Business owners wondering how a recent U.S. Supreme Court ruling could upend sales-tax issues in eastern Oklahoma may get a hint from a grocery store’s legal challenges now under way in state and federal courts.

In McGirt v. Oklahoma, the U.S. Supreme Court held the Muscogee (Creek) Nation’s reservation was never disestablished. While the ruling applied only to Creek land and questions of criminal prosecution under the federal Major Crimes Act, its precedent and basis are expected to result in application to numerous other issues, such as taxation and regulation, and also include the land of four other tribes—the Choctaw, Chickasaw, Cherokee, and Seminole nations—whose combined territory includes most of eastern Oklahoma.

Among the many issues raised by the ruling is how sales tax collections will be handled by non-tribal-owned businesses operating on land now considered part of a reservation.

Warehouse Market operates the Cox Cash Saver Cost Plus in a shopping center at 1701 S. Wood Drive in Okmulgee. The shopping center is located on restricted Indian land within the jurisdiction of the Muscogee (Creek) Nation and leased through a Bureau of Indian Affairs master lease.

Until October 2018, Warehouse Market collected and paid a 10.083-percent sales tax to the Oklahoma Tax Commission (OTC) on sales of items at the store.

But a Sept. 6, 2018 letter from the Muscogee (Creek) Nation, which was forwarded to Warehouse Market, informed Warehouse Market that under its lease, effective October 1, 2018, any retail sales on the property were subject to a 6-percent sales tax, payable to the Muscogee (Creek) Nation Tax Commission.

The Creek letter also stated, “There is no obligation to pay taxes to any city, county, or state agencies as the Muscogee (Creek) Nation Tax Commission is the only authorized taxation agency allowed to assess or collect taxes on restricted land.”

Warehouse Market is now arguing in both state and federal courts that it should not be required to collect taxes for both the state and tribal governments, and has argued imposition of both forms of taxation would effectively deter economic development on tribal lands and undermine efforts at economic independence for affected tribal nations.

In a federal lawsuit filed in November, Warehouse Market, Inc., sought declaratory judgment that the state of Oklahoma is not entitled to tax retail sales at the company’s Okmulgee grocery store.

In its filing, Warehouse Market said that the Oklahoma Tax Commission’s efforts to collect state sales tax on Indian land “frustrates” the goal of economic development of tribal lands “because no business would agree to open a retail store on restricted Indian land that was required to collect double taxes from its customers—six percent for the Nation, and 10.083 percent for the State.”

“The Muscogee (Creek) Nation has a financial interest in the State refraining from taxing sales on Indian land, because the additional State tax that a lessee has to pay makes leasing the property unworkable,” Warehouse Market officials argued.

The company has also pursued its challenge in state court, winning summary judgment against the OTC on Nov. 21, 2019. In its order, the trial court stated, “Defendant Oklahoma Tax Commission is not currently entitled to retail tax proceeds at Plaintiff’s subject matter retail establishment unless and until the legitimate dispute between the Muscogee (Creek) Nation and the Oklahoma Tax Commission as to taxation authority is resolved in another forum or tribunal.”

In the state case, Warehouse Market officials said “the State Tax Commission and the Tribe’s Tax Commission have both warned Warehouse Market that if the matter is not resolved, they could take steps to close the business, adversely affecting Warehouse Market, its employees, and its customers.”

In its appeal of the lower-court ruling in Warehouse Market’s state case, the office of the Oklahoma attorney general described the Warehouse Market case as involving “a non-tribal corporation invoking tribal sovereignty to exempt its grocery store from state taxes.”

“Plaintiff, Warehouse Market, Inc., is a non-tribal corporation that subleases restricted Indian land from another non-tribal corporation who in turn leases that land from an individual tribal member—not the Nation itself,” the state’s brief notes.

The state brief also declares, “Importantly, the U.S. Supreme Court has recognized that dual taxation by state and tribe may occur,” citing a court case that held New Mexico could impose severance taxes on the on-reservation production of oil and gas by non-Indians who were simultaneously subject to the Jicarilla Apache Tribe’s separate severance tax.

While Warehouse Market’s state lawsuit preceded the U.S. Supreme Court’s McGirt ruling and was not prompted by it, the case may still give a glimpse of the complications that will now arise for businesses and state government across much of eastern Oklahoma.

Such potential complications were noted in a report released on Sept. 30 by the Oklahoma Tax Commission that warned the McGirt decision would have “a significant immediate and ongoing fiscal impact.”

That report pointed out that the McGirt ruling “changes the geographic area in which the OTC has jurisdiction to levy and enforce the State’s taxes.”

The Oklahoma Tax Commission report said that tribal and non-tribal businesses operating in reservation areas recreated by the McGirt ruling “are not required to collect taxes” on sales to tribal members, but “are required to collect and remit the appropriate sales taxes from non-tribal members.” However, the commission report warned that “there remains an issue with enforcement against tribal businesses that may successfully claim sovereign immunity.”

The report estimated the Oklahoma government will lose $132.2 million in annual sales tax collections due to tax exemptions for tribal members. It appears that estimate did not account for potential loss of taxes by non-tribal retailers operating on tribal reservation territory, like Warehouse Market, that may now seek tax exemptions.

The commission’s report also stated, “It should be noted that the potential exists for purchasers to be subject to double taxation on sales occurring on tribal land.”

The Tax Commission report declared, “Sales by a non-tribal entity to a non-tribal member are subject to sales tax.” But the report added that, while the state has the right to impose sales taxes on sales to non-tribal members on tribal land, prior court rulings have found the state has little authority to collect those taxes.

The likelihood of major tax and regulatory complications arising from the McGirt decision prompted the Oklahoma Commission on Cooperative Sovereignty to recently endorse a framework that will provide certainty in a wide range of areas, including taxation.

The commission was created by Gov. Kevin Stitt to study the fallout of the McGirt ruling.

In an October report, the sovereignty commission stated, “The burden of current and historic taxes, fees, and other levies established by the commonly elected officials of Oklahoma should be placed on all Oklahoma residents irrespective of race, gender, or affiliation in order to avoid the unequal and inequitable distribution of the costs associated with the common services provided to those residents by the state.”

The report further added that Oklahoma “must provide a level playing field for all businesses to compete and flourish, regardless of where, within the boundaries of the State of Oklahoma, they are located. Only then will we attract and retain businesses in our great state.”