August 18, 2004
Peter A. Kolbe General Counsel North Carolina Department of Insurance
P.O. Box 26387 Raleigh, NC 27611
Re: Advisory Opinion: Premium Tax on Surplus Lines Insurance;
Exemption for Cherokee Indian Reservation; N.C.G.S. § 58-21-85
Dear Mr. Kolbe:
By an electronic message dated December 15, 2003, you asked whether the Eastern Cherokee Band of Indians (hereinafter “Eastern Cherokee Band”) is exempt from surplus lines premium taxes under Article 21 of Chapter 58 of the North Carolina General Statutes by virtue of its status as a federally recognized Indian tribe. This Advisory Opinion supercedes and replaces the prior letter to you on this topic dated December 3, 2003.
Your request for this Advisory Opinion concerns surplus lines insurance, as defined by
N.C.G.S. § 58-21-10(8). Documents subsequently provided by Marie Dunn, the Surplus Lines Coordinator at the North Carolina Department of Insurance, indicate that The Cherokee Boys Club, Inc.[hereinafter, “Boys Club”] paid surplus lines insurance premium and premium taxes on a policy for which the Boys Club was the named insured. The Secretary of State’s office lists the Boys Club as a nonprofit corporation. The Articles of Incorporation for the Boys Club show that its incorporators and initial Board of Directors were members of the Cherokee Council House in Cherokee and that its registered office and mailing address is The Cherokee Council House in Cherokee, North Carolina. It thus appears that the Boys Club is owned and operated by the Eastern Cherokee Band and located on the reservation. Our analysis and conclusions reached herein are limited to surplus lines insurance purchased by a nonprofit corporation owned by the Eastern Cherokee Band. In addition, this Advisory Opinion does not address surplus lines insurance where the policyholder is an individual member of the tribe.
The purpose of the Boys Club is to benefit reservation Indians by promoting their education and development and to provide for underprivileged children on the reservation. According to Article 3 of the Articles of Incorporation, the Boys Club is organized for the following purposes, among others: To promote the education and development of youths who are, or will be enrolled in or were formerly enrolled in the Cherokee High School on the Reservation of the Eastern Band of Cherokee Indians, North Carolina, by providing them with opportunities to develop practical skills in agricultural, industrial, mechanical and mercantile pursuits.
To promote the leadership training of such youth . . .
To provide employment for such youth during periods of time that they are not in attendance school . . .[in order to] assist [them] by providing them with a source of income . . . and [the] means for their further education and development.
To assist said youth in establishment of home projects, to be carried on . . . in connection with their home or farm . . . .
To assist the development of said youth by sponsoring educational trips for their attendance . . . field trips . . . and other healthful recreational activities for said youth.
To engage in all types of farming and agricultural activities and pursuits . . .
To operate and maintain a home for underprivileged children, and to supervise, keep and maintain said children.
The Articles further provide that, in the event the corporation dissolves, all of the corporation’s assets shall be distributed for the use and maintenance of underprivileged children on the Cherokee Indian Reservation. Although the Boys Club sponsors field trips and other recreational opportunities off of the reservation, it appears that the majority of the activities conducted by the Boys Club take place on the reservation.
Under N.C.G.S. § 58-21-10(8), “surplus lines insurance” is defined as:
[A]ny insurance in this State of risks resident, located, or to be performed in this State, permitted to be placed through a surplus lines licensee with a nonadmitted insurer eligible to accept such insurance, other than reinsurance, commercial aircraft insurance, wet marine and transportation insurance, insurance independently procured pursuant to G.S. § 58-28-5, life and accident or health insurance, and annuities.
N.C.G.S. § 58-21-10(8) (2004). A surplus lines licensee is “a person licensed under N.C.G.S. § 58-21-65 to place insurance on risks resident, located, or to be performed in this State with nonadmitted insurers eligible to accept such insurance.” N.C.G.S. § 58-21-10(9). N.C.G.S. §§ 5821-15 and -20 set forth requirements which must be met before a surplus lines licensee can procure insurance from a nonadmitted insurer. Although N.C.G.S. § 58-21-85(b) requires each surplus lines licensee to pay a premiums receipt tax on surplus lines insurance issued in this State when he files his quarterly report with the Commissioner, this tax is actually born by the purchaser of such insurance under N.C.G.S. § 58-21-85(a). That statute provides that “[g]ross premiums charged, less any return premiums, for surplus lines insurance are subject to a premiums receipt tax of five percent (5%), which shall be collected by the surplus lines licensee as specified by the Commissioner, in addition to the gross premium charged by the insurer for the insurance.”
(Emphasis added). N.C.G.S. § 58-21-85(a) further states that “[t]he surplus lines licensee is prohibited from absorbing such tax and from rebating for any reason, such tax.”
“Absent explicit congressional direction to the contrary, we presume against a State’s having the jurisdiction to tax within Indian country, whether the particular territory consists of a formal or informal reservation, allotted lands, or dependent Indian communities.” Oklahoma Tax Commission v. Sac and Fox Nation, 508 U.S. 114, 127, 113 S. Ct. 1985, 1993 (1993). As stated by a leading commentator, in the absence of an express federal law, states may not tax: (1) Indian reservation lands held in trust by the federal government pursuant to 25 U.S.C. §§ 462 & 465, (2) income earned by a tribe if the income was derived wholly from reservation resources, or (3) income earned by a tribe member living on the reservation if the individual’s income was derived wholly from reservation resources. See Felix S. Cohen, Handbook of Federal Indian Law § 7.C (1982) [hereinafter Cohen]; McLanahan v. Arizona Tax Commission, 411 U.S. 164, 93 S. Ct. 1257 (1973) (holding that state could not tax the income of Indians where that income derives solely from reservation sources); Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 115 S. Ct. 2214 (1995) (holding that state could not impose income tax on members of the Chickasaw Nation who are employed by the tribe but who reside in the state outside Indian Country); Eastern Band of Cherokee Indians v. Lynch, 632 F.2d 373 (4th Cir. 1980). Tribal activities conducted outside the reservation, however, are treated differently. See Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148, 93 S. Ct. 1267, 1270 (1973) (holding that Indian enterprise located on land beyond its reservation borders is subject to the same taxes to which businesses throughout the state would be subject). As one commentator noted, “Outside Indian country under tribal jurisdiction, Indians are subject to state taxing jurisdiction in common with other persons, except where a more specific federal right preempts state law.” Cohen, § 7.C. Thus, a state may tax income earned by a tribe outside of the reservation. Mescalaro, 411 U.S. 145, 157, 93 S. Ct. 1267, 1275. Similarly, states may tax that portion of a Indian’s income that is earned off the reservation even if the individual lives on the reservation. Cohen, § 7.C.
Although the issue of whether states can impose a surplus lines premium tax on federally recognized Indian tribes has not been addressed by the courts, a review of the federal case law regarding the state’s power to tax tribes and members of federally recognized Indian reservations leads to the conclusion that the state is precluded from imposing a surplus lines premium tax on the Cherokee Boys Club, Inc. In McClanahan v. Ariz. State Tax Comm’n, 411 U.S. 164, 93 S. Ct. 1257 (1973), the Supreme Court held that the State of Arizona could not tax the income of Indians where that income derives entirely from reservation sources. Appellant was a member of the Navajo Reservation and derived all of her income from within the Navajo reservation. McClanahan, 411 U.S. at 166, 93 S.Ct. at 1259. The Court discussed and relied in part upon the tradition of Indian sovereignty, which is “the policy of leaving Indians free from state jurisdiction and control,” and is a concept of Indian reservations as separate, although dependent nations within whose boundaries state law could have no role. Id. at 168, 93 S. Ct. at 1260. Noting that “the trend has been away from the idea of inherent Indian sovereignty as a bar to state jurisdiction and toward reliance on federal pre-emption,” the Court stated that “[t]he Indian sovereignty doctrine is relevant, then, not because it provides a definitive resolution of the issues in this suit, but because it provides a backdrop against which the applicable treaties and federal statutes must be read.” Id. at 172, 93 S. Ct. at 1262. The Court then read the relevant treaty and statutes with this tradition of sovereignty in mind and concluded that it was clear that Arizona had exceeded its lawful authority by attempting to tax the income of tribal members living on the reservation where that income was derived from reservation sources. Id. at 174-76, 93 S. Ct. at 1263-64.
In Eastern Band of Cherokee Indians v. Lynch, 632 F.2d 373 (4th Cir. 1980), the Fourth Circuit applied the holding of McClanahan to prohibit North Carolina from imposing taxes on the income earned on the Eastern Cherokee Reservation by members of the tribe who reside on the reservation and to prohibit Swain County, where the reservation is situated, from levying taxes on personal property located on the reservation and owned by members of the Eastern Cherokee Band residing there. The Court concluded that because the United States recognizes the Eastern Cherokee Band as an Indian tribe and holds in trust the Indian reservation on which its members live, the State must show express federal permission to impose these taxes. Id. at 375.
In Lynch, the Court examined the relationship of the Eastern Cherokee Band to the State of North Carolina and the United States. Under the Treaty of New Echota, the Cherokee Nation, which was one of several tribes that originally occupied the lands now composing North Carolina, South Carolina, Tennessee, Georgia, and Alabama, ceded to the United States all possessory rights to lands east of the Mississippi and agreed to move west. Some Cherokees remained in the southeastern states pursuant to Article 12 of the Treaty, which provided that those Cherokees willing to become citizens of the states in which they resided could seek from the commissioners named in the Treaty permission to remain in the east. Id. at 375. In 1866, North Carolina gave consent to allow the Eastern Cherokees to remain. Subsequently, the Cherokees used certain federal payments to help purchase the land that eventually became the Eastern Cherokee Reservation. Pursuant to Congressional Acts enacted in 1924 and 1934, the United States now holds these lands in trust for the benefit of the Eastern Cherokee Band. Id. at 376-77.
The Fourth Circuit reviewed a number of its own opinions since 1934 which acknowledge federal guardianship over the Eastern Cherokee Band. In doing so, the Court reiterated that members of the Eastern Cherokee Band have a dual status as citizens of North Carolina and as members of a federally recognized Indian tribe who live on a federally recognized Indian reservation held in trust for their benefit by the United States. Id. at 377. In deciding whether North Carolina could impose the taxes at issue, the Court had to reconcile the dual status of the Cherokees as citizens of North Carolina and as Indians living on a federal reservation. Id. at 379. Ultimately, the Court concluded that the current status of the Cherokee Indians as members of a federally recognized tribe residing on an Indian reservation, held in trust by the United States, rather than their North Carolina citizenship, determines the State’s power to tax. Id. at 380. The Court concluded that the rationale of McClanahan applied to all members of federally recognized Indian tribes who earn their livelihood on federally recognized reservations, including the Eastern Cherokee Band, and thus required the state to show congressional permission to impose an income tax on such Indians. Since Congress had not consented, the Court held the tax could not stand. Id. at 381. The Court similarly concluded that in the absence of express congressional consent to tax the personal property of Indians residing on the Eastern Cherokee Reservation, Swain County could not levy a tax on personal property possessed by members of the Eastern Cherokee Band on the reservation where they reside. Id. at 382.
More recently, in Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450, 115 S. Ct. 2214 (1995), the Supreme Court held that 18 U.S.C. § 1151 defines the state’s taxing authority. In Chickasaw Nation, the Court held that Oklahoma has the authority to impose its income tax upon members of the Chickasaw Nation who are employed by the Tribe but who reside in the State outside Indian Country.1 It also held that Oklahoma did not have the authority to impose a motor fuels excise tax upon fuel sold by Chickasaw Nation retail stores on tribal trust land. The Court concluded that members of the Chickasaw Nation employed by the tribe but residing in the State outside Indian Country were not exempt from taxation because the general principle of tribal immunity from state taxation does not operate outside Indian Country. Id. at 464, 115 S. Ct. at 2223.
In addressing the motor fuels tax, the Chickasaw Nation Court stated that “when a State attempts to levy a tax directly on an Indian tribe or its members inside Indian country, rather than on non-Indians, we have employed, instead of a balancing inquiry, ‘a more categorical approach: “Absent cessation of jurisdiction or other federal statutes permitting it,” we have held, a State is
“Indian country” is defined as “(a) all land within the limits of any Indian reservation under the jurisdiction of the United States Government, notwithstanding the issuance of any patent, and, including rights-of-way running through the reservation, (b) all dependent Indian communities within the borders of the United States whether within the original or subsequently acquired territory thereof, and whether within or without the limits of a state, and
(c) all Indian allotments, the Indian titles to which have not been extinguished, including rightsof-way running through the same.” 18 U.S.C. § 1151 (2004).
without power to tax reservation lands and reservation Indians.’” Id. at 458, 115 S. Ct. at 2220. The Court then cited numerous decisions in which it had held, under this categorical approach, state taxes whose legal incidence rested on a tribe or on tribal members inside Indian country to be unenforceable. Id. Under this approach, “the initial and frequently dispositive question in Indian tax cases, therefore, is who bears the legal incidence of a tax.” Id. “ If the legal incidence of an excise tax rests on a tribe or tribal members for sales made inside Indian country, the tax cannot be enforced absent clear congressional authorization.” Id. Because the Court determined that the legal incidence of the motor fuels tax rested on the tribe or tribal members as retailers for sales made inside Indian country, those taxes were held to be unenforceable. Id. at 411-12, 115
S. Ct. at 2221-22.
The analysis underlying the McClanahan, Lynch, and Chickasaw decisions would appear to be equally applicable to determining the State’s authority to impose other taxes on the Eastern Cherokee Band, including surplus lines premium taxes under N.C.G.S. § 58-21-85. Although the surplus lines tax is paid by and for the benefit of the Boys Club, a nonprofit corporation owned by the Eastern Cherokee Band, it is immune from taxes to the same extent that an Indian tribe or member is immune. Indian corporations and entities are treated as Indian tribes or members for the purposes of determining tax immunity. Whether or not a business owned by a tribe is incorporated “is irrelevant to determining the question of tax immunity because tax immunity should not turn upon the particular form in which the tribe chooses to conduct its business.” Mescalero Apache Tribe v. Jones, 411 U.S. 1459, 93 S. Ct. 1267 (1973) (Indian owned corporation exempt from ad valorem tax on permanent improvements made to ski operation located off the reservation but within Indian Country). See also, Pourier, et. al. v. S.D. Dep’t of Revenue, 658 N.W.2d 395, 2003 S.D. 21 (2003) (corporation solely owned by member and resident of the reservation which sells fuel on the reservation mostly to reservation Indians is immune from taxation because “a corporation owned by a tribe or an enrolled tribal member residing on an Indian reservation and doing business on the reservation for benefit of reservation Indians is an enrolled member of the tribe for purposes of protection of tax immunity”), aff’d in part and rev’d in part on other grounds, 674 N.W.2d 314, 2004 S.D. 3, cert. denied, 2004 U.S. Lexis 3270, 124 S.Ct. 2400 (2004). Cf., Winnegago Tribe of Neb., et. al. v. Stovall, et. al., 216 F Supp. 2d 1226 (Kan. 2002), aff’d, 341 F.3d 1202 (10th Cir. 2003) (tribes entitled to preliminary injunction to enjoin enforcement of tax on motor fuels sold by tribal corporation which was a subsidiary of a wholly owned tribal corporation on grounds that legal incidence of tax falls upon the tribes because an action against a tribal enterprise is an action against the tribe itself); Sage v. Sicangu Oyate Ho, Inc., 473 N.W.2d 480 (S.D.1991) (Indian nonprofit corporation organized under state law was Indian and thus entitled to sovereign immunity); Thomas v. Dugan, 1997 U.S. Dist. Lexis 20850
(W.D.N.C. 1997), aff’d, 168 F.3d 483 (4th Cir. 1988) (tribal corporation treated as an Indian tribe for purpose of determining exemption from Title VII). Thus, absent cession of jurisdiction or other federal statute permitting it, the states cannot tax an Indian owned corporation if : (1) it is located on the reservation or within Indian Country, (2) the activities of the corporation take place on the reservation or within Indian Country, and (3) the legal incidence of the tax falls upon the corporation, the tribe, or its members.
Since no express congressional consent to impose a surplus lines premium tax is known to exist, we believe, based upon current federal precedent, that North Carolina cannot impose a surplus lines premium tax on property located upon or activity occurring within the reservation where the legal incidence of that tax falls upon the tribe. The Boys Club is a corporation owned and operated by the tribe, is located on the reservation, and is organized for the benefit of Indian youth residing on the reservation. Moreover, the majority of the club’s activities take place on the reservation. Based upon these facts, we also believe that the legal incidence of the surplus lines tax falls upon the Boys Club as the purchaser. Accordingly, North Carolina would be prohibited from imposing such a tax.
We hope this advisory opinion will be useful to you. If you require additional information, please let us know.
Reginald Watkins Senior Deputy Attorney General
Anne Goco Kirby Assistant Attorney General
cc: Charles Swindell Charles Bernard Marie Dunn