California BOE Proposes to Amend Regulation on Sales Tax on Indian Tribes’ Property

The California State Board of Equalization (BOE) has propos­ed to amend Regulation 1616, Federal Areas, to clarify the additional circumstances under which sales of tangible personal property to and the use of tangible personal property by the governments of federally-recognized Indian tribes are exempt from California sales and use tax under Revenue and Taxation Code (RTC) section 6352.

The proposed amendments add new subdivision (d)(4)(G) to Regulation 1616 to implement, interpret, and make specific the provisions of RTC section 6352 by further prescribing the circumstances under which a sale of tangible personal property to and the storage, use, or other consumption of tangible personal property by the tribal government of an Indian tribe that is officially recognized by the United States is exempt from sales and use tax because the tax is preempted by federal law.

In its current form, RTC section 6352 exempts the sale and the storage, use, or other consumption of tangible personal property from sales and use tax when California is prohibited from taxing the sale or use of tangible personal property under federal law, including the United States Constitution.

In 1831, Chief Justice Marshall recognized that Indian tribes, which are officially recognized by the government of the United States, are independent nations that retain inherent rights to self-government. (Cherokee Nation v. Georgia (1831) 30 U.S. 1, 16.) Justice Marshall also recognized that article 1, section 8, clause 3 of the United States Constitution reserves to the United States Government the exclusive authority to regulate commerce with the Indian tribes. (Id. at p. 18.)

Subsequent United States Supreme Court opinions further explained that federally-recognized Indian tribes “retain ‘attributes of sovereignty over both their members and their territory’” (White Mountain Apache Tribe v. Bracker (1980) 448 U.S. 136, 142 [quoting from United States v. Mazurie (1975) 419 U.S. 544, 557]), “as a separate people, with the power of regulating their internal and social relations, and thus far [are] not brought under the laws” of the United States or the states in which the tribes reside. (Bracker, 448 U.S. at p. 142 [quoting from McClanahan v. Arizona State Tax Commission (1973) 411 U.S. 164, 173, which was quoting from United States v. Kagama (1886) 118 U.S. 375].)

In 1978, subdivision (d) was added to Regulation 1616 to prescribe the circumstances under which the sale and use of tangible personal property on an Indian reservation are exempt from sales and use tax under RTC section 6352 because the tax is preempted by federal law. Subdivision (d) is based upon United States Supreme Court cases regarding the federal preemption of the states’ authority to tax federally-recognized Indian tribes and their members, which have held that the application of state sales and use tax is preempted with regard to the sale and use of property on Indian reservations if the legal incidence of the tax falls on a tribe or tribal members. Regulation 1616, subdivision (d), is still consistent with United States Supreme Court opinions preempting California sales and use tax when the tax unlawfully infringes upon federally-recognized Inidan tribes’ sovereignty over their reservations. (See, e.g., Wagnon v. Prairie Band of Potawatomi Nation (2005) 546 U.S. 95, 101-102.)

Pursuant to the current provisions of Regulation 1616, subdivision (d)(4)(A) and (E), sales tax will not apply to the sale of tangible personal property to an Indian if the property is delivered to the Indian and ownership of the property transfers to the Indian on a reservation, and use tax will not apply to tangible personal property delivered to an Indian on a reservation unless the property is used off a reservation more than it is used on a reservation during the first 12 months following delivery. The federal preemption recognized by the current provisions of Regulation 1616, subdivision (d), allows the government of a federally-recognized Indian tribe to purchase tangible personal property for use in tribal self-governance without being subject to California sales and use tax if the property is delivered to the tribal government on its tribe’s reservation and the property is used on the reservation more than it is used off reservation during the first 12 months following delivery. The current provisions of Regulation 1616, subdivision (d), do not address situations where California sales and use tax is preempted by federal law because the tax unlawfully infringes on federally-recognized Indian tribes’ sovereignty over their members.

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