Native Americans, or American Indians as they are sometimes known, have long had a fraught relationship with the federal government.
Years of conflict between Native Americans and European settlers, often backed up by the might of the federal government, characterized the 18th and 19th centuries of American history.
The end result was that Native Americans were confined to reservations, which created a system of competing governments and authorities that still confuses people to this day.
This is particularly true with regard to tax, which continues to fuel conflict between the federal government and Native American tribes.
So common is the confusion surrounding Native Americans and their tax situation that the Native American Rights Fund, dedicated to providing legal assistance to Native American tribes, organizations, and individuals, has ‘do Indians pay taxes?’ listed in their FAQ section.
So, it’s clearly a question that has caused some confusion. In this article, we’ll attempt to clear that confusion up.
First, we’ll look at what Indian reservations are, and how they may have caused the confusion in the first place.
What Is an Indian Reservation?
To put it simply, an Indian reservation is a part of the United States that belongs to, and is governed by, a federally recognized American Indian tribe.
It has been, in a similar way to military bases are reserved for military use, ‘reserved’ for the use of a particular tribe, usually after signing treaties to relinquish their claims to other lands outside the reservation boundaries.
So what on earth is a federally recognized tribe? Of course, we all know that a tribe is the traditional organizational unit of Native American peoples, held together by a common language and culture as well as blood.
The term federally recognized tribe refers to tribes that maintain legal relationships with the United States through treaties and other legal instruments.
At this time, there are more than 550 federally recognized tribes in the country with many more attempting to achieve federal recognition.
What Is Tribal Sovereignty?
Yes, you read right. Native American tribes govern themselves. Tribal sovereignty refers to this right to self-government; the tribes themselves are sovereign within their own reservations.
Of course, a right to self-government also implies the ability to conduct relationships with other governments, as Indian tribes do with the United States Government.
Given that Indian Tribes govern themselves and conduct their own relations with the U.S. government, they are in fact independent nations in their own right.
This gets to the heart of where the confusion lies, since as an independent nation Indian tribes have at least some of the same powers as regular nations.
They can form their own governments, decide their own membership, adjudicate on legal matters within their reservation borders, and most importantly, levy their own taxes.
Do Indian Reservations Pay Tax?
It is important to distinguish between the tribes themselves and individuals.
Indian Reservations, or more properly the federally recognized tribes running the reservations, are sovereign entities and thus not subject to any tax levied by the federal government.
Therefore, when a tribe earns income as a joint entity, it is not subject to any taxation. The tribe may, however, choose to tax the profits it distributes amongst its members.
The rules are different, however, for members of Native American tribes.
Do Indians Pay Tax?
Before 1924, not all American Indians were granted United States citizenship. Until that time, only ‘naturalized’ Native Americans and members of federally recognized tribes received citizenship.
Since that time, however, every Native American born on United States soil is a United States citizen.
As U.S. citizens, they are subject to federal income tax just like everybody else, and all the normal caveats apply.
For example, Native Americans do not pay tax on government benefits or social security payments.
This could be part of the confusion, since poverty runs rampant on many Indian reservations and many tribe members rely on government support for their income.
Nonetheless, a payment made in exchange for a service is subject to federal income tax on an Indian reservation just the same as it is off it.
State income taxes are not paid on Indian reservations as they are sovereign in their own right.
What About State Taxes?
The rule pertaining to Native Americans and state taxation is actually pretty simple.
In essence, any given state is powerless to tax reservation lands, tribal members who live on those lands, or any income derived from those lands, in any way- unless the state has express congressional approval.
That goes for all taxes, including sales taxes and state income taxes.
In other words, state income taxes are not paid on Indian reservations as they are sovereign in their own right, and states are powerless to enforce their sales taxes on reservations.
Tribal governments, with their own power to levy taxes, can and do collect a sales tax on goods and services purchased on reservation lands, although not all tribes do so.
One reason not to levy a sales tax is the competitive edge it gives businesses on reservation lands.
Without tax, things like cigarettes and gas become much cheaper, attracting non-native customers to spend their money on the reservation.
It should be said for clarity, however, that as U.S. citizens Native Americans are subject to the same duties and taxes as everyone else once they step off of the reservation.
Typically, this works the other way around too, with non-natives subject only to reservation taxes when on reservation land.
However, New York, for example, has enacted legislation to allow it to tax the tobacco purchases of non-tribal members made on tribal land.
Tribal casinos, as the name suggests, are typically owned and operated by the tribes themselves.
As we established earlier, tribes do not have to pay any income tax, state or federal, on any money they make as an entity, and this goes for tribal casinos, too.
Native Americans, as U.S. citizens, have to pay federal income taxes on their taxable income like every other citizen.
The tribes themselves are not subject to any taxes, however, and individual states are nearly powerless to levy taxes on tribal land or tribal members living on tribal lands, unless they leave the reservation.