State, Local Taxes On Tribal Leases Vulnerable After California Court Order

Steven D. Gordon is a Partner and Kenneth W. "Ken" Parsons is an Associate in our Washington, D.C. office.

HIGHLIGHTS:

A California district court recently issued an order that signals it is likely to invalidate Riverside County's imposition of a possessory interest tax on lessees of trust lands within the reservation of the Agua Caliente Band of Cahuilla Indians. The court analyzed several previous cases, the Bureau of Indian Affairs (BIA) leasing regulations and the Bracker balancing test, which is designed to determine whether the exercise of state authority violates federal law. As a result of the changing landscape, tribes are now in a position to argue that many lease-related state and local taxes are preempted by federal law even if those taxes have been upheld by courts in the past. Indian country may be close to another victory against state and local taxes. On Feb. 8, 2016, a California district court issued an order that signals it is likely to invalidate Riverside County's imposition of a possessory interest tax on lessees of trust lands within the reservation of the Agua Caliente Band of Cahuilla Indians (the Tribe). The case is Agua Caliente Band of Cahuilla Indians v. Riverside County, et al, Case. No. ED-CV-14-007-DMG (C.D. Calif. 2014).

The Dispute

Riverside County assesses a possessory interest tax on the lessees of the Tribe's trust lands. The tax is a general revenue-generation tax, which the Tribe alleges has no direct nexus with services provided by Riverside County to the Tribe or its members.

On Jan. 2, 2014, the Tribe filed a complaint against Riverside County seeking to invalidate the tax. Although Riverside County assesses the possessory interest tax against lessees, the Tribe alleges that the economic burden of the tax falls at least in part on the Tribe and its members. In particular, the Tribe alleges that the levy of the possessory interest tax lowers the lease value of its trust lands and costs the Tribe tax revenue. (The Tribe foregoes the imposition of a tribal tax on lessees of its trust lands in order to prevent double taxation.)

On July 28, 2014, Riverside County filed a motion for judgment on the pleadings. The court denied this motion on Feb. 8, 2016. Although this ruling does not finally decide the case, the court's reasoning indicates that it is likely to invalidate the tax when it does issue a final decision.

The Court's Analysis

Bracker Abrogates Earlier Cases

The court began its analysis by...