Keweenaw Bay Indian Community v. Khouri et al
Filing
423
OPINION AND ORDER RESOLVING CROSS MOTIONS FOR PARTIAL SUMMARY JUDGMENT; signed by District Judge Paul L. Maloney (Judge Paul L. Maloney, cmc)
Case 2:16-cv-00121-PLM-MV ECF No. 423, PageID.6554 Filed 07/13/21 Page 1 of 83
UNITED STATES DISTRICT COURT
WESTERN DISTRICT OF MICHIGAN
NORTHERN DIVISION
KEWEENAW BAY INDIAN COMMUNITY,
Plaintiff,
-vNICK A. KHOURI, et al.,
Defendants.
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No. 2:16-cv-121
Honorable Paul L. Maloney
OPINION AND ORDER RESOLVING CROSS MOTIONS FOR PARTIAL
SUMMARY JUDGMENT
Michigan collects sales taxes, use taxes, and tobacco taxes from transactions involving
members of the Keweenaw Bay Indian Community and Keweenaw Bay Indian Community
itself. Unlike many other federally recognized Indian tribes in Michigan, Keweenaw Bay
Indian Community (KBIC) has not negotiated a tax agreement with Michigan. As a result,
Michigan requires KBIC and its members to submit forms requesting exemptions and
refunds from the various state taxes. In 2012, KBIC and four of its members began
submitting sales and use tax claims to the State. Sometimes, Michigan grants the requested
refunds. For example, Michigan granted a refund for the taxes imposed on the purchase of
building materials by KBIC’s public works department that were used for the construction
of a transfer station. (ECF No. 155-23.) Other times, Michigan denied the request for a tax
refund, including when the casino requested a refund on the tax paid for the delivery of
thirty-four pizzas. (ECF No. 155-8).
Using the results of the requested refunds as exemplary claims, KBIC filed this
lawsuit, its third, seeking declaratory and injunctive relief and damages. KBIC contends the
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enforcement and collection of state taxes violates federal law. KBIC also seeks monetary
damages under § 1983.
In its third amended complaint, KBIC asserts sixteen causes of action.1 Two the
claims, Counts 13 and 14, have already been dismissed. (ECF No. 82.) The parties filed
three dispositive motions which are addressed in this Opinion and Order.2 KBIC filed a
motion for partial summary judgment. (ECF No. 125.) Defendants filed a motion for
summary judgment. (ECF No. 316.) KBIC then filed a second motion for partial summary
judgment.3 (ECF No. 327.) The Court held a hearing on the three motions. (ECF No. 405.)
The Court will grant in part and deny in part the motions for partial summary
judgment. Because Michigan does not permit apportionment of its use tax, the Court will
grant KBIC summary judgment on Count 5. For all other counts and claims, the Court will
grant summary judgment to Defendants.
I.
KBIC has filed multiple lawsuits challenging Michigan’s taxes. A brief history
provides some context for this third action.
KBIC is a federally recognized Indian tribe and is the successor in interest to the
L’Anse and Ontonagon bands of Chippewa Indians. Keweenaw Bay Indian Cmty. v. Rising,
569 F.3d 589, 591 (6th Cir. 2009) (Rising II). KBIC “exercises powers of self-governance
1
Counts 17 and 18 are not causes of action; the two counts are prayers for relief. In Count
17, KBIC request declarative and injunctive relief. In Count 18, KBIC requests costs and attorney
fees.
2
Defendants Grano and Sproull also filed a motion for summary judgment concerning
pending state court criminal actions. (ECF No. 98.)
3
Plaintiff filed two briefs in support, ECF No. 328 and ECF No. 364. The later filed brief
replaced the earlier filed brief.
2
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and sovereign jurisdiction over the L’Anse Indian Reservation in the Upper Peninsula of
Michigan, as well as over extensive lands held in trust by the United States outside of the
reservation in the western half of the Upper Peninsula.”4 Id. In 1977, Michigan and KBIC
entered into a comprehensive tax agreement for the assessment and collection of state taxes
involving the Tribe and its members. Id. In 1997, Michigan terminated its tax agreements
with the twelve federally recognized Tribes in Michigan as part of an effort to obtain
uniformity in the agreements. Id. While Michigan has reached new agreements with most
of the Tribes, Michigan and KBIC have not reached a new agreement.5 Id. As a result,
KBIC and its members must request exemptions and refunds from state taxes on a
transaction-by-transaction basis. Id.
In 2003, KBIC filed a lawsuit to enjoin Michigan from collecting state taxes on
cigarettes sold by KBIC at its gaming facilities. Keweenaw Bay Indian Cmty., No. 2:03-cv111 (W.D. Mich.)
Michigan collects taxes on cigarettes before a retail sale by requiring
tobacco products to bear a stamp indicating the tax has been paid. KBIC challenged the
prepayment of taxes, asserting that the process imposed too much of a burden. Judge Robert
Bell upheld Michigan’s system for refunding cigarette taxes to retail sellers located on Indian
country for sales to KBIC and its members. Id., 2005 WL 2207224 at *10 (W.D. Mich.
Sept. 12, 2005). Judge Bell also held that Article II of the 1842 Treaty did not prohibit
4
In one of its briefs, Defendants identify a dispute about the scope of the reservation land in
Baraga County. (ECF No. 365 Def. Resp. at 5 n.1 PageID.5314.) KBIC has not alleged any claims
about the size, scope, or placement of its lands. To the extent any factual dispute exists on this point,
the dispute is not material to the claims presented in the complaint and the motions.
5
Between 2003 and 2011, Michigan entered into tax agreements with ten Tribes. (ECF No.
152-2 Fratzke Dec. ¶ 12 PageID.2144.)
3
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Michigan from collecting taxes on cigarettes sold by KBIC to non-Indians. Id. at *11. The
Sixth Circuit upheld both of these findings. Keweenaw Bay Indian Cmty. v. Rising, 477 F.3d
881, 892-93 (6th Cir. 2007) (Rising I).
In 2005, KBIC filed a lawsuit to enjoin Michigan from collecting both sales taxes and
use taxes on its members. Keweenaw Bay Indian Cmty. v. Kleine, No. 2:05-cv-224 (W.D.
Mich.) Judge Gordon Quist held that KBIC had standing to challenge the enforcement of
the sales and use taxes as a violation of federal law. Id., 546 F.Supp.2d 509, 520-21 (W.D.
Mich. 2008). Judge Quist explained that the enforcement scheme for the sales and use taxes
was similar to the enforcement scheme for cigarette taxes in Rising I, but less burdensome
because KBIC and its members were not required to prepay the taxes. Id. at 525.
Ultimately, Judge Quist held that KBIC’s challenge to the sales and use tax enforcement
scheme was not ripe because the parties had not presented specific factual situations where
either KBIC or one of its members sought and was denied a tax exemption. Id. at 526. The
Sixth Circuit agreed that KBIC’s tax-related claims should be dismissed as unripe. Rising II,
569 F.3d at 594.
Following Rising II, Michigan created two forms that non-agreement tribes and their
members must use when seeking an exemption or a refund.6 Form 4765 is used by individual
members of a Tribe for their own transactions. (ECF No. 128-2 PageID.1684.) Form 4766
is used by federally recognized tribes for its transactions. (ECF No. 128-3 PageID.1687.) By
6
KBIC and its members do not need to use these particular forms for generally applicable tax
exemptions. (ECF No. 15202 Fratzke Dec. ¶ 21 PageID.2146.) The Court infers that the form is
used only for tax exemptions that are unique to Indian tribes and their members.
4
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completing either form and submitting it to the Michigan Department of Treasury, KBIC
and its members may seek a determination in advance whether a particular transaction is
subject to taxation. (ECF No. 58 Third Amended Complaint “Compl.” ¶ 41 PageID.803.)
Without an advanced determination, the purchaser must pay any tax at the time of the
transaction and then submit a completed form to request a refund of the sales or use tax
paid. (Id.)
KBIC and four of its members have since filed request for exemptions and refunds
in an effort to create the record for this lawsuit. KBIC itself submitted request forms using
the process established by Michigan. Between January 2013 and February 2017, KBIC
submitted approximately 991 claims for exemptions or refunds. (Compl. ¶ 44 PageID.804.)
The claims related to purchases of a variety of tangible personal property (e.g., motor
vehicles, office furniture, linens, uniforms, and housekeeping items) and for various services
(e.g., telephone and telecommunication services). (Id.) Of the 991 claims, 33 had not been
ruled upon when the complaint was filed. (Id.) Michigan granted only 58 and denied the
other 900 claims. (Id.)
Four members of KBIC also submitted forms following the process. Between
January 2012 and February 2017, the four members submitted approximately 254 claims for
exemption or refund. (Compl. ¶ 45 PageID.804.) The members sought exemptions and
refunds for transactions involving a variety of tangible personal property and services. (Id.
PageID.805.) Of the 254 claims, KBIC has no records indicating what decision was made
concerning 25 of the claims. (Id.) Michigan granted 68 claims and denied 161 claims. (Id.)
5
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The parties have each submitted their own summary tables for the refund and
exemption claims. The parties have also submitted declarations in which the declarants
describe the process and offer some explanations about the information the tables. (ECF
No. 128 Nichols Dec. (Plaintiff) PageID.1642; ECF No. 152-2 Fratzke Dec. (Defendants)
PageID.2141; ECF No. 152-9 Thelen Dec. (Defendants) PageID.2176.) KBIC filed a single
comprehensive table identifying 1339 claims that were submitted between July 2012 and
August 2017. (ECF No. 128-1 KBIC Summary Chart PageID.1649-82.) Defendants filed
three documents. Defendants filed a similar comprehensive table identifying 1345 claims
that were submitted between May 2012 and September 2017.7
(ECF No. 152-10
PageID.2190-2230.) Defendants filed a table summarizing information about the claims and
results identified in the first table. (ECF No. 152-11 PageID.2232-36.) The third table
provides the same summary information as the second table, but only for claims submitted
between January 1, 2014, and September 5, 2017. (ECF No. 152-12 PageID.2238-41.)
Defendants insist that Plaintiff’s table “does not fully or accurately account for the claims or
how Treasury decided them.” (ECF No. 152 at 8 PageID.2104.) Thelen explains why
Defendants submitted a second summary table: (1) most of the claims were submitted after
2013 and (2) a delay occurred in 2013 in the computer systems for refunds and checks.
(ECF No. 152-9 ¶ 43 PageID.2187.) Other than KBIC’s claims for damages in Counts 13
15 and 16, any differences between the two comprehensive tables are not material differences
that affect the cross motions for summary judgment.
7
The chart includes two claims submitted on May 4, 2012. All other claims were submitted
between July 2012 and August 2017.
6
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According to Defendants, each claim for an exemption or a refund receives an
individual review and determination. (See ECF No. 15-2 Fratzke Dec. ¶ 4.c. PageID.2142
and ¶¶ 34-40 PageID.2149-50; ECF No. 152-9 Thelen Dec. ¶¶ 8 and 9 PageID.2178.)
Generally, Michigan responds to each request for an exemption or refund with one of four
options: (1) issue a letter denying the refund or exemption; (2) issue a check or warrant when
the refund is approved; (3) issue an exemption letter when an exemption is approved; or (4)
issue a letter requesting more information or documentation from the filer. (ECF No. 1522 Fratzke Dec. ¶ 38 PageID.2150, ¶ 43 PageID.2151, and ¶ 47 PageID.2151; ECF No. 1529 Thelen Dec. ¶ 10 PageID.2178.)
II.
The legal standard for evaluating a motion for summary judgment is familiar and well
established. A trial court should grant a motion for summary judgment only in the absence
of a genuine dispute of any material fact and when the moving party establishes it is entitled
to judgment as a matter of law. Fed. R. Civ. P. 56(a). The moving party bears the burden of
showing that no genuine issues of material fact exist. Celotex Crop. v. Catrett, 477 U.S. 317,
324 (1986). To meet this burden, the moving party must identify those portions of the
pleadings, depositions, answers to interrogatories, admissions, any affidavits, and other
evidence in the record, which demonstrate the lack of genuine issue of material fact. Fed.
R. Civ. P. 56(c)(1); Pittman v. Experian Info. Sols., Inc., 901 F.3d 619, 627-28 (6th Cir.
2018). The moving party may also meet its burden by showing the absence of evidence to
support an essential element of the nonmoving party’s claim. Holis v. Chestnut Bend
Homeowners Ass’n, 760 F.3d 531, 543 (6th Cir. 2014). When faced with a motion for
7
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summary judgment, the nonmoving party “must set forth specific facts showing that there is
a genuine issue for trial.” Pittman, 901 F.3d at 628 (quoting Anderson v. Liberty Lobby,
Inc., 477 U.S. 242, 250 (1986)). The court must view the facts and draw all reasonable
inferences from those facts in the light most favorable to the nonmoving party. Maben v.
Thelen, 887 F.3d 252, 263 (6th Cir. 2018) (citing Matsushita Elec. Indust. Co. v. Zenith
Radio Corp., 475 U.S. 574, 587 (1986)). In resolving a motion for summary judgment, the
court does not weigh the evidence and determine the truth of the matter; the court
determines only if there exists a genuine issue for trial. Tolan v. Cotton, 572 U.S. 650, 656
(2014) (quoting Anderson, 477 U.S. at 249). The question is “whether the evidence presents
a sufficient disagreement to require submission to the jury or whether it is so one-sided that
one party must prevail as a matter of law.” Anderson, 477 U.S. at 251-252.
When one party moves for summary judgment, and the facts and the law clearly
establish that the other party is entitled to summary judgment on the issue, a district court
may enter summary judgment on the issue. See Wilson v. Cont’l Dev. Co., 112 F.Supp.2d
648, 663 (W.D. Mich. 1999); Eckford-El v. Toombs, 760 F.Supp. 1267, 1272 (W.D. Mich.
1991); see also Salens v. Tubbs, 292 F. App’x 438, 441 (6th Cir. 2008) (“As we have said,
granting summary judgment ‘in favor of an opposing party when one party has made a motion
for summary judgment . . . may not be as detrimental since the moving party is at least aware
that the issue has been raised.’” (quoting Employers Ins. of Wausau v. Petroleum Specialties,
Inc., 69 F.3d 98, 105 (6th Cir. 1995)).
III.
A brief summary of Michigan’s tax statutes provides necessary background.
8
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A. Sales Tax
The Michigan Legislature enacted a retail sales tax, the General Sales Tax Act, §§
205.51, et seq. (GSTA). The GSTA provides that the tax will be collected annually from the
seller, and that the tax will be calculated on six percent of the gross proceeds of the business.
Except as provided in section 2a, there is levied upon and there shall be
collected from all persons engaged in the business of making sales at retail, by
which ownership of tangible personal property is transferred for consideration,
an annual tax for the privilege of engaging in that business equal to 6% of the
gross proceeds of the business, plus the penalty and interest if applicable as
provided by law, less deductions allowed by this act.
Mich. Comp. Laws § 205.52(1). The "legal responsibility" for the sales tax falls on the retail
seller, who is responsible for remitting the tax to the state government. Andrie Inc. v.
Treasury Dep't., 853 N.W.2d 310, 314 (Mich. 2014). The GSTA "does not prohibit" the
seller from reimbursing itself "by adding to the sale price any tax levied by this act." Mich.
Comp. Laws § 205.73(1).
In 2004, as an amendment to the GSTA, the Michigan Legislature passed into law
certain provisions that allowed Michigan to participate in the Streamlined Sales Tax Project.
Among the additions, the GSTA now includes guidelines for identifying where a retail sale
occurs.
(1) For sourcing a sale at retail for taxation under this act, the following apply:
(a) If a product is received by the purchaser at a business location of the seller,
the sale is sourced to that business location.
(b) If a product is not received by a purchaser at a business location of the
seller, the sale is sourced to the location where the product is received by the
purchaser or the purchaser's designee, including the location indicated by
instructions for delivery to the purchaser, known to the seller.
Mich. Comp. Laws § 205.69(1).
9
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B. Use Tax
The Michigan Legislature also enacted a use tax, the Use Tax Act, §§ 205.91, et seq.
(UTA). The UTA provides that the tax will be collected from individuals who use tangible
personal property in the State at a rate of six percent of the price of the property or services.
There is levied upon and there shall be collected from every person in this
state a specific tax, including both the local community stabilization share and
the state share, for the privilege of using, storing, or consuming tangible
personal property in this state at a total combined rate equal to 6% of the price
of the property or services specified in section 3a or 3b. . . .
Mich. Comp. Laws § 205.93(a). The statute does not permit apportionment of the use tax
to distinguish between use of the tangible property in Indian country and use of the property
in Michigan but outside of Indian country.
The tax levied under this act applies to a person who acquires the tangible
personal property or services that are subject to the tax levied under this act
for any tax-exempt use who subsequently converts the tangible personal
property or service to a taxable use, including an interim taxable use. If
tangible personal property or services are converted to a taxable use, the tax
levied under this act shall be imposed without regard to any subsequent taxexempt use.
Id. The "legal responsibility" for the use tax "falls solely on the consumer." Andrie Inc., 853
N.W.2d at 314. "[S]ellers with sufficient connection to Michigan are required to collect the
tax and remit it to the Department of Treasury." World Book, Inc. v. Dep't of Treas., 590
N.W.2d 293, 296 (Mich. 1999) (citing Mich. Comp. Laws § 205.95). The UTA contains a
subsection that addresses taxes on personal property purchased for lease purposes.
A lessor may elect to pay use tax on receipts from the rental or lease of the
tangible personal property in lieu of payment of sales or use tax on the full cost
of the property at the time it is acquired. . . .
Mich. Comp. Laws § 205.95(4).
10
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The GSTA and the UTA are "complementary" such that property for which the use
tax is paid is not subject to the sales tax and property on which sales tax is paid is not subject
to the use tax. World Book, 590 N.W.2d at 296. A taxpayer asserting an exemption from
Michigan’s use tax must establish that sales tax was both due and paid on the retail sale of
the property. Andrie Inc., 853 N.W.2d at 315. And, the taxpayer must prove that the sales
tax was paid to the retail seller or that the retail seller remitted the sales tax to the State; no
presumption arises that a taxpayer paid the sales tax at the point of sale. Id. at 316.
C. Tobacco Tax
Michigan’s Tobacco Products Tax Act (TPTA), Mich. Comp. Laws § 205.421, et al.,
imposes an excise tax on the sale of tobacco products. The TPTA also “requires those who
manufacture, transport and sell tobacco products to obtain a license to ‘purchase, possess,
acquire for resale, or sell a tobacco product.’” Rising I, 477 F.3d at 883 (quoting Mich.
Comp. Laws § 205.423(1)). The legal incidence of the tax on tobacco products falls on the
consumer. See id. at 890. (“For these reasons, we affirm the district court’s conclusion that
the legal incidence of the tax falls on the non-tribal consumers and not on the Community.”).
In Rising I, the Sixth Circuit stated that Michigan cannot tax cigarettes sold on the reservation
to tribal members for their own use, but Michigan “can tax sales made by a tribe to individuals
who are not tribal members.” Id. at 883.
IV.
The tax disputes between KBIC and Michigan are not unique or novel. As sovereign
nations, Indian tribes have long resisted paying state taxes. When considering KBIC’s
11
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claims, this Court must keep in mind the guidelines outlined by the United States Supreme
Court.
A. State Taxation of Indians - Who and Where Factors
The United States Supreme Court has had multiple opportunities to consider a state's
attempt to tax Indian tribes and their members as well as non-Indians doing business with
Indians or doing business on Indian lands. Early on, the Supreme Court warned that
"[g]eneralizations on this subject have become particularly treacherous." Mescalero Apache
Tribe v. Jones, 411 U.S. 145, 148 (1973). A state's ability to exercise authority over Indian
tribes and tribal members is constrained by "two independent but related barriers," federal
preemption and tribal sovereignty. White Mountain Apache Tribe v. Bracker, 448 U.S.
136, 142 (1980). First, dating back to 1790, Congress enacted statutes, the Indian Trader
statutes, that have "comprehensively regulated trade with Indians to prevent 'fraud and
imposition' upon them." Cent. Mach. Co. v. Arizona State Tax Comm’n, 448 U.S. 160, 163
(1980). Second, because Indian tribes exercise some sovereignty within their territory, "there
is no rigid rule by which to resolve the question whether a particular state law may be applied
to an Indian reservation or to tribal members." Bracker, 448 U.S. at 142.
Through the years, the Supreme Court has offered some guidance on the relationship
between state tax authority and tribal sovereignty. For "Indian tax immunity cases, the 'who'
and the 'where' of the challenged tax have significant consequences." Wagnon v. Prairie Band
Potawatomi Nation, 546 U.S. 95, 101 (2005). Although Wagnon is a relatively recent
opinion, looking historically at Supreme Court opinions, the who and where considerations
factored prominently in the outcomes.
12
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1. "Where" Factor
In 1973, the Supreme Court issued companion opinions illuminating the importance
of the "where" factor. Both cases involved a state's attempt to tax Indian tribes and their
members. The two cases indicated that a state's tax authority over Indians is greater off
reservations and is very limited on reservations. In one case, New Mexico tried to collect a
sales tax and a use tax related to a ski resort operated by the Mescalero Apache Tribe on
land outside the tribal reservation. Mescalero Apache Tribe, 411 U.S. at 146. In the other
case, Arizona tried to impose personal income taxes on tribal members whose income
derived entirely from reservation sources. McClanahan v. State Tax Comm’n of Arizona,
411 U.S. 164, 165 (1973).
McClanahan establishes that "state law is generally inapplicable" for "on-reservation
conduct involving only Indians." Bracker, 448 U.S. at 144. McClanahan was resolved against
the backdrop of the well-settled doctrine of Indian sovereignty. McClanahan, 411 U.S. at
172. McClanahan was a member of the Navajo tribe and she lived on the Navaho reservation
located in Arizona. Id. at 165. The Navajo Treaty had been consistently interpreted as
establishing the exclusive sovereignty of the Navajos under federal supervision. Id. at 175.
And, a condition of Arizona's entry into the Union was that the state disclaimed rights and
titles to lands owned or held by Indians and Indian tribes. Id. "Since appellant is an Indian
and since her income is derived wholly from reservation sources, her activity is totally within
the sphere of the relevant treaty and statutes leave for the Federal Government and for the
Indians themselves." Id. at 179-80.
13
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A different outcome occurred in Mescalero Apache Tribe. The dispute concerned
a ski area that was developed under the Indian Reorganization Act and the money for the
project was a loan from the federal government under the Act. Mescalero Apache Tribe,
411 U.S. at 146.
The ski area, however, was located off of the reservation. The Court
observed that "[a]bsent express federal law to the contrary, Indians going beyond reservation
boundaries have generally been held subject to non-discriminatory state law otherwise
applicable to all citizens of the State." Id. at 148-49. The Court considered that the Indian
Reorganization Act did explicitly exclude from state taxation those lands taken or acquired
under the Act. Id. at 155. The Court then distinguished the land itself from income derived
from the land, the former being tax exempt while the latter was not. Id. at 155-56. The Court
held that Arizona could levy a sales tax on the applicable business activities at the ski resort.
Id. at 157-58. The use tax, however, could not be levied. Id. at 158-59. Permanent
improvements to the Tribe's tax-exempt land were immune from Arizona's property taxes.
Id. at 158. Arizona was levying the use tax on "personalty installed in the construction of the
ski lifts" and the parties had stipulated that the personal property had been permanently
attached to the land. Id. The Court reasoned that if Arizona could not levy property taxes
the land or its permanent attachments, it also could not levy taxes on the use of that land and
permanent attachments because "use is a tax upon the property itself." Id.
2. "Who" Factor
For the "who" factor, courts should consider "who bears the legal incidence of a tax,"
a fact that is "frequently dispositive" in Indian tax cases. Oklahoma Tax Comm’n v.
Chickashaw Nation, 515 U.S. 450, 457 (1995). The party on whom the tax is levied, the
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party responsible for paying the tax, typically bears the legal incidence of the tax. The test
imposes a "reasonably bright-line standard, from a tax administration perspective." Id. at 460.
The Supreme Court rejected an “economic realities” test as unworkable. Id. at 459. When
the legal incidence of a tax falls on non-Indians, no categorical bar prevents enforcement of
the tax and courts balance the state, federal and tribal interests. Id. at 459; see Bracker, 448
U.S. at 145 (holding that where a state asserts authority over non-Indians engaging in activity
in a reservation, courts must perform a "particularized inquiry into the nature of the state,
federal and tribal interests at stake."). However, when the legal incidence of the tax falls on
an Indian tribe or its members for activities within Indian lands, the tax cannot be enforced
without a clear signal from Congress. Id. A state may include “dispositive language” in its
statute which affixes the legal incidence of a tax on one of the parties to the transaction. Id.
at 461. Sometimes, a state’s statute does not clearly identify the entity bearing the legal
incidence of a tax. The Supreme Court has clarified that the legal incidence test is "nothing
more than a fair interpretation of the taxing statute as written and applied, without any
requirement that pass-through provisions or collection requirements be 'explicitly stated.'"
California State Bd. of Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9, 11 (1985).
Wagnon and Chickshaw Nation illustrate the different outcomes based on who bears
the legal incidence of a state-imposed tax. In Chickashaw Nation, Oklahoma imposed a tax
on fuel sold by the Chickashaw Nation tribe. Chickashaw Nation, 515 U.S. at 457. The
legislation required fuel distributors, on behalf of the licensed retailer, to remit the taxes due
to the State’s Tax Commission. Id. at 461. After considering other provisions within the
statute, the Court held that the tax was imposed on the retailer, not the distributor. Id. at
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461-62. Because Oklahoma was levying a tax on the fuel sold by the Tribe in Indian country,
the excise tax was unenforceable.8 Id. at 453.
In Wagnon, Kansas imposed a tax on the initial receipt of motor fuel by fuel
distributors. Wagnon, 546 U.S. at 99. The non-Indian fuel distributors subsequently
delivered fuel to gas stations owned by an Indian tribe and located on the tribe's reservation.
Id. The state statute specified that "the incidence of this tax is imposed on the distributor of
the first receipt of the motor fuel." Id. at 102 (quoting Kan. Stat. Ann. § 79-3408(c)). Fuel
distributors passed along the cost of the tax to their customers, including the Tribe. Id. at
99-100. The Supreme Court held that the tax was a valid exercise of state authority. Id. at
115.
B. Bracker Balancing
For situations involving a State's authority over the conduct of non-Indians engaging
in activity on Indian land, the Supreme Court requires a court to balance competing state,
federal and tribal interests. Bracker, 448 U.S. at 144-45; see Ramah Navajo School Bd., Inc.
v. Bureau of Revenue of New Mexico, 458 U.S. 832, 838 (1982). Weighing these factors, a
court must decide if federal interests preempt state interests or whether a state can advance
its interests consistent with federal interests.9
The majority was careful to note that the tax "as currently designed" was unenforceable. Id.
at 453. Later in the opinion, the majority commented that Oklahoma could have amended the law
to shift the legal incidence of the tax to consumers, rather than the retailers. Id. at 460.
9
The Court uses the term “federal interests” broadly to include tribal interests. As Bracker
explains, federal interests and tribal interests can independently provide a sufficient basis for
preempting the state’s law, but federal and tribal interests are interdependent because a tribe’s right
to self-government depends upon and is subject to federal legislation. Bracker, 448 U.S at 143.
8
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Bracker and Ramah illustrate how comprehensive federal legislation can preempt a
state’s attempt to tax activities by non-Indians on Indian land. Bracker involved state taxes
imposed on a non-Indian logging company working a reservation. The Court began by
identifying the economic interests of the Apache Tribe and the federal statutes and
regulations relevant to the commercial operation giving rise to the dispute. Over ninety
percent of the Tribe's annual profits came from its timber operations. Bracker, 448 U.S. at
138. Under federal law, the timber on the reservation is owned by the United States for the
benefit of the Tribe and the timber could not be harvested without permission from
Congress. Id. The Secretary of the Interior authorized the formation of the Fort Apache
Timber Company (FATCO), which was a tribal company for managing and selling timber.
Id. at 139. The United States contracted with FATCO to harvest timber and FATCO, in
turn, contracted with logging companies, including non-Indian companies. Id.
Arizona levied taxes on a non-Indian logging company, which were paid under
protest. One tax was a motor carrier license tax based on a percentage of the carrier's gross
receipts. Bracker, 448 U.S. at 139. Arizona also collected a fuel tax which was levied for the
purpose of compensating Arizona for the use of its roads. Id. at 139-40. For the litigation,
the parties conceded the carrier's tax liability associated with travel on the State's roads in the
reservation. Id. at 140 n.6.
To resolve the dispute, the Court identified several factors that had to be considered
when states attempt to tax non-Indians for conduct occurring on Indian land.
In such cases we have examined the language of the relevant federal treaties
and statutes in terms of both the broad policies that underlie them and the
notions of sovereignty that have developed from historical traditions of tribal
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independence. This inquiry is not dependent on mechanical or absolute
conceptions of state or tribal sovereignty, but has called for a particularized
inquiry into the nature of the state, federal, and tribal interests at stake, an
inquiry designed to determine whether, in the specific context, the exercise of
state authority would violate federal law.
Bracker, 448 U.S. at 145 (emphasis added). Thus, the independent but related concepts of
tribal sovereignty and federal supremacy, id. at 143, must be weighed against any regulatory
interest of the State, id. at 144. The Court concluded the relevant factors overwhelming
favored federal preemption: the federal regulation of harvesting Indian timber was
comprehensive through federal statutes, detailed regulations promulgated by the Secretary
of the Interior, and day-to-day supervision by the Bureau of Indian Affairs. Id. at 145-48.
In addition to interfering with federal regulatory schemes, Arizona could not identify any
regulatory function or service it provided that would justify levying taxes for use of the
Bureau's and the Tribe's roads. Id. at 148-49. The Court also found that the taxes threatened
the Tribal profits derived from the timber sales. Id. at 149. The United States has a general
policy of encouraging tribal self-governance and control over their business and economic
affairs. Id.
These same concerns required the same outcome in Ramah. Instead of timber sales,
that case involved the construction of a school. The Ramah Navajo Chapter formed a school
board and, with funds provided by the Bureau of Indian Affairs, it operated an independent
school for the benefit of Navajo children. Ramah Navajo Sch. Bd., 458 U.S. at 834. The
Board later solicited funds from Congress for construction of a new building and contracted
with the BIA for the design of the school. Id. at 835. The Board hired sub-contractors,
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including a non-Indian sub-contractor. When New Mexico collected taxes from the subcontractor, which were passed to the Board, the Board sued.
The Court found the facts "indistinguishable in all relevant aspects from [Bracker].
Ramah Navajo Sch. Bd., 458 U.S. at 839. "Federal regulation of the construction and
financing of Indian educational institutions is both comprehensive and pervasive." Id. After
summarizing the balancing scheme from Bracker, the Court noted that the preemption
analysis was not controlled by standards in other preemption situations. Id. at 838. "Instead,
the traditional notions of tribal sovereignty, and the recognition and encouragement of this
sovereignty is congressional Acts promoting tribal independence and economic
development, inform the pre-emption analysis that governs this inquiry." Id. And, Congress
need not have explicitly announced an intention to pre-empt state activity. Id.
In contrast to Bracker and Ramah, in Cotton Petroleum Corporation v. New Mexico,
490 U.S. 163 (1989), the Supreme Court held that federal and tribal interests did not
preempt New Mexico’s severance tax on the production of oil and gas by a non-Indian
company on leases within a tribe’s reservation. The leases were located on land owned by
the United States and held in trust for the Jacarilla Apache Tribe. Id. at 166. The Tribe
leased the land to non-Indian companies for oil and gas production. Id. at 167. The
Secretary of the Interior authorized the Tribe to impose taxes on non-members doing
business on the reservation. Id. The Tribe levied both a severance tax and a privilege tax,
both of which were authorized by the Secretary. Id. at 167-68. New Mexico also levied
multiple taxes on the production of oil and gas within the state. Id. at 168.
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Cotton Petroleum challenged New Mexico’s taxes relevant to the oil and gas leases
on the reservation. The Court conducted a Bracker balancing analysis. Cotton Petroleum,
490 U.S. at 176-87. Beginning with federal interest, the Court found that the 1938 Indian
Mineral Leasing Act did not preclude state taxation, even if the purpose of the 1938 Act was
to provide Indian tribes with needed revenue. Id. at 180. The Court found no history or
tradition of tribal independence from state taxation under which oil and gas lessees could
find immunity. Id. at 182. Finally, the Court found that New Mexico provided substantial
services to both the Jicarilla Tribe and to Cotton Petroleum and also regulated the spacing
and integrity of Cotton Petroleum’s wells. Id. at 185. Balancing these interests, the Court
held that federal law did not preempt New Mexico’s oil and gas severance taxes. Id. at 18687.
V.
With this background and context, the Court considers the cross motions for partial
summary judgment.
A. Count 1 - Sales Tax - Per Se Rule10
In Count 1, KBIC alleges that Michigan’s sale tax, as applied to KBIC and its
members for products and services used exclusively within their Indian country, is per se
unconstitutional. Specifically, KBIC contends that Michigan cannot collect a sales tax on a
transaction (purchase, lease, or rental of personal tangible property) between a non-Indian
retailer and an Indian when the personal tangible property is used exclusively in Indian
10
Plaintiff’s first motion for partial summary judgment. (ECF No. 126 Pl. Br. at 23-27
PageID.1622-26.)
20
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country. KBIC succinctly summarizes its reasoning: “For purposes of applying this federal
immunity, vendors making sales to Indians within their Indian country qualify as Indian
traders regardless of whether the vendors have Indian trader licenses or places of business
within Indian country.” (ECF No. 126 at 23 PageID.1622.) KBIC generally relies on
Warren Trading Post v. Arizona Tax Commission, 380 U.S. 685 (1965), Central Machinery
Company v. Arizona State Tax Commission, 448 U.S. 160 (1980) and Department of
Taxation v. Milhelm Attea & Brothers, Inc., 512 U.S. 51 (1994).
KBIC contends that the Supreme Court applies a per se rule. Defendants disagree.
Both parties’ approach this claim as a question of law. They generally agree that no material
facts are in dispute. For this claim, the transaction occurs between an Indian and a nonIndian trader and the goods or services are used entirely in KBIC’s Indian country. None
of the claims involve KBIC or one of its members acting as a retailer. (ECF No. 152-2
Fratzke Dec. ¶ 52 PageID.2152; ECF No. 152-9 Thelen Dec. ¶ 23 PageID.2181.) And,
none of the sales tax claims involve a retailer licensed under the Indian Trader Statutes or a
purchase financed or approved by the Bureau of Indian Affairs. (ECF No. 152-2 Fratzke
Dec. ¶ 53 PageID.2153.) Plaintiffs have not argued or presented evidence otherwise.11
For this lawsuit, the Court assumes all of the transactions occurred within KBIC’s
Indian country. KBIC argues that all of its exemplar claims “involve purchases and use
within the Reservation, based on established Michigan rules for determining the location of
11
In the Complaint, KBIC alleges that, in some cases, the retail sellers are also members of
KBIC. (Compl. ¶ 110 PageID.822.) The Court has not identified any evidence in the record to
support this allegation.
21
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a transaction for tax purposes[.]” (ECF No. 126 at 11 PageID.1610.) KBIC submitted four
declarations from tribal members, all of which contain the exact same language. In relevant
part, each individual states “[t]he exemplar claims that I submitted do not represent all
instances in which I was required to pay sales or use tax with respect to a transaction that
took place in the Community’s Indian country or property stored in the Community’s Indian
country.” (ECF No. 131 E. Mayo Dec. ¶ 4 PageID.2032; ECF No. 132 S. Mayo Dec. ¶ 4
PageID.2036; ECF No. 133 S. LaFernier Dec. ¶ 4 PageID.2040; ECF No. 134 M. LaFernier
Dec. ¶ 4 PageID.2044.) The Court notes that the form requests information that would
assist Michigan in determining where a transaction occurred: the location of solicitation,
payment, the signing of any contract, and where the exchange of possession occurred. (ECF
No. 128-2 PageID.1684.) For most or all of the claim forms in the record, KBIC and its
members indicated that the solicitation, payment, and exchange of possession occurred on
the Tribes’ reservation.12 In the denial letters for many of these claims, Michigan wrote, in
part, that the information provided indicates that some or all of the transactions occurred
with the Tribe’s Indian country or it is unclear and, therefore, Michigan used the Bracker
balancing test.13 Defendants do not assert any factual dispute concerning the location of the
transactions.
Warren Trading and Central Machinery involved an Arizona sales tax, while Milhelm
Attea involved cigarette taxes. In 1965, in Warren Trading, the Supreme Court held that
E.g., ECF No. 129-2 claim form for natural gas purchase from SEMCO PageID.1788; ECF
No. 129-3 claim form for paint and supplies from Sherman Williams PageID.1799; ECF No. 1297 claim form for a toy and a sauté pan from Walmart.com PageID.1839—40.
13
E.g., ECF No. 129-2 PageID.1785; ECF No. 129-3 PageID.1796; ECF No. 129-7
PageID.1837.
12
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Arizona's sales tax could not be levied on a retail trading business operating on the Navajo
Reservation under a license issued by the Bureau of Indian Affairs. Warren Trading, 380
U.S. at 691-92. The Court reasoned that the federal legislation and regulations were
comprehensive and that "no room remains for state laws imposing additional burdens upon
traders." Id. at 690. Fifteen years later, in Central Machinery, the Supreme Court considered
application of the same sales statute to a retailer without a license. Central Machinery sold
11 tractors to a farming business operated by the Gila River Indian Tribe.
Central
Machinery, 448 U.S. at 161. The farms were located exclusively on Indian land, the
transaction was solicited on the reservation, the contract was formed on the reservation, and
the payment for and delivery of the tractors occurred on the reservation. Id. And, the
Bureau of Indian Affairs approved the transaction. Id. Unlike the retailer in Warren
Trading, however, Central Machinery did not have a retail store on the reservation and was
not licensed to engage in trade with the Tribe. Id. The Court found these two differences
to be without distinction. Id. at 164-65. The Court again concluded that Arizona could not
levy its sales tax on the transaction because the Indian Trader Statutes "preempts the field of
transactions with Indians occurring on reservations." Id. at 165.
Fourteen years after Central Machinery, in Milhelm Attea & Brothers, the Supreme
Court considered New York's scheme for taxing cigarette sales on Indian reservations. New
York imposed a per pack tax on cigarettes, but tribal members who purchased cigarette packs
on Indian reservations were exempt from the tax. Milhelm Attea, 512 U.S. at 64. To prevent
non-Indians from avoiding the tax, New York imposed recordkeeping requirements and
quantity restrictions on cigarette wholesalers for sales to tribes and tribal retailers. Id. The
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wholesalers filed a facial challenge to the regulatory scheme. Id. at 69. The Court ultimately
upheld the regulatory scheme.
The Court offered some clarification of the law concerning the sale of goods on
Indian reservations. The Court clarified that, since Warren Trading, the Court's opinions
have "undermined" the proposition that "no state regulation of Indian traders can be valid."
Milhelm Attea, 512 U.S. at 71 (citing Central Machinery, 448 U.S. at 172). States can require
tribal retailers to collect taxes on goods sold to non-Indians and to keep records of those
sales. Id. at 71-72 (discussing Moe v. Confederated Salish and Kootenai Tribes of the
Flathead Reservation, 425 U.S. 463 (1976) and Washington v. Confederated Tribes of the
Colville Indian Reservation, 447 U.S. 134 (1980)).
KBIC is not entitled to summary judgment on Count 1. Because this dispute does
not rest on any factual dispute, the Court concludes Defendants are entitled to summary
judgment and dismissal of Count 1. Under Michigan law, the burden of the sales tax falls on
the retailer. In this lawsuit, the retailers are non-Indian entities. The Supreme Court has
expressly rejected any categorical bar or per se rule which would prevent the collection of
sales tax in these circumstances. See Chickashaw Nation, 515 U.S. at 459 (“But if the legal
incidence of the tax rests on non-Indians, no categorical bar prevents enforcement of the tax;
. . . .”).
KBIC’s authority does not support the conclusion that a per se rule prohibits the
application of state sales taxes to retailers simply because the sale, lease or rental of tangible
personal property is made to a member of an Indian tribe or the Tribe itself and because
the transaction occurred within KBIC’s Indian country. While Warren Trading and Central
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Machinery might suggest such a categorical rule, the Supreme Court disavowed any such
interpretation in Milhelm Attea. Furthermore, the statements in Milhelm Attea on which
KBIC relies are, at best, dicta. The issue in Milhelm Attea was the sale of cigarettes to nonIndians. Any comments by the Court about sales to Indians were not essential to the holding.
Similarly, KBIC’s authority does not support the conclusion that a per se rule
prohibits state sales taxes on all retailers for transactions with a member of an Indian tribe or
the Tribe itself where the object of the transaction will be used in their Indian country. The
holding in Bracker, which the Court quoted earlier, undermines completely KBIC’s
argument. The Court explained that courts must perform “particularized inquiry.” Bracker,
448 U.S. at 145. Notably, Central Machinery and Bracker were companion cases issued on
the same day.
B. Count 2 - Sales Tax - Bracker Balancing Test14
In Count 2, KBIC asserts that federal and tribal interests outweigh Michigan’s
interests relevant to the assessment of Michigan’s sales tax on non-Indian retail sellers for
goods sold to KBIC and its members and used by KBIC and its members in KBIC’s Indian
country. Both parties have requested summary judgment on Count 2. KBIC argues that the
federal government and tribal governments share an interest in tribal economic development
and in tribal self-government. KBIC attempts to identify how the federal government has
14
Plaintiff’s second motion for partial summary judgment. (ECF No. 364 Pl. Br. at 23-38
PageID.5272-87.) Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at
24-28 PageID.3569-3574.)
25
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comprehensively regulated various of federal-tribal relations. Finally, KBIC argues that
Michigan cannot identify a sufficient interest to justify the sale taxes.
The parties do not dispute several important facts. The undisputed facts relate to the
“who” question. First, the parties do not dispute that the retail sellers involved in the disputes
relevant to this claim are not Indian retail sellers. Second, the parties do not dispute that the
purchase of the goods involved in these transactions was an Indian purchaser, either KBIC
or a member of KBIC.
The Court concludes that the record contains no material dispute of facts that the
exemplar transactions occurred in KBIC’s Indian country.15 In addition to requesting
information about the location of the transaction, the two forms used for refunds and
exemptions also request information about the location of the filer’s residence, where the
item will be used, and the location of the seller. The Court has reviewed each of the
completed forms submitted for a refund by members of KBIC and attached to KBIC’s first
motion for partial summary judgment, exhibits 7 through 31. On each form, the member
checked the boxes indicating that the solicitation, payment and exchange of possession
occurred on KBIC’s reservation. If the member signed a contract, that event also occurred
on KBIC’s reservation.
When Michigan addressed the question of location of the
transaction in the letters responding to the submitted forms, Michigan avoided making any
determination. The letters contain the same generic statement.
15
The parties do dispute whether the Sales Tax Sourcing Rule, Michigan Compiled Laws §
205.69, applies to the determination of the location of these transactions. Because the parties do
not dispute that the exemplar transactions occurred in Indian Country, the Court does not need to
decide if § 205.69 applies.
26
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In reviewing the information submitted regarding the above purchase, it
appears that the transaction either took place within the Tribe’s Indian
Country, or it is unclear. However, given that the balancing test favors the
State in these instances, further analysis in this area is unnecessary.
(ECF No. 129-1 PageID.1170.) In their response brief, Defendants argue that the location
of the particular transactions are not in dispute because KBIC “does not identify a single
claim in which Treasury failed to apply the Bracker test because it thought the sale occurred
outside of Indian Country.” (ECF No. 365 PageID.5232.)
Application of the Bracker test requires the Court to determine whether federal
legislation has pre-empted state taxation. “Under the current doctrine, a State can impose a
nondiscriminatory tax on private parties with whom the United States or an Indian tribe does
business, even though the financial burden of the tax may fall on the United States or tribe.”
Cotton Petroleum, 490 U.S. at 175. The particularized Bracker inquiry demands a “flexible
pre-emption analysis sensitive to the particular facts and legislation involved.” Id. at 176. “It
bears emphasis that although congressional silence no longer entails a broad-based immunity
from taxation for private parties doing business with Indian tribes, federal pre-emption is not
limited to cases in which Congress has expressly—as compared to impliedly—pre-empted the
state activity.” Id. at 176-77.
Courts consider the history of tribal sovereignty as backdrop to the Bracker balancing
inquiry. Cotton Petroleum, 490 U.S. at 176. The Supreme Court has observed, in its own
opinions, a “trend . . . away from the idea of inherent Indian sovereignty as a bar to state
jurisdiction and toward reliance on federal pre-emption.” Rice v. Rehner, 463 U.S. 713, 718
(1983) (quoting McClanahan, 411 U.S. at 172); see Arizona Dept. of Revenue v. Blaze
27
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Constr. Co., Inc., 526 U.S. 32, 36 n.2 (1999) (“Blaze also appears to argue that Arizona’s tax
infringes on the Tribe’s right to make their own decisions and be governed by them and that
this is sufficient, by itself, to preclude application of Arizona’s tax. Our decisions upholding
state taxes in a variety of on-reservation settings squarely forecloses that argument.”) (internal
citation and citations omitted). Thus, a court’s determination of preemption should be
“informed by historical notions of tribal sovereignty, rather than determined by them.” Id.
Courts should take into consideration “the tradition of Indian sovereignty as a ‘backdrop
against which the applicable treaties and federal statutes must be read’ in our preemption
analysis.” Rice, 463 U.S. at 719 (quoting McClanahan, 411 U.S. at 172).
KBIC identifies four categories or circumstances where state sales taxes should be
preempted: (1) the tax intrudes on federal government regulation intended to benefit a tribe;
(2) the tax burdens reservation value in which a tribe has a significant interest; (3) the
economic burden falls directly on a tribe; and (4) the tax is imposed without relation to a
state service provided on the reservation to the taxpayer or to the activity burdened by the
tax. (ECF No. 364 at 26 PageID.5275.) But, Bracker requires a particularized inquiry into
the specific context. Challenges to a state’s tax based on the Bracker balancing test likely
cannot be resolved based on broad categories as urged by KBIC.
KBIC also discusses four factors relevant to a Bracker analysis, which the Court
analyzes below.
1. Burden of the Sales Tax
First, KBIC argues that KBIC and its members bear the burden of the sales tax, which
“should end” the inquiry. (ECF No. 364 at 27 PageID.5276.) The Michigan statute explicitly
28
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places the legal incidence of the tax on the retail seller. See Mich. Comp. Laws § 205.52(1);
Andrie Inc. 853 N.W.2d at 314. “[I]f the legal incidence of the tax rests on non-Indians, no
categorial bar prevents enforcement of the tax; if the balance of federal, state, and tribal
interests favors the State, and federal law is not to the contrary, the State may impose its tax.”
Chickasaw Nation, 515 U.S. at 459. KBIC cites Ramah and Bracker, which found that the
economic burden fell on the tribe. The relevant sentences in Ramah and Bracker both end
with footnotes that distinguish between the legal incidence of a tax and the economic burden
of a tax. Ramah, 458 U.S. at 844 n.8; Bracker, 448 U.S. 151 n.15. In both footnotes, the
Court explained that the economic burden of the tax, by itself, was not sufficient for
preemption. Federal preemption occurs when the economic burden of the tax falls on a
tribe and there exists “a comprehensive federal regulatory scheme, which . . . leaves no room
for the additional burdens sought to be imposed by state law.” Bracker, 448 U.S. at 151
n.15. That KBIC and its members bear the economic burden of the sales tax is a factor the
Court considers, but it does not end the inquiry. The Court also notes that the goods that
are transferred when the tax is levied derive no value whatsoever from any activity in KBIC’s
Indian Country. Michigan levies the tax on the initial sale from the non-Indian retail seller
to KBIC or its members.
2. Indian Sovereignty Interests
As the second consideration, KBIC argues that the sales tax interferes with its
sovereignty interests and its interest in self-governance. KBIC reasons that it operates more
than twenty programs that provide government or government-type services to its members.
KBIC funds those programs through its various enterprises, like the casinos and gaming
29
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facilities. The revenues from those enterprises are essential to KBIC’s self-determination
and economic development. For this second argument, KBIC relies on the economic
burden of the tax, which is passed along by the retail seller. (ECF No. 364 at 29 PageID.5278
“There is no dispute that the Community and its members bear the economic burden of the
Sales Tax in their purchases on the Reservation.”). KBIC reasons that when it pays the sales
tax, the funds for its government programs and services are reduced.
KBIC has not established that tribal sovereignty provides a basis for preemption of
Michigan’s sales tax when applied to retail purchases on tribal lands by KBIC or its members
from non-Indian retailers. In Rice, the Court summarized how tribal sovereignty should be
considered in a preemption analysis.
When we determine that tradition has recognized a sovereign immunity
in favor of the Indians in some respect, then we usually are reluctant to infer
that Congress has authorized the assertion of state authority in that respect
except where Congress has expressly provided that State laws shall apply.
Repeal by implication of an established tradition of immunity or selfgovernance is disfavored. If, however, we do not find such a tradition, or if we
determine that the balance of state, federal, and tribal interests so requires, our
pre-emption analysis may accord less weight to the backdrop of tribal
sovereignty.
Id. at 719-20 (cleaned up; internal citations and citations omitted). KBIC has not identified,
or even attempted to identify, any history or tradition of tribal sovereignty that would function
to preempt a generally applicable sales tax. More specifically, the Supreme Court has
rejected the argument that a state tax should be preempted on tribal sovereignty grounds
because the tax generally burdens tribal revenues which consequently undermines a Tribe’s
ability to fund governmental programs. Colville, 447 U.S. at 156-57; see Wagnon, 546 U.S.
at 114 (“But the Nation cannot invalidate the Kansas tax by complaining about a decrease in
30
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its revenues.”) (citing Colville). In the challenge to imposition of the sales tax, tribal
sovereignty remains a factor, but a factor that the Court affords little weight in this
circumstance.
3. Federal Legislation
For its third consideration, KBIC argues that federal policy and federal statutes
demonstrate comprehensive regulation such that the sales tax must be preempted. KBIC
identified three such areas. KBIC contends (1) through the Indian Trader Statute, the
federal government enacted comprehensive legislation regulating trade between Indian
purchasers and non-Indian sellers on a reservation; (2) through the Indian Gaming
Regulatory Act, (IGRA), the federal government established a comprehensive regulatory
structure for Indian gaming, with the goal of promoting tribal self-sufficiency, tribal economic
development, and tribal government; and (3) through the Indian Self-Determination and
Education Assistance Act (ISDA), the federal government has established a framework for
Indians to develop and to administer their own economies and programs with the goal of
transitioning away from the federal government’s trust responsibility.
KBIC has not established a basis for federal preemption under the Indian Trader
Statutes. KBIC has not established that any of the exemplary transactions occurred with a
federally licensed Indian trader or as part of a federally approved contract. Warren Trading
Post and Central Machinery are the two Supreme Court opinions involving the Indian
Trader Statutes. Warren Trading Post involved a federally licensed Indian trader located
on a reservation and the Court precluded Arizona from taxing the proceeds of the Indian
trader’s transactions with the Navajo on the Navajo reservation. Warren Trading Post, 380
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U.S. at 691-92 (“Insofar as they are applied to this federally licensed Indian trader with
respect to the sales made to reservation Indians on the reservation, tese [sic] state laws
imposing taxes cannot stand.”) In Central Machinery, the Court addressed the exact same
state tax which Arizona attempted to levy on a transaction between the Gila River Indian
Tribe and a company selling farming equipment. The Court noted that “it should be
recognized that the transaction at issue in this case was subject to comprehensive federal
regulation. Although appellant was not licensed to engage in trading with Indians, the Bureau
of Indian Affairs had approved both the contract of sale for the tractors in question and the
tribal budget, which allocated money for the purchase of this machinery.” Central Mach.,
448 U.S. at 165 n.4.
KBIC’s interpretation of the Indian Trader Statutes presents a potential unintended
consequence, one that would create huge economic problems for KBIC and its members.
KBIC asks the Court to find that Congress intended to comprehensively regulate all trade
between Indians and non-Indian retail sellers when the transaction occurs in Indian country.
As noted in Warren Trading Post, federal regulations impose “penalties for acting as a trader
without a license.” 380 U.S. at 689. Under the current regulations, non-Indians who
introduce or trade goods on an Indian reservation without a license “shall forfeit all
merchandise offered for sale to the Indians or found in his possession, and shall moreover
be liable to a penalty of $1,368[.]” 25 C.F.R. § 140.3. The retail sellers in Warren Trading
Post and Central Machinery obtained federal approval of the disputed sales, which was why
the state could not tax the transactions. Adopting KBIC’s interpretation of the Indian Trader
Statute would require every single non-Indian retail seller who delivers goods to a reservation
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to either obtain a license or seek federal approval or risk the penalty. The unintended
consequence of accepting KBIC’s interpretation of the Indian Trader Statutes would be to
shut off all trade between Indians and non-Indian retail sellers in KBIC’s Indian country.
KBIC has not established a basis for federal preemption based on the IGRA. The
IGRA comprehensively regulates “class III gaming activity,” which “means just what it sounds
like—the stuff involved in playing class III games.” Michigan v. Bay Mills Indian Cmty., 572
U.S. 782, 792 (2014); see Navajo Nation v. Dalley, 896 F.3d 1196, 1207 (10th Cir. 2018)
(“The Court’s analysis in Bay Mills leads us to the clear conclusion that Class III gaming
activity relates only to activities actually involved in the playing of the game, and not activities
occurring in proximity to, but not inextricably intertwined with, the betting of chips, the
folding of a hand, or suchlike.”) (italics in original). KBIC has not identified any of the
exemplary transactions that involve the application of Michigan’s sales tax to a gaming activity
in KBIC’s Indian country.
KBIC has not established a basis for federal preemption based on the ISDA. The
ISDA allows tribes to “enter into self-determination contracts with federal agencies to take
control of a variety of federally funded programs.” Menominee Indian Tribe of Wisconsin
v. United States, 577 U.S. 250, 252 (2016); see Salazar v. Ramah Navajo Chapter, 567 U.S.
182, 186 (2012) (“To that end, the Act directs the Secretary of the Interior, ‘upon request of
any Indian tribe . . . to enter into a self-determination contract . . . to plan, conduct, and
administer’ health, education, economic, and social programs that the Secretary otherwise
would have administered.”) (citing 25 U.S.C. § 450f(a)(1)). KBIC reasons that if a state could
not tax purchases made by a federal agency operating one of the programs, then a state
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should not be able to tax a tribe that takes control of the federal program. First, by crafting
a test that balances competing interests, the Supreme Court implicitly rejected any suggestion
that federally recognized tribes must be afforded the same immunity from state taxes that the
federal government enjoys. Second, KBIC has not demonstrated that any of the exemplary
purchases were made by KBIC as part of the administration of an ISDA self-determination
contract. KBIC’s authority on this argument, United States v. California, 507 U.S. 746, 753
(1993), does not support its argument. That dispute arose from a contract between the
federal government and Williams Brothers Engineering Company (WBEC), which included
a reimbursement for costs. California assessed sales and use taxes on WBEC. Later, the
federal government sued California to recover some of the costs charged by WBEC. The
Court began with the principle that a state cannot impose a tax on the federal government
directly. Id. (“Tax immunity is ‘appropriate in only one circumstance: when the levy falls on
the United States itself, or on an agency or instrumentality so closely connected to the
Government that the two cannot realistically be viewed as separate entities.’”) (citation
omitted). The next paragraph clarifies what was and what was not taxed. “It is beyond
peradventure that California did not tax—indeed, could not have taxed—the Federal
Government in this case. California taxed the WBEC. And the Government’s voluntary
agreement to reimburse (or even fund in advance) WBEC for those taxes does not make the
Government’s payments direct disbursements of federal funds to the State.” Id.
4. State Interests
KBIC argues that Michigan does not have a legitimate interest to support imposing
its sales tax on the transactions. KBIC objects to Defendants’ use of the concept of “essential
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government services” as a means of distinguishing between tax exempt purchases and
purchases that are not exempt. KBIC also argues that Michigan can only identify generalized
state interests to support the sales tax and cannot establish any nexus between the activity
taxed and the services provided by Michigan.
KBIC’s objection to Michigan’s use of the concept “essential government services”
does not address Michigan’s interest in levying its sales tax. Michigan uses the concept to
identify KBIC’s sovereignty and self-governance interests. Michigan does not use the
concept to identify its own interests. When Michigan concludes that KBIC’s purchase
supports an essential government service, it grants a sales tax refund. Michigan does not use
the concept to deny requests for tax exemption. When Michigan concludes the purchase
does not relate to essential government services, it applies the Bracker balancing test. KBIC
is not entitled to any relief on the basis of this particular objection.
The Court agrees with KBIC that Michigan’s interest in imposing and collecting the
sales tax supports only general projects and services. The services provided by the revenue
generated by the sales tax is not directly connected to the activity subject to the tax. Michigan
uses sales tax revenue to fund a variety of projects, including schools, roads, and local
governments. (See ECF No. 317-29 Darragh Rept. At 6 PageID.3701.) KBIC and its
members do receive a benefit from those services. KBIC members can and do attend local
schools. KBIC members drive the local roads. And, KBIC and its members are eligible to
receive some of the services offered by local governments. That KBIC also contributes to
local schools and governments does not undermine Michigan’s interest in those projects and
services.
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Nevertheless, KBIC has not demonstrated that Michigan’s general interests are
insufficiently related to the transactions such that the Court should preclude Michigan from
collecting the tax. In both Bracker and Ramah, the Supreme Court found that the state’s
general interest in raising revenue was insufficient to allow the state to levy the tax. Ramah,
458 U.S. at 845; Bracker, 448 U.S. at 150. But, weighing against that general interest in both
Bracker and Ramah were comprehensive federal regulatory programs covering the very
activity subject to the state’s tax, something not present in this dispute. Ramah, 458 U.S. at
839 (“Federal regulation of the construction and financing of Indian educational institutions
is both comprehensive and pervasive.”); Bracker, 448 U.S. at 149 (“The imposition of the
taxes at issue would undermine that policy in a context in which the Federal Government
has undertaken regulate the most minute details of timber production and expressed a firm
desire that the Tribe should retain the benefits derived from the harvesting and sale of
reservation timber.”).
5. Other Concerns
Weighing the interests of the federal government, KBIC, and Michigan, the Court
concludes that the balance of interests does not result in federal preemption. None of the
federal statutes and regulations identified by KBIC so thoroughly permeate the federal
relationship with KBIC that Michigan’s sales tax would impermissibly interfere with the
situation. KBIC has not identified any historical tradition of sovereignty concerning the
purchase of ordinary goods used in daily life and in commercial enterprises. And, while
Michigan has only a general interest in raising revenue, the counterbalancing interests are
insufficient for this Court to conclude that the sales tax should be preempted. Accordingly,
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Defendants are entitled to summary judgment on Count 2 and KBIC is not entitled to
summary judgment on Count 2.
In addition to the interests discussed above, which were advanced by KBIC, the Court
identifies two other concerns that support the Court’s conclusion. First, the earliest federal
regulation of Indian traders dates to 1790. Warren Trading Post, 380 U.S. 685. The Indian
Trader Statutes were first enacted in 1882. The modern retail sales tax in the United States
began sometime in the late 1920s or early 1930s. By 1970, most states had adopted some
sort of retail sales tax.16 While this scenario—non-Indian retail sellers conducting transactions
in Indian Country—may have been less common in the past, with the explosion of on-line
shopping and delivery services, the situation would appear relatively ubiquitous except for
the most isolated Indian reservations. Nevertheless, KBIC has not identified a single
instance in which state’s general, non-discriminatory retail sales tax, collected from a nonIndian retail seller, has been successfully challenged by an Indian purchaser when the
transaction occurred in Indian Country.
Second, KBIC does not distinguish between purchases made by the Tribe and
purchases made by its members. Indeed, KBIC argues that its “interests apply with equal
force to refund and exemption claims submitted by Community members.” (ECF No. 364
at 30 PageID.5279.) The authority cited by KBIC on this point does not support the
conclusion it asserts. And, none of KBIC’s authority involves a Bracker balancing analysis,
which requires a particularized inquiry. While Michigan’s interests might not change, the
Kirk J. Stark, The Uneasy Case for Extending the Sales Tax to Services, 30 Fl. St. U. L. R.
435, 440 (2003)
16
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federal and tribal interests may be affected by the purchaser and the goods purchased. For
example, KBIC’s purchase of natural gas to heat a bingo hall (ECF No. 155-2 PageID.2442)
may implicate certain federal and tribal interests that would not be affected by a community
member’s purchase of natural gas to heat a home (ECF No. 155-3 PageID.2452). KBIC’s
purchases of accessories for law enforcement vehicles (ECF No. 155-1 PageID.2440) may
implicate certain federal and tribal interests that would not be affected by a community
member’s purchase of auto parts for use in a personal vehicle (ECF No. 129-1 PageID.1773).
And, clothing and uniform purchases by one of the tribal enterprises that is part of a casino
may implicate federal and tribal interests (ECF No. 129-20 PageID.1974) that would not be
affected by clothing purchases made by a member of KBIC (ECF No. 129-12 PageID.1895).
By treating all purchases equally, KBIC has not engaged in the sort of specific inquiry
required by the Bracker test.
Finally, the Court concludes that Defendants’ process for determining whether
refunds of the sales tax are appropriate does not violate Bracker balancing. Bracker requires
a particularized and specific inquiry. The exemplary requests illustrate the difficulty in
reaching broad categorical conclusions about when the sales tax should apply to a particular
transaction. The forms created by Defendants seek information about the specific purchase,
information that is relevant under the Bracker test. To the extent KBIC advances a Bracker
challenge to the process for obtaining a refund, KBIC is not entitled to any relief.
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C. Count 3 - Sales Tax - Tribal Self Government17
In Count 3, KBIC asserts that Michigan’s sales tax, when applied to purchases and
leases made by KBIC and its members within KBIC’s Indian country, infringes KBIC’s
rights of self-government and inherent sovereignty. Both parties request summary judgment
on Count 3. In its motion, KBIC argues that tribal sovereignty functions as an independent
barrier to Michigan’s ability to levy its sales tax on transaction that occur in KBIC’s Indian
country. “The power to tax transactions occurring on trust land and significantly involving a
tribe or its members is a fundamental attribute of sovereignty which tribes retain unless
divested of it by federal law or necessary implication of their dependent status.” Colville,
447 U.S. at 152.
As presented to the Court, this claim can be resolved as a question of law. The parties
have not identified any disputes of material fact relevant to this claim.
The Court concludes that tribal sovereignty and the right to self-government do not
preclude Michigan from levying its sales tax on transactions involving Indian purchasers and
non-Indian retail sellers that occur in Indian Country. The principles of Indian sovereignty
and tribal self-government do not prohibit or preclude the state in which the reservation lies
from exercising any regulatory authority on tribal lands. See Nevada v. Hicks, 533 U.S. 353,
361-62 (2001) (“Our cases make clear than the Indians’ right to make their own laws and be
governed by them does not exclude all state regulatory authority on the reservation. State
17
Plaintiff’s second motion for partial summary judgment. (ECF No. 364 Pl. Br. at 41-44
PageID.5290-5293.) Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at
29 PageID.3574.)
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sovereignty does not end at the reservation’s border. Though tribes are often referred to as
‘sovereign’ entities, it was ‘long ago’ that ‘the Court departed from Chief Justice Marshall’s
view that ‘the laws of a State can have no force within reservation boundaries.”) (cleaned up).
As explained above, the Supreme Court in recent years considers tribal sovereignty
only as a backdrop to the question of federal preemption. Notably, KBIC has not cited any
court opinion that supports its claim that the right to self-government provides a basis for a
court to preclude a state from taxing transactions in Indian Country. In Colville, the Supreme
Court considered and rejected a similar self-government challenge to a state’s tax.
Washington State levied a cigarette excise tax on the sale and use of cigarettes throughout
the State. The Colville Tribe, located in Washington State, levied its own tax on the sale of
personal property, including cigarettes. The Colville Tribe objected to Washinton’s tax
arguing, among other things, tribal sovereignty. The Court rejected the Tribe’s argument,
holding that the imposition of the tax on the sale of cigarettes on the Tribe’s reservation
would not “contravene the principle of tribal self-government.” Colville, 447 U.S. at 161.
Nine years later, in Cotton Petroleum, the Court considered a challenged to New
Mexico’s severance tax on the oil and gas production. Cotton Petroleum, a non-Indian
company with rights to extract oil and gas from leases on the Jacarilla Apache Reservation,
filed the lawsuit. The Court explained that the leases were subject to the taxing jurisdiction
of three different entities: the federal government, New Mexico, and the Tribe. Cotton
Petroleum, 490 U.S. at 188-89. The Court found that the federal government had not
prohibited taxation by either the Tribe or New Mexico. Id. at 189. The Court held that
“[u]nless and until Congress provides otherwise, each of the other two sovereigns has taxing
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jurisdiction over all of Cotton’s leases.” Id. This holding at least implicitly rejects the
conclusion that a tribe’s taxing authority as part of its sovereign powers ousts a state’s taxing
authority over the same land.
D. Count 4 - Sales Tax - Indian Commerce Clause18
In Count 4, KBIC alleges that Michigan’s sales tax, when imposed on transactions
between non-Indian retail sellers and KBIC and its members in KBIC’s Indian country,
violates the Indian Commerce Clause. Defendants request summary judgment on Count 4.
In its response, KBIC abandons Count 4, and rests its challenges to Michigan’s sales tax on
the other claims. (ECF No. 370 Def. Resp. at 22 n.14 PageID.5596.)
Defendants are entitled to summary judgment on Count 4 as KBIC has waived any
opposition to the dismissal of its Indian Commerce Clause claim.
E. Count 5 - Use Tax - Per Se Rule
1. Use Taxes Generally19
In Count 5, KBIC alleges that when the legal incidence of a state’s use tax falls on a
tribe or its members for activities occurring within their Indian country, the tax violates the
Supremacy Clause. And, when the tribe and its members use the property both on and off
their Indian country, the State must have some mechanism for apportioning the use tax.
KBIC argues “Defendants are absolutely precluded from imposing the Michigan use tax
upon the Community or its members with respect to their use, storage, or consumption of
18
Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 29-30
PageID.3574-75.)
19
Plaintiff’s first motion for partial summary judgment. (ECF No. 126 Pl. Br. at 30-32
PageID.1629-31.)
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tangible personal property or services within the Reservation—regardless of whether it is also
used outside the Reservation.” (ECF No. 126 at 32 PageID.1631.) KBIC relies on Moe v.
Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463 (1976),
Washington v. Confederated Tribes of Colville Indian Reservation, 477 U.S. 134 (1980),
Oklahoma Tax Commission v. Sac & Fox Nation, 508 U.S. 114 (1980), and Oklahoma Tax
Commission v. Chickasaw Nation, 515 U.S. 450 (1995).20 All four cases involved, in relevant
part, state taxes on motor vehicles or motor fuels. And, in all four cases, the Court found
problems with the manner in which the state taxes were enforced.
The parties approach this claim as a question of law. They generally agree that there
are no material facts in dispute. KBIC acknowledges that Defendants grant their refund
requests when the goods are stored, used, or consumed entirely within KBIC’s Indian
country. (ECF No. 128-6 Ans. To Interrogatory #3 PageID.1702.)
Moe v. Confederated Salish and Kootenai Tribes of the Flathead Reservation
involved a challenge to Montana's personal property tax on motor vehicles owned by tribal
members, among other things. Moe, 425 U.S. at 468. Montana and local governments built
and maintained the state highways, county roads, and streets on the reservation. Id. at 467.
The Court rejected that fact as a basis for distinguishing the holding in McClanahan. Id. at
476. And, the Court found that there was no basis for distinguishing the treaties and federal
Plaintiffs also discuss Chosa v. Michigan Department of Treasury, Mich. Tax Tribunal Dkt.
No. 283437 (Apr. 20, 2005.) The Michigan Tax Tribunal Website does not make the opinion
available; it has been archived. Plaintiffs filed a copy of the opinion. (ECF No. 128-9 PageID.173034.) The dispute was resolved in the Small Claims Division of the Michigan Tax Tribunal. By
statute, unless otherwise designated, decisions issued by the Small Claims Division are without
precedent. See Mich. Comp. Laws § 205.765.
20
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statutes that governed the outcome in McClanahan.
Id. at 477.
Thus, following
McClanahan, the personal property tax imposed on personal property (motor vehicles)
located within the reservation could not be applied.21 Id. at 480-81.
Washington v. Confederated Tribes of the Colville Indian Reservation involved
Washington's vehicle excise tax imposed on Indian-owned vehicles.22 Colville, 447 U.S. at
139. The excise taxes were imposed for the "'privilege of using the covered vehicles in the
State," and the tax was assessed annually at a percentage of the fair value of the vehicle. Id.
at 162. The Court noted that the "only difference between the taxes" in Moe and here was
the name: an excise tax and a personal property tax. Id. at 163. While the Court invalidated
the tax as applied to Indians, it noted that Washington could have "tailored its tax to the
amount of actual off-reservation use, or otherwise varied something more than
nomenclature[.]" Id. at 163-64.
In Oklahoma Tax Commission v. Sac and Fox Nation, the Indian tribe challenged
Oklahoma's vehicle excise tax and the vehicle registration fee. Sac and Fox Nation, 508 U.S.
at 119. The excise tax was imposed upon the transfer of a vehicle registered in the state and
the registration fee was imposed annually with a flat rate plus a percentage of the value of the
vehicle. Id. The tax and the fee were imposed to "provide funds for 'general governmental
functions.'" Id. Sac and Fox Nation required its members to register vehicles with the Tribe
and issued tribal license plates. Id. at 119-20. Oklahoma did not attempt to collect taxes on
In McClanahan, the Court held that the state income tax levied on Indians whose entire
income was derived from reservation sources "interfered with matters which the relevant treaty and
statutes leave to the exclusive province of the Federal Government and the Indians themselves. The
tax is therefore unlawful as applied . . . ." McClanahan, 411 U.S. at 165.
22
Also at issue and addressed by the Court was Washington's cigarette tax.
21
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tribal-registered vehicles. Id. at 120. But, when a tribal-registered vehicle was sold to a nonIndian, the new owner had to pay the current and delinquent excise taxes, the registration
fee for the year, and a penalty registration year for one previous year. Id. The Court held
that Oklahoma could not apply the vehicle excise tax and the registration fee, finding no
meaningful way to distinguish Moe and Colville. Id. at 127. "Like the taxes in both those
cases, the excise tax and the registration fee are imposed in addition to a sales tax; the two
taxes are imposed for use both on and off Indian country; and the registration fees are
assessed annually based on a percentage of the value of the vehicle." Id.
Oklahoma Tax Commission v. Chickashaw Nation is the most recent of the four
cases. Oklahoma imposed a motor fuel excise tax on fuel sold by Chickashaw Nation retail
stores on tribal trust land. After examining the state statute, the Count concluded that the
legal incidence of the tax fell on the retailer, not the distributor or the consumer. Chickashaw
Nation, 515 U.S. at 462. The Court concluded, as the statue was written, it could not be
enforced because the legal incidence of the tax fell on a tribe or tribal members for sales
made inside Indian country and there was no clear congressional authorization allowing the
tax. See id. at 458-60.
Defendants attempt to distinguish Michigan’s use tax from the taxes involved KBIC’s
authority. First, Michigan’s use tax is an excise tax levied on the exercise of a privilege, such
as the buying or selling the property, and is not a tax on the property itself. See Sullivan v.
United States, 395 U.S. 169, 175 (1969); Market Place v. City of Ann Arbor, 351 N.W.2d
607, 611-12 (Mich. Ct. App. 1984) (citations omitted). UTA provides that the tax is “for the
privilege of using, storing, or consuming tangible personal property in this state . . . .” Mich.
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Comp. Laws § 205.93(1). Second, the use tax does not resemble a property tax because it
is calculated on the sale price not the value of the vehicle and it is assessed once, not annually.
Finally, Michigan does not assume the vehicle will be used on state roads. The exemption
form asks the where the item will be used (tribe's reservation, tribe's trust land, other
Michigan location, or out of state). (Form PageID.1684.) Defendants assert the request for
an exemption is denied if the "other Michigan location" box is checked.
KBIC is entitled to summary judgment on Count 5 of their complaint. As written,
the Court cannot meaningfully distinguish Michigan’s UTA from the state tax in Sac and Fox
Nation. Both taxes were excise taxes imposed upon the privilege of using the vehicle in the
state. The Oklahoma tax was levied once. The Oklahoma excise tax was calculated on
vehicle's value while Michigan's excise tax is calculated on the sale price. This is a difference
without a meaningful distinction. Presumably, the sale price has a connection to the value
of the vehicle. Finally, Michigan’s UTA does not apportion the tax based on any offreservation use, a feature the Supreme Court has consistently considered when Tribes have
successfully challenged state taxes on vehicles. The statute precludes apportionment. When
tangible property is acquired for tax exempt uses and the property is subsequently put to a
taxable use, the tax is levied. Mich. Comp. Laws § 205.93(1). And, when tangible personal
property is converted to a taxable use the tax is levied without regard to any subsequent taxexempt use. Id.
2. Use Taxes on Leases23
23
Plaintiff’s first motion for partial summary judgment. (ECF No. 126 Pl. Br. at 27-29
PageID.1626-28.)
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In its complaint, KBIC alleges that Michigan denies the claims for use taxes on items
leased from out-of-state lessors. (Compl. ¶ 54 PageID.807.) KBIC contends the lessor is
not using the items and the lessor is not located in Michigan. (Id.) KBIC also contends the
denial of these claims violates the per se rule that a state cannot tax Indian traders in Indian
country. For example, KBIC paid a use tax on the rental of a dish washing machine for use
on its reservation, submitted a claim for a refund, which was denied. (ECF No. 129-9
PageID.1864-71.)
Under Michigan law, a business that acquires tangible personal property for the
purpose of leasing the property may elect to pay use tax on the rental receipts rather than the
sales tax on the initial purchase. See Mich. Comp. Laws § 205.95(4); Mich. Dep’t of
Treasury, Revenue Admin. Bulletin No. 2015-25.24 “If the lessee of the property is an entity
that is exempt from tax under the Use Tax Act . . . then the lessor is not liable for use tax on
the rental receipts.”
(RAB 2015-25 PageID.1740.)
Section 205.104b outlines the
responsibilities of the seller (lessor) and the purchaser (lessee) for claiming exemptions and
refunds for use taxes.
Although it is not clear that KBIC has a pled a distinct claim relating to use taxes for
leases, KBIC would be entitled to summary judgment on the claim.25 Defendants concede
that KBIC is exempt from use taxes on leases and rentals when the items are used exclusively
24
The Michigan Department of Treasury’s website includes links to each of its Revenue
Administrative Bulletins. KBIC submitted a copy of the document. (ECF No. 128-10 RAB 201525 PageID.1736-40.)
Defendants assert that KBIC does not have any specific prayer for relief concerning
use taxes on leases. (Def. Resp. at 19-20 PageID.2115-16.)
25
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in Indian country. (ECF No. 152 Def. Resp. at 18-19 PageID.2114-15.) The legal incidence
of the State’s use tax falls on the consumer (the lessee), although the tax is remitted to
Michigan by the lessor. Michigan’s own guidelines, RAB 2015-25, indicates that use taxes
need not be paid by a lessor when leasing property to a tax-exempt entity. In its denial letters,
Michigan incorrectly asserted that the use tax was still owed by the lessor, and that the lessor
could choose to pass the tax along to the Tribe. (See, e.g., PageID.1864.) Defendants insist
that this issue is already being addressed. (Def. Resp. at 19 PageID.2115.)
F. Count 6 - Sales and Use Taxes - 1842 Treaty26
In Count 6, KBIC asserts that Michigan’s sales and use taxes, when levied on
transactions in certain geographic area (the Ceded Area), violate Article II of the 1842 Treaty.
In its motion, KBIC explains that, under the terms of the 1842 Treaty, federal law governs
in the Ceded Area and preempts state law. KBIC reasons that the treaty remains in force
and necessarily preempts Michigan law.
KBIC raised the same argument against the TPTA in its earlier lawsuits. And,
Defendants made many of the same responses. In the 2003 case, Judge Bell found that he
did not need to resolve much of the parties’ disputes concerning the interpretation and
enforceability of the treaty to resolve the claim presented by KBIC about enforcement of
the TPTA.
For purposes of these cross-motions for summary judgment the Court need
not concern itself with disputed issues regarding whether the trade an
intercourse provisions of Article II of the 1842 Treaty were superseded or
26
Plaintiff’s second motion for partial summary judgment. (ECF No. 364 Pl. Br. at 44-50
PageID.5293-99). Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at
30-43 PageID.3575-88.)
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abrogated following the 1954 Treaty, or whether Article II was understood by
the signatories to be a liquor clause that was abrogated by Article 7 of the 1854
Treaty, or whether the Community has unclean hands with respect to its 1842
Treaty argument because it routinely ignores trade and intercourse provisions
in its sales of alcohol, tobacco and gambling services. Even if this Court were
to assume that the 1842 Treaty is still binding and that it incorporates the
Indian trade and intercourse laws, the Court is satisfied that the plain meaning
of Article II does not prohibit the State from collecting its excise tax on
cigarettes sold by the Community to non-Indians.
KBIC v. Rising, 2005 WL 2207224, at *11. Judge Bell concluded that federal law permits
Michigan to levy its tobacco tax on the sale of cigarettes to non-Indians, even in the Ceded
Area.
The 1842 Treaty plainly makes federal law applicable to the Ceded Area, and
federal law permits the states to impose their tobacco taxes on cigarette sales
to nonmembers of the Tribe. The 1842 Treaty does not limit the State’s ability
to impose minimal burdens on the Community to assist in the collection of
the State’s cigarette taxes.
Id. The Sixth Circuit affirmed Judge Bell’s reasoning and conclusion. Rising I, 477 F.3d at
853.
In the 2005 lawsuit, Judge Quist reached the same conclusion for KBIC’s challenge
to Michigan’s sales and use taxes. Like Judge Bell, Judge Gordon Quist reasoned that the
1842 Treaty made federal law applicable to the Ceded Area, and that federal law permits
state taxation. See KBIC v. Kleine, No. 2:05-cv-224 (W.D. Mich. Mar. 27, 2008) (opinion).27
On appeal, the Sixth Circuit found that KBIC’s challenges to the use and sales taxes were
not ripe. Regarding the 1842 Treaty, however, the circuit court held that the treaty did not
27
Judge Quist issued an opinion granting Defendants’ motion for summary judgment. In
footnote 4 on page 18 of that opinion (ECF No. 144 PageID.2409), Judge Quist wrote “[t]hus, if
taxation is permissible under federal law, it is likewise permissible under the terms of the 1842 treaty.
Therefore, there is no need for the Court to engage in a separate analysis of the 1842 treaty.”
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create an “independent barrier” to Michigan’s taxes on the ceded area. Rising II, 569 F.3d
at 594 (“To the extent that the Community contends that the treaty creates an independent
barrier to state taxation of transactions with Indians in the ceded area, that argument was
rejected by this Court in Keweenaw Bay Indian Community v. Rising (Rising I), 477 F.3d
881, 893 (6th Cir. 2007)). The court left open the question of whether the Ceded Area
constitutes Indian Country, as that phrase is defined in 18 U.S.C. § 1151. Id. at 594.
This Court must follow the prior opinions issued by the Sixth Circuit. The 1842
Treaty does not create an independent barrier to Michigan’s sales and use taxes in the Ceded
Area. Judge Bell’s reasoning in the 2003 lawsuit over tobacco taxes is persuasive authority
and applies equally to KBIC’s challenge in this lawsuit to sales and use taxes in the ceded
area. The Sixth Circuit affirmed Judge Bell’s decision concerning the enforcement of state
tobacco taxes in the ceded area. Judge Quist reached a similar conclusion about sales and
use taxes in the 2005 case, a conclusion also affirmed by the Sixth Circuit. The 1842 Treaty
does not function as a separate, distinct, and independent barrier to state taxation.
G. Count 7 - Process for Exemptions and Refunds - Equal Protection and Due Process28
In Count 7, KBIC argues the system for exemptions and refunds violates both Equal
Protection and Due Process.
1. Due Process
KBIC complains that the process for requesting a tax refund imposes a burden that
no other group must bear. KBIC pleads that Defendants do not act on all of the claim forms,
28
Plaintiff’s first motion for partial summary judgment. (ECF No. 126 Pl. Br. at 32-37
PageID.1631-36.)
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do not explain the basis for denying applications, and deny applications arbitrarily. (Compl.
¶ 140 PageID.834.) In its brief, KBIC succinctly summarizes its Due Process claim, but
does not cite any authority for it. (ECF No. 126 at 32-33 PageID.1631-32.) KBIC argues
that Defendants take weeks or months to respond to their claims; Defendants use irrelevant
or inapplicable criteria for resolving the claims; Defendants deny about 90% of the claims;
and the manner in which the claims are approved make it difficult for Plaintiffs to determine
whether all of the claim was approved and paid. (Id.)
Defendants address the due process claim in some detail. Defendants explain that
the Supreme Court permits states to enlist tribes, tribal members and non-Indians to collect
lawful taxes so long at the burden does not interfere with tribal sovereignty or self-governance.
Defendants summarize how the process for exemptions and refunds is fair.
The Court interprets KBIC’s claim as one for violation of procedural due process,
not substantive due process. See Cty. of Sacramento v. Lewis, 523 U.S. 833, 845-46 (1988)
(distinguishing between procedural and substantive due process); EJS Props., LLC v. City of
Toledo, 698 F.3d 845, 855 (6th Cir. 2012) (same). Neither party suggests or argues that a
genuine issue of material fact relevant to this claim exists. Both parties address this claim as
a question of law.
KBIC is not entitled to summary judgment for its due process claim. KBIC failed to
support this portion of its motion with any authority that would establish a procedural due
process violation based upon the facts upon which the parties do not dispute. Here, the
taxes were levied on the non-Indian retailer, so KBIC and its members have not been
burdened with the collection of the tax. For taxation claims, a state satisfies due process
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concerns by providing either a pre-deprivation or a post-deprivation process that includes a
“fair opportunity to challenge the accuracy and legal validity of their tax obligation, [and] also
a ‘clear and certain remedy,’ for any erroneous or unlawful tax collection to ensure that the
opportunity to contest the tax is a meaningful one.” McKesson Corp. v. Div. of Alcoholic
Beverages and Tobacco, Dept. of Bus. Regulation of Florida, 496 U.S. 18, 38 (1990)
(internal citation omitted). As part of their response, Defendants assert that Michigan
“provides a pre-tax exemption process, a post-tax refund process, and methods to challenge
both decisions.” (ECF No. 152 Def. Resp. at 35 PageID.2131.) KBIC has not addressed
this argument. The Court observes that, in its reply, KBIC neglected to address any of
Defendants’ arguments or authority on the due process claim.
On this record, Defendants are entitled to summary judgment on KBIC’s due process
claim. KBIC does not deny that Michigan provides a mechanism for obtaining refunds and
a mechanism for challenging the denial of refunds. At best, KBIC demonstrates that the
refund process is slow, cumbersome, and produces adverse results. Such evidence does not
establish a constitutionally deficient process. “The Due Process Clause simply does not
mandate that all governmental decision making comply with standards that assure perfect,
error-free determinations.” Mackey v. Montrym, 443 U.S. 1, 13 (1979); see Chernin v.
Welchans, 844 F.2d 322, 329 (6th Cir. 1988) (“The due process clause has never been
construed to require that all government acts assure perfect, errorless determinations.”). Nor
does the Due Process Clause require a government to adopt a more favorable procedure
simply because a claimant does not like the one provided. See Heller v. Doe, 509 U.S. 312,
332 (1993) (“’The Due Process Claus does not . . . require a State to adopt one procedure
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over another on the basis that it may produce results more favorable to’ the party challenging
the existing procedures.”) (quoting Medina v. California, 505 U.S. 437, 451 (1992)).
2. Equal Protection
KBIC pleads that Michigan’s process for seeking exemptions and refunds treats
KBIC and its members “far differently than such other tax-exempt purchasers, lessees,
renters, and users and to the detriment of the Community and its members, with respect to
the exercise of their tax immunities.” (Compl. ¶ 139 PageID.834.) In its brief, KBIC
contends its member are treated differently based on race.
(ECF No. 126 at 33-34
PageID.1632-33.) Essentially, KBIC and its members must use one form for seeking tax
refunds while all other individuals and entities who might claim some sort of tax relief can
use a different, less burdensome, form.
Like the Due Process challenge, the parties generally agree on the facts underlying
this claim. Neither party argues that a material dispute of fact exists relevant to KBIC’s Equal
Protection claim. Both parties address the claim as a question of law.
The Equal Protection Clause provides that no State may “deny to any person within
its jurisdiction the equal protection of the laws.” U.S. Const. amend XIV, § 1, cl. 4.
Generally, the clause stands for the principle that similarly situated persons should be treated
alike. City of Cleburne v. Cleburne Living Ctr., 473 U.S. 432, 439 (1985). “’The Equal
Protection Clause prohibits discrimination by government which either burdens a
fundamental right, targets a suspect class, or intentionally treats one differently than others
similarly situated without any rational basis for the difference.’”
Loesel v. City of
Frankenmuth, 692 F.3d 452, 461 (6th Cir. 2012) (quoting Rondigo, LLC v. Twp. of
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Richmond, 641 F.3d 673, 681-82 (6th Cir. 2011)). Unless the state infringes the exercise of
a fundamental right, or the state categorizes on the basis of a suspect characteristic, a court
applies rational basis review to an Equal Protection claim. Nordlinger v. Hahn, 505 U.S. 1,
10 (1992).
The Court first considers whether KBIC’s claim must be analyzed under strict
scrutiny or under rational basis review. KBIC does not allege that Michigan’s tax laws burden
any fundamental right. KBIC alleges that Defendants have, without statutory authority,
developed a “system” that requires KBIC and its members to submit a unique document for
tax exemptions or refunds. (Compl. ¶ 139-142 PageID.834-35.) In its brief, KBIC
challenges the “burdensome Refund and Exemption Process.” (PageID.1631-37.) The
parties agree that, following Rising II, Michigan developed a formal process for those tribes
without a tax agreement, and their members, to file claims for exempts and refunds. (Compl.
¶¶ 41 and 42 PageID.803-04; Pl. Br. at 9 PageID.1608; Def. Resp. Br. at 6-7 PageID.210203.) All other tax-exempt individuals and entities use Form 3372. (ECF No. 128-5
PageID.1692.)
KBIC has not established that any discrimination occurs because of race. The
process for seeking refunds and exemption is not required for all Indians or even all Indian
tribes. The process and unique form must be used only by a federally recognized Indian
tribe that does not have a tax agreement with Michigan. And, tribal membership, not race,
determines whether the individual may use the process and the Form to seek a tax refund.
See Morton v. Mancari, 417 U.S. 535, 553 n.24 (1974) (explaining that a hiring preference
at the Bureau of Indian Affairs was not a racial preference because it “was not directed
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towards a ‘racial’ group consisting of ‘Indians’; instead it applies only to member of ‘federally
recognized’ tribes. This operates to exclude many individuals who are racially to be classified
as ‘Indians.’ In this sense, the preference is political rather than racial in nature.”); United
States v. Eagleboy, 200 F.3d 1137, 1138 (8th Cir. 1999) (“Consequently, persons of Indian
descent who are not members of a recognized tribe are not covered by the policy even though
the policy covers all persons who are in fact enrolled members of a recognized tribe. To
repeat, the criterion is tribal membership, not race.”)
The fact that Michigan put the system in place as a means of obtaining exemptions
and refunds from state taxes, rather than federal taxes, does not make a difference for KBIC’s
Equal Protection claim. The Supreme Court has recognized that federal legislation
concerning federally recognized tribes arises from the historic relationship between the
federal government and the tribes’ status as quasi-sovereign entities. Mancari, 417 U.S. at
554. At least one federal circuit court has questioned whether the holding in Mancari can
be extended to all state statutes based on tribal status because states do not have the same
historic relationship with Indian tribes. KG Urban Enters., LLC v. Patrick, 693 F.3d 1, 19
(1st Cir. 2012). Patrick recognized that some state legislation concerning Indian tribes would
be valid extensions of Mancari “where the state acted pursuant to Congressional
authorization.” Id. at 20 (discussing Washington v. Confederated Bands and Tribes of the
Yakima Indian Nation, 439 U.S. 463 (1979)); see also Artichoke Joe’s California Grand
Casino v. Norton, 353 F.3d 712, 733 (9th Cir. 2003) (summarizing the holding in Yakima as
“when a state law applies in Indian Country as a result of the state’s participation in a federal
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scheme that ‘readjusts’ jurisdiction over Indians, that state law is reviewed as if it were federal
law.”).
In the Court’s view, the tax exemption and refund system of which KBIC complains
functions as an extension of the federal government’s relationship with Indian tribes. KBIC
and its members can claim certain exemptions for state sales and use taxes because of their
tax status as determined by the federal government. That tax exempt status arises because
the federal government has recognized KBIC’s quasi sovereign status as a Tribe. The Court
concludes that Michigan’s tax exemption and refund system merely uses the federal
government’s recognition of KBIC as an Indian tribe, a determination that carries with it
some tax benefits. And, the system also uses KBIC’s determination of its membership,
another determination that carries with it some tax benefits for individuals. By basing the
system of tax exemptions and refunds on KBIC’s status as a federally recognized tribe,
Michigan has not created a system based on race. Nor is Michigan’s use of KBIC’s status as
a federally recognized tribe a proxy for race. See Rice v. Cayetano, 528 U.S. 495, 514-15
(2000) (finding that Hawaii’s restriction on voting based on defined ancestry was a proxy for
race).
Because the Court concludes that the tax system is not based on race, the Court
applies rational basis scrutiny to KBIC’s challenge to the system created by Michigan. In the
context of an equal protection challenge, courts must afford substantial deference to the
choices of the legislature. F.C.C. v. Beach Commc’ns, Inc., 508 U.S. 307, 313-14 (1993).
The “legislative choice is not subject to courtroom fact-finding and may be based on rational
speculation unsupported by evidence or empirical data.” Id. at 315. When applying rational
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basis to an equal protection claim, the plaintiff must demonstrate that the legislative choice
lacks a rational basis “either by negating every conceivable basis which might support the
government action, or by demonstrating that the challenged government action was
motivated by animus or ill-will.” Davis v. Prison Health Servs., 679 F.3d 433, 438 (citation
omitted). KBIC has not established that Michigan’s tax exemption and refund system was
motivated by impermissible animus or ill-will.29
KBIC has not put forth sufficient evidence to meet its burden to show that the
challenged system of tax exemptions and refunds lacks a rational basis.
Among the
justifications offer by Defendants for the difference in treatment between KBIC and other
tax-exempt entities is the geographic criteria that KBIC must meet. While other tax-exempt
entities like Section 503(c) non-profit companies are exempt from sales taxes throughout
Michigan, the exemption for KBIC and its members depend in part on where the sale
occurs. And, even if Defendants are ultimately wrong about whether the tax exemption
depends on location, KBIC cannot succeed on its equal protection claim simply by proving
that the justification was mistaken. See Minnesota v. Clover Leaf Creamery Co., 449 U.S.
456, 464 (1981). Finally, the Court finds that KBIC has not demonstrated that it (and its
members) are similarly situated to all other tax-exempt entities identified in the brief. “In
29
KBIC (PageID.1635) points to a letter from Walter Fratzke (ECF No. 128-8 PageID.1728)
stating that, for Indian tribes, Michigan is not “comfortable” using a system where the purchase
presents a tax exemption certificate to the retailer. Viewing this evidence in the light most favorable
to KBIC does not create any disputed fact about Michigan’s animus toward KBIC specifically or
Indians generally. Fratzke explains that ordinarily, if Michigan determines later that the transaction
was taxable, Michigan pursues the purchaser. But, Michigan cannot pursue Indian tribes in court
because Indian tribes enjoy sovereign immunity. The lack of comfort does not arise because
Michigan has animus or ill-will toward KBIC or Indians, but because Michigan has no effective
remedy.
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the Equal Protection Clause context, very few taxpayers are regarded as similarly situated and
thus entitled to equal treatment.” Alabama Dept. of Rev. v. CSX Transp., Inc., 575 U.S. 21,
28 (2015).
For these same reasons, Defendants are entitled to summary judgment on KBIC’s
Equal Protection claim. The process for exemptions and refunds is not based on race. The
process for obtaining exemptions and refunds has a rational basis.
H. Count 8 - Exemption or Refund Process of Sales and Use Taxes - Other Violations of
Federal Law30
In Count 8, KBIC alleges that the process for filing exemption claims and for refunds
violates federal law. In paragraph 144 of the complaint, KBIC enumerates those violations:
(1) because sales and use taxes are preempted the process violates federal law; (2) the process
is preempted under Bracker balancing; (3) the process violates the right of tribal sovereignty
and self-government; (4) the process violates the Indian Commerce Clause; (5) the process
violates the 1842 Treaty; and (6) the process violates sovereign immunity.
Defendants request summary judgment on Count 8. Defendants argue that KBIC
merely repeats the same legal theories underlying its challenges to the sales and use taxes.
The only new legal theory rests on the notion of sovereign immunity. Defendants reason
that they have not sued KBIC for any sales or use taxes and they have not seized any of
KBIC’s property. Defendants argue that KBIC cannot identify any theory of sovereign
30
Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 43-44
PageID.3588-89.)
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immunity that would support the relief it seeks. Nor can KBIC find any legal support for its
theory of sovereign immunity.
Defendants are entitled to summary judgment on Count 8. Important here, the legal
burden of the tax falls on the non-Indian retail seller, not on KBIC or the members of the
tribe. Generally, the same reasons KBIC’s challenges to the taxes themselves fail also apply
to this challenge to the process of obtaining a tax refund. KBIC’s sovereign immunity
provides protection from lawsuits. See Rising I, 477 F.3d at 395. KBIC does not specifically
address Defendants’ argument that sovereign immunity does not provide a legal basis for a
challenge to the exemption and refund process. And, KBIC has not identified any legal
authority that would support its claim.
I. Count 9 - Tobacco Tax - Bracker Balancing Test31
In Count 9, KBIC argues that federal and tribal interests outweigh Michigan’s interests
relevant to the assessment of Michigan’s tobacco tax on the sale of tobacco products within
KBIC’s Indian country. In its motion, KBIC contends that it creates value in its Indian
country through the development of its tobacco retail business. KBIC argues it has strong
interests in self-determination, self-sufficiency, and economic development in the right to sell
untaxed tobacco products. KBIC asserts that Michigan cannot identity any legitimate interest
supported by the tobacco tax levied on sales on the reservation by KBIC to non-Indians.
31
Plaintiff’s second motion for partial summary judgment. (ECF No. 364 Pl. Br. at 38-41
PageID.5287-90. Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 512 PageID.3550-57.)
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Defendants argue that the Contraband Cigarette Trafficking Act (CCTA) makes the
Bracker balancing test inapplicable. Alternatively, Defendants argue that the balance of
interests favor Michigan interests in enforcement of the tobacco tax within KBIC’s Indian
Country.
Both parties request summary judgment on this claim. Neither party argues that a
genuine issue of material fact exists relevant to Claim 9. Both parties address the claim as a
question of law.
Under the TPTA, Michigan imposes various taxes on tobacco products. Mich.
Comp. Laws § 205.427(1). The TPTA also requires every person who transacts cigarettes,
other than the retail consumer, to keep detailed records of each transaction. See id. §
205.426. Licensees remit the taxes to Michigan on a monthly basis for the tobacco products
sold. Id. § 205.427(3). The Legislature has declared that "[i]t is the intent of this act to
impose the tax levied under this act on the consumer of the tobacco products by requiring
the consumer to pay the tax at the specified rate." Id. § 205.427a. In 1999, Michigan notified
all federally recognized Indian tribes that, going forward, cigarette taxes would be prepaid
and that retailers within Indian lands would file for refunds for sales to the Tribe or its
members. Rising I, 477 F.3d at 884. The Sixth Circuit upheld the scheme. Id. at 892.
The Supreme Court has considered the regulatory burdens imposed on tribal entities
by the tobacco tax laws enacted by multiple states. "The Supreme Court permits states to
impose a “minimal burden,” on tribal retailers that are “reasonably tailored to the collection
of valid taxes from non-Indians.'" Rising I, 477 F.3d at 892 (quoting Dep’t of Taxation and
Fin. Of New York v. Milhelm Attea & Bros., Inc., 512 U.S. 61, 73 (1994)); see Milhelm
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Attea, 512 U.S. 73-75; Colville, 447 U.S. at 159-60 Salish and Kootenai Tribes, 425 U.S. at
482-83.
KBIC has not established that any federal statutes or policies provide a specific basis
for federal preemption of Michigan’s tobacco tax. The Court infers that KBIC relies on the
same areas of federal law discussed in KBIC’s Bracker balancing claim against Michigan’s
sales and use taxes. The Court’s consideration of the Indian Trader Statutes, the IGRA, and
the ISDA also applies here. And, none of the three statutes specifically regulate tobacco
sales.
KBIC has not established that tribal interests are a basis for federal preemption of
Michigan’s tobacco tax. KBIC advances arguments similar to the arguments used to support
its challenge to the sales and use taxes. KBIC explains that all of the revenue generated from
the sale of untaxed tobacco products goes to the General Welfare Support Program, which
KBIC uses to assist members with certain expenses. KBIC also argues that the untaxed
tobacco products function as a complement to its gaming enterprises and are considered part
of the gaming experience. As explained in the denial of KBIC’s challenge to the sales and
use taxes, the Supreme Court has held that the loss of revenue that would be otherwise used
to support tribal programs promoting self-governance and self-sustainability is not a sufficient
reason for a court to find preemption.
KBIC has not established that on-reservation activities add any value to the tobacco
products.
As the Court understands the situation, KBIC purchases from outside its
reservation premade tobacco products and simply resells the products. The value marketed
to non-Indians is the avoidance of state taxes. See Colville, 477 U.S. at 155 (“It is painfully
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obvious that the value marketed by the smokeshops to persons coming from outside is not
generated on the reservations by activities in which the Tribes have a significant interest.”)
The Supreme Court rejected the reasoning behind any interest a tribe might have in creating
a tax-avoiding market on a reservation.
What the smokeshops offer these customers, and what is not available
elsewhere, is solely an exemption from state taxation. The Tribes asserts the
power to create such exemptions by imposing their own taxes or otherwise
earning revenue by participating in the reservation enterprises. If this assertion
were accepted, the Tribes could impose a nominal tax and open chains of
discount stores at reservation borders, selling goods of all descriptions at deep
discounts and drawing custom from surrounding areas. We do not believe
that principles of federal Indian law, whether stated in terms of pre-emption,
tribal self-government, or otherwise, authorize Indian tribes thus to market an
exemption from state taxation to persons who would normally do their
business elsewhere.
Id.
Michigan has a strong and legitimate interest in the revenue raised by the tobacco tax
because the value of the tobacco product was not created in KBIC’s Indian Country. See
Colville, 477 U.S. at 157 (“The State also has a legitimate governmental interest when the tax
is directed at off-reservation value and when the taxpayer is the recipient of state services.”).
Michigan deposits most of the funds in the state school aid fund. See Mich. Comp. Laws §§
205.432(2)(a), (3)(e), (4)(b), (5)(a), and (6)(a). Tribal members and non-members therefore
both benefit from the tobacco tax. And, Michigan has more than simply a revenue raising
interest in the tobacco tax. There exists a direct connection between the tax and efforts to
reduce the use of tobacco. Portions of the tobacco tax specifically fund smoking prevention
programs. See Mich. Comp. Laws §§ 205.432(2)(b), (3)(f), (4)(c), (5)(b), and (6)(b). By
raising the price of the good, the tax itself discourages tobacco use.
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Defendants have not demonstrated that the CCTA makes the Bracker balancing test
inapplicable. “The CCTA is a federal criminal statute that targets interstate cigarette
trafficking.” United States v. Khan, 771 F.3d 367, 374 (7th Cir. 2014). The CCTA prohibits
any person from shipping, transporting, receiving, possessing, selling, distributing, or
purchasing contraband cigarettes. 18 U.S.C. § 2342(a). The statute primarily targets
“contraband cigarettes,” which it defines by referencing state tax law. See id. § 2341(2) (“a
quantity in excess of 10,000 cigarettes, which bear no burden of the payment of applicable
State or local cigarette taxes in the State or locality where such cigarettes are found, if the
State or local government requires a stamp . . . to evidence payment of cigarette taxes[.]”);
Grey Poplars Inc. v. One Million Three Hundred Seventy One Thousand One Hundred
(1,371,100) Assorted Brands of Cigarettes, 282 F.3d 1175, 1177 (9th Cir. 2002). The CCTA
explicitly allows a state to enforce its cigarette tax laws, including the seizure of contraband
cigarettes. 18 U.S.C. § 2345(a).
Balancing the relevant federal, tribal, and state interest, the Court concludes that
Michigan’s tobacco taxes are not preempted by federal law. With this conclusion, KBIC is
not entitled to summary judgment on Count 9. Defendants, however, are entitled to
summary judgment on Count 9. Defendants have demonstrated that the balance of interests
weigh in favor of allowing Michigan to tax KBIC’s sale of tobacco products to non-Indian
consumers.
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J. Count 10 - Tobacco Tax - Tribal Self Government32
In Count 10, KBIC alleges that Michigan’s enforcement of the TPTA violates KBIC’s
sovereign right to make its own laws. KBIC also alleges that the seizure of its cigarettes, truck
and trailer was violated its sovereignty and was unlawful because Michigan State Police
officers conducted surveillance on KBIC’s Indian country. Defendants insist that TPTA
does not violate tribal self-government. Defendants also contend that tribal self-government
and KBIC’s rights as a sovereign do not prevent them from conducting investigations in
KBIC’s Indian country for crime that occurred outside of Indian country. All parties
approach this claim as a question of law. No party has identified any dispute of fact.
First, KBIC has not established that the TPTA violates KBIC’s rights as a sovereign.
KBIC challenged the sales and use taxes on the same basis, which this Court resolved against
KBIC. The same reasoning applies this claim. The holdings in Colville and Cotton
Petroleum undermine KBIC’s argument. Unless prohibited by the federal government,
which has not occurred here, Michigan has the authority to tax tobacco sales to non-Indians
even when the sale occurs in Indian country. See Cotton Petroleum, 490 U.S. at 189. And,
as the Supreme Court noted in Hicks, tribal sovereignty and self-government does not
“exclude all state regulatory authority on the reservation.” 533 U.S. at 361.
Second, KBIC has not established that the Michigan State Police violated KBIC’s
sovereignty by conducting an investigation in KBIC’s Indian country.
32
KBIC’s broad
Plaintiff’s second motion for partial summary judgment. (ECF No. 364 Pl. Br. at 41-44
PageID.5290-93.) Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at
12-13 PageID.3557-58.)
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assertion that a state cannot conduct any sort of law enforcement activities in Indian country
does not accurately state the law. In Hicks, the Supreme Court firmly rejected the principle
advanced by KBIC here. Hicks, 533 U.S. 353, 365-66 (2001) (“Nothing in the federal
statutory scheme prescribes, or even remotely suggests, that state officers cannot enter a
reservation including Indian-fee land to investigate or prosecute violations of state law
occurring off the reservation.”). And, the Court held that “tribal authority to regulate state
officers in executing process related to the violation, off reservation, of state laws is not
essential to tribal self-government or internal relations—to ‘the right to make laws and be
ruled by them.’” Id. at 364. Three State Supreme Courts have followed Hicks as binding
authority. See State v. Cummings, 954 N.W.2d 371, 737-38 (S.D. 2021) (abrogating State v.
Cummings, 679 N.W.2d 484 (S.D. 2004)); State v. Clark, 308 P.3d 590, 594-96 (Wash.
2013); State v. Harrison, 238 P.3d 869, 877-78 (N.M. 2010).
Defendants are entitled to summary judgment on Count 10. Defendants have
established that enforcement of the TPTA, including the investigation on the reservation and
the prosecution of tribal members for off-reservation crimes, does not violate KBIC’s
sovereignty or right to self-government.
K. Count 11 - Tobacco Tax - Indian Commerce Clause33
In Count 11, KBIC alleges that the Indian Commerce Clause prevents the
enforcement of the tobacco tax for sales in KBIC’s Indian country, the seizure and forfeiture
of its property, and the criminal prosecution of its members.
33
Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 14-16
PageID.3559-61.)
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Defendants request summary judgment on Count 11. Defendants raise both factual
concerns and legal arguments. For Defendants’ motion, the Court will assume KBIC
purchased cigarettes from other federally recognized Indian tribes.
The Indian Commerce Clause grants Congress the authority to regulate commerce
with Indian tribes. U.S. Const., art. I, § 8, cl. 3. The “central function of the Indian
Commerce Clause is to provide Congress with plenary power to legislate in the field of Indian
affairs.” Cotton Petroleum, 490 U.S. at 192. Almost forty years ago, then sitting on the First
Circuit Court of Appeals, Judge Steven Breyer wrote that the
Supreme Court decisions since Chief Justice Marshall’s time have generally
rejected the concept that the Clause automatically and necessarily preempts all
state laws dealing with Indians. Instead, these decisions have tended to expand
the area in which states may legislate. And, when the Supreme Court has
found state legislation preempted, it has used an analysis that balances the
federal, state, and tribal authorities, rather than any rule that automatically
preempts state statutes on the basis of the Clause.
James v. Watt, 716 F.2d 71, 73-74 (1st Cir. 1983) (internal citations and citations omitted).
So long as a state’s tax laws “are applied in a nondiscriminatory manner to all transactions
within the State [,]” “[i]t can no longer be seriously argued that the Indian Commerce Clause,
of its own force, automatically bars all state taxation of matters significantly touching the
political and economic interests of the Tribes.” Colville, 447 U.S. at 157. The TPTA applies
uniformly throughout the state and applies to both tribal and nontribal entities. Therefore,
the TPTA is a nondiscriminatory statute. KBIC does not argue otherwise.
Defendants have established that the Indian Commerce Clause does not provide an
independent basis for preempting Michigan’s tobacco tax or prohibiting Michigan from
enforcing the TPTA. KBIC has not identified any binding authority that would support
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application of the Indian Commerce Clause as a shield against enforcement of a
nondiscriminatory state tax. In Ramah, the Solicitor General argued that the Court should
amend the preemption analysis and rely on the dormant Indian Commerce Clause for onreservation activities. Ramah, 458 U.S. at 845. The Court declined the invitation explaining
that “the existing pre-emption analysis governing these cases is sufficiently sensitive to many
of the concerns expressed by the Solicitor General.” Id. at 846; see Otoe-Missouria Tribe
of Indians v. New York Dept. of Fin. Servs., 769 F.3d 105, 117 n.9 (2d Cir. 2014) (“Although
the Interstate Commerce Clause contains a ‘dormant’ protection that prohibits states from
discriminating against interstate commerce, courts have never inferred that the Indian
Commerce Clause contains a similar unspoken shield.”).
Binding and persuasive authority supports the conclusion that Michigan can enforce
the TPTA in the specific situations identified by KBIC in Count 11. First, Defendants can
tax on-reservation cigarette sales by Indian retailers to non-Indian purchasers. The Supreme
Court has held, on several occasions, that a state may tax cigarette sales in Indian country
when the transaction involves a tribal retailer and a non-Indian consumer. See Milhelm, 512
U.S. at 64; Oklahoma Tax Comm’n v. Citizen Band of Potawatomi Indian Tribe of
Oklahoma, 498 U.S. 505, 512-13 (1991); Colville, 447 U.S. at 160-61; Salish and Kootenai
Tribes, 425 U.S. at 483. Second, a state can conduct off-reservation seizures of a tribe’s
tobacco products that violate state law. Citizen Band of Potawatomi Indian Tribe, 498 U.S.
at 514; Colville, 447 U.S. at 161-62; see Muscogee (Creek) Nation v. Oklahoma Tax
Comm’n, 611 F.3d 1222, 1237 (10th Cir. 2010) (involving the seizure of cigarettes and
holding that the Indian Commerce Clause does not prevent a state from “enforcing its tax
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laws outside Indian Country, even if such enforcement significantly touches the political and
economic interests” of the tribe); Narragansett Indian Tribe v. Rhode Island, 449 F.3d 16,
21 (1st Cir. 2006) (en banc) (“It is beyond peradventure that a state may seize contraband
cigarettes located outside Indian lands but in transit to a tribal smokeshop.”); Yakama Indian
Nation v. Washington Dept. of Revenue, 176 F.3d 1241, 1246 (9th Cir. 1999) (“In addition,
the Supreme Court has specifically approved of states enforcing their tax laws through offreservation seizure of unstamped cigarettes.”)
Third, because the alleged crime,
transportation of contraband cigarettes, occurred off-reservation, Michigan has jurisdiction
to prosecute KBIC’s tribal members. See Hicks, 533 U.S. at 362 (“It is also well established
in our precedent that States have criminal jurisdiction over reservation Indians for crimes
committed (as was the alleged poaching in this case) off the reservation.”) (citing Mescalero
Apache Tribe v. Jones, 411 U.S. 145, 148-49 (1973)).
For these reasons, Defendants are entitled to summary judgment on Count 11.
L. Count 12 - Tobacco Tax - Interstate Commerce Clause34
In Count 12, KBIC alleges that the Interstate Commerce Clause (1) prevents
Michigan from treating KBIC’s cigarettes as contraband, (2) precludes Michigan from using
the state’s tobacco tax act to seize KBIC’s property and (3) prohibits the criminal prosecution
of KBIC’s members for violation of the state’s tobacco tax act.
Defendants request summary judgment on Count 12. Defendants raise only legal
issues, not factual disputes. Defendants assert that Count 12 raises a claim under the
34
Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 17-18
PageID.3562-63.)
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dormant Commerce Clause, and assertion KBIC does not deny. Defendants argue that,
through the CCTA, Congress allows states to enact and enforce laws addressing the
transportation of contraband cigarettes in interstate commerce. In addition, Defendants
argue that federal courts have approved the seizure of tribal cigarettes outside of Indian
Country as a lawful response to the unique problems posed by tribal sovereign immunity.
The Interstate Commerce Clause gives Congress the power to regulate commerce
among the states. U.S. Const., art. I, § 8, cl. 3. By implication, the clause has a "negative"
aspect such that a State cannot unjustifiable discriminate against or burden the flow of
interstate commerce. American Beverage Assoc. v. Snyder, 735 F.3d 362, 369 (6th Cir.
2013) (citation omitted). This negative implication is referred to as the dormant Commerce
Clause, and it restricts a State's ability to perform economic protectionism favoring in-state
economic interests by burdening out-of-state competitors. Id.; see Dept. of Rev. of Kentucky
v. Davis, 553 U.S. 328, 337-38 (2008) (“The modern law of what has come to be called the
dormant Commerce Clause is driven by concern about ‘economic protectionism that is,
regulatory measures designed to benefit the in-state economic interests by burdening out-ofstate competitors.’”) (citation omitted). But, not all state regulations affecting interstate
commerce are prohibited. State taxes on activities connected with interstate commerce are
"sustainable if it 'is applied to an activity with a substantial nexus with the taxing State, is fairly
apportioned, does not discriminate against interstate commerce, and is fairly related to the
services provided by the State.'" Merrion v. Jicarilla Apache Tribe, 455 U.S. 130, 157 (1982)
(quoting Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 (1977)).
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Courts consider the economic discrimination under the dormant Commerce Clause
only when Congress has not acted or purported to act. Merrion, 455 U.S. at 154. "Once
Congress acts, courts are not free to review state taxes or other regulations under the dormant
Commerce Clause. When Congress has struck the balance it deems appropriate, the courts
are no longer needed to prevent States from burdening commerce, and it matters not that
the courts would invalidate the state tax or regulation under the Commerce Clause in the
absence of congressional action." Id.; see Fednav. Ltd. v. Chester, 547 F.3d 607, 624 (6th
Cir. 2008) (same)
Congress enacted the Contraband Cigarette Trafficking Act in 2006, 18 U.S.C. §
2341, et seq., which supplements a state's enforcement of its own cigarette taxes, United
States v. Mohamed, 759 F.3d 789, 809 (7th Cir. 2014). The CCTA explicitly states that the
statute shall not be "construed to affect the concurrent jurisdiction of a State or local
government to enact and enforce its own cigarette tax laws, to provide for the confiscation of
cigarettes or smokeless tobacco and other property seized for violation of such laws, and to
provide for penalties for the violation of such laws." 18 U.S.C. § 2345(a). The Sixth Circuit
held that the CCTA was a valid exercise of Congress's authority under the Interstate
Commerce Clause. United States v. Abdullah, 162 F.3d 897, 901-02 (6th Cir. 1998).
Defendants are entitled to summary judgment on Count 12. Because Congress has
acted in the area of interstate cigarette transportation and relies on state tax laws to identify
contraband cigarettes, KBIC’s dormant Commerce Clause claim must be dismissed. See
Fednav, Ltd., 547 F.3d at 624 (“We would lose our constitutional bearing if we were to hold
that the Commerce Clause, in its dormancy, strikes down a state regulation that Congress, it
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actively exercising its power under the Clause, expressly contemplated.”) (emphasis in
original). KBIC has not demonstrated that the TPTA unfairly burdens or discriminates
against out-of-state economic interests.
O. Count 15 - Sales and Use Taxes - § 1983 Monetary Damages35
In Count 15, KBIC seeks monetary damages under § 1983 for violations of its rights
arising from the sales and use taxes levied by Michigan against KBIC and its members.
Section 1983, 42 U.S.C. § 1983, provides
Every person who, under color of any statute, ordinance, regulation, custom,
or usage, of any State . . ., subjects, or causes to be subjected, any citizen of the
United States or other person within the jurisdiction thereof to the deprivation
of any rights, privileges, or immunities secured by the Constitution and laws,
shall be liable to the party injured in an action at law, suit in equity, or other
proper proceeding for redress, . . . .
KBIC specifically alleges that the acts of Defendants Khouri and Fratzke give rise to this
claim. Defendants raise a number of defenses. Defendants question KBIC’s ability to seek
some of the refunds and question whether any request for a refund was properly made for
some of the claims. Defendants argues that KBIC is not a “person” under § 1983 because
the sales and use tax claims relate to KBIC’s sovereign status. Defendants contend that
KBIC’s claim for refund or damages against Defendants in their official capacities should
have been filed in state court because Michigan enjoys immunity in federal court under the
Eleventh Amendment. Defendants also argue that the alleged damages did not occur
35
Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 44-47
PageID.3589-92.)
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because of any act by a named defendant in his or her individual capacity. Defendants assert
qualified immunity for the individual capacity claims.
1. Standing and Ripeness
Defendants assert that KBIC cannot seek refunds for taxes paid by members of the
tribe. Defendants also argue that, for some of the specific refund requests, neither KBIC
nor any member of the tribe filed the proper paperwork. After KBIC filed this lawsuit in
2016, the individual members of KBIC whose requests for refunds are included in the proofs
executed assignments of their claims. (ECF No. 317-62.)
For the purpose of this particular standing concern of Defendants, when KBIC filed
the complaint in 2016, it had standing to assert each claim and to seek tax refunds.
Defendants do not dispute that KBIC paid sales and use taxes. A plaintiff must demonstrate
standing for each claim presented and for each form of relief sought. Davis v. Fed. Election
Comm’n, 554 U.S. 724, 734 (2008) (quoting DaimlerChrylser Corp. v. Cuno, 547 U.S. 332,
352 (2006)). And, “the standing inquiry remains focused on whether the party invoking
jurisdiction had the requisite stake in the outcome when the suit was filed.” Id. (citing Friends
of Earth, Inc. v. Laidlaw Environ. Serv., Inc., 527 U.S. 167, 180 (2000)). Each claim and
prayer for relief arises from the imposition of and payment of taxes, something KBIC did
before it filed this lawsuit.
The Court will, however, grant summary judgment and dismiss the portion of Count
15 seeking refunds for taxes paid by individual members of KBIC. At the time KBIC filed
its complaint it did not have standing to seek a tax refund for the taxes paid by the individual
members. Generally, an entity that did not pay the taxes “may not sue for a refund of taxes
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paid by another.” Montana v. Crow Tribe of Indians, 523 U.S. 696, 713 (1998) (citations
omitted). KBIC attempted to remedy that oversight during the course of the litigation
through the assignments. But, the post-complaint assignment does not cure the standing
problem because “[t]he Supreme Court . . . has not explicitly overruled past precedent that
confined the standing inquiry to the moment when the lawsuit was filed.” Memphis A.
Phyilip Randolf Inst. v. Hargett, —F.3d—, 2021 WL 2547052, at *4 (6th Cir. June 22, 2021).
KBIC might have been able to remedy the problem with the late assignment simply by filing
a supplemental complaint under Rule 15(d). See Northstar Fin. Advisors Inc. v. Schwab
Investments, 779 F.3d 1036, 1044-45 (9th Cir. 2015). KBIC has not filed a supplemental
complaint. And, it is not clear to the Court that KBIC could litigate the tax refund claims on
behalf of its individual members. The Indian exception to the Tax Injunction Act, 8 U.S.C.
§ 1362, provides for federal court jurisdiction over civil actions brought by an Indian tribe or
band and does not apply to suits by individual Indians.36 Chippewa Trading Co. v. Cox, 365
F.3d 538, 545 (6th Cir. 2004).
On this record, the Court also declines to dismiss any particular refund request on
the basis of ripeness. Viewing the evidence in the record in the light most favorable to KBIC,
there remain questions of fact about the few claims identified by Melissa Thelen in her
second declaration. (ECF No. 317-38.) Assuming KBIC prevailed on any claim for which
36
The parties have not discussed, and the Court has not considered, whether the assignments
are valid. The assignments require KBIC to remit any refund amount back to the individual who
assigned the claim. (E.g., ECF No. 317-62 PageID.4082.)
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it might recover damages, either at trial or in some post-trial proceeding, KBIC would have
to establish that the disputed requests for refunds were properly submitted and then rejected.
2. KBIC as a Person under § 1983
Defendants argue KBIC is not a “person”—“any citizen of the United States or other
person within the jurisdiction thereof”—who can sue under § 1983. The Supreme Court has
held that an Indian tribe, like KBIC, cannot sue under § 1983 to vindicate its rights as a
sovereign. Inyo Cty., California v. Paiute-Shoshone Indians of the Bishop Cmty. of the
Bishop Colony, 538 U.S. 701, 712 (2003). The analysis requires consideration of the
underlying statute that gives rise to the claim.
As we have recognized in other contexts, qualification of a sovereign as a
“person” who may maintain a particular claim for relief depends not “upon a
bare analysis of the word “person,” but on the “legislative environment” in
which the word appears[.]
Id. at 711 (internal citations omitted). One district court applied the Inyo holding by posing
a question: could the Tribe bring the claim if it were not a sovereign? Texas v. Ysleta del
Sur Pueblo, 367 F. Supp. 3d 596, 606 (W.D. Tex. 2019). Using this question as the test,
claims that are based on Tribal treaties, sovereign immunity, or other privileges
granted only to sovereigns should be barred. On the other hand, if the claim
is one that nonsovereign entities in similar situations could bring—even if the
claim has some relation to the Tribe’s sovereignty—then Inyo County should
not preclude the claim.
Id.
Defendants are entitled to summary judgment on KBIC’s Count 15 § 1983 claim for
damages based on sales and use taxes in Count 3 (challenge to sales tax based on tribal selfgovernment) and Count 6 (challenge to sales tax based on the 1842 Treaty). Defendants are
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also entitled to summary judgment on the Indian Commerce Clause claim in Count 4 and
the Equal Protection Claim in Count 7, both of which arise based on KBIC’s status as a tribe.
Each of these claims depend entirely on KBIC’s status as a sovereign. Defendants are not
entitled to summary judgment on KBIC’s § 1983 claims for sales and use tax damages in
Counts 1, 2, 5 and the Due Process claim in Count 7. Each of those claims do not depend
on KBIC’s status as a sovereign. Although the Bracker challenges in Count 2 does consider
sovereignty as one of many factors, the claim does not arise because of KBIC’s status as a
sovereign.
3. Eleventh Amendment and § 1983
Defendants argue that the Eleventh Amendment precludes any claim for a refund or
damages that would ultimately be paid by Michigan.37 For Count 15, KBIC sued Nick
Khouri and Walter Fratzke in their official and their individual capacities. When a plaintiff
sues an individual in his or her official capacity, the real party in interest in the entity for
which the individual is an agent. Kentucky v. Graham, 473 U.S. 159, 165-66 (1985). KBIC’s
official capacity claims against Khouri and Fratzke are, therefore, claims against Michigan.
See Hafer v. Melo, 502 U.S. 21, 25 (1991) (“Suits against state officials in their official
capacity therefore should be treated as suits against the State.”).
The Eleventh Amendment generally prohibits an unconsenting state from being sued
in federal courts by a citizen of that state or the citizens of another state. U.S. Const. am. XI.
37
To be clear, Defendants do not assert Eleventh Amendment immunity as a reason for
summary judgment against all claims. Defendants assert only that the Eleventh Amendment bars
KBIC’s claims for refunds and damages. (ECF No. 317 Def. Br. at 46 PageID.3591.)
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Unless a state waives Eleventh Amendment immunity or unless Congress has validly
overridden a state’s Eleventh Amendment immunity, “[t]he Eleventh Amendment bars a
damages action against a state in federal Court. This bar remains in effect when state officials
are sued for damages in their official capacity.” Graham, 473 U.S. at 169 (internal citation
and citation omitted). Generally, states have not waived Eleventh Amendment immunity
from lawsuits by Indian tribes. Blatchford v. Native Vill. of Noatak and Circle Vill., 501 U.S.
775, 779-82 (1991). And, Congress did not abrogate the Eleventh Amendment through 28
U.S.C. § 1362, which gives federal courts original jurisdiction over civil actions brought by
Indian tribes. Id. at 786-88.
Independent of the Eleventh Amendment, the Supreme Court has also held that a
state is not a “person”—“Every person who, under color of any statute”—for the purpose of
§ 1983. Will v. Michigan Dept. of State Police, 491 U.S. 58, 69 (1989) (“We find nothing
substantial in the legislative history that leads us to believe that Congress intended that the
word ‘person’ in § 1983 included the States of the Union.”). Therefore, states cannot be
sued for damages under § 1983. Arizonans for Official English v. Arizona, 520 U.S. 43, 69
(1997) (“We have held, however that § 1983 actions do not lie against a State. Thus, the
claim for relief that the Ninth Circuit found sufficient to overcome mootness was nonexistent.
The barrier was not, as the Ninth Circuit supposed, Eleventh Amendment immunity, which
the State could waive. The stopper was that § 1983 creates no remedy against a State.”)
(internal citation omitted).
Defendants are entitled to summary judgment for any damage claims against the
individual defendants sued in their official capacities.
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4. Qualified Immunity
For KBIC’s claim against Khouri and Fratzke in their personal capacities, KBIC seeks
to impose personal liability on the two defendants for actions taken under color of law. See
Graham, 473 U.S. at 165. Defendants argue that they are entitled to qualified immunity.
Defendants argue they have made a good faith attempt to interpret and apply the legal
principles in the Supreme Court’s Indian tax cases.
“[G]overnment officials performing discretionary functions generally are shielded
from liability for civil damages insofar as their conduct does not violate clearly established
statutory or constitutional rights of which a reasonable person would have known.” Harlow
v. Fitzgerald, 457 U.S. 800, 818 (1982). Qualified immunity is a legal question for the court
to resolve. Everson v. Leis, 556 F.3d 484, 494 (6th Cir. 2009) (citing Elder v. Holloway, 501
U.S. 510, 516 (1994)). When resolving a governmental employee’s assertion of qualified
immunity, the court determines (1) whether the facts the plaintiff has alleged or shown
establishes the violation of a constitutional right, and (2) whether the right at issue was clearly
established at the time of the incident. Stoudemire v. Michigan Dep’t of Corr., 705 F.3d
560, 567 (6th Cir. 2013) (citing Pearson v. Callahan 555 U.S. 223, 232 (2009)). Courts may
examine the two prongs in any order, depending on the facts and circumstances of the case.
Id. at 567-68. Once the qualified immunity defense is raised, the plaintiff bears the burden
of demonstrating both that the challenged conduct violates a constitutional or statutory right
and that the right was so clearly established at the time that “’every reasonable official would
have understood that what he [was] doing violate[d] that right.’” T.S. v. Doe, 742 F.3d 632,
635 (6th Cir. 2014) (quoting Ashcroft v. al-Kidd, 563 U.S. 731, 741 (2011)) (alterations in
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T.S.). “Qualified immunity gives government officials breathing room to make reasonable
but mistaken judgments about open legal questions. When properly applied, it protects ‘all
but the plainly incompetent or those who knowingly violate the law.’” al-Kidd, 563 U.S. at
743 (quoting Malley v. Briggs, 475 U.S. 335, 341 (1986)).
Defendants Khouri and Fratzke are entitled to qualified immunity for the sales and
use tax claims brought against them in their individual capacities. With the exception of the
use tax, the Court has found that neither Khouri’s acts nor Fratzke’s acts violated federal law.
Khouri and Fratzke would thus be entitled to qualified immunity for any claim other than
claims related to the use tax. For use tax claims, the Court concludes that the problem was
a lack of apportionment, something not permitted by the state statute. See Mich. Comp.
Laws § 205.93(1). “The Supreme Court tells us that public officials should generally receive
qualified immunity when enforcing properly enacted laws.” Citizens in Charge, Inc. v.
Husted, 810 F.3d 437, 441 (6th Cir. 2016).
State statutes generally are afforded a
presumption of constitutionality. Id. “When public officials implement validly enacted state
laws that no court has invalidated, their conduct typically satisfies the core inquiry—the
‘objective reasonableness of an official’s conduct’—that the immunity doctrine was designed
to test.” Id. (emphasis added) (quoting Harlow v. Fitzgerald, 457 U.S. 800, 818 (1982)).
Khouri and Fratzke are entitled to qualified immunity for claims arising from use taxes
because they were simply enforcing the state statute as written, a statute no court has
invalidated.
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P. Count 16 - Tobacco Seizures - § 1983 Monetary Damages38
KBIC alleges that Defendants Khouri, Fratzke, Croley, Grano and Sproull were each
involved in the planning, authorizing, and conducting the seizure of KBIC’s truck, trailer,
and cigarettes. KBIC asserts that it has been injured by these actions, including money
damages for the value of the seized property, loss of revenue, loss of use of the property, and
the cost of challenging the seizures. (Compl. ¶ 183 PageID.849-50.) The Court interprets
the claim as one seeking money damages. Defendants raise many of the same defenses here
as they did to the § 1983 claim for sales and use tax refunds.
1. KBIC as a Person under § 1983
For the reasons previously explained, KBIC cannot sue as a “person” under § 1983
when it seeks to vindicate its rights as a sovereign. Defendants are entitled to summary
judgment for KBIC’s Count 16 § 1983 claim for money damages as those damages relate to
Count 10 (tobacco taxes and cigarette seizures interfere with tribal self-government).
Defendants are also entitled to summary judgment on any claim for money damages related
to Count 11 (tobacco taxes and cigarette seizures are preempted by the Indian Commerce
Clause). KBIC’s claims for damages related to those Counts necessarily rely on its status as
a sovereign. See Muscogee, 611 F.3d at 1234-35. Defendants are not entitled to summary
judgment for Count 16 for money damages related to Counts 5, 9 and 12 as those counts do
not depend on KBIC’s status as a sovereign.
2. Eleventh Amendment and § 1983
38
Defendants’ motion for partial summary judgment. (ECF No. 317 Def. Br. at 19-22
PageID.3564-67.)
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For the reasons previously explained, KBIC cannot seek money damages under §
1983 against Michigan. Defendants are entitled to summary judgment for Count 16 for any
claim for money damages brought against them in their official capacities.
3. Comity Principles and the Tax Injunction Act
Defendants argue that, applying principles of comity, federal courts should ordinarily
abstain from constitutional challenges to state tax systems.
Federal courts adhere to a "broad federal common-law principle of comity that
governs constitutional challenges to state tax administration." Chippewa Trading Co., 365
F.3d at 541. The principle arises from several Supreme Court cases and generally prohibits
taxpayers from asserting § 1983 claims against the validity of state tax systems in the lower
federal courts. Id. (citation omitted). In these cases, federal courts should abstain from
resolving claims where a "’plain, adequate, and complete’ remedy is available to the plaintiff
in state court.” Id. (citation omitted). The same concerns led Congress to enact the Tax
Injunction Act, 28 U.S.C. § 1341. Id. The limitations on suits in the Tax Injunction Act,
however, do not prevent civil actions brought by Indian tribes; the limitation extends to
individual Indians and private Indian corporations. Id. at 545. The Sixth Circuit has
suggested that when a case falls “within the ambit of § 1362,” the comity principles favoring
abstention likely do not apply. Id. (“suspect[ing]” that abstention would not apply to a suit
brought by a tribe and noting that, even if it were true, the plaintiff was not an Indian tribe or
band).
Defendants are not entitled to summary judgment on Count 16 based on comity
principles and the Tax Injunction Act. KBIC is a federally-recognized tribe and the Court
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has jurisdiction under § 1362, which undermines the principles of comity that would
otherwise apply.
4. Individual Liability and Qualified Immunity
Defendants argue that the individual defendants, sued in their personal capacities,
cannot be held vicariously liable. Defendants also argue that they are entitled to qualified
immunity.
Under § 1983, state officials can be held liable in their individual capacities “only for
their own unconstitutional behavior.” Colvin v. Caruso, 605 F.3d 282, 292 (6th Cir. 2010)
(citation omitted). Nor can supervisory officials be held liable based on their ability to control
other employees. Heyerman v. Cty. of Calhoun, 680 F.3d 642, 647 (6th Cir. 2012). “At a
minimum, a plaintiff must show that the official at least implicitly authorized, approved, or
knowingly acquiesced in the unconstitutional conduct of the offending officers.” Id. (quoting
Hays v. Jefferson Cty., 668 F.2d 869, 874 (6th Cir. 1982)).
a. Defendant Khouri and Defendant Fratzke
Defendant Khouri and Defendant Fratzke are entitled to qualified immunity for the
tobacco tax related claims brought against them in their individual capacities. KBIC
contends Khouri is “responsible for the policies and actions of the Department.” (ECF No.
370 Pl. Resp. at 32 PageID.5606.) KBIC contends that Defendant Fratzke “carried out those
policies with respect to imposition of the Sales and Use Taxes.” (Id.) KBIC has not
established, with any evidence in the record, any personal involvement by Defendants
Khouri or Fratzke regarding the enforcement of tobacco taxes or the seizures of KBIC’s
cigarettes.
At best, KBIC asserts responsibility based on Khouri’s official duties as
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Michigan’s Treasurer and Fratzke’s official duties in his position as the Native American
Affairs Specialist. KBIC’s allegations for these two defendants establish only vicarious
liability.
b. Defendant Grano and Defendant Sproull
Defendants filed a separate motion for partial summary judgment for the claims
brought against Defendants Grano and Sproull. (ECF No. 98.) The Court recently issued
an Opinion and Order granting in part that motion. (ECF No. 421.) The Court already
concluded that Grano and Sproull were entitled to immunity from the claims related to the
seizure of cigarettes. KBIC has not alleged any other claims against Grano and Sproull.
Accordingly, the Court finds moot Grano and Sproull’s request for qualified immunity in
this motion.
c. Defendant Croley
Defendants argue Croley was not involved in any investigation or in the traffic stop or
seizure of tobacco products in Iron County.
KBIC pleads that Defendant Croley
“coordinated, authorized, and executed the seizures of tobacco products and other
Community property at issue in this action.” (Compl. ¶ 10 PageID.795.) As evidence, KBIC
points to a portion of Croley’s deposition where he admits to conducting an investigation
“within the exterior boundaries of the KBIC reservations.” (ECF No. 336-4 Croley Dep. at
81 PageID.4712.)
Defendant Croley is entitled to qualified immunity for tobacco tax related claim
brought against him in his individual capacity. The Court concludes that Defendants are
entitled to summary judgment for Count 10 for claims arising from the investigation in
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KBIC’s Indian country. Because the investigation did not violate KBIC’s rights, KBIC has
no claim against Croley. And, KBIC has not identified any Supreme Court or even federal
appellate court authority showing clearly established law concerning the legal principle that
law enforcement cannot conduct an investigation on an Indian reservation.
Q. Permanent Injunction and Attorney Fees39
KBIC requests a permanent injunction (Count 17) and attorney fees (Count 18).
Defendants argue that KBIC is not entitled to either prayer for relief. For the injunction,
Defendants contend KBIC has not established any continuing harm.
The Court will grant KBIC an injunction preventing Michigan from enforcing the use
tax to the extent that Michigan does not permit apportionment of the tax to distinguish
between on-reservation and off-reservation use. The Court declines to rule on any request
for attorney fees as premature.
VI.
The Court concludes that the disputed claims can be resolved on the cross motions
for partial summary judgment. The parties generally agree on the material facts and the
claims can be resolved a question of law. Defendants are entitled to summary judgment for
all of the claims arising from sales taxes, including the claims arising from the process of
exemptions and refunds. Neither KBIC nor the tribal members bear the burden of those
taxes, the taxes are not per se unconstitutional, and the balance of factors in the Bracker test
do not weigh in favor of finding federal preemption. The other challenges to the sales tax
39
Defendants’ motion for partial summary judgment (ECF No. 317 Def. Br. at 48-49
PageID.3593-94.)
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Case 2:16-cv-00121-PLM-MV ECF No. 423, PageID.6636 Filed 07/13/21 Page 83 of 83
fail. Defendants are entitled to summary judgment for all of the claims arising from tobacco
taxes, including those related to the seizure of cigarettes. The Supreme Court has largely
rejected, in other contexts, explicitly or implicitly, each of the arguments KBIC raises here
about Michigan’s tobacco taxes. Finally, Defendants have established that the Court cannot
award KBIC damages in this lawsuit. KBIC cannot overcome Michigan’s immunity under
the Eleventh Amendment. The Court concludes that each of the defendants, sued in their
individual capacities, are entitled to qualified immunity.
KBIC is entitled to summary judgment on Count 5, its claim arising from Michigan’s
use taxes. The Supreme Court has found unconstitutional similar use or excise taxes. At
least on the arguments presented here, this Court cannot meaningfully distinguish between
the taxes involved in the Supreme Court’s opinions and Michigan’s use tax. Accordingly,
KBIC is entitled to an injunction against enforcement of the use tax as it is presently
interpreted by Michigan.
The Court will issue an Order contemporaneous with this Opinion.
Date: July 13, 2021
/s/ Paul L. Maloney
Paul L. Maloney
United States District Judge
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