Do Native Americans Pay Taxes?
Taxation can be a divisive line between tribes and surrounding states
The rumor has been around for decades, maybe even centuries: Native Americans don’t have to pay taxes. And that’s exactly what it is—a rumor—although the devil is in the details.
There’s a major distinction between the terms “Native American” and “Native American tribe.” Adding that one 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 on American soil.
Tribes themselves are not bound to pay taxes to the U.S. government. That’s the easy part. It gets a bit more complicated from there.
Federal Income Taxes
Native American tribe members have been granted U.S. citizenship since 1924, and as citizens, they must pay taxes on their incomes. But there are some exceptions, just as there are exemptions for non-Indian citizens.
Native Americans don’t pay taxes on some sources of income that derive from government benefits. This income must represent “general welfare” payments provided for by a governmental program such as Welfare or Social Security Supplemental Income. Payments cannot be made in exchange for services of any kind. They become taxable if they are.
Native Americans who have income pay taxes just as everyone does. As of 2018, the first $9,525 of income is tax free under all tax brackets, but anyone who earns $9,526 or more pays a percentage.
State Sales Taxes
Sales taxes on goods and services sold on Native American reservations have been an issue of some dispute for a while now, and the issue seems to be heating up.
As sovereign entities, tribes are entitled to impose their own taxes on their own grounds, taxing not only their tribe members but anyone else who passes through as well. Not all 550-plus recognized Native American tribes impose taxes, but some do.
If you purchase goods or services on tribal land, there might be a sales tax, or there might not be. This has become a thorn in the sides of many states because as sovereign nations, tribes are exempt from collecting sales taxes imposed at the state level, just as they’re exempt from paying income taxes to the Internal Revenue Service.
This enables them to sell things like tobacco and gasoline much cheaper than that convenience store or gas station across the tribal territorial line, particularly in states that have "extra" gasoline and tobacco taxes over and above their regular sales tax. If you lived in one of these areas and you had a choice, where would you shop for cigarettes or fuel up your car?
Logically, many non-Indian consumers cross over onto tribal lands to make these purchases when it’s at all feasible, and states take the position that this cheats them out of sales tax revenues. This isn’t even to mention that a good many tribal nations operate casinos, which bring non-Indians onto their lands in droves, and they buy gas and tobacco while they’re there.
At least one state—New York—has revised its tax code to allow it to levy sales taxes on tobacco products sold on Seneca and Cayuga tribal lands. The state can’t impose the tax on tribe members who purchase there, but it takes the position that it can tax non-members who buy tobacco products on these reservations. A federal U.S. District Court judge agreed in January 2018.
And then there’s Nebraska. The Winnebago tribe makes its own tobacco products. The facility was the subject of a raid by the Bureau of Alcohol, Tobacco and Firearms, also in 2018. The raid was intended to gather documents and information relating to distribution and taxation. That case is still pending. The Winnebago Nation believes that the State of Nebraska instigated the ATF action and investigation.
By far, the most significant revenues on Native American lands come from their casinos. This has been the case going back at least 30 years and it’s prompted federal legislation.
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 federal U.S. government passed the Indian Gaming Regulatory Act (IGRA) to nail down some regulations and guidelines, charging the National Indian Gaming Commission with oversight. This blurred the lines somewhat between the federal U.S. government and Native American sovereign nations.
These gaming operations are typically owned and operated by their tribes, but the old rule didn’t change. Tribes still don’t have to pay federal or state income tax on their revenues, including those generated by gaming.
Native Americans employed by the casinos must pay income taxes on their earnings, however, and 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. But many states exempt any payments that come from an individual's own tribe.
State Income Tax Issues
Tribes are also exempt from state income taxes because they’re sovereign—they’re not technically part of the states that abut their reservation lands. The IGRA also prohibits states from levying income taxes on the tribes themselves but tribes are free to negotiate their own contracts with their surrounding states to allow taxation of the gaming institutions themselves—a gray area indeed.
The general rule in most states is that income is taxable when a Native American individual earns it off his reservation.
Should a tribe member open a business and set up shop off the reservation, she would be subject to state and local taxes income there.