Law & Principles

Court cases show Oklahoma has enforcement power over tribes

June 27, 2023

Ray Carter

When members of the Oklahoma Senate convened this week to vote on overriding Gov. Kevin Stitt’s veto of a state-tribal compact drafted by the Legislature on tobacco taxes, lawmakers were effectively told they had only two choices.

They could vote to override Stitt’s veto and pay tens of millions of tax dollars to a relatively small group of tribal government officials, even though there is little justification to pay most of that money and little meaningful service rendered by the tribe in exchange. Or they could sustain Stitt’s veto, let current compacts expire, and watch tribal officials engage in widespread, black-market style activity that would cost Oklahoma taxpayers even more money.

Senators were told there was no scenario in which the state could collect all tobacco taxes it is owed—those generated by tobacco sales to non-Indians—because the state cannot sue a tribal government.

In a set of talking points provided to senators prior to the override vote, obtained by the Oklahoma Council of Public Affairs, senators were told, “Tribes, like all sovereigns, are immune from suit, and that immunity controls unless the Tribe consents or Congress grants a State specific power. States—including Oklahoma—simply cannot subject (or) impose its tax laws on a Tribe.”

But court decisions show otherwise, with courts ruling that Oklahoma state government can enforce its tax laws even when dealing with tribal actors who are breaking state law.

Those cases stretch back to the U.S. Supreme Court’s 1991 ruling in Oklahoma Tax Commission v. Potawatomi Tribe, which held that a state government “is free to collect taxes” on tribal tobacco “sales to nonmembers of the tribe.”

The court ruled that “the Tribe’s sovereign immunity does not deprive Oklahoma of the authority to tax cigarette sales to nonmembers of the Tribe at the Tribe’s store, and the Tribe has an obligation to assist in the collection of validly imposed state taxes on such sales.”

Courts have also upheld the right of state governments to impose enforcement actions on tribal actors that are violating state law regarding the collection of tobacco taxes on sales to non-Indians.

In Muscogee Creek Nation v. Oklahoma Tax Commission, the United States Court of Appeals for the 10th Circuit declared in 2010 that the Muscogee (Creek) Nation “cannot seriously argue that the Indian Commerce Clause, of its own force, automatically bars or preempts a state from enforcing its tax laws outside Indian country, even if such enforcement significantly touches the political and economic interests of MCN.”

In that case, state officials believed Muscogee (Creek) Nation outlets were supplying off-reservation Oklahoma smoke shops with unstamped (untaxed) cigarettes, evading state tax law.

The Oklahoma Tax Commission directed the state highway patrol to stop Muscogee (Creek) Nation vehicles on public thoroughfares outside the tribe’s trust lands and inspect them. Following inspection and search of the vehicles, Oklahoma Tax Commission agents were summoned to seize any illegal, untaxed cigarettes that did not bear the tax stamp affixed when the tax is paid at the wholesale level.

In just two stops, the Oklahoma Tax Commission seized unstamped cigarettes worth an estimated $107,000.

The Muscogee (Creek) Nation sued the state in response, but a district court sided with the state as did the U.S. Court of Appeals for the 10th Circuit upon appeal.

In their complaint, the Muscogee (Creek) Nation leadership claimed that they enjoyed a blanket exemption from Oklahoma’s cigarette tax enforcement, claiming that “[t]obacco products being moved between the Nation’s Indian country are not subject to state taxation nor properly considered as ‘contraband.’” The tribe’s leaders also claimed that the Oklahoma Tax Commission’s enforcement efforts violated the Muscogee (Creek) Nation’s “sovereign immunity and impermissibly burdens Indian commerce in violation of the Constitution.”

But those arguments were rejected.

“Although the cigarettes in transit are as yet exempt from state taxation, they are not immune from seizure when the Tribes, as here, have refused to fulfill collection and remittance obligations which the State has validly imposed,” the 10th Circuit decision stated.

Similarly, in a 2012 ruling in Muscogee Nation v. Pruitt, the United States Court of Appeals for the 10th Circuit noted that the U.S. Supreme Court “has repeatedly found that the preemption and infringement barriers do not prevent the state from taxing non-Indians in Indian country so long as the tax imposes only minimal burdens on the Indians.”

That case also centered on a dispute between the state of Oklahoma and the Muscogee (Creek) Nation, which did not have a state-tribal compact on tobacco taxes at that time.

The Muscogee (Creek) Nation operated a tobacco wholesale business that marketed and sold tobacco products to tribally licensed retailers. The tribe’s wholesaler was not licensed by the Oklahoma Tax Commission and was distributing untaxed cigarettes to retailers.

“MCN complains that the State’s practice of enforcing the Excise Tax Statute by seizing cigarettes outside Indian country that do not have a tax or tax-free stamp infringes on its tribal sovereignty,” the 10th Circuit decision stated. “The Supreme Court again instructs us otherwise. Such seizures are permissible, especially when, as here, a tribe fails to cooperate and collect valid state taxes on sales of cigarettes to non-tribal members on Indian country.”

Under SB 26X, the state of Oklahoma and various tribes could enter into one-year tobacco compacts that duplicate language in expiring compacts. Gov. Kevin Stitt vetoed the legislation, saying the compacts need to be updated to ensure they apply only to tribal sales on land held in trust for American Indian tribes. While that has been the practice for years, a 2020 ruling from the U.S. Supreme Court may open the door for Oklahoma tribes to claim the tobacco compacts apply to sales across as much as 42 percent of the state, a change that could result in millions of dollars in tobacco-tax collections being diverted from state government to tribal officials.

During debate, supporters of SB 26X warned that tribes may begin pursuing black-market style activity like that engaged in by the Muscogee (Creek) Nation that generated the aforementioned court cases. One lawmaker said that without new compacts, tribal outlets will be “under no obligation to buy from these wholesalers that we already collect the tax at a wholesale level.”

Some state lawmakers have objected to the idea of the state using its enforcement powers to force tribes to comply with both state law and existing court rulings that require the tribes to collect tax on sales to non-Indian customers.

For example, House Democratic Leader Cyndi Munson of Oklahoma City declared the state could face “expensive lawsuits dragging on for years.”

However, the amount of money the state spends on enforcement efforts and defending against lawsuits would likely pale in comparison to the amount of tax revenue the state could lose otherwise.

Under federal law, Oklahoma cannot require tribal shops to collect tobacco taxes on sales to tribal members (who represent between 10 percent and 15 percent of the total population) but can require tax payments on sales to the remainder of a tribal smoke shop’s customers.

Senate leadership has indicated that roughly $114 million in tobacco tax revenue is generated by sales through tribal outlets. Based on the share of the population who may be American Indian, perhaps $17.1 million in tax collections would need to be rebated to tribal entities due to the tax exemption for those individuals, although the true amount may be much lower since a substantial share of sales occur in tribal casinos located on interstates that draw customers from outside Oklahoma.

However, under existing compacts, tribal entities are receiving far more than $17.1 million, and instead receive $57 million annually (half the total tax collected), based on comments made by Senate leadership on the Senate floor.

The extra $39.9 million is, in essence, a payoff so tribal entities will not engage in black-market style sales and is also in return for tribal entities agreeing to spend a portion of the money on causes favored by state officials.