Extras on Excise: Statutory Analysis in Fuel Tax Case Takes Center Stage at SCOTUS


On Oct. 30, the U.S. Supreme Court heard oral arguments in Washington State Dept. of Licensing v. Cougar Den, Inc. The case hinges on whether Washington’s motor fuel tax applies to the possession of fuel, or rather, its transportation—a decision that will require the court to interpret Wash. Rev. Code § 82.38.030(9)(c), the statute imposing a tax on motor fuel in the state. Also for the court to decide is whether a Native American treaty preempts this tax from being collected from certain entities.

The tax applies at the time motor fuel is removed through in-state pipelines and other methods, and when fuel “enters into [Washington] state for sale, consumption, use, or storage, unless the fuel enters th[e] state for direct delivery to an international fuel tax agreement licensee under § 82.38.320, if … the entry is by bulk transfer and the importer is not a licensed supplier; or the entry is not by bulk transfer.” When the case was before Washington’s Supreme Court, the majority interpreted the tax to be on the transportation of fuel, finding that its application to the Yakama Nation was preempted by a tribal treaty provision protecting the right to travel.

Will the U.S. Supreme Court decide that this tax is imposed on transportation or instead the possession of fuel? The answer the court chooses will shape not only the state’s taxing powers but also the parameters of treaties with Native American tribes.

Legislative Purpose or Taxable Activity?

In her questioning of Adam Unikowsky, counsel for Yakama-incorporated Cougar Den, Justice Elena Kagan commented that the outcome of the case depends on how one views the case: whether by focusing on the taxable activity or on “the full scope of activities that the state is trying to tax and why they have this tax.”

Unikowsky responded by arguing the importance of looking at the specific activity being taxed. Under the Yakama Nation Treaty of 1855, the Yakama people have the right to travel on public highways and take goods to market without being subject to taxation “regardless of whether this tax is styled as one on possession or transportation.” The company imports the fuel to the state for sale by trucking it via roads, which is an activity protected under that treaty; ergo, Unikowsky asserted, the tax infringes on this right.

While hearing from Washington state Solicitor General Noah Purcell about the tax being on possession, the court made comments that highlight Unikowsky’s point. In response to Purcell’s statements regarding the tax imposed on possession, Kagan said, “[s]o if Jack says I’m taking my pigs to market, and somebody says, what are you doing, Jack? He says, well, I’m taking my pigs to market. No, I think you’re possessing your pigs, Jack.”

During Purcell’s speaking time, he instead analyzed the tax’s purpose, saying, “Cougar Den and the Yakama Nation are free to use the highway and not pay this tax. What they can’t do is possess fuel and bring it into the state or purchase it in the state without paying the tax.”

Native American Tribal Exemptions from Taxes

Native American sovereignty and immunity from state tax law is a complicated subject, and this is not the first Supreme Court case in recent years dealing with tribal exemptions from gasoline tax. Wagnon v. Prairie Band Potawatomi Nation in 2005 upheld state fuel taxes because the incidence of the tax fell on non-tribal distributors’ receipts of fuel off the reservation; the tribe had argued that because the language of the statute said the tax was imposed on the “‘use, sale, or delivery’” of the fuel, this was an impermissible tax on the delivery to the tribe.

In her SCOTUSBlog analysis of the case at hand, University of Connecticut law professor Bethany Berger explains that “[i]f … the ‘legal incidence’—essentially the ultimate legal liability—to pay the tax falls on non-Indians, states may impose taxes unless they are pre-empted under a distinctive balancing test that considers the broad purposes of federal law.” Otherwise, non-discriminatory state taxes apply to Native Americans outside of reservations except as preempted by federal law.

Purcell began his oral argument by stating the tax meets this second requirement—the tax is non-discriminatory, with the incidence occurring off reservations, and that the treaty, which says “the right of way, with free access from the same to the nearest public highway is secured to [the Yakama]; as also the right in common with citizens of the United States, to travel upon all public highways,” does not specifically preempt “non-discriminatory taxes that apply equally to everyone.”[1]

Now the Wait for a Decision Begins

Relying on Supreme Court precedent that treaty disputes must be interpreted as the tribes would have understood them, the Washington Supreme Court ruled in favor of Cougar Den based on the “historical significance of travel to the Yakama Indians.” The Supreme Court gave no indication during oral arguments of how it may decide; the justices put counsel for both sides through their paces with detailed hypotheticals, as Bloomberg Tax’s Emma Beyer reports. However, the decision will likely have an impact on state tax limitations on Native Americans. While Berger notes that only two other tribes have similar treaties, “[t]he stakes may be bigger for federal Indian law generally,” as many of the amicus curiae seek to limit off-reservation exemptions for tribal members.

Continue the discussion on Bloomberg Tax’s State Tax Group on LinkedIn: Which side’s arguments do you find most persuasive and why?

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[1] Berger notes that Washington state amended its laws to shift the legal incidence after a federal court determined the incidence was on tribal members.