Aggressively promoted investment schemes that purport to convey tax benefits are nothing new. They hurt individual taxpayers and the tax system, increasing the government’s enforcement costs and lost revenue.
Indian country unfortunately isn’t immune to fraudulent and abusive schemes. These arrangements—which seek to exploit lack of understanding of federal tax law as it applies in Indian country—undermine tribal sovereignty.
Since Europeans arrived in the Americas, tribes have been recognized as “distinct, independent political communities.” A core tenet of tribal sovereignty is the legitimacy of a tribe’s ability to self-govern. Since the late 1960s, prevailing policy in Indian country has focused on tribal self-determination and self-governance, which rests on the notion that tribal governments have inherent sovereign powers.
The recent promotion of “sovereign tax credits” delegitimizes this sovereignty. The name is deceptive and misleading, as no such credits exist under the federal tax code. The schemes prey on lack of awareness and understanding of tribal governments as sovereign entities, the political status of individual American Indian tribal members, and the complex taxation rules within Indian country.
As tribal governments continue to shape economic development activities in their communities, certainty in tax consequences is vital to success. Tribes and tribal enterprises can benefit from federal tax incentives, such as new markets tax credits and tax credits available for clean energy development.
Tribes may not be able to participate in such programs without outside investment. Willing investors—commonly private equity—want to know the tax implications of joint ventures. Proposed regulations issued last year would help clarify the federal tax treatment of some types of tribal enterprises, though I’ve argued they don’t go far enough.
The proposed Tribal Tax and Investment Reform Act, which would treat tribes like state governments for some federal tax purposes, is a step in the right direction. Like the proposed regulations, the bill would increase clarity if enacted. It also may help simplify some complexities with respect to taxation in Indian country.
The problems aren’t limited to lack of certainty with federal tax rules. One of the most pressing challenges for tribal economic development is a tribe’s limited ability to create a sustainable tax base within its own territory. This is exacerbated by uncertainty regarding the scope of state and local taxing authority in Indian country.
When both the tribe and state government assert taxing authority in Indian country, it creates a problem of double taxation. Tribes often are forced to choose between tax revenue and the business activity itself. The scope of state authority to tax transactions in Indian country often leads to litigation.
Many of those cases have gone to the US Supreme Court, resulting in “one of the most complex and unpredictable legal issues tribes and states continue to face today.” Solving it would require an untangling of Supreme Court jurisprudence and a multistate approach.
Sovereign tax credits are more than a symptom of the tax uncertainty problem. These tax schemes also play into pernicious stereotypes that tribal governments and individual American Indian tribal members receive preferential treatment from the federal government.
History is replete with examples in which the unique status of tribes and individual American Indians has been used to exploit any perceived benefit given to tribes and their people. These instances extend far beyond tax benefits.
For example, some artists falsely claimed to be members of a tribe to satisfy market demand for authentic American Indian art. Congress responded by passing the Indian Arts and Crafts Act of 1990. That law created uniform national standards to protect American Indian artists and craftspeople from counterfeit producers and consumers from false claims of authenticity—and to preserve American Indian art as an aspect of cultural heritage.
A similar example is the ceremonial use of peyote by indigenous people, which federal law allows. Non-Native people have co-opted peyote in ways that contradict the sanctity of that use.
Exploitation of the unique status of tribes and individual American Indians corrodes sovereignty. It relies on token terms or concepts without understanding the broader historical and legal significance, often at the expense of tribes or indigenous communities.
Sovereign tax credits are one of many tax schemes that are too good to be true. Hopefully, the tax system will work to minimize their impact.
IRS enforcement against these schemes will result in asserting the unpaid tax, penalties, and interest. But addressing general misunderstanding of tribes and tribal members’ unique status will require a broader cultural shift.
This article does not necessarily reflect the opinion of Bloomberg Industry Group, Inc., the publisher of Bloomberg Law and Bloomberg Tax, or its owners.
Author Information
Pippa Browde is a professor at the University of Montana School of Law, where she researches and writes about all things tax in Indian country.
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