The fraught relationship between the United States government and Native American tribes has led to recurring conflict and confusion over the issue of taxation. Put simply, Native Americans do pay taxes, but there are some quirks when it comes to the way the tax code treats Native Americans.
Here's what you need to know about how taxes apply to Native American tribes and individuals.
Differentiating Between Tribes and Individuals
The United States tax code distinguishes between the terms “Native American” and “Native American tribe.” Adding the word "tribe" differentiates between an individual and a sovereign entity. As a sovereign entity, a tribe governs itself. It’s effectively an independent nation, even though it's located within the borders of the U.S. federal government.
Native American tribes aren't obligated to pay taxes to the U.S. government, but the same rule doesn't apply to tribe members. When a tribe, as an entity, earns income, that income is not taxable. However, when a tribe distributes those profits among its members, those members may be individually taxed for those distributions.
Native Americans and Federal Income Tax
Native American tribe members have been granted U.S. citizenship since 1924, and as citizens, they must pay taxes on their incomes. There are some exceptions, just as there are for any type of citizen.
For example, Native Americans don’t pay taxes on sources of income that derive from government benefits. This income must represent “general welfare” payments provided for by a governmental program, such as Supplemental Security Income.
However, when payments are made in exchange for services of any kind, they become taxable forms of earned income. Native Americans who have earned income must pay federal income tax.
Native Americans do not receive financial assistance from the federal government based solely on the fact that they are Native Americans. As with any citizen, they receive assistance based on need, such as in instances of physical disability.
How State Sales Taxes Apply
As sovereign nations, tribes have certain protections from state governments, and that includes the imposing of sales taxes. States can't force tribes to collect sales taxes, and tribes can choose to impose their own sales tax (though not all tribes do). As a result, If you purchase goods or services on tribal land, there may or may not be a sales tax.
This enables tribes to sell things like tobacco and gasoline much cheaper than competitors across the tribal territorial line, particularly in states that have significant gasoline and tobacco taxes.
At least one state—New York—has revised its tax code to allow it to levy sales taxes on tobacco products sold on tribal lands. The state can’t impose the tax on tribe members who purchase these products on their own tribal lands, but it takes the position that it can tax non-tribal members who buy tobacco products on these reservations.
Tribal Casinos and State Taxes
The Supreme Court ruled in 1987 that tribes could run gaming establishments on their own lands without interference by state governments. Then, in 1988, the U.S. government passed the Indian Gaming Regulatory Act (IGRA). This act created the National Indian Gaming Commission and charged it with overseeing casino regulations on tribal lands.
These gaming operations are typically owned and operated by their tribes, which do not have to pay federal or state income tax on their revenues, including those generated by gaming.
While these casinos are often exempt from federal taxes, Native Americans employed by the casinos must pay federal income taxes on their earnings. If the tribes transfer or distribute any of their gaming revenues to tribe members, these “per capita” payments are subject to federal income tax, as well.
While federal taxes apply to individual earnings and payments, some states exempt any payments that come from an individual's own tribe from state income tax, including distributed gaming revenues. California is an example of one of these states, though individuals must meet a set of circumstances (such as living on tribal lands) to qualify for the exemption.
- Native American tribes are not subject to state or federal income taxes.
- Tribes can and do set their own sales taxes for products purchased from them on their lands.
- Native Americans usually pay federal income tax on their personal incomes.
- Income may be tax-exempt at the state and local level when a Native American individual earns it on tribal lands.
- Individual Native Americans who receive per capita gaming distributions from their tribe must pay federal tax on this income.