The strained relationship between the US government and Native American tribes still leads to confusion regarding taxation. The issue has permeated many industries, including gambling. While tribes are exempt from state and federal income taxes, individuals must pay them, like all US citizens.
However, things become slightly complicated when gambling is concerned. Although tribes are sovereign entities, they must enter a Tribal-State compact to build and operate a land-based casino or any other gambling establishment. This triggers various questions, including the one regarding taxes.
In this article, we’ll explore the legal side of tribal casinos and their duties toward the state.
Indian Gaming Regulatory Act
Gambling has been part of Native American culture for decades, but it became legally recognized in 1988 when the Indian Gaming Regulatory Act (IGRA) was introduced. Before that, no legal framework regarding tribal gambling existed.
The act aims to provide a legislative basis for regulating tribal gambling and protecting games to generate revenue. IGRA founded the National Indian Gaming Commission (NIGC), a regulatory authority that controls and oversees the tribal gambling market. However, this act was at the center of many controversies and litigations, with some reaching the US Supreme Court.
One of the ongoing issues resolved by IGRA was the states’ desire to control and tax Indian gambling revenues. Tribes went into legal battles against the states to protect income and maintain tribal sovereignty. As a result, Congress proposed a set of compromises that later became the Indian Gaming Regulatory Act.
Here are the main IGRA takeaways:
- Tribes must enter a Tribal-State compact to establish casinos.
- The federal government has the power to regulate gaming.
- Tribal casinos aren’t subject to the federal income tax on their revenue.
- Indian casinos must pay payroll taxes for their employees.
Several laws and legal cases prompted the creation of the Indian Gaming Regulatory Act. Read more about them below.
Bryan vs. Itasca County
In the early 1970s, two members of the Chippewa Tribe filed a class action lawsuit against the state of Minnesota because it tried to tax their property on the reservation. According to the US Constitution, only the federal government can govern Native Americans, not individual states.
However, Public Law 280 gave some states jurisdiction over criminal laws, leading the courts to rule in favor of the state. However, the Supreme Court later reversed the decision, stating that MN only had jurisdiction over criminal laws, not civil laws and disputes.
The new PL 280 interpretation created room for the Indian gaming industry and various economic opportunities on tribal lands.
California vs. Cabazon Band of Mission Indians
In the 1980s, the Cabazon Band of Mission Indians founded a card club and bingo parlor on the tribe’s lands. The state tried to shut it down, but the Cabazon Band sued, stating their actions were illegal because of the tribal sovereignty and the new PL 280 interpretation.
The State of California went up against them, saying that running a gambling operation was illegal, therefore, punishable as a crime according to PL 280. The case went to the Supreme Court, where the “Native American Cause” won because California law allowed state lottery.
This event solidified the tribe’s sovereignty, giving them the power to introduce and regulate gambling as they saw fit. Of course, the tribe couldn’t run gaming operations if the state prohibited all gambling forms.
Soon afterward, the US Constitution introduced the Indian Gaming Control Act, and the new era of tribal gambling began.
Tribal Casinos and Taxes
As mentioned, tribes and tribal casinos are exempt from state and federal income taxes. However, when a tribe distributes gaming revenue to its members, the per capita payments are subject to federal taxation.
Likewise, anyone working in a tribal casino must pay payroll taxes. The employers must also withhold income and FICA taxes and deposit the money to the IRS on the employee’s behalf.
Moreover, the payments are taxable if a tribe sets a trust fund and distributes gaming revenue to a minor’s account. However, the state won’t charge taxes if money remains in the account until the beneficiary reaches legal age.
Lastly, tribes must pay the excise tax on wagering for various gambling activities, including:
- Pari-mutuel wagering (horse racing, jai alai, dog racing)
- Coin-operated machines (slots, video games, pinball machines)
- Lottery drawings
To sum it up — tribal casinos don’t pay state or federal income taxes but have to cover other taxes, including distribution and payroll taxes.
So, while the tribal casinos are mostly independent and operate under IGRA regulations, they must abide by certain federal laws and regulations.