Native Americans and sales taxes

As the main source of federal, state, and local government revenue, taxes are designed to pay for our nation’s common needs -- public education, safety, highways, etc. But because of our nation’s history, Native Americans and the US government have worked out a unique arrangement regarding all taxes, including federal, state, local, and sales.

To help us better understand this freighted subject (which is actually pretty simple), this post walks through the basics of US tribes, including their populations, what it takes to be a tribe, how they work together and separately regarding the United States government, and what tribal/nontribal members can expect regarding sales taxes when selling widgets on the reservation (Note: we are using the term Native American in this post. However, most legal, governmental, and regulatory provisions use the term Indian -- as in “Indian Tax Law”).

As of the 2010 Census, the United States has:

• 2.9 million people identifying as American Indian and Alaska Native (AIAN) alone
• 5.2 million people identifying as AIAN, either alone or in combination with one or more other races
• 567 federally recognized tribes
• 326 Indian reservations

While these numbers may not represent a large tax issue in raw dollars, staying up-to-date on these rules is essential for businesses, especially in states with large AIAN populations (CA, OK, AZ, TX, NY, NM, WA, NC, FL, MI). To start, it's important to know the key terms and phrases in this conversation: tribe, federally recognized, tribal sovereignty, and reservations.

In general, a tribe is a group of families and relatives who live together in a defined territory and who share the same language or dialect, customs, and beliefs. However, to be considered a tribe AND have a legal government-to-government relationship with the United States, this group must be federally recognized.

Once recognized, a tribe gains tribal sovereignty, which means they have the right to govern themselves as an independent nation with their own membership and government, including the right to levy taxes (or not) and assign their own rules regarding sales tax within their borders/reservations (areas of land reserved for a tribe or tribes under treaty or other agreement with the United States).

It’s still a fairly common misconception that Native Americans pay no taxes whatsoever. Not true. ALL Native Americans are subject to federal income taxes but, because of the states’ inability to tax American Indians within reservation boundaries, individual Native Americans who live there do not pay state income taxes. However, when it comes to sales taxes, the rules vary between reservations and tribal/nontribal members.

As stated above, tribal governments as sovereign entities have the power to levy taxes on reservation lands. Some tribes levy taxes, some don’t. In addition, some tribes today allow nontribal residents and landowners within their reservations. As a result, varying tax rules apply to the goods and services purchased on the reservation, depending on the tribe. But in general the following applies.

Doing Business on the Reservation

• When a Native or nonnative American sells goods on a reservation to a Native American, the tribe -- not the state -- collects any sales tax if the tribe imposes a sales tax. The amount of sales tax is whatever the tribe has adopted.
• When a Native or nonnative American sells goods on a reservation to a nonnative American, the state may require collection of its generally applicable statewide sales tax.

Doing Business off the Reservation

• For Native or nonnative Americans selling goods or operating a business off the reservation, both are equally subject to state and local taxes. This is because the tribe’s status as a sovereign nation impacts the way taxing works within its geographic borders. Those special taxing considerations do not extend outside that territory.

Three Key Things to Remember

1. Unless you are a Native-owned business, the benefit of any tax status will not accrue to you. That is, don’t open a shop on a reservation thinking that your revenues will be maximized because you don’t have to collect sales tax. If you are not a native business, you will not get a break.
2. Probably the biggest pitfall if you are a business located on Native-owned land is the possibility that you’ll be collecting taxes for two entities (the tribe and the state), applying them to each customer individually depending on their allegiances.
3. Check the rules with tribal government and your state’s department of revenue if you are dealing with tribal sales tax either as someone living and selling on a reservation or selling into a reservation. 

FAQs: Bureau of Indian Affairs, U.S. Department of the Interior

Small Business Association—Native American Small Business

IRS Tax Information for Indian Tribal Governments

IRS Tribal Business Structure Handbook