State-Tribal Relations

Case in Brief: Narragensett Tribe v. Rhode Island

The Narragansett Tribe and the state of Rhode Island became involved in a dispute over whether the tribe could operate a smoke shop on its settlement lands without applying the state's cigarette tax laws.  The tribe brought the dispute to the U.S. District Court for the District of Rhode Island in July 2003.  The court concluded in December 2003 that the state may impose its tax on cigarettes sold at the tribal smoke shop and may enforce the law's criminal provisions against noncompliance that occurs on the settlement lands.  This conclusion is based on the court's finding that the legal incidence, or burden, of the state's cigarette tax falls on the non-Native purchaser and not on the tribe.  Under the state's cigarette tax scheme, the tribe acts merely as an agent for the collection of the tax.  State imposition of the tax does not impose a tax on the tribe itself and does not violate the tribe's sovereign rights.  As a result, the U.S. District Court ruled that the tribe must comply with the state's cigarette tax laws if it wishes to continue to sell cigarette products on the settlement lands.

Q.           What was the case about?

A.            On July 12, 2003, the tribe opened a smoke shop on settlement lands for the purposes of producing income for the tribe. The tribe, asserting that as a sovereign nation they not subject to the state's tax laws, chose not to comply with the state cigarette tax and when the shop opened, offered untaxed cigarettes to the general public at prices much lower than the minimum price established by state law.  Although some cigarettes were sold to tribal members, a large portion was sold to individuals who were not members of the tribe.  The Supreme Court has ruled that states can collect taxes on tribal cigarette sales to non-Indians and members of other tribes.  The state may not impose taxes on the tribe itself or tax smoke shop patrons that are members of the tribe owning the shop.  On July 14, 2003, the Rhode Island state policy executed a search warrant at the shop and confiscated the tribe's inventory of cigarettes.  During the execution of the warrant, an altercation occurred between some members of the tribe and the state police officers.  Eight tribal members, including the tribe's leader, were arrested.

On July 15, 2003, the tribe brought this issue to court seeking a declaratory judgment against the state and various state officials.  The tribe alleges that its status under the Rhode Island Indian Claims Settlement Act and its sovereign immunity as a federally-recognized Indian tribe preclude the state and its officials from enforcing the state's cigarette tax with respect to tribal activities occurring on the settlement lands.

Q.         What is the effect of the Rhode Island Indian Claims Settlement Act?

A.                 In 1880, the tribe agreed to sell all but two acres of land that comprised the tribe's original land base in what became the city of Charlestown for $5,000.  In 1978, the tribe filed two complaints in the U.S. District Court alleging its right to possess approximately 3,200 acres of land in Charlestown.  The tribe claimed it owned the land as part of its historical aboriginal territory and that the state had improperly alienated the tribe from the land in 1880 in violation of the Indian Nonintercourse Act.  The tribe claimed that the transfer violated this Act because the federal government never approved the transfer. The tribe claimed that its aboriginal title was never extinguished and was therefore superior to any title held by any landowner that acquired land subsequent to the transfer in 1880.

In an attempt to resolve this dispute, the Narragasets, Charlestown and the state of Rholde Island settled the lawsuits and memorialized their agreement in a joint memorandum of understanding (JMOU) on Feb. 28, 1978. The JMOU provided the following:

• the state would enact legislation creating a state-chartered, Indian-controlled corporation with an irrevocable charter for the purpose of permanently holding and managing the settlement lands in trust for the tribe,
• the settlement lands would include approximately 900 acres of privately held land (to be purchased with a federal appropriation) and approximately 900 acres of state owned land (to be transferred by the state),
• the settlement lands would be subject to a special federal restraint against alienation and would be exempt from federal, state and local taxation and the city of Charlestown would instead receieve in leiu payments for governmental services provided with respect to the land,
• all laws of the state would continue in full force and effect on the settlement lands, but the indian-controlled corporation would be given authority to establish its own hunting and fishing regulations on the settlement lands, and
• the Narragansetts would agree to dismiss, with prejudice, their complaint against the state and agree to extinguish all Indian land claims in Rhode Island.

Congress enacted the Settlement Act (which was necessary due to the fact that Congress has plenary powers over Indian matters) and the Rhode Island General Assembly enacted the Narragansett Indian Land Management Corporation Act.  Consistent with the JMOU, the Settlement Act provided that the land transferred to the state corporation would not be subject to any form of federal, state, or local taxation.

In 1985, the Rhode Island General Assembly amended the State Act by providing an expiration date for the state corporation and for the transfer of the settlement lands from the corporation to the tribe.  This amendment was contingent upon the tribe being granted federal recognition.  The tribe had received federal recognition in 1983, so the settlement lands were transferred to the tribe.  The State Act, like the Settlement Act, recognized that the tribe was not required to pay any taxes on the settlement lands, but the State Act also provided that the state corporation was subject to all the criminal and civil laws of the state. 

In 1988, the tribe deeded the settlement lands to the Bureau of Indian Affairs (BIA) to be held in trust for the tribe. The deed transferring the lands to the BIA expressly recognized the applicability of state laws conferred by the Settlement Act.  At present, the settlement lands remain in the hands of the BIA.   On September 4, 2003, after the commencement of litigation on this matter, the tribe filed a new deed with the BIA eliminating this language.  The state has initiated an action in this court against the BIA to prevent the acceptance of the new deed.   This action is still pending.  (see Carcieri et. al. v. Norton, et. al., C.A. No. 03-469S)

Q.       What did the Federal District Court say?

A.        The ability of Rhode Island to apply the state's cigarette tax to the sale of cigarettes at the tribe's smoke shop depends on who bears the legal incidence, or burden, of the tax.  If, as the state contends, the tax ultimately falls on the (non-Native) consumer, the state cannot be barred from enforcing the cigarette tax.  If however, as asserted by the tribe, the legal incidence rests on the tribe or its members, the tax cannot be enforced absent clear Congressional authorization, which the tribe claims in absent.

Rhode Island law states that "all taxes paid in pursuance of the cigarette tax are conclusively presumed to be a direct tax on the consumer, pre-collected for the purpose of convenience and facility only".  In other words, the retailer pays the cigarette tax prior to the sale and then adjusts the sale price of the cigarettes paid by the consumer.  In effect, this transfers the burden of the tax to the consumer.  The state argues that a literal reading of the Rhode Island's cigarette tax law makes plain the legislature's intent to place the legal incidence of the tax on the consumer.  The tribe counters by arguing that while Rhode Island law creates a legal presumption that the incidence of the tax falls on the consumer, the operational legal incidence of the tax falls on the tribe, therefore amounting to a tax on the tribe itself.  The court rejects this argument based on Supreme Court precedence that has stated that a state may impose minimal burdens on retailers of cigarettes (specifically Indian tribes) by using the pass-through language in order to ensure that a tax is collected without changing the locus of the legal incidence.   As a result, this court holds that the legal incidence of Rhode Island's cigarette tax falls on the consumer.

The court's determination that the legal incidence of the cigarette tax falls on the consumer and not the tribe makes determining whether or not a tax structure that does place the legal incidence on the tribe is lawful in light of the tribe's sovereign status unnecessary.  The tribe also sought a declaration that the July 12, 2003 search warrant and subsequent arrests be held in violation of federal law. This court has held that the legal incidence of the tax falls on the consumers, not the tribe, and therefore, the tribe is obligated to tax cigarettes sold at its smoke shop.  Given these findings, the court concludes that criminal law enforcement, including the seizure of contraband, on the settlement lands is permissible.

Based on the rationale above, the court rules in favor of the state and concludes that:

• the legal incidence of the cigarette tax falls on the consumer, not the tribe,
• the state did not violate federal law or the tribe's sovereign rights when it enforced its criminal statutes by executing a search warrant and making arrests pursuant to the warrant on tribal land, and
• the tribe must comply with the cigarette tax if it wishes to continue to sell cigarettes on the settlement lands.

Q.          Can the parties appeal the ruling of the Federal District Court to a higher court?

A.                Yes.  Given that the claim involves questions arising under federal law and the U.S. Constitution, the parties could appeal the ruling of the Federal District Court to the U.S. Court of Appeals and eventually, the U.S. Supreme Court. 

The tribe's leader, Sachem Matthew Thomas, is reported to have said he is likely to recommend to the tribal government that an appeal be filed. 

Q.                What does this ruling mean for other states?

A.                   The sovereign status of tribal governments can make interactions between the states and tribes confusing in relation to a variety of public policy issues.  The final outcome of this case will set a precedent regarding a state's ability and limitations to tax tribally-owned and operated businesses located on Indian land.  States across the U.S. are struggling to understand and define their power to impose taxes on tribal enterprises.  Due to the tight budget situation that exists in many states, some policymakers have increased cigarette taxes as a way to generate state revenue and close budget gaps.  Some lawmakers fear that the increased price of state-sold cigarettes will drive consumers to tax-free shops.  Conversely, tribes across the U.S. have long struggled to generate revenue for their communities and develop their economies.  Tax-free tribal enterprises are a key aspect of this goal.

Case Citation:
Narraganett Tribe v. Rhode Island, 03CV0296S (Dec. 29, 2003)

For More Information:
Contact Andrea Wilkins of NCSL's State-Tribal Relations Project at 303-856-1558 or State-Tribal Relations Program.

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