Puff, Puff, Tax: I-502 and Washington Indian Country

Washington state’s legalization and regulation of marijuana will be hazy for some time. But the effects of Initiative 502 in Washington Indian Country promises to be cloudier than throughout the rest of the state. Setting aside the social issues that all of Washington will be dealing with as pot becomes a mainstream recreational drug à la tobacco and alcohol, the taxation of pot in Indian country, if it can even be sold on Reservations, promises a host of issues that we’ll be working through well into the next election cycle. Issue No. 1: Tribal Prohibition

Tribes can and increasingly do prohibit marijuana on their reservations. While tribes lack criminal jurisdiction over non-Indians, through their civil authority, tribes could attempt to regulate pot traffic and use because it “threatens or has some direct effect on the political integrity, economic security, or the health and welfare of the tribe.” Montana v. United States, 450 U.S. 544, 566 (1981). If tribes do so, and if the Liquor Control Board’s forthcoming pot-licensing regulations mirror liquor regulations (where local governments can object to licenses), many of these taxation issues will be academic.

Issue No. 2: Federal Law

If Washington tribes follow the state’s lead and decriminalize pot within their jurisdictions, federal interference remains likely. In recent years, tribal flirtation with medical marijuana has garnered unintelligible but angry responses from the Department of Justice. Marijuana remains a controlled substance under federal law, everywhere. But the fact that Indian reservations comprise often largely federal land makes them awkward places to sell drugs that are legal under state law (which doesn’t apply) and illegal under federal law (which is often unenforced).

Issue No. 3: Reservation-based Value

In Washington, as throughout Indian Country, federal law generally bars taxes on products that incorporate “value generated on the reservation,” sold to Indians or non-Indians. See WAC 458-20-192(c). This means that food harvested from Indian lands or prepared at a tribal facility and sold to nonmembers would be untaxed. Id. at (a)(i); cf. Agua Caliente Band of Cahuilla Indians v. Hardin, 223 F.3d 1041, 1044 (9th Cir. 2000) (dicta); California v. Cabazon Band of Mission Indians, 480 U.S. 202, 220 (1987); Indian Country, U.S.A., Inc. v. Oklahoma, 829 F.2d 967, 986 (10th Cir. 1987); Conn. Legal Ruling No 2002-3 (May 29, 2002).

In other words, if a Tribe adds value to a product and sells it on the Reservation, it shouldn’t be taxed. In a vacuum this means that tribally or tribal-member grown pot sold on the Reservation will not be subject to state taxes. If state-regulated pot is actually a feasible business endeavor and not irrelevant because of the black market, untaxed on-Reservation sales could severely undercut off-Reservation sales, which will carry a 25% tax.

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Whatever form Washington Liquor Control Board pot regulations take when they are published, Washington Indian Country should remain vigilant to ensure that its interests are taken into account – whether tribes wish to fight pot on the reservation, or to regulate and tax it.

Anthony Broadman is a partner at Galanda Broadman PLLC. He can be reached at 206.321.2672, anthony@galandabroadman.com, or via www.galandabroadman.com.