An audit letter from the Oklahoma Tax Commission (OTC) eventually led to an arbitration award, affirmed by a federal court, preventing the State of Oklahoma from denying the Citizen Potawatomi Nation the ability to sell and serve alcohol at its compact facilities because the nation refused to collect and remit Oklahoma sales taxes. The arbitration award means the nation does not have to pay millions of dollars in state sales tax on sales made on tribal lands to nontribal members. This victory is another chapter in the long history of tax struggles between the tribes and the State of Oklahoma, and sets a strong precedent for the nation as well as other tribes in Oklahoma and beyond.
The nation initiated arbitration before the American Arbitration Association after the OTC lifted a stay on administrative enforcement proceedings alleging that the nation failed to prove its sales were exempt from Oklahoma’s tax law and seeking to revoke every one of the nation’s sales tax and alcoholic beverage tax permits. Because this included revoking the nation’s tax permits for its Class III gaming facilities, including the Grand Casino and Entertainment Center along Interstate 40, the nation turned to the Tribal-State Model Gaming Compact. The compact contains a dispute resolution provision requiring the tribe and the state to first seek to settle all unresolved disputes by arbitration. This turned out to be a crucial factor because the nation was ultimately denied an evidentiary hearing before the OTC.
The nation prevailed in arbitration based upon the arbitrator conducting a preemption analysis the nation had sought, known as the “Bracker balancing test,” which the OTC had rejected without a hearing. This U.S. Supreme Court test balances federal and tribal interests against the interests of the state in deciding whether a state tax applies to non-Indian activity on Indian land when the legal incidence of the tax falls upon non-Indians. The nation presented evidence and testimony, including expert testimony, that demonstrated the significant federal and tribal interests in the nation’s self-governance, economic self-sufficiency and self-determination and that the nation alone invests value in the goods and services that it sells, does not derive such value through an exemption from state sales taxes, and imposes its own equivalent tribal sales tax on the sales. Additionally, the state made no evidentiary showing of any interest beyond general revenue collection. As a result, the arbitrator held that federal and tribal interests at stake predominate significantly over any possible state interests. Thus, federal law preempted the application of Oklahoma’s state sales tax to the nation’s sales at issue.
This positive outcome is important beyond the bounds of Citizen Potawatomi lands. The arbitrator’s decision, upheld by the federal court, that the Bracker analysis should be applied to the transactions may have value to other tribes in similar circumstances. Other tribes may desire to challenge the application of sales tax laws to their transactions if they are able to establish the predominance of federal and tribal interests in those transactions over any state interests. While it is by no means a certainty, other tribes could potentially advance the argument that the decision involving the nation binds the State of Oklahoma in its disputes with those tribes (i.e., the other tribes may use the nation’s favorable decision offensively as a form of collateral estoppel against the state).
The firm is honored to have represented the Citizen Potawatomi Nation in this precedent-setting arbitration matter. If you would like further information about this case, or want to discuss whether it may apply to your tribe, please contact D. Michael McBride, III, Jimmy K. Goodman, Harvey D. Ellis Jr., or any other member of the Indian Law & Gaming Practice Group.