FACTS:

A company (the "Company") sells and rents construction equipment, such as scaffolding and cranes, for use on the reservation of a federally-recognized Indian tribe ("the Tribe") located within Connecticut. Sometimes the Company sells or rents the equipment directly to the Tribe or its individual members. At other times the Company sells or rents the equipment to contractors that are not connected with the Tribe, for use by the contractors in fulfilling contracts with the Tribe for construction related to Indian gaming.

ISSUES:

Whether the sale or rental of construction equipment directly to the Tribe or its members for use on the Tribe's reservation is subject to sales and use taxes.

Whether the sale or rental of construction equipment to contractors that are not connected with the Tribe, for use by the contractors in fulfilling construction contracts with the Tribe, is subject to sales and use taxes.

DISCUSSION:

Conn. Gen. Stat. §12-407(2) defines "sale" and "selling" to include "(a) Any transfer of title . . . of tangible personal property for a consideration . . ." and "(j) the leasing or rental of tangible personal property of any kind whatsoever. . . ." However, Conn. Gen. Stat. §12-412(2) exempts from the sales and use taxes "[sales of tangible personal property or services which this state is prohibited from taxing under the constitution or laws of the United States."

The United States Supreme Court has consistently ruled that pursuant to the United States Constitution, article I, section 8, states are without power to tax Indian reservations and the Indians on them without clear congressional authorization to do so. Recently, in Oklahoma Tax Commission v. Chickasaw Nation, 515 U.S. ---, 132 L. Ed. 2d 400 (1995), the Court held that Oklahoma could not impose a motor fuels tax on fuel sales on an Indian reservation because the tax was imposed on Indians within their own federally-recognized area. "In so holding, we adhere to settled law: when Congress does not instruct otherwise, a State's excise tax is unenforceable if its legal incidence falls on a Tribe or its members for sales made within Indian country." 132 L. Ed. 2d at 406. The "legal incidence" of a tax falls on the party to which, under the taxing statute, the tax burden is ultimately passed on, even if the tax is to be charged and collected by another person making the sale to such party. 132 L. Ed. 2d, 409-12.

The Connecticut sales tax is imposed on the retailer of tangible personal property for the privilege of making taxable sales in this state; Conn. Gen. Stat. §12-408(1); and the retailer must collect reimbursement for the tax from the consumer; §12-408(2). Under the holding in Chickasaw Nation, supra, the legal incidence of the Connecticut sales tax would fall on an Indian tribe or its members when a retail sale is made to them. See also Avco Mfg. Corporation v. Connelly, 145 Conn. 161, 171, 140 A.2d 479 (1958). However, federal preemption of the states' power to impose excise taxes on Indian tribes or their members appears to apply only when sales are made within Indian country. ("Indian country" is defined in 18 U.S.C. § 1151 as including "all land within the limits of any Indian reservation under the jurisdiction of the United States Government. . . .") Indian tribes and their members, unlike the governments of the State of Connecticut or the United States, do not enjoy exemption and/or constitutional immunity from state taxation wherever in Connecticut they happen to be when otherwise taxable sales are made. Instead, the exemption from sales tax depends on both the identity of the purchasers (Indian tribes or their members) and where the sales to them take place (within Indian country). Implicit in the Supreme Court's bright-line test in Chickasaw Nation is the recognition that when Indians are on their own federally-recognized land they are generally beyond the jurisdictional reach of the states within which they are situated; but the land itself, without the tribe, and the Indians themselves, without the land, are not necessarily beyond the states' reach. Thus when title to tangible personal property is transferred to a tribe or its members at a Connecticut location outside of Indian country, such as at a retailer's place of business, the imposition of sales tax on such transaction is not federally preempted, and the retailer is required to pay the tax under §12-408(1) and collect reimbursement for it under §12-408(2). "Absent express federal law to the contrary, Indians going beyond reservation boundaries have generally been held subject to non-discriminatory state law otherwise applicable to all citizens of the State." Mescalero Apache Tribe v. Jones, 411 U.S. 145, 148-9, 36 L. Ed. 2d 114 (1973).

Independent of the retailer's obligations under Conn. Gen. Stat. §12-408, a use tax is imposed "on the storage, acceptance, consumption or any other use in this state of tangible personal property purchased from any retailer for storage, acceptance, consumption or any other use in this state . . ."; § 12-411(1). The use tax exists apart from the sales tax, whether or not the sale should have been subjected to sales tax by a retailer. Hartford Parkview Associates Limited Partnership v. Groppo, 211 Conn. 246, 255-6, 558 A.2d 993 (1989); see also William Raveis Real Estate, Inc. v. Commissioner, Conn. Super. Ct. Tax Sess. (Shea, STR), No. CV-91-0387235-S (January 5, 1995). The two taxes "are different in conception . . . [and] are assessments upon different transactions. . . ." International Business Machines Corp. v. Brown, 167 Conn. 123, 129, 355 A.2d 236 (1974). The sales tax is imposed on a retailer "for the privilege of making any sale" in Connecticut and may therefore only be imposed on sales made in this state; the use tax is imposed on the use of an item when it is "purchased . . . for use" in Connecticut and is actually so used, and may be imposed on items purchased anywhere. While the "taxable moment" of the sales tax on sales of tangible personal property occurs when title to the property passes from seller to purchaser, and can be fixed in both time and space on that basis, the imposition of the use tax involves a purchase, wherever made, together with an element of intent to use the property in Connecticut by the purchaser, followed by action upon that intent by the purchaser. Magic II, Inc. v. Dubno, 206 Conn. 253, 537 A.2d 998 (1988); Stetson v. Sullivan, 152 Conn. 649, 211 A.2d 685 (1965). Thus, although a sale of tangible personal property made within Indian country to an Indian tribe or one of its members cannot be subject to sales tax under the scope of the federal preemption described in Chickasaw Nation, a subsequent use of such property by the purchaser in Connecticut outside of Indian country may be subject to use tax, provided the property was purchased with the intent to use it in Connecticut outside of Indian country. In that case the federal preemption would not apply, because the use tax is not imposed "for sales made within Indian country," 132 L. Ed. 2d at 406, but instead on use of the property made outside Indian country subsequent to its purchase.

Applying the foregoing analysis to the facts of this Ruling, then, sales of construction equipment by the Company directly to the Tribe or its enrolled members are exempt from sales tax under Conn. Gen. Stat. § 12-412(2) by virtue of the federal preemption when title to the property passes within Indian country, but not when title to the property passes in Connecticut outside of Indian country. The same is true of sales of any other items, such as building materials and supplies, when sold directly to the Tribe. However, even purchases made by the Tribe or its members within Indian country may be subsequently subject to use tax if the property is intended to be used in Connecticut outside of Indian country at the time of sale and then is so used.

The imposition of sales and use taxes on the leasing or rental of tangible personal property pursuant to Conn. Gen. Stat. § 12-407(2)(j) does not depend on passage of title to the property, but instead on where delivery of the property occurs and where the property is used. Conn. Agencies Regs. § 12-426-25, which provides rules for the taxability of leases and rentals, states, in subsection (h):

As noted above, the reservation is not automatically "outside the state" for sales and use tax purposes. However, sales tax on the Company's rentals of tangible personal property, where delivery of the property is taken within Indian country by the Tribe or its members, is federally preempted because the legal incidence of the tax falls on the Indians on their own land. Such rentals will not be subject to use tax as long as the Tribe or its members do not rent the property with the intent to use it in Connecticut outside of Indian country and then so use it.

The application of Connecticut law and federal preemption standards to purchases by non-Indian contractors requires a different analysis. It is apparent from Chickasaw Nation and other Supreme Court decisions that the legal incidence test is meant to foreclose further inquiry only when it operates in favor of an Indian tribe. When the legal incidence of the tax is found to be on a tribe or its members for a sale within Indian country, state taxation of the transaction is categorically prohibited, and no other test is necessary or permissible. The Supreme Court has specifically rejected any further consideration of "economic reality," that is, of whether the economic burden of a tax is borne by non-Indians, once it has been determined that the legal incidence falls on the tribe or its members for sales within Indian country. 132 L. Ed. 2d at 410. "But if the legal incidence of the tax rests on non-Indians, no categorical bar prevents enforcement of the tax; if the balance of federal, state and tribal interests favors the State, and federal law is not to the contrary, the State may impose its levy. . . ." 132 L. Ed. 2d at 409. Thus if a transaction between non-Indians takes place within Indian country, a "balancing" test must be employed. The essential elements of this test are that when the direct economic burden of a tax on a sale within Indian country falls on an Indian tribe, affecting a program subject to extensive federal regulation, the federal and/or tribal interests generally outweigh those of the state, and the imposition of the state tax is prohibited. See, e.g., Ramah Navajo School Board v. Bureau of Revenue, 458 U.S. 832, 842-45 (1982) and White Mountain Apache Tribe v. Bracker, 448 U.S. 136, 141-53 (1980); see also 1986 Conn. Op. Atty. Gen. 86-067 at 273.

In Connecticut, rules for the taxability of purchases by contractors are set forth in Conn. Agencies Regs. § 12-426-18. According to subdivision (b)(1) of the regulation, "[a] contractor shall pay the tax as a consumer on the purchase or lease of all materials, supplies or equipment used by him. . . ." When contractors purchase equipment to use in the fulfillment of construction contracts, the legal incidence of the tax falls on the contractors themselves, not on those for whom the contractors are performing their services. Retail sales of equipment to non-Indian contractors where title passes outside of Indian country, and leases of equipment to contractors where delivery is taken outside of Indian country, are beyond the reach of the federal preemption. But where title to the equipment passes within Indian country, or delivery of rented equipment occurs within Indian country, further examination of the transaction becomes necessary, even when the Tribe does not bear the legal incidence of the tax. It must initially be determined whether the "direct economic burden" of the tax falls on the Tribe or its members. Obviously, practically all of a contractor's costs of doing business, such as personnel costs, office expenses, insurance costs and taxes, are built into the contractor's price. However, such costs are not necessarily "directly" borne by the contractor's customers. (For example, no one would argue that a contractor's customers bear the direct economic burden of the contractor's income taxes.)

When equipment is rented by the Company to contractors solely for use in connection with a particular construction project for the Tribe that takes place within Indian country, and delivery of the equipment is taken within Indian country, it would appear that the "direct economic burden" of the equipment rental, and hence of any tax in connection therewith, does indeed fall on the Tribe, assuming the entire rental cost is passed on to the Tribe. However, the equipment must be used exclusively within Indian country for the entire rental term. If the equipment is rented for use in connection with more than just the reservation project during the rental term, it cannot be said that the direct economic burden is borne by the Tribe, since at least a portion of that burden will be passed on to other customers of the contractor, as well. Thus, for example, if the equipment is rented by the week, the equipment must be used only within in Indian country for the entire week in order for the Tribe to be considered to have borne the direct economic burden for that week's rental payment. Each succeeding rental period must be reexamined in the same light.

The same general principle applies when equipment is sold outright by the Company to the contractor and title passes within Indian country: if the equipment is to be used for its entire life exclusively within Indian country and the purchase price of the equipment is to be passed on by the contractor to the Tribe, then the Tribe bears the economic burden; but if the equipment is to be retained by the contractor and used on other projects outside of Indian country, then the economic burden for the cost of the equipment, and any tax thereon, does not fall directly on the Tribe.

If the direct economic burden of the tax falls on the Tribe or its members under the foregoing analysis, the tax will be impermissible if the tax also affects a program subject to extensive federal regulation. Since 1988, the regulation of gaming on Indian lands has been completely the province of the federal government under the Indian Gaming Regulatory Act, 25 U.S.C. §§ 2701 et seq. Construction projects within Indian country in connection with Indian gaming, therefore, affect programs subject to extensive federal regulation.

By the same token, sales to contractors of materials and supplies that are to become physically incorporated in and become a permanent part of projects constructed for the Tribe within Indian country are likewise exempt from tax, as long as title to the materials and supplies passes within Indian country.

RULING:

Sales tax on construction equipment sold directly to the Tribe or its members is federally preempted and the sales are exempt under Conn. Gen. Stat. § 12-412(2), when title to the equipment passes within Indian country. The Tribe or its members will not be subject to use tax unless they purchase the equipment with the intention of using it outside of Indian country and actually so use it. The rental of construction equipment directly to the Tribe or its members is not subject to sales tax when delivery of the equipment is taken within Indian country. The Tribe or its members will not be subject to use tax unless they rent the equipment with the intention of using it outside of Indian country and actually so use it.

Sales tax on the rental of construction equipment to non-Indian contractors for use in connection with construction projects for the Tribe or its members within Indian country is federally preempted and the rentals are exempt under Conn. Gen. Stat. § 12-412(2), (a) when delivery of the equipment is taken within Indian country, (b) when the entire cost of the equipment rental for the rental period is passed on to the Tribe or its members, and (c) as long as the equipment will be used exclusively within Indian country during the rental period. Sales of construction equipment to non-Indian contractors are only exempt (a) when title to the equipment passes within Indian country, (b) when the entire cost of the equipment is passed on to the Tribe or its members, and (c) when the equipment is to be used exclusively and permanently within Indian country.

Sales either directly to the Tribe, or to non-Indian contractors, of materials and supplies that are to become physically incorporated into and become a permanent part of projects constructed for the Tribe within Indian country, are federally preempted and exempt under Conn. Gen. Stat. § 12-412(2), when title to the property passes within Indian country

When title to tangible personal property passes outside of Indian country or delivery of rented property is taken outside of Indian country, such sales or rentals are subject to sales and use taxes, whether made directly to the Tribe or to a contractor.

LEGAL DIVISION

November 29, 1995