Taxation Issues for The Tribal Indian Gambling
Few topics regarding Indian gambling have generated more controversy and heated dispute than the subject of taxation.
As governmental entities, tribal governments are not subject to federal income taxes. Instead, the Internal Revenue Service classifies tribal governments as non-taxable entities. 103 As Indian casinos are owned and often operated by the tribes, the net revenues from these facilities go directly into the coffers of the tribal governments. Some proponents of Indian gambling argue that these revenues are thus taxed at a rate of 100 percent.
As noted above, IGRA requires that the revenues generated by Indian gambling facilities be used for tribal governmental services and for the economic development of the tribe. To the extent that the revenues are used for these purposes, they are not subject to federal taxes. The major exception concerns per-capita payments of gambling revenues to eligible tribal members. According to IGRA, if any gambling revenues remain after a tribe’s social and economic development needs have been met, and its tribal government operations have been sufficiently funded, then per-capita distributions can be made to eligible tribal members, if approval is granted by the Secretary of the Interior. Individuals receiving this income are then subject to federal income taxes as ordinary income. 104
State income taxes, however, do not apply to Indians who live on reservations and who derive their income from tribal enterprises. State income tax does apply to non-Indians working at Indian casinos, and to Indians living and working off the reservations, as well as to those Indians who live on reservations but who earn their income at non-tribal operations off the reservations.
In general, state and local government taxes do not apply to tribes or tribal members living on reservations. However, many of the state-tribal compacts that have been negotiated contain provisions for payments by the tribes to state governments, which may or may not then allocate some of the proceeds to local governments. These payments most commonly include reimbursement of the state’s share of the costs of regulating tribal gambling facilities or similar types of services. But there are examples in which the state has required payment from tribes merely as a quid pro quo for concluding a compact. For example, in its compact with the Mashantucket Pequots, the state of Connecticut receives 25 percent of the proceeds from slot machines at the Foxwoods casino in return for maintaining the tribe’s monopoly (shared along with the nearby Mohegan Sun casino on the Mohegan reservation) on slot machines in the state. In addition to these mandatory compacts, many tribes have negotiated voluntary agreements with neighboring communities in which compensation is provided for fire protection, ambulance service, and similar functions provided to the tribe.
Tribes in some states have made “voluntary” payments to states in exchange for the exclusive right to conduct casino-type gambling on a large scale when states allow charitable casino nights but not commercial casinos. These “exclusivity payments” are usually based on a percentage of revenues earned from slots or other gambling.
These voluntary payments have created some confusion. Given that the IGRA specifically prohibits imposition of a state tax on an Indian tribe as a condition of signing a tribal gambling compact, the payments at first glance seem to violate this provision. 105 The distinction, however, is that in order for these voluntary payments to be valid, the state must provide additional value that is distinct from the right of a tribe to operate Class III gambling in a state.
103 Internal Revenue Service Revenue Ruling 94-16, 1994-1 C. B. 19, as amplified by Rev. Rul. 94-65, 1994-2 C. B. 14. See also, “Indian Assistance Handbook,” Department of the Treasury, Internal Revenue Service, (1994). 104 25 U. S. C. § 2710( b)( 3)( D). 105 25 U. S. C. § 2710( d)( 4), as follows: “( 4) Except for any assessments that may be agreed to under paragraph (3)( C)( iii) of this subsection, nothing in this section shall be interpreted as conferring upon a State or any of its political subdivisions authority to impose any tax, fee, charge, or other assessment upon an Indian tribe or upon any other person or entity authorized by an Indian tribe to engage in a class III activity.”