Does Utah sales tax apply to construction materials a non-Indian contractor buys to build a tribal health facility on reservation trust land, funded through a federal Indian-health grant?

Plain-English summary

An Indian tribe wrote to the Commission on behalf of a private, non-Indian construction company building a new tribal Health and Multi-purpose facility on the tribe's trust lands. The project was funded through an Indian Health Service grant channeled through HUD's Community Development Block Grant program, under a contract entered pursuant to the Indian Self-Determination Act (25 U.S.C. § 450 et seq.). The contractor had been buying construction materials from off-reservation vendors and having them delivered to the reservation construction site; the state had previously treated these purchases as exempt but recently reversed course and told the contractor tax was due. The tribe argued the tax was federally preempted, citing a long line of U.S. Supreme Court Indian-law cases.

The Commission's response reframed the legal question before applying the precedent. Under Rule R865-19S-58, a real property contractor is liable for sales tax on construction materials it converts into real property — meaning the tax legally falls on the contractor, not on the tribe or its members directly. Because of that, the Commission said it didn't need to address the tribe's cases dealing with taxes that fall directly on the tribe; the real question was narrower: when can a state tax a non-Indian contractor's activity on the reservation?

Applying White Mountain Apache Tribe v. Bracker (1980) and Ramah Navajo School Board v. Bureau of Revenue (1982), the Commission agreed that federal preemption can bar state taxation of a non-Indian contractor's on-reservation work when the underlying activity is governed by a sufficiently comprehensive federal regulatory scheme. In White Mountain, pervasive federal timber regulations preempted state gross-receipts and fuel taxes on a non-Indian logging contractor because state taxation would have undermined the federal program's goal of channeling timber profits to the tribe. In Ramah, comprehensive federal regulation of Indian educational-facility financing and construction similarly preempted a state gross-receipts tax on a non-Indian school-building contractor.

Applying that framework, the Commission concluded: if the contractor's contracts were entered under the Indian Self-Determination Act or similarly extensive federal regulations governing the financing and construction of Indian medical facilities, the contractor may purchase the construction materials tax-free. The Commission treated this like an exempt purchase made on behalf of a public school or a religious/charitable organization — the contractor must identify the materials to the specific contract, segregate them from any nonexempt purchases, actually install them as part of the qualifying health care facility, and give its suppliers exemption certificates tied to the exempt project.

What this means for you

Contractors building on tribal trust land under federally funded programs

Whether your materials purchases are tax-exempt turns on whether your specific contract falls under a comprehensive federal regulatory scheme (like the Indian Self-Determination Act) governing the project's financing and construction — not simply on the fact that the work happens on a reservation. Document the federal statutory basis for your contract clearly, since that's what carries the preemption analysis.

Tribes and tribal governments negotiating federally funded construction

Build the federal statutory basis for the project into your contracting paperwork from the start (grant documentation, references to the Indian Self-Determination Act or equivalent), since the state's preemption analysis will look for a "comprehensive federal scheme," not just tribal land ownership or funding source alone.

Accountants and tax professionals advising reservation-based construction projects

Treat this like an exempt-organization purchase for recordkeeping purposes: materials must be identified to the contract, segregated from other purchases, actually installed in the qualifying facility, and covered by proper exemption certificates given to suppliers — the same documentation discipline required for school or charitable-organization exempt purchases.

Common questions

Q: Is all construction on an Indian reservation exempt from Utah sales tax?
A: No. The exemption here depended on the specific federal regulatory scheme governing the contract (the Indian Self-Determination Act), not simply on the fact that the work occurred on tribal land.

Q: Who legally owes the sales tax on construction materials converted to real property — the contractor or the tribe?
A: The contractor, under Rule R865-19S-58, as the final consumer of materials it converts to real property. That's why the Commission didn't need to reach the tribe's arguments about taxes falling directly on tribal members.

Q: What does a contractor need to do to buy tax-free under this ruling?
A: Identify the construction materials to the specific exempt contract, segregate them from nonexempt purchases, actually install them in the qualifying facility, and give suppliers exemption certificates tied to the exempt project — the same process used for school or charitable-organization exempt purchases.

Q: Does this ruling apply to any contractor working on tribal land?
A: Not automatically. This is a private letter ruling binding only on the Commission as to this taxpayer's specific facts, and it turned on the specific federal funding/regulatory scheme described. It can't be relied on as binding by anyone else, though it may carry weight if your facts closely match.

Citations and references

Statutes and rules:

• Utah Code Ann. §§ 59-12-102, 59-12-103 (general sales/use tax provisions cited in the taxpayer's request)
• Utah Admin. Rule R865-19S-58 (contractor liable for sales tax on construction materials converted to real property)
• Indian Self-Determination and Education Assistance Act, 25 U.S.C. § 450 et seq.
• White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980); Ramah Navajo School Board v. Bureau of Revenue, 458 U.S. 832 (1982); Maryboy v. Utah State Tax Comm'n, 904 P.2d 662 (Utah 1995)

Source

• Landing page: https://tax.utah.gov/commission/rulings/
• Original PDF: https://files.tax.utah.gov/tax/commission/ruling/97-017.pdf

Original ruling text

97-017

Response
April 8, 1997

REQUEST
LETTER

Dear
Ms. Rees:

This
letter is to request an opinion letter on whether the Utah State Tax Commission
can apply its tax on Materials and Supplies sold to owners, contractors and
repairmen of real property pursuant to Utah Code Ann. ��59-12-102 and 59-12-103
on a supplier of a contractor doing business on the COMPANY A of Utah
Reservation. The COMPANY A of Utah (the "COMPANY A") is currently
constructing a new Health and Multi-purpose facility that will be utilized for
tribal health and administration purposes. This facility is being funded
through a grant provided by the Indian Health Service ("IHS") through
the Housing and Urban Development, Community Development Block Grant program
and pursuant to a contract under the Indian Self Determination Act, 25 U.S.C.
�450 et seq. COMPANY B ("COMPANY B"), a private construction company,
is performing the work. COMPANY B has been purchasing materials from vendors
located outside the XXXXX Tribal lands and having the materials delivered to
the construction site located on XXXXX trust lands. Until recently, we
understood that the State of Utah treated such purchases as being exempt under
Utah Code Ann. ��59-12-102 and 59-12-103. Recently, however, the State has
apparently changed its position and has informed COMPANY B that the tax is required.

It
is the Tribe's opinion that COMPANY B should not have to pay this tax. Although
the law concerning state taxation of activities taking place on Indian
reservations or on Indian lands is quite complicated and varies on the facts
involved, the Tribe believes that since the proposed tax is falling on an
activity with a strong tribal/federal nexus--the construction of a tribal
health and governmental facility using federal funds--this tax is preempted by
federal law. I will set forth the Tribe's legal position in the following
sections.

I.
Federal Preemption of State Taxation of On-Reservation Activities.

States
have been permitted to tax the income of non-Indians earned on Indian
reservations.1 Kahn v. Arizona State Tax Comm'n, 490 P.2d 846
(1971), appeal dismissed, 411 U.S. 941 (1973). There are important limitations,
however, on the on the power of states to levy taxes in Indian country.
Principally, the subject-matter is preempted by federal law. Warren Trading
Post Co. v. Arizona Tax Comm'n, 380 U.S. 685 (1965). In Warren Trading
Post, the United States Supreme Court held that Arizona could not tax the
gross receipts of a non-Indian trading post on the Navajo Reservation. The
Court pointed out that Indian traders had to be federally licensed and were
subject to extensive regulations. These regulations took the business of Indian
trading � so fully in hand that no room remains for state laws imposing
additional burdens upon traders." Id. at 650.

Most
importantly, the Supreme Court has quite regularly invalidated state taxes
imposed on non-Indian contractors engaged in sales or services to the tribes in
Indian country. In White Mountain Apache Tribe v. Bracker, 448
U.S. 136 (1980), the Court struck down state gross-receipts and motor fuel
taxes on non-Indians cutting timber on a reservation and delivering it to the
tribal sawmill. These taxes were held to be preempted by extensive federal
regulations applying to timber operations in Indian Country. The Court made it
clear that preemption did not require an express congressional declaration
invalidating state taxes, and observed that "[t]he unique historical
origins of tribal sovereignty make it generally unhelpful to apply to federal
enactments regulating Indian tribes those standards of preemption that have
emerged in other areas of law." Id. at 143. See also, Central
Machinery CO. v. Arizona Tax Comm'n, 448 U.S. 160 (1980)(the Court held
invalid a state gross receipts tax applied to sale of machinery in Indian
country by a non-Indian dealer whose permanent place of business was
off-reservation on the grounds of preemption).

In
Ramah Navajo School Board v. Bureau of Revenue, 458 U.S. 832 (1982), the
Supreme Court struck down a gross receipts tax imposed on a non-Indian
contractor building a school for an Indian school board on the reservation. In
so holding, the Court reiterated its view that traditional notions of
sovereignty, as well as federal policies favoring tribal self-development, must

inform
preemption analysis.2 In White Mountain Apache Tribe, the Court held
that a use fuel tax imposed on a nontribal logging company that was working on
the reservation was preempted by (1) a comprehensive federal scheme, (2) the
fact that the tax burden ultimately fell on the tribe, and (3) the state's
inability to justify taxes except in terms of generalized interest of revenue.
See also, Moe v. Salish & Kootenai Tribes, 425 U.S. 463,
480-81 (1976)(the Court held that personal property tax could not be applied to
tribal members who resided on the reservation because the taxes conflicted with
applicable federal statutes). In the Indian law context, state law is preempted
not only by an explicit congressional statement--the traditional preemption
standard--but also if the balance of federal, state, and tribal interests tips
in favor of preemption. In Re Blue Lake Forest Products. Inc., 30
F.3d 1138, 1142 (9th Cir. 1994), quoting Gila River Indian Community v.
Waddell, 967 U.S. F.2d 1404, 1407-08.

The
rule of Williams v. Lee, 358 U.S. 217 (1959), stating that states may
not interfere with the right of reservation Indians to make their own laws and
be governed by them, has been held to be an additional, independent limitation
on the states� power to tax. See, e.g., White Mountain Apache Tribe v.
Bracker at 136; Ramah Navajo School Board v. Bureau of Revenue at

837. So stated, this rule helps to curb attempts by states to tax the sovereign
     functions of Indian tribes. Where the tax is on non-Indians, this rule is used
     in the background while the courts engage in the balancing of interests called
     for by the preemption analysis illustrated in White Mountain Apache Tribe
     and Ramah. When this process results in the preemption of a state tax,
     the rule of Williams v. Lee is sometimes invoked as additional support
     for the result. See, e.g., Crow Tribe v. Montana, 819 F.2d 895, 902-903
     (9th Cir. 1987), aff'd, 108 S.Ct. 685 (1988).

In
the present case, the tax is being levied on materials that are being used for
construction of the new Health and Multipurpose facility. The materials are
being used to build a tribal facility funded pursuant to federal statutes to be
used for Indian health and governmental purposes. In the Tribe's view, the
exercise of taxation authority by the Utah Tax Commission is preempted by
federal law in light of Ramah and White Mountain Apache Tribe
for the following reasons:

1.
The facility's construction is being funded pursuant to federal statutes, such
as the Indian Self Determination Act for the purposes of Indian health and self-determination,
therefore fitting directly under the reasoning of Ramah and White
Mountain Apache holdings of a comprehensive federal scheme
preempting state taxation power.

2"As
a result, ambiguities in federal law should be construed generously, and
federal preemption is not limited to those situations where Congress has
explicitly announced an intention to preempt state activity." Id.
at 838.

3.
The state cannot show a justifiable interest in imposing the tax except for the
generalized interest of raising revenue. This interest does not outweigh the
federal and tribal interests in the construction of the facility. The Supreme
Court of Utah has recognized this preemption analysis in state taxation on
Indian tribes. Marvboy v. Utah State Tax Comm'n, 904 P.2d 662 (Utah
1995). In Maryboy, the Utah Supreme Court held that federal law
preempted the Utah State Tax Commission from imposing income taxes on an Indian
state employee who provided mental health services on the Navajo reservation.
The court used the same preemption analysis stated above in weighing the
relative state, federal, and tribal interests. The court stated that when state
taxation of Indians is an issue, tribal interests are strongest when the tax is
based on value derived from on reservation conduct involving only tribal
members and where the taxpayer is recipient of tribal services. Id. at 666. The
Tribe believes that since the tax will ultimately fall on them in the
construction of the tribal facility, the value taxed is one that is derived
from on-reservation conduct. The recipients of the tribal services to be
offered at these facilities are Paiute Tribal members and their interests
outweigh the general interest of the state in collecting revenue.

In
summary, the Tribe feels that this tax should be preempted by federal law. This
is due to the comprehensive federal scheme in the funding of the construction
and the programs to be run in the facility, and the fact that these programs
directly relate to the tribe's inherent sovereign right to make its own laws
and be governed by them. Even though this tax is levied upon the supplier of
materials and not on the contractor himself, the Tribe believes that the tax
will ultimately be passed on and fall directly on the Paiute Tribe and its members.
Since this facility is being built purely for Tribal health and governmental
purposes, Tribal interests in avoiding this tax are at their greatest.

We
would like to request an opinion letter from your office concerning the validity
of the tax addressing the Tribe's position. We appreciate your attention in
this matter.

Footnotes

1. For example, In Cotton Petroleum Corp. v.
   New Mexico, 490 U.S. 163, 175-77 (1989), the Court held that federal law
   did not preempt state oil and gas severance taxes imposed on a non-Indian
   lessee producing oil from on-reservation wells. In Washington v. __Confederated
   Colville Indian Reservation __447 U.S. 134, 151, 15559 (1980), the Court held
   that a state cigarette sales tax imposed on sales by tribal members to
   nontribal members was not preempted by a tax imposed by the tribal government.

2.
The tax will ultimately fall on the tribe due to the fact that the value upon
which the tax is based flows from purely on-reservation activities conducted by
the tribe for the welfare of its members, not for commercial reasons.

Very
truly yours,

ADDRESS

CITY
STATE ZIP

RESPONSE LETTER

April
8, 1997

NAME

ADDRESS

CITY
STATE ZIP

Advisory
Opinion - Application of sales tax to purchases of materials to construction of
a health care facility on reservation land.

Dear
name,

We have received your request for
tax guidance pertaining to the purchase of construction materials by a non-Indian
real property contractor for use in constructing health care facilities on
Indian lands. We offer the following:

A real property contractor is liable
for sales tax on purchases of construction materials that the contractor
converts to real property. Utah Admin.
R. R865-19S-58. The sales tax at issue
here falls on COMPANY B, not the XXXXXX Tribe.
For that reason, we need not address the cited cases that deal with
other tax types that, if imposed, would fall directly upon the tribe or tribal members. Instead we focus on the issue of when a
state can tax a non-Indian performing contracts on the reservation. This issue has been addressed by the U.S.
Supreme Court in White Mountain Apache Tribe V. Bracker, 448 U.S. 136
(1980) and Ramah Navajo School Bd. v. Bureau of Revenue, 458 U.S. 832
(1982).

In White Mountain, the court
considered the state�s authority to impose gross receipts tax and fuel tax on a
non-Indian contractor harvesting timber on Indian land. In considering whether the state could tax
this contractor�s activities on the reservation, the court stated that the
language of relevant treaties and statutes must be examined in terms of their
underlying policies and notions of tribal independence and sovereignty. The court found that federal regulations at
issue in White Mountain were so pervasive that they preempted the
state�s taxing authority. Specifically,
the court found that the underlying objective of the timber regulations was to
insure that profits derived from timber sales would inure to the Tribe�s
benefit, subject only to administrative costs.
The imposition of state taxes undermined that objective and interfered
with the federal agency�s ability to carry out its responsibilities with regard
to the program.

In Ramah, the court again
barred the state from imposing gross receipts tax on a non- Indian contractor
who built schools on tribal lands.
These construction contracts fell within the comprehensive federal
regulations of the Indian Self-Determination and Education Assistance Act. The
court found that federal regulation of construction and financing of Indian
educational facilities is so comprehensive and pervasive as to preempt the
state�s authority.

Turning to COMPANY B�s contracts, if
the contracts were entered pursuant to the Indian Self-Determination Act or
other extensive federal regulations governing the finance and construction of
Indian medical facilities, we find that the contractor may purchase the
construction materials tax free.

For purposes of record keeping,
COMPANY B is like a contractor who makes tax exempt purchases on behalf of a
public education institution or a religious or charitable organization. COMPANY B must clearly identify the
construction materials to the contract, segregate them from nonexempt
purchases, and actually install them as part of the qualifying health care
facility. COMPANY B must give his
suppliers exemption certificates identifying the exempt purchases with the
exempt project.

Please let us know if you have other
questions with regard to these transactions.

For
the Commission,

Joe
B. Pacheco,

Commissioner