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

Executive Summary


The Federal Highway Administration (FHWA) selected the Louis Berger Group and ICF Consulting (the Project Team) to undertake an investigation of American Indian motor fuel sales on tribal lands and to assess any reporting issues attendant to these sales. The primary objective of the work was to determine whether significant motor fuel sales on tribal lands are not included in state-level estimates of fuel sales provided to FHWA. As these estimates form the basis of FHWA´s attribution formula for Highway Trust Fund resources, such omissions raise concerns about potential bias in the attribution process. The current study's intent was to investigate attribution issues, not tax evasion issues per se.

The Project Team's efforts included a thorough review of available data and reports to understand the magnitude of these sales. The Team also undertook an analytical exercise to determine the scope of sales on tribal lands as well as estimates of sales to non-residents of tribal lands. In addition, the team also reviewed recent judicial decisions related to the issue of tribal-state excise tax issues, as the reporting issues are closely imbedded in this larger topic. The Team also completed a comprehensive survey of current reporting arrangements between tribal governments and selected states. This effort included outreach to tribal and state entities to understand the various types of reporting arrangements, as well as to assess the problems and benefits attributable to each. The Team then developed a series of policy recommendations stemming from the research and analysis conducted in the study.


American Indian tribal entities exhibit a variety of inter-governmental relationships with the states surrounding or adjacent to the tribal reservation. While sovereignty is the cornerstone of the relationship, significant variation exists when comparing specific relationships between states and tribes because of historical circumstances and established treaties. One important area of variation relates to the tax treatment of fuel sales on tribal lands. In general, motor fuel sales to American Indians for on-reservation consumption are not taxable by states. In certain instances, this differential tax treatment has led to ex tax fuel sales occurring on reservations. In turn, ex tax sales to tribal members has created a situation wherein non-tribal members may make fuel purchases outside the FHWA motor fuel sales reporting regime.

Significant unreported sales could create bias in the attribution process utilized by FHWA to identify each state's share of total fuel sales and federal tax receipts. Errors in attribution would then lead to biased estimates of the amount due to each state under the Federal-Aid Highway Minimum Guarantee provision. While under-reporting could occur for various reasons, this effort seeks to identify the existence of under-reporting associated with tribal fuel sales, and whether under-reporting is of a magnitude sufficient to affect in a significant way the accuracy of FHWA's attribution formula.

Summary of Results
Task 1: Ascertaining the Scope of the Problem

The key elements of Task 1 were two-fold: first, undertake a quantitative assessment of motor fuel sales at the county level, with specific attention on those counties bordering tribal reservations; and second, complete a review of recent judicial decisions to identify the important legal issues governing state tax treatments of tribal retail activities. Key elements of the work carried out by the Project Team, as summarized in this report, include the following:

  • The Team found that American Indian Tribes have made significant investments in economic development initiatives. Retail service stations have emerged as an important source of sales, both as stand-alone establishments and as components of larger investments, such as retail shopping centers and gaming facilities.
  • The Team also found evidence of motor fuel sales to non-tribal residents. The finding was based on indirect evidence: Counties adjacent to tribal reservations with significant fuel outlets tended to exhibit lower fuel sales than expected. While price differentials on and off-reservation may explain the existence of export sales, other factors, such as tribal gaming activities, may explain the sales volume.
  • A price differential between reservation and off-reservation sales was found to be an important determinant of on-reservation sales. Specifically, when there is indirect evidence that no price differential exists then there is little evidence of sales to non-residents.
  • There appears to be a potential for reporting bias in several states where tribal sales are significant and where no agreement is currently in place to report sales. New York State may be where unreported sales are highest: The Team estimates that sales on tribal lands could account for as much as 0.5 percent of total sales in the state.
  • The legal context is important to the issues of tribal fuel sales reporting. Near unanimity exists among the various US Circuit Courts in regards to the legitimacy of tribal immunity from state motor fuel excise taxation. Recent decisions in South Dakota, Idaho and Kansas have denied state attempts to levy excise taxes on motor fuel sold on tribal reservations. In October, 2005 the Supreme Court will consider an appeal from the Kansas case.
  • In general, where reporting issues remain, these stem from a lack of reporting agreements between states and tribes combined with significant fuel sales on tribal lands. Imposing state taxes on fuel at the terminal level is sometimes proposed as a solution. The change in tax treatment, however, is not always a panacea; there is evidence that these restrictions can be overcome by retailers.
Task 2: State of the Practice

Twelve states were examined for this portion of the study. The team sought both state and tribal contacts knowledgeable about the status and history of tribal fuel sales reporting and taxation in each state. In all, state staff in eleven states and tribal representatives in ten states had input into the study.

  • Among these twelve states, most said that tribal fuel sales were being successfully reported. In some states there was a problem with reporting in the past or an ongoing issue, generally due to tribes purchasing fuel from out-of-state distributors without reporting those sales to the state.
  • As courts have generally upheld the right of tribes to an exemption from the state fuel tax, tribes cannot be compelled to report these sales. Many states have formed agreements with tribes to allow for this exemption while maintaining reporting of all sales. In these agreements, states also create an even level of taxation, often by substituting tribal fuel tax for state fuel tax, and account in some way for taxes on purchases by non-tribal members.

Agreements on tribal fuel sales reporting and taxation generally fall into one of three types.

  • The most common type of agreement is a non-exceptional agreement with tribal refunds. This type of agreement is "non-exceptional" in that tribes agree to purchase fuel within the state's existing fuel sales reporting system, in return for a refund to the tribe for tribal member purchases. Typically, the amount purchased by tribal members is estimated, which lowers the administrative burden of this type of agreement. In this study, Washington, Montana, Minnesota, South Dakota, Oklahoma, Arizona, and Iowa were found to have this type of agreement with some or all tribes within their boundaries.
  • A second type of agreement is the exceptional agreement with tax parity. In this type of agreement, tribal retailers purchase fuel and report it separately from other retailers, or "exceptionally." However, tribes also assess their own fuel tax, in the same amount as the state's fuel tax. This provides for tax equity between tribal and non-tribal retailers. New Mexico, Nebraska, and Arizona have this type of agreement with some or all tribes within their boundaries. In addition, one tribe in New York reported that it was negotiating this type of agreement with the state.
  • A third type of agreement is a non-exceptional agreement with individual refunds. In this type of agreement, tribal retailers purchase fuel just as any other retailer, within the state's reporting system. The state then allows individual tribal members to apply for a refund for the fuel taxes they paid at tribal retailers. Arizona has this type of agreement with some tribes, and Michigan reportedly has this type of agreement with tribes, although the state was not contacted as part of the study.
  • Most states and tribes praised the effect of the agreements, saying that they created a more stable tax environment and have allowed some states and tribes to cooperate on related issues such as fuel tax evasion. They have also led in some cases to increased economic development on tribal lands, resolving legislative disputes, and a generally more cooperative relationship between states and tribes.
  • A few states and tribes said they were somewhat dissatisfied with the negotiated agreement, believing either that they should have received more of the fuel tax revenue or that the agreement was questionable on principle. Some states continue to contest the exemption for tribal fuel sales to tribal members. On the other side, some tribes question any agreement because of concerns about tribal sovereignty, for example the right to set their own fuel tax rate, since most agreements require the tribal fuel tax to equal the state's tax rate.
  • Both states and tribes made recommendations for other states and tribes working on agreements. A cooperative attitude and respect were emphasized by several contacts. In some cases, combining fuel taxation with other issues, such as sales taxes, was seen to be beneficial. In at least one case, however, bundling fuel taxation with other more contentious issues, such as land claims and gaming, was seen as a roadblock to an agreement on fuel taxation.
  • The non-exceptional agreement with tribal refunds was recommended by several states as a flexible type of agreement with a low administrative burden. The exceptional agreement with tax parity was recommended as a way to solve the issue of unequal fuel taxation in the face of significant conflict over the issue in two states, New Mexico and Nebraska. These agreements carry a higher administrative burden for states and tribes, but tribes sometimes prefer them because the tribe administers its own tax in the first instance.
Task 3: Policy Recommendations

The Team's research suggests that tribal fuel sale reporting is not likely to be biasing FHWA's attribution formula. Most of the states surveyed reported either successful reporting agreements or movements towards achieving such agreements. Even in sates where reporting issues exist, the potential magnitude of unreported sales is relatively modest as a proportion of total fuel sales in the state.

  • The resolution of outstanding reporting issues should follow from the establishment of state-tribal tax compacts. The Team's research suggests that a key to such agreements was commitment among leaders, whether agency heads, the Governor, or the tribal council. Leadership is important especially when this issue has become very contentious, such as in New Mexico prior to the 1999 compromise bill.
  • For most issues involved in fuel taxation agreements, win-win solutions are possible. The one zero-sum issue is the recipient of fuel tax revenue, while each side can easily make allowances on many other issues. For tribes, respect for tribal sovereignty and economic development on tribal lands are important and not counter to state interests. For states, fuel price equity, cooperation against fuel tax evasion, and full reporting of fuel sales to FHWA can easily be win-win issues.
  • Both states and tribes benefit in general from a more cooperative relationship. Courts are unlikely to resolve this issue completely, as they have upheld exemptions for tribal members, but left sales to non-members in a grey zone because of the difficulty of tracking retail sales based on tribal membership. Agreements in many states have created a "tax peace" that is beneficial to both tribes and states.


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