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Lawyers Fear Kansas May Win Tax Case

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  • Lawyers Fear Kansas May Win Tax Case

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    Lawyers Fear Kansas May Win Tax Case

    (javascript:PrintWindow();) Posted: October 14, 2005
    by: _Jim Adams_ ( / Indian
    Country Today

    Today's feature article sponsored by _WellPoint, Inc. WellPoint, the
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    (; Analysis

    WASHINGTON - Kansas is a good bet to win its U.S. Supreme Court tax case
    against the Prairie Band Potawatomi, legal observers are saying, after tribal
    lawyers faced a ''difficult'' oral argument before the nine justices in the
    first Indian case before the John Roberts court.

    But the most likely result might not be the ''bright line'' doctrine the
    state was urging as an attack on tribal sovereignty. Instead, the justices will
    probably deepen the mess they've already made in their rulings on state
    taxation of reservation economies.

    The case is the latest in a decade of Kansas attempts to tax motor fuel
    sales on tribal reservations within its boundaries. The 10th Circuit Court of
    Appeals has generally knocked down the state taxes: and the Supreme Court
    refused to intervene until now.

    It was already a bad sign that the Supreme Court took up the case. ''They
    wouldn't grant cert [the writ of certiorari that brings a case before the
    Supreme Court] unless they wanted to reverse the Court of Appeals,'' said Richard
    Guest of the Native American Rights Fund. But things got worse as soon as the
    court opened oral argument Oct. 3.

    Justice David Souter threw the tribal attorney for a loop when he asked
    whether tribal sovereignty was really involved. Setting the tone for the rest of
    the session, he asked whether the state tax affected the reservation at all.
    According to Guest, a courtroom observer, the tribal team hadn't expected the
    argument to go this way and remained off-balance under the sharp barrage of
    questions from the bench.

    The debate veered sharply from the issues in the briefs that the NARF -
    National Congress of American Indians Supreme Court Project had carefully
    coordinated. The series of tribal ''friends of the court'' briefs were defending a
    lower-court trend of balancing interests in deciding whether states could tax
    tribal business. In this case, the 10th Circuit had overturned a state tax
    on the non-Indian distributors of motor fuel, levied even before the gasoline
    reached the pumps of the Prairie Band Potawatomi's Nation Station.

    Kansas, and a consortium of state attorneys general and tax collectors,
    wanted to overturn the balancing test, especially since it was protecting Indian
    interests even off the reservation. They asked for a ''bright line'' test
    that would give them the categorical right to tax all Indian sales to
    non-Indians. (Contrary to widespread political rhetoric and confusing Supreme Court
    precedents, that is not what the Constitution now allows.)

    But instead of reaching these issues, the justices hammered on what is known
    as ''tax incidence.'' The term might sound like a legal and economic
    technicality, but it could become just as dangerous for tribes as the all-out attack
    on sovereignty. It could be even more insidious, in fact, if the Supreme
    Court continues to turn the same blind eye to the states that it showed in its
    courtroom Oct. 3.

    ''Tax incidence'' is best understood as the power to destroy. It describes
    the person who bears the brunt of paying the tax. But there are two kinds of
    incidence. There is legal incidence, meaning the person that the law
    designates to write out the check to the tax collector. And there is economic, or
    effective, incidence, meaning the people who ultimately bear the cost. Economists
    and consumers understand the phenomenon of ''tax shifting.'' If you tax a
    distributor, he will pass on the cost as much as he can, usually by raising the
    price at the cash register.

    When John Marshall wrote his famous line in McCulloch v. Maryland that ''the
    power to tax involves the power to destroy,'' he wasn't talking about legal
    incidence. He had in mind the real economic crunch that comes at the end of
    the line. The basic principle was that one sovereign could not tax another
    sovereign because that power could be used to put that other sovereign out of
    business. This is a bedrock principle of constitutional law - except when it
    comes to Indian tribes.

    In a truly ditzy line of decisions, the Supreme Court has seemed to say it
    will only consider legal incidence when state taxes impinge on tribes. As
    Justice Ruth Bader Ginsburg wrote in Oklahoma Tax Commission v. Chickasaw Nation
    (1995), if a state says it is taxing ''a tribe or tribal members inside a
    reservation, that tax cannot be enforced absent clear Congressional
    authorization.'' But, she continued, the court wouldn't take the ''more venturesome
    approach'' of looking at economic reality.

    ''If we were to make 'economic reality' our guide,'' she went on, ''we might
    be obliged to consider, for example, how completely retailers can pass along
    tax increases without sacrificing sales volume - a complicated matter
    dependent on the characteristics of the market for the relevant product.'' Of
    course, economists and competent tax administrators do this all the time. What
    Ginsburg is saying, in plainspeak, is ''Ooh, these numbers hurt my head.''

    The new chief justice, John Roberts, homed in on the problem, in the one ray
    of hope in the Kansas argument. If the court only looks at what the state
    Legislature says it is taxing - the language of the law - and not its actual
    impact, what is to prevent some ''bright young lawyer'' from designing the law
    to hurt tribes without saying so? The state can say it is only taxing
    distributors or wholesalers, and not the reservation retailer who has to swallow the
    added cost ... or the tribal government that is foreclosed from collecting
    its own taxes by the economic reality that it would price itself out of a

    This is exactly the issue in Kansas, in Rhode Island in the raid on the
    Narragansett smoke shop, and in state tax departments around the country. If the
    Supreme Court continues the train of thought that Justice David Souter
    started, it will intensify the insidious state campaign to destroy tribal
    retailers. The result will be deeper confusion and more violent conflict.
    Don't worry that it's not good enough for anyone else to hear... just sing, sing a song.sigpic

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