The Personal Income Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill, for taxable years beginning on or after January 1, 2017, would exclude from gross income the earned income of an eligible taxpayer that is derived from sources within Indian country in this state. The bill would define specified terms for the purposes of this exclusion.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill, for taxable years beginning on or after January 1, 2017, would exclude from gross income the earned income of an eligible individual taxpayer that is derived from, or attributable to, from sources within Indian country in this state. The bill would define specified terms for the purposes of this exclusion.

This bill would take effect immediately as a tax levy.

The Personal Income Tax Law, in conformity with federal income tax law, generally defines gross income as income from whatever source derived, except as specifically excluded, and provides various exclusions from gross income.

This bill, for taxable years beginning on or after January 1, 2017, would exclude from gross income the earned income of an eligible individual that is derived from, or attributable to, sources within Indian country in this state. The bill would define specified terms for the purposes of this exclusion.

This bill would take effect immediately as a tax levy.

 VETO  

Bill No: SB 289

Author:

:

Vote: 7

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 3/29/17

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara, Moorlach

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/17

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SENATE FLOOR: 40-0, 5/31/17 (Consent)

AYES: Allen, Anderson, Atkins, Bates, Beall, Berryhill, Bradford, Cannella, De León, Dodd, Fuller, Gaines, Galgiani, Glazer, Hernandez, Hertzberg, Hill, Hueso, Jackson, Lara, Leyva, McGuire, Mendoza, Mitchell, Monning, Moorlach, Morrell, Newman, Nguyen, Nielsen, Pan, Portantino, Roth, Skinner, Stern, Stone, Vidak, Wieckowski, Wiener, Wilk

ASSEMBLY FLOOR: 77-0, 9/12/17 - See last page for vote

SUBJECT:

SOURCE: Author

DIGEST:

This bill excludes income derived from Indian country received by members of federally-recognized tribes who live on any tribal land.

ANALYSIS:

Existing law:

1. Applies the personal income tax on all of its residents’ income, regardless of source, including Native Americans unless the income is derived from the reservation of the tribe in which they reside and are a member.
2. Excludes specified income of Native Americans, such as active duty U.S. military service members with orders to live outside Indian country, pension income of retired military service members who reside on their tribe’s reservation, and per capita income distributed to members living outside the state.

This bill:

1. Excludes income derived from or attributable to Indian country in California received by members of federally-recognized Indian tribes in California who also reside within any Indian country in the state for state tax purposes.
2. Applies only to wage and income subject to self-employment tax.
3. Defines “earned income,” “eligible individual,” and “Indian country.”
4. Applies beginning in the 2017 taxable year.

Background

The United States Constitution vests Congress with the authority to engage in relations with Indian tribes, sovereign nations that existed long before the founding of the Republic. This sovereignty was first affirmed in the 1832 by the United States Supreme Court in Worcester v. Georgia, 31 U.S. 515, which stated that “the Indian nations had always been considered as distinct, independent political communities retaining their original natural rights as undisputed possessors of the soil, from time immemorial.” As a result, state laws generally do not apply to Native Americans on their respective lands, except where expressly allowed.

Because of this sovereign status, Native Americans and their property located on their respective countries are generally not subject to state taxation. The Supreme Court affirmed these limits on state tax authority in McClanahan v. State Tax Commission of Arizona (1973) 411 U.S. 164, ruling that the State of Arizona has no jurisdiction to impose a tax on the income of Navajo Indians who (1) are members of the Navajo tribe, (2) reside on the Navajo land, and (3) whose income is wholly derived from Native American sources. However, the “McClanahan exemption” does not limit states from applying taxes on Native Americans who work, invest, or own property outside lands reserved exclusively for the use of their tribe. Courts have subsequently affirmed a state’s authority to extend its laws to Indians living away from their tribe’s lands.

This limitation on state tax powers does not affect federal taxation of the same income, which generally applies the same income tax laws to Native Americans residing on reservations as any other citizen, unless a federal law or a treaty creates one, such as the current income exclusion for general welfare payments. Tribes themselves and any of its wholly-owned corporations are exempt from tax; however, its members are not exempt, even though some tribes impose taxes on their members. Under the Indian Gaming Regulatory Act, any distribution of casino gaming proceeds to individual tribe members is subject to federal income tax. Additionally, while there are numerous valid treaties between various federally-recognized tribal governments and the federal government, the Internal Revenue Service states that these treaties have limited application to the specific tribe bound by the treaty.

California applies its personal income tax on all of its residents’ income, regardless of source. As a result, members of federally recognized tribes must pay tax on most income from any source other than the same tribal lands in which they live and are an enrolled member, including lands of other federally-recognized tribes, as this income does not meet McClanahan’s requirements of membership, residency, and source of income. Members pay tax on income even when they marry members of another tribe, and live on their spouse’s tribe’s lands. For example, a member of the Karuk tribe who married a Yurok Indian, and now lives on the Yurok land with her husband, must include in taxable income any wages she makes on either the Karuk or Yurok tribal lands. In response, many states have either specifically excluded any Indian Country-derived revenue of any member of a federally-recognized tribe so long as they live on tribal lands, or exempted Native Americans from tax entirely. SB 289 exempts earned income derived from any tribal land in California by an individual who is a member of a federally recognized tribe.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) indicates that this bill results in a General Fund revenue loss of $1.6 million in 2017-18, and $1 million annually thereafter. FTB’s administrative costs resulting from the bill have yet to be determined.

SUPPORT: (Verified 10/11/17)

Barona Band of Mission Indians

Blue Lake Rancheria

California Nations Indian Gaming Association

California Taxpayers Association

Dry Creek Rancheria of Pomo Indians

Potter Valley Tribe

San Manuel Band of Mission Indians

Tolowa Dee-ni’ Nation

Tule River Indian Tribe of California

United Auburn Indian Community of the Auburn Rancheria

OPPOSITION: (Verified 10/11/17)

None received

ARGUMENTS IN SUPPORT: According to the author, “California’s income tax reaches too far onto the territory of sovereign nations by taxing the income of Native Americans who live in tribal lands, but apart from their tribe’s homelands. Many tribes have lived adjacent to each other for thousands of years before being restricted to reservations, and often marry members of neighboring tribes. The Tribal Trust landbase in California is very small relative to the large ancestral landbase that California tribes once controlled, and tribal housing and employment opportunities are limited in the remaining tribal lands. Additionally, the state does not provide many services in Indian Country. Given the importance of the relationship between the state and Native American tribes, the state should reduce its taxation of the state’s first residents. The measure is narrowly tailored to apply only to earned income, such as wages and self-employment income, and does not include distributions from tribal gaming activities.”

GOVERNOR'S VETO MESSAGE:

I am returning the following two bills without my signature:

Assembly Bill 778

Senate Bill 289

Both of these bills create a new tax break. These bills are an end run of the budget process, and would commit us to spending more than eight million dollars through 2018-19.

The budget process allows for all tax break proposals to be weighed equally through public hearings, negotiations and, finally, approval of a balanced budget. As I said last year, I believe this is the best way to evaluate and prioritize all new spending proposals, including those that create new tax breaks.

ASSEMBLY FLOOR: 77-0, 9/12/17

AYES: Acosta, Aguiar-Curry, Travis Allen, Arambula, Baker, Berman, Bigelow, Bloom, Bocanegra, Bonta, Brough, Burke, Caballero, Calderon, Cervantes, Chau, Chávez, Chen, Chiu, Choi, Chu, Cooley, Cooper, Cunningham, Dababneh, Dahle, Daly, Eggman, Flora, Fong, Frazier, Friedman, Gallagher, Cristina Garcia, Eduardo Garcia, Gipson, Gloria, Gonzalez Fletcher, Gray, Grayson, Harper, Holden, Irwin, Jones-Sawyer, Kalra, Kiley, Lackey, Levine, Limón, Low, Maienschein, Mathis, Mayes, Medina, Melendez, Mullin, Muratsuchi, Nazarian, O'Donnell, Patterson, Quirk, Quirk-Silva, Reyes, Ridley-Thomas, Rodriguez, Rubio, Salas, Santiago, Steinorth, Mark Stone, Thurmond, Ting, Voepel, Waldron, Weber, Wood, Rendon

NO VOTE RECORDED: McCarty, Obernolte

Prepared by:

1/2/18 9:56:15

**** END ****

SENATE THIRD READING

STR Bill Id:SB 289

Author:(McGuire)

As Amended Ver:April 5, 2017

Majority vote

SENATE VOTE: 40-0

SUMMARY: Excludes income derived from "Indian country" received by a member of a federally recognized tribe who lives on any tribal land. Specifically, this bill:

1. Provides, beginning on or after January 1, 2017, that gross income shall not include "earned income" of an eligible individual.
2. Defines "earned income" as having the same meaning as provided in Internal Revenue Code Section 32(c)(2), but substitutes the phrase "but only if such amounts are includable in gross income for the taxable year" with "but only if such amounts would have been otherwise properly includable in gross income for the taxable year without regard to subdivision (a) and only to the extent that the earned income is derived from sources within Indian country in this state."
3. Defines an "eligible taxpayer" as an individual who is a member of a federally recognized Indian tribe in this state who resides within "Indian country" in California.
4. Defines "Indian country" as having the same meaning as provided for under Revenue and Taxation Code Section 30101.7.
5. Takes effect immediately as a tax levy.

EXISTING STATE LAW:

1. Imposes, in general, a tax on income of California residents, regardless of source.
2. Exempts income from taxation if a tribal member:
   1. Is enrolled in a federally recognized California Indian tribe, lives in the tribe's Indian country, and the taxpayer earned or received reservation source income from the same Indian country in which the tribal member lives and is enrolled in;
   2. Serves as an active duty U.S. military service member, receives military pay, and is stationed in California with orders to live outside of Indian country;
   3. Is retired from military service, receives a pension, and resides on their tribe's reservation; or,
   4. Lives outside of California and receives per capita income from California sources.
3. Imposes a tax on income if a tribal member:
   1. Receives or earns income outside of California or their member tribe;
   2. Receives or earns reservation sourced income but lives outside of Indian country but within California; or,
   3. Lives on their unaffiliated tribal member spouse's reservation.

EXISTING FEDERAL LAW:

1. Imposes, in general, a tax on income earned by Native Americans.
2. Imposes a tax on per capita gaming distributions to individual tribal members under the Indian Gaming Regulatory Act.

FISCAL EFFECT: According to the Assembly Appropriations Committee, annual General Fund revenue loss of $1.6 million in 2017-18, $1.0 million in 2018-19, and $1.0 million in 2019-20.

COMMENTS:

1. The author has provided the following statement in support of this bill:

California's income tax reaches too far onto the territory of sovereign nations by taxing the income of Native Americans who live in tribal lands, but apart from their tribe's homelands. Many tribes have lived adjacent to each other for thousands of years before being restricted to reservations, and often marry members of neighboring tribes. The Tribal Trust landbase in California is very small relative to the large ancestral landbase that California tribes once controlled, and tribal housing and employment opportunities are limited in the remaining tribal lands. Additionally, the state does not provide many services in Indian Country. Given the importance of the relationship between the state and Native American tribes, the state should reduce its taxation of the state's first residents. The measure is narrowly tailored to apply only to earned income, such as wages and self-employment income, and does not include distributions from tribal gaming activities.

1. Committee Staff Comments:
   1. Background: Generally, a tribal member living within the geographical boundaries of California is a resident of this state and is subject to California personal income taxes on his or her entire taxable income. McClanahan v. Arizona State Tax Commission (411 U.S. 164, 1974) is the first case that limited a state's ability to tax a tribal member's income if the tribal member received income wholly from reservation sources. The Court, in reaching its decision, explained that because the "appellant is an Indian and since her income is derived wholly from reservation sources, her activity is totally within the sphere which the relevant treaty and statutes leave for the Federal Government and for the Indians themselves."^[1] The holding in McClanahan had been read in subsequent cases as exempting tribal members from state income tax "whose source of income was from 'Indian Lands' and who resided on 'Indian Lands,' regardless of whether the sources of income and/or place of residence were lands set aside for a tribe in which he or she was a member."^[2] This was true until the Court in Washington v. Confederated Tribes of Colville Indian Reservation (447 U.S. 134, 1980), for the first time, concluded that a "state could distinguish between Indians residing on the lands of another tribe and those residing on their own tribal lands, and accord the same tax treatment to the former group as it accorded to non-Indians." The distinction in Colville was an important factor when the California Court of Appeal determined in Mike v. FTB that California had the authority to impose a tax on income received by tribal members living on a different tribe's reservation. In reaching this conclusion, the Court determined that the idea of sovereignty was limited only to tribal members and their activities if conducted within their own reservation. As such, case law has now made clear that an exemption from gross income is only provided if: i) the tribal member is enrolled in a federally recognized California Indian tribe, ii) the tribal member lives within his or her tribe's Indian Country, and iii) the tribal member earned or received reservation source income from the same Indian country in which the tribal member lives and is enrolled in.
   2. Flexibility: The rule for determining the taxability of income provides little flexibility for tribal members and fails to recognize the ways in which tribes have been merged, separated, and located throughout history. Some reservations are extremely small and provide little in terms of employment while others lack the infrastructure necessary to build suitable housing. As an example, the Twenty-Nine Palms Band of Mission Indians reservation consists of a 240-acre plot near the City of Coachella and a 160-acre plot near the City of Twenty-Nine Palms. The first plot of land consists of a casino and a parking lot built in 1995; the second plot is undeveloped desert land, with no connections to electrical, water, or sewer facilities. It is not surprising, therefore, that the plaintiff in Mike chose to leave her tribe's designated plot of land to find a more suitable living arrangement. Unfortunately, moving to more suitable reservations creates a kind of "moving penalty" when the act triggers a tax on income. Allowing tribal members to exclude income while living on a reservation that is not their own would at least eliminate the penalty and provide greater flexibility for tribal members seeking more suitable housing and employment opportunities.

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098 FN: 0001638

1. Id. ↑

2. Angelina Mike v FTB, 182 Cal. App. 4th 817, 2010 (emphasis added) ↑

Date of Hearing: July 19, 2017

ASSEMBLY COMMITTEE ON APPROPRIATIONS

Lorena Gonzalez Fletcher, Chair

SBPCA Bill Id:SB 289

Author:(McGuire) – As Amended Ver:April 5, 2017

Urgency: No State Mandated Local Program: No Reimbursable: No

SUMMARY:

This bill excludes from income for state tax purposes the earned income derived from Indian country, as defined, received by members of federally-recognized tribes who reside within any Indian country in California. This exclusion is effective beginning in the 2017 taxable year.

FISCAL EFFECT:

Annual General Fund (GF) revenue loss of $1.6 million in 2017-18, $1.0 million in 2018-19, and $1.0 million in 2019-20.

COMMENTS:

1. Background. Generally, a tribal member living in California is a resident of the state and is subject to California personal income taxes on his or her taxable income. However, the state cannot tax a tribal member’s income if that income comes from reservation sources. California courts have ruled that this sovereignty is limited only to tribal members and their activities if conducted within their own reservation.

As a result of the nuances of tribal sovereignty and reservation-sourced income, a three-part test determines whether a tribal member’s income is non-taxable under state law: a) The tribal member is enrolled in a federally recognized California Indian tribe; b) The member lives within that tribe’s boundaries; and c) The income is derived from sources within that tribe’s boundaries where the member also lives. The Assembly Committee on Revenue and Taxation’s analysis of SB 289 notes that the current policy has little flexibility and fails to recognize the ways in which tribes have been merged, separated, and located throughout history.

1. Purpose. The author argues that California’s income tax reaches too far into the territory of sovereign nations by taxing the income of Native Americans who live in tribal lands but apart from their tribe’s homelands. SB 289 allows income earned on other tribal lands to be nontaxable, thereby updating tax policy to reflect the realities of work opportunities across different tribes and family relationships between members of different tribes.

Analysis Prepared by: Luke Reidenbach / APPR. / (916) 319-2081

Date of Hearing: June 26, 2017

ASSEMBLY COMMITTEE ON REVENUE AND TAXATION

Sebastian Ridley-Thomas, Chair

SBPCA Bill Id:SB 289

Author:(McGuire) – As Amended Ver:April 5, 2017

Majority vote. Tax levy. Fiscal committee.

SENATE VOTE: 40-0

SUBJECT: Personal income taxes: gross income exclusion: reservation-sourced income

SUMMARY: Excludes income derived from "Indian country" received by a member of a federally recognized tribe who lives on any tribal land. Specifically, this bill:

1. Provides, beginning on or after January 1, 2017, that gross income shall not include "earned income" of an eligible individual.
2. Defines "earned income" as having the same meaning as provided in Internal Revenue Code Section 32(c)(2), but substitutes the phrase "but only if such amounts are includable in gross income for the taxable year" with "but only if such amounts would have been otherwise properly includable in gross income for the taxable year without regard to subdivision (a) and only to the extent that the earned income is derived from sources within Indian country in this state."
3. Defines an "eligible taxpayer" as an individual who is a member of a federally recognized Indian tribe in this state who resides within "Indian country" in California.
4. Defines "Indian country" as having the same meaning as provided for under Revenue and Taxation Code Section 30101.7.
5. Takes effect immediately as a tax levy.

EXISTING STATE LAW:

1. Imposes, in general, a tax on income of California residents, regardless of source.
2. Exempts income from taxation if a tribal member:
   1. Is enrolled in a federally recognized California Indian tribe, lives in the tribe's Indian country, and the taxpayer earned or received reservation source income from the same Indian country in which the tribal member lives and is enrolled in;
   2. Serves as an active duty U.S. military service member, receives military pay, and is stationed in California with orders to live outside of Indian country;
   3. Is retired from military service, receives a pension, and resides on their tribe's reservation; or,
   4. Lives outside of California and receives per capita income from California sources.
3. Imposes a tax on income if a tribal member:
   1. Receives or earns income outside of California or their member tribe;
   2. Receives or earns reservation sourced income but lives outside of Indian country but within California; or,
   3. Lives on their unaffiliated tribal member spouse's reservation.

EXISTING FEDERAL LAW:

1. Imposes, in general, a tax on income earned by Native Americans.
2. Imposes a tax on per capita gaming distributions to individual tribal members under the Indian Gaming Regulatory Act.

FISCAL EFFECT: The Franchise Tax Board (FTB) estimates general fund revenue losses of $1.6 million in fiscal year (FY) 2017-18, $1 million in FY 2018-19, and $1 million in FY 2019-20.

COMMENTS:

1. The author has provided the following statement in support of this bill:

California's income tax reaches too far onto the territory of sovereign nations by taxing the income of Native Americans who live in tribal lands, but apart from their tribe’s homelands. Many tribes have lived adjacent to each other for thousands of years before being restricted to reservations, and often marry members of neighboring tribes. The Tribal Trust landbase in California is very small relative to the large ancestral landbase that California tribes once controlled, and tribal housing and employment opportunities are limited in the remaining tribal lands. Additionally, the state does not provide many services in Indian Country. Given the importance of the relationship between the state and Native American tribes, the state should reduce its taxation of the state's first residents. The measure is narrowly tailored to apply only to earned income, such as wages and self-employment income, and does not include distributions from tribal gaming activities.

1. Proponents state that the FTB's three part test for gaining tax-exempt status "precludes registered tribal members from maintaining their tax-exempt status if they simply reside on or earn their income through a reservation of another tribe, and unfairly penalizes members of tribes that are unable to provide employment."
2. Committee Staff Comments:
   1. Background: Generally, a tribal member living within the geographical boundaries of California is a resident of this state and is subject to California personal income taxes on his or her entire taxable income. McClanahan v. Arizona State Tax Commission (411 U.S. 164, 1974) is the first case that limited a state's ability to tax a tribal member's income if the tribal member received income wholly from reservation sources. The Court, in reaching its decision, explained that because the "appellant is an Indian and since her income is derived wholly from reservation sources, her activity is totally within the sphere which the relevant treaty and statutes leave for the Federal Government and for the Indians themselves."^[1] The holding in McClanahan had been read in subsequent cases as exempting tribal members from state income tax "whose source of income was from 'Indian Lands' and who resided on 'Indian Lands,' regardless of whether the sources of income and/or place of residence were lands set aside for a tribe in which he or she was a member."^[2] This was true until the Court in Washington v. Confederated Tribes of Colville Indian Reservation (447 U.S. 134, 1980), for the first time, concluded that a "state could distinguish between Indians residing on the lands of another tribe and those residing on their own tribal lands, and accord the same tax treatment to the former group as it accorded to non-Indians." The distinction in Colville was an important factor when the California Court of Appeal determined in Mike v. FTB that California had the authority to impose a tax on income received by tribal members living on a different tribe's reservation. In reaching this conclusion, the Court determined that the idea of sovereignty was limited only to tribal members and their activities if conducted within their own reservation. As such, case law has now made clear that an exemption from gross income is only provided if: (i) the tribal member is enrolled in a federally recognized California Indian tribe, (ii) the tribal member lives within his or her tribe's Indian Country, and (iii) the tribal member earned or received reservation source income from the same Indian country in which the tribal member lives and is enrolled in.
   2. Flexibility: The rule for determining the taxability of income provides little flexibility for tribal members and fails to recognize the ways in which tribes have been merged, separated, and located throughout history. Some reservations are extremely small and provide little in terms of employment while others lack the infrastructure necessary to build suitable housing. As an example, the Twenty-Nine Palms Band of Mission Indians reservation consists of a 240-acre plot near the City of Coachella and a 160-acre plot near the City of Twenty-Nine Palms. The first plot of land consists of a casino and a parking lot built in 1995; the second plot is undeveloped desert land, with no connections to electrical, water, or sewer facilities. It is not surprising, therefore, that the plaintiff in Mike chose to leave her tribe's designated plot of land to find a more suitable living arrangement. Unfortunately, moving to more suitable reservations creates a kind of “moving penalty” when the act triggers a tax on income. Allowing tribal members to exclude income while living on a reservation that is not their own would at least eliminate the penalty and provide greater flexibility for tribal members seeking more suitable housing and employment opportunities.
   3. Gaming distributions: This bill defines "earned income" as wages, salaries, tips, and other employee compensation if the earned income is derived from sources within Indian country in California. This definition does not include gaming distributions since per capita gaming distributions from a tribe's gaming operations are not earned. Providing an exemption that excludes gaming distributions may cause confusion since tribal members may inadvertently assume that all income is excluded for state purposes so long as they reside on Indian country.
   4. New form: The FTB made available a new form in January to assist implementing the current exemption, and reduce incorrect enforcement notices, eliminate unnecessary contacts, and avoid future audits. Tribal members can file the Enrolled Tribal Member Certification (Form 3504) to declare their residency in Indian Country and their exemption from tax. Tribal members can file the certification directly or as part of their return when required to do so. The FTB also offers a separate tribal hotline number to connect experts on tribal taxation issues with affected taxpayers.

REGISTERED SUPPORT / OPPOSITION:

Support

California Taxpayers Association

Barona Band of Mission Indians

Opposition

None on file

Analysis Prepared by: Carlos Anguiano / REV. & TAX. / (916) 319-2098

1. Id. ↑

2. Angelina Mike v FTB, 182 Cal. App. 4th 817, 2010 (emphasis added) ↑

 THIRD READING  

Bill No: SB 289

Author:

:

Vote:

SENATE GOVERNANCE & FIN. COMMITTEE: 7-0, 3/29/17

AYES: McGuire, Nguyen, Beall, Hernandez, Hertzberg, Lara, Moorlach

SENATE APPROPRIATIONS COMMITTEE: 7-0, 5/25/17

AYES: Lara, Bates, Beall, Bradford, Hill, Nielsen, Wiener

SUBJECT:

SOURCE: Author

DIGEST:

This bill excludes income derived from Indian country received by members of federally-recognized tribes who live on any tribal land.

ANALYSIS:

Existing law:

1. Applies the personal income tax on all of its residents’ income, regardless of source, including Native Americans unless the income is derived from the reservation of the tribe in which they reside and are a member.
2. Excludes specified income of Native Americans, such as active duty U.S. military service members with orders to live outside Indian country, pension income of retired military service members who reside on their tribe’s reservation, and per capita income distributed to members living outside the state.

This bill:

1. Excludes income derived from or attributable to Indian country in California received by members of federally-recognized Indian tribes in California who also reside within any Indian country in the state for state tax purposes.
2. Applies only to wage and income subject to self-employment tax.
3. Defines “earned income,” “eligible individual,” and “Indian country.”
4. Applies beginning in the 2017 taxable year.

Background

The United States Constitution vests Congress with the authority to engage in relations with Indian tribes, sovereign nations that existed long before the founding of the Republic. This sovereignty was first affirmed in the 1832 by the United States Supreme Court in Worcester v. Georgia, 31 U.S. 515, which stated that “the Indian nations had always been considered as distinct, independent political communities retaining their original natural rights as undisputed possessors of the soil, from time immemorial.” As a result, state laws generally do not apply to Native Americans on their respective lands, except where expressly allowed.

Because of this sovereign status, Native Americans and their property located on their respective countries are generally not subject to state taxation. The Supreme Court affirmed these limits on state tax authority in McClanahan v. State Tax Commission of Arizona (1973) 411 U.S. 164, ruling that the State of Arizona has no jurisdiction to impose a tax on the income of Navajo Indians who (1) are members of the Navajo tribe, (2) reside on the Navajo land, and (3) whose income is wholly derived from Native American sources. However, the “McClanahan exemption” does not limit states from applying taxes on Native Americans who work, invest, or own property outside lands reserved exclusively for the use of their tribe. Courts have subsequently affirmed a state’s authority to extend its laws to Indians living away from their tribe’s lands.

This limitation on state tax powers does not affect federal taxation of the same income, which generally applies the same income tax laws to Native Americans residing on reservations as any other citizen, unless a federal law or a treaty creates one, such as the current income exclusion for general welfare payments. Tribes themselves and any of its wholly-owned corporations are exempt from tax; however, its members are not exempt, even though some tribes impose taxes on their members. Under the Indian Gaming Regulatory Act, any distribution of casino gaming proceeds to individual tribe members is subject to federal income tax. Additionally, while there are numerous valid treaties between various federally-recognized tribal governments and the federal government, the Internal Revenue Service states that these treaties have limited application to the specific tribe bound by the treaty.

California applies its personal income tax on all of its residents’ income, regardless of source. As a result, members of federally recognized tribes must pay tax on most income from any source other than the same tribal lands in which they live and are an enrolled member, including lands of other federally-recognized tribes, as this income does not meet McClanahan’s requirements of membership, residency, and source of income. Members pay tax on income even when they marry members of another tribe, and live on their spouse’s tribe’s lands. For example, a member of the Karuk tribe who married a Yurok Indian, and now lives on the Yurok land with her husband, must include in taxable income any wages she makes on either the Karuk or Yurok tribal lands. In response, many states have either specifically excluded any Indian country-derived revenue of any member of a federally-recognized tribe so long as they live on tribal lands, or exempted Native Americans from tax entirely. SB 289 exempts earned income derived from any tribal land in California by an individual who is a member of a federally recognized tribe.

FISCAL EFFECT: Appropriation: Fiscal Com.: Local:

According to the Senate Appropriations Committee, the Franchise Tax Board (FTB) indicates that this bill results in a General Fund revenue loss of $1.6 million in 2017-18, and $1 million annually thereafter. FTB’s administrative costs resulting from the bill have yet to be determined.

SUPPORT: (Verified 5/25/17)

Blue Lake Rancheria

California Nations Indian Gaming Association

California Taxpayers Association

Dry Creek Rancheria of Pomo Indians

Potter Valley Tribe

San Manuel Band of Mission Indians

Tolowa Dee-ni’ Nation

Tule River Indian Tribe of California

United Auburn Indian Community of the Auburn Rancheria

OPPOSITION: (Verified 5/25/17)

None received

ARGUMENTS IN SUPPORT: According to the author, “California’s income tax reaches too far onto the territory of sovereign nations by taxing the income of Native Americans who live in tribal lands, but apart from their tribe’s homelands. Many tribes have lived adjacent to each other for thousands of years before being restricted to reservations, and often marry members of neighboring tribes. The Tribal Trust landbase in California is very small relative to the large ancestral landbase that California tribes once controlled, and tribal housing and employment opportunities are limited in the remaining tribal lands. Additionally, the state does not provide many services in Indian Country. Given the importance of the relationship between the state and Native American tribes, the state should reduce its taxation of the state’s first residents. The measure is narrowly tailored to apply only to earned income, such as wages and self-employment income, and does not include distributions from tribal gaming activities.”

Prepared by:

5/27/17 18:48:47

**** END ****

SENATE COMMITTEE ON APPROPRIATIONS

Senator Ricardo Lara, Chair

2017 - 2018 Regular Session

SB 289 (McGuire) - Personal income taxes: gross income exclusion: reservation-sourced income

This bill meets the criteria for referral to the Suspense File.

Bill Summary:

SB 289 would exclude income derived from Indian Country received by members of federally-recognized tribes who live on any tribal land.

Fiscal Impact:

The Franchise Tax Board (FTB) indicates that this bill would result in a General Fund revenue loss of $1.6 million in 2017-18, and $1 million annually thereafter. FTB’s administrative costs resulting from the bill have yet to be determined.

Background:

Under federal law, Congress has the authority to engage in relations with Indian tribes. Consequently, state laws generally do not apply to Native Americans on their respective lands. Moreover, because of their sovereignty, Native Americans and their property located on their respective countries are generally not subject to state taxation. However, states can tax Native Americans who work, invest, or own property outside lands reserved exclusively for the use of their tribe.

Under California law, the personal income tax applies to all of its residents’ income, regardless of source. Consequently, members of federally recognized tribes must pay tax on most income from any source other than the same tribal lands in which they live and are an enrolled member, including lands of other federally-recognized tribes. State law excludes certain income, such as active duty U.S. military service members with orders to live outside Indian Country, pension income of retired military service members who reside on their tribe’s reservation, and per capita income distributed to members living outside the state. Members pay tax on income even when they marry members of another tribe, and live on their spouse’s tribe’s lands.

Proposed Law:

This bill would, beginning in the 2017 taxable year, allow American Indian tribal members living in Indian Country (as defined), whether their own or another tribe’s reservation, to exclude from gross income their earned income (as defined) that is derived from sources within any Indian Country in California.

Staff Comments:

U.S. Census data indicate that in 2015, approximately 325,000 Native Americans living in California were in the labor force. FTB assumes that 10,000 of these individuals reside in Indian Country, 1,000 of which do so on another tribe’s reservation and thus would earn income sourced from Indian Country that would be excluded from income under this bill.

Using Census data, it is estimated that the average earned income derived from sources within Indian Country in California for the California Native American population is approximately $20,000. Thus, FTB estimates that about $20 million would have been eligible for the bill’s income exclusion in 2015. FTB then further estimates that this amount has grown to $25 million in 2017. The department’s specific revenue estimates for the bill (1) assume a 4 percent average tax rate, and (2) calculate the revenue loss on a fiscal-year basis.

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SENATE COMMITTEE ON GOVERNANCE AND FINANCE

Senator Mike McGuire, Chair

2017 - 2018 Regular

Personal income taxes: gross income exclusion: reservation-sourced income

Excludes income derived from Indian Country received by members of federally-recognized tribes who live on any tribal land.

Background

The United States Constitution vests Congress with the authority to engage in relations with Indian tribes, sovereign nations that existed long before the founding of the Republic. This sovereignty was first affirmed in the 1832 by the United States Supreme Court in Worcester v. Georgia, 31 U.S. 515, which stated that “the Indian nations had always been considered as distinct, independent political communities retaining their original natural rights as undisputed possessors of the soil, from time immemorial.” As a result, state laws generally do not apply to Native Americans on their respective lands, except where expressly allowed.

Because of this sovereign status, Native Americans and their property located on their respective countries are generally not subject to state taxation. The Supreme Court affirmed these limits on state tax authority in McClanahan v. State Tax Commission of Arizona (1973) 411 U.S. 164, ruling that the State of Arizona has no jurisdiction to impose a tax on the income of Navajo Indians who (1) are members of the Navajo tribe, (2) reside on the Navajo land, and (3) whose income is wholly derived from Native American sources. However, the “McClanahan exemption” does not limit states from applying taxes on Native Americans who work, invest, or own property outside lands reserved exclusively for the use of their tribe. Courts have subsequently affirmed a state’s authority to extend its laws to Indians living away from their tribe’s lands.

This limitation on state tax powers does not affect federal taxation of the same income, which generally applies the same income tax laws to Native Americans residing on reservations as any other citizen, unless a federal law or a treaty creates one, such as the current income exclusion for general welfare payments. Tribes themselves and any of its wholly-owned corporations are exempt from tax; however, its members are not exempt, even though some tribes impose taxes on their members. Under the Indian Gaming Regulatory Act, any distribution of casino gaming proceeds to individual tribe members is subject to federal income tax. Additionally, while there are numerous valid treaties between various federally-recognized tribal governments and the federal government, the Internal Revenue Service states that these treaties have limited application to the specific tribe bound by the treaty.

California applies its personal income tax on all of its residents’ income, regardless of source. As a result, members of federally recognized tribes must pay tax on most income from any source other than the same tribal lands in which they live and are an enrolled member, including lands of other federally-recognized tribes, as this income does not meet McClanahan’s requirements of membership, residency, and source of income. State law excludes some income not subject to the McClanahan exemption, such as active duty U.S. military service members with orders to live outside Indian Country, pension income of retired military service members who reside on their tribe’s reservation, and per capita income distributed to members living outside the state. Members pay tax on income even when they marry members of another tribe, and live on their spouse’s tribe’s lands. For example, a member of the Karuk tribe who married a Yurok Indian, and now lives on the Yurok land with her husband, must include in taxable income any wages she makes on either the Karuk or Yurok tribal lands. In response, many states have either specifically excluded any Indian Country-derived revenue of any member of a federally-recognized tribe so long as they live on tribal lands, or exempted Native Americans from tax entirely.

Seeking to limit the state’s taxing powers onto tribal lands, the author wants to exempt earned income derived from any tribal land in California by an individual who is a member of federally recognized tribe.

Proposed Law

Senate Bill 289 excludes from the income derived from or attributable to Indian Country in California received by members of federally-recognized Indian tribes in California who also reside within any Indian County in the state. The measure applies only to wage and income subject to self-employment tax. The bill defines “earned income,” “eligible individual,” and “Indian Country,” and applies beginning in the 2017 taxable year.

State Revenue Impact

According to the Franchise Tax Board (FTB), SB 289 results in revenue losses of $1.6 million in 2017-18, $1 million in 2018-19 and 2019-20.

Comments

1. Purpose of the bill. According to the author, “California’s income tax reaches too far onto the territory of sovereign nations by taxing the income of Native Americans who live in tribal lands, but apart from their tribe’s homelands. Many tribes have lived adjacent to each other for thousands of years before being restricted to reservations, and often marry members of neighboring tribes. The Tribal Trust landbase in California is very small relative to the large ancestral landbase that California tribes once controlled, and tribal housing and employment opportunities are limited in the remaining tribal lands. Additionally, the state does not provide many services in Indian Country. Given the importance of the relationship between the state and Native American tribes, the state should reduce its taxation of the state’s first residents. The measure is narrowly tailored to apply only to earned income, such as wages and self-employment income, and does not include distributions from tribal gaming activities.”

2. Revenue loss. SB 289’s expands a current exclusion from income for wages and other income that is taxable under current law. As a result, the state will have to reduce spending or increase taxes to match the amount of foregone revenue.

3. Recent appeals. In 2007, the Fourth District Court of Appeal considered the appeal of Angelina Mike, an enrolled member of the Twenty-Nine Palms Band of Mission Indians. Mike did not live on her tribe’s reservation, but instead of the reservation of a different one, where she received distributions from her tribe’s gaming activities. Mike argued that because she still lived on Indian lands only 18 miles from her tribe’s reservation, the exemption applied. The Court affirmed the trial court ruling against Mike, stating that an essential ingredient for the exemption, her residence on the lands set aside for the tribe in which she is a member and from which the income derived, is necessary for the exemption. The Board of Equalization applied the ruling in when it ruled for FTB in the Appeal of Clifford and Deanna Marshall in 2015. SB 289 would remove the distinction between her tribe’s reservation and Indian Country generally which made Mike ineligible for the exemption, but the measure would not have changed the court’s decision because it does not exclude distributions from tribal gaming activities from tax. Instead, the bill applies directly to the facts in the BOE case, which only involved earned income.

4. New form. FTB made available a new form in January to assist implementing the current exemption, and reduce incorrect enforcement notices, eliminate unnecessary contacts, and avoid future audits. Tribal members can file the Enrolled Tribal Member Certification (Form 3504) to declare their residency in Indian Country, and their exemption from tax. Tribal members can file the certification directly, or as part of their return when required to do so. FTB also offers a separate tribal hotline number to connect experts on tribal taxation issues with affected taxpayers.

5. Technicals. FTB and Committee Staff recommend the following technical amendments:

• Move the quotation mark after “year” on P.2, L.9 to after “state” on P. 2, L.11
• On P.2, L.10, strike “, or attributable to,”
• Strike references to “eligible person” and “eligible individual,” and replace with “eligible taxpayer.”

Support and Opposition

(3/24/17)

Support: Blue Lake Rancheria, California Nations Indian Gaming Association, California Taxpayers Association, Dry Creek Rancheria of Pomo Indians, Tule River Indian Tribe of California, United Auburn Indian Community of the Auburn Rancheria.

Opposition: None received.

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