Congress has sanctioned the formation of Tribal Corporations and Tribal Business Enterprises operating as an Arm of the Tribe in order to fund services. (iStock)
This feature originally appeared in the March 2019 “Infrastructure” print edition of Native Business Magazine.
According to veteran lawyer Pilar Thomas, a member of the Pascua Yaqui Tribe of Arizona, there are only three ways a Tribe can raise revenue for Tribal governmental purposes.
One way, she says, is like any other government — through the assessment and collection of taxes. A second way is through grants and contracts with federal or state governments. And a third way is through Tribal enterprise revenue.
“But the challenge for Tribes is that unlike other governments, from a tax perspective, Tribes really lack, in many circumstances, an economic base to tax,” Thomas said in an interview with Native Business Magazine last year, when she served as a lawyer in Lewis Roca Rothgerber Christie LLP’s Indian Tribal Nations Practice. “There just isn’t a lot of economic activity on the reservation that you can tax.” Thomas recently joined Quarles & Brady LLP as a partner, leading the Energy, Environment & Natural Resources and Real Estate practice groups in Tucson, Arizona.
Maranda Compton (Delaware Tribe of Indians), a partner at Van Ness Feldman LLP, adds that because Tribal lands are held in trust by the federal government, property taxes are largely unavailable, so the typical land-based tax regimes that states and municipalities employ are also difficult to implement in Indian Country.
“The idea that tax revenue could fund Tribal governments — like other governments are funded — is just not there,” Compton said. “In light of that, Tribes must rely heavily — and sometimes almost exclusively — on commercial development to fund their basic governmental services.”
To address this issue, Congress has sanctioned the formation of Tribal Corporations and Tribal Business Enterprises operating as an Arm of the Tribe. Understanding this “Arm of the Tribe” distinction is critical because it serves as a differentiator between businesses that exist to fund Tribal coffers and all other businesses on and off the reservation.
“Arms of the Tribes are entities that are governmental in status but commercial in behavior. These sovereign commercial arms are essential for Tribes but also used by some of the fifty United States,” Compton said. “The federal government has long understood that Tribes require an extra level of commercial endeavor to fund their governmental activities.”
In theory, this sounds simple enough, but recently, there have been a number of lawsuits in which a Tribally owned enterprise, or a wholly owned-subsidiary of a Tribal economic enterprise, has had its status as an “arm of the tribe” attacked or challenged. This largely stems from the extension of the Tribe’s sovereign immunities to the business or businesses operating as its arm.
“The more Congress has promoted Tribal enterprise development and therefore the more Tribal enterprises get created, the more pushback you start to see in the federal law around this idea of what has been called a subordinate economic organization,” Thomas said. “Tribes can and should take on enterprises that are wholly owned by the Tribe and where the revenue of that enterprise is going into the Tribe’s coffers. By definition, they should be considered part of the Tribe.”
Along with the challenges to arm of the Tribe companies invoking the Tribe’s sovereign immunity from suit comes a court system grappling with how to determine whether a company is an arm of the Tribe — and thus entitled to sovereign immunity — or not.
“The test for what constitutes an ‘arm of the Tribe’ is in flux and still developing under federal, state, and Tribal law,” Compton said. “I think Tribes would assert that the key criteria for ‘arm of the Tribe’ are method of creation and intent — i.e., whether the Tribe created the entity under Tribal law with the intent to create an arm of the sovereign.”
“But what we are seeing the courts apply is an ad-hoc, multi-factor test that goes well beyond Tribal intentions to discrete matters of financing and operation, establishing standards for Tribal businesses that chill the very ability of Tribes to engage in commercial activity,” Compton continued.
Under federal law, Tribes possess the sovereign authority to engage in a wide range of economic enterprise — subject only to self-imposed limitations and congressional action limiting those activities.
“These factors seem to deal more with the discomfort of non-Tribal courts, regulators, and plaintiffs’ attorneys,” Compton said. “The real inquiry is likely not how Tribes can conduct commercial activity as sovereigns but what commercial activity Tribes should be allowed to conduct.”
While there have been several tests established to determine whether an entity qualifies as an arm of the Tribe, one of the most commonly cited is the six-factor test outlined in the Tenth Circuit Court of Appeals’ 2010 decision in Breakthrough Management Group v. Chukchansi Gold Casino and Resort. Those six factors for an economic entity include (1) their method of creation; (2) their purpose; (3) their structure, ownership, and management, including the amount of control the tribe has over the entities; (4) whether the tribe intended for the entities to have tribal sovereign immunity; (5) the financial relationship between the tribe and the entities; and (6) whether the purposes of tribal sovereign immunity are served by granting immunity to the entities.
Compton said that while the Breakthrough Court was indicating some factors to consider, no one factor is dispositive and later courts’ reliance on Breakthrough as the sole standard is troubling.
“With the Breakthrough factors, the court was not setting out a rigid set of criteria,” Compton said. “They were simply identifying, given those specific facts, some factors that they felt were consequential.”
She also said the most important component beyond the Breakthrough test is that, outside of the gaming context, the federal government has not established requirements for an “arm of the Tribe.”
“Unless and until Congress endorses the specific criteria of Breakthrough, it is appropriately understood as one Circuit’s proposed analysis, not a national test,” Compton said. “It should not be conflated with Congress saying, ‘given our desire to encourage Tribal economic development, here are the factors that we think should be considered.’”
This reflects one of the big challenges with a lot of these cases, Thomas says, which is that courts have mixed law and Congress has not stepped in to provide clarity. As a result, the first thing that Tribes do after a suit is brought is invoke their immunity and argue that their immunity extends to the arm of the Tribe.
“A Tribe puts up information that shows why it meets the test for arm of the Tribe, and then they wait to see what happens,” Thomas said. “If the Tribe wins, then the case is dismissed because the court lacks subject matter jurisdiction. If it loses, then it either appeals the decision or litigates the case.”
“It’s unfortunate that what’s happening is that this test is morphing, and that’s really the bigger challenge,” Thomas continued. “And the more it morphs, as with anything in Indian law, it morphs not in our favor — and so it’s only going to get worse.”
“Given the changing case law, it might really be time for Tribes to put their heads and resources together and figure out how to best deal with these issues as they pop up around the country,” Thomas said. We need to figure out how to stem the attacks against Tribal sovereignty and Tribal sovereign immunity in what these cases represent.”
“What’s needed is for the legal standards to be married with a little more realism and business operation,” Compton said.