Property Owned by Non-Indians and Located on Tribal Land Is Subject to Property Tax

By Heidi McNeil Staudenmaier and Tyler D. Eddington

Generally, tribal lands held in trust by the federal government are exempt from state and local taxation under Section 5 of the Indian Reorganization Act of 1934 (the Act). However, when non-Indians are involved in ownership or use of such lands, the situation can become more complicated.

On March 19, 2024, the Arizona Court of Appeals ruled that the Act does not immunize property owned by non-Indians from local taxation when the assessed property is located upon land that is leased from a tribe.¹ On remand from the Arizona Supreme Court, the appeals court considered whether federal law, specifically the Act, impliedly preempted local law from levying property tax on a power plant and the personal property used to operate it owned by South Point Energy Center LLC (the Plant).² 

The Plant, and personal property assessed by Mohave County, are built and used on land that is leased from the Fort Mojave Indian Tribe and held in trust for such Tribe by the US Department of the Interior. South Point claimed that Mohave County could not levy ad-valorem property taxes because Section 5 of the Act provides that such land “shall be exempt from State and local taxation.” To such point, South Point argued that any and all property improvements located on tribal land, regardless of the ownership of those improvements, were impliedly entitled to such exemption.

Generally, federal law will preempt state law where the state authority interferes or is incompatible with federal and tribal interests unless the state interests at stake are sufficiently high to justify the assertion of state interests over federal interests.³ 

In 2022, Snell & Wilmer summarized the case in which the Arizona Supreme Court held that the Act did not expressly preempt taxation of the Plant.⁴ In this case, the court of appeals analyzed whether the local property tax law, if not expressly preempted, was impliedly preempted by the Act under the Bracker analysis. The Bracker analysis refers to a legal framework established by the United States Supreme Court⁵ to determine whether state laws can be applied to activities conducted on tribal lands by non-Indians.

The Bracker analysis considers factors such as the impact of state regulation on tribal self-government, economic development, and the federal government’s regulatory scheme. It recognizes that while states have authority to regulate certain activities, this authority is subject to limits when it comes to tribal lands and activities involving tribal interests. The analysis aims to strike a balance between tribal sovereignty and the state’s regulatory interests, with the overarching goal of promoting harmony and cooperation among the various sovereign entities involved.

Here, the Court of Appeals considered the economic burden of the property tax. The Court determined that the property tax is levied on the Plant and related improvements owned by South Point, not on the land owned by the Tribe. Therefore, South Point is considered the actual taxpayer and bears the legal incidence of the tax – as opposed to the Tribe.

Additionally, the Court mentioned the United States Supreme Court has rejected the argument that indirect burdens on the profitability of economic development on reservations justify granting non-Indian contractors immunity from state or local taxation. This rejection is based on a previous case, Helvering v. Mountain Producers Corp.,⁶  where the Court ruled that indirect burdens do not justify immunity from taxation.

Lastly, the Court discussed how the tax revenue generated supports various local services beneficial to South Point, its employees, and the Tribe. These services include both on-reservation and off-reservation services benefiting the reservation and tribal members. Examples cited include support for local school districts where both tribal-member children and children of South Point non-Indian employees attend schools. Additionally, the tax helps maintain roads providing access to the Plant, and revenue supports various other state and county services, such as flood control, law enforcement, emergency planning, fire districts, libraries, and oversight of pipelines. The Court emphasized the substantial state interest in funding these services, which outweighs federal and tribal interests. As a result, the Court concluded there is no implied preemption of the county's tax, and the application of the interest balancing test does not establish Congress's implicit intent to preempt taxing the Plant.

This case continues the pattern in Arizona (and throughout the United States) of rejecting non-Indian’s claims of immunity based on the premise that such immunity is warranted when building or transacting upon tribal lands.⁷ Indeed, this case cites the Supreme Court’s sentiment on such claims to immunity: “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.” Washington v. Confederated Tribes of Colville Indian Rsrv., 447 U.S. 134, 155–56 (1980).

Footnotes: 

1. South Point Energy Center LLC v. Arizona Department of Revenue et al., No. 1 CA-TX 20-0004. [BACK]
2. This was a question previously raised by South Point on appeal but not decided by the appeals court. See S. Point Energy Ctr. LLC v. Ariz. Dep’t of Revenue, 251 Ariz. 263, 268, ¶ 24 (App. 2021), vacated in part and remanded  by S. Point Energy Ctr. LLC v. Ariz. Dep’t of Revenue (South Point II), 253 Ariz. 30, 39, ¶¶ 37–38 (2022). [BACK]
3. See New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 334–35 (1983) at 344. [BACK]
4. South Point Energy Center LLC v. Arizona Department of Revenue et al., No. CV-21-0130-PR (Apr. 26, 2022). [BACK]
5. See White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980). [BACK]
6. 303 U.S. 376 (1938). [BACK]
7. See e.g., Circle K Stores, Inc. v. Apache Cnty., 199 Ariz. 402, 407, ¶ 13 (App. 2001). [BACK]