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Flandreau Santee Sioux Tribe v. Gerlach

United States District Court, D. South Dakota, Southern Division

September 15, 2017

FLANDREAU SANTEE SIOUX TRIBE, a federally-recognized Indian Tribe, Plaintiff,
ANDY GERLACH, Secretary of the State of South Dakota Department of Revenue; and DENNIS DAUGAARD, Governor of the State of South Dakota, Defendants.


          Lawrence L. Piersol United States District Judge

         Pending before the Court is the Flandreau Santee Sioux Tribe's ("the Tribe") Motion for Summary Judgment on Claims for Relief One, Three, and Four of the First Amended Complaint. Doc. 115. In its motion, the Tribe asserts that the State of South Dakota's ("the State") imposition of a state use tax on nonmember purchases of goods and services throughout the Royal River enterprise is unlawful under the Indian Gaming Regulation Act ("IGRA") and interferes with and frustrates federal and tribal interests.

         Also before the Court is Defendants' Motion for Summary Judgment on all claims in the First Amended Complaint. Doc. 78. In their motion, the Defendants argue that the imposition of a state use tax on nonmember consumers' purchases of goods and services throughout the Royal River enterprise is not expressly or impliedly preempted by IGRA nor does it interfere with or frustrate federal and tribal interests. Further, Defendants assert that the State may permissibly condition reissuance of a liquor license to the Tribe on the collection and remittance by the Tribe of the nonmember consumers' use tax liability.

         The Court has considered all filings and for the following reasons, the Tribe's motion is granted in part and denied in part. The Defendants' motion is similarly granted in part and denied in part.


         The Tribe is a federally-recognized Indian tribe located in Flandreau, South Dakota. The Tribe owns and operates the Royal River Casino & Hotel ("the Casino") and the First American Mart ("the Store") (collectively, the "Licensed Premises") on the Flandreau Indian Reservation.[1]These two businesses operate as a single business enterprise under the Royal River name and, irrespective of patrons' tribal or residential status, provide a wide variety of goods and services, including: overnight hotel stays, recreational vehicle accommodation, food and beverage services (alcoholic and non-alcoholic), gifts and sundries, tobacco products, fuel, services for catering, meetings, conferences, and special events, live entertainment, snacks, video arcade games, transportation services, health and fitness services, and gambling.[2] As a unitary business, the entire enterprise is overseen by the Tribe's elected governing body, the Flandreau Santee Sioux Executive Committee. The Licensed Premises' patron base is approximately 60% South Dakota residents. Revenue, including that from gambling, hotel stays, food, the bar, the gift shop, the RV park, and the Store, is calculated in the aggregate as "net revenues." Of that sum, 35% is distributed toward tribal economic development, 40% via individual per capita payments to tribal members, 5% into a minors' trust fund, 15% toward tribal government operations, 4% into a community assistance fund, and 1% into a local government revenue sharing fund. The Tribe also imposes a 6% sales tax. Over 90% of the Tribe's sales tax revenue is generated by transactions at the Licensed Premises.

         Pursuant to IGRA, the Tribe and the State have in place a Tribal-State gaming compact ("the Compact"), which controls the Tribe's gaming operations at the Casino. The Compact allows the Casino to participate in Class III gaming.[3] The Compact is silent in regard to the State's authority to apply its alcohol regulatory laws, the State's imposition of its use tax on nonmember[4] activity at the Casino, and the State's requirement that the Tribe collect and remit the use taxes from nonmember activities or purchases. It is undisputed that the Tribe sold the above-listed goods and services to nonmembers at the Casino. It is also undisputed that the Tribe has not remitted to the State the relevant use taxes on nonmember sales.

         The State has issued three alcoholic beverage licenses to the Tribe-one for the casino, one for the store, and one for the Royal River Family Entertainment Center ("Bowling Center").[5]These licenses, however, are conditioned on the Tribe's remittance of the State use tax pursuant to S.D.C.L. § 35-2-24. The South Dakota statute does not differentiate between alcohol tax and use tax on other goods and services. Id. In 2009 and 2010, the Tribe sought from the State a renewal of its three alcohol licenses. Based on S.D.C.L. § 35-2-24, both requests were denied by the State as the statute directs that licenses are not to be reissued until the Tribe remits use taxes incurred by nonmembers.[6]

         As a result, the Tribe, pursuant to S.D.C.L. § 1-26-16, requested a hearing before the South Dakota Office of Hearing Examiners to review the State's alcohol license denial. At the hearing, the Hearing Examiner concluded that all nonmember purchases at the Casino are subject to the use tax scheme, that the Tribe failed to remit the use taxes, and, therefore, the Tribe was not entitled to alcohol license renewal. Prior to the Hearing Examiner's decision becoming final, the Tribe filed this action in federal court on November 18, 2014. The Tribe simultaneously moved the Court for preliminary injunction enjoining state action pursuant to the Hearing Examiner's decision. The Tribe and State ultimately made the motion for preliminary injunction moot by entering into a stipulation whereby the State recognized the three alcohol licenses' continuing validity pending a decision on the merits in this case. The Tribe did not appeal the Hearing Examiner's decision to South Dakota state court.

         Specific to this federal action, the Tribe alleges that the State lacks authority to impose its use tax scheme on reservation land against nonmember patrons of the Licensed Premises. In its Complaint, the Tribe alleges that IGRA preempts the field of taxation thereby barring the State's imposition. To that end, the Tribe argues that all activity engaged in under the Royal River Casino name is "gaming activity" untaxable by the State by virtue of IGRA (Claims for Relief One, Two, and Six). Outside of IGRA, the tribe maintains that the use tax and remittance requirements are preempted by the Indian Commerce Clause of the Federal Constitution and federal common law and that they infringe on inherent tribal sovereignty (Claims for Relief Three and Five); that the State's tax imposition is unlawfully discriminatory as applied to the Tribe (Claim for Relief Four); that, as a predicate to funds contained in an escrow account pursuant to a 1994 Deposit Agreement between the Tribe and the State being disbursed to the Tribe, the State is without power to impose its taxation scheme on the Tribe's Casino (Claim for Relief Seven);[7] and that conditioning the alcohol licenses on the S.D.C.L. § 35-2-24 tax remittance requirement violates 18 U.S.C. § 1161 (Claim for Relief Eight).

         The Tribe has moved the Court for summary judgment pursuant to Fed.R.Civ.P. 56(a) as to Claims for Relief One, Three, and Four. The Defendants have moved the Court for summary judgment on all Claims for Relief. For reasons explained herein, both motions are granted in part and denied in part.


         Pursuant to Rule 56(a) of the Federal Rules of Civil Procedure, summary judgment is proper "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). "A party asserting that a fact cannot be . . . disputed must support the assertion" either by "citing to particular parts of materials in the record, " or by "showing that the materials cited do not establish the .. . presence of a genuine dispute[.]" Fed.R.Civ.P. 56(c)(1)(A)-(B). "The movant can also establish the absence of a disputed material fact by showing 'that an adverse party cannot produce admissible evidence to support the fact.'" Jensen v. Hy-Vee Corp., 2011 WL 1832997, at *1 (D.S.D. May 13, 2011) (quoting FED. R. ClV. P. 56(c)(1)(B)).

         In a motion for summary judgment, the moving party bears the initial burden of establishing the absence of a genuine issue of material fact. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986) (internal quotations omitted). Once this burden is met, the burden then shifts to the non-moving party to demonstrate "that a fact... is genuinely disputed" either by "citing to particular parts of materials in the record, " or by "showing that the materials cited do not establish the absence ... of a genuine dispute." Fed.R.Civ.P. 56(c)(1)(A)-(B). "For purposes of summary judgment, the facts, and inferences drawn from those facts, are 'viewed in the light most favorable to the party opposing the motion.'" Jensen, 2011 WL 1832997, at *2 (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986)).


         I. Preemption of the Tax Itself

         The Tribe asserts that the imposition of the State use tax on nonmember consumers of the Licensed Premises is preempted under IGRA. Further, to the extent it is not otherwise preempted by IGRA itself, the Tribe argues that the tax is incompatible with Federal and Tribal interests in protecting tribal self-government and is therefore preempted by Federal Indian law in general as it infringes on tribal sovereignty. "State jurisdiction is preempted by the operation of federal law if it interferes or is incompatible with federal and tribal interests reflected in federal law, unless the state interests at stake are sufficient to justify the assertion of state authority." Casino Res. Corp. v. Harrah's Entm't, Inc., 243 F.3d 435, 437 (8th Cir. 2001) (citing New Mexico v. Mescalero Apache Tribe, 462 U.S. 324, 334 (1983)). "The traditional notions of tribal sovereignty and the recognition and encouragement of this sovereignty in Congressional Acts promoting tribal independence and economic development inform the pre-emption analysis." Ramah Navajo Sch. Bd., Inc. v. Bureau of Revenue, 458 U.S. 832, 846 (1982).

         A state's regulatory power is at its lowest and generally inapplicable when applied to on-reservation conduct of tribal members. White Mountain Apache Tribe v. Br acker, 448 U.S. 136, 144 (1980) (citing Moe v. Salish & Kootenai Tribes, 425 U.S. 463, 480-81 (1976) and McClanahan v. Ariz. Tax Comm'n, 411 U.S. 164 (1973)). The question of the lawfulness of state regulatory authority becomes more difficult where, as here, a state asserts authority over the conduct of non-Indians on the reservation. Id.

In such cases we have examined the language of the relevant federal treaties and statutes in terms of both the broad policies that underlie them and the notions of sovereignty that have developed from historical traditions of tribal independence. This inquiry is not dependent on mechanical or absolute conceptions of state or tribal sovereignty, but has called for a particularized inquiry into the nature of the state, federal, and tribal interests at stake, an inquiry designed to determine whether, in the specific context, the exercise of state authority would violate federal law.

Id. at 144-45.

         A. IGRA

         For over forty years, Indian gaming has served as a source for commercial revenue for tribes. See Kenneth Bobroff, et al., Cohen's Handbook of Federal Indian Law 875 (Nell Jessup Newton, Lexis Nexis 2015) (1941). The Supreme Court's 1987 decision in California v. Cabazon Band of Mission Indians, in holding that the state of California could not impose its gaming regulations on a tribal gaming operation because they were preempted by tribal and federal interests, opened the door to numerous public policy questions regarding what is today a multi-billion dollar industry. 480 U.S. 202 (1987). See Bobroff, at 875-76. Thus, in 1988, Congress enacted IGRA.

IGRA was Congress' compromise solution to the difficult questions involving Indian gaming. The Act was passed in order to prove 'a statutory basis for the operation of gaming by Indian tribes as a means of promoting tribal economic development, self-sufficiency, and strong tribal governments' and 'to shield [tribal gaming] from organized crime and other corrupting influences to ensure that the Indian tribe is the primary beneficiary of the gaming operation.' 25 U.S.C. § 2702(1) and (2). IGRA is an example of 'cooperative federalism' in that it seeks to balance the competing sovereign interests of the federal government, state governments, and Indian Tribes, by giving each a role in the regulatory scheme.

Artichoke Joe's California Grand Casino v. Norton, 353 F.3d 712, 715 (9th Cir. 2003) (internal quotes and citations omitted).

         Under IGRA, three conditions must be satisfied before a tribe operates a class III gaming facility: (1) authorization of such gaming by the governing body of the Indian Tribe and the Chair of the National Indian Gaming Commission ("NIGC"); (2) authorization of such gaming by the state in which the reservation is located; and (3) the existence of a gaming compact between the tribe and the state approved by the Secretary of the Interior. See 25 U.S.C. § 2710(d)(1)). The Act further delineates proper subject matter of a compact. 25 U.S.C. § 2710(d)(3)(C)(i)-(vii). The principal subject matter provision here is subsection (vii), which allows for a compact to contain provisions for "any other subjects that are directly related to the operation of gaming activities." 25 U.S.C. § 2710(d)(3)(C)(vii).[8] IGRA does not mention the sale of goods and services to nonmember casino patrons, alcohol sales, or a correlating taxation. As stated before by this Court in its Memorandum Opinion and Order on Defendants' Motion for Judgment on the Pleadings, that fact alone weighs in the Tribe's favor. Doc. 59 at 16. The basic Indian law canons of construction require that statutes be liberally construed in favor of the Tribes and that all ambiguities are to be resolved in their favor. See Montana v. Blackfeet Tribe, 4701 U.S. 759, 767-68 (1985). Further, tribal property rights and sovereignty are preserved unless Congress's intent to the contrary is clear and unambiguous. See Minnesota v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172, 202 (1999).

         The Compact that exists between the Tribe and the State is also silent as to the sale of goods and services to nonmember consumers on the Licensed Premises. The Tribe asserts, however, that the goods and services offered on the Licensed Premises are within the contemplation of subsection (vii) as "subjects that are directly related to the operation of gaming activities" because they "are tailored to accomplish one primary goal: to attract and retain gaming guests and ultimately generate gaming revenue." See Plaintiffs Memorandum is Support of its Motion for Summary Judgment, Doc. 117 at 5. At the same time, the Tribe argues that the use tax is further preempted under § 2710(d)(4), which provides that "nothing in this section shall be interpreted as conferring upon a State ... authority to impose any tax . . . upon an Indian tribe or upon any other person or entity authorized by an Indian tribe to engage in a class III activity." On the other hand, the Defendants assert that § 2710(d)(4) only prohibits the taxation of actual game play, which the State is not doing. Further, the Defendants argue that anything other than the actual game play does not fall within subsection (vii) because it is not "directly related to the operation of gaming activities."

         When assessing whether certain subject matter falls within the scope of IGRA's catchall provision, it should not be simply asked "but for the existence of the Tribe's class III gaming operation, would the particular subject regulated under a compact provision exist? Instead, we must look to whether the regulated activity has a direct connection to the Tribe's conduct of class III gaming activities." Doc. 42-1 (Letter from Donald E. Laverdure, Acting Assistant Secretary, Indian Affairs, to Greg Sarris, Chairman, Federated Indians of Graton Racheria at 10) (July 13, 2012)) (hereinafter, "Graton Letter"). See 25 U.S.C. § 2710(d)(3)(C)(vii). To the extent such activities are "directly related to the operation of gaming activities, " however, Federal courts need not balance the competing federal, tribal, and state interests involved, as Congress already completed the balancing test with respect to those activities in enacting IGRA. See Gaming Corp of Am., 88 F.3d at 544 (citing S.Rep. No. 445, 100th Cong., 2d Sess. 6 (1988)).

         In opposition to the Tribe's broad definition of "directly related to the operation of gaming activities, " the Defendants rely on Michigan v. Bay Mills Indian Cmty. (Bay Mills), 134 S.Ct. 2024 (2014) for the proposition that the scope of 25 U.S.C. § 2710(d)(3)(C)(vii) is actually quite narrow. In Bay Mills, the Supreme Court held that the provision of IGRA authorizing a state to sue a tribe to enjoin a class III gaming activity located on Indian lands did not abrogate tribal sovereign immunity to enjoin a tribe from operating a casino located outside its reservation. See Bay Mills, 134 S.Ct. at 2039. In an attempt to fit the suit within the provision's authority, Michigan argued that, though the casino was outside the Indian reservation, Bay Mills "authorized, licensed, and operated" that casino from within its own reservation and that authorization, licensing, and operation was "Class III gaming activity." Id. at 2032. Therefore, Michigan claimed, the State could sue to enjoin the "gaming activity" because part of that activity took place on reservation land. Id. The Supreme Court, however, disagreed, saying that "numerous provisions of IGRA show that 'class III gaming activity' means just what it sounds like-the stuff involved in playing class III games.. .each roll of the dice and spin of the wheel." Id. at 2032-33. That class III gaming activity is "the gambling in the poker hall, not the proceedings of the off-site administrative authority, " see Id. at 2033, however, does not answer the question presented to this Court. Instead, this Court must determine what is "directly related to the operation of gaming activity, " or, in the words of the Supreme Court in Bay Mills, what is "directly related to the operation of 'the gambling in the poker hall.'"

         IGRA was "intended to expressly preempt the field in the governance of gaming activities on Indian lands, " Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 544 (8th Cir. 1996). It follows then, that '"[a]ny claim which would directly affect or interfere with a tribe's ability to conduct its own [gaming] licensing [and operation] process[es] should fall within the scope of [IGRA's] complete preemption.'" Casino Res. Corp. v. Harrah's Entm't, Inc., 243 F.3d 437 (8th Cir. 2001) (quoting Gaming Corp. of Am. v. Dorsey & Whitney, 88 F.3d 536, 549 (8th Cir. 1996)). Though that is the strongest proposition that the preemptive scope of IGRA applies, that is not the only proposition. Gaming Corp., 88 F.3d at 550 ("The proposition that the preemptive scope of IGRA encompasses a claim is strong for claims that would intrude on the tribe's regulation of gaming .... Potentially valid claims under state law are those which would not interfere with the nation's governance of gaming." (emphasis added)). Indeed, were it the only proposition, § 2710(d)(3)(C)(vii) would be rendered superfluous, as subsection (i) already provides a means by which states and tribes may negotiate regarding the application of civil laws and regulations "that are directly related to, and necessary for, the licensing and regulation of such activity." 25 U.S.C. § 2710(d)(3)(C)(i). Similarly subsection (vi) provides that the states and tribes may negotiate regarding "standards for the operation of such activity and maintenance of the gaming facility, including licensing." Id. at § 2710(d)(3)(C)(vi).

         "[C]ourts have been quick to dismiss challenges to generally-applicable laws with de minimis effects on a tribe's ability to regulate its gambling operations. For example, courts have held that IGRA's preemptive scope is not implicated in cases involving gaming management and service contracts with a tribe, Casino Res. Corp. v. Harrah 's Entm 't, Inc. (Harrah 's Entm 't), 243 F.3d at 438-39 (8th Cir. 2001); contracts to acquire materials to build a casino, Barona Band, 528 F.3d at 1192; and release of detailed investigative reports on the management of gaming, Siletz, 143 F.3d at 487." Mashantucket Pequot Tribe v. Ledyard, 722 F.3d 457 (2d Cir. 2013). Similarly, in Ledyard, the court found IGRA did not preempt a property tax imposed by the state on a non-Indian vendors property leased to the tribe. Id. at 469-71. All of these cases, however, are distinguishable from the case at bar.

         In Harrah's Entm't, a non-Indian company, Harrah's Entertainment, entered into a consulting agreement with another non-Indian company, Casino Resource Corporation (CRC) to jointly pursue gaming opportunities with the Potawatomi Indian Nation. Harrah 's Entm 't, 243 F.3d at 436. After the Nation was unable to negotiate a compact agreement with the state of Michigan, the non-Indian companies executed a termination agreement that dissolved their management relationship. Id. at 437. CRC then sued Harrah's Entertainment in federal court asserting state law claims, alleging that Harrah's Entertainment breached the consulting agreement and tortiously interfered with CRC's "contractual and prospective economic advantage." Id. The Eighth Circuit found that the state law claims could not be preempted by IGRA merely because the original contract between the two parties was "peripherally associated with tribal gaming." Id. at 439. Instead, the court found "the potential infringement on a tribe's governance of gaming" minimal, as "a non-tribal entity's state law claim (that does not implicate tribal interests) against another non-tribal entity is not of central concern to IGRA." Id. at 440.

         Seven years later, in Barona Band, the Ninth Circuit found a state tax on construction materials was not preempted by IGRA. See Barona Band, 528 F.3d 1184. The Tribe entered into a contract with a non-Indian general contractor to construct the expansion of the casino floor and hotel, as well as other amenities. Id. at 1187. In the contract, "the Tribe touted a method it had devised to circumvent state sales tax, which would otherwise fall on the contractor, by scheduling deliveries to occur on tribal lands." Id. Under this contract, the contractor entered into a series of subcontracts with contractors in various trades. Id. An audit of the general contractor determined that over $200, 000 in sales and use tax associated with purchases of construction materials from non-Indian vendors for use on the casino expansion-with deliveries taking place on Indian land. Id. at 1188. The court found that IGRA did not preempt taxation of third-party purchases of equipment used to construct the gaming facilities when the construction materials, purchased by a non-Indian subcontractor, "could be used for a multitude of purposes unrelated to gaming." Id. at 1191-92 ("That these sophisticated parties contracted to create a taxable event on Indian territory which otherwise would occur on non-Indian territory factually distinguishes the present case from the multitude of cases where courts have analyzed state taxation on non-Indians performing work on Indian land."). The court refused to invalidate the state tax by preemption "where the Tribe has invited commercial activity onto its territory for the purpose of marketing a sales tax exemption to non-Indian businesses who would otherwise be liable for the state tax under laws of general applicability." Id. at 1193. See also Washington v. Confederated Tribes of the Colville Indian Reservation (Colville), 447 U.S. 134 (1980) (upholding a state tax on cigarettes sold on-reservation to nonmembers when the only value added to the transaction by the tribe was the marketing of a tax exemption).

         Similarly, in Ledyard, the Second Circuit upheld a state tax on non-Indian owners of slot machines that were leased to a tribe to be used in their on-reservation gaming facility. See Ledyard, 722 F.3d 457. "[U]nder IGRA, mere ownership of slot machines by the vendors does not qualify as gaming and taxing such ownership therefore does not interfere with the 'governance of gaming.'" Id. at 470. Because the tax was dependent entirely on a non-Indian's ownership of the property, and had nothing to do with a transaction with the tribe, id. at 469, the tax was permissible, and any effect on the tribe was "too indirect and too insubstantial" to support a preemption claim. Id. at 476 ("Any adverse effect on the Tribe's finances caused by the taxation of a private party contracting with the Tribe would be ground to strike the tax. Absent more explicit guidance from Congress, we decline to return to this long-discarded and thoroughly repudiated doctrine." (quoting Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163, 186-87(1989))).

         Finally, in Confederated Tribes of Siletz Indians v. Oregon (Siletz), the tribe and the state of Oregon negotiated a compact that authorized Oregon to monitor and investigate the casino to ensure compliance with the compact. 143 F.3d 481, 482-84 (9th Cir. 1998). Included in the compact was a provision providing that the tribe must comply with the state's public records laws. Id. The Ninth Circuit found, without any analysis of 25 U.S.C. § 2710(d)(3)(C)(iii), which appears to answer the question, that the state reporting statute applied to the tribe's operations by virtue of the Tribal-State compact itself. Id. at 484-85. Further, the court iterated that the records laws did not seek to usurp tribal control over gaming and the fact that the release of a ...

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