02-1351
Income Tax
Signed 1/17/03
BEFORE THE UTAH STATE TAX COMMISSION
: Initial
Hearing Decision and Order
: Appeal No. 02-1351
v. :
: Acct. No. #####
Auditing Division of the Utah State :
:
_______________________________________________
Presiding:
Appearances:
For Petitioner: Petitioner, and Representative
For Respondent: Susan Barnum, Assistant Attorney General,
with Dan Engh, Audit Manager
At issue in this case is the question of whether Petitioners’ income earned on an Indian Reservation in Utah is subject to state income tax. This matter was argued in an Initial Hearing held January 9, 2003.
The facts of this case are not in dispute. MR and MRS. PETITIONER are enrolled members of the Apache Tribe and for the tax years at issue here they lived and worked on the Navajo reservation in Utah. They claimed an exemption from Utah State income tax on the theory that income of Native Americans working on Indian Reservations cannot be taxed by the state. Petitioners acknowledge the Tax Commission’s long held position that income of an American Indian is exempt from taxation only if the wage earner is an enrolled member of a Utah tribe and if income is earned on the reservation of the tribe in which the American Indian is enrolled. Petitioners argue, however, that the Commission mistakenly relies on case law issued in consideration of taxes other than income tax. The income tax exemption, according to Petitioners, is eligible for different treatment than sales tax or cigarette tax or other taxes that have come before the courts.
At the foundation of Petitioner’s argument is the United States Supreme Court decision in McClanahan v. Arizona,[1] which outlawed the state income tax on reservation source income of individual member Indians living on the reservation. Petitioner reads that case broadly to mean that the state is precluded from taxing the income of any Indian who lives and works on any reservation.[2] We disagree. Even if the language of the McClanahan case seems broadly drawn with its references to “reservation Indians,” the case itself did not require the court to consider the issue of tribal affiliation. McClanahan and subsequent cases have helped define the rules of taxation with regard to tribes, individual Indians, and their activities on and off the reservation.
For instance, Washington v. Confederated Tribes of Coleville Indian Reservation, 447 U.S. 134 (1980), involved the taxation of cigarette sales on the reservation to non-tribal members. Although not an income tax case, the Confederated Tribes court stated that even the broadest reading of the relevant federal statutes does not preclude from imposing its taxes on Indians who are not members of the reservation’s governing tribe.
Utah has long taken the position that tribal affiliation is a determining factor in the state’s right to tax the income of an American Indian working on a reservation in Utah. That position, along with the underlying reasoning and discussion of supporting case law, has been published in decisions and letter rulings dating back to the 1980’s. To date, no one has successfully challenged that position, and Petitioner provides no persuasive support here to lead the Commission to adopt a different point of view. The Tax Commission’s position is clearly stated in the TC-40 instructions as follows:
Enrolled members of a Native American tribe or nation in Utah, who live and work on the reservation on which they are enrolled, are exempt from Utah income tax on income earned on the reservation.
DECISION