Tomorrow’s Arguments: Wagnon v. Prairie Band Potawatomi Nation

By Amy Howe
on Oct 2, 2005 at 8:37 pm

Note: This post was authored by Julia Lipez, a third-year law student at Stanford.

The second case to be argued tomorrow is Wagnon v. Prairie Band Potawatomi Nation, No. 04-631, which pits the sovereign interests of the state of Kansas against those of a federally recognized Indian Tribe, and implicates federal interests under the Indian Commerce Clause. The case presents the question whether a Kansas state tax that is “imposed on the use, sale, or delivery” of motor fuel may be imposed on a motor fuel that a non-Indian, off-reservation distributor delivers and sells directly to an Indian Tribe at its on-reservation service station.

Former Solicitor General Theodore Olson will argue on behalf of the State of Kansas. Jenner & Block’s Ian Gershengorn will argue for the Tribe. Deputy Solicitor General Edwin Kneedler will argue on behalf of the United States.

The parties’ briefs are available here.

Respondent Prairie Band Potawatomi Nation is a federally recognized Indian Tribe that resides on a 121-square-mile reservation in Jackson County, a remote county in northeast Kansas that has a population of approximately 13,000 people. The Tribe owns and operates a casino and uses the casino revenues principally to fund tribal government programs and promote tribal economic development. Adjacent to the casino is a full-service gas station. The station purchases fuel wholesale from Davies Oil Company, a non-Indian distributor located off-reservation, which delivers fuel directly to the station. The State of Kansas imposes a fuel tax on the distributor and uses the revenue to fund construction and maintenance of public roads in Kansas. The structure of the statute places the legal incidence of the tax on the fuel distributor, but permits the distributor to pass the tax directly to the fuel retailers.

The Tribe sells the fuel it purchases at fair market prices. Therefore, it cannot and does not advertise an exemption from state fuel taxes. The Tribe also imposes a tax on fuel sales at the station. The station provides the Tribe with its sole source of fuel revenue, which amounts to about $300,000 in tribal fuel taxes each year. Pursuant to the Tribe’s Motor Fuel Tax law, this fuel revenue is used for constructing and maintaining roads located on or near the Reservation. This includes maintenance on the road connecting the nearby United States Highway to the Tribe’s casino. Kansas does not provide the Tribe with financial assistance to maintain this stretch of roadway.

The Tribe sued in federal district court, seeking to enjoin Kansas from collecting its tax on fuel delivered to the on-reservation station. The Tribe argued that federal law preempted the state tax and that the tax infringed upon the Tribe’s sovereign power to impose its own taxes. The district court granted Kansas’s request for summary judgment. In so doing, that court considered the “legal incidence” of the tax – put another way, who was required to pay it. The district court found that the legal incidence of the Kansas tax falls upon the distributor and not the Tribe, and that under the Supreme Court’s 1995 decision in Oklahoma Tax Commission v. Chickasaw Nation, there is no categorical bar to enforcement of the tax if the legal incidence of the tax falls upon non-Indians.

The Tenth Circuit reversed on appeal. While the court of appeals agreed with the district court that the legal incidence of the tax was placed on non-Indian distributors, it relied on a balancing test (following the Supreme Court’s decisions in Chickasaw Nation and White Mountain Apache Tribe v. Bracker) that considers federal, tribal, and state interests to determine whether federal law preempts state taxes. The balance of interests weighed in favor of the Tribe, the court reasoned, because the Kansas tax would essentially nullify the Tribe’s tax. The Tribe had an overriding interest in its tax because its “fuel revenues are derived from value generated primarily on its reservation . . . [and] its fuel marketing is integral and essential to the gaming opportunity the Nation provides.” Furthermore, the court of appeals found that the Tribe had a strong interest in its need to raise fuel revenue to construct and maintain reservation roads, which is aligned with the federal government’s interest in promoting “tribal economic development, tribal self-sufficiency, and strong tribal government.” The state, in contrast, only had a generalized interest in raising revenue, which the court reasoned was insufficient to uphold enforcement of the tax.

Kansas claims that the court of appeals was incorrect in applying the Bracker balancing test to the case at bar. Instead, the state argues, courts should apply a balancing test to state-tribal disputes only when a state attempts to exert its authority on-reservation to tax the activities of non-members engaged in an economic relationship with the Tribe. Because the law at issue is a non-discriminatory law administered off-reservation, the state contends that traditional preemption standards control and it is free to apply its tax unless Congress has by express statement provided otherwise. In the alternative, the state argues that if Bracker is indeed applicable to the case at issue, then the Court should take the opportunity to overrule that decision because the balance-of-interests test has proved “unworkable” in this context. The state claims that the test runs contrary to the interest of states in setting their tax policy, as “tax administration requires predictability.” The ad hoc nature of the Bracker test has “shown itself ill-fitted to coherent, reasonably predictable decision-making” and can make it difficult for business owners to generate reasonable expectations based on the amount of tax that they might owe. Finally, the state claims that even if Bracker is controlling in this case and even if the Court declines to abandon the balancing test, the court of appeals still failed to properly apply the test. The state contends that the court of appeals placed too much weight on the Tribe’s economic interest generated by the gas station and the adjacent casino, and not enough weight on the state’s interest in generating revenue to construct and maintain its highway and road system – which, petitioner notes, provides the only means by which non-Indian casino patrons can access the reservation.

Ultimately, the dispute seems to center on a framing issue. The Tribe contends that the court of appeals was correct in applying the Bracker test. Kansas has not simply placed a non-discriminatory tax on an off-reservation non-Indian distributor; rather, the state tax has “the practical effect of nullifying the tribal tax and eliminating all of the Tribe’s fuel tax revenue.” Thus, under the Tribe’s construction, the dispute is not about a state’s sovereign ability to impose taxes, but rather centers on the competing interests of two legitimate sovereigns, the state and the Tribe. In that case, the Tribe asserts, application of a balancing test is the only legitimate way to resolve the dispute. The Tribe then contends that the court of appeals placed the appropriate amount of weight on its sovereign interest in imposing taxes to maintain infrastructure and foster economic development on the reservation. The Tribe also claims that the Tenth Circuit’s holding is correct based on the “independent, but related” ground that the state tax infringes on the right, previously recognized by the Supreme Court in Bracker and other cases, of reservation Indians “to make their own laws and be ruled by them.” Finally, the Tribe claims that federal interests in encouraging Tribes to use their sovereignty to impose taxes and maintain reservation roads, as outlined in a number of federal regulations supporting the use of fuel taxes by Tribes to generate revenue for road repair, weigh in favor of invalidating Kansas’s tax.

The United States has filed a brief as amicus curiae in support of the Tribe, supporting the contention that federal interests weigh in favor of invalidating the tax. The Solicitor General urges the Court to reject the State’s “extraordinary” suggestion that the Court should abandon its longstanding balancing test. The Solicitor General also argues that application of the balancing test might not be necessary in this case because the “legal incidence” of Kansas’s tax in effect falls on the Tribe, and not on the non-Indian distributor. Thus, under the Supreme Court’s decision in Chickasaw, a state cannot impose the “legal incidence” of an excise tax on an Indian Tribe. Here, too, we see a framing dispute, as the parties disagree about the nature of the tax and how it should be viewed by the courts.

No matter how the dispute is framed, the most interesting issues in the case ultimately revolve around the balance between the competing sovereign interests of the state of Kansas and the Prairie Band tribe.