the native question ifta & exempt status of native/first nations andrew foster new brunswick

The Native Question

IFTA & Exempt Status of

Native/First Nations

Andrew Foster

New Brunswick

Legal Origins※USA※ Canada

The Native Question 3September, 2006

USA

※ US Code of Law All lands or interests in land

acquired by the US for an Indian/Indian tribe is sovereign from state tax, unless there is clear congressional authorization to the contrary.


Canada

※ Exempt status of Natives protected under Section 87 of Canada’s Indian Act.

※ This legislation is applied based upon the interpretation of the Supreme Court of Canada which is as follows: All goods either purchased on reserve

land or delivered to reserve land are exempt from tax (federal and provincial)

Implications for Taxing Authorities

※US State Level※Canadian Provincial Level


State Level

※ No authority to impose tax ※ Bureau of Indian Affairs ※ Increased commercial activity ※ Commercial establishments

No legal obligation to collect Exceptions


Provincial Level

※ Obligation to respect exempt status

※ Variety of Administrative arrangements

※ Authority to tax sales to non-Natives

Administrative Challenges

The Case of IFTA (US)


International Fuel Tax Agreement

※ R820, Article VIII All motor fuel acquired that is

normally subject to consumption tax is taxable unless proof to the contrary is provided by the licensee. The licensee must report all fuel placed in the supply tank of a qualified motor vehicle as taxable on the IFTA tax return.


Background ~ USA

※ Proliferation of on-reserve commercial establishments

※ Large fuel stops※ Financial incentives - Price

Manipulation ※ Misleading non-tribal purchasers

…Continued


Background ~ USA

※ Truckers purchasing from Natives Claim tax paid on returns Base jurisdictions process returns Funds are transmitted on the assumption

that all purchases made in the jurisdictions of travel were taxed at the respective rates

…Continued


Consequences ~ USA

※ Jurisdictions Incorrect Distribution of funds

Potential for revenue loss Difficult to remedy

※ Carrier/Trucker Large assessment may result

According to the Courts…

※The Case of Idaho※The Case of Kansas


The Case of Idaho

※ Prior to 2001 non-tribal tax distribution to tribal based retailers subject to tax

※ In 2001 the state’s taxation of Indian reservations declared unlawful by the Supreme Court of Idaho

※ In 2002 legislative amendment introduced to place legal incidence of tax on distributor, rather than the retailer

…Continued


The Case of Idaho

※ Immediately following the effective date of the amendment, the Coeur D’Alene Tribe filed suit in Federal District Court

※ In Aug 2002 the Federal District Court invalidated the tax

※ In August 2004, the Ninth Circuit affirmed the district court’s decision following a state appeal

※ A request by Idaho for leave to appeal to the US Supreme Court has since been denied


The Case of Kansas

※ Kansas motor fuel tax collected at the distributor level

※ In 2003 Prairie Band Potawatomi Nation files suit in Federal District Court for relief from the state’s collection of fuel tax on fuel delivered by distributors to reservation. Court rules in state’s favour.

※ In 2004 this ruling reversed by the Court of Appeals for the Tenth Circuit.

…Continued


Supreme Court Decision※ In October 2005 the Kansas fuel tax statute is

validated by the U.S. Supreme Court in the case of Joan Wagnon, Kansas Department of Revenue v. Prairie Band Potawatomi Nation

※ Found merit in the State’s position because: Legal incidence of tax placed expressly on fuel

distributors of first receipt” which in this case occurred off-reservation at the distributor’s place of business

Tax is imposed on non-Indians as a result of an off-reservation transaction

Tax poses no affront to the Nation’s sovereignty

Administrative Challenges

The Case of IFTA (Canada)


Background ~ Canada※ Trend towards increased retailing

of fuel through gas bars, truck stops, etc. by Native Bands

※ Exempt sales by Natives are restricted to Native peoples

※ Non-Native truckers pay tax on reserve

Assessing Consequences

The New Brunswick Case


Potential Problem

An independent Native trucker (1 truck) buys the fuel for his qualified vehicle on a reserve (NB) where he is eligible for exemption.

The Native then travels into Maine where he consumes the fuel purchased tax exempt.

…Continued


Potential Problem

Upon filing the return, the Native may do one of two things:

1. Report all travel as exempt on basis of exempt status, or

2. Report all travel as tax paid to avoid any further questioning

…Continued


Potential ProblemIf the Native reports all travel as

exempt on basis of exempt status: NB would be obligated to recognize the

exemption for NB consumption, but would have to decide an action for the travel in Maine. NB would be obligated as per terms of the agreement to transfer the funds to Maine to account for the consumption, which would result in a net loss to NB. Would there be any grounds upon which to recover this from the Native?

…Continued


Potential Problem

If the Native reports all travel as tax paid to avoid any further questioning:

NB would process the return in the standard manner and make the necessary transfers, which would create a revenue loss for NB. This could only be detected in the event that the Native was audited.


Hypothetical becomes Reality

※ In 2005, NB encountered its first individual Native registrant

※ Operation based on reserve with travel being conducted in NB and Me.

※ Dilemma:How to account for the consumption of exempt fuel on the IFTA return if exempt status is respected.


Remedy

※ Purchase tax paid fuel both on and off reserve

※ File return※ Transfer tax in accordance with

normal procedures (No longer an IFTA issue)

※ Administer exemption outside of IFTA through the Refund process

…Continued


Remedy….cont’d※ tax reimbursed on the total fuel

purchased on the reserve less any amount of this tax that was used to satisfy a shortage in another jurisdiction (Me.)

※ Shortages in Me tax will be addressed by transferring the tax on litres purchased both on and off reserve

…Continued


Remedy….cont’d

※ Example:※ If 200 litres were purchased off reserve,

1000 litres were purchased on reserve and 10% of the travel was in Me, the tax on 20 litres purchased off reserve and tax on 100 litres purchased on reserve would be transferred to Me.

※ The refund would be for 1000 litres less the 100 litres transferred to Me.


Conclusions

※ The Circuit courts continue to uphold the Sovereignty of Native Tribes relative to state taxing authority in the majority of states.

※ In the absence of compacts /agreements with First Nations and /or strengthened taxing statutes consistent with the Kansas model, states will continue to experience erosion of tax revenue administrative difficulties vis-à-vis IFTA.

…Continued


Conclusions

※ The administration of IFTA is undermined by reporting discrepancies inherent in a system that includes a growing number of fuel retailers that fall outside the taxing authority of states.

※ Pro-active measures are required on the part of all IFTA members to educate their carrier populations on the consequences of purchasing fuel on reserve and to adopt measures that minimize the exposure to revenue loss.

For more information on Native American Issues:December 2005 FTA Survey of Native American Issues - Contact Cindy Anders-Robb – Motor Fuel Tax Section Coordinator, Federation of Tax Administrators, or visit FTA Web site @ www.taxadmin.org

the native question ifta & exempt status of native/first nations andrew foster new brunswick

Documents

tax federal

state tax

tax sales

nativesclaim tax

consumption tax

states collection of

kansas fuel tax statute

legal incidence of tax