ARIZONA DEPARTMENT OF REVENUE v. BLAZE CONSTR. CO.
Over several years, the Federal Bureau of Indian Affairs contracted with Blaze Construction Company to build, repair, and improve roads on several Indian reservations located in Arizona. When the various contracts expired, the Arizona Department of Revenue issued a tax deficiency assessment against Blaze for its failure to pay Arizona's transaction privilege tax, the tax levied on the gross receipts of companies doing business in the state, on the proceeds from its contracts with the Bureau. Blaze protested the assessment and prevailed in administrative proceedings. On review, the Arizona Tax Court granted summary judgment for the Department. In reversing, the Arizona Court of Appeals held that federal law pre-empted the tax's application to Blaze. The Supreme Court of Arizona denied review.
May a state impose a nondiscriminatory tax upon a private company's proceeds from contracts with the Federal Government when the federal contractor renders its services on an Indian reservation?
Yes. In a unanimous opinion delivered by Justice Clarence Thomas, the Court held that a "State generally may impose a nondiscriminatory tax upon a private company's proceeds from contracts with the Federal Government, regardless of whether the federal contractor renders its services on an Indian reservation." Justice Thomas wrote for the Court that, "[a]bsent a constitutional immunity or congressional exemption, federal law does not shield Blaze (a federal contractor) from Arizona's transaction privilege tax."
Argument of Patrick Irvine
Chief Justice Rehnquist: We'll hear argument next in No. 97-1536, Arizona Department of Revenue v. the Blaze Construction Company.
Mr. Irvine: Mr. Chief Justice, and may it please the Court:
This Court should adopt a categorical bright line rule that nontribal members who work as Federal contractors on Indian reservations are subject to nondiscriminatory State taxes unless Congress expressly provides otherwise.
This rule will clarify existing law, recognize a uniform rule that applies throughout the country, and provide certainty and predictability to contractors, the Federal Government, and to States.
This rule is consistent with this Court's precedents regarding Federal contractors and will not require the Court to rule... overrule any of its decisions concerning taxation of persons doing business with Indian tribes or tribal members.
This is the rule that the United States itself argues here should apply.
Justice O'Connor: Let me ask you a question.
There's something, legislation, called the Self-Determination Act under which, if I understand it correctly, an Indian tribe could opt to accept Federal money to build roads and projects like this using that money but itself administering the program.
Now, if the tribe had done so and had awarded the contract in question here, could... could the State have been able to impose the tax then, do you think?
Mr. Irvine: No, Your Honor.
Under the authority of the Ramah Navajo School Board case, if a contractor... a nontribal member contractor deals directly with a tribal entity, then there is no State tax.
Justice O'Connor: So, it was open to the tribe to protect itself had it wanted to do so...
Mr. Irvine: That's correct, Your Honor.
None of the...
Justice O'Connor: and its... and its contractors.
Mr. Irvine: None of the contracts at issue were... were taken over by tribes pursuant to self-determination, but each and every one of them could have been.
Justice Kennedy: Thank you.
Mr. Irvine: In fact, if Congress decides that a different rule, a different preemption rule, should apply, it can certainly enact one.
It has the authority to provide that there is no State tax in almost any circumstance and certainly in... in circumstances dealing with Indian reservations.
Justice O'Connor: The... the tax here amounts to quite a bit of money all told, doesn't it?
How much is at stake?
Mr. Irvine: The assessment, including interest, was approximately $ 1.2 million.
The tax, as a percentage of the gross receipts for every contract, is 3.5 percent of the gross receipts.
Justice O'Connor: And yet, in fact, the State has provided very little in the nature of services, I guess, in connection with this contractor.
Mr. Irvine: We don't argue that there are any direct services directly to these contracts or the particular geographic location.
As we cite in the brief, the State has not ignored these reservations and does provide numerous general services to the reservations and, indeed, to Blaze both on and off the reservation.
We have not argued that there have to be direct services.
And that's consistent with the rule that applies to any Federal contractor.
Almost any Federal contract, whether it be on a military base or in a national forest, may involve little in the way of State services, and the State may have very little authority to regulate the contract.
Justice Kennedy: Well, but I thought that we had made a special inquiry into the extent the State has provided services when Indian sovereignty is at stake, as opposed to whether or not the State can just tax a Federal contractor without added complication of an Indian reservation.
Mr. Irvine: That's correct, Justice Kennedy.
Justice Kennedy: In other words, the Cotton Petroleum case requires us to make this sort of inquiry.
Mr. Irvine: That's correct, Your Honor, but this issue of Federal contractors has never been addressed by the Court.
The existence of the Federal Government as a party to the contract really changes the nature of the analysis because the Federal sovereign is such an overwhelming presence.
The Federal Government does not need the courts to protect it from States.
It hasn't hesitated to... to sue States when it felt that the taxes were not... not supported by the law.
The categorical test that we argue for would apply just to Federal contractors as it does with any Federal contractor throughout the country.
Justice Kennedy: And... and you would say the Cotton Petroleum inquiry then is... is not necessary when there's a Federal contractor involved?
Mr. Irvine: That's correct, Your Honor.
And if it... if a contract still involved a contract with someone other than the Federal Government, the Court's analysis, the balancing test, the particularized inquiry would still be effective, though as we argue in our brief, the lower court misapplied that analysis as well just because it didn't take into account that tribal sovereignty, tribal interests are not really affected in any significant way when it's a contract between a nontribal member and a nonmember such as the United States itself.
Justice Ginsburg: What about the argument that it will reduce the total amount available for road building if some money has to be spent in paying State taxes, that that money that could be spared would otherwise be available to build more roads inside the reservation?
Mr. Irvine: Your Honor, I think the... this Court has consistently held, both in the context of Federal contractors and even contracts on reservations, that the very fact that there may be economic effects are not sufficient to preempt the tax.
In the case involving a Federal contractor, that's even more applicable.
As this Court held in the United States v. New Mexico, even if the cost is directly passed on to the Federal Government, that's not ground for preemption.
In U.S. v. New Mexico, I believe it was a cost-plus contract, so there was no doubt that the cost was passed on to the Federal Government.
Economic effects themselves are not sufficient to... to preempt the tax.
As the United States points out in its brief, merely because there's a tax on the Federal contractor does not necessarily mean that there will be an impact on the... the number... the amount of roads built or the amount of work done because it will hinge on what the agency does, what Congress does in their appropriations.
There's no evidence that Congress hasn't appropriated funds taking into account the full amount of the taxes and equally could reduce the appropriation if there's a less... 5 percent less because of the tax.
So, the economic effects are a difficult standard to apply and this Court has generally rejected it in the Federal... Federal contractor context, as well as tribal... reservation transactions.
Justice Scalia: Are these contracts subject to Federal wage laws?
Mr. Irvine: I believe they would be.
They are direct contracts with the Federal Government.
Justice Scalia: So, there may be no economic impact at all if indeed the wages are... happen to be set according to what the rest of the industry is doing in that area no matter... and the rest of the... and the rest of the industry is paying taxes if the market is operating properly anyway.
This contract wouldn't necessarily be reduced by the amount of the tax.
Mr. Irvine: That's correct, Justice Scalia.
And, indeed, by looking at economic effects, that's always a difficult test to apply because it's very unpredictable.
This is a tax which means that both the contractors and the Federal Government benefit by having certainty and predictability knowing when the contract is issued whether it's subject to tax, which is why we focus on who the contracting parties are as opposed to a more amorphous standard, which may very well apply in the context when tribal interests are affected but where the Federal sovereign is a party to the contract and can certainly protect itself from overreaching State taxes.
Those considerations just aren't an issue.
There really is no reason to apply a different rule than the categorical bright line test for reservation transactions because the cases this Court has... has decided involving reservation transactions that apply a different test have all involved effects on tribes and tribal members, contracts with tribes or tribal members, costs that are directly passed on to tribal treasuries.
The Court has repeatedly drawn the line, saying that protecting tribal sovereignty, tribal interest is really what the key is in... in applying a different test.
Indian sovereignty, as the Court has described, provides the backdrop against which the applicable treaties must be read.
Here tribal sovereignty is not endangered by a tax on a Federal contractor because if there is any danger, it's to the Federal Government which, as I've stated, can protect itself.
Merely because the cost is passed on to the Federal Government or even to a tribe is not sufficient in and of itself.
There must be essentially the State reaching into the reservation and trying to regulate a transaction with a tribe.
Applying State laws to tribal members on the reservation is what this Court has consistently sought to protect.
It has not sought to protect nonmembers or the Federal Government from the reach of State laws anywhere within the State.
The Court has, over the past 150 years or so, tried to develop different analysis, the intergovernmental tax immunity doctrine that the Court discussed in detail in Cotton Petroleum, but the Court has come around to the idea that that is just too difficult.
The standard should be is the legal incidence of the tax on the Federal Government.
If it is not, the tax should be sustained.
If you try to look through the transaction, you do end up with a fairly free-wheeling balancing test which is difficult to apply certainly in advance, sometimes even at all.
Even if the Court doesn't apply a categorical test, as we've argued under the implied preemption analysis, the lower court erred because it didn't give sufficient weight to the State's interest in regulating activities throughout the State, including on reservations.
In this case, State law does not... is not imposed on any transaction involving a tribal member or a tribe.
There's no impact on tribal sovereignty.
Cotton Petroleum certainly held that State taxes are permissible if they do not directly and substantially affect tribal interests.
Other cases of this Court hold the same, particularly the tobacco cases... excuse me... where the Court has consistently found that the State has an interest in taxing sales to nonmembers of cigarette products and other products even though it has economic impact on the tribe, even though the tribe, indeed, is the seller.
So, in those cases, the tribe or the tribal member is actually a party to the transaction, but the Court has said that the State has an interest in taxing them.
The State has not looked at any specific services that are required in those tobacco cases.
It sort of accepted the fact that nonmembers receive services.
It hasn't required a direct connection with those... with the taxed activities, and consistently applying those precedents leads to the line again that the Court will seek to protect taxes that directly impact on tribes but will not seek to protect nonmembers merely because they do business on reservations.
These transactions do take place within the State of Arizona, and that's the key element here.
And just because they're on a reservation does not mean different rules should apply if tribal sovereignty is not implicated, and the Court has required that that really be the test.
Justice Ginsburg: What about the argument that sovereignty is implicated because you're steering... the State by taxing the contractor, when the contract is with the United States, is steering the tribe's decision not to do the... be the contracting party itself?
Mr. Irvine: That's a very indirect impact, Your Honor, and I think if... every tax will have an effect on decision making.
The absence of a tax will have an effect on decision making.
And if the change... the effect on decision making is the test, it becomes almost impossible to apply.
In this case, the decisions are made by the Federal Government which has accepted tribal input, but ultimately the burden of the tax rests on the contractor which does business with the Federal Government which, under its own sovereign powers, has the right to make the decisions that it chooses to make.
And so, there really is no direct or substantial effect on tribal decision making because the State is taxing parties that the tribe does not... or that the contractor does not even do... do business with.
And the Federal Government in this case, because of its own sovereignty, is not... is the major party here.
To the... even under the implied preemption analysis, if there is a passing on of the tax to anyone, it's to the Federal Government.
It's not the tribe.
This Court's decisions upholding the tax... the taxes on nonmembers would really govern here, and as I mentioned, the lower court just gave too little weight to the very fact that the State does have sovereign interests throughout the State, including on Indian reservations.
The only limitation is when there is an impact on tribal sovereignty.
In this case, the contract takes place on a reservation, but the direct impact of the tax is on that contract between Blaze and the Federal Government.
Any effects on tribal sovereignty are very indirect, and therefore, even under the implied preemption analysis, there should be no... there should be no preemption here.
If the Court has no further questions, I will reserve the remainder of my time.
Argument of Beth S. Brinkmann
Chief Justice Rehnquist: Very well, Mr. Irvine.
Ms. Brinkmann, we'll hear from you.
Mr. Brinkmann: Mr. Chief Justice, and may it please the Court:
We believe that under United States v. New Mexico, respondent Blaze as the Federal contractor is subject to the nondiscriminatory State tax at issue here because Congress has not expressly acted to provide otherwise.
The fact that the contracts involved building and maintenance of roads on Indian reservations should not alter that analysis.
The Blaze company's invocation of the Indian preemption doctrine is misplaced.
That doctrine has been applied by this Court in cases where nontribal members engage in direct commercial dealings with Indian tribes or members of tribes.
But here, the nontribal members engaged in direct dealings with a Federal agency.
Thus, the three primary concerns that trigger application of the Indian preemption doctrine are not present.
First, State taxes on Federal contractors will not unduly interfere with tribal sovereignty because the United States is the contracting party, not the tribe.
The tribe's involvement in the making and performance of the contract is far less significant than if the tribe was a party to the contract.
Second, State taxes on Federal contractors have only an uncertain and indirect effect on a tribe's economic self-sufficiency because that effect depends on the United States' response to the State tax.
The tribal treasury is not directly involved.
The United States may choose not to pass the State tax on to the tribal entity.
The United States may increase appropriations, or the United States may change the allocation of the funds.
Justice O'Connor: Ms. Brinkmann, what if the tribe had elected under the Self-Determination Act to take the money and... and award the contracts?
Mr. Brinkmann: We believe that the Indian preemption doctrine then would be applied, and there would be a balancing analysis under that because in that situation, Your Honor, these concerns about direct relations with the tribe, tribal sovereignty, and economic self-sufficiency of the tribe would be at issue because the tribe would be a party to the contract.
With regard to the third major reason we think that the State taxes on Federal contracts don't call for the application of that doctrine, though, is because the core concerns about the regulation of direct relations with Indians is not present because the tribe is not a... a member to the contract.
Those kinds of Federal concerns are found in the Indian Commerce Clause, the Federal Government's ability to regulate commerce directly with Indian tribes, and in statutes such as the Indian trader statutes and the Self-Determination Act statute, which Justice O'Connor asked about.
The interests underlying those statutes would come into play if the Indian tribe were a direct party to the contract.
Also, regarding the economic self-sufficiency, as United States v. New Mexico makes clear, in a case where the United States is the contracting party, the United States has the authority to alter the imposition of that State tax by legislation.
Here, of course, the tribe would not have that authority if they were the direct party to the contract.
And as the Court made clear in the Montana v. Crow case and the Cotton Petroleum case, the Indian preemption doctrine in those situations protects against extraordinarily high taxes, protects the tribe.
Respondent, nonetheless, invokes the Indian preemption doctrine based on purported interference with Federal interests, particularly the Self-Determination Act, which we were just discussing.
As we discussed, that statute authorizes tribes to make the choice whether to take over Federal Government projects, enter into their own relationships with contractors.
But in response to your question, Justice Ginsburg, to my co-counsel, we believe there's nothing in that statute that suggests that it was intended to preempt all aspects of a State law that could somehow indirectly affect a tribe's decision whether to enter into a Self-Determination Act contract.
Rather, that statute reinforces the fact that there is a distinction between a contract with the Federal Government and a contract with a tribe, reinforcing the fact that when there's a tribal contract and the contract is directly with the tribe, questions of tribal sovereignty and self-determination are at issue.
Justice Stevens: May I just ask something out of curiosity?
I'm not familiar with the statute that Justice O'Connor cited.
Does that statute provide for waiver of tribal sovereign immunity?
Mr. Brinkmann: No, it does not, Your Honor.
Justice Stevens: So that a contractor conceivably might say, well, I don't want to do business with you because I might not be able to collect.
Mr. Brinkmann: That may be, Your Honor.
There were some provisions on... in regulations also concerning requirements for liability insurance, for example, in some instances.
Also though, you would have to take into other concerns about whether or not the contractor would engage in a relationship with the tribe and that way perhaps the tax instance that's at issue here would make a significant difference in...
Justice Kennedy: How do we describe the State's interest in taxing?
Simply because the reservation is within the sovereign borders of the State?
Mr. Brinkmann: Yes, Your Honor.
The Court has made clear that that land is within the State and that the State would still have interest in taxing the land within its geographic boundaries, and we think under United States v. New Mexico as a Federal contractor, the Court has made clear that there is no bar to that tax unless Congress provides otherwise expressly.
Chief Justice Rehnquist: And...
Well, Ms. Brinkmann, you say that it would have interest in taxing that land.
Actually they're taxing a transaction...
Mr. Brinkmann: Yes.
Chief Justice Rehnquist: that took place on the land.
Mr. Brinkmann: I'm sorry.
Certainly, Your Honor, it's that transaction privilege tax.
It's that relationship, that contract between the contractor and the United States.
Justice Kennedy: And is this against the background of the fact that the State always provides certain services or, again, is it just this geographic location within the sovereign borders of the State?
Mr. Brinkmann: I think it's both, Your Honor.
I mean, I think that the idea that it's within the geographic boundaries of the State calls into fact the question that a State provides services to the entire geographic entity.
I think it's what the Court talked about in Cotton Petroleum, the general services that are... anyone is entitled to in an organized community.
Chief Justice Rehnquist: Well, certainly it wouldn't be open to me, say, if I live in Arlington, Virginia, to refuse to pay my property tax because they're not fixing a pothole in my road, would it?
Mr. Brinkmann: No, Your Honor.
It certainly would not.
If there's nothing further, Your Honor, we believe that the decision of the Arizona Court of Appeals should be reversed.
Argument of Bruce C. Smith
Chief Justice Rehnquist: Thank you, Ms. Brinkmann.
Mr. Smith, we'll hear from you.
Mr. Smith: Mr. Chief Justice, and may it please the Court:
In 1980, the State of Arizona came to this Court and admitted that it wanted to tax a nonmember use of BIA roads, and this Court in White Mountain v. Bracker told the State of Arizona, you cannot tax when a nonmember uses those same BIA roads.
Now the State is here to say when a nonmember is building those same BIA roads, we are entitled to tax it.
Under the implied preemption analysis for Indian cases, this Court should affirm the decision of the Arizona Court of Appeals and hold that this tax is preempted.
The central issue in this case is, I believe, what test should this Court apply.
Should it apply the United States v. New Mexico rule, or should it apply Indian preemption analysis?
There are several reasons why United States v. New Mexico simply does not work here.
United States v. New Mexico is a decision of this Court based on the clash of only two sovereigns, that is, State authority and Federal authority, and whether States can tax contractors with the Federal Government.
That two-sovereign dispute is not at issue when you are dealing with Indian tribes.
This Court has recognized on a number of occasions that Indian tribes and their relationship to States and the Federal Government is a unique one in our constitutional system.
And the other thing that is important to consider is that the agency here that is dealing with these Indian tribes is the BIA.
It's not the Department of Energy or the old Atomic Energy Commission in United States v. New Mexico.
We are dealing here with the Bureau of Indian Affairs, an agency whose sole obligation is to satisfy a trust obligation that it has toward Indian tribes.
The other important consideration here that is not present in United States v. New Mexico analysis...
Chief Justice Rehnquist: Mr. Smith, I... I suppose that the Government is speaking here for... for the BIA, don't you think?
Mr. Smith: I would submit, Your Honor, that the Government is speaking on behalf of the BIA at the highest levels, but I think if you carefully read the Government's brief and you look at the record in this case, most notably the testimony of Mr. Ward that is in the joint appendix and the full transcript that is an appendix to our appellate brief, you'll see that there are differences between what the Government says and what Mr. Ward said in his testimony.
Mr. Ward recognized that one of my obligations is to do the most that we can on behalf of these tribes.
The Government says, we... there... excuse me... there is no interest that the tribes have once we have them contracted.
That is simply not true in this case.
Chief Justice Rehnquist: What was Mr. Ward's position in the Bureau of Indian Affairs?
Mr. Smith: Mr. Ward was the contracting officer for all of the Navajo contracts that are at issue in this case.
Mr. Ward put the contracts out for bid.
He reviewed the contracts.
He went to the Federal Government and got a comparison bid to make sure that the bids were in line, and he ultimately awarded the contracts.
The record shows that he signed all of these contracts.
Chief Justice Rehnquist: And he himself is a Federal employee, I take it.
Mr. Smith: He himself is a Federal employee.
Chief Justice Rehnquist: Of the Bureau of Indian Affairs?
Mr. Smith: Yes, that's true.
And now, the Government's position here is, well, this is not going to interfere in tribal sovereignty.
I believe that it will interfere in tribal sovereignty because if this Court upholds Arizona's taxes, what it's going to do is it's going to send a message maybe not to the people down the street who are making broad policy statements, but it is going to interfere with the way Mr. Ward will do his job tomorrow and the way in which the Navajos, the Gila River reservations, and the other tribes interact with Mr. Ward.
Mr. Ward will now have to go to these tribes and say, if you want a hundred percent of your Federal dollars under these contracts, you should do the contracts yourself, but if you can get by with 95 percent of the budget for your contracts, then we can do that.
That is fulfilling the trust obligation, and... and under the contracts that were at issue in this case, that was his regulatory obligation, to tell the tribes the financial impacts of these tribal self-determination decisions.
This Court has repeatedly said...
Justice O'Connor: Well, certainly in White Mountain Apache Tribe, it was the tribe that entered into the contract with the logging company, was it not?
Mr. Smith: Yes, it was, Your Honor.
Justice O'Connor: And that isn't the case here.
This comes much closer to the New Mexico case, does it not?
Mr. Smith: I don't believe that it comes closer to the New Mexico case, Justice O'Connor, for this reason.
Congress has given to tribes the right to make these what are called 638 decisions, the self-determination contract decision.
Congress has said, when you decide to contract or when you decide not to contract, those are both equal self-determination decisions.
You are... we are not going to...
Justice O'Connor: Well, the tribe could have opted under the act to ask for the money and do its own contracting.
Mr. Smith: Yes, it could have, Your Honor.
But you must recognize the realities of our Indian tribes and their particular situations.
Some tribes like the Navajo Nation may have expertise in an area, for example, road construction, and they may have the ability to contract.
But the policy of Congress here is we're not going to prejudice you if there's a decision about perhaps building a... a jail for the tribe or building a clinic if you don't have the expertise in that area.
You should get the same amount of money.
We're not going to interfere, and Congress has specifically told the Government in 1994 when it amended the tribal Self-Determination Act, we don't want the BIA to interfere when Indian tribes make these decisions.
Now, if we have a situation where Congress is responding to Indian tribes about interference with tribal self-determination decisions, Congress has responded, clarified its intent, has mandated that the BIA promulgate Self-Determination Act regulations, and those regulations say, we are not going to interfere with tribal sovereignty, then you have a situation where the decision process itself, whether or not to contract, is heavily regulated by statutes and regulations.
You have that preemptive effect.
You have those... you have the situation like Ramah Navajo and the Bracker case where the congressional policies are preempted by State law.
And like the Ramah Navajo case and like the Bracker decision, we have a case here in which Arizona does not have any interest in the construction activity at issue.
Justice Ginsburg: But unlike those two cases, it's a U.S. contractor contract, and is there any precedent, other than this Arizona Appeals Court, that says that the State can tax when the contract is between the United States and the contractor as distinguished from the two cases on which you rely where the contract was with the tribe itself?
Mr. Smith: No, Justice Ginsburg.
I am not aware of any such case.
But what I am aware of is prior decisions of this Court like in the Colville case where it addressed a... an argument of tribal self-determination and the Court applied the same preemption balancing test to determine whether the State tax was preempted by Federal law.
Now, in the Colville case, the Court applied that balancing test and upheld the State tax because what was at issue there was they... as the Court characterized it, they're simply marketing a tax exemption and making cheaper cigarettes available to non-Indians.
Justice Ginsburg: Well, why... why couldn't one take the positions... your big point is that there are three sovereigns in this picture... that the tribe, whenever it chooses to act as sovereign, that is, make the contract itself, its tribal sovereignty is respected, but when it chooses to let the United States act as kind of patriarch for it, then it isn't exercising its sovereign capacity?
It's more in the position of... of the ward of the United States who is acting for its benefit.
Mr. Smith: If we were dealing with a clean slate and simply as a matter of Federal common law, I might agree with you, Justice Ginburg... Ginsburg, but what we have here is the Court looks to Congress to tell it what is... how Congress is exercising its plenary authority.
And in this instance, Congress has told the United States that self-determination decisions whether or not to contract are both equal self-determination decisions.
So, you can't simply presume that it's not exercising its sovereign decision making process.
One of the issues that has come up in this case is whether there's going to be any interference with the tribal decision making process, and it will have a direct impact on that decision making process.
Justice O'Connor: Well, what if the Indian tribe were to lease property to a non-Indian business entity?
The business entity sets up operation and does business on the reservation on the... from the leased premises with non-Indians.
The State wants to tax.
You could make the same argument, that to allow the State to tax would interfere with tribal sovereignty.
Mr. Smith: The... those kinds of commercial relationships, Justice O'Connor, have been dealt with by the Court in the past.
If you look at the cases that were cited by one of the amici, those kinds of commercial relationships...
Justice O'Connor: Do you say there the State is free to impose its taxes?
Mr. Smith: I think that what the Court should do is apply its implied preemption analysis, look at the situation, and see whether there's an overriding Federal and tribal interest that should preempt this kind of tax.
The beauty of this Court's implied preemption analysis is that it takes into consideration the interests of all three parties who are being affected by...
Chief Justice Rehnquist: And it makes it very difficult to apply any general principle.
It's a case-by-case analysis every time so that people really don't know what the outcome is going to be until perhaps it gets to this Court.
Mr. Smith: This Court in many factual situations does not apply a bright line rule.
This Court in free speech cases, religion cases, and discrimination cases applies tests.
It applies factors.
And if you look at State taxation of interstate cases or State taxation of foreign commerce clause cases, this Court still applies factors, determines whether those factors are satisfied, and then determines whether the State nondiscriminatory tax will be upheld.
I submit that the Federal preemption analysis that this Court has adopted, while it does require case-by-case analysis, is not a difficult and is not an unduly burdensome test.
Chief Justice Rehnquist: But it's certainly more difficult than the United States v. New Mexico doctrine.
I mean, I don't think we've had a case on State taxation of Federal entities since our decision in United States against New Mexico, which is a signal that it's a readily understood and applicable doctrine in the lower courts.
Mr. Smith: I agree, Your Honor.
It is a readily understood test.
However, that test does not take into consideration the Federal and tribal interests that are at issue in cases like this.
Chief Justice Rehnquist: Well, certainly the Federal Government here is saying it does take into consideration the Federal interest.
Mr. Smith: I would disagree with... with the United States' position on whether it's going to interfere with their relationships with Indian tribes.
I think when you get down to the Mr. Wards of this world in the BIA, it is going to have a direct and it is going to have a substantial impact on the way in which they are interacting with these Indian tribes.
The Court must keep...
Justice O'Connor: Well, the idea that we should be concerned about a BIA employee when the BIA itself isn't concerned strikes me as... as... as rather unusual, to say the least.
Mr. Smith: This Court in many of its criminal procedure cases takes into consideration what the effect of its rulings will be for the police officers on the street.
Will this rule be difficult to apply?
How easy will this rule be to apply?
That is the same consideration that the Court should take into consideration for Mr. Ward because it is not the Solicitor General's office that on a day-to-day basis carries into effect the United States' trust responsibilities to this Nation's Indian tribes.
Justice Scalia: What do we do with... with contractors with the Federal Government itself?
We don't apply this case-by-case weighing as to... to what extent the... the State's imposition of a tax upon this contract with the Federal Government will affect the sovereignty interests of the Federal Government, blah, blah, blah.
I mean, you know, we... there would be no end to litigation if we did that.
We simply have a flat rule.
You can do it.
Mr. Smith: I agree but...
Justice Scalia: And why should we have a different rule for the Indian tribes?
Mr. Smith: The reason why we have a different rule and the Court should adopt a different rule for Indian tribes is because of that unique trust relationship because in these situations the Government doesn't deal with Indian tribes as a mere recipient of Federal money.
It deals with them on a government-to-government basis.
Justice Scalia: But you can't demand more of a person than that he treats someone as well as he would treat himself, and if the Federal Government doesn't... doesn't deem it a... too much of an imposition upon its own sovereignty to have... to have its contracts taxed by the States, why should it deem it an excessive imposition upon the tribes' sovereignty to have their contracts taxed by the States?
Mr. Smith: Because Congress has said that self-determination decisions are equal expressions, and what this does is it adds an additional factor into the tribal calculus of whether or not to make a self-determination decision.
Justice Scalia: Well, sure, but any tax is... is going to affect how the tribe decides to do business to some degree.
And... and we're supposed to sit here and decide whether the degree is too much contract by contract?
You'd have to do it contract by contract, wouldn't you?
Mr. Smith: In some situations, Justice Scalia, you may have to do that, but when you... I think when you look at the broader issues that are involved here, I think that decisions by this Court or the lower courts can help clarify the issue.
I think that decisions by the Ninth Circuit have clarified sales tax issues in Arizona law.
I think that decisions by this Court have clarified the... the smoke shop line of cases.
However, in the contracting situation, if this Court adopts our rule, it will send a message and it will provide clarity to this situation.
We are talking about something that is crystal clear.
It's the tax.
It's the percentage of tax.
And the Court, probably for the first time, has before it an actual record of the... of the impact of this tax.
Mr. Ward provided that testimony, and he said that a 5 percent tax will mean a 5 percent reduction in the amount of roads that are built.
That is what is a very, very important and a very, very crucial decision for this Court to consider.
The tax itself affects tribal procurement processes.
How much money are we going to have?
If we decide after the planning stage to determine the scope of the road contract, well, what's going to be left?
Is the... is the Federal Government going to budget enough money for this project?
We've designed it, and in many situations tribes have the right to take money from the Government and plan their own roads.
Will there be enough money to build the road that we have planned?
How much is going to be there?
That is an important...
Justice O'Connor: Well, if it's clear that the taxes can be imposed, then in the Federal budgeting and appropriation process, that amount can be taken into consideration.
I think it's very helpful to have a clear rule and not monkey around with some case-by-case analysis, and certainly the budgeting and appropriation processes can take into account all the expenditures that will be required and the costs, including applicable State taxes.
Mr. Smith: If the Court were to adopt that standard and send the message to Congress, I do not believe that it will still in... in the future have the effect that... that you desire, Justice O'Connor, because what is going to happen under the Transportation Equity Act for the 21st Century is that Congress is going to authorize money to Indian tribes on a tribe-by-tribe basis.
Those Indian tribes are then going to be left with the position of knowing what money has been budgeted for them.
They're going to be in the position of, as in this case, setting the priorities, working on the planning with the BIA, and then they have to decide whether or not to enter into the Self-Determination Act decision.
It's much like the decision that State legislatures and Congress make every year when they do tax projections.
How much money are we going to have in our budget for us this year?
What kind of projects...
Justice Stevens: May I ask, Mr. Smith?
Your rule isn't limited to road building, is it, the rule you advocate?
Mr. Smith: No.
Justice Stevens: No matter what... if they build houses or ski resorts or casinos, anybody contracting with the tribe would have a tax exemption.
Mr. Smith: A contract with the tribe, Justice Stevens?
Justice Stevens: The Federal Government.
With the Federal Government doing anything for the tribe.
Of course, a fortiori, if it's a contract directly with the tribe, of course, it would be totally exempt under your view.
Mr. Smith: Yes.
Justice Breyer: Yes.
Mr. Smith: I think in those situations, for example, looking at... at gaming casinos, you'd have to look at the Federal, State, and tribal interests involved.
That's a balancing test that... that other folks have engaged in and we know how to apply it.
I believe that it's very simple.
You simply look at the State involvement with the on-reservation activity.
You look at the Federal and tribal interests that are involved and you do the balancing test and you make the decision as to where it comes out.
Now, in some of the cases that have been cited in the briefs like the Gila River case, you had a situation in which the State or State agencies were actively involved in the on... on-reservation activity.
Policemen were provided for certain events.
In that case, the Court was able to determine this is how the balancing test comes out.
Going back to the contracting situation, you would look at situations involving perhaps under the Indian Health Service a clinic or a medical facility and the other applicable Federal statutes to determine what kind of... of balancing and how that test comes out.
The petitioners and the United States have argued that, you know, we... we don't have to necessarily consider each and every factor.
And this is just one factor and it's almost like a slippery slope here.
But what is important to consider is this Court's decisions in the New Mexico v. Mescalero Apache Tribe and in the White Mountain/ Bracker case itself.
In both of those decisions, this Court said, we need to consider whether this tax would affect the full objectives of the Federal legislation.
Similarly in the New Mexico/ Mescalero Apache case, the Court said, how is this going to affect the legislation?
And that's what we have here.
We have a tax.
It's a set percentage of a tax.
And the Court has to ask itself, is this going to interfere with Congress' stated objective, interfering with decisions on whether or not to enter into these Self-Determination Act decisions?
It clearly will.
Like in Bracker where the Court condemned the imposition of the tax, even though it was only $ 5,000 or $ 6,000 in annual taxes, this Court said that that tax will add an additional factor for the parties to consider, and that is sufficient for us to find that the tax is preempted.
This road construction contract is no different than the construction contract at issue in the White Mountain/ Bracker case.
We believe that that case is on all fours with this case but for the issue of whether or not the Court should apply preemption analysis to Indian roads.
Chief Justice Rehnquist: Mr. Smith, I gather that... you said the contractor, but at least according to the petitioner's brief, the... there are a number of contracts all over the State with different... different tribes.
Is that correct?
Mr. Smith: Yes, Your Honor, that is correct.
What happened in this situation is Mr. Ward... he is a Navajo representative of the BIA.
Given the size of the Navajo tribe, they have their own special BIA office.
There's also evidence in the record that's alluded to regarding the Phoenix office.
That is another BIA office and they administer Federal programs and interact with Federal tribes in the Phoenix office.
There are a number of BIA offices and they deal with the tribes in their jurisdiction.
Chief Justice Rehnquist: And so, your client did work not just on the Navajo reservation but on a number of other Indian properties, if one may call it that, in the State.
Mr. Smith: That's correct, Your Honor.
Blaze built roads on the Navajo reservation.
It built roads on the Hopi reservation, the Papago... now it's called the Tohono O'odham... reservation, the Gila reservation, and the Colorado River Indian reservation.
If there are no further questions, thank you.
Rebuttal of Patrick Irvine
Chief Justice Rehnquist: Thank you, Mr. Smith.
Mr. Irvine, you have 7 minutes remaining.
Mr. Irvine: Thank you, Your Honor.
I met Mr. Ward at the hearing.
I think I've met a lot of Mr. Wards in different capacities.
And I think officials at that level want a clear rule.
Mr. Ward, I'm sure, wants to be able to tell the people, the contractors, whether it's taxable or not.
If the test is we don't know because it depends on whether the State provides services, we don't know because it depends on which statute authorizes the funding and what may apply, that's no help to Mr. Ward.
It's no help to Blaze Construction.
It's no help to the State of Arizona in deciding whether the tax is permissible.
So, in terms of... of the interest of... of lower levels of the BIA, I would think a... a clear bright line rule, as the United States itself argues here, should be the answer.
In terms of multiple sovereignties, here there is a clash between only two sovereigns, the State and the Federal Government.
The tribe is not a party to the transaction.
The transactions take place on the reservation, but the tribe is... is not affected except indirectly through the Federal sovereignty.
The agency certainly is the Bureau of Indian Affairs which does have trust responsibilities to the tribes, but that's a function which is... is between the tribes and the Federal Government.
It's not something that the State is involved in.
There's nothing in the record that shows that Congress expects the State of Arizona to help the BIA pay its bills by not imposing its taxes.
And certainly there can be interference with tribal decision making because of a State tax, but if there is no tax on Federal contractors, there can equally be interference with Bureau of Indian Affairs decision making.
Would the Bureau then have to decide whether to construct projects on the reservation or off the reservation because there might be some tax effect?
The Indian Health Service has a hospital in Phoenix, good transportation, good other health care.
If there's a tax savings, should they be enticed to move 20 or 30 miles to a reservation just because of the tax effects?
As I mentioned earlier, there's always an effect of... on... there's always an effect on decision making whether there is or isn't a tax.
Finally, as far as the Self-Determination Act goes, that doesn't even apply to the contracts at issue.
These contracts were not between the tribe and the contractor.
Each of the tribes chose not to exercise their option under the Self-Determination Act.
This Court has never preempted a tax on a reservation based on a statutory scheme that doesn't even apply to the regulated activity, and I suggest it shouldn't here either.
If there are no further questions, I'll conclude with that.
Chief Justice Rehnquist: Thank you, Mr. Irvine.
The case is submitted.
The honorable court is now adjourned until tomorrow at ten o'clock.
Argument of Speaker
Mr. Speaker: The opinion of the Court in No. 97-1536, Arizona Department of Revenue versus Blaze Construction Company will be announced by Justice Thomas.
Argument of Justice Thomas
Mr. Thomas: This case comes to us on a writ of certiorari to the Arizona Court of Appeals.
Respondent is a construction company incorporated under the laws of Blackfeet Tribe of Montana.
Bureau of Indian Affairs contracted with respondent to perform work on several Indian reservation roads in Arizona.
Because none of the work occurred on it’s own reservation, respondent is treated as a non-Indian private company for purposes of this case.
Arizona imposes a tax on the gross receipts of the companies doing business in that state.
Respondent failed to pay this tax on the proceeds from its contract with the Bureau.
Arizona issued a tax deficiency assessment and respondent protested, arguing that the federal law preempted Arizona’s tax and hence it owed no taxes to Arizona.
The Arizona Tax Court rejected the protest, but the Arizona Court of Appeals reversed.
Employing a test which balanced the Federal, State and Tribal interest the Court of Appeals held that a congressional intent to preempt Arizona’s tax could be inferred from the federal laws regulating the welfare of Indian Tribes.
The Arizona’s Supreme Court denied a petition for review.
In an opinion filed with the clerk today, we reverse.
A state generally may impose a nondiscriminatory tax on a private company’s proceeds from its contracts with the Federal Government.
Congress may displace its authority by expressly exempting the contracts from such taxation.
In this case Congress has not expressly exempted respondent’s contract from Arizona’s gross receipt tax.
And the incidence of that tax falls on respondent not the United States.
The Court of Appeals was mistaken in its efforts to balance the federal, state and tribal interest while that balancing test has been applied to state taxation of on reservation transactions between tribes and private parties.
It does not apply to taxation of transactions between Federal Government and its private contractors even when those transactions happen to take place on Indian reservations.
The opinion of the Court is unanimous.