The Tax Implications of the Changing Native American Economy

By: Dylan Ray

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Sandia Resort and Casino

Nearly all revenue generated by Native American tribes is exempt from federal income taxation. Individual Native Americans are, however, usually, taxed like all other citizens. Individual Native Americans must pay tax on income derived from their labor, businesses, investments, and gains from dealings in properties that are not held in trust by the federal government. Additionally, the Internal Revenue Code (IRC) taxes individual Native American’s income regardless of whether it was earned on or off Native land.

There are, however, several important exceptions to the general rule that individual Native Americans are taxed like other taxpayers in the United States. Specifically, IRS guidance interpreting the Per Capita Act of 1982 states exempts from federal taxation: 1) income from leases, easements, and other uses of trust land; 2) income from trust resources such as fish, mineral deposits, and oil and gas; 3) income from the sale of trust land or from damage awards related to trust land; and 4) income from certain trust case settlements with the United States. Importantly, the exemption for income derived from trust resources will be beneficial as the Native American economy begins to realize income from cannabis sales.

The Native American economy changed substantially when tribes began to open casinos in the late 1970s. Since the first casino opened on Native American land in Florida, over 242 tribes in 28 states have opened casinos of their own. Of those 242 casinos, 88 have less than three million in annual revenue. Furthermore, 96 tribes have revenue between 10-25 million. In addition to the insignificant revenue many casinos generate, nearly 25 percent of the Native American population remains in poverty. Indeed, revenue from casinos has not changed many Native American’s life.

While casinos have provided only a modest increase in wealth for many Native American tribes and individual Native Americans, the cannabis industry, which many tribes are now involved in, will likely provide increased revenue to the tribe and tax-free income to individual Native Americans. First, a number of investors have stated that Native American profits from cannabis, which can now be legally sold in several states for both medical and recreational use, will produce more revenue than casinos. Second, individual Native Americans will likely not be taxed on the money they earn from the cannabis industry, whether they operate their own business or earn income through a tribal entity, significantly increasing their income.

As mentioned above, income individual Native Americans earn from trust resources such as fish, mineral deposits, oil, and gas are exempt from taxation. The IRS, and the United States Supreme Court, have stated that fish, mineral deposits, oil, and gas are given special treatment in the code because those goods are derived directly from Native American land and held in trust by the United States government. Similar to the other resources derived from trust land, Native American cannabis sold by Native American tribes and individuals has been derived from their own land. With the growing cannabis industry, Native Americans have the opportunity to generate significant revenue, which will not be taxable and may help lift tribes and their members out of poverty.

Dylan Ray is a third-year law student at Wake Forest. Before law school, Dylan attended Appalachian State, where he studied political science. After completing his education, he hopes to practice tax law.