TESTIMONY OF MARK A. JARBOE

PARTNER IN DORSEY & WHITNEY LLP

Before the United States Senate Committee on Indian Affairs

Oversight Hearing on Tribal Sovereign Immunity

March 11, 1998

INTRODUCTION

Mr. Chairman, my name is Mark Jarboe. I am a partner in the Minneapolis, Minnesota office of the law firm of Dorsey & Whitney LLP, and am the Chairman of the firm's Indian Law Practice Group. I have practiced law in Indian Country for 13 years, primarily in the areas of finance, tribal governmental regulation and reservation economic development. I am honored to be invited to present this testimony to the Committee on the issue of tribal sovereign immunity in the contexts of contracting and the collection of state sales taxes.

Dorsey & Whitney is an international firm of over 450 lawyers and represents 36 Indian tribal governments in 15 states. We also represent people and businesses doing business with tribes--including commercial banks, investment banks, leasing companies, construction contractors, equipment suppliers and service providers. As such, we have seen the issue of tribal sovereign immunity addressed in many circumstances and from many points of view. While I will present some information at the end of my remarks on the issue of the collection of state sales taxes, my friend and co-panelist, Reid Chambers, will testify more directly on that point. The principal observation that I would like to make this morning is that tribal sovereign immunity is not an obstacle to contracting with Indian tribes. It is an issue in contracting, yes--an issue that must be addressed and dealt with. But it is no more of an obstacle than many other issues that will arise in any contract negotiation and that likewise must--and can--be dealt with to the satisfaction of both contracting parties.

A. The Expansion of Economic Development in Indian Country.

Until the recent improvements in the financial situation of some tribes, fueled in many cases by gaming but also by recreation, tourism, natural resource development and tribal business diversification efforts, economic activity in Indian Country was minimal. Very few tribes had the financial wherewithal to enter into contracts of any size for any purpose, and mainstream American business did not pursue what opportunities did exist with the tribes. Business in Indian Country was, with few exceptions, left to local, small-scale establishments to pursue. Those local establishments entered into transactions often on a cash, not credit, basis, or extended "credit" to a tribe only if the tribe's obligation was fully collateralized by cash deposits or other marketable collateral. The tribes generally refused to waive their sovereign immunity in those contracts, but in such a situation the sovereign immunity of a tribe is not a significant issue. If a tribe has fully performed its side of a bargain (for example, by paying cash up front) or has fully collateralized its obligations with cash or other security, the fact that the other party may not have the ability to sue the tribe under the contract is of little moment--that party will likely have no occasion to have to sue.

The situation started to change dramatically in the present decade. Some tribes began to have financial resources sufficient to enable them to enter into commercial transactions of significant size. These tribes sought to open lines of credit, to borrow money and to issue bonds. They sought to build new buildings on the reservations, often starting with gaming facilities and then continuing on to include tribal schools, clinics and administrative buildings. They sought to obtain equipment, to contract for services and, in general, to enter the stream of American commerce.

On the non-Indian side, American business began to recognize, albeit slowly, new opportunities with the tribes. Banks and investment bankers considered making loans or underwriting the issuance of tribal debt securities. Construction companies bid to build tribal buildings. Equipment suppliers and service providers recognized a new market for their offerings. However, when these new players started to become active in Indian Country, they quickly encountered the principle of tribal sovereign immunity and, at first, did not know how to respond to it.

B. The Evolution of Sovereign Immunity.

Sovereign immunity is the right of a sovereign government not to be sued in any court unless it first gives its consent to be sued. All governments in this country enjoy sovereign immunity: the federal government, the state governments, municipal governments and tribal governments. Just last week the Supreme Court handed down a decision reaffirming the sovereign immunity enjoyed by municipal governmental officials in carrying out their legislative duties. In the contractual context, court decisions and legislative actions have qualified and modified the sovereign immunity of the federal, state and municipal governments so that people--if they know the rules--are able to contract with those governments and to have an ability to enforce their contractual obligations. For the federal, state and municipal governments, that process took decades; with respect to the sovereign immunity of tribal governments, the process is now underway. However, it is a process that, like the similar processes that took place with the other governments, should be carried out by the tribes themselves and the people with whom they deal.

This last point deserves special attention. It is based on two very important facts:

1. No one is forced to enter into a contract. Contracts are voluntary transactions, entered into by willing parties.

2. Each government that has decided to modify its sovereign immunity has done so in its own way, at its own pace, and in the manner it judged most appropriate for its circumstances.

Please permit me to elaborate.

1. Freedom of Contract. No tribe, and no person or entity interested in doing business with a tribe, is ever forced to enter into a contract against its, his or her will. In order for any two parties to enter into a contract, the terms of that contract must be satisfactory to both of them. Certainly, there will be provisions that favor one side or the other, and almost always both sides would like to add provisions that do not appear, or delete provisions that do appear, in order to make the final agreement even more attractive to that side. But if both sides agree upon a set of terms, then each side has determined that, when all of the advantages of the bargain are toted up and set against all of its disadvantages, the advantages outweigh the disadvantages.

In any contract with an Indian tribe, the issue of the tribe's sovereign immunity is one issue that must be addressed. It can be addressed in any number of ways, from a complete refusal on the part of the tribe to any suit against it in any forum, to an ability of the non tribal party to sue the tribe in any court and without any limitation on recourse, or by any of a number of intermediate positions (some of which I shall describe below). How that issue is resolved is a matter for the parties to decide; the point that I wish to emphasize is that the parties are able to resolve it, and must resolve it to their satisfaction, or else no contract will result.

If a tribe seeks to borrow money from a bank, the bank will likely insist on having a means to enforce the obligation of the tribe to repay the loan. Because the tribe has sovereign immunity, unless the tribe makes some concession to the bank so as to enable the bank to sue the tribe upon default, it is almost inconceivable that the bank will make the loan. ⁽¹⁾

The tribe and the bank may engage in a give-and-take on the issue. They may consider arbitration, a limited waiver for suits in tribal court, a waiver for suits in state court (in a Public Law 280 jurisdiction), or the use of a separate tribal instrumentality or corporation to be the borrower. The tribe may negotiate that, in exchange for a waiver of immunity more favorable to the bank, the bank must concede on some other point or points in the contract in favor of the tribe. However, the tribe and the bank will have to come to a mutually acceptable resolution of this issue or else no loan will be made. How they decide to resolve it is up to them in the context of their particular contract.

2. Any Modification of a Government's Sovereign Immunity is a Decision for that Government Itself to Make. The federal, state and municipal governments all enjoy sovereign immunity. Those governments have seen fit to modify their immunity and to permit suits to be brought against them in certain circumstances and subject to certain limitations. In each case, however, the modifications that were made, and the resulting recourse that claimants have against those governments, were made over time, by the courts and legislatures of those governments themselves, and were not imposed on them from above.

Each state has dealt with limitations on its sovereign immunity differently. While the National Conference of Commissioners on Uniform State Laws has promulgated nearly 200 model statutes for states to adopt, ranging from the Uniform Commercial Code to the Uniform Act to Secure Attendance of Witnesses From Without a State in Criminal Proceedings, there is no "Uniform Waiver of Sovereign Immunity Act." State immunity waivers may be limited to certain types of claims and may be conditioned on actions being brought in specific forums, on notices of claims being given within short time lines, or on suits being filed within strict limitations periods. ⁽²⁾

Damage awards may be capped. Specific performance may be unavailable. All of these issues and more are dealt with by each state in the manner it deems most appropriate for its circumstances, and the decision of one state on any of these points is likely to be different from the decision of its neighbor.

Until the recent increase in economic activity in Indian country, tribal governments have not had any serious need to address the issue of how sovereign immunity affects their ability to contract. Their improving economic status has caused many tribes to reconsider their treatment of immunity. ⁽³⁾

The result has been an evolution of tribal positions on this issue, an evolution that roughly parallels developments with federal, state and local immunity in the beginning of this century. That evolution will continue, and if left to proceed will result in solutions that both accord with tribal policies, culture and governmental structures and meet the needs of non-Indian contracting parties.

C. Examples of Tribal Solutions.

Tribes have explored many ways to accommodate the legitimate interests of non-Indian contracting parties. A few are described below. In providing this summary, I am referring to transactions in which I was personally involved; there are undoubtedly many others, some similar to the following and some quite different, where tribal governments developed innovative and effective solutions to deal with the sovereign immunity issue.

1. Las Vegas Paiute Tribe. The Las Vegas Paiute Tribe is developing the Las Vegas Paiute Resort, a destination golf resort on 4,000 acres of trust land just outside of Las Vegas, Nevada. The Tribe sought financing for that project for over two years--financing a golf resort on Indian lands is not one of the easiest of tasks. It eventually succeeded, with interim financing from two bond funds (Calvert Funds in Maryland and Miller & Schroeder Financial, Inc. in Minneapolis) and permanent financing of over $25,000,000 from Bank of America.

In preparation for obtaining this financing, the Tribal Council, in 1993, took three specific actions:

a. It called for a tribal election, to be conducted by the Secretary of the Interior, to adopt an amendment to the Tribe's Constitution adding a "no impairment of contracts" provision similar to the provision of Article I, Section 10, Clause 1 of the United States Constitution. ⁽⁴⁾

The election was held on April 9, 1994 and that provision was adopted. ⁽⁵⁾

b. It established a tribal governmental instrumentality, the Snow Mountain Recreational Facilities Authority, to act as the borrower of the financing for the project, to lease the site of the project from the Tribe, and to be able to grant to the lender a leasehold interest on the project to secure the repayment of the financings.

c. It established the Tribal Commercial Court as a division of the Las Vegas Paiute Tribal Court. The Tribal Commercial Court, which has jurisdiction over all civil matters involving the Tribe where the amount in controversy exceeds $50,000, has the following attributes:

i. The judges of the division are lawyers licensed to practice in any state within the Ninth or Tenth federal circuits;

ii. The Division applies the substantive contract law of the State of Nevada in all cases before it; and

iii. The rules of the Nevada Uniform Commercial Code apply with respect to the creation and perfection of security interests. ⁽⁶⁾

On this last point, it is essential to note that the Las Vegas Paiute Tribal Commercial Court, while looking and acting a lot like a state or federal civil court, is a tribal court, is created under tribal law, and functions as an arm of tribal government. The federal government and many state governments have specialized courts for specialized purposes: the federal government has, in addition to the federal district courts, courts such as the Court of Federal Claims, bankruptcy courts, tax courts, and military courts; states have civil courts, criminal courts, juvenile courts, probate courts, family courts--whatever areas the government determines need to be addressed by specific methods of dispute resolution. A tribal government has the same power, and can decide that certain types of disputes should be heard by specialized subdivisions of its tribal court system. This is what the Las Vegas Paiute Tribe, and other tribes who have acted similarly, ⁽⁷⁾ have done.

After the Tribe took these actions, it was able to focus the attentions of prospective lenders on the economic and credit issues presented by the proposed project--where the attention of a lender should be focused. The Tribe's experience both with the bond funds and with Bank of America was that its actions in anticipating the legitimate needs of its lenders, coupled with an agreement by the Tribe and the Authority that they could be sued in the Tribal Commercial Court to enforce the loans, satisfied the enforcement concerns of the lenders. The Tribe has taken out four separate multi-million dollar loans from Bank of America as the project has grown, all ultimately enforceable in the Tribal Commercial Court.

2. Cow Creek Band of Umpqua Tribe of Indians. Earlier this month, the Cow Creek Band of Umpqua Tribe of Indians was negotiating a contract between its Nesika Health Group (Nesika), a business enterprise wholly owned by the Tribe, and a provider of specialized services needed for the Tribe's health program. The service provider had never before faced the issues presented in contracting with tribes and initially took the position that any dispute under the contract should be resolved in Oregon state court (a legal possibility, given that Oregon is a Public Law 280 state, but of uncertain effect given that Oregon state courts have not ruled on whether the abstention doctrine, set out by the United States Supreme Court in the National Farmers Union and Iowa Mutual cases, applies to actions brought in state court). ⁽⁸⁾

The Tribe was unwilling to consent to Oregon state court jurisdiction, but was willing to permit Nesika to be sued by the service provider in the Cow Creek Tribal Court should the Tribe default under the contract. That result was unacceptable to the provider.

The solution that was reached was another example of tribal government flexibility:

a. The Cow Creek Tribe had previously established a Tribal Commercial Court similar to that established by the Las Vegas Paiute Tribe and enacted a Tribal Arbitration Code. Under that Code, an agreement in a contract which provides that disputes thereunder are to be referred to arbitration is specifically enforceable as a matter of tribal law. Any action brought in Tribal Commercial Court to compel arbitration shall be enforced by the Tribal Judge. Questions as to whether a dispute is arbitrable are for the arbitrators to decide, and any award resulting from the arbitration shall be confirmed and enforced by the Tribal Commercial Court as issued by the arbitrators, without modification by the court. ⁽⁹⁾

b. Nesika and the service provider agreed that any dispute between them would be referred to arbitration under the Tribal Arbitration Code, using the commercial arbitration rules of the American Arbitration Association.

c. Nesika consented to be sued in courts of competent jurisdiction in order to enforce its obligations under the contract, particularly the obligation to arbitrate any disputes. The consent specifically limited the amount of any damages that could be awarded against Nesika and provided that no recourse could be had against any assets of the Tribe other than those vested in its Nesika enterprise.

As a result, the position of the parties in the event of a default by the Tribe's Nesika enterprise under that contract is this: An action to enforce the contract will be resolved by arbitration. If the Oregon state courts would take jurisdiction over an action to compel arbitration, or to enforce an arbitration award, the provider can bring such an action there. If, however, the Oregon courts would apply the abstention rule, or if the provider wanted to initiate an enforcement action in the tribal forum, that action can be brought in the Tribal Commercial Court. This was a sufficiently satisfactory combination of remedies to the provider for the contract to be signed. ⁽¹⁰⁾

3. Confederated Tribes of the Grand Ronde Community of Oregon (Spirit Mountain Development Corporation). The Grand Ronde Confederated Tribes have incorporated Spirit Mountain Development Corporation (SMDC) as a tribally-chartered corporation, ⁽¹¹⁾

and have chartered Spirit Mountain Gaming, Inc. (SMGI) as a wholly-owned subsidiary of SMDC. The Confederated Tribes are the sole owner of SMDC; SMDC, in turn, is the sole owner of SMGI.

The purpose of the establishment of SMDC and SMGI was to carry out business diversification activities on behalf of the Tribes. SMDC and SMGI both enjoy sovereign immunity, but both can waive that immunity without affecting the immunity enjoyed by the Tribes themselves.

When the Tribes sought financing for the development of their Spirit Mountain Resort, the Tribes contacted numerous financial institutions. The one that they selected was John Hancock Mutual Life Insurance Company, in Boston. John Hancock was willing to lend the Tribes $18,900,000 to finance this project, but, like the lenders described above, wanted to ensure its right to enforce the loan obligations against its borrower should a default occur. The solution agreed upon was this:

a. SMGI became the borrower of the loan.

b. The Tribe leased the resort site to SMGI, and SMGI became the developer and operator of the resort.

c. SMGI pledged all of the revenues derived from the operation of the resort to the lender and agreed to deposit those revenues daily into bank accounts pledged as security to the lender. Revenues would be released to SMGI out of those accounts monthly after all obligations under the loan were first provided for.

d. SMGI consented to be sued by the lender in the Oregon state courts (Oregon is a Public Law 280 state) and the federal courts to enforce its obligations under the loan documents, and waived any requirement on the part of the lender to exhaust remedies in the Grand Ronde Tribal Courts. Counsel to SMGI advised the lender that the waiver of the requirement to exhaust tribal court remedies was of uncertain enforceability. The Tribes themselves did not waive their sovereign immunity.

Although the question of whether, upon a default, the lender would be required to pursue its remedies in tribal, as opposed to state, court was not resolved with certainty, this arrangement proved to be sufficiently satisfactory to the parties that a second loan for an expansion of the original facility, in an amount in excess of $7,500,000, was made to SMGI by John Hancock on the same terms.

4. Confederated Tribes of the Colville Reservation (Colville Tribal Enterprise Corporation). The Colville Tribal Enterprise Corporation (CTEC) is a governmental corporation and instrumentality of the tribal government of the Confederated Tribes of the Colville Reservation in Washington. CTEC operates the business operations of the Colville Tribes, including the harvest and sale of tribal timber; the operation of a sawmill, wood products facilities, gaming facilities, and a marina; the rental of vacation houseboats on Lake Roosevelt; and the overseeing of the tribal credit operation. As an instrumentality of tribal government, CTEC enjoys sovereign immunity and it can waive that immunity without affecting the immunity of the Tribes themselves.

In 1996, CTEC sought to refinance a number of outstanding loans, primarily relating to the Tribe's timber sales and fabrication operations, and to open up a working capital line of credit. It negotiated with Key Bank of Washington for a $10,000,000 revolving and term credit facility to be secured by a pledge of most of CTEC's revenues, a security interest in certain personal property and a mortgage on CTEC's leasehold interest in the tribal sawmill. In the negotiations, CTEC agreed to waive its sovereign immunity in order to permit suits to enforce the loan and security, but only in the Colville Tribal Courts. The immunity of the Tribes themselves would not be waived. This was not even a significant issue in the negotiations. The contract was drafted to give either side the option to trigger arbitration if it desired, but then provided that any arbitration award would be enforced in the Colville Tribal Court. The bank accepted the Tribal Court as the forum for the enforcement of the contract and the loans were made.

D. Conclusion.

These are but a few examples; there are many more like them. They involve large amounts of money and small amounts; long term obligations and short term. In each case, the tribe involved and its contracting party have worked out how the issue of tribal sovereign immunity--how the other party can hold the tribe to its promise should the tribe default--will be dealt with in the contract. Common themes that we have seen include:

Consenting to suit in tribal court, perhaps in connection with the establishment of a specialized commercial division of tribal court.

Establishing a tribal arbitration code, providing that arbitration awards are specifically enforceable in tribal court and consenting to the jurisdiction of the tribal court in suits to compel arbitration or to enforce an arbitration award.

Consenting to suit in state court in a Public Law 280 state.

Establishing a tribal corporation, a Section 17 IRA corporation, ⁽¹²⁾

or a tribal government instrumentality to serve as the contracting party, vesting in that entity sufficient assets or resources to carry out its obligations, and granting that entity the power to waive its sovereign immunity without waiving the immunity of the tribe itself.

In most cases, one or more of these solutions have proven sufficient to address the legitimate needs of the non-Indian party and to preserve the governmental interests of the tribes involved. Sometimes they are not sufficient; occasionally the non-Indian party refuses to accept any result other than state court enforcement, and in those cases the parties usually cannot come to agreement. But there is no law that every proposed contract has to come into effect, and if the parties cannot reach agreement, that contract won't. That is their decision.

These solutions work. They have worked for hundreds of millions, if not billions, of dollars of contracts with tribes and tribal entities. But the solution that works in one situation, with one tribe, will not necessarily be the solution that works with another tribe, in another situation. Just as the federal government and each of the 50 states has had to deal with, and solve the difficulties created by, their sovereign immunity and to deal with them in their own ways, the tribes have to deal with their sovereign immunity in ways that respect their own traditions, structures and situations while accommodating the legitimate needs of others. That process often gets worked out in the give and take of voluntary contract negotiations. The tribes and the business community have been effective in reaching agreement on solutions; I respectfully submit that there is no need for the federal government to intervene and prevent the continued evolution in this area among informed, consenting parties.

In the context of the collection of state sales taxes on retail sales made to non-Indians in Indian Country, it is important to recognize that (A) many tribes and states have entered into arms-length tribal-state agreements providing for the imposition of state, tribal or joint taxes and the method of collection and distribution of their proceeds, and (B) even if there is no tribal-state agreement in place, states can collect taxes before the taxable items reach Indian Country. In addition, sales and excise taxes vary from state to state in their nature and legal format. As with the issue of sovereign immunity, the tribes and the non-Indian parties--in this case the states--are working matters out in ways that best suit their particular situations, needs and interests. There is no need for a federal imposition of uniformity, stopping the process in its tracks.

A. Tribal-State Tax Agreements.

Many states and tribes have entered into agreements covering how they will deal with retail sales and excise taxes. A few examples follow.

1. Minnesota. By the early 1980's, Minnesota had agreements with the 11 Chippewa and Dakota tribes in the state regarding cigarette, alcoholic beverage, and sales taxes. In 1994, the Minnesota Legislature amended then existing state law to authorize more comprehensive tax sharing agreements between the state and tribal governments. Today, the Minnesota Department of Revenue and the tribes have each entered into tax agreements with respect to: (a) sales and use tax, including motor vehicle excise tax, (b) cigarette and tobacco products excise tax, (c) liquor tax, and (d) motor fuel tax.

Under the agreements, both tribal members and non-members must pay the equivalent of the state sales tax for transactions occurring on the reservation and state cigarette taxes for on-reservation cigarette purchases. Using a per capita formula, the Minnesota Department of Revenue refunds to tribes an amount attributable to taxes paid by enrolled members. The agreements authorize the State Tax Commissioner to collect the state and tribal taxes that are the subject of the agreements.

The agreements fix the estimated per capita amounts for each tax based on changes in the Consumer Price Index for the Minneapolis/St. Paul metropolitan area. To receive the per capita payments the tribal governing body must certify its population to the State Tax Commissioner.

The tribes and the state also share a "base tax." The base tax is the difference between the total tax from sales on the reservation and the tax attributable to enrolled member consumption. The total on-reservation cigarette, tobacco products and alcoholic beverage taxes are derived from quarterly sales by distributors to retailers located on the reservation.

The payment formula can be expressed in mathematical terms:

a. Per Capita Tax X Certified Population = Tax on Member Consumption

b. Tax Included in On-Reservation Sales - Tax on Member Consumption = Base Tax

c. Tax on Tribal Consumption + (Base Tax X 50%) = Payment

All vendors located on the reservation must purchase their stock from distributors licensed by the state and all cigarettes sold on the reservation must bear an Indian reservation tax stamp.

2. South Dakota. In South Dakota, agreements have been in place with four of the nine tribes in the state regarding sales and use taxes, and cigarette and contractors' excise taxes. These agreements were entered into in late 1970's, were amended numerous times and, although they expired last year, the tribes and the state are continuing to operate under them.

Under these agreements, the state collects a tribal tax which is equivalent to the state tax. Every transaction on the reservation of a compacting tribe is subject to applicable sales, use, contractors' excise, or cigarette excise taxes, whether the sale is to an Indian or a non-Indian. The State collects the tribal tax, remits a percentage to the tribe, and keeps the remaining percentage. While there is no state tax imposed, the state does collect a 1% administrative fee.

3. Washington. Washington State has entered into agreements with several of the 26 tribes located in the state on motor fuel taxes and liquor taxes. In addition, Washington implemented a cigarette allocation system in 1980.

Pursuant to the motor fuel tax agreements, on-reservation Indian retailers are required to pay the state tax for all sales and to keep records of exempt sales. The state then refunds to the tribe the taxes paid on exempt sales. Alternatively, some motor fuel tax agreements require the tribe to purchase a percentage of tax-free fuel representing exempt sales to Indians.

Eighteen of the 26 tribes participate in the cigarette allocation program. A quota of tax-free cigarettes, determined by a per capita consumption formula, is set aside to be sold to tribal retailers. Wholesalers, who apply stamps to the cigarettes, pre-pay the cigarette taxes and receive refunds from the state for tax-free sales to tribes if they obtain approval from the State Department of Revenue prior to the sale.

4. Nevada. The State of Nevada has provided by statute that the state shall not collect state sales tax on the sale of tangible personal property on an Indian reservation if the tribe levies and collects a sales tax on retail sales at rates at least as high as Nevada's. Similarly, the Nevada Tax Commission has provided that the state excise tax will not apply to the sale of cigarettes on an Indian reservation if the tribe levies and collects an excise tax at rates at least as high as Nevada's. Nevada's interest appears to be to ensure that there is an equal tax burden on retail and cigarette sales, not to raise revenue from taxing transactions that arise in Indian country.

Under this authority, the state, through the Department of Taxation, and a number of tribes in Nevada have entered into intergovernmental agreements under which (a) the tribes agree to impose sales and excise taxes on the sale of tangible personal property and cigarettes, whether to Indians or non-Indians, at rates at least as high as Nevada's, (b) the Nevada state taxes do not apply to those transactions, and (c) the tribes retain the revenue generated by the tribal tax.

5. Oklahoma. Application of Oklahoma's motor fuels tax to sales in Indian Country was invalidated by the Supreme Court in the Chickasaw Nation case. The Court ruled that the legal incidence of the state tax fell on the tribal retailer in Indian Country and, as such, was invalid because it was not authorized by the Congress. The Court also recognized that Oklahoma could simply shift the legal incidence of the tax so that it fell upon the ultimate retail purchaser, whereupon it could be legally imposed upon non-Indian consumers. The Oklahoma Legislature responded by amending the state tax laws in 1996 to shift the legal incidence of the tax to the consumer.

The State has also entered into tax agreements with nine tribes. These agreements provide that the State of Oklahoma collects a motor fuels tax at the distributor level before any fuels enter Indian Country. The State then pays the tribes a certain percentage of all taxes collected, reflecting the estimated exempt tribal consumption share.

6. Wisconsin. In Wisconsin, the state and the tribes have entered into cigarette tax agreements which require the tribes to collect state sales taxes on the sale or the purchase, consumption and use of cigarettes. Under this agreement, every consumer, including a tribal member, pays the state tax. Similar to the agreements in Minnesota, the State then remits to the tribe a percentage of the state tax collected which is determined on a tribal member per capita basis.

7. New York. Although not an example of a tribal-state tax agreement, I should call the Committee's attention to recent developments in the State of New York.

The State of New York adopted a precollection scheme for the taxation of gasoline, motor fuel and cigarettes which were destined for retailers in Indian country. The procedure involved collecting the tax on those products at the distribution level, from the first person who brought the taxable product into New York. This approach was upheld by the United States Supreme Court in Department of Taxation and Finance of New York v. Milhelm Attea & Bros., although the Court noted in a footnote that it was not addressing whether the precollection procedure violated treaty rights of the Seneca Nation of Indians.

Prior to implementation of this procedure, the state sought to negotiate tax agreements with the New York tribes under which the tribes would either impose their own taxes on, or establish minimum resale prices for the sale of, gasoline and cigarettes sold on their lands, and would agree to share information as to the sales and distribution of those products with the New York taxing authorities. Some tribes agreed in principle to such an arrangement; others did not. Accordingly, on April 1, 1997, the state implemented its precollection procedure. It met with widespread opposition, both from the tribes and from non-Indians living in or near Indian lands in New York. The tribes asserted that they alone had the power to regulate commerce on their territories, and that the state's precollection scheme was an improper infringement of tribal governmental power. In May, Governor Pataki agreed. He ordered that the precollection practice be stopped, directed that the regulations implementing it be revoked, and proposed legislation amending the New York tax code so as to exempt from the New York sales and excise taxes all retail sales of gasoline, motor fuels and tobacco products that take place in Indian Country. That legislation is presently pending.

In the meantime, the New York Association of Convenience Stores, a nonprofit organization representing convenience stores that sell cigarettes, motor fuel and other products in the state of New York, has brought suit against the New York Commissioner of Taxation and Revenue to enforce the collection of state excise and sales taxes from on-reservation sales of cigarettes and motor fuel to non-Indian customers. That case is currently before the New York Court of Appeals and is to be argued later this month. The Seneca Nation has appeared in the case as amicus curiae in order to support the decision of the state not to attempt to collect the taxes at issue.

The situation in New York has a long history and feelings run deep on both sides. However, the Governor has decided that it is in the best interest of the people of New York, including but not limited to its Indian residents, that the tribes regulate retail sales of these products on their own, as they deem best, and that the state not attempt to tax those transactions.

B. State Collection Power in the Absence of an Agreement.

The existence of a tribal-state tax agreement is not a prerequisite to a state's ability to collect a lawfully imposed state tax. The Supreme Court itself, in Oklahoma Tax Commission v. Citizen Band of Potawatomi, identified a number of ways that a state can collect a lawfully imposed tax:

"There is no doubt that sovereign immunity bars the state from pursuing the most efficient remedy, but we are not persuaded that it lacks any adequate alternatives. We have never held that individual agents or officers of a tribe are not liable for damages in actions by the state. And under today's decision, states may of course collect the sales tax from cigarette wholesalers, either by seizing unstamped cigarettes off the reservation, or by assessing wholesalers who supplied unstamped cigarettes to tribal stores. States may also enter into agreements with the tribes to adopt a mutually satisfactory regime for the collection of this sort of tax."

In addition, only tribes themselves enjoy sovereign immunity, not individual tribal retail operators. Therefore, if a state and a tribe cannot reach agreement on the matter of sales and excise taxes, and the state still wants to collect any tax that it can lawfully impose, then its course is rather clear:

1. ensure that the legal incidence of the state tax falls on the ultimate consumer (in order that it can be imposed on a non-Indian retail purchaser making a purchase in Indian country), and

2. if retail operations are being conducted by the tribes themselves, as opposed to individual Indian retailers, institute a procedure to collect the tax at the importer/distributor level, under which the first person bringing the product into the state, or the manufacturer of an in-state product, collects that tax as part of the sales price to the retailer and remits it to the state on behalf of the ultimate consumer.

This may require a change in state tax law or procedure, but it is legally available, has been upheld by the Supreme Court, and does not require any federal intervention.

C. Conclusion.

The area of retail sales and excise taxes is more controversial than the area of contract, in large measure because it involves the competing power of two governments. Those two governments generally are not on the best of terms, and it is often difficult for them to sit down and try to resolve their differences in a way that meets their mutual needs and interests. However, I submit to the Committee that it is best to let this process continue to work itself out. Tribes and states are reaching workable, creative and effective solutions to this issue, solutions that meet the needs of those tribes and those states. Imposing a uniform federal rule would stop this process cold and prevent continued evolution in the tribal/state relationship that, if continued by people with good will on both sides, could well result in benefits for Indians and non-Indians alike.

Mr. Chairman, in both of these areas--contracting and the collection of state sales taxes--tribes and their contracting parties, in the first, and tribes and states, in the second, are reaching solutions that serve their respective interests and meet their needs in their respective situations. This is a process that evolves. It evolved with the federal government, it evolved with the state and local governments, and it is evolving with the tribes. The evolution proceeds smoothly at some times, at others it moves in fits and stops, but the evolution continues. If it may seem to some that this evolution is late in coming, please recall that until recently there was little need for it to do so, because of the historically low level of economic activity in Indian Country. It is the increase in that activity that provides the impetus for tribes and non-Indians to address these issues cooperatively.

In addition, I submit that, just as there is no uniform scheme or procedure for dealing with sovereign immunity in all federal, state and local governmental contracts and no uniformity in the nature and format of state sales taxes, there is no uniform scheme or procedure that is appropriate for dealing with sovereign immunity in all tribal contracts or in tribal/state tax relationships. These matters are best dealt with by the parties directly involved, in ways that they deem best. It may sometimes take a bit of effort for those parties to reach accord, but it is better for all that they do so themselves. The result will be much more appropriate for their needs than any "solution" imposed from above.

Thank you very much, Mr. Chairman. I would be happy to respond to any questions that the Committee may have.

Attachments: Exhibit A - - Law and Order Code of the Las Vegas Tribe of Paiute Indians, Title 1 - The Tribal Court

Exhibit B - - Cow Creek Band of Umpqua Tribe of Indians, Tribal Legal Code, Title 70 - Arbitration Code

1. ^1/ An exception to this would be the types of loans that, unfortunately, we still see in Indian Country--loans that are not made unless the tribe first deposits with the bank as collateral cash or investment securities in an amount in excess of the amount of the loan. Because the bank can exercise setoff rights against such collateral, it can, upon any default by the tribe, make itself whole without the need of commencing any enforcement action. However, a loan of this nature is essentially the bank lending the tribe's own money back to it, and is not a true extension of credit.

2. ^2/ It is worthy of note that one of the groups most adversely affected by the remaining immunity enjoyed by the states are the tribes themselves. After the Supreme Court ruled in Seminole Tribe of Florida v. Florida that the Eleventh Amendment to the Constitution prohibited the federal courts from taking jurisdiction over a suit brought by a tribe against a state in order to enforce the state's federal obligation to negotiate a gaming compact under the Indian Gaming Regulatory Act, tribes explored bringing those suits in state courts but found that without a waiver of the state's immunity, no such suit could be brought.

3. ^3/ In the early 1990's, a tribe refused to waive sovereign immunity in connection with a proposed water system loan from the United States Farmers Home Administration, even though, under case law, tribes do not enjoy sovereign immunity in suits brought by the federal government. The Tribal Council took the position then that the tribe should not waive its sovereign immunity in any situation. That same tribe has recently borrowed over $50,000,000 from a consortium of banks under an agreement wherein it consents to suit in any court of competent jurisdiction to enforce its loan obligations.

4. ^4/ The "contracts clause" of the United States Constitution, which prohibits the states from taking any action under their governmental powers to impair the obligation of contracts, does not apply to the federal or tribal governments.

5. ^5/ The provision, Article X of the Las Vegas Paiute Constitution, reads:

The Las Vegas Paiute Tribe shall not adopt any law, ordinance, measure or resolution, whether under Articles VII [dealing with the powers of the Tribal Council] and VIII [dealing with initiative and referendum] hereof or otherwise, impairing the obligation of contracts of the Las Vegas Paiute Tribe or of any instrumentality, agent, corporation or member of the Las Vegas Paiute Tribe.

6. ^6/ A copy of Title 1 of the Las Vegas Paiute Tribal Law and Order Code, establishing the Tribal Court and the Tribal Commercial Court, is attached to this testimony as Exhibit A.

7. ^7/ Other examples include the Cow Creek Band of Umpqua Tribe of Indians and the Mohegan Tribe of Connecticut.

8. ^8/ The abstention doctrine provides that if both a federal court and a tribal court have jurisdiction over a matter and the case is brought in federal court, the federal court must abstain and let the matter proceed in tribal court. The law has not been resolved as to whether that same rule applies to cases in Public Law 280 states where state and tribal courts have concurrent jurisdiction. The Minnesota state courts have ruled that it does. Matsch v. Prairie Island Indian Community.

9. ^9/ A copy of the Cow Creek Tribal Arbitration Code is attached to this testimony as Exhibit B.

10. ^10/ A similar structure was sufficiently satisfactory to a consortium of banks, lead by Bank of America, for them to provide a $350,000,000 credit facility to the Mashantucket Pequot Tribe, which has adopted a similar arbitration ordinance.

11. ^11/ As governments, tribes have the power to establish corporations. Tribal corporations can be chartered under a tribal corporation code (e.g., Ho-Chunk, Inc., chartered by the Winnebago Tribe of Nebraska; Colville Tribal Enterprise Corporation, chartered by the Confederated Tribes of the Colville Reservation), or by specific action of the tribal government (e.g., Little Six, Inc., chartered by the Shakopee Mdewakanton Sioux (Dakota) Community; the Mille Lacs Corporate Commission, chartered by the Mille Lacs Band of Ojibwe; Ketchikan Tribal Hatchery Corporation, chartered by the Ketchikan Indian Corporation). In many cases, tribal corporations are registered, with the Secretary of State of the state in which their chartering tribe resides, to do business in the state as foreign corporations.

12. ^12/ A federally chartered corporation under Section 17 of the Indian Reorganization Act; 25 U.S.C. § 477.