Proposition 70 s Tax on Indian Gaming Open to Challenge

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Duane Potter
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Proposition 70 s Tax on Indian Gaming Open to Challenge Tax Provision Could Be Invalidated Leaving 99-Year Monopoly, Expanded Gaming and Unlimited Expansion Without Revenues to the State or Taxpayer

1 Proposition 70 s Tax on Indian Gaming Open to Challenge Tax Provision Could Be Invalidated Leaving 99-Year Monopoly, Expanded Gaming and Unlimited Expansion Without Revenues to the State or Taxpayer Protection In reviewing Proposition 70 s proposed charge on Indian gaming activities, we have concluded that the initiative is drafted in such a way as to leave open the possibility that the charge is challenged in Court as an unconstitutional tax on Indian tribes. The initiative has been placed on the ballot and is being heavily promoted by a few California Indian gaming interests. However, the initiative is a legislative act much as if it were passed by the legislature itself. The imposition of a charge or tax - this take or leave it sort of approach - is susceptible to challenge because States are prohibited from imposing such demands. If these charges are successfully challenged as unconstitutional or otherwise ruled to violate federal law, the initiative itself provides a mechanism whereby the Courts can and must severe the offending provisions and effectuate the remainder. If successful, the real taxpayers in California, including local governments, police and fire protection services are the ones stuck paying for and providing the services necessary to support this enterprise while the tribes enjoy a 99-year monopoly for unlimited and virtually unregulated gambling throughout California. When you consider how much money the proponents of Proposition 70 are spending to try and pass this initiative and how much money will be at stake should this unlimited authority for gaming in California pass, it s not unreasonable to conclude the some tribe, whether they supported Proposition 70 or not, will file suit challenging the imposition of this tax. That is a risk, the California Taxpayers Association believes, the people of California cannot afford to take.

2 October 1, 2004 Proposition 70 s Tax on Indian Gaming Open to Challenge We have reviewed Proposition 70 with respect to the question of whether its provisions intending to require payment from Indian casinos that is equivalent to the amount of revenue the State would receive on the same amount of net business income, earned by a private, non-exempt California corporation based upon the then-prevailing general corporate tax rate might be vulnerable to legal challenge as an impermissible tax imposed on the operations of a tribal enterprise. If these corporate tax provisions were found to be preempted by federal ban on taxing Indian tribe casinos and severed from the initiative, the tribes could be rewarded with expanded casino gaming rights and a 99-year franchise on their monopoly operations but not be required to make any payments to the State. Background: Federal law provides that the state imposition of on-reservation taxes of tribes or their members is presumptively invalid. As the United States Supreme Court held in California v. Cabazon Band of Mission Indians (1987) 480 U.S. 202, 215, n.17; We have repeatedly addressed the issue of state taxation of tribes and tribal members and the state, federal, and tribal interest which it implicates. We have recognized that the federal tradition of Indian immunity from state taxation is very strong and that the state interest in taxation is correspondingly weak. Accordingly, it is unnecessary to rebalance these interests in every case. See also, Oklahoma Tax Comm n v. Chickasaw Nation (1995) 515 U.S. 450, 458. Furthermore, the federal Indian Gaming Regulatory Act (25 U.S.C. section 2710(d)(4)) expressly prohibits the states from imposing a tax as a condition for agreeing to a tribal-state compact. There is simply no argument; the states cannot tax tribes and their members. The only question is whether the provisions of Proposition 70 are an impermissible tax. Proposition 70 amends the State Constitution in three key ways: 1 1. Proposition 70 adds subdivision (I) to Article IV, section 19 of the California Constitution, and provides, in relevant part that Any federally recognized Indian tribe requesting to enter into a new or amended compact pursuant to this subdivision shall agree under the terms of the compact to contribute to the state, on a sovereign-to-sovereign basis, a percentage of its net income from gaming activities that is equivalent to the amount of revenue the State would receive on the same amount of net business income earned by a private, non-exempt California corporation based upon the then-prevailing general corporate tax rate under the state Revenue and Taxation Code. This contribution shall be made in consideration for the exclusive right enjoyed by Indian tribes to operate gaming facilities in an economic environment free of competition for slot machines and other forms of Class III casino gaming on non-indian lands in California. The compact shall provide that in the event the Indian tribes lose their exclusive right to - 1 -

3 1) The measure requires that any tribe seeking the terms of Proposition 70 in a tribal-state compact must pay to the State a percentage of its net income from gaming activities that is equivalent to the amount that the State would receive on the net business income of a non-indian business based on the then prevailing general corporate tax rate. Net income from gaming activities is not defined. 2) These payments are deemed to be in consideration for the [tribes ] exclusive right to conduct casino gaming and will cease if gaming is authorized for any non-indian entity. 3) The payment to the State is in lieu of any other state or local tax, fee or levy that might be charged against the tribe. It is our view that a credible argument can be made that Proposition 70 s provisions requiring tribes to make payments to the State could exceed the permissible scope of revenue-sharing agreements permitted by prevailing federal law and the Department of Interior. If the payments are deemed to be a tax, they would be stricken as inconsistent with federal law. Should this happen, the severability clause provided for in Section 6 of the initiative would work to preserve the tribes 99-year monopoly on near unlimited casino gaming in California with no obligation to make any payment to the State or any local government of any kind. Discussion: On August 20, 2004, the Secretary of the Interior approved the five amended compacts singed by Governor Schwarzenegger on June 22 and ratified by the Legislature shortly thereafter. In her letter of approval to the Governor, the Secretary notes that in the over 200 compacts approved by the Department of the Interior, only a few have include tribal payments to States other than for direct expenses to defray the costs of regulating a gaming activity under the compact. She further notes that [t]his is because IGRA prohibits states from imposing a tax, fee, charge or other assessment to engage in Class III gaming. The Secretary goes on to state that the Department has sharply limited the circumstances under which Indian tribes can make direct payments to a State for purposes other than defraying the costs of regulating gaming activities. The only exception is where the payments are in exchange for quantifiable economic benefits over which the State is not required to negotiate, such as substantial exclusive rights to engage in Class III gaming activities. The amount of the payment of the State must be appropriate in light of the exclusivity right conferred on the tribe. In the case of the five re-negotiated compacts, the Secretary found that the payment of the equivalent of a 10% net win (when considering the tribe s obligation to pay for the $1 billion transportation bond and certain other payments) was of sufficient substantial economic benefit to the tribes so as to justify the payment. The Secretary ultimately found that, in the overall context of these compacts, the payments should not be considered a fee, charge, or assessment. operate slot machines and other forms of Class III casino gaming in California, the obligation of the Indian tribe to contribute to the state a portion of its net income from gaming activities pursuant to this subdivision shall case. Contributions made to the State pursuant to this subdivision shall be in lieu of any and all other fees, taxes, or levies that may be charged or imposed, directly or indirectly, by the state, cities, or counties against the Indian tribe on its authorized gaming activities

4 Although the Secretary s opinion is not binding on a court, it will be given deference and the tribes supporting Proposition 70 will undoubtedly argue that paying the state the equivalent of the corporate tax rate of 8.84% on the net income from gaming activities is consistent with the Secretary s approval of their compacts. But there is a critical flaw in this argument. The compacts approved by the Secretary were negotiated between the tribes and the State signifying that the tribes agreed with the revenue-sharing provisions. In contrast, Proposition 70 is a legislative act by the State of California which ties the tribes payments to the state to the Legislature s determination of the corporate tax rate. Moreover, in order to get the 99-year monopoly, they are required to pay 8.84% (or whatever the current corporate tax rate may be) to the State on their net income from gaming activities. Because some of the tribes are sponsoring Proposition 70, it is easy to mistakenly believe that they are proposing a payment to the State. But in strictly legal terms, the enactment of the initiative is a legislative act which sets out the nonnegotiable terms by which tribes must abide in order to achieve their 99-year exclusive franchise. What s more, it is not apparent that all the potential tribes impacted by this initiative are necessarily supportive of its passage. In this context, it s not unreasonable to think that some tribe, whether having supported Proposition 70 or not, could argue that the State s imposition of the corporate tax rate on their net income in exchange for the other provisions of Proposition 70 constitutes a prohibited tax pursuant to the federal Indian Gaming Regulatory Act (25 U.S.C. section 2710(d)(4)). The Ninth Circuit Court of Appeals has opined that, in some instances within the context of negotiations, state may insist on fees from the tribes so long as the State offers something in return. 2 The difference here is that the context is not one of a negotiation, but rather of a legislative act by the people of the State of California setting forth conditions which must be met for a compact to be entered into. There are no negotiations. Under these circumstances, we are concerned that a lawsuit filed by a tribe after Proposition 70 is approved might result in a court invalidating the payment provisions. Section 6 of the proposition sets forth the intent that any provision that is invalidated must be severed from the initiative giving full effect to those remaining provisions not invalidated. The courts will generally sever unconstitutional provisions of an initiative so long as it is grammatically, functionally, and volitionally separable. 3 It could be argued that the 99-year exclusive franchise on casino 2. See In re Indian Gaming Related Cases (9 th Cir. 2003) 331 F.3d 1094, We do not hold that the State could have, without offering anything in return, taken the position that it would conclude a Tribal-State compact with Coyote Valley only if the tribe agreed to pay into the RSTF. Where, as here, however, a State offers meaningful concession in return for fee demands, it does not exercise authority to impose anything. Instead, it exercises its authority to negotiate, which IGRA clearly permits. See S.Rep.No , at 13 (1988), reprinted in 1988 US.C.C.A.N. 3071, 2083 (describing the compacting process as a viable mechanism for setting various matters between two equal sovereigns ). Depending on the nature of both the fees demanded and the concessions offered in return, such demands might, of course, amount to an attempt to impose a fee, and therefore amount to bad faith on the part of a State. If, however, offered concession by a State are real, 2710(d)(4) does not categorically prohibit fee demands. Instead, courts should consider the totality of that State s actions when engaging in the factspecific good-faith inquiry IGRA generally requires. See 25 U.S.C. 2710(d)(7)(B)(iii). (Emphasis in original.) 3. See Calfarm Ins. Co. V. Deukmejian (1989) 48 Cal.3d 805, See also Hotel Employees & Restaurant Employees Internat. Union v. Davis (1999) 21 Cal.4 th 585, 613. [An invalid part] is grammatically separable if it is distinct and separate and, hence, can be removed a as a whole without affecting the wording of any of the measure s other provisions. (Citing Calfarm, supra.) It is - 3 -

5 gaming in Proposition 70 is severable. The question would be whether the payments to the State were of critical importance to the measure s enactment. Indeed, the measure itself provides that the tax provision is, in effect, severable because if nontribal gaming is authorized the obligations to make payments to the State ceases. Given the amount of money at stake should this measure be enacted, it is almost a certainty that one tribe will emerge to invalidate to corporate tax provision. While it is by no means certain what the outcome of that litigation will be, it is important to remember that the Senate Report accompanying the enactment of the Indian Gaming Regulatory Act (IGRA) provides that a court should interpret any ambiguities on these issues in a manner that will be most favorable to tribal interests. 4 Given this command with respect to statutory construction, it is easy to conclude that Proposition 70 is vulnerable in this regard and consequently so are the taxpayers of the State of California. Wm. Gregory Turner General Counsel functionally separable if it si not necessary to the measure s operation and purpose. (Citing Calfarm, supra.) And it is volitionally separable if it was not of critical importance to the measure s enactment. (Citing Calfarm, supra.) 4. S.REP.NO , at p.15 (1988), reprinted in 1988 U.S.C.C.A.N. 3071,

OFFICE OF THE SECRETARY Washington,DC AUG

United States Department OFFICE OF THE SECRETARY Washington,DC 20240 of the Interior Honorable Sherry Treppa Chairperson, Habematolel Porno of Upper Lake 375 E. Hwy. 20, Suite 1 P.O. Box 516 Upper Lake,