, however, the Court has ignored the Chickasaw line between Indian residents and Indian non-residents. The Court did not fashion a result that distinguished resident Indian consumers from non-resident Indian consumers. From a policy perspective, ignoring that line is proper because cigarette excise taxes are consumption taxes, which do not incorporate a concept of residency and are not administered in that manner, and there is no custom or practice suggesting otherwise. The line the Court drew in Colville, however, was whether an Indian was a member of the tribe or not, which was unprincipled and unsupported by statute, precedent, or policy considerations, and contradicted by the Indian Trader statutes.

Moreover, in Moe and Colville, where the Court prohibited a state from levying its cigarette taxes on member-Indians but not on non-members, the legal incidence fell on the Indian purchaser, thus violating the Chickasaw doctrine.

Maybe we should not be too critical of the failure to let legal incidence control in the cigarette cases. As state tax lawyers fully appreciate, legal incidence is a formal concept, divorced of economic significance, which is why Complete Auto rejected it. The charm of a legal incidence test, according to Chickasaw, is predictability and certainty. But Prairie Band Potawatomi Nation demonstrates that legal incidence is not always easily determinable, which undercuts its extolled benefits. Moreover, like most formalisms, a state can usually re-draft a statute to shift the legal incidence from a tribe or an Indian to non-Indians. Oklahoma did exactly that after losing Chickasaw, and Kansas did the same thing with respect to the tax at issue in Prairie Band. In the case of a state sales tax on reservation purchases, the Indian Trader statutes would likely immunize the Indian consumer, notwithstanding that the legal incidence is imposed on a non-Indian vendor. This is the lesson of Warren Trading and Central Machinery, where the tax was imposed on the vendor but nonetheless struck down under the Indian Trader statutes. Furthermore, unlike the unprincipled distinction drawn in Colville, the Indian Trader statutes do not distinguish between member and non-member Indians, only between Indians and non-Indians. And they do not apply to “full blooded” Indians at all, a point lost in all the cases. The Indian Trader statutes should have protected the non-member Indians in Colville and the “full blooded” exception should have applied in Moe.

The protection extended by the Indian Trader statutes is limited. Reflecting the era in which they were drafted, such statutes are limited to the sale of property and do not cover services, although a regulation issued by the Bureau of Indian Affairs interprets the statutes to cover services.

At the other end of the continuum is Mescalero, which dealt with purely off-reservation activities. Indians or tribes conducting an off-reservation transaction seem to receive no special protection from state taxation (unless a statute provides otherwise). An Indian who buys and consumes a good off-reservation is subject to a state sales tax like anyone else. Indeed, the sales tax applies even if the Indian brings the good onto the reservation or has it shipped there. Finally, Prairie Band Potawatomi illustrates that a tax on the off-reservation activities of non-Indians receives no special consideration even if the economic incidence of that tax falls on reservation activities.

As we move away from either of the polar points on the continuum, things get murkier, especially when a transaction occurs on a reservation and involves Indians and non-Indians. A treaty, federal statute, or state enabling act can preempt a state tax under these circumstances. In a preemption analysis, the Court’s mission should be to determine the scope of federal law by discerning the intent of Congress. The Court can take into account a state’s interests in inferring Congressional intent.

From the perspective of the Indians, a preemption analysis contains an undesirable tradeoff. The more Congress relaxes its control over the Indians to encourage their self-government and economic development, the less likely there will be a federal statute that can be used to preempt a state tax.

The Court has also applied a flexible preemption approach, tantamount to a balancing test, to determine when a state tax is valid. In a balancing test, the Court is not trying to identify Congressional intent but instead is substituting its own evaluation of how the competing interests — a state on one side, and the federal government and the Indians on the other — should be accommodated. A preemption test is grounded on the Supremacy Clause; the Constitutional roots of a balancing test are less easily identified.

One of the critical questions in a balancing test is the weight that should be placed on the economic effects of a state tax on the Indians. In Moe and Colville, the Court was willing to accept the near destruction of a tribe’s retail cigarette sector, apparently because the Indians were characterized as “marketing an exemption.” From the perspective of the Indians, however, they were simply engaged in using a tax incentive the way other jurisdictions routinely do.

Moe, Colville, and Cotton indicate the Court has a high tolerance for state taxes that severely impact activities on a reservation. If these cases can be gently shunted aside, perhaps by limiting Moe and Colville to tax avoidance situations, as well as failure of proof cases (which could also describe Cotton), the tribes would have much more latitude to argue about the economic consequences of a state tax. The fear is that many cases would end up with a battle of expert witnesses with the de rigueur printouts, charts, and PowerPoint presentations.

As part of its balancing inquiry, the Court will also take into account the nature and extent of the services provided by a state on the reservation. Because services come in so many sizes and shapes, and can benefit a reservation even if provided off-reservation, conceptually this inquiry is bankrupt. Nonetheless, it seems to have a certain emotional appeal for the Court.

What should carry no weight in a balancing inquiry is a state’s interest in raising revenue. Almost every tax is intended to raise revenue. Placing too much emphasis on the state’s revenue interests will skew the balancing in every case. Moreover, the amount of tax at stake will typically be a de minimis percentage of the state’s budget. But for the Indians, the consequences of a state tax could be significant.

As part of the arguments about the economic effect of state taxes, litigants sometimes request that the Court grant relief for double taxation, that is, relief from the simultaneous imposition of a tribal and state tax on the same transaction. The Court has been relatively indifferent to issues of double taxation. In Colville, the Court accepted the imposition of tribal and state cigarette taxes without any kind of relief. Cotton accepted the same double taxation involving tribal and state severance taxes. The Tribe, however, was not a party in Cotton and was forced to make its case through amicus briefs. Cotton can thus be viewed as a failure of proof case. With better facts about the harmful effects of double taxation, the Court might be amenable to granting relief.

Only Justice Stewart in Colville seemed willing to relieve double taxation through a credit for a tribal tax. Ironically, a credit under the facts of Colville would have accomplished little because the Indians would still not have had the advantage of selling cigarettes free of the Washington tax. In Cotton, where a credit for the tribal severance tax would have been significant, Stewart was silent.

Keywords: Indian Commerce Clause, Native American, Tribe, Indian, State Tax, Constitution, Infringement, Preemption, Article III, Articles of Confederation, Constitutional Convention, Judiciary Act of 1789, Section 465, Indian Reorganization Act

JEL Classification: K34, H77