Motor Fuel and the Highway Trust Fund

American Indian Sales of Motor Fuel:
Assessment of Reporting and Policy Recommendations

3.0 Best Practices in Agreements on Tribal Fuel Sales

The research and analysis contained in this report has addressed the issue of reporting of American Indian sales of motor fuel. The concern for FHWA is that inaccurate tallies of gallons sold could create bias in the attribution process utilized in apportioning resources from the Highway Trust Fund to each state. The research by the Project Team has found the following:

• In general, the majority of states do not identify themselves as facing reporting issues with respect to tribal sales. For many states this simply reflects the fact that no tribal sales take place there; for others, it is a reflection of the fact that existing reporting agreements, often combined with state taxes being levied on all fuel entering the state, result in a satisfactory level of reporting accuracy.
• However, varying degrees of reporting issues appear to exist in several states. Data on tribal fuel sales is incomplete in these states, and the magnitude of the issue is estimated indirectly. The team examined one such area, New York State, and concluded that under-reporting is likely.
• If all of the sales of the major retailers on tribal lands in New York are unreported, this would account for 0.5 percent of state gasoline sales.
• In general, where issues exist, a factor that is consistently observed is the lack of a successful reporting agreement between states and tribal governments. While this is not the only factor, reporting agreements become increasingly important when one recognizes their close relationship with improved communication generally between the various parties

Given the role of reporting agreements on this issue, this section draws conclusions from previous sections and provides a summary of best practices that can serve as a guide for further improving reporting between all states and tribal governments.

As sovereignty of tribal governments is the basis for state-tribal relations, the best manner to ensure accurate reporting is to establish successful reporting agreements (which generally take the form of the tax compacts described in Section 1.7.3, Section 2 and in summary form below) between states and tribal governments. this may require structuring good incentives to generate a "win-win" outcome. specifically, it is important to recognize the benefits (as well as potential downside) for each of the parties if the reporting of fuel sales is improved in states where there are currently issues of under-reporting.

Successful reporting may well have its greatest benefits in terms of helping to improve relations between the tribes and states involved. If the reporting improvement leads to an increased estimate of fuel sales, the state itself may receive additional Federal-aid Highway funds through the attribution process. this means that state departments of transportation and the state government may tend to see improved reporting as a benefit in increasing transportation resources.

Improved relations with states should benefit tribal residents generally. Findings in Section 2 suggest that improved relations with the state improve necessary cooperation between the governments. Also, tribal residents should also benefit to a degree if a state finds that reporting increases its share of Federal funds. two points must be raised that mitigate the benefit to tribal residents: First, individuals could face an increased burden if they are required to report their fuel sales for a refund as part of a reporting agreement. Second, actual additional funds that would follow improved reporting could, due to the relatively small roadway and population shares on reservations, be quite small. Discussions with tribal representatives showed this to certainly be the perception.

3.1 Overview of Types of Agreements

Agreements between tribes and states on fuel sales reporting can take various forms, as demonstrated by the Task 2 research. Typically the problem of unreported fuel sales on tribal lands is caused by tribal retailers purchasing fuel outside of the state's taxation and reporting system because of the tribal exemption from state fuel taxes. Agreements provide for tribal retailers to stay within the state's system, or report their purchases and sales through another route. these two options are described as "non-exceptional" or "exceptional." If the fuel comes to the retailer "non-exceptionally," it arrives via the same route as any other fuel retailers' goods arrive, tracked and taxed at the rack or distributor level, or on first import. In effect, it is not distinguishable by the state at any point in its distribution, and is typically not tracked separately from other fuel sales at all. In contrast, with "exceptional" sales tracking, the tribal fuel distribution and sometimes tribal retail sales are tracked separately from other fuel distribution and sales, and the state typically maintains separate records.

In addition to being classified by the way that they track tribal fuel sales, agreements are differentiated on how they provide tribes with an exemption from the state fuel tax. As mentioned above, sales to tribal members on tribal lands are exempt from state fuel tax. Several court cases have upheld this exemption. although one case is currently pending at the U.S. Supreme Court, the states in this survey with agreements responded to existing court decisions in their Negotiations. Agreements support individual refunds, tribal refunds, or tax parity. The two agreements with refunds (individual and tribal) first assess the tax on the fuel, and then provide a refund to the individual or tribe. Under tax parity agreements, by contrast, tribes assess their own fuel tax on fuel sales on tribal lands, in the same amount as the state's fuel tax.

Characteristics of the three main agreement types are presented below, with comparisons across the three types. Agreements are described in more detail below.

Source: ICF Consulting

*Fuel sales on tribal lands may be either reported explicitly to the state by retailers on tribal lands, or can be accounted for through reporting at other points in the fuel supply chain, such as through terminal operators or distributors.

A. Non-Exceptional Agreement with Individual Refunds

Under this type of agreement, the state does not distinguish tribal fuel sales from any other fuel sales. Tribal retailers agree to purchase fuel within the state's system, just as any other retailer would. The advantage of an agreement such as this for the state is that it disallows tribal retailers from purchasing fuel ex-tax, for example by importing fuel from another state without reporting it. In order to exempt tribal member sales, the state allows individual tribal members to apply for refunds for the state fuel tax on their private fuel purchases. in this sense the agreement creates a situation similar to other individual exemptions, such as a farmer applying for an off-road fuel use exemption.

While this type of agreement was reported in Arizona, and in Michigan (not surveyed directly), the administrative burden is unclear. In addition, while arizona reported this type of arrangement with tribes that did not have any other type of agreement, it is unclear whether members of those tribes take advantage of the individual refunds. Michigan was reported to have this type of agreement with tribes, but was not surveyed directly as part of this study. in both cases, the administrative burden for the state of processing individual requests for refunds was unclear.

For tribal governments already using a different type of agreement, the non-exceptional arrangement with individual refunds may not be appealing. Because the refunds in this case go to individuals, tribal governments do not receive any direct benefit. It is also unclear how many individuals actually apply for the refunds, meaning that many tribal members de facto pay the state fuel tax.

B. Non-Exceptional Agreement with Tribal Refunds

Non-exceptional agreements with tribal refunds were the most frequently encountered agreement in the case studies. Under these agreements, tribal fuel sales are made within the state's existing fuel sale reporting and taxation system. Tribes agree to require their retailers to purchase fuel with the state fuel tax included, just as any other retailer in the state. Since most states track fuel sales through their taxation system, tribal sales are then included in the state's total. States with this type of agreement include Arizona (some tribes), Iowa (some tribes), Minnesota, Montana, Oklahoma, South Dakota, and Washington.

In return for agreeing to pay the state's fuel tax, the tribes receive a refund from the state based on an estimated amount of fuel sold to tribal members on tribal lands. The amount estimated is typically based on a negotiated formula, for example estimated fuel use per capita multiplied by the number of tribal members living on the reservation lands, though each formula is slightly different. more detail on the formula used by each state with this type of agreement is provided in Section 2.

Non-exceptional agreements with tribal refunds are advantageous because they carry a low administrative burden, compared to an agreement where tribal fuel sales are actually tracked gallon for gallon. At the same time, the state is assured that tribal fuel sales include the state gas tax amount in their price, calming concerns that tribal retailers could have a competitive advantage over Non-tribal fuel retailers. The state is also assured that tribal fuel sales are tracked along with other fuel sales in the state, and that the state apportionment from the Federal-aid Highway program will be unbiased. These agreements sometimes place restrictions on tribal use of these revenues, requiring the funds to be used for governmental purposes.

For tribes, these agreements provide a source of revenue, often with low or No administrative costs to the tribal government. However, because some tribes give up their ability to sell fuel ex-tax to all customers through these agreements, they do not necessarily see an agreement as a net economic gain. In order to lessen the net economic loss, some states refund tribes a share of revenue from Non-tribal member sales as well as the revenue from member sales. In Minnesota, for example, the state refunds an estimate of total tribal member sales to the tribes, along with 50 percent of the remaining revenues from tribal lands sales. for this agreement to work, tribal retailers in Minnesota report total fuel sales, gallon for gallon.

Tribal governments and states value the economic and taxation stability in these agreements, despite the fact that, for the most part, both sides perceive them as net revenue losers. Because tribal governments receive revenue directly from the agreements, however, they are motivated to honor them. In Montana, the agreements between the state and tribes can be cancelled by either party with 30 days' notice, and have been in existence for 12 years. States, which are often motivated by public criticism of ex-tax sales on tribal lands, have found this type of agreement to be successful in eliminating ex-tax sales.

Some tribes also pointed out in interviews that because tribal governments are responsible for public services on reservation lands, including roadway maintenance, the revenue to the tribal governments may provide a net benefit since it supports local infrastructure.

Tribal sovereignty is a key philosophical issue for tribes as they evaluated agreements for this study. Regardless of fiscal benefits, several tribes that use this type of agreement emphasized that it was difficult to negotiate because of concerns that it would weaken the tribe's power to self-govern and self-tax. in most states, these agreements require the tribe to enact a "like tax," that is a tax in the same amount as the state fuel tax, even though in practice the state collects the fuel tax from distributors or suppliers. Through this mechanism, tribal members are legally paying a tribal tax, not the state fuel tax, and the state makes a transfer payment to the tribe on the estimated amount of the tribal tax.

Finally, one advantage of this type of agreement is that in negotiation, a very fine-tuned mechanism can be created to estimate the amount of tax due to the tribal government, without increasing the administrative burden on either the state or the tribe. Several tribal and state representatives emphasized the unique situation of each tribe, making the flexibility of this type of agreement an advantage.

C. Exceptional Agreement with Tax Parity

Under an exceptional agreement with tax parity, tribes report fuel sales on tribal lands separately from other fuel sales. This exceptional process can take different forms, ranging from a circumscribed process enacted statewide, to a reporting mechanism specific to individual tribes. In New Mexico, licensed indian distributors report tribal fuel sales to the state, showing how much fuel was sold to tribal retailers and showing proof that they paid the tribe's fuel tax. In Nebraska, a tribal corporation functions both as the distributor and retailer and reports directly to the state on all imports, sales and exports. in Arizona, only one tribe has this type of agreement with the state, and it has a special arrangement with the state because it imports most of its fuel from its own territory in a different state.

The reporting under this type of agreement is somewhat more complicated, and tends to carry a higher administrative burden. Under the New Mexico system, which was implemented in 2002, the state is ironing out problems and inefficiencies in the reporting system. Tribes in New Mexico are also required to collect a fuel tax in the same amount as the state's on all gallons distributed to retailers on their lands. This process requires each tribe to have a tax administration system, again with some administrative burden.

The tax parity requirement in these agreements demands that the tribe enact its own fuel tax and administer it, rather than purchasing and selling fuel through the state's taxation and reporting system. This is preferable for some tribes because it confers both greater tribal sovereignty, and in some cases a larger percentage of revenues from fuel sales on tribal lands. In New Mexico, tribes retain all revenue from fuel sales on tribal lands. This is not the case in Nebraska, however, where tribes negotiated a percentage share with the state. a New York agreement that was reported to be in negotiations would provide for the tribe to keep all revenue from fuel sales taxes as well.

For states, the main advantage of the exceptional agreement with tax parity is the ability to create an equitable fuel taxation environment. Administratively and revenue-wise, it can easily be a net loss for the state, depending on whether the tribe retains all revenue from the fuel taxes. The administration of a large Number of special reports from tribal distributors and/or retailers can also be quite burdensome, depending on the level of economic activity on tribal lands. the state is also dependent on ongoing cooperation from tribes in order to conduct audits and other checks on the system.

The state with the largest number of tribes in this arrangement is New Mexico. New Mexico is an exceptional state in this study for several reasons, the most significant being that this arrangement is actually the result of state legislation, and not the result of agreements with individual tribes. This solution was created by the Governor's office in 1999, and added to in 2001, in order to bring to a halt a contentious situation surrounding fuel taxation on tribal lands. The legislative arrangement has reportedly been successful in eliminating ex-tax fuel sales, but the larger success story of this arrangement is that it has solved what seemed, for some time, to be an intractable issue for this state. for tribes, many see this arrangement as a net positive because it has not only provided for tribal revenue, but also provided for "tax peace," thus allowing for attention to other issues and for increased interest in economic development from outside companies on tribal lands. For example, one tribe reported that after the legislation passed, a brand-name fuel retailer opened on tribal lands for the first time.

In general, the tribes appreciate this type of agreement because it confers greater sovereignty on the tribe in the arrangement. Tribal members are able to avoid any payment of the state fuel tax, however temporary, and tribal retail operations are able to avoid differentiating sales to tribal members from non-member sales. The largest concession tribes make in this type of agreement is to levy a tribal fuel tax in the same amount as the state fuel tax, giving up any ability to market a tax exemption for economic development.

3.2 Most Effective Agreements

Most of the states surveyed as part of this study said that they have no issues with tribal fuel sales reporting. Of the thirteen states identified in the 2002 FTA Survey of American Indian Issues as having problems with ex-tax sales, eight were contacted for this study, of which five reported that they currently have no problems with ex-tax sales. Of the remaining three, two have outstanding issues (New York and Iowa), and one has an indeterminate status (Arizona). In that sense, all of the agreements described here are effective from the point of view of the states. The fact that the situation in these five states has changed since 2002 supports the notion that, with some effort, a state can come to an agreement with tribes which eliminates ex-tax sales and produces an equitable taxation environment.

However, as was emphasized by several tribes and states consulted as part of the case studies, each tribe has a unique history and unique needs in the present day. The various agreements that states have reached with tribes in essence represent different solutions to different problems (the central types of agreements are described above in 3.2). Nevertheless, the study found that there are general points of consensus on the best way to track tribal fuel sales for states, and general lessons can be applied to solving specific types of problems.

The agreements with the lowest administrative burden were found by far to be the non-exceptional agreements with tribal refunds. these agreements restrict tribal retailers to purchasing fuel within the state's system, placing them in the same position as any other fuel retailer in the state in terms of tracking. Arguably, tribes also receive the highest benefit from these agreements without incurring their own administrative burden. In some ways, these agreements function like a revenue-sharing provision. The only cost tribes bear is the lost opportunity to market a tax exemption for economic development purposes. Several states contacted as part of this study, including washington and Montana, praised these agreements as stable and easy to administer.

On the other hand, in these and other agreements, specific problems were addressed in negotiations that may be of interest to other states and tribes.

Representation of tribal membership, Census counts, or per capita mileage unclear. In some cases, tribal representatives said that figures used in the formulas for estimating tribal refunds were undercounting actual tribal members or their travel patterns. Because the formulas are negotiable, they often include general provisions to account for these differences. In Montana, the agreement calls for a 20 percent higher per capita mileage than the state average for tribal members. In Washington, the state expanded the definition of those exempt to include tribal members living near the reservation, defined generally as adjacent counties.

Intractable tribal sovereignty conflicts. Some tribes refuse to even partially or provisionally subject fuel sales on tribal lands to state taxes. In some cases, this is due to historical conflicts between the state and a particular tribe. In one such case in the state of Washington, a tribe entered into a federal consent decree because of historical conflicts with the state.

Intractable statewide conflict. In New Mexico, tribes and the state all reported that the issue of state fuel taxation had become an intractable conflict that was not making progress, was keeping state legislators from addressing other issues, and was creating an unstable taxation situation in and near tribal lands. In 1999, the state reached a negotiated agreement with all 23 tribes in the state, which was enacted through legislation. This approach of not having to negotiate with each of the tribes individually allowed for a swifter resolution of the issue. It depended on a consensus amongst tribes as to the nature of the agreement. After the legislation, the Governor created a gas tax working group to bring together opposing parties to work on common problems, such as tax evasion and reporting irregularities. The group includes representatives from tribes, the convenience store industry, fuel distributors, and others. The state reported that the legislation eliminated ex-tax sales, though not immediately.

Impending litigation. In Nebraska, the state reached a level of conflict with one tribe that could have easily led to protracted litigation. The tribe had announced its intention to sell fuel ex-tax to all customers, aware that although courts had only upheld tribal member exemptions, there was no established method of distinguishing customers' tribal status at the cash register. To reduce the potential costs and burdens associated with a long term conflict, the state proactively pursued an agreement that would eliminate ex-tax sales and provide full reporting, while allowing the tribe to retain control of the fuel sales on its lands.

3.3 Implementation Recommendations for FHWA, States and Tribes

Recommendations for FHWA

As the final user of state-level fuel reporting data, FHWA has an interest in helping states reach agreements with tribal governments. Some potential areas of involvement include the following:

Documentation of case studies: FHWA could provide detailed case studies of reporting best practices. These could be more detailed documentation for a few of the best states identified in the current study, as well as some not surveyed here. This could take the form of a booklet containing documentation of all of the case study states, or it could be a separate brochure for each of the several case study states.

Negotiation assistance: FHWA may be able to assist in the negotiation process between states and tribal governments. FHWA experts have experience working with tribal governments both on transportation planning and impact assessments (Office of Environment and Planning) and administering Federal Lands projects under the Indian Reservation Road Program. FHWA could also ease the process for the negotiating parties by entering negotiations as a neutral third party.

Presentations: At appropriate venues, such as national meetings of AASHTO, iTA, FTA, and others, the FHWA could make presentations on the importance of fuel data and the role of cooperation (including agreements) in improving the quality of fuel data reporting. This is a traditional role served by FHWA on a variety of issues important to the Federal-aid Highway Program.

Acting as a clearing house for agreements: The FHWA can serve as a clearing house or promote a clearing house in AASHTO for agreements and case studies on fuel data reporting. The FTA could serve as a clearing house, but state dOTs are more usually comfortable with FHWA acting in such a role.

Working with BIA: The FHWA has a long standing relationship with the bureau of Indian Affairs through administration of the Indian Reservation Road program. The FHWA could work with the BIA to provide information to tribes on fuel reporting issues.

Recommendations for States and Tribes

Court cases have been fairly consistent on the issue of tribal taxation. In essence, court decisions provide for the exemption of tribal member purchases on tribal lands. No court case has upheld exemptions for non-member purchases, but the method for discerning member from non-member purchases has not been established. In fact, this discrimination has been a major issue for tribes, which have generally refused to make the differentiation at the cash register. this leaves some grey area regarding non-member purchases on tribal lands, and this is the essence of the problem that can only effectively be solved through a negotiated agreement between states and tribes.

In order to come to a negotiated agreement, each party must first understand the motivations of the other. Several win-win solutions have been described in the agreements above that span a range of administrative burden and revenue sharing arrangements between the state and the tribe. Some issues are zero-sum, meaning that they are basically win-lose issues. For example, when fuel is taxed, only one party can receive the revenue from a given purchase. However, there are several issues that are not equally important to both parties, and these can be used to form a win-win solution. The relative importance of each issue is shown in the table below by X's.

X's indicate general weight given to each consideration.

Source: ICF Consulting

When asked what led to successful agreements, several state staff described their commitment to finding an agreement from the beginning of the process, often with support from high-level offices within the state government or from the Governor. Generally, agreements were negotiated between the state's department for taxation, with assistance from legal counsel, and the tribe's legal counsel. In some cases, the state department needed legislative authorization to enter into an agreement on fuel taxation with tribes.

While many agreements included other taxation issues along with fuel, such as tobacco, alcohol and sales tax, combining other issues was identified as a roadblock in one state. Other contentious issues, such as gaming, archeological preservation, and land claims were seen as threats to even existing agreements on fuel taxation. In general, the benefits and drawbacks to tying fuel taxation to other issues are substantial in each case and should be taken into consideration.

Tribes highly value state recognition of their tribal sovereignty at all stages of negotiation. The study found that for tribes with failed or tenuous negotiations, the issue most mentioned was the lack of respect for the tribe and its sovereignty, much more so than lost revenue or economic disadvantage. Two states with longstanding agreements, Montana and Minnesota, made a point to emphasize in their discussion of the agreements that they respected the sovereignty of the tribes. In Minnesota, a staff attorney made the statement that "there had to be a level of trust - if that wasn't there, you didn't need an agreement." Emphasizing this recognition, both symbolically and in actions, is a way for states to develop the type of relationship that can then support successful agreements.

One state in litigation at the time they were contacted made a point of discussing the revenue they would lose through an agreement with tribes. In other states, staff expressly described part of their motivation in the negotiation process as related to the desire to avoid costly litigation. In New Mexico, the state decided that resolving the issue was more important than any tax revenue from tribal fuel sales. States may benefit from assessing the value of "tax peace," relative to the revenue they receive from tribal fuel sales. If tribes sell fuel with the same level of tax included, presumably other retailers will not lose any sales to tribes, or at least no more so than they might to any other competitor. For states, the lost revenue may thus be less under an agreement than without one, even though tribal governments receive some revenue directly from the state.