“We’re Not in Kansas Anymore”: Wagnon v.

Prairie Band Potawatomi

Nation and the Quandaries of State Taxation in Indian Country

INTRODUCTION: Nearly ten years ago, Kansas sought to apply

its Motor Fuel Tax Act to Indian tribes for the first time,

touching off litigation that only recently concluded with the

United States Supreme Court’s decision in Wagnon v. Prairie Band

Potawatomi Nation. The Potawatomi tribe (“the Nation”)

maintained a gas station to support an on-reservation casino and

charged a tax on fuel sales. The Kansas tax, to be applied

concurrently, would effectively nullify the tribal tax because

simple economics dictated the two were mutually exclusive. The

Court interpreted the relevant statute literally, holding it put

the legal incidence of the tax on non-Indian distributors and

was applied to their first receipt of the fuel, a transaction

that occurred off-reservation. Applying these circumstances to

established law, the Court ruled Kansas was within its sovereign

authority to levy the tax. A dissent argued the incidence of

the tax applied to an on-reservation transaction and fell on

Indian retailers, and advocated the use of a balancing test.

BACKGROUND: For nearly 200 years, Supreme Court

adjudication surrounding tribal-state relations emphasized

concurrent sovereignty, preferring unilateral regulation of the

tribes by the federal government. However, Court decisions over

the last thirty-five years have gradually eroded tribal immunity

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from state regulation, occasionally upholding state taxes that

reach into jurisdictions that are historically Indian.

In certain circumstances the Court allowed states to levy

taxes directly on the tribes or their members. For example, a

New Mexico tax on the gross receipts a tribe earned from an off-

reservation business venture was upheld in Mescalero Apache

Tribe v. Jones. Similarly, in Oklahoma Tax Commission v.

Chickasaw Nation, a state tax on income earned by Indians who

lived off-reservation survived scrutiny. However, California v.

Cabazon Band of Mission Indians prohibited a state from

regulating on-reservation gaming ventures by Indian tribes.

Thus, tribal enterprises and individual members may be subject

to state taxation off the reservation, but are immune therein.

State attempts to tax non-Indians on the reservation proved

more contentious, and the resulting doctrine more opaque. In

general, states may impose taxes in these instances unless (1)

doing so would infringe on the right of Indians to make their

own laws, or (2) the state is preempted by Congress. In White

Mountain Apache Tribe v. Bracker, the Court stated explicit

statutory preemption is unnecessary. In that case, an Arizona

fuel tax was invalidated because a combination of federal and

tribal interests preempted its imposition. Incorporated into

this interest-balancing test was the previously separate notion

that states may not infringe on tribal autonomy.

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 The Court continues to apply the Bracker test in cases

where states seek to tax non-Indian entities operating on tribal

lands. In Washington v. Confederated Tribes of the Colville

Indian Reservation, the Court upheld a state tax on cigarette

purchases by non-Indians at stores located on reservations.

Likewise, a state severance tax on oil drawn by a private

company from reservation land was validated in Cotton Petroleum

Corp. v. New Mexico.

Although the initial motor fuel tax statute was ambiguous,

Kansas altered it sometime in the late 1990s to explicitly place

the incidence on the distributor of first receipt. This appeared

to effectively clear up any misconceptions. In Kaul v. Kansas

Department of Revenue, the Kansas Supreme Court interpreted the

statute as placing the incidence of the tax on non-Indians, and

a federal district court agreed in Winnebago Tribe of Nebraska

v. Kline. But curiously, the Tenth Circuit came to a different

conclusion in Prairie Band Potawatomi Nation v. Richards,

finding federal and tribal interests preempt the tax regardless

of who bears its incidence. This misapplication required

clarification and, thus, the stage was set for Wagnon.

ANALYSIS: The Court’s opinion in Wagnon is premised on the

clarity of the Kansas state legislature’s assignment of the fuel

tax incidence in section 79-3408(c). It also refers to the

Kansas Supreme Court’s interpretation of the statute in Kaul.

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According to Justice Thomas, writing for the majority, because

the Nation does not bear the burden of the tax and because the

tax arises from an off-reservation transaction, it is valid.

In contesting the opinion, the Nation first argues that the

statute actually puts the incidence on Indian retailers. This

is because distributors may pass on the costs incurred by the

tax to retailers at the point of sale. But the Court points out

that distributors must calculate and physically pay the tax, and

are not required to pass on the tax. Alternatively, the Nation

argues the tax actually arises from the on-reservation delivery

of the fuel, which would trigger the Bracker test. In support of

this proposition, the Nation refers to sections 79-3408(a) and

79-3408(d) of the tax statute. Justice Thomas opts for a less

expansive interpretation of those provisions, and relies on

alternatives to distinguish the Nation’s assertion.

Although not essential to the holding, the remainder of the

opinion attempts to clarify the instances in which the

application of the interest-balancing test is appropriate. Three

points are important: (1) the state does not infringe on tribal

sovereignty when, as here, the tax falls on a transaction

occurring off the reservation; (2) the balancing test should not

be applied simply because the state tax interferes with the

tribe’s own ability to tax; and (3) the Nation is not a

territory exempted from the tax by statute.

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 In dissent, Justice Ginsburg argues for the imposition of

the interest-balancing test. She points out that the taxes are

mutually exclusive—although legally both the tribe and the state

may tax the motor fuel, economic reality dictates that the two

taxes together would raise the market price far above the

competition. Thus, if the tax is upheld the incidence will

ultimately fall on the tribe, since it will have to forego the

tax revenue it had previously enjoyed and depended upon to

maintain reservation roads. Accordingly, the tribe can

demonstrate a compelling interest in avoiding the tax, and

Justice Ginsburg argues it should be invalidated.

EVALUATION: The Court’s opinion correctly interprets the

incidence of the motor fuel tax and then applies the appropriate

case law. The best way to demonstrate this is by comparing

alternative treatments of the two overarching issues in Wagnon:

(1) who bears the incidence of the tax, and (2) where

geographically is the tax assessed? If the tax is born by

Indians for sales made on the reservation, it is categorically

barred. If the tax is imposed on non-Indians but occurs on the

reservation, the Bracker test should be applied. If the tax is

born by non-Indians and assessed off-reservation, as the Court

rules, it is valid.

Assessing the first alternative, the tax is not

categorically barred because the incidence does not fall on the

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Nation. (Although the dissent advocates for affirming the

Richards decision to the contrary.) It is certainly true that

the state tax will affect the Nation by negating its ability to

levy its own motor vehicle tax. However, both Justice Ginsburg

and the Tenth Circuit make a logical misstep by equating the

tax’s effect on the Nation with the tax’s imposition on the

Nation. The two are simply not the same, certainly not enough

to allow the Nation to overcome explicit language to the

contrary from section 79-3408(c).

Regarding the second alternative, the Bracker test is not

appropriate because, although the incidence of the tax is on the

non-Indian distributor, it does not arise out of an on-

reservation transaction. The dissent argues the tax is imposed

on the on-reservation fuel sale from distributor to retailer,

based on section 79-3408(d) of the statute, which states the

“who” and “where” of the fuel sale are the criteria for

determining which transactions are tax exempt. As a corollary,

Justice Ginsburg suggests they must also be the criteria for

determining which transactions are taxed. This is a complete

misreading of the statute: section 79-3408(d) denotes when the

tax is not imposed; it is section 79-3408(c) that states the

method in which the tax is imposed. Section 79-3408(d) cannot be

read backward to imply what transactions trigger the tax, and it

need not be: section 79-3408(c) states them explicitly.

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 Even if the Court were to decide the incidence of the tax

occurs on the reservation and applied the Bracker test, it is

not clear the result would be any more favorable for the Nation.

First, both the state and the tribe have an interest in

maintaining the sovereign authority to tax. A finding against

Kansas would prohibit its ability to tax the sale of motor fuel

to distributors in situations where distributors might pass that

tax down to Indian retailers. Alternatively, a finding against

the Nation does not prohibit its ability to tax fuel at all. The

tribe retains the power to levy its own tax concurrent with that

of the state; it simply complains it cannot.

Second, both the state and the tribe have an interest in

obtaining tax revenue. While a finding against Kansas appears

more palatable, especially since the state apparently does not

use the revenue it receives from the motor fuel tax to maintain

the majority of reservation roads, there are a number of

problems with this conclusion. First, it relies on the

assumption that the state tax must be proportional to services

provided by the state, which is not consistent with precedent.

Second, it ignores the fact that Kansas applies a general tax,

the proceeds of which go to finance state projects, some of

which surely benefit the Nation. Finally, it suggests the

Nation will be unable to procure alternative means of finance.

From a policy standpoint, the Court’s decision in Wagnon is

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potentially disastrous for Indian tribes everywhere. Tax

revenues are a valuable source of funding, and tribes who find

their ability to levy taxes impaired by concurrent state taxes

will be forced to find alternative sources of fiscal support for

social services. Although this is certainly an area in need of

attention, the inherent inequities of concurrent taxation are

appropriately the province of Congress, and the Court is right

to sidestep the issue. Furthermore, the tribes have several

options to correct policy deficiencies: (1) they may seek

Congressional legislation that explicitly abrogates taxes like

the one Kansas seeks to apply; (2) they may contract with the

states individually to achieve mutually beneficial results; or

(3) they may rely on alternative business enterprises for tax

exempt revenue, which can be used to fund tribal services.

CONCLUSION: In Wagnon, the Supreme Court correctly read the

operative state statute to determine that the incidence of a

Kansas fuel tax was on non-Indian distributors and assessed off

the reservation. The Court then applied the appropriate

precedent to protect Kansas’s sovereign authority to levy taxes

on transactions within its own borders. The Court’s ruling does

not prohibit the Nation from levying a concurrent fuel tax on

the reservation, and the tribe can mitigate any potential losses

in tax revenue with the tax-exempt profits it earns from its

casino or by seeking a nonjudiciary solution.