Flandreau Santee Sioux Tribe v. Gerlach et al

Filing 154

Memorandum Opinion and ORDER granting in part and denying in part 78 Motion for Summary Judgment; granting in part and denying in part 115 Motion for Summary Judgment. Signed by U.S. District Judge Lawrence L. Piersol on 9/15/17. (SLW)

FILen

UNITED STATES DISTRICT COURT
DISTRICT OF SOUTH DAKOTA
SOUTHERN DIVISION

S£p 15
2011

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FLANDREAU SANTEE SIOUX TRIBE,
a federally-recognized Indian Tribe,
Plaintiff,

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vs.

ANDY GERLACH, Secretary of the State of
South Dakota Department of Revenue; and
DENNIS DAUGAARD, Governor of the State
of South Dakota,
Defendants.

CIV 14-4171

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MEMORANDUM OPINION AND
ORDER ON PARTIES ' MOTIONS
FOR SUMMARY JUDGMENT,
DOCS. 78 & 115

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Pending before the Court is the Flandreau Santee Sioux Tribe's ("the Tribe") Motion for
Summary Judgment on Claims for Relief One, Three, and Four of the First Amended Complaint.
Doc. 115. In its motion, the Tribe asserts that the State of South Dakota' s ("the State")
imposition of a state use tax on nonmember purchases of goods and services throughout the
Royal River enterprise is unlawful under the Indian Gaming Regulation Act ("IGRA") and
interferes with and frustrates federal and tribal interests.
Also before the Court is Defendants' Motion for Summary Judgment on all claims in the
First Amended Complaint. Doc. 78. In their motion, the Defendants argue that the imposition of
a state use tax on nonmember consumers' purchases of goods and services throughout the Royal
River enterprise is not expressly or impliedly preempted by IGRA nor does it interfere with or
frustrate federal and tribal interests. Further, Defendants assert that the State may permissibly
condition reissuance of a liquor license to the Tribe on the collection and remittance by the Tribe
of the nonmember consumers' use tax liability.

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·The Court has considered all filings and for the following reasons, the Tribe's motion is
granted in part and denied in part. The Defendants' motion is similarly granted in part and denied
in part.

FACTUAL BACKGROUND
The Tribe is a federally-recognized Indian tribe located in Flandreau, South Dakota. The
Tribe owns and operates the Royal River Casino & Hotel ("the Casino") and the First American
Mart ("the Store") (collectively, the "Licensed Premises") on the Flandreau Indian Reservation. 1
These two businesses operate as a singl,e business enterprise under the Royal River name and,
irrespective of patrons' tribal or residential status, provide a wide variety of goods and services,
including: overnight hotel stays, recreational vehicle accommodation, food and beverage services
(alcoholic and non-alcoholic), gifts and sundries, tobacco products, fuel, services for catering,
meetings, conferences, and special events, live entertainment, snacks, video arcade games,
transportation services, health and fitness services, and gambling.2 As a unitary business, the
entire enterprise is overseen by the Tribe's elected governing body, the Flandreau Santee Sioux
Executive Committee. The Licensed Premises' patron base is approximately 60% South Dakota
residents. Revenue, including that from gambling, hotel stays, food, the bar, the gift shop, the RV
park, and the Store, is calculated in the aggregate as "net revenues." Of that sum, 35% is
distributed toward tribal economic development, 40% via individual per capita payments to tribal
members, 5% into a minors' trust fund, 15% toward tribal government operations, 4% into a
community assistance fund, and 1% into a local government revenue sharing fund. The Tribe
also imposes a 6% sales tax. Over 90% of the Tribe's sales tax revenue is generated by
transactions at the Licensed Premises.
Pursuant to IGRA, the Tribe and the State have in place a Tribal-State gaming compact
("the Compact"), which controls the Tribe's gaming operations at the Casino. The Compact
allows the Casino to participate in Class III gaming. 3 The Compact is silent in regard to the
1

The Casino and the Store are located in separate buildings.
The specific departments and sub-departments within the Royal River business enterprise include: Slots, Table
Games, Food and Beverage (Group Sales and Events), Hotel, Controller (Gift Shop), Human Resources, Porter,
Security, Surveillance, Maintenance, Marketing, Players Club, First American Mart, and the Compliance Office.
3
Class III gaming is defined by IGRA as "all forms of gaming that are not class I gaming and class II gaming." 25
U.S.C. § 2703(8). The definition includes games such as: "slot machines, roulette, craps, pari-mutuel wagering,
lotteries, and banked card games (which are games played against the 'house' rather than other players) such as
blackjack and baccarat." STEPHEN L. PEV AR, The Rights of Indians and Tribes 277 (Oxford University Press, 4th ed.
2012). As an incentive to partake in gaming, the Casino offers a Royal Rewards Club program. Royal Rewards Club
members earn points when they play Slots and other live card games, which can then be redeemed for a wide variety
2

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State's authority to apply its alcohol regulatory laws, the State's imposition of its use tax on
nonmember4 activity at the Casino, and the State's requirement that the Tribe collect and remit
the use taxes from nonmember activities or purchases. It is undisputed that the Tribe sold the
above-listed goods and services to nonmembers at the Casino. It is also undisputed that the Tribe
has not remitted to the State the relevant use taxes on nonmember sales.
The State has issued three alcoholic beverage licenses to the Tribe-one for the casino,
one for the store, and one for the Royal River Family Entertainment Center ("Bowling Center"). 5
These licenses, however, are conditioned on the Tribe's remittance of the State use tax pursuant
to S.D.C.L. § 35-2-24. The South Dakota statute does not differentiate between alcohol tax and
use tax on other goods and services. Id. In 2009 and 2010, the Tribe sought from the State a
renewal of its three alcohol licenses. Based on S.D.C.L. § 35-2-24, both requests were denied by
the State as the statute directs that licenses are not to be reissued until the Tribe remits use taxes
incurred by nonmembers. 6
As a result, the Tribe, pursuant to S.D.C.L. § 1-26-16, requested a hearing before the
South Dakota Office of Hearing Examiners to review the State's alcohol license denial. At the
hearing, the Hearing Examiner concluded that all nonmember purchases at the Casino are subject
to the use tax scheme, that the Tribe failed to remit the use taxes, and, therefore, the Tribe was
not entitled to alcohol license renewal. Prior to the Hearing Examiner's decision becoming final,
the Tribe filed this action in federal court on November 18, 2014. The Tribe simultaneously
moved the Court for preliminary injunction enjoining state action pursuant to the Hearing
Examiner's decision. The Tribe and State ultimately made the motion for preliminary injunction
moot by entering into a stipulation whereby the State recognized the three alcohol

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continuing validity pending a decision on the merits in this case. The Tribe did not appeal the
Hearing Examiner's decision to South Dakota state court.
Specific to this federal action, the Tribe alleges that the State lacks authority to impose its
use tax scheme on reservation land against nonmember patrons of the Licensed Premises. In its
of services or for cash. The only way to earn Royal Rewards Club points is through game play. Purchases of items
at the hotel, RV park, the Store, bar, restaurant, or gift shop, do not earn members points.
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Individuals who are not members of the Tribe.
5
The Royal River Family Entertainment Center ("Bowling Center") is no longer in operation, having closed in July
of2015.
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The Tribe applied for a license renewal each year since the initial denial. Each request has been denied by the
State, but the Tribe is enabled to continue operations under the original licenses until a final administrative decision
is issued pursuant to S.D.C.L. § 1-26-28.
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Complaint, the Tribe alleges that IGRA preempts the field of taxation thereby barring the State's
imposition. To that end, the

T~be

argues that all activity engaged in under the Royal River

Casino name is "gaming activity" untaxable by the State by virtue of IGRA (Claims for Relief
One, Two, and Six). Outside of IGRA, the tribe maintains that the use tax and remittance
requirements are preempted by the Indian Commerce Clause of the Federal Constitution and
federal common law and that they infringe on inherent tribal sovereignty (Claims for Relief
Three and Five); that the State's tax imposition is unlawfully discriminatory as applied to the
Tribe (Claim for Relief Four); that, as a predicate to funds contained in an escrow account
pursuant to a 1994 Deposit Agreement between the Tribe and the State being disbursed to the
Tribe, the State is without power to impose its taxation scheme on the Tribe's Casino (Claim for
Relief Seven); 7 and that conditioning the alcohol licenses on the S.D.C.L. § 35-2-24 tax
remittance requirement violates 18 U .S.C. § 1161 (Claim for Relief Eight).
The Tribe has moved the Court for summary judgment pursuant to Fed. R. Civ. P. 56(a)
as to Claims for Relief One, Three, and Four. The Defendants have moved the Court for
summary judgment on all Claims for Relief. For reasons explained herein, both motions are
granted in part and denied in part.

LEGAL STANDARD
Pursuant to Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is
proper "if the movant shows that there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law." FED. R. CIV. P. 56(a). "A party asserting that
a fact cannot be ... disputed must support the assertion" either by "citing to particular parts of
materials in the record,'' or by "showing that the materials cited do not establish the ... presence
of a genuine dispute[.]" FED. R. CIV. P. 56(c)(l)(A)--(B). "The movant can also establish the

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On April 14, 1994, the Tribe initiated an action seeking declaratory and injunctive relief against then South Dakota
Governor Walter D. Miller and then Secretary of Revenue of South Dakota Ronald J. Schreiner. Flandreau Santee
Sioux Tribe v. South Dakota, Civ. No. 94-4086 (D.S.D.). There, the Tribe alleged that the State lacked jurisdiction to
impose its sales and use taxes on tribal sales of personal property to nonmembers when the sales occur on Indian
trust lands. The case was consolidated with a similar case that raised taxation issues. Sisseton-Wahpeton Sioux Tribe
v. South Dakota, No. CIV 93-1033 (D.S.D.) ("The State contends that the Tribe is subject to the sales and use tax
laws and liquor licensing laws of the State of South Dakota as they pertain to the Tribe's transactions with nonIndians and non-members at the Tribe's casino, which contention the Tribe disputes ... . The State further contends
that the Tribe has incurred and will continue to incur sales tax liability through its sales to non-Indians and nonmembers[.]"). Related to that litigation, the Tribe entered into the Deposit Agreement wherein the Tribe agreed to
deposit the aggregate amount of disputed tax liability into an escrow account pending final resolution of the case.
The 1994 action was dismissed without prejudice on April 30, 1998. Around that time, the Tribe ceased making
payments into the escrow account. The total amount contained in the escrow account is currently $400,000.
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absence of a disputed material fact by showing 'that an adverse party cannot produce admissible
evidence to support the fact."' Jensen v. Hy-Vee Corp., 2011 WL 1832997, at *1 (D.S.D. May
13, 2011) (quoting FED. R. CIV. P. 56(c)(l)(B)).
In a motion for summary judgment, the movmg party bears the initial burden of
establishing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S.
317, 323 (1986) (internal quotations omitted). Once this burden is met, the burden then shifts to
the non-moving party to demonstrate "that a fact ... is genuinely disputed" either by "citing to
particular parts of materials in the record," or by "showing that the materials cited do not
establish the absence . . . of a genuine dispute." FED. R. CIV. P. 56(c)(l)(A)-(B). "For purposes
of summary judgment, the facts, and inferences drawn from those facts, are 'viewed in the light
most favorable to the party opposing the motion."' Jensen, 2011 WL 1832997, at *2 (quoting
Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).
DISCUSSION
I.

Preemption of the Tax Itself

The Tribe asserts that the imposition of the State use tax on nonmember consumers of the
Licensed Premises is preempted under IGRA. Further, to the extent it is not otherwise preempted
by IGRA itself, the Tribe argues that the tax is incompatible with Federal and Tribal interests in
protecting tribal self-government and is therefore preempted by Federal Indian law in general as
it infringes on tribal sovereignty. "State jurisdiction is preempted by the operation of federal law
if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless
the state interests at stake are sufficient to justify the assertion of state authority." Casino Res.
Corp. v. Harrah's Entm 't, Inc., 243 F.3d 435, 437 (8th Cir. 2001) (citing New Mexico v.
Mescalero Apache Tribe, 462 U.S. 324, 334 (1983)). "The traditional notions of tribal
sovereignty and the recognition and encouragement of this sovereignty in Congressional Acts
promoting tribal independence and economic development inform the pre-emption analysis."
Ramah Navajo Sch. Bd. , Inc. v. Bureau ofRevenue, 458 U.S. 832, 846 (1982).
A state's regulatory power is at its lowest and generally inapplicable when applied to onreservation conduct of tribal members. White Mountain Apache Tribe v. Bracker, 448 U.S. 136,
144 (1980) (citing Moe v. Salish & Kootenai Tribes , 425 U.S. 463, 480-81 (1976) and
McClanahan v. Ariz. Tax Comm 'n, 411 U.S. 164 (1973)). The question of the lawfulness of state

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regulatory authority becomes more difficult where, as here, a state asserts authority over the
conduct of non-Indians on the reservation. Id.
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 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.
Id. at 144--45.

A. IGRA

For over forty years, Indian gaming has served as a source for commercial revenue for
tribes. See KENNETH BOBROFF, ET AL., COHEN'S HANDBOOK OF FEDERAL INDIAN LAW 875 (Nell
Jessup Newton, Lexis Nexis 2015) (1941). The Supreme Court's 1987 decision in California v.
Cabazon Band of Mission Indians, in holding that the state of California could not impose its
gaming regulations on a tribal gaming operation because they were preempted by tribal and
federal interests, opened the door to numerous public policy questions regarding what is today a
multi-billion dollar industry. 480 U.S. 202 (1987). See BOBROFF, at 875-76. Thus, in 1988,
Congress enacted IGRA.
IGRA was Congress' compromise solution to the difficult questions involving
Indian gaming. The Act was passed in order to prove 'a statutory basis for the
·operation of gaming by Indian tribes as a means of promoting tribal economic
development, self-sufficiency, and strong tribal governments' and 'to shield
[tribal gaming] from organized crime and other corrupting influences to ensure
that the Indian tribe is the primary beneficiary of the gaming operation.' 25
U.S.C. § 2702(1) and (2). IGRA is an example of 'cooperative federalism' in that
it seeks to balance the competing sovereign interests of the federal government,
state governments, and Indian Tribes, by giving each a role in the regulatory
scheme.
Artichoke Joe's California Grand Casino v. Norton, 353 F.3d 712, 715 (9th Cir. 2003) (internal
quotes and citations omitted).
Under IGRA, three conditions must be satisfied before a tribe operates a class III gaming
facility: (1) authorization of such gaming by the governing body of the Indian Tribe and the
Chair of the National Indian Gaming Commission ("NIGC''); (2) authorization of such gaming
by the state in which the reservation is located; and (3) the existence of a gaming compact
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between the tribe and the state approved by the Secretary of the Interior. See 25 U.S.C.
§ 2710(d)(l)). The Act further delineates proper subject matter of a compact. 25 U.S.C.
§ 2710(d)(3)(C)(i)-(vii). 8 The principal subject matter provision here is subsection (vii), which
allows for a compact to contain provisions for "any other subjects that are directly related to the
operation of gaming activities." 25 U.S.C. § 2710(d)(3)(C)(vii). IGRA does not mention the sale
of goods and services to nonmember casino patrons, alcohol sales, or a correlating taxation. As
stated before by this Court in its Memorandum Opinion and Order on Defendants' Motion for
Judgment on the Pleadings, that fact alone weighs in the Tribe's favor. Doc. 59 at 16. The basic
Indian law canons of construction require that statutes be liberally construed in favor of the
Tribes and that all ambiguities are to be resolved in their favor. See Montana v. Blackfeet Tribe,
4701 U.S. 759, 767-68 (1985). Further, tribal property rights and sovereignty are preserved
unless Congress's intent to the contrary is clear and unambiguous. See Minnesota v. Mille Lacs
Band of Chippewa Indians, 526 U.S. 172, 202 (1999).

The Compact that exists between the Tribe and the State is also silent as to the sale of
goods and services to nonmember consumers on the Licensed Premises. The Tribe asserts,
however, that the goods and services offered on the Licensed Premises are within the
contemplation of subsection (vii) as "subjects that are directly related to the operation of gaming
activities" because they "are tailored to accomplish one primary goal: to attract and retain
gaming guests and ultimately generate gaming revenue." See Plaintiffs Memorandum is Support
of its Motion for Summary Judgment, Doc. 117 at 5. At the same time, the Tribe argues that the
use tax is further preempted under § 2710(d)(4), which provides that "nothing in this section
shall be interpreted as conferring upon a State ... authority to impose any tax ... upon an Indian
tribe or upon any other person or entity authorized by an Indian tribe to engage in a class III
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25 U.S.C. § 2710(d)(3)(C)(i)-(vii) reads, in whole,
(C) Any Tribal-State compact negotiated under subparagraph (A) may include provisions relating to(i) the application of the criminal and civil laws and regulations of the Indian tribe or the state
that are directly related to, and necessary for, the licensing and regulation of such activity;
(ii) the allocation of criminal and civil jurisdiction between the State and the Indian tribe
necessary for the enforcement of such laws and regulations;
(iii) the assessment by the State of such activities in such amounts as are necessary to defray the
costs of regulating such activity;
(iv) taxation by the Indian tribe of such activity in amounts comparable to amounts assessed by
the State for comparable activities;
(v) remedies for breach of contract;
(vi) standards for the operation of such activity and maintenance of the gaming facility, including
licensing; and
(vii) any other subjects that are directly related to the operation of gaming activities.
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activity." On the other hand, the Defendants assert that§ 2710(d)(4) only prohibits the taxation
of actual game play, which the State is not doing. Further, the Defendants argue that anything
other than the actual game play does not fall within subsection (vii) because it is not "directly
related to the operation of gaming activities."
When assessing whether certain subject matter falls within the scope of IGRA's catchall
provision, it should not be simply asked "but for the existence of the Tribe's class III gaming
operation, would the particular subject regulated under a compact provision exist? Instead, we
must look to whether the regulated activity has a direct connection to the Tribe's conduct of class
III gaming activities." Doc. 42-1 (Letter from Donald E. Laverdure, Acting Assistant Secretary,
Indian Affairs, to Greg Sarris, Chairman, Federated Indians of Graton Racheria at 10) (July 13,
2012)) (hereinafter, "Graton Letter"). See 25 U.S.C. § 2710(d)(3)(C)(vii). To the extent such
activities are "directly related to the operation of gaming activities," however, Federal courts
need not balance the competing federal, tribal, and state interests involved, as Congress already
completed the balancing test with respect to those activities in enacting IGRA. See Gaming Corp
ofAm., 88 F.3d at 544 (citing S.Rep. No. 445, 1001h Cong., 2d Sess. 6 (1988)).

In opposition to the Tribe's broad definition of "directly related to the operation of
gaming activities," the Defendants rely on Michigan v. Bay Mills Indian Cmty. (Bay Mills), 134
S.Ct. 2024 (2014) for the proposition that the scope of 25 U.S.C. § 27lO(d)(3)(C)(vii) is actually
quite narrow. In Bay Mills, the Supreme Court held that the provision of IGRA authorizing a
state to sue a tribe to enjoin a class III gaming activity located on Indian lands did not abrogate
tribal sovereign immunity to enjoin a tribe from operating a casino located outside its
reservation. See Bay Mills, 134 S.Ct. at 2039. In an attempt to fit the suit within the provision's
authority, Michigan argued that, though the casino was outside the Indian reservation, Bay Mills
"authorized, licensed, and operated" that casino from within its own reservation and that
authorization, licensing, and operation was "Class III gaming activity." Id. at 2032. Therefore,
Michigan claimed, the State could sue to enjoin the "gaming activity" because part of that
activity took place on reservation land. Id. The Supreme Court, however, disagreed, saying that
"numerous provisions of IGRA show that 'class III gaming activity' means just what it sounds
like-the stuff involved in playing class.III games ... each roll of the dice and spin of the wheel."
Id. at 2032-33. That class III gaming activity is "the gambling in the poker hall, not the

proceedings of the off-site administrative authority," see id. at 2033, however, does not answer
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the question presented to this Court. Instead, this Court must determine what is "directly related
to the operation of gaming activity," or, in the words of the Supreme Court in Bay Mills, what is
"directly related to the operation of 'the gambling in the poker hall."'
IGRA was "intended to expressly preempt the field in the governance of gaming
activities on Indian lands," Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 544 (8th
Cir. 1996). It follows then, that "' [a]ny claim which would directly affect or interfere with a
tribe's ability to conduct its own [gaming] licensing [and operation] process[es] should fall
within the scope of [IGRA's] complete preemption.'" Casino Res. Corp. v. Harrah's Entm 't,
Inc., 243 F.3d 437 (8th Cir. 2001) (quoting Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d
536, 549 (8th Cir. 1996)). Though that is the strongest proposition that the preemptive scope of
IGRA applies, that is not the only proposition. Gaming Corp., 88 F.3d at 550 ("The proposition
that the preemptive scope of IGRA encompasses a claim is strong for claims that would intrude
on the tribe's regulation of gaming .... Potentially valid claims under state law are those which
would not interfere with the nation's governance of gaming." (emphasis added)). Indeed, were it
the only proposition, § 271 O(d)(3)(C)(vii) would be rendered superfluous, as subsection (i)
already provides a means by which states and tribes may negotiate regarding the application of
civil laws and regulations "that are directly related to, and necessary for, the licensing and
regulation of such activity." 25 U.S.C. § 2710(d)(3)(C)(i). Similarly subsection (vi) provides that
the states and tribes may negotiate regarding "standards for the operation of such activity and
maintenance of the gaming facility, including licensing." Id. at§ 2710(d)(3)(C)(vi).
"[C]ourts have been quick to dismiss challenges to generally-applicable laws with de
minimis effects on a tribe's ability to regulate its gambling operations. For example, courts have
held that IGRA's preemptive scope is not implicated in cases involving gaming management and
service contracts with a tribe, Casino Res. Corp. v. Harrah's Entm 't, Inc. (Harrah's Entm 't), 243
F.3d at 438-39 (8th Cir. 2001); contracts to acquire materials to build a casino, Barona Band,
528 F.3d at 1192; and release of detailed investigative reports on the management of gaming,
Siletz, 143 F.3d at 487." Mashantucket Pequot Tribe v. Ledyard, 722 F.3d 457 (2d Cir. 2013).
Similarly, in Ledyard, the court found IGRA did not preempt a property tax imposed by the state
on a non-Indian vendors property leased to the tribe. Id. at 469-71. All of these cases, however,
are distinguishable from the case at bar.

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In Harrah's Entm 't, a non-Indian company, Harrah's Entertainment, entered into a
consulting agreement with another non-Indian company, Casino Resource Corporation (CRC) to
jointly pursue gaming opportunities with the Potawatomi Indian Nation. Harrah's Entm 't, 243
F.3d at 436. After the Nation was unable to negotiate a compact agreement with the state of
Michigan, the non-Indian companies executed a termination agreement that dissolved their
management relationship. Id. at 437. CRC then sued Harrah's Entertainment in federal court
asserting state law claims, alleging that Harrah's Entertainment breached the consulting
agreement and tortiously interfered with CRC's "contractual and prospective economic
advantage." Id. The Eighth Circuit found that the state law claims could not be preempted by
IGRA merely because the original contract between the two parties was "peripherally associated
with tribal gaming." Id. at 439. Instead, the court found "the potential infringement on a tribe's
governance of gaming" minimal, as "a non-tribal entity's state law claim (that does not implicate
tribal interests) against another non-tribal entity is not of central concern to IGRA." Id. at 440.
Seven years later, in Barona Band, the Ninth Circuit found a state tax on construction
materials was not preempted by IGRA. See Barona Band, 528 F.3d 1184. The Tribe entered into
a contract with a non-Indian general contractor to construct the expansion of the casino floor and
hotel, as well as other amenities. Id. at 1187. In the contract, "the Tribe touted a method it had
devised to circumvent state sales tax, which would otherwise fall on the contractor, by
scheduling deliveries to occur on tribal lands." Id. Under this contract, the contractor entered into
a series of subcontracts with contractors in various trades. Id. An audit of the general contractor
determined that over $200,000 in sales and use tax associated with purchases of construction
materials from non-Indian vendors for use on the casino expansion-with deliveries taking place
on Indian land. Id. at 1188. The court found that IGRA did not preempt taxation of third-party
purchases of equipment used to construct the gaming facilities when the construction materials,
purchased by a non-Indian subcontractor, "could be used for a multitude of purposes unrelated to
gaming." Id. at 1191-92 ("That these sophisticated parties contracted to create a taxable event on
Indian territory which otherwise would occur on non-Indian territory factually distinguishes the
present case from the multitude of cases where courts have analyzed state taxation on nonIndians performing work on Indian land."). The court refused to invalidate the state tax by
preemption "where the Tribe has invited commercial activity onto its territory for the purpose of
marketing a sales tax exemption to non-Indian businesses who would otherwise be liable for the
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state tax under laws of general applicability." Id. at 1193. See also Washington v. Confederated
Tribes of the Colville Indian Reservation (Colville), 447 U.S. 134 (1980) (upholding a state tax

on cigarettes sold on-reservation to nonmembers when the only value added to the transaction by
the tribe was the marketing of a tax exemption).
Similarly, in Ledyard, the Second Circuit upheld a state tax on non-Indian owners of slot
machines that · were leased to a tribe to be used in their on-reservation gaming facility. See
Ledyard, 722 F.3d 457. "[U]nder IGRA, mere ownership of slot machines by the vendors does

not qualify as gaming and taxing such ownership therefore does not interfere with the
'gov{'.mance of gaming."' Id. at 470. Because the tax was dependent entirely on a non-Indian's
ownership of the property, and had nothing to do with a transaction with the tribe, id. at 469, the
tax was permissible, and any effect on the tribe was "too indirect and too insubstantial" to
support a preemption claim. Id. at 476 ("Any adverse effect on the Tribe's finances caused by the
taxation of a private party contracting with the Tribe would be ground to strike the tax. Absent
more explicit guidance from Congress, we decline to return to this long-discarded and
thoroughly repudiated doctrine." (quoting Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163,
186-87 (1989))).
Finally, in Confederated Tribes of Siletz Indiqns v. Oregon (Siletz), the tribe and the state
of Oregon negotiated .a compact that authorized Oregon to monitor and investigate the casino to
ensure compliance with the compact. 143 F.3d 481,.482-84 (9th Cir. 1998). Included in the
compact was a provision providing that the tribe must comply with the state's public records
laws. Id. The Ninth Circuit found, without any analysis of 25 U.S.C. § 2710(d)(3)(C)(iii), which
appears to answer the question, that the state reporting statute applied to the tribe's operations by
virtue of the Tribal-State compact itself. Id. at 484-85. Further, the court iterated that the
records laws did not seek to usurp tribal control over gaming and the fact that the release of a
report that contained damaging information on the operation of the casino could have a
detrimental effect on the business was fully consistent with IGRA's goal of fair and honest
gaming. Id. at 487.
Essentially, the taxes and regulations in the cases above were only tangentially related to
tribal gaming and each could have taken place regardless of the tribe's operation of a casino.
Ownership of slot machines by non-Indians, the purchase of construction materials by nonIndian subcontractors, and the state law claims of a non-Indian company against another non11

. Indian company arising out of a management contract between the two companies are all events
that could arise in spite of the tribe's ownership and operation of a casino. In this case, most of
the transactions the State seeks to tax are not merely tangentially related to tribal gaming, but
would not exist but for the Tribe's operation of a casino. Further, by finding the state's public
records laws consistent with IGRA and a permissible provision of the compact between the state
and the tribe in Siletz, because the state had properly included the provision in its compact,
preemption analysis was rendered irrelevant. Id. at 484 ("We are not persuaded that a preemption
analysis is necessary here. Rather, we look to the Compact itself."). The Tribe in this case
similarly argues that preemption analysis is not necessary here, at least with respect to their first
claim for relief, as the imposition of the use tax should have been included in the Compact.
In re Gaming Related Cases (Coyote Valley II), 331 F.3d 1094 (9th Cir. 2003), Rincon
Band of Luiseno Mission Indians of the Rincon Reservation v. Schwarzenegger (Rincon), 602
F.3d 1019 (9th Cir. 2010), and Big Lagoon Rancheria v. California (Big Lagoon), 759 F.Supp.2d
1149 (N.D. Cal. 2010) offer more instruction. In Coyote Valley II, the tribe asserted that the state
had acted in bad faith in negotiating the tribal-state compact. The State had insisted on provisions
providing for a revenue-sharing trust fund (RSTF) and a special distribution trust fund (SDF), as
well as a provision requiring the tribe to adopt a labor relations ordinance. The Tribe argued
these provisions fell outside the list of appropriate topics for tribal-state compacts in 25 U.S.C.
§ 2710(d)(3)(C) and that the insistence on the RSTF and SDF provisions constitute a "demand

by the State for direct taxation of the Indian tribe," 25 U.S.C. § 2710(d)(7)(B)(iii)(II). The Ninth
Circuit disagreed. The RSTF funds were held to be directly related to the operation of gaming as
those amounts were intended to be redistributed from gaming to non-gaming tribes, which the
court found to be consistent with IGRA's purpose of furthering tribal economic development. Id.
at 1111. The SDF payments were also considered directly related as those funds were designated
to compensate for negative externalities associated with gaming, i.e., for gaming-related
purposes. Id. at 1114. Further, both the RSTF and SDF provisions were permissible because the
state had "offered meaningful concessions in return" and therefore "[did] not exercise 'authority
to impose' anything." Id. at 1112. Finally, the labor relations provision was also found to be
directly related to the operation of gaming. The provision "demanded that tribes meet with labor
unions to negotiate independently a labor ordinance addressing only organization and

12

representational rights and applicable only to employees at tribal casinos and related facilities."
Id. at 1116. The compact provided:
Notwithstanding any other provision of this Compact, this Compact shall be null
and void if on or before October 13, 1999, the Tribe has not provided an
agreement or other procedure acceptable to the State for addressing organizational
and representational rights of Class III Gaming Employees and other employees
associated with the Tribe's Class III gaming enterprise, such as food and
beverage, housekeeping, cleaning, bell and door services, and laundry employees
at the Gaming Facility or any related facility, the only significant purpose of
which is to facilitate patronage at the Gaming Facility.
Id. (emphasis added). The court found that this provision .was "directly related to the operation of
gaming activities" and thus permissible to include in the compact pursuant to 25 U.S.C.
§ 2710(d)(3)(C)(vii). Id. at 1115-16. "Without the 'operation of gaming activities,' the jobs this
provision covers would not exist; nor, conversely, could Indian gaming activities operate without
someone performing these jobs." Id. at 1116. Because all of the provisions were found to be
"directly related to the operation of gaming activities," the Court found the state did not negotiate
in bad faith in requiring that the Tribe consent to those provisions. Id. at 1115-16. ·
Similarly, and in relying on Coyote Valley II, the Northern District of California found in
Big Lagoon that the state's requests for environmental mitigation measures in the compacting
process "was permissible so long as such measures directly relate to gaming operations or can be
considered standards for the operation and maintenance of the Tribe's gaming facility" and the
state offered meaningful concessions in return. Big Lagoon, 759 F. Supp.2d at 1161. The tribe did
not dispute that the gaming activities would take place in an environmentally-sensitive area or
that the operations would take place without any negative environmental effects. Id. Further,
"Big Lagoon [did] not establish that the State's proposed environmental mitigation measures
[were] so discordant with IGRA's purposes that they amount to prohibited topics of negotiation."
Id. at 1162.
In Rincon, the Ninth Circuit was presented with another revenue sharing provision in a
tribal-state compact. The court referred back to its earlier decision in Coyote Valley II,
recognizing that the court construed the meaning of subjects "directly related to the operation of
gaming" broadly to include "fair distribution of gaming opportunities" and "compensation for
the negative externalities caused by gaming." Rincon, 602 F.3d 1019, 1033-34. However, the
court found that the general fund revenue sharing, unlike funds paid into the RSTF and SDF, had

13

undefined potential uses and therefore could not be found to be directly related to gaming.
"Whether revenue sharing is an authorized negotiation topic under § 2710(d)(3)(C)(vii) thus
depends on the use to which the revenue will be put, not on the mere fact that the revenue derives
from gaming activities." Id. ("No amount of semantic sophistry can undermine the obvious: a
non-negotiable, mandatory payment of 10% net profits into the State treasury for unrestricted use
yields public revenue, and is a 'tax."').
In the case presented before the Court, the State seeks to impose a use tax on the
transactions of nonmembers with the Indian tribe at the Casino and its amenities, as well as the
Store. The funds from this use tax are placed in the State's general fund, to be used for any
number of purposes. As mentioned supra, most of the transactions the State seeks to tax are not
merely tangentially related to tribal gaining, but would not exist but for the Tribe's operation of a
casino, thus they are not of the kind in Harrah 's Entm 't that would occur between non-Indians
regardless of the existence of the Casino.
This Court finds that whether the only significant purpose of these amenities is to
facilitate gaming is supported by evidence of complementarity of these amenities with gaming.
Complementary goods are "[p]airs of goods for which consumption is interdependent."
Declaration of Jonathan B. Taylor in Support of [the Tribe's] Motion for Summary Judgment,
Doc. 118-1, at 10 (citing G. BANNOCK ET AL., DICTIONARY OF ECONOMICS 66 (4th ed. 2003)
[hereinafter BANNOCK ET AL.]). If a good is complementary, the proportionate change in the
quantity demanded of one good divided by the proportionate change in the price of another good
will be negative. Id. at 11 (citing BANNOCK ET AL., at 83). For example, if the price of coffee
rises, the demand for coffee creamer falls. "Complementarity often motivates an enterprise to
develop one product as a "loss-leader" to increase sales of its complement." Id. at 13. A "lossleader" is a "product deliberately sold below cost and therefore at a loss to in an attempt to
encourage sales of other products." Id. (citing A. ASHWIN, M. TAYLOR, & N.G. MANKIW,
BUSINESS ECONOMICS 324 (2016)). At the Licensed Premises, the food and beverage department,
live entertainment, and the Store all operate at a loss. While the Court finds the fact that these
amenities operate at a loss to be evidence of their complementarity, it does not find it dispositive.
The Court finds more convincing evidence that increases in patronage at one amenity is directly
tied to increases in gaming activity itself.

14

The Tribe has shown the complementarity of food, alcohol, and hospitality with casino
activity. For example, "a one-dollar increase in the variable representing overall restaurant sales
produced a $91 increase in slot wagers." V. Kalargyrou, A.K. Singh & A.F. Lucas, Estimating

the Effect of Racina Restaurant Sales on Slot Wagering Volume, 24 INT'L. J. OF CONTEMPORARY
HOSP. MGMT. 1088, 1088 (2012). Further, "[a] 10% increase in the price of food reduces
consumption of entertain on average by 7.2%." R.H. FRANK, MICROECONOMICS & BEHAVIOR 126
(2015). This Court has found from the start that alcohol consumption and gaming on a casino
floor are commonly associated and certainly reinforce one another. See e.g. , Hakimoglu v, Trump

Taj Mahal Assocs., 70 F.3d 291, 294 (3rd Cir. 1995) (quoting Tose v. Greate Bay Hotel and
Casino Inc., 819 F.Supp. 1312, 1317 n. 8 (D.N.J. 1993), aff'd, 34 F.3d 1227 (3rd Cir. 1995))
("'The State has regulated the minutiae of gaming rules and alcohol service and expressly
permitted the serving of free drinks to patrons at the gaming tables. Surely it could not have been
unaware that the cognitive functioning of many gamblers would be impaired by drinking or of
the consequences of permitting persons so impaired to gamble.'"); Tose, 819 F .Supp. at 1320
("At the very least the State condones casino patrons drinking while they place bets, and the
policing of providing free drinks on request could arguably be said to actively encourage this
conduct."). This Court now finds that related amenities, the only significant purpose of which is
to facilitate gaming activities at the Casino, also fall within the purview of 25 U.S.C.
§ 2710(d)(3)(C)(vii). The Court is convinced that but for the existence of the Casino, the gift
shop, hotel, RV park, food and beverage services, and live entertainment events would not exist
in the sleepy but pleasant little town of Flandreau, population 2,332. Nor could the Casino
operate without the existence of these amenities. Unlike other casinos, Royal River is far from a
substantial population center and, in fact, provides the only hotel service in town. Without a hotel
or RV park, the Casino simply could not operate in order to further the self-sufficiency of the
Tribe. Similarly, the gift shop would be of little worth without the Casino's apparel. When
purchases take place at these amenities, the state is not "losing tax revenues it would otherwise
obtain from sales made outside of tribal boundaries," nor is the Casino and its related facilities
undermining the state economy or tax base. See Indian Country, US.A., Inc. v. Oklahoma, 829
F.2d 967, 986 (10th Cir. 1987). The product of value is not a tax exemption, but a "form of
entertainment that is wholly created, sold, and consumed within the boundaries" of the Flandreau

15

Indian Reservation. Id. The product of value is a form of entertainment the only significant
purpose of which is to facilitate gaming activities at the Casino.
Beyond what is authorized by 25 U.S.C. § 2710(d)(3)(C), 25 U.S.C. § 2710(d)(4)
prohibits a state from taxing "an Indian Tribe or upon any other person or entity authorized by an
Indian tribe to engage in a class III activity." 25 U.S.C. § 2710(d)(4). The Court finds logical
that that proscription applies to nonmembers on the Casino floor authorized to gamble, which
includes the costs of associated activities, i.e., gamblers and what they spend on gambling,
alcohol, food, rooms, and other merchandise from the Casino. However, the mere fact that the
convenience store falls within the same business enterprise operated by the Tribe is not sufficient
to equate such services as directly related to the operation of gaming. See Barona Band of

Mission Indians v. Yee, 528 F.3d 1184, 1193 (2008) ("Extending IGRA to preempt any
commercial activity remotely related to Indian gaming-employment contracts, food service
contracts, innkeeper codes-stretches the statute beyond its stated purpose."). Were the various
food, beverages, and other services offered at the convenience store to be within the scope of 25
U.S.C. § 2710(d)(3)(C)(vii), there would be no end to what other activities would fall under the
IGRA's protection when, by virtue of a business decision, they are somehow operated under the
same umbrella as an IGRA-sanctioned casino. The Tribe has not presented sufficient evidence to
the Court to show that the Store is sufficiently complementary to gaming, thus the Court finds
that the Store, though it may benefit from its proximity to the Casino, is not in existence but for
the tribe's operation of a Casino and it cannot be said that the only substantial purpose of a
convenience store is to facilitate gaming. 9
Section 2710(d)(4) provides that IGRA should not be interpreted to provide the state with
authority to impose a tax on (1) the tribe or (2) "any other person or entity authorized by an
Indian tribe to engage in a class III activity," except to the extent .such a tax is agreed to in the
compact under § 2710(d)(3)(C)(iii) as an "assessment by the State of such activities in such
amounts as are necessary to defray the costs of regulating such activity."

In other words,

§ 2710(d)(4) reinforces the permissible compact negotiation topics provided in § 2710(d)(3)(C)
by requiring a state to engage in compact negotiations despite the fact that IGRA does not grant
the state any additional taxing authority. See Rincon 602 F .3d at 1031. "[I]t is clear from the
9

Prior to oral argument, the Court specified some of the issues to be addressed. Plaintiff submitted additional
affidavits on the day of argument. The Court did not request nor authorize supplementation to the record which was
long before closed, so that submission has not been considered.
16

legislative history that by limiting the proper topics for compact negotiations to those that bear a
direct relationship to the operation of gaming activities, Congress intended to prevent compacts
from being used as subterfuge for imposing State jurisdiction on tribes concerning issues
unrelated to gaming." Coyote Valley II, 331 F.3d at 1t11. Instead, the state may only negotiate
for "such amounts as are necessary to defray the costs of regulating such activity." Any other
request for "revenue sharing" is only a permissible topic for compact negotiation, under Rincon,
"if the revenue sharing provision is (a) for uses 'directly related to the operation of gaming
activities' in · § 2710(d)(3)(C)(vii), (b) consistent with the purposes of IGRA, and (c) not
'imposed' because it is bargained for in exchange for a 'meaningful concession."' Rincon, 602
F.3d at 1033 (emphasis omitted).
The Defendants contend that the Tribe's motion may not be granted without finding that
the IGRA provision describing compactable topics is a mandatory provision rather than a
permissive one. Indeed, IGRA provides that compacts "may include provisions" as set forth in
25 U.S.C. § 2710(d)(3)(C), and not that the compacts "shall" contain such provisions. However,
the list of subjects is merely permissive in that a compact is not required to contain any of the
subjects listed. It is mandatory, however, that if a tribe requests negotiation on any of those
subjects, a state "shall" negotiate in good faith on the requested subjects. 25 U.S.C.
§ 2710(d)(3)(A). Further, if the state wishes to have authority over any of the listed subjects, it is
mandatory that such authority be found in a valid gaming compact. See Gaming Corp of Am. v.
Dorsey & Whitney, 88 F.3d 536, 546-47 ("[U]nder [IGRA], the only method by which a state
can apply its general civil laws to gaming is through a tribal-state compact.") Ultimately, since
the Court holds that the slots, table games, food and beverage services, hotel, RV park, live
entertainment events, and gift shop are directly related to class III gaming pursuant to 25 U.S.C.
§ 271 O(d)(3)(C)(vii), regulation and taxation is, therefore, compactable between a tribe and a
state. As the State and the Tribe did not include a provision providing for such taxation in the
gaming compact, the application of the use tax to such amenities is preempted by IGRA and the
Tribe's motion for summary judgment is granted to that extent. Even had the State negotiated for
such a provision, though, the State would have to earmark those funds for services that are also
directly related to the operation of gaming activities as well as offer meaningful concessions in
return to satisfy the rationale of Rincon. The remittance of those taxes into a general fund with
unlimited potential uses, such as the State's general fund here, would not satisfy Rincon and
17

would be preempted by IGRA as an impermissible negotiation topic. Finally, with respect to the
Store, the Tribe's motion for summary judgment is denied, as the convenience store's connection
to the gaming activities is too indirect and insubstantial.
B. Under Federal Law
"The federal policy favoring tribal self-government operates even in areas where state
control has not been affirmatively preempted by federal statute." Iowa Mut. Ins. Co. v. LaPlante,
480 U.S. 9, 14 (1987). Thus, it is still necessary to determine if the use tax, where not preempted
by plain implication of IGRA-in other words, the sale of goods and services at the Store-is
not otherwise preempted under the Bracker balancing test.
Undertaking on-reservation preemption analysis begins with determining where the
"legal incidence" of the tax falls . See Oklahoma Tax Comm 'n v. Chickasaw Nation, 515 U.S.
450, 458-59 (1995). "State taxes on nontribal members in Indian country are not categorically
barred. Instead, courts apply a 'flexible preemption analysis sensitive to the particular facts and
legislation involved,' Cotton Petroleum, 490 U.S. at 176, to determine whether a state can
impose the taxes." BOBROFF, supra, at 702. From there, federal and tribal interests, in
conjunction, are weighed against state interests. If the former outweighs the latter, the tax is
invalid. If, however, state interests predominate, the state tax on the nonmember is permissible.
See Chickasaw Nation, 515 U.S. at 459. Other factors that have been considered in the context of

on-reservation state tax preemption include: the degree of federal regulation, the respective
governmental interests of the tribe and state; provision of tribal or state services to the part the
state seeks to tax, see Machinery Co. v. Arizona State Tax Comm 'n, 448 U.S. 160 (1980); White
Mountain Apache Tribe v. Bracker, 448 U.S. 136, 143-51 (1980); Colville, 447 U.S. at 152-59;

the economic burden of the tax, see Bracker, 448 U.S. at 149-50; whether the value being taxed
is generated on the reservation or is attracted to the reservation solely by the claimed exemption
from state taxes, see Colville, 447 U.S. at 154-57; and whether the state tax discriminates against
Indian commerce or unduly burdens it, see id. at 156-57 (dictum).
There is no dispute that the incidence of the use tax imposed on Store purchases falls
upon the nonmember consumer. Therefore, the Court must apply the Bracke. balancing test to
r
determine if the use tax is permissible. "The traditional notions of Indian sovereignty provide a
crucial 'backdrop' against which any assertion of State authority must be assessed." New Mexico
v. Mescalero Apache Tribe, 462 U.S. 324, 334 (1983) (internal citations omitted). Both the Tribe
18

and the Federal Government have an interest in promoting tribal self-government, including
"Congress' overriding goal of encouraging 'tribal self-sufficiency and economic development."'
Id. (citing Bracker, 448 U.S. at 143 (footnote omitted)). However, "[the State] does not infringe
the right of reservation Indians to "make their own laws and be ruled by them" merely because
the result of imposing its taxes will be to deprive the Tribes of revenues which they currently are
receiving." Colville, 447 U.S. at 156 (citing Williams v. Lee, 358 U.S. 217, 220 (1959). "While
the Tribes do have .an interest in raising revenues for essential governmental programs, that
interest is strongest when the revenues are derived from value generated on the reservation by
activities involving the Tribes and when the taxpayer is the recipient of tribal services." Id. at
156-57. "The State also has a legitimate governmental interest in raising revenues, and that
interest is likewise strongest when the tax is directed at off-reservation value and when the
taxpayer is the recipient of state services." Id. at 157. See also Barona Band, 528 F.3d at 1193
(citing Ramah, 458 U.S. at 843) ("We recognize that the state interest strengthens where there is
a nexus between the taxed activity and the government function provided.").
Where the Federal government has undertaken comprehensive regulation, a number of
policies underlying the federal regulatory scheme are threatened by the taxes, and the state is
unable to justify the taxes except in terms of a generalized interest in raising revenue, the taxes
are impermissible. See Bracker, at 448 U.S. at 151. Where, however, the Tribe benefits from
generalized government functions, the legitimacy of generalized taxes on third parties with
whom the Tribe does business is strengthened. See Ledyard, 722 F.3d at 475.
IGRA created a federal National Indian Gaming Commission (NIGC) to oversee
regulation, licensing, and background checks of key employees. The Store's connection to the
NIGC, however, is tangential, and none of the functions overseen by the NIGC take place at the
Store. The Tribe asserts that the Store, like its other facilities, is subject to Indian Health Services
health and safety regulations and Bank Secrecy Act regulations regarding the handling of cash
with which the Tribe must comply. This Court is not convinced that this is the same extensive
regulation seen in other cases where the courts have found no room for state regulation, nor is it
regulation that applies only to the Store by virtue of its indirect connection to the casino. Further,
the cost of compliance with the tax, though it may decrease revenue in general, is not enough to
shake up the regulatory structure currently in place.

19

While the value of the Tribe's goods and services need not come from on-reservation
activity, the Tribe must serve as more than "a conduit for the products of others." Cabazon Band
of Mission Indians v. Wilson, 37 F.3d 430, 435 (9th Cir. 1994) ("It is not necessary ... that the

entire value of the on-reservation activity come from within the reservation's borders. It is
sufficient that the Bands have made a substantial investment in the gaming operations and are
not merely serving as a conduit for the products of others."). The Tribe argues that the value of
the Store is substantially produced on the reservation. The Tribe built the Store, purchases and
stocks the items in the Store, as well as prices and monitors the items for spoilage. The Tribe also
asserts that value added on the reservation includes additional costs of overhead, such as
marketing, human resources, maintenance costs, accounting, security, surveillance, etc. Certainly
the same overhead costs can be said to exist in any business. However, Colville requires that the
value marketed be generated on the reservation "by activities in which the Tribes have a
significant interest." Colville, 447 U.S. at 155. Though tribal sovereignty and economic
development are activities in which the tribe has an interest, it is insufficient by itself to bar the
State's generally applicable tax imposed on nonmember purchases from a convenience store. See
Ledyard, 722 F.3d at 477 ("Tribal sovereignty is an important consideration for a court weighing

interests in the Bracker test, but it is insufficient in itself to bar the State's generally applicable
tax imposed on non-Indians' ownership of on-reservation personal property.").
Finally, the use tax imposed on goods and services provided at the Store will be placed
into the State's general fund, which is distributed for any number of services including funding
for schools, health and medical services, emergency management services, Medicaid, economic
assistance programs, and long-term care services, parks and .recreation services, court services,
and correctional services. While the parties disagree as to the extent the nonmember consumers
of the Store benefit from these services, it stands to reason that South Dakota residents generally
benefit from the services provided by the general fund, regardless of the extent to which those
services are provided on the reservation.
"[T]he State does not interfere with the Tribes' power to regulate tribal enterprises when
it simply imposes its tax on [use by] nonmembers." Colville, 447 U.S. at 159. "Nor would the
imposition of [the] tax on these purchasers contravene the principle of tribal self-government, for
the simple reason that nonmembers are not constituents of the governing tribe." Id. at 161.
Further, "[t]he State has an interest in the uniform application of its tax code." Town of Ledyard,
20

722 F.3d at 475. The Court finds the State's interests outweigh the general interests of the
Federal Government and the Tribe with respect to a tax imposed on nonmember purchases made
at the Store. Thus, the Tribe's motion for summary judgment with respect to preemption of the
tax on nonmember purchases at the Store is denied.
II.

Discriminatory Nature of State Tax

In addition to the preemption arguments asserted above, the Tribe also argues in their
fourth Claim for Relief of their First Amended Complaint and the final component of their
Motion for Summary Judgment that the State use tax is invalid because it is discriminatory. The
Tribe asserts that the State discriminates against the Tribe by failing to grant a tax credit to
consumers who have paid sales or use tax to the Tribe on the same transaction sought to be taxed
by the State, while granting a credit to consumers who have paid a tax to other taxing
jurisdictions.
S.D.C.L. 10-46-6.1 provides:
The amount of any use tax imposed with respect to tangible personal property,
any product transferred electronically, or services shall be reduced by the amount
of any sales or use tax previously paid by the taxpayer with respect to the property
on account of liability to another state or its political subdivisions.
This credit is only available if the other state "reciprocally" grants a credit. Id. In accordance
with the statute, the State grants such a credit to forty-three states and the District of Columbia.
The Tribe imposes a tax on all on-reservation purchases of goods and services at a rate of
six percent. Further, the Tribe's tax code provides:
The amount of any tax imposed by this Subchapter with respect to tangible
personal property or services shall be reduced by the amount of any sales or use
tax previously paid by the taxpayer with respect to the property or services on
account of liability to another tribe or state or their political subdivisions.
23 FSST Tribal Law and Order Code§ 3.36.
In

Colville,

the

Court indicated

that "[ s]tate[ s]

may sometimes

impose a

nondiscriminatory tax on non-Indian customers of Indian retailers doing business on the

reservation." Colville, 447 U.S. at 151 ("The [Indian Commerce] Clause may have a more
limited role to play in preventing undue discrimination against, or burden on, Indian
Commerce."). "A tax is discriminatory if it is not imposed equally upon similarly situated
groups." Salt River Pima-Maricopa Indian Cmty. v. Yavapai County, 50 F.3d 739, 740 (9th Cir.

21

1995) (citing First Federal S & L v. Mass. Tax Comm 'n, 437 U.S. 255, 260-62 (1978); United

States v. Fresno, 429 U.S . 452, 462 (1977)).
The Defendants argue that the nonmember consumers are subject to a nondiscriminatory
tax because the Tribe is not similarly situated to other states or their political subdivisions. By
contrast, the Tribe, relying on Prairie Band Potawatomi Nation v. Wagnon (Prairie Band), 475
F.3d 818 (10th Cir. 2007) and Cabazon Band of Indians v. Smith, 388 F.3d 691 (9th Cir. 2004),
asserts that it is a similarly-situated sovereign government entitled to the credit. However, the
Tribe's reliance on these cases is misplaced. Unlike the tribe and state's similar public safety
interests in the use of emergency light bars on patrol vehicles at issue in Cabazon, and unlike the
complete ouster of tribal jurisdiction caused by the registration and titling laws of the state in

Prairie Band, this is a tax case, where, "[w]hen two sovereigns have legitimate authority to tax
the same transaction, exercise of that authority by one sovereign does not oust the jurisdiction of
the other." Prairie Band, 475 F.3d 818, 827 (citing Colville, 447 U.S. at 184 n. 9 (Rehnquist, J.,
concurring in part, concurring in result in part, and dissenting in.part) ("When two sovereigns
have legitimate authority to tax the same transaction, exercise of that authority by one sovereign
does not oust the jurisdiction of the other. If it were otherwise, we would not be obligated to pay
federal as well as state taxes on our income or gasoline purchases. Economic burdens on the
competing sovereign ... do not alter the concurrent nature of the taxing authority.")).
The Tribe also argues that instead of comparing tribal retailers to other retailers in the
State of South Dakota, the Court should compare tribal retailers to "similarly situated" retailers
in other states because there are no "similarly situated" retailers in the State. Id. at 33. The Tribe
argues that "the discrimination arises not from a failure to grant tax-exempt treatment to goods
destined for the

Tribe-as-ret~iler

(as in Wagnon), but from the failure to afford equal treatment to

the Tribe-as-government." Id. at 33. In Cabazon, the regulation was found discriminatory
because it treated law enforcement agencies of other States differently from the law enforcement
agency of the tribe. The case at hand is not a matter of treating a tribal agency differently than an
agency of another State, this is a matter of granting a tax credit to a State versus a tribe within the
boundaries of the same State imposing the tax.
All of the transactions the State seeks to tax are located entirely within the borders of the
Flandreau Indian Reservation and also within the borders of the State of South Dakota. Both
entities have taxing jurisdiction of nonmembers within their borders to the extent state taxation
22

has not been preempted by federal law. As stated above, federal law has not preempted the state
tax with respect to nonmember consumers of the Store. While these nonmember consumers will
be subject to a total tax that is higher on the reservation than off the . reservation, that is not
because the tax is discriminatory. The State tax is imposed at a uniform rate throughout the
state's jurisdiction, both on and off the reservation. "The burdensome consequence is entirely
attributable to the fact that the [transactions] are located in an area where two governmental
entities share jurisdiction." Cotton Petroleum, 490 U.S. at 189.
In Wagnon v. Prairie Band Potawatomi Nation (Wagnon), 546 U.S. 95 (2005), the
Supreme Court found that the tribe was not similarly situated to other states or the Federal
Government, which were exempt from the fuel tax, because the Tribe benefited from the
proceeds of the fuel tax imposed on Kansas fuel retailers. See Wagnon, 546. U.S. at 115. The
fuel tax proceeds were used to pay for a significant portion of the costs of maintaining the roads
and bridges on the tribe's reservation, including the main highway used by casino patrons.
"Kansas offers no similar services to the several States or the Federal Government." Id. The
Tribe and the State disagree as to how similar the facts of Wagnon are to the case presented here,
as the Tribe argues that "South Dakota does not expend significant sums from the proceeds of its
use tax to provide government services within the Flandreau Indian Reservation or within the
exterior boundaries of other states, let alone services specifically and uniquely funded through
the challenged tax itself." Doc. 117 at 33. However, "the relevant services provided by the State
include those that are available to the [consumers] and the members of the Tribe off the
reservation as well as on it." Cotton Petroleum, 490 U.S. at 190. Although the proceeds of the
use tax enter the State's general fund, which is not earmarked for any expenditures in particular,
the Tribe does indeed benefit from off-reservation road maintenance and public safety services
leading to the Store, the licensure of some food vendors, as well as other services. Further,
nonmember consumer residents of South Dakota benefit from a wide range of general services
offered by the State when off the reservation. Therefore, the State tax is not discriminatory, as
the Tribe is not similarly situated to other states which have been granted a tax credit.
Accordingly, the Tribe's Motion for Summary Judgment on Claim for Relief Four is denied and
the Defendants' Motion for Summary Judgment on the same is granted.

23

III.

Preemption of Collection and Remittance of the Tax
The Tribe's second and fifth Claims for Relief of the First Amended Complaint allege

that the State's attempt to impose the obligation to collect and remit the use tax 1) violates IGRA
and 2) is preempted by federal law and infringes upon Tribal sovereignty. The Defendants
moved for summary judgment on the issues, arguing that IGRA's scope does not include the
collection and remittance of the use tax as it is not imposed on gaming activities. The Tribe
asserted that the issues were not ripe for summary judgment, as the collection and remittance
requirements would not be at issue unless some or all of the disputed taxes were found to be
valid.
As the Court discussed supra, to the extent the tax is imposed on transactions that are
"directly related to the operation of gaming activities" the tax is impermissible, as it should have
been imposed via the gaming contract. To the extent the tax is invalid, the challenge to collection
and remittance requirements is therefore moot. However, to the extent the tax is imposed on
transactions that are not "directly related to the operation of gaming activities" (i.e. , nonmember
consumer purchases at the Store), the Court must consider whether the collection and remittance
requirements are preempted by federal law or improperly infringe on tribal sovereignty. ·

Moe v. Salish & Kootenai Tribes, 425 U.S. 463 (1976), established that a State may
impose at least "minimal" burdens on an Indian retailer to aid in enforcing and collecting a valid
tax. See also Dep't. of Taxation & Fin. v. Mi/helm Attea & Bros., Inc., 512 U.S. 61, 73 (1994)
("States may impose on reservation retailers minimal burdens reasonably tailored to the
collection of valid taxes from non-Indians."). The State imposes the tax on the transaction at the
Store and where the goods or services purchased are ultimately consumed is irrelevant. The
Tribe's burden in enforcing and collecting the tax is limited to determining if the purchase is
made by a member of the Tribe or a nonmember. This collection burden is not unlike those
upheld in Moe and Colville, and is therefore valid. The Court thus grants the Defendants' motion
for summary judgment on the second and fifth Claims for Relief to the extent the collection and
remittance requirements are imposed on nonmember consumer purchases at the Store.
IV.

Validity of S.D.C.L. § 35-2-24
In its sixth Claim for Relief, the Tribe also argues that S.D.C.L. § 35-2-24 interferes with

and is, therefore, preempted by IGRA. In the alternative, in its eighth Claim for Relief, the Tribe
argues that the statute is impermissible as it exceeds the scope of the State's regulatory authority
24

under 18 U.S.C. § 1161. The Defendants have moved for summary judgment while the Tribe
asserts that the issues, like the collection and remittance requirements, are not ready for summary
judgment review.
S.D.C.L. § 35-2-24 reads, in pertinent part,
No license granted under this title may be reissued to an Indian tribe operating in
Indian country controlled by the Indian tribe or to an enrolled tribal member
operating in Indian country controlled by the enrolled tribal member's tribe until
the Indian tribe or enrolled tribal member remits to the Department of Revenue all
use tax incurred by nonmembers as a result of the operation of the licensed
premises, and any other state tax has been remitted or is not delinquent.
As was established supra, to the extent the taxes are imposed on transactions that are
"directly related to the operation of gaming activities," those taxes are impermissible as they
should have been imposed through the compact negotiation process provided by IGRA. To the
extent those taxes are imposed on transactions at the Store, however, they are not preempted by
IGRA, and the Court grants the Defendants' motion for summary judgment on the Tribe's sixth
claim for relief to that extent. However, as to the taxes imposed on transactions at the Store, the
Court must determine whether the conditioning of the renewal of a beverage license on the
collection and remittance of a use tax on nonmember consumer purchases is permissible.
18 U.S .C. § 1161 10 provides that "liquor transactions in Indian country are not subject to
prohibition under federal law provided those transactions are 'in conformity both with the laws
of the State in which such act or transaction occurs and with an ordinance duly adopted by the
tribe having jurisdiction over such area of Indian country."' Rice v. Rehner, 463 U.S. 713, 716
(1983) (quoting 18 U.S.C. § 1161). In finding that "tradition simply has not recognized a
sovereign immunity or inherent authority in favor of liquor regulation by Indians, id. at 722, and
that, because of the potential for substantial impact beyond the reservation, the state has
important interests in controlling liquor traffic within its borders, id. at 725-56, the statute, in
effect, operated to delegate Congressional authority over liquor regulation in Indian country to
both Indian tribes and states, concurrently. See id. at 723-79, 733-34.
10

The statute reads:
The provisions of sections 1154, 1156, 3113, 3488, and 3669, of this title, shall not apply within
any area that is not Indian country, nor to any act or transaction within any area of Indian country
provided such act or transaction is in conformity both with the laws of the State in which such act
or transaction occurs and with an ordinance duly adopted by the tribe having jurisdiction over such
area of Indian country, certified by the Secretary of the Interior, and published in the Federal
Register.
28 U.S.C. § 1161.
25

Prosecutions of Indians for state liquor law violations on reservation land, Fort Belknap

Indian Cmty. of Fort Belknap Indian Reservation v. Mazurek, 43 F.3d 428 (9th Cir. 1994), tribal
regulations over non-Indians within reservation land, City of Timber Lake v. Cheyenne River

Sioux Tribe, 10 F.3d 554 (8th Cir. 1993), a state alcohol license requirement to sell 3.2% beer,
Citizen Band of Potawatomi Indian Tribe v. Okla. Tax Comm 'n, 975 F.2d 1459 (10th Cir. 1992),
and a state tax on liquor sales to non-Indians, Squaxin Island Tribe v. Washington, 781 F.2d 715
(9th Cir. 1986) have all been upheld under 18 U.S .C. § 1161. However, there is little by way of
instruction as to what states may permissibly tax before issuing a liquor license. This Court has
expressed skepticism about the State's view of 18 U.S.C. § 1161 before. "The State seems to
suggest that the state laws the tribes must comply with may be of indeterminate scope and
contemplate a vast array of subject matter unrelated to alcohol regulation. All a state need do is
establish a statutory scheme superficially connecting the subject matter (here, a tax) with alcohol
regulation." Doc. 59 at 31.
A state's authority to tax in Indian country is operationally curtailed by a tribe's
sovereign immunity in a way in which liquor regulation is not. Recognizing the limited tax
enforcement power of States on reservations, the Supreme Court suggested five alternative
remedies for the collection of a cigarette tax in Okla. Tax Comm 'n v. Citizen Band Potawatomi

Indian Tribe, 498 U.S. 505 (1991), including: imposing liability on individual agents of tribes for
failing to collect the taxes; seizing untaxed goods in shipment to reservations; collecting taxes
from wholesalers off reservations; entering into collection agreements with tribes; and seeking
congressional legislation. Id. at 513-14. Though certainly not dispositive of the issue, the
Supreme Court did not recommend imposing conditions on licensing requirements, liquor or
otherwise.
"Indian traders are not wholly immune from state regulation that is reasonably necessary
to the assessment or collection of lawful state taxes." Milhelm Attea, 512 U.S. at 75. However,
the Court does not find the imposition of a condition that the tribe remit all outstanding taxes on
the renewal of an alcohol license as reasonably necessary. If it were, there would be no limit to
the authority the State would try to impose on a tribe by virtue of the State's regulation of
alcohol sales. The State has a valid interest in the regulation of alcohol within its borders due to
the potential for substantial impact beyond the reservation. Rice, 463 U.S. at 725-26. However,
conditioning an alcohol license on taxes entirely unrelated to alcohol and its potential for
26

substantial impact does not further the State's recognized interest. Therefore, the Defendants'
Motion for Summary Judgment on claim eight is denied.

V.

Declaration of Jurisdiction
The Tribe's seventh Claim for Relief seeks a declaration upon resolution of the use tax

claims that the escrow agent should disburse to the Tribe the funds held in escrow pursuant to the
deposit agreement between the Tribe and the State. The State agrees that the Court's
determination regarding the applicability of the state's use tax to nonmember consumer
purchases at the Licensed Premises will determine the appropriate recipient of the proceeds of
the escrow account. As the Court has determined the use tax on nonmember consumer purchases
at the Store are properly subject to state tax, the State has jurisdiction to assess a use tax on those
purchases. The State does not have jurisdiction, however, to assess a use tax on nonmember
consumer purchases at the Casino's slots, table games, food and beverage services, hotel, RV
park, live entertainment events, and gift shop. Consistent with this Court's earlier ruling in this
case, notwithstanding this declaration, the Court does not have jurisdiction to award money
damages or injunctive relief against the Tribe. See Doc. 60 (citing Chemehuevi Indian Tribe v.

California State Bd. of Equalization, 492 F. Supp. 55, 58 (N.D.C.A. 1979) ("[E]ven if the court
were to decide in favor of the Board in the Declaratory judgment action brought by the Tribe, it
would still not have jurisdiction to adjudicate a counterclaim against the Tribe, nor to award
money damages or injunctive relief against the Tribe."). Accordingly,
IT IS ORDERED:
1. The Tribe's Motion for Summary Judgment, Doc. 115, is GRANTED to the
extent that:
a. The State cannot impose a use tax on nonmember purchases of goods
and services as to the Casino's slots, table games, food and beverage
services, hotel, RV park, live entertainment events, and gift shop
(claim one).
2. The Tribe's Motion for Summary Judgment, Doc. 115, is DENIED as to the
following:
a. The State can impose a use tax on nonmember purchases of goods and
services at the Store (claims one and three).

27

.
b .. The State's use tax on nonmember purchases of goods and services at
the Store is not discriminatory (claim four)
3. The Defendants' Motion for Summary Judgment, Doc. 78, is GRANTED to
the extent that:
a. The State's use tax on nonmember purchases of goods and services at
the Store is not preempted by IGRA (claim one).
b. The State's use tax on nonmember purchases of goods and services at
the Store is not discriminatory (claim four).
c. The collection and remittance of taxes on nonmember consumer
purchases at the Store are not preempted by federal law and do not
infringe on tribal sovereignty (claims two and five).
4. The Defendants' Motion for Summary Judgment, Doc. 78, is DENIED as to
the following:
a. The State cannot impose a use tax on nonmember purchases of goods
and s_rvices as to the Casino's slots, table games, food and beverage
e
services, hotel, RV park, live entertainment events, and gift shop
(claim one).
b. The State cannot condition renewal of the Tribe's beverage license on
the collection and remittance of a use tax on nonmember consumer
purchases (claims six and eight).
5. The State does not have jurisdiction to assess a use tax on nonmember
purchases at the Casino's slots, table games, food and beverage services,
hotel, RV park, live entertainment events, and gift shop. However, the State
does have jurisdiction to assess a use tax on nonmember purchases at the
Store (claim seven).
6. Each party requested declaratory relief. Tribal sovereign immunity is
jurisdictional in nature. This Court has no jurisdiction due to tribal sovereign
immunity to order the payment to the State from the escrow funds held
pursuant to the Deposit Agreement. The Tribe, however, agreed in the Deposit
Agreement that those funds would be held by the escrow agent pending the
outcome of this lawsuit. Accordingly, the escrow agent may now, subject to
28

...
any stay granted pursuant to an appeal, pay the funds held in escrow to the
Tribe and to the State in their respective shares under the guidance provided
by this declaratory judgment.
BY THE COU~T()_

~URJu.{jfu.~
i rence L. Piersol
United States District Judge

~l~ietr
ATTEST:
JOSEPH HAAS, Clerk of Courts
BY

,).un/t1Q1
Deputy

~

29

·