Cotton Petroleum Corp. v. New Mexico - 490 U.S. 163, 109 S. Ct. 1698 (1989)

Rule:

Federal law, even when given the most generous construction, does not pre-empt New Mexico's oil and gas severance taxes. 

Facts:

Pursuant to authority granted by the Indian Mineral Leasing Act of 1938 (1938 Act), the Jicarilla Apache Tribe (Tribe) leased lands on its New Mexico reservation to appellant Cotton Petroleum Corp. (Cotton), a non-Indian company, for the production of oil and gas. Cotton's on-reservation production is subject to both a 6% tribal severance tax and appellee State's 8% severance taxes, which apply to all producers throughout the State. In 1982, Cotton paid its state taxes under protest and then brought an action in state court under, inter alia, the Commerce Clause of the Federal Constitution, contending that the state taxes were invalid on the basis of evidence tending to prove that the amount of such taxes imposed on reservation activity far exceeded the value of services the State provided in relation to such activity. The Tribe filed a brief amicus curiae arguing that a decision upholding the state taxes would substantially interfere with the Tribe's ability to raise its own tax rates and would diminish the desirability of on-reservation leases. The trial court upheld the state taxes, concluding, among other things, that the State provides substantial services to both the Tribe and Cotton, that the theory of public finance does not require that expenditures equal revenues, that the taxes' economic and legal burden falls on Cotton and has no adverse impact on tribal interests, and that the taxes are not preempted by federal law. The State Court of Appeals affirmed. This Court noted probable jurisdiction and invited the parties to brief and argue the additional question whether the Commerce Clause requires a tribe to be treated as a "State" for purposes of determining whether a state tax on non-tribal activities conducted on a reservation must be apportioned to account for taxes the tribe imposed on the same activity.

Issue:

May the State validly impose severance taxes on the same on-reservation production of oil and gas by non-Indian lessees as is subject to the Tribe's own severance tax?

Answer:

Yes.

Conclusion:

The Court held that under the circumstances, federal law did not pre-empt, either expressly or by plain implication, New Mexico's imposition of its severance taxes, in addition to the tribal taxes, on the same production of oil and gas, where (a) the text, purpose, and legislative history of the 1938 Act did not require such pre-emption, at least as to Executive order reservations, (b) New Mexico provided substantial services to both the tribe and the lessee, and there was no proportionality requirement imposed on the states in this context, (c) although federal and tribal regulations as to such leases were extensive, they were not exclusive, (d) the primary burden of the state taxation fell on the non-Indian lessee, and (e) any impairment to federal policy that might be caused by the state taxes' marginal effects was too indirect and too insubstantial to support a claim of pre-emption. The Constitution's commerce clause does not require that an Indian tribe be treated as a "state," for purposes of determining whether a state tax on non-tribal activities conducted on an Indian reservation must be apportioned to account for taxes imposed on those same activities by the Indian tribe. Under the circumstances, New Mexico's imposition of its severance taxes, in addition to the tribal taxes, on the same production of oil and gas did not violate the commerce clause, where (a) the burdensome consequences were entirely attributable to the fact that the leases were located in an area in which two governmental entities--the tribe and the state--shared jurisdiction to tax, and (b) there is no constitutional requirement that benefits received from a taxing authority by an ordinary commercial taxpayer, or by those living in the community where the taxpayer is located, must equal the amount of its tax obligations.