Negotiating “Tax Peace”: Best Practices in Tribal Fuel Taxation Agreements

Tribal fuel sales to tribal members are exempt from state fuel taxes under the current interpretation of federal law; the exemption can make it difficult for states to track tribal fuel sales because they typically track fuel upon taxation. FHWA has an interest because state fuel sales reports serve as a baseline for federal apportionments, and incomplete reporting could introduce bias. In addition to reporting concerns, states are under public pressure to ensure that tribal fuel retailers do not gain competitive advantage by selling fuel without the tax applied. Tribes, for their part, carefully guard their sovereignty on this issue, although many tribes still lack statutes governing tribal fuel taxation. This study investigated agreements on reporting and taxation between states and tribes, including recent legal cases, and developed a typology of agreement types. Researchers obtained input from tribal and state representatives in 12 states, most of whom reported resolution of fuel tax issues through one of three types of agreements. Under the most common type of agreement, tribes purchase fuel within the state's taxation system and receive refunds of the estimated revenue from tribal member purchases. Under the second most common type of agreement, tribes assess a fuel tax directly on distributors and report sales to the state. In general, tribes and states were positive about the agreements, saying they had contributed to increased cooperation between states and tribes, supported economic development on tribal lands by providing a revenue source for tribes, and created an equal taxation environment for the state.