In a major win affecting counties and local taxing entities throughout California, Best Best & Krieger LLP attorneys Roderick E. Walston and Steven G. Martin helped secure a federal court ruling that possessory interests held by non-Indians on otherwise tax-exempt Indian lands are nonetheless subject to state and local taxation. The decision clarifies that California’s taxes on possessory interests — a type of interest created by lease — are generally not preempted by federal law in Indian country, and that counties are essentially free to levy and collect taxes on the value of such possessory interests to support programs funded by their taxes.

The case stems from a complaint filed by the Agua Caliente Band of Cahuilla Indians against Riverside County in January 2014. BB&K represents Desert Water Agency, which intervened on the side of Riverside County. The County levies and collects Desert Water Agency’s ad valorem taxes, which are taxes based on the value of the possessory interest and that support debt payments related to importing water supplies for people and businesses, including the Indian tribes, in the Coachella Valley.

The issue in the case was whether the County’s possessory interest tax (which includes Desert Water Agency’s ad valorem tax) can lawfully be applied to non-Indians on the Tribe’s reservation. Riverside County has levied and collected such taxes for decades pursuant to California law. The Tribe brought the action against the County in federal court alleging that the County’s tax is preempted by federal law. Specifically, the Tribe alleged that the County’s tax is preempted by a federal statute that preempts state taxes applied to lands and rights of Indian tribes (25 U.S.C. section 5108 (former section 465)). It also alleged that the so-called Bracker balancing test, which analyzes the balance of federal, state and tribal interests related to state taxation of non-Indians on Indian reservations, weighs in favor of the Tribe to preempt the tax.

All three parties — the Tribe, Riverside County and Desert Water Agency — filed motions for summary judgment arguing either that the federal laws preempt the local taxes, or they do not preempt them. The motions were argued on May 12. U.S. District Court Judge Dolly Gee for the Central District of California ultimately ruled Thursday in favor of the County and Desert Water Agency, and against the Tribe. The ruling stated that the federal statute (25 U.S.C. section 465) does not apply to Indian reservations created prior to enactment of the Indian Reorganization Act of 1934, and thus it does not apply on the Tribe’s reservation here. It also stated that the balance of federal, state and tribal interests under the Bracker balancing test weighs in favor of the County and Desert Water Agency, because they provide services to the non-Indians on the Tribe’s reservation and the legal incidence of the tax falls on the non-Indians and not on the Tribe or its members.

This decision adds greater clarity to the question of whether local taxes on non-Indian possessory interests in Indian country are preempted by federal law, and supports counties across the State that desire to levy and collect taxes on the value of such possessory interests.
 
The case is Agua Caliente Band of Cahuilla Indians v. Riverside County, 14-0007

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