Department of the Interior Sued Over Tax Provision in New Indian Leasing Regulations

Update: Here is the complaint:

Complaint

The Desert Water Agency, based in southern California, has sued the Department of the Interior over the tax provisions in its new Indian leasing regulations.

The Department of the Interior published revised surface leasing regulations in November 2012, after a year-long public notice and comment rulemaking process.  Those regulations govern surface leasing of Indian lands, and include a new provision clarifying the tax status of property and activities under a lease:

§ 162.017 What taxes apply to leases approved under this part?

(a) Subject only to applicable Federal law, permanent improvements on the leased land, without regard to ownership of those improvements, are not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State. Improvements may be subject to taxation by the Indian tribe with jurisdiction.

(b) Subject only to applicable Federal law, activities under a lease conducted on the leased premises are not subject to any fee, tax, assessment, levy, or other charge (e.g., business use, privilege, public utility, excise, gross revenue taxes) imposed by any State or political subdivision of a State. Activities may be subject to taxation by the Indian tribe with jurisdiction.

(c) Subject only to applicable Federal law, the leasehold or possessory interest is not subject to any fee, tax, assessment, levy, or other charge imposed by any State or political subdivision of a State. Leasehold or possessory interests may be subject to taxation by the Indian tribe with jurisdiction.

In its complaint, the Desert Water Agency is challenging the application of this provision to the fees it assesses to water users/lessees on tribal lands (particularly the Agua Caliente Reservation) in southern California.  It asserts that its taxes are not preempted by federal law, and that the new regulation either does not apply or is arbitrary and capricious.

As part of its claim, the Desert Water Agency asserts that Congress has expressly permitted state and local government to levy such taxes on Executive Order reservations (like Agua Caliente’s) through 25 U.S.C. Section 398c. (It also asserts that its taxes are permitted under the traditional Bracker balancing test).

The Desert Water Agency’s reliance on 398c is curious, because that provision was included in 1927 legislation that Congress enacted to address Indian mineral leasing.

As most Indian law practitioners know, the federal Indian surface estate and the Indian mineral estate are governed under separate legal regimes.  The Department of the Interior’s leasing regulations expressly apply to surface leasing under 25 U.S.C. Section 415 and related statutes.  They are inapplicable to mineral leases on Indian lands (in fact, 398c is not even listed as authority for the regulations).

Either the Desert Water Agency’s attorneys are unaware of this key distinction in Indian law, or they are deliberately misrepresenting 25 U.S.C. 398c.  Given the history of Indian law, either is possible – though I’m not sure that either is a good position to be in.

The Desert Water Agency has also claimed that it was unaware of the rule change until it had already gone into effect on January 2013.  I  find these types of claims particularly weak, given the fact that Indian leasing reform was a signature initiative of the Department of the Interior in President Obama’s first term.  The President himself announced the proposed change at the 2011 Tribal Nations Conference, and it was published in the Federal Register through the traditional public notice and comment rulemaking process with a version of the tax provision included.  The BIA even hosted a tribal consultation session in January 2012 at the publicly-owned Palm Springs Convention Center in the Desert Water Agency’s backyard.

Challenges to the tax provisions of the new leasing regulations were inevitable, especially considering the stakes involved.  The fact that it has only taken several months for this type of suit to arise speaks to those stakes.  It will be interesting to watch this case unfold.