10:51 PM PST on Wednesday, December 8, 2010

Sacramento Bureau

SACRAMENTO – In and out of the courtroom, state tax collectors and some California tribes continue to clash over the income tax liability of tribal members.

Next month, attorneys for the Twenty-Nine Palms Band of Mission Indians, which operates the Spotlight 29 casino in Coachella, are scheduled to file paperwork as part of their appeal of a federal judge’s spring 2010 decision. The judge ruled that California can collect state income tax from tribal members who do not live on the reservation.

In recent weeks, meanwhile, the California Franchise Tax Board, the state version of the federal Internal Revenue Service, has mailed hundreds of audit letters to tribal tax filers who claim they do not owe state income tax.

The letters demand proof that the filer is a tribal member, lives on tribal land and received income from tribal sources.

The audit letters are a fraction of the number sent annually, with far more going to taxpayers to prove they qualify for head of household tax benefits.

Underlying the income tax disagreement is the bitter financial history between American Indians and all levels of government officials.

In Washington, Congress is considering a $3.4 billion settlement to tribal claims that federal officials bilked them out of billions in oil, gas and timber royalties since 1887.

Some tribal officials have talked of seeking state legislation on the income tax issue in the coming months.

Richard Freeman, an attorney for the Twenty-Nine Palms band, said the state is making a “tax grab” because of its horrible fiscal situation.

“The Franchise Tax Board has been essentially becoming more aggressive in asking for tax money,” Freeman said.

But Dan Tahara, a Franchise Tax Board spokesman, said the letters to tribal members are “business as usual.”

The letters, he said, are similar to inquiries to other California taxpayers who claim not to owe taxes for a variety of reasons.

“It’s part of an ongoing effort,” Tahara said. He estimated that the agency has sent out 500 to 600 audit letters on the tribal tax exemption.

The income tax exemption has been on the books for decades. It wasn’t until recently that tribes and California authorities began disagreeing over the state’s interpretation of the rules.

“It is an area that you’d think would have been decided. But tribal members didn’t have enough money to make it worthwhile,” said professor I. Nelson Rose, an expert on tribal and gambling law at Whittier College. “Historically, so many Native Americans were living in abject poverty.”

Today, dozens of tribes operate successful casinos that generate income for tribal members. Other tribal members have successful on-reservation businesses.

Mike Connolly, a member of the Campo Band of Kumeyaay Indians in San Diego County, runs an environmental consulting business on the tribe’s reservation.

Because his income doesn’t come from the tribe, he owes income tax under the state’s interpretation of the law. That’s unfair, he said, because it’s the tribe, not the state, that pays for a full-time fire department and other services on the reservation.

“If San Diego County was collecting taxes off of a Riverside County property, people would be up in arms,” Connolly said. The state’s policy, he said, “is going to kill private enterprise on the reservation.”

“That’s the only benefit that we’ve had to compensate for all these other negatives,” he said of the income tax exemption.

Jerome Encinas, director of government affairs at the California Nations Indian Gaming Association, said the Franchise Tax Board seems out to get tribal members.

“Tribes don’t have a problem paying what they’re supposed to pay,” he said.

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