South Point Energy Center LLC v. Ador ( 2022 )

IN THE
SUPREME COURT OF THE STATE OF ARIZONA
SOUTH POINT ENERGY CENTER LLC,
Plaintiff/Appellant,
v.
ARIZONA DEPARTMENT OF REVENUE, ET AL.,
Defendants/Appellees.
No. CV-21-0130-PR
Filed April 26, 2022
Appeal from the Arizona Tax Court
The Honorable Christopher T. Whitten, Judge
Nos. TX2013-000522, TX2014-000451, TX2015-000850,
TX2016-001228, TX2017-001744, TX2018-000019,
TX2019-000086 (Consolidated)
Opinion of the Court of Appeals, Division One
251 Ariz. 263 (App. 2021)
VACATED IN PART AND REMANDED
COUNSEL:
Bennett Evan Cooper (argued), Vail C. Cloar, Dickinson Wright PLLC,
Phoenix; Pat Derdenger, Karen Lowell, Lewis Roca Rothgerber Christie
LLP, Phoenix, Attorneys for South Point Energy Center LLC
Cameron C. Artigue (argued), Camila Alarcon, Christopher L. Hering,
Gammage & Burnham, P.L.C., Phoenix, Attorneys for Arizona Department
of Revenue, et al.
Charles W. Galbraith, Jenner and Block LLP, Washington, D.C.; Verrin T.
SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
Kewenvoyouma, Christopher Love, Kewenvoyouma Law, PLLC, Tempe,
Attorneys for Amici Curiae Fort Mojave Indian Tribe, the Navajo Nation,
the Gila River Indian Community, Gila River Indian Community Utility
Authority, the Inter-Tribal Association of Arizona, and the National
Congress of American Indians
James M. Susa, DeConcini McDonald Yetwin & Lacy, P.C., Tucson,
Attorneys for Amicus Curiae County Supervisors Association of Arizona
and the Arizona Association of Counties
VICE CHIEF JUSTICE TIMMER authored the opinion of the Court, in which
CHIEF JUSTICE BRUTINEL and JUSTICES BOLICK, LOPEZ, BEENE,
MONTGOMERY, and KING joined.
VICE CHIEF JUSTICE TIMMER, opinion of the Court:
¶1 The issue here is whether the Indian Reorganization Act of
1934 (the “Act”) expressly preempts Mohave County’s ad valorem property
tax on a power plant owned by non-Indian lessees of land purportedly
acquired by the federal government under the Act and held in trust for the
benefit of an Indian tribe. We hold the Act does not expressly preempt
this tax.
BACKGROUND
¶2 In 1999, Calpine Construction Finance Co. (“Calpine”), a non-
Indian-owned entity, leased 320 acres of undeveloped land on a long-term
basis from the Fort Mojave Indian Tribe (the “Tribe”) to construct and
operate an electric power generating plant (the “Plant”) on reservation
lands. The Plant, which began operating in 2001, is a “merchant plant”
that sells electrical energy to public and private utility companies for resale
and redistribution to end-users. It does not supply electrical energy to the
Tribe or to any person or entity located on the reservation. The Tribe did
not finance the Plant’s construction and does not contribute any operating
funds.
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
¶3 After the Plant was built, Mohave County assessed ad
valorem property taxes against the Plant based on valuations determined
by the Arizona Department of Revenue (“ADOR”). See Ariz. Const. art. 9,
§ 2(13) (“All property in the state not exempt under the laws of the United
States or under this constitution or exempt by law under the provisions of
this section shall be subject to taxation to be ascertained as provided by
law.”); A.R.S. § 42-11002 (to same effect). ADOR assessed only the value
of the Plant itself and the personal property used to operate it; ADOR did
not assess the value of the underlying land.
¶4 Calpine paid the taxes and unsuccessfully sued for a refund,
arguing the Tribe, as lessor, owned all improvements to the leased
property, thereby exempting the Plant from state taxation pursuant to
federal law. See Calpine Constr. Fin. Co. v. Ariz. Dep’t of Revenue, 221 Ariz.
244, 249 ¶ 22 (App. 2009); see also Cass County v. Leech Lake Band of Chippewa
Indians, 524 U.S. 103, 110 (1998) (“State and local governments may not tax
Indian reservation land ‘absent cession of jurisdiction or other federal
statutes permitting it.’” (quoting County of Yakima v. Confederated Tribes &
Bands of Yakima Nation, 502 U.S. 251, 258 (1992))). In the ensuing appeal,
the court of appeals acknowledged the general rule that a lessor owns all
real property improvements made by a lessee but concluded the parties’
lease varied that rule by providing that Calpine owns all improvements.
Calpine Constr., 221 Ariz. at 248 ¶¶ 16–17. Consequently, the court
affirmed the tax court’s judgment that Calpine was liable for property taxes
based on the value of the Plant and related personal property. See id.
at 246 ¶ 1.
¶5 After a series of transactions involving Calpine and several of
its related entities, the Tribe’s land and the Plant were sublet to South Point
Energy Center LLC (“South Point”), another Calpine-related entity, with
the Tribe’s consent and approval by the Bureau of Indian Affairs (the
“BIA”). In 2012, the Tribe and Calpine’s successor-lessees, which we
include in our references to “South Point” for convenience, executed an
amended lease, which remained in place during this lawsuit. Among
other things, the amended lease provides that no partnership exists
between the Tribe and South Point. It further reaffirms that the Plant and
“all [i]mprovements and associated materials, supplies, and equipment”
are “owned and controlled” by South Point, and that at the expiration of
the lease, South Point must remove all above-ground real property
improvements and personal property, excepting roads and foundations.
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
¶6 The amended lease contemplates that ad valorem property
taxes may be assessed on the Plant. The lease requires South Point to
timely pay all taxes levied by any governmental entity to prevent
imposition of any liens and to hold the Tribe harmless against any liens that
are imposed. The BIA approved the amended lease.
¶7 South Point initiated these consolidated lawsuits seeking a
refund of payments for property taxes imposed from 2010 to 2018, to the
extent they were based on valuations of the Plant. See A.R.S. § 42-11005
(authorizing suit to recover illegally levied, assessed, or collected taxes).
South Point does not challenge the tax assessments based on ownership of
the Plant, as Calpine did in its earlier lawsuit. Instead, South Point argues
that § 5 of the Act, 25 U.S.C. § 5108, expressly preempts states from
imposing property taxes on any real property improvements, regardless of
ownership, located on land held in trust by the federal government for the
benefit of Indian tribes or individual Indians. Alternatively, South Point
argues that application of a balancing test announced in White Mountain
Apache Tribe v. Bracker, 448 U.S. 136 (1980), evidences Congress’s implicit
intent to preempt taxing the Plant.
¶8 The tax court rejected both of South Point’s arguments and
granted summary judgment for Mohave County and ADOR (collectively,
the “County”). The court of appeals reversed, reasoning that § 5 of the Act
expressly and categorically exempts permanent improvements on the
Tribe’s land from state taxation regardless of ownership. S. Point Energy
Ctr. LLC v. Ariz. Dep’t of Revenue, 251 Ariz. 263, 269 ¶ 30 (App. 2021). It
remanded for the tax court to determine which, if any, of the assets making
up the Plant constitute the tax-exempt permanent improvements. Id.The court did not itself apply the balancing test under Bracker but instead
instructed the tax court to do so in considering whether property taxes on
the Plant’s impermanent assets were taxable. Id.¶9 We granted review to decide whether § 5 of the Act expressly
preempts taxing permanent improvements constructed on tribal lands
acquired under that section when those improvements are owned by non-
Indians, an issue of statewide importance.
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
DISCUSSION
I.
¶10 We review the tax court’s entry of summary judgment de
novo, viewing the facts in the light most favorable to South Point as the
nonmoving party. Dinsmoor v. City of Phoenix, 251 Ariz. 370, 373 ¶ 13
(2021). We will affirm if there is no genuine dispute of material fact and
the State is entitled to judgment as a matter of law. Id.; Ariz. R. Civ.
P. 56(a). We review the prior courts’ preemption decisions and their
interpretation of § 5 of the Act de novo as issues of law. See Conklin v.
Medtronic, Inc., 245 Ariz. 501, 504 ¶ 7 (2018) (preemption); Brenda D. v. Dep’t
of Child Safety, 243 Ariz. 437, 442 ¶ 15 (2018) (statutory interpretation).
II.
A.
¶11 The Supremacy Clause of the United States Constitution
makes valid federal laws predominate over conflicting state laws. See U.S.
Const. art. 6, cl. 2. Within constitutional limits, Congress may generally
preempt application of state law in a few ways, including “by so stating in
express terms,” which is known as “express preemption.” See Pac. Gas &
Elec. Co. v. State Energy Res. Conservation & Dev. Comm’n, 461 U.S. 190,
203–04 (1983) (describing different types of preemption). In deciding
whether state laws apply to non-Indian activities conducted on an Indian
reservation, the Court in Bracker provided an additional pathway for
finding federal preemption. 448 U.S. at 144–45. A court faced with a
preemption challenge in that circumstance, absent express preemption,
should make “a particularized inquiry into the nature of the state, federal,
and tribal interests at stake . . . to determine whether, in the specific context,
the exercise of state authority would violate federal law.” Id. If so, the
state law is impliedly preempted. See id.; see also Cotton Petroleum Corp. v.
New Mexico, 490 U.S. 163, 176–77 (1989) (“It bears emphasis that although
congressional silence no longer entails a broad-based immunity from
taxation for private parties doing business with Indian tribes, federal
preemption is not limited to cases in which Congress has expressly—as
compared to impliedly—preempted the state activity.”).
¶12 The only issue before us is whether § 5 of the Act expressly
preempts application of Arizona’s ad valorem tax laws against the Plant.
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
See Confederated Tribes of Chehalis Rsrv. v. Thurston Cnty. Bd. of Equalization,
724 F.3d 1153, 1159 (9th Cir. 2013) (stating that when § 5 of the Act applies
to preempt taxation, there is no need to consider implied preemption under
Bracker).
B.
¶13 Section 5 of the Act provides in relevant part:
The Secretary of the Interior is authorized, in his discretion, to
acquire, through purchase, relinquishment, gift, exchange, or
assignment, any interest in lands, water rights, or surface
rights to lands, within or without existing reservations,
including trust or otherwise restricted allotments, whether
the allottee be living or deceased, for the purpose of providing
land for Indians.
....
Title to any lands or rights acquired pursuant to this Act or
the Act of July 28, 1955 (69 Stat. 392), as amended (25 U.S.C.
608 et seq.) shall be taken in the name of the United States in
trust for the Indian tribe or individual Indian for which the
land is acquired, and such lands or rights shall be exempt
from State and local taxation.
25 U.S.C. § 5108 (emphasis added). South Point argues that the above-
emphasized language categorically exempts the Plant from the County’s
property tax regardless of ownership. The County asserts that because the
Plant is not owned by the United States in trust for the Tribe or for
individual Indians, the Plant is not included in “such lands or rights”
exempt from tax under § 5.
¶14 Our primary goal in interpreting § 5 is to determine and give
effect to Congress’s intent. See Steven H. v. Ariz. Dep’t of Econ. Sec., 218
Ariz. 566, 570 ¶ 14 (2008). We read words in context and effectuate the
plain meaning of § 5 unless doing so would be absurd. See Welch v. Cochise
Cnty. Bd. of Supervisors, 251 Ariz. 519, 523 ¶ 11 (2021). If the language is
ambiguous, we consider secondary interpretive principles, such as the Act’s
subject matter, history, and purpose, and the consequences of differing
interpretations. Id.6
SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
¶15 We start with § 5’s plain language. The provision exempts
“such lands or rights” from state and local taxation. § 5108. “Such lands
or rights” are identified as “any interest in lands, water rights, or surface
rights to lands” acquired by the Secretary of the Interior “for the purpose of
providing land for Indians” and titled “in the name of the United States in
trust for [an] Indian tribe or [an] individual Indian.” Id. These “lands or
rights” can be located “within or without existing reservations.” Id.
Thus, to fall under § 5’s tax exemption, the Plant must be (1) an “interest in
lands, water rights, or surface rights to lands,” (2) acquired by the Secretary
of the Interior pursuant to § 5, and (3) titled “in the name of the United
States in trust for the Indian tribe or [an] individual Indian.” See id. The
primary issue here is whether the Plant is included within the federal
government’s ownership rights, and thus the Tribe’s beneficial rights, in the
land underlying the Plant. If it is, and § 5’s additional requirements are
satisfied, the Plant is tax exempt.
¶16 The Act itself does not delineate the rights included in the
federal government’s ownership of land under § 5. According to the BIA,
those rights include “any interests, benefits, and rights inherent in the
ownership of the real property.” 25 C.F.R. § 150.2. As acknowledged in
Calpine Construction, such rights generally include ownership of permanent
improvements constructed by a tenant on leased property. 221 Ariz. at
248 ¶ 16; see also Cutter Aviation, Inc. v. Ariz. Dep’t of Revenue, 191 Ariz. 485,
492 (App. 1997) (recognizing that generally “a permanent structure placed
upon and attached to the realty by a tenant is real property belonging to the
lessor”). This general rule does not apply when, as here, the lease
provides that the tenant owns the permanent improvements. See Calpine
Constr., 221 Ariz. at 248 ¶¶ 16–17; Cutter Aviation, 191 Ariz. at 492. The
BIA recognizes this exception as applying to leases of land owned by the
federal government pursuant to § 5. 25 C.F.R. § 162.415(a) (“A business
lease must specify who will own any permanent improvements the lessee
constructs during the lease term and may specify under what conditions, if
any, permanent improvements the lessee constructs may be conveyed to
the Indian landowners during the lease term.”).
¶17 It is settled that South Point, not the federal government,
owns the Plant. Calpine Constr., 221 Ariz. at 248 ¶ 17. Based on this fact
alone, § 5 seemingly does not exempt the Plant from the County’s property
taxes because the land owned by the United States in trust for the Tribe does
not include the Plant. See § 5108. As South Point notes, however, the
Supreme Court expansively applied § 5 in Mescalero Apache Tribe v. Jones,
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Opinion of the Court
411 U.S. 145 (1973), to exempt a state tax imposed on a tribal entity for using
permanent improvements it constructed and owned on land leased from
the federal government. In doing so, the Court relied on United States v.
Rickert, 188 U.S. 432, 441–43 (1903), a pre-Act case, which disallowed a state
property tax on permanent improvements constructed by Indians on land
held in trust for them by the federal government. We therefore consider
these cases in determining whether § 5 broadly applies to categorically
exempt all permanent improvements affixed to land owned by the federal
government in trust for Indians. See James v. City of Boise, 577 U.S. 306, 307
(2016) (concluding that state and federal courts are bound by the Supreme
Court’s interpretation of federal law); Weatherford ex rel. Michael L. v. State,
206 Ariz. 529, 532 ¶ 8 (2003) (acknowledging that a Supreme Court decision
on a substantive federal issue binds the state courts on that issue).
¶18 The Court in Rickert addressed whether a South Dakota
county could assess and impose property taxes on permanent
improvements and personal property owned by Indians and used in
cultivating lands allotted them under the now-defunct General Allotment
(Dawes) Act of 1887, ch. 119, 24 Stat. 388 (codified as amended in scattered
sections of 25 U.S.C.). 188 U.S. at 432–33. That act authorized the federal
government to allot agricultural and grazing lands on Indian reservations
to individual Indians. General Allotment Act, § 1. Upon allotment, the
land was owned by the government in trust for the sole use and benefit of
allottee Indians for twenty-five years, at which time the government would
convey fee simple title to them and discharge the trust. Id. § 5. After all
Indians were allotted reservation lands, any remaining lands could be sold
to the United States, which could then open them to non-Indians for
homesteading. Id. “[T]he allotment process was designed to assimilate
Indians into the larger society,” the theory being that by the time they took
fee title to the lands, the Indians would have adapted to the mainstream
western agricultural economy. Philip P. Frickey, A Common Law for Our
Age of Colonialism: The Judicial Divestiture of Indian Tribal Authority over
Nonmembers, 109 Yale L.J. 1, 14–15 (1999).
¶19 The Rickert Court first concluded that the South Dakota
county lacked authority “to assess and tax the lands in question until at
least the fee was conveyed to the Indians.” 188 U.S. at 437. It
characterized the allotted trust lands as “an instrumentality employed by
the United States” to benefit Indians and reasoned that permitting taxation
would defeat the government’s statutory obligation to convey the land in
fee to allottees free of any encumbrances, including tax liens. Id. at 437–38.
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
¶20 The Court applied similar reasoning in holding the county
could not assess and tax the Indians’ permanent improvements or personal
property (cattle, horses, and the like), the latter having been purchased with
federal funds to fulfill the government’s goal of aiding the Indians in
successfully cultivating the allotted lands. See id. at 441–45. The Court
stated that allotting lands to individual Indians evidenced Congress’s
expectation that those lands “would be improved and cultivated by the
allottee,” and concluded “that object would be defeated if the
improvements [and personal property] could be assessed and sold for
taxes.” Id. at 442. Responding to the county’s suggestion that the
government’s only interest was conveying the allotted land free from
encumbrance after twenty-five years and not the improvements or
personalty, the Court explained that the government owed a duty of “care
and protection” to the Indians that transcended its contractual obligation.
Id. at 442–43. “The government would not adequately discharge its duty
to these people if it placed its engagements with them upon the basis merely
of contract, and failed to exercise any power it possessed to protect them in
the possession of such improvements and personal property as were
necessary to the enjoyment of the land held in trust for them.” Id. at 443.
¶21 After Rickert, and by the 1920s, allotment proved disastrous
for Indian tribes and individual Indians. See Frickey, supra, at 15
(describing the loss of “huge amounts of Indian land . . . through sales and
tax foreclosures” after the Indians became fee owners of the allotted lands);
L. Scott Gould, The Consent Paradigm: Tribal Sovereignty at the Millennium, 96
Colum. L. Rev. 809, 829 (1996) (“Although the [General Allotment Act] was
ostensibly intended to reduce poverty among Indians, it had the opposite
effect.”). Confronting this failure, Congress passed the Act in 1934 “to
rehabilitate the Indian’s economic life and to give him a chance to develop
the initiative destroyed by a century of oppression and paternalism” by
giving Indian tribes and Indians control of their own property and affairs.
See Mescalero, 411 U.S. at 152 (quoting H.R. Rep. No. 73-1804, at 6 (1934)).
In addition to authorizing the Secretary of the Interior to acquire lands,
water rights, or surface rights in trust for Indians, the Act discontinued the
allotment program and strengthened means for Indian tribes and Indians
to self-govern and perpetuate their cultures. See Indian Reorganization
(Wheeler-Howard) Act, Pub. L. No. 73-383, 48 Stat. 984 (1934) (codified as
amended at 25 U.S.C. §§ 461–479) (describing the Act as one “[t]o conserve
and develop Indian lands and resources; to extend to Indians the right to
form business and other organizations; to establish a credit system for
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
Indians; to grant certain rights of home rule to Indians; to provide for
vocational education for Indians; and for other purposes”).
¶22 This brings us to Mescalero. The Mescalero Apache Tribe
owned and operated an off-reservation ski resort in New Mexico, which the
tribe developed under the Act. Mescalero, 411 U.S. at 146. Specifically,
the United States Forest Service leased land to the tribe, and the federal
government loaned the tribe money to build and equip the resort. 1 See id.New Mexico imposed both a sales tax on the resort’s gross receipts and a
use tax for the tribe’s use of two ski lifts operating at the resort. See id. at
146–47. In the tribe’s subsequent challenge under § 5 of the Act, then
codified at 25 U.S.C. § 465, the Court upheld the sales tax, reasoning that
“[o]n its face, the statute exempts land and rights in land, not income
derived from its use.” Id. at 155. The Court acknowledged that an
exemption for sales tax is arguably supported by the context and purposes
of § 5 but concluded that “absent clear statutory guidance, courts ordinarily
will not imply tax exemptions.” Id. at 155–56; see also id. at 156 (stating that
a tax exemption affecting Indians “can not [sic] rest on dubious inferences”
but must be expressed by Congress “in plain words” (quoting Okla. Tax
Comm’n v. United States, 319 U.S. 598, 607 (1943))).
¶23 The Court reached a contrary conclusion regarding the use
tax, which taxed the tribe’s use of the ski lifts and was assessed based on
the out-of-state purchase price for the materials used to construct the lifts.
See id. at 147, 158. The Court initially noted the ski lifts had been
permanently attached to the land and, citing Rickert, concluded they
“would certainly be immune from the State’s ad valorem property tax.”
Id. at 158. It found that the same immunity extended to the use tax,
reasoning that use of land “is among the ‘bundle of privileges that make up
property or ownership’ of property and, in this sense, at least, a tax upon
‘use’ is a tax upon the property itself.” Id. (quoting Henneford v. Silas
Mason Co., 300 U.S. 577, 582 (1937)). And because “use of permanent
improvements upon land is so intimately connected with use of the land
itself,” the Court concluded that § 5’s exemption applied to the use tax. Id.
1 The Court acknowledged that “[t]he ski resort land was not technically
‘acquired’ ‘in trust for the Indian tribe.’” Mescalero, 411 U.S. at 155 n.11.
It nevertheless concluded that § 5 applied to the tribe’s interest in the land
as “it would have been meaningless for the United States, which already
had title to the forest, to convey title to itself for the use of the Tribe.” Id.
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Opinion of the Court
¶24 South Point argues Mescalero categorically bars the County’s
assessment of property taxes on the Plant under § 5 regardless of South
Point’s ownership of the facility. It asserts that, as with use of the ski lifts
in Mescalero, the Plant is included within the “bundle of privileges”
comprising the Tribe’s beneficial ownership of the land underlying the
Plant, and taxing the Plant necessarily, and impermissibly, taxes that
“bundle.” The County counters Mescalero had “nothing to do with the
taxation of non-Indian property,” and we should therefore apply the plain
language of § 5 to find it does not exempt the Plant from the County’s tax.
¶25 We do not read Mescalero as applying § 5 to exempt taxation
of non-Indian-owned permanent improvements. First, the Court’s
analysis solely concerned tribal property and tribal activities. A
tribal-owned entity owned and used the ski lifts, and New Mexico assessed
the use taxes “against the [Mescalero Apache] Tribe.” Id. at 147. The
Court did not address whether New Mexico could impose a use tax on
non-Indians using property at the ski resort or whether it could assess a
property tax on non-Indian-owned property affixed to the resort land.
¶26 Second, Rickert, which the Mescalero Court relied on for its
use-tax analysis, turned on the property owners’ status as Indians.
Specifically, Rickert prohibited imposition of property taxes on Indian-
owned permanent improvements and personal property on allotted lands
to avoid taxing “an instrumentality” employed by the federal government
to benefit and protect allottee Indians in improving and cultivating trust
lands. 188 U.S. at 437, 442–44; cf. M’Culloch v. Maryland, 17 U.S. (4 Wheat.)
316, 436–37 (1819) (disallowing a state-levied tax on the operations of a
national bank that, in violation of the Supremacy Clause, interfered with
the federal government’s execution of powers). Taxing permanent
improvements owned by non-Indians would not affect those objectives.
Thus, it does not necessarily follow that Rickert, as applied in Mescalero to
interpret § 5, exempts non-Indian-owned property from state taxation.
¶27 Third, before Mescalero, the Court had refused to extend
Rickert’s “federal instrumentality” analysis to exempt state property taxes
and state excise taxes for non-Indian lessees of Indian lands if those taxes
were imposed on similarly situated persons. See Okla. Tax Comm’n v. Tex.
Co., 336 U.S. 342, 343, 366–67 (1949) (holding that a non-Indian lessee of
mineral rights on lands allotted under the General Allotment Act was not
immunized by the Supremacy Clause from state taxes levied against both
the lessee’s property used in producing petroleum and on the oil and gas
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Opinion of the Court
produced in the tax year); Taber v. Indian Territory Illuminating Oil Co., 300
U.S. 1, 3–5 (1937) (upholding a state’s non-discriminatory ad valorem
property taxes on dwelling, tool house, garage, and equipment used by
non-Indian lessee of restricted Indian lands to produce oil and gas). The
Court in Oklahoma Tax Commission v. Texas Co. concluded that “whether
immunity shall be extended in situations like these is essentially legislative
in character,” and because Congress had not created such immunity by
affirmative action, the taxes there were validly levied. 336 U.S. at 365–66.
¶28 The Mescalero Court recognized that Oklahoma Tax Commission
v. Texas Co. and other cases had “cut to the bone the proposition that
restricted Indian lands and the proceeds from them were—as a matter of
constitutional law—automatically exempt from state taxation.” 411 U.S.
at 150. In determining § 5’s applicability, the Court also relied on
Oklahoma Tax Commission v. Texas Co. in stating that “[l]essees of otherwise
exempt Indian lands are also subject to state taxation.” Id. at 157. In light
of this pronouncement, if the Court had interpreted § 5 as also exempting
permanent improvements owned by non-Indian lessees from state and
local taxation, we would expect the Court to have said so rather than
leaving confusion in its wake. It did not.
¶29 Fourth, applying Mescalero’s holding outside the context of
Indian-owned property would ignore § 5’s requirement that the federal
government own the “lands or rights” in trust for an Indian tribe or for
individual Indians. See § 5108. Mescalero included permanent
improvements and their use as among the “bundle of privileges” making
up property or property ownership because such improvements are
“intimately connected with use of the land itself.” 411 U.S. at 158. But
when ownership of permanent improvements is purposefully plucked
from that bundle, as occurred here, it loses that intimate connection. In
that circumstance, the Indian beneficiary has no possessory or use interest
in the permanent improvements, and the federal government’s “lands or
rights” do not include those improvements.
¶30 Chehalis does not persuade us that Mescalero interpreted § 5 as
imposing the categorical bar urged by South Point. There, the Ninth
Circuit considered whether § 5 preempted a county tax on a resort,
conference center, and water park owned by a limited liability company
and built on land held in trust by the United States for the Confederated
Tribes of Chehalis Reservation. 724 F.3d at 1154–55. The tribe, which
formed the company and owned an undivided 51% interest in it, leased the
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Opinion of the Court
land to the company for twenty-five years. Id. at 1154. Per the lease, the
tribe would take ownership of all buildings and other improvements at the
end of the leasehold term. Id. at 1154–55.
¶31 The Ninth Circuit found Mescalero dispositive and held the
county was barred from taxing the company’s permanent improvements.
See id. at 1157–58. In its concluding paragraph, the court stated, “Mescalero
sets forth the simple rule that [§ 5] preempts state and local taxes on
permanent improvements built on non-reservation land owned by the
United States and held in trust of an Indian tribe. This is true without regard
to the ownership of the improvements.” Id. at 1159 (emphasis added). In
isolation, this statement supports South Point’s view of Mescalero. But the
body of the opinion clarifies that § 5 preemption applies to permanent
improvements regardless of the ownership vehicle a tribe uses to own the
improvements. Specifically, the court rejected the county’s argument that
Mescalero was distinguishable because a private company rather than the
Confederated Tribes of Chehalis Reservation itself owned the permanent
improvements. See id. at 1157. The court characterized Mescalero as
instructing that “the question of tax immunity cannot be made to turn on
the particular form in which the [t]ribe chooses to conduct its business.”
Id. at 1156 (quoting Mescalero, 411 U.S. at 157 n.13). The court then
concluded that “the [t]ribe’s decision to give ownership of the [permanent
improvements] to its limited liability company for the duration of the lease”
was irrelevant. Id. at 1157. Chehalis, therefore, does not support applying
Mescalero to exempt the tax against the Plant. Alternately, if the Ninth
Circuit indeed intended the broader reading of Mescalero urged by South
Point, we reject that reading for the reasons previously explained. See
supra ¶¶ 25–29.
¶32 We are also unpersuaded that other federal authorities cited
by South Point establish that § 5 preempts the County’s tax on the Plant.
In Seminole Tribe of Florida v. Stranburg, 799 F.3d 1324, 1326 (11th Cir. 2015),
one issue was whether § 5 exempted a state tax on rents paid by a non-
Indian lessee of food-court operations inside two Indian-owned casinos.
Under Florida law, the tax was imposed for the “privilege [of engaging] in
the business of renting, leasing, letting, or granting a license for the use of
any real property,” assessed against the lessee and collected by the
landlord, which remitted the tax to the state. Id. (alteration in original)
(quoting Fla. Stat. § 212.031(1)(a)). Relying heavily on Mescalero, the
Eleventh Circuit concluded that § 5 preempted the rental tax. Id. at
1328–32. The court described Mescalero as “stand[ing] for the proposition
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Opinion of the Court
that [§ 5] precludes state taxation of that ‘bundle of privileges that make up
property or ownership of property.’” Id. at 1330 (quoting Mescalero, 411
U.S. at 158). After concluding that leasing property “is a fundamental
privilege of property ownership,” the court found that Florida’s tax on that
privilege was tantamount to the use tax at issue in Mescalero and similarly
preempted. Id.¶33 Stranburg did not apply Mescalero’s holding to taxing non-
Indian-owned permanent improvements because the case did not involve
taxing such improvements. Nevertheless, South Point seizes on
Stranburg’s description of Mescalero as meaning § 5 preempts state and local
taxes on privileges attending Indians’ beneficial ownership of property,
asserts the Tribe’s ownership privileges include benefitting from South
Point’s “use of the land and any permanent improvements,” and argues the
tax here infringes those privileges and are therefore preempted under § 5.
This is a leap too far. The County’s property tax is not imposed on South
Point’s rental payments, so the tax does not burden the Tribe’s use of its
land as was the case in Stranburg. And as previously explained, the Tribe
has no ownership interest in the Plant, so the tax could not infringe on it.
Cf. Okla. Tax Comm’n, 336 U.S. at 353 (stating that the taxes there raised no
issues regarding the immunity of Indian lands because “[t]here is no
possibility that ultimate liability for the taxes may fall upon the owner of
the land”). Thus, because the Tribe derives no benefit from the Plant, the
tax cannot infringe on it.
¶34 South Point also asks us to give weight to a Department of
Interior regulation concerning Indian land leases. See Wade v. Ariz. State
Ret. Sys., 241 Ariz. 559, 563 (2017) (acknowledging that absent legislative
direction, the court will give weight to an agency’s construction of the
system it administers). Title 25, § 162.017(a) of the Code of Federal
Regulations states that “[s]ubject only to applicable Federal law, permanent
improvements on the leased land, without regard to ownership of those
improvements, are not subject to any fee, tax, assessment, levy, or other
charge imposed by any State or political subdivision of a State.”
¶35 The regulation does not persuade us to interpret § 5
differently. First, the regulation itself cannot preempt the County’s tax.
See Kansas v. Garcia, 140 S. Ct. 791, 801 (2020) (stating preemption can arise
only from “the Constitution itself or a valid statute enacted by Congress”).
Second, Congress has provided direction on the exemption at issue by
enacting § 5. We can ascertain that provision’s meaning by applying
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
interpretive principles, and we have no need to defer to the Department of
Interior’s interpretation. See Wade, 241 Ariz. at 563 (recognizing the
judiciary has final authority in interpreting statutes). Third, the regulation
is “[s]ubject . . . to applicable Federal law,” which includes § 5, the cases
interpreting it, and Bracker. § 162.017(a). The Department of Interior has
taken the position in other cases that “§ 162.017 has no legal effect at all,”
and the department is “agnostic” on whether any specific state tax is
preempted. Desert Water Agency v. U.S. Dep’t of the Interior, 849 F.3d 1250,
1254 (9th Cir. 2017). Instead, the regulation merely reflects the agency’s
view that when a Bracker analysis is conducted, “the federal and tribal
interests at stake are strong enough to have a preemptive effect in the
generality of cases.” See id.; see also Stranburg, 799 F.3d at 1337–38
(declining to defer to § 162.017 and describing the preamble to the
regulations as “outlin[ing] the Bracker balancing test and then appl[ying] it
generally”).
¶36 In sum, § 5 preempts state and local taxes imposed on land
and rights acquired by the Secretary of the Interior and titled in the name
of the United States in trust for Indian tribes or individual Indians.
Ownership rights in land generally include permanent improvements
affixed to that land by a lessee but not if the parties agree that the lessee
owns those improvements. When that lessee is a non-Indian, § 5 does not
preempt a state or locality from taxing the improvements. Neither
Mescalero nor other federal authorities provides otherwise.
¶37 Here, South Point indisputably owns the Plant, and the
property taxes fall solely on it and not the Tribe’s land. Consequently, § 5
does not exempt the Plant from taxation, and the court of appeals erred by
holding otherwise. Considering our decision, we need not address the
County’s additional argument that exemption does not apply because the
Secretary of the Interior did not acquire the land underlying the Plant
pursuant to § 5. Because the court of appeals did not address whether the
tax court correctly ruled that the Plant is also not impliedly exempt from
the County’s tax under Bracker, we remand to the court of appeals to decide
that issue. See S. Point Energy Ctr., 251 Ariz. at 268 ¶ 24.
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SOUTH POINT V. ADOR, ET AL.
Opinion of the Court
CONCLUSION
¶38 For the foregoing reasons, we vacate the court of appeals’
opinion ¶¶ 9–24 and the first sentence in ¶ 30. We remand to the court of
appeals to decide the remaining issue left undecided by that court.
16