Presented by: Robert L. Gips, Esq. Drummond Woodsum National Intertribal Tax Alliance Conference

1. Alcohol Regulation and Taxation in Indian Country Presented by: Robert L. Gips, Esq. Drummond Woodsum National Intertribal Tax Alliance Conference Thursday, September 14, 2017

2. The anomalous case of alcohol regulation – an exception to the general preemption of state civil and regulatory authority in Indian country – how did we get here? • Early history - Congressional passage in 1802 of the Trade and Intercourse Act, authorized the President “to prevent or restrain the vending or distributing of spirituous liquors among all or any of the said Indian tribes.” • The Act of 1834 – first outright prohibition of the introduction of alcohol into Indian country, banning distilleries, and establishing specific punishments for violations of these rules.

3. 1919 – Congress passes National Prohibition Act, prohibiting alcohol for the entire country • Twenty-First Amendment repealed national prohibition in 1933 • But this repeal did not affect Indian liquor laws – these remained in place • This did not change until 1954 when, during the Termination Era, Congress enacted 18 U.S.C. §1161

4. 18 U.S.C. § 1161 • “The provisions of sections 1154 [“Intoxicants dispensed in Indian country”], 1156, [“Intoxicants dispensed unlawfully”] 3113, [“Liquor violations in Indian country”] 3488, [“Intoxicating liquor in Indian country as evidence of unlawful introduction”] and 3669, [“Conveyances carrying liquor”] of this title, shall not apply within any area that is not Indian country, nor to any act or transaction within any area of Indian country provided such act or transaction is in conformity both with the laws of the State in which such act or transaction occurs and with an ordinance duly adopted by the tribe having jurisdiction over such area of Indian country, certified by the Secretary of the Interior, and published in the Federal Register. “ 18 U.S.C. § 1161 • Legislative history reflects termination era goal of eradicating tribal and Indian status generally: Senate Report stated that ‘all legislation discriminating against our Indian citizens should be abolished. Termination of the subsection of Indians to Federal laws applicable only to Indians certainly appears to be desirable.”

5. Key provisions of §1161 • Tribes can opt out of the prohibitions on liquor transactions in Indian country set forth in §§1154, 1156, 3113, 3448 and 3669 under two conditions - liquor transactions in Indian country must be “in conformity” with both - • “the laws of the state in which such act or transaction occurs”, and • “with an ordinance duly adopted by the tribe having jurisdiction over such area of Indian country, certified by the Secretary of the Interior, and published in the Federal Register”

6. Critical Question: What is required to be “in conformity” with state law – does this include the power to impose state taxes? Can state liquor licenses be conditioned on payment of state liquor taxes? • These questions are not necessarily going to be answered by federally approved tribal liquor ordinances • Department of Interior checklist for liquor ordinance drafting and approval is boiler-plate and provides no authority for state licensing or taxation: ‘The jurisdictional statement should confirm that the ordinance is in conformity with the laws of the State as required by 18 U.S.C. §1161. Although it is not a requirement, the Tribe may reference its compliance with State licensing requirement”

7. Case law interpreting 18 U.S.C. §1161 - U.S. v. Mazurie, 419 U.S. 544 (1975) • The Mazuries, non-Indian bar owners, attempted to obtain a tribal liquor license but were denied by the Wind River Tribes in Wyoming after tribal citizen protest at applicant public hearing; Mazuries nonetheless continued to sell liquor, followed by federal criminal prosecution. • Case turned in part on tribal ability to regulate liquor on non-Indian fee land within the reservation; in so doing, Court upheld tribal authority to regulate liquor as a Congressionally-delegated power – but concluded it was not necessary to decide the issue of whether tribes had “independent” authority to regulate absent Congressional delegation). The Court upheld tribal right to exercise regulatory jurisdiction “even though the lands were held in fee by non-Indians, and even though the persons regulated were non-Indians”. 419 U.S. at 716. • Court describes 18 U.S.C. §1151 as “local option legislation allowing Indian tribes, with the approval of the Secretary of the Interior, to regulate the introduction of liquor into Indian country, so long as state law was not violated”. 419 U.S. at 713.

8. Case law interpreting 18 U.S.C. §1161 - Rice v. Rehner, 463 U.S. 713 (1983) • Rehner, a federally licensed Indian trader who operated a general store on the Pala Reservation in California, sought a declaratory judgment that a state liquor license was not needed to sell liquor for off-premises consumption. The Ninth Circuit held 18 U.S.C. §1161 did not confer jurisdiction on states to require liquor licenses; the Court reversed. • The Court declined to extend Mazurie to find independent tribal authority sufficient for tribes to impose their own liquor regulations. • “Although in Indian matters, Congress usually acts ‘upon the assumption that the States have no power to regulate the affairs of Indians on a reservation.’ Williams v. Lee, 358 U.S. 217 (1959), that assumption would be unwarranted in the narrow context of the regulation of liquor.” 463 U.S. at 723.

9. Case law interpreting 18 U.S.C. §1161 - Rice v. Rehner, 463 U.S. 713 (1983) (Continued) • The Court found the “historical tradition of concurrent state and federal jurisdiction over the use and distribution of alcoholic beverages in Indian country is justified by the relevant state interests involved.” 463 U.S. at 724. • “We conclude that § 1161 was intended to remove federal discrimination that resulted from the imposition of liquor prohibition on Native Americans. Congress was well aware that the Indians never enjoyed a tradition of tribal self-government insofar as liquor transactions were concerned. Congress was also aware that the States exercised concurrent authority insofar as prohibiting liquor transactions with Indians was concerned. By enacting § 1161, Congress intended to delegate a portion of its authority to the tribes as well as to the States”. 463 U.S. at 733.

10. Case law interpreting 18 U.S.C. §1161 – Rice v. Rehner, 463 U.S. 713 (1983) (Continued) • Importantly, while the Court did not directly address taxation, it stated the following: “Unlike the authority to tax certain transactions on reservations that we have characterized as “a fundamental attribute of sovereignty which the tribes retain unless divested of it by federal law or necessary implication of their dependent status … tradition simply has not recognized a sovereign immunity or inherent authority in favor of liquor regulation by Indians.” 463 U.S. at 722. • Strong minority dissent by Blackmun, Brennan and Marshall, argued that the preemption analysis set forth in Warren Trading Post v. Arizona Tax Comm’n, 380 U.S. 685 (1965), and Central Machinery Co. v Arizona Tax Comm’n, 448 U.S. 160 (1980) must govern, and argues that §1161 makes applicable state standards, but not general state civil regulatory power.

11. Case law interpreting 18 U.S.C. §1161 – Squaxin Island Tribe v. State of Wash., 781 F. 2d 715 (9 Cir. 1986) • Four Washington tribes established tribal liquor businesses, purchasing from out-of-state distributors and selling through tribal liquor stores to Indians and non-Indians. Tribal but not state sales and vendor taxes were collected, and tribal sales prices “were generally fixed lower than in state outlets to attract customers from off the reservations”. 781 F. 2d at 717 • This was direct competition with Washington’s monopoly liquor distribution system, with the state Liquor Control Board purchasing liquor from distributors and retailing it through State stores and vendors at LCB-fixed prices. Following Rice, LCB amended its regulations to require a vendor agreement as a condition to tribal sales to non-Indians; vendor agreements required prepayment of liquor cost, including all state taxes, at time of delivery.

12. Case law interpreting 18 U.S.C. §1161 – Squaxin Island Tribe v. State of Wash., 781 F. 2d 715 (9 Cir. 1986) (Continued) • Ninth Circuit held that tribal preemption of state authority to regulate or tax tribal liquor sales to non-members “must fail because tribal sovereignty is not infringed. Cited Rice for the proposition that state licensing requirements for tribal liquor sales to non-Indians do not infringe upon tribal sovereignty. • Note the conflation of regulatory power with taxation power, which wasn’t directly addressed in Rice except to the extent taxation was arguably distinguished. • Following the cigarette tax cases, the Court analyzed the state tax through the lens of Washington v. Confederated Tribes of the Colville Indian Reservation, 447 U.S. 134 (1980). “As in Colville, the value marketed here by the tribes to non-tribal members “is not generated on the reservations by activities in which the Tribes have a significant interest” but is instead “solely an exemption from state taxation …The tribes are not authorized “to market an exemption from state taxation to persons who would normally do their business elsewhere.” 781 F. 2d at 720. • “We affirm the court’s decision that the State of Washington is authorized to tax tribal liquor sales to non-Indians and to regulate all tribal liquor sales.” 781 F. 2d at 724.

13. Case law interpreting 18 U.S.C. §1161 – Citizen Band of Potawatomi v. Oklahoma Tax Comm’n, 975 F. 2d1459 (10 Cir. 1992) • Citizen Band was selling beer containing 3.2% alcohol by weight, and the state contended that it needed a state license to do so. The Court held the Tax Commission could require the Tribe to obtain a state license to sell 3.2 beer on tribal land. • While the Court noted the seller was a federally recognized Indian tribe with immunity for suit unlike Rice where the seller was an individual non-Indian, it held “the individual-versus-tribe distinction makes no difference. Addressing tribal sovereign immunity as a 'backdrop' to its preemption analysis, the Rice Court found that “tradition simply has not recognized a sovereign immunity or inherent authority in favor of liquor regulation by Indians.” Id. at 722.

14. Challenging conditioning a state liquor license on payment of state taxes - Flandreau: Flandreau Santee Sioux v. Gerlach, 155 F. Supp. 3d 972 (Dist. So. Dakota September 2015) (denying state’s motion to dismiss) and Flandreau Santee Sioux v. Gerlach, 162 F.Supp.3d 888 (February 2016) (granting Tribe’s motion for judgment on the pleadings). • State statute authorizing tribal liquor license renewal conditioned license renewal on tribal payment of all non-member use taxes owed to the State. Tribe sued over the state’s withholding license renewal based on the Tribe’s failure to pay the state’s use tax for non- customers at the Tribe’s casino. • Tribe argued that the state could not convert invalid on-reservation taxes into valid taxes by merely conditioning alcohol licensure on paying the taxes, and that the state’s power to regulate under §1161 did not empower the state to attach tax conditions to licensures that have no nexus to alcohol regulation, and that state taxation was preempted under IGRA.

15. Challenging conditioning a state liquor license on payment of state taxes –Flandreau (continued): • In its December 2015 decision denying the state’s motion to dismiss, the Court ruled that alcohol sales to nonmember patrons at the casino could be directly related to class III gaming and taxes on the sales are, therefore, preempted by the IGRA. • The Court specifically addressed the Ninth Circuit’s reasoning in Squaxin and distinguished the case because “the value marketed [in Squaxin]to non-tribal members was not generated on the reservation by activities in which the Tribes have a significant interest but was instead solely an exemption from state taxation.” The Court went on to suggest that the state tax in Squaxin was only valid because it was “confined strictly to alcohol sales marketed toward non-members who were being empowered to avoid state tax impositions.” 155 F. Supp. 3d at 999.

16. Challenging conditioning a state liquor license on payment of state taxes – Flandreau (continued): • On February 1, 2016, the District Court granted the Tribe’s motion for judgment on the pleadings. The Court held that the scope of IGRA covers activity beyond game-play at the casino and, consequently, federal law could potentially preempt state taxes on alcohol sales. To support this proposition, the court stated that “any claim which would directly affect or interfere with a tribe’s ability to conduct its own gaming licensing and operation processes should fall within the scope of IGRA’s complete preemption.” • The court noted “case law is bereft of instruction as to what states may permissibly tax before issuing a liquor license.” Id. at 999. Although it is clear after Rehner that states may require tribes to purchase liquor licenses, the court indicates that it may be a violation of state regulatory authority “to attach tax conditions to licensures that have no nexus to alcohol regulation.” Id. The case did not resolve the issue, but the court determined that the tribe adequately pled to withstand a Rule 12(c) motion for judgment on the pleading as to its claim that the state’s conditional licensure violated 18 U.S.C. § 1161.

17. Challenging conditioning a state liquor license on payment of state taxes – Citizen Potawatomi: Citizen Potawatomi Nation v. State of Oklahoma, 2016 WL 3461538 (10 Cir. July 2016). • The Oklahoma Tax Commission ordered revocation of all the Nation’s alcoholic beverage and sales tax permits on the ground that the Nation had not collected and remitted sales tax on liquor sales. The Nation appealed that decision to the Oklahoma Supreme Court, which stayed the case pending arbitration of the dispute pursuant to the Nation’s gaming compact with the State. • The Arbitrator found for the Nation, and the Oklahoma district court affirmed a final arbitration award in the Nation’s favor, enjoining the State “from taking any further action to divest the Nation’s Compact facilities of the right to sell and serve alcoholic beverages or threaten other enforcement actions against them on the ground that the Nation does not comply with the State’s sales tax laws.” WL 3461538, at *3.

18. Challenging conditioning a state liquor license on payment of state taxes – Citizen Potawatomi (Continued): • Regarding alcohol sales within the Nation’s gaming facilities, the Arbitrator engaged in a Bracker analysis, weighed federal, state and tribal interests, noted the Nation wasn’t marketing an exemption from taxation, and found that federal law protecting tribal sovereignty interests preempts and invalidates the State's sales tax on the Nation's sales in question. 2016 WL 3090583. • A subsequent Oklahoma Tax Commission decision dated February 9, 2017 confirmed that the Nation’s renewal application for its non-compact retail locations should be denied because the Nation showed no proof of compliance with the state tax laws at issue. 2017 WL 2181059, at *7. The Commission suspended its decision regarding the Nation’s renewal application for its compact facilities pending a final decision in the appeal of the arbitration award. Id. The state’s argument in front of the Tenth Circuit panel will be that the issue was not appropriately subject to arbitration.

19. Addressing concurrent state and tribal jurisdiction through a memorandum of agreement or understanding • Can allow for tribal regulation in a manner that accommodates state regulatory and enforcement concerns and addresses §1161 issues. • Can also preclude the attempted conditioning of tax issues into licensing – though more difficult in states that are already trying to conflate the issues

20. Pokagon Band of Potawatomi Memorandum of Agreement in Indiana • Pokagon Band restoration of tribal homelands in Indiana culminated in land in trust in South Bend, Indian in November 2016 • Provided opportunity for a ‘fresh slate’ MOA – first land in trust in Indiana • Parties to MOA are PGC and Indiana Alcohol and Tobacco Commission (“IATC”). MOA incorporates substantive state law through use of state definitions and standards; • Licenses for on-premises retail sales, off-premises retail sales of liquor, and manufacture of liquor on Band trust lands issued by PGC, not state; IATC agrees to recognize and accept such licenses

21. Pokagon Band of Potawatomi Memorandum of Agreement in Indiana (Continued) • PGC agrees to ensure “importation, manufacture, distribution, and sale of liquor for commercial purposes” shall be “in conformity” with Indiana laws, "as that phrase is used in and to the extent required by 18 U.S.C. §1161’”, and specifically references relevant substantive standards (prohibitions of sales to minors, intoxicated individuals, ID checking requirements, minimum age for alcohol servers) • All purchases of liquor for retail sale must come from holders of state wholesaler permits, or from holders of manufacturer’s licenses issued by PGC

22. Pokagon Band of Potawatomi Memorandum of Agreement in Indiana (Continued) • IATC agrees to defer to federal government and PGC regarding enforcement of applicable laws • No waiver of tribal sovereign immunity and no enforcement provision; dispute resolution for noncompliance involves good faith discussion, each party has unqualified right to terminate the MOA in the event the dispute cannot be resolved

23. Tribal-State MOA’s in Washington – Suquamish example • Licensing by Tribe, liquor sales by tribal members and tribally licensed businesses (not wholly-owned by Tribe) must be approved by Tribe • Tribe purchases of liquor from wholesalers and Tribe sales of liquor authorized by State so long as done pursuant to an approved Operating Plan • Operating plan addresses among other things: location, nature and times of sales; training and MAST (Mandatory Alcohol Server Training) permit requirements; regulatory and enforcement and compliance plan; sales to minors • Tribe and State agree to consult in good faith over Operating Plan, State role is to determine if Tribe has met public safety requirements, approval of Operating Plan not to be unreasonably withheld

24. Tribal-State MOA’s in Washington – Suquamish example (Continued) • Annual fee payment by Tribe to State in lieu of license fees, and State agrees to accept such payments in lieu of sales tax on Tribal sales of liquor as well subject to renegotiation if changes in operations modify regulatory effort required by State • Agreement to disagree over State authority to suspend Tribal license authority in the event of Tribal non-payment of fee in lieu of license fees • No waiver of tribal immunity, dispute resolution through mediation, followed by AAA arbitration

25. Tribal distilleries / wineries / craft breweries - can tribes distill alcohol, brew beer, or make wine? • Federal law prohibits anyone from establishing a distillery to manufacture “ardent spirits” in Indian country. See 25 U.S.C. § 251. But what are “ardent spirits”? • Common definitions and case law indicate that the term encompasses strong alcoholic liquor made by distillation, such as gin, vodka, whiskey and the like. • Do ardent spirits include beer or wine?

26. Tribal distilleries / wineries / craft breweries - can tribes distill alcohol, brew beer, or make wine? (Continued) • No. Sarlls v. United States, 152 U.S. 570 (1894): holding that lager beer was not an ardent or spirituous liquor and spurring Congress to amend the provision prohibiting the introduction of alcohol into Indian country to expressly include beer and ale. In light of Sarlls, Congress amended 25 U.S.C. § 241 (relating to sale of intoxicating liquors) to include beer and ale. • The plain meaning of the term “ardent spirit” does not include beer or wine and Supreme Court precedent indicates that Congress must be explicit if it intends to make it unlawful to manufacture or otherwise introduce these substances into Indian country. Although there are still restrictions on the introduction of beer and wine onto reservations, federal statutes allow exceptions for this activity pursuant to 18 U.S.C. § 1161. • The federal prohibition against establishing a distillery to manufacture ardent spirits in Indian country should not preclude tribes from establishing craft breweries or wine-blending operations on tribal lands.

27. Tribal craft brewery and brew pub business considerations – favorable economics and demographics for tribal gaming resorts even before tax preemption • Tribal craft breweries: • Low initial capital costs for production, scalable with production needs • Even more so for operations that do not involved bottling and distribution, which are not needed for initial start-up and likely only desirable if operations and branding prove to be very successful • Funding options include tribal capital, resort maintenance capital / capital improvement budgets, or third party capital - loans / license agreements / joint ventures • Easy tribal entry – through hiring master brewer(s) and self-managing, or working with successful local or regional craft breweries through license or similar agreements (important to preserve tribal ownership and control for tax purposes)

28. Tribal craft brewery and brew pub business considerations – favorable economics and demographics for tribal gaming resorts even before tax preemption (Continued) • Tribal brew pubs in gaming resorts: • Interiors and fixtures for brew pubs not expensive • Should be profitable from a food and beverage standpoint alone – tax revenues are supplementary • Ability to market and control taps within existing tribal bars and restaurants to increase volume • Ability to attract an extremely desirable demographic for tribal gaming operations • Wineries and wine blending operations and wine tasting rooms • Observations regarding tribal craft breweries and brew pubs should be equally applicable

29. Tribal craft brewery and brew pub / winery and wine tasting room tax considerations • Tribally owned and operated, on-reservation production, within tribal gaming facilities, gives businesses the strongest possible arguments for state tax preemption under a Brackerbalancing test analysis. As stated in California v. Cabazon Band of Mission Indians:"Here, however, the Tribes are not merely importing a product onto the reservations for immediate resale to non-Indians. They have built modern facilities which provide recreational opportunities and ancillary services to their patrons, who do not simply drive onto the reservations, make purchases and depart, but spend extended periods of time there enjoying the services the Tribes provide. The Tribes…are generating value on the reservations through activities in which they have a substantial interest." 480 U.S. at 219-220.

30. Tribal craft brewery and brew pub / winery and wine-blending and wine tasting room tax considerations (Continued) • Examples of the (not insignificant) state tax preemption amounts: Indiana and Michigan: • Beer by the glass: we calculate the total amount of state tax saved on a 12 ounce glass of beerto be $0.43 in Indiana and $0.38 in Michigan. • Calculating (a) excise taxes per barrel (31 gallons to the barrel) at $3.56 in Indiana and $6.30 in Michigan, and (b) sales tax of 7% in Indian and $6% in Michigan. • For a bottle of wine: we calculate the total amount of state tax saved on a bottle of wine to be $2.89 in Indiana and $3.34 in Michigan. • Excise taxes increase dramatically for high ABV wine (in Indiana defined to be above 21% ABV, in Michigan above 16% ABV). Calculating excise taxes per gallon for wine with ABV below such amounts, and sales tax of 7% in Indian and $6% in Michigan.

31. Conclusion • Rice and its progeny have led historically to ceding of tribal regulatory sovereignty and state tax applicability – but the modern trend is and should be to narrow Rice and increase the space for tribal regulation and sovereignty • Tribes are often one of, if not the most significant seller of alcohol in their regions and have the regulatory capacity and expertise to occupy the field through exercise of concurrent jurisdiction • Tribes should, where possible, negotiate memoranda of agreement with states addressing how Tribe will robustly regulate liquor while separating state tax power from application of state substantive liquor standards • As seen in Flandreau and Citizen Potawatomi, opportunities exist for successful state tax preemption litigation for alcohol served in tribal gaming facilities, using IGRA preemption arguments • Tribal craft breweries and brew pubs (as well as wineries and wine tasting rooms) are promising on a number of grounds for tribes with gaming resorts • If tribal craft breweries prove successful, a significant opportunity exists for similar success distilling hard liquor if federal prohibition were repealed

32. Discussion? Thank you! Robert L. Gips, Esq. rgips@dwmlaw.com