Arizona Supreme Court Confronts Applicability of State Ad Valorem Tax on Tribal Land

By Heidi McNeil Staudenmaier and Marsha Cotton

On April 26, 2022, the Arizona Supreme Court issued a significant unanimous decision addressing the applicability of a state ad valorem property tax on a power plant located on Indian land. The Arizona Supreme Court held that such a tax is not expressly preempted by § 5 of the Indian Reorganization Act of 1934, 25 U.S.C. § 5108, (the “Act”), when the lessee who owns the power plant is a non-Indian.

South Point Energy Center LLC v. Arizona Department of Revenue et al., No. CV-21-0130-PR (Apr. 26, 2022), contends with an ad valorem property tax assessed by Mohave County on a power plant (the “Plant”) owned by multiple non-Indian lessees (collectively “South Point”). The Plant is located on land within the Fort Mojave Indian Tribe (“Tribe”) Reservation, and South Point leases the land from the Tribe. Mohave County only assessed the ad valorem tax on the Plant and not the land. The parties did not dispute that South Point owned the Plant and that the Plant is a permanent improvement on the land.

South Point argued that § 5 of the Act expressly preempts states from imposing taxes on any real property improvements, regardless of ownership, located on lands subject to the Act—which are lands held in trust by the federal government for the benefit of Indian tribes or individual Indians. Alternatively, South Point argued that application of the balancing test announced in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980), implicitly preempts Mohave County from taxing the Plant.¹

The Court started by analyzing the plain language of the Act. Section 5 provides in relevant part:

"Title to any lands or rights acquired pursuant to this Act . . . shall be taken in the name of the United States in trust for the Indian tribe or individual Indian for which the land is acquired, and such lands or rights shall be exempt from State and local taxation.²"

The Court explained that “[t]he Act itself does not delineate the rights included in the federal government’s ownership of land under § 5.”³ Although the Court recognized the general principle that ownership rights in land include permanent improvements affixed to that land by a lessee, the Court explained that an exception to this general principle occurs when the lessor and lessee agree that the lessee owns those improvements. The Court found that the Bureau of Indian Affairs recognizes this exception as applying to leases of land owned pursuant to the Act.⁴

The Court determined that this exception applied to South Point because of the language in its amended lease agreement with the Tribe.⁵ In 2012, the Tribe and South Point executed an amended lease, which provided that all “improvements and associated materials, supplies and equipment” are owned and controlled by South Point.⁶ The amended lease further required South Point to timely pay all taxes levied by any governmental entity to prevent imposition of any liens and hold the Tribe harmless against any liens that were imposed.⁷

The Court distinguished this case from the United States Supreme Court decision in Mescalero Apache Tribe v. Jones, 411 U.S. 145 (1973), and the cases relied upon by the Supreme Court in Mescalero.⁸ Mescalero addressed a New Mexico use tax assessed on ski lifts owned by a tribe operating a ski resort on land it leased from the federal government. The Supreme Court found that the use tax was preempted by § 5 of the Act because use is among the “bundle of privileges” that make up property ownership. The Supreme Court reasoned that the ski lifts were permanent improvements on the land and § 5 of the Act applied to permanent improvements because use of a permanent improvement is “intimately connected” with use of the land itself.⁹ Ultimately, the Court explained that Mescalero only dealt with tribal property and tribal activities, and it did not stand for the proposition that § 5 of the Act applied to exempt taxation of all permanent improvements upon Indian land, particularly when the permanent improvements are owned by non-Indians.¹⁰

Because the Arizona Court of Appeals did not apply the Bracker balancing test when considering preemption of the ad valorem tax, the Court only addressed South Point’s argument regarding the Act. The Court remanded the case back to the Court of Appeals to consider whether the tax court correctly decided that Bracker did not implicitly preempt the ad valorem tax.¹¹

The Arizona Supreme Court’s holding in South Point could potentially affect ad valorem taxes—and perhaps other state taxes—assessed around the country on non-Indians owning permanent improvements on tribal land because very few courts have wrestled with this issue.