GM 14-013

Second Circuit Allows Connecticut Town to Tax Slot Machines Leased to Tribal Casino

On January 21, 2014, the Mashantucket Pequot Tribe announced that it would not appeal an unfavorable ruling of the Second Circuit Court of Appeals to the U.S. Supreme Court. The Tribe’s decision leaves in place the Second Circuit’s decision in Mashantucket Pequot Tribe v. Town of Ledyard in which the court upheld the Town of Ledyard’s imposition of a personal property tax on slot machines leased to the Tribe’s casinos.

The State of Connecticut authorizes towns to impose a personal property tax on owners of property that is maintained for the purpose of generating revenue. Towns, however, cannot tax Indian-owned property on Indian lands. Both Atlantic City Coin & Slot Service Company and WMS Gaming lease slot machines to the Mashantucket Pequot Gaming Enterprise which operates the Foxwoods Resort Casino. For proprietary reasons, slot machine vendors routinely lease, but do not sell, their most popular games to casino operators.

Ledyard sought to impose its property tax on the slot machines leased to the Tribe’s Gaming Enterprise. The Tribe challenged the property tax. The district court ruled in favor of the Tribe, holding that the tax was barred by principles of federal preemption under the Indian Trader Statutes, the Indian Gaming Regulatory Act (IGRA), and the balancing test in White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980).

Although the Second Circuit recognized that the tax has “measurable interference in the Tribe’s sovereignty on its reservation” it reversed the district court, holding that state and local interests outweighed federal and tribal interests. Using the Bracker balancing test, the court ruled that tribal and federal interests under the Indian Trader Statutes did not outweigh the state’s interests, especially since the incidence of the tax fell on non-Indians. The court also ruled that IGRA does not expressly preempt state jurisdiction. The court explained that “under IGRA, mere ownership of slot machines by the vendors does not qualify as gaming, and taxing such ownership therefore does not interfere with the ‘governance of gaming.'”

Finally, the court held that federal law and sovereignty principles did not bar the tax. The court concluded that the Town’s and State’s interests outweighed the Tribe’s and federal government’s interests. The court acknowledged that “this is arguably a close case.” The court found that the tax had a “less than minimal” effect on the Tribe’s economic development, and a “moderate effect on tribal sovereignty.” The court also found the federal interests in limiting crime would not be harmed by the tax. Conversely, the court found that the Town not only had a stronger economic interest, but its road, transportation, and educational services were connected to the tax. The court also said that the Town had an interest in avoiding litigation that could tie up its financial resources. And the court found that the Town had an interest in avoiding complications based on how property owned by non-Indians on the Tribe’s reservation was used because the “additional level of analysis would further frustrate the Town’s revenue collection and would render the State’s tax more difficult and expensive to administer.” Finally, the court found that the State had an interest in the uniform application of its generally-applicable tax and noted that in this situation “there is room for both State and Tribal taxation of the same activity.”

Now that the Second Circuit’s ruling in the Ledyard case is final, the outcome may encourage other courts to conduct the balancing test utilizing seemingly arbitrary factors such as litigation risk and the avoidance of complicated inquiries for the benefit of the non-tribal party in order to outweigh tribal sovereign interests in future tax cases. The result in this case highlights the need for tribes to closely scrutinize the potential exposure of current and future tribal economic development activities to state and local taxation schemes.

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