"In a unanimous decision, the U.S. Ninth Circuit Court of Appeals has held that a tribe cannot protect non-Indian contractors from state taxation. The decision sends a clear signal to businesses contracting with tribes that they must pay state sales and use taxes, even if all of their work is on Indian land.

It is well established that tribes are exempt from state sales taxes. However, tribes cannot bestow the benefit of their exemption on non-Indian contractors.

The Barona Band of Mission Indians contracted for a $75 million expansion of its casino. The work was to be done under a lump sum contract with a general contractor, who, in turn, awarded subcontracts for various stages of construction. The tribe "touted" to its contractor a method devised by the tribe to "circumvent " sales tax due to the state of California from the project contractor and subcontractors and set out in the construction contract detailed steps necessary for the contractor and the subcontractors to enjoy tax-free construction work. The contractor and subcontractors were designated as "purchasing agents" for the tribe. All materials had to be delivered on tribal land. Material sales reputedly were not complete until delivery to the tribe's property. All shipping orders and delivery receipts had to include language to the effect that sales were not complete until delivery was accepted on tribal land. The contractor and subcontractors were not allowed to pay for materials in advance.

California assessed the project's electrical subcontractor more than $200,000 in sales tax. Acting on its promise to indemnify and defend the contractor against any tax assessment by the state of California, the Tribe sought a judicial determination that the state sales tax was invalid. Reversing the District Court, the Ninth Circuit viewed the "blueprint" devised by the Tribe very critically, characterizing it as causing "theoretical" sales on Indian land and as an attempted "end-run" that would provide a tax shelter for non-Indian businesses."

Get the Story:
Nancy Appleby: Ninth Circuit Nixes Tax Avoidance Strategy (Mondaq 8/19)

9th Circuit Decision:
Barona Band of Mission Indians v. Yee (June 18, 2008)

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Appeals court cites gaming to weaken tribe's sovereignty (6/19)