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Eighth Circuit Rules South Dakota Can Tax Casino Work

South Dakota is allowed to tax the renovation of a Native American casino by a nontribal contractor, a divided Eighth Circuit panel ruled Friday.

(CN) – South Dakota is allowed to tax the renovation of a Native American casino by a nontribal contractor, a divided Eighth Circuit panel ruled Friday.

And in a separate opinion, the St. Louis-based federal appeals court also found that the state can condition the renewal of alcohol licenses on the tribe’s payment of a valid tax.

The Flandreau Santee Sioux Tribe operates the Royal River Casino & Hotel on its reservation near Flandreau, South Dakota. In addition to slot machines and table games, the facility includes a restaurant, bar and live entertainment venue.

After a larger rival casino opened in 2011, the tribe planned a $24 million renovation and expansion of its facility. The tribe and South Dakota agreed that the casino could double its number of slot machines.

The Henry Carlton Co. performed the renovation, which would be subjected to the state’s 2% excise tax if the casino were not located on a Native American reservation.

The state’s Department of Revenue twice denied Carlton’s request for a tax exemption, which is sometimes allowed on the construction of tribal government buildings and schools on the reservation.

Carlton paid the tax under protest and asked South Dakota to refund the money to the tribe. When the state refused, the tribe took it to court.

A federal judge ruled that the tax is preempted by the Indian Gaming Regulatory Act for a pair of reasons: the law comprehensively regulates gaming on tribal lands, and the tribe would be unable to operate its casino without the construction project.

However, the Eighth Circuit reversed that decision Friday in an opinion written by U.S. Circuit Judge James Loken.

“The absence of a compact provision addressing the state’s contractor gross receipts tax does not evidence congressional intent to preempt state taxation of the gross receipts of nonmember construction companies renovating tribal casinos,” he wrote.

Loken disagreed with the lower court’s finding that the tribe’s independence related to gaming outweighs the state’s interest in taxing the renovation work on the casino.

He called the fee a “one-time tax on nonmember contractor construction services in expanding and renovating the casino’s realty, some of which are performed off the reservation.”

“This tax hardly implicates the relevant federal and tribal interests,” the judge wrote.

He also noted that the total amount of the tax would be $480,000.

“While substantial, that is only a small percentage of the gross casino revenues generated in 2016 and 2017 alone,” wrote Loken, who was joined in the majority by U.S. Circuit Judge Steven Colloton.

U.S. Circuit Judge Jane Kelly dissented from her colleagues.

“The tribe’s interest in retaining this $480,000 is substantial, and it outweighs the state’s interest in raising additional revenue for its general fund,” she wrote.

In the second ruling regarding liquor licenses, the tribe challenged the state’s denial of licenses for its casino and First American Mart. The state’s action was based on the tribe’s failure to pay use tax on goods and services, which were purchased mostly by nontribal members.

While nothing that the lower court properly determined that federal law preempts the tax on amenities at the casino, Loken stated that South Dakota has the power to withhold the liquor licenses.

“The tribe has failed to meet its burden to demonstrate that the state alcohol license requirement is not reasonably necessary to further its interest in collecting valid state taxes,” he wrote.

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