89-0535 - Individual Income









Respondent )



This matter came before the Utah State Tax Commission for a formal hearing on XXXXX. Alan Hennebold, Presiding Officer, heard the matter for and on behalf of the Commission. Present and representing the Petitioner was XXXXX. Present and representing the Respondent was XXXXX, Assistant Utah Attorney General

Based upon the evidence and testimony presented at the hearing, the Tax Commission hereby makes its:


1. The tax in question is individual income tax.

2. The periods in question are tax years XXXXX and XXXXX.

3. The Petitioner is an enrolled member of the XXXXX Indian Tribe. His wife is an enrolled member of the XXXXX Indian Tribe.

4. The Petitioner was employed at the XXXXX at XXXXX, Utah beginning in XXXXX and extending to XXXXX. Both the Petitioner's place of employment and his residence were on the XXXXX and XXXXX of the XXXXX Tribe.

5. At the time the Petitioner commenced his employment at the XXXXX, he was provided a form entitled "Withholding Exemption Certificate", which stated:

For use by Indian employees who live and are employed within an Indian reservation and thereby claim that no Utah State Income Tax liability exist. Based on the decision by the Supreme Court of the United States in McClanahan v. Arizona State Tax Commission, Case No. 71-834 (March 29, 1973).

The Petitioner completed the foregoing form, submitted it to his employer, and as a consequence no state income tax was withheld from his earnings.

6. The Petitioner filed a federal income tax return establishing his federal adjusted gross income at $$$$$$ for XXXXX. He filed no state income tax return for that year.

7. During XXXXX, the Petitioner moved to XXXXX. During the spring of XXXXX, he filed a XXXXX federal income tax return showing adjusted gross income of $$$$$$. He also filed a XXXXX Oregon state income tax return, reporting all his earnings for the year as taxable in Oregon. His Oregon income tax return established a liability of $$$$$, which was satisfied from funds withheld from his salary in Oregon.

8. The Commission's Auditing Division discovered that the Petitioner had resided in Utah during XXXXX and XXXXX and had reported earnings from his Utah employment to the federal government, but had not filed Utah state income tax returns for those years. It therefore calculated Petitioner's state income tax liability for both years from information obtained from his federal returns. The Audit Division assessed tax liability of $$$$$ against Petitioner for XXXXX, together with late filing and late payment penalty of $314.58 and associated interest. The Audit Division assessed tax liability of $$$$$ for XXXXX, together with late filing and late payment penalty of $$$$$ and associated interest.


Utah State income tax is imposed on the state taxable income of every resident individual. (Utah Code Ann. 59-10-104) "Resident individual" is any individual domiciled in this state for any period of time during the taxable year. (Utah Code Ann. 59-10-103(1)(j).) "State taxable income" is defined as federal taxable income, with certain adjustments that do not apply under the facts of this case. (Utah Code Ann. 59-10-112)

The Tax Commission is granted the authority to waive, reduce, or compromise penalties and interest upon a showing of reasonable cause. (Utah Code Ann. 59-1-401(8).)


The first issue before the Tax Commission is whether Petitioner's earnings from the XXXXX at XXXXX are subject to Utah state income tax.

It is undisputed that Petitioner is an enrolled member of an Indian tribe other than the XXXXX Indian Tribe, on whose reservation the XXXXX is located. As a general rule, all income from employment in the state of Utah is subject to state income taxation. No specific exemption exists for income earned from employment on Indian reservations. However, federal law as interpreted by the U.S. Supreme Court in McClanahan, supra, exempts income earned by enrolled members of an Indian tribe on that tribe's reservation.

Under the facts of this case, the foregoing exemption does not apply to the Petitioner's earnings at the XXXXX, because he was not a member of the XXXXX Tribe on whose reservation the XXXXX was located. This conclusion is supported by Washington v. Confederated Tribes of The Colville Indian Reservation, 447 U.S. 134 (1980), holding that Indians working on the reservation of another tribe are not exempt from state taxation. The Commission therefore finds that the Petitioner's income earned during XXXXX and XXXXX from the XXXXX in XXXXX was subject to Utah state income tax.

The available evidence supports the Audit staff's determination of Petitioner's state income tax liability for the XXXXX tax year, since the Petitioner resided in Utah throughout that year and derived all his income from the XXXXX. The Petitioner is therefore liable for tax of $$$$$ for XXXXX. With respect to XXXXX, the evidence establishes that Petitioner was employed and residing in Utah for only a small portion of the year. Most of his income for XXXXX is attributable to Oregon. The Audit Division's determination of tax for XXXXX fails to take that fact into account. The Audit Division is therefore instructed to recompute Petitioner's tax liability for XXXXX by allocating his income between Utah and Oregon.

The final issue before the Tax Commission is whether the Petitioner should be assessed non-filing and non-payment penalties with respect to his XXXXX and 1985 income tax liability. The record establishes that Petitioner relied upon information provided by his employer in concluding that he was exempt from state taxation. Since being notified by the Audit Division of its conclusion that additional tax is due, Petitioner has been cooperative and forthcoming with necessary information. The Commission therefore concludes that reasonable cause exists to waive the non-filing and non-payment penalties assessed against Petitioner. Interest is not waived.

In summary, the Audit Division's determination of tax liability for XXXXX is affirmed. The Audit Division is instructed to recompute Petitioner's tax liability for XXXXX in accordance with this decision. Penalty charges are waived, but interest is not waived. It is so ordered.

DATED this 17th day of September, 1991.


R. H. Hansen Roger O. Tew

Chairman Commissioner

Joe B. Pacheco S. Blaine Willes*

Commissioner Commissioner