UNITED STATES DISTRICT COURT FOR T UNITED STATES … · 2021. 7. 14. · united states district court for t united states district court for the western district of michigan keweenaw

UNITED STATES DISTRICT COURT FOR T UNITED STATES DISTRICT COURT

FOR THE WESTERN DISTRICT OF MICHIGAN

KEWEENAW BAY INDIAN COMMUNITY,

Plaintiff,

v.

KHOURI, et al.,

Defendants.

File No. 2:16-cv-00121

Hon. Paul L. Maloney

THE KEWEENAW BAY INDIAN COMMUNITY’S RESPONSE MEMORANDUM TO DEFENDANTS’ MOTION FOR PARTIAL SUMMARY JUDGMENT

ORAL ARGUMENT REQUESTED

Case 2:16-cv-00121-PLM-MV ECF No. 370, PageID.5567 Filed 11/16/18 Page 1 of 53

Contents

INTRODUCTION ...................................................................................................................... 1

ARGUMENT .............................................................................................................................. 2

I. DEFENDANTS’ ENFORCEMENT OF THE SALES TAX IS PREEMPTED BY FEDERAL LAW UNDER BRACKER BALANCING. ................ 2

1. Defendants Erroneously Deny that the Economic Burden of the Challenged Tax is Relevant Under Bracker. ............................. 3

2. Defendants’ Statements Regarding Other Community Interests are Factually and Legally Incorrect. ...................................... 5

3. Federal Interests Align with and Support the Community’s Interests. ........................................................................ 6

4. Defendants’ Alleged State Interests are not Sufficient to Justify Imposing the Sales Tax. ........................................................... 8

5. Defendants’ Allegations Regarding the Marketing of a Tax Exemption are Nonsensical and Do Not Establish a Legitimate State Interest. ..................................................................... 9

6. Defendants’ Reliance on Two Recent Federal Balancing Decisions is Misplaced. ..................................................................... 11

II. DEFENDANTS’ ENFORCEMENT OF THE TOBACCO TAX IS PREEMPTED UNDER BRACKER BALANCING. ................................................. 13

1. The CCTA Does Not Expand State Authority over Indian Tribes. ................................................................................................ 13

2. Defendants’ Wrongly Dismiss the Community’s Significant Interests in Economic Development and Self-Determination. ................................................................................... 14

3. Defendants Cannot Identify any Legally Relevant State Interest Favoring Imposition of the TPTA. ....................................... 17

4. The Balance of Interests Favors the Community. .............................. 19

III. DEFENDANTS’ ENFORCEMENT OF THE SALES AND TOBACCO TAXES VIOLATES THE COMMUNITY’S RIGHTS OF SELF-GOVERNMENT AND SOVEREIGNTY. ................................................................ 19

A. Defendants’ Enforcement of the TPTA and Sales Tax Acts Usurps the Community’s Power to Regulate Activity within its


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Reservation. ................................................................................................... 19

B. Defendants’ Law Enforcement Operations on the Reservation Infringe the Community’s Sovereignty and Right of Self-Government. .................................................................................................. 20

IV. DEFENDANTS’ ENFORCEMENT OF THE TOBACCO TAXES VIOLATES THE INDIAN COMMERCE CLAUSE OF THE U.S. CONSTITUTION. ..................................................................................................... 22

V. DEFENDANTS’ SEIZURES OF TOBACCO FROM A COMMON CARRIER VIOLATED THE INTERSTATE COMMERCE CLAUSE. ................. 25

VI. THE COMMUNITY IS ENTITLED TO RELIEF ON ITS § 1983 CLAIMS. ................................................................................................................... 27

A. The Sixth Circuit Confirmed that “the Community has a private right of action to sue for violations of its Constitutional rights under 42 U.S.C. § 1983.” ............................................................................... 27

B. The Sales, Use, and Tobacco Taxes are Preempted Under Federal Law and the Community is Entitled to Damages, Including Refunds on the Denied Exemplar Claims. ..................................................... 29

C. The Community’s Claims are not Barred by the Tax Injunctions Act or Comity Principles. .............................................................................. 30

D. Defendants are Not Entitled to Qualified Immunity. ..................................... 32

VII. THE 1842 TREATY PRECLUDES DEFENDANTS FROM IMPOSING MICHIGAN SALES OR USE TAXES AGAINST THE COMMUNITY OR ITS MEMBERS FOR TRANSACTIONS WITHIN THE CEDED AREA......................................................................................................................... 35

A. Article II Remains in Force and was Never Repealed or Abrogated....................................................................................................... 35

B. The Plain Language of Article II Requires that the Ceded Area be Treated as Indian Country for Purposes of Applying Federal Indian Trade and Intercourse Laws. .............................................................. 38

C. Defendants Cannot Use Specious Claims of “Indian Understanding” to Deprive the Community of its Treaty Rights. ................. 40

VIII. THE REFUND AND EXEMPTION SYSTEM VIOLATES THE COMMUNITY’S FEDERAL RIGHTS .................................................................... 43

IX. THE COMMUNITY IS ENTITLED TO A PERMANENT INJUNCTION AND TO RELIEF UNDER § 1988. ................................................. 44


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CONCLUSION ......................................................................................................................... 45


TABLE OF AUTHORITIES

Page(s)

Cases

Adoptive Couple v. Baby Girl, 570 U.S. 637 (2013) .....................................................................................................23, 24, 25

Assiniboine & Sioux Tribes v. Montana, 568 F. Supp. 269 (D. Mont. 1983) ...........................................................................................30

Best v. Lowe’s Home Ctrs., Inc., 563 F.3d 171 (6th Cir. 2009) ...................................................................................................42

C & A Carbone v. Town of Clarkstown, 511 U.S. 383 (1994) .................................................................................................................26

California State Bd. of Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9 (1985) .....................................................................................................................17

Cent. Mach. Co. v. Ariz. State Tax Comm’n, 448 U.S. 160 (1980) ...............................................................................................................4, 7

Chippewa Trading Co. v. Cox, 365 F.3d 538 (6th Cir. 2004) .............................................................................................30, 31

Choate v. Trapp, 224 U.S. 665 (1912) .................................................................................................................42

Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163 (1989) .............................................................................................................4, 25

Day v. Wayne County Bd. of Auditors, 749 F.2d 1199 (6th Cir. 1984) .................................................................................................29

Dep’t of Taxation & Fin. of New York v. Milhelm Attea & Bros., 512 U.S. 61 (1994) .............................................................................................................17, 43

Flandreau Santee Sioux Tribe v. Sattgast, 325 F. Supp. 3d 995 (D.S.D. 2018) ...........................................................................................7

Georgia v. Evans, 316 U.S. 159 (1942) .................................................................................................................28

Grey Poplars Inc. v. One Million Three Hundred Seventy-One Thousand One Hundred (1,371,100) Assorted Brands of Cigarettes, 282 F.3d 1175 (9th Cir. 2002) .................................................................................................15


2

Hall v. De Cuir, 95 U.S. 485 (1877) ...................................................................................................................27

Ho-Chunk, Inc. v. Sessions, 253 F. Supp. 3d 303 (D.D.C. 2017) .........................................................................................24

Indian Country, U.S.A., Inc. v. Oklahoma, 829 F.2d 967 (10th Cir. 1987) ......................................................................................... passim

Keweenaw Bay Indian Cmty. v. Naftaly, 370 F. Supp. 2d 620 (W.D. Mich. 2005) .................................................................................42

Keweenaw Bay Indian Cmty. v. Rising, 477 F.3d 881 (6th Cir. 2007) .............................................................................................15, 28

Keweenaw Bay Indian Cmty. v. Rising, 569 F.3d 589 (6th Cir. 2009) .......................................................................................28, 32, 39

Keweenaw Bay Indian Community v. Rising, 477 F.3d 881893 (6th Cir. 2007) .............................................................................................40

Lac Du Flambeau Band of Lake Superior Chippewa Indians v. Zeuske, 145 F. Supp. 2d 969 (W.D. Wisc. 2000) ..................................................................................30

Mashantucket Pequot Tribe v. Town of Ledyard, 722 F.3d 457 (2d Cir. 2013)...............................................................................................30, 31

Minnesota v. Mille Lacs Band of Chippewa Indians, 526 U.S. 172 (1999) .................................................................................................................35

Moe v. Confederated Salish & Kootenai Tribes of Flathead Reservation, 425 U.S. 463 (1976) ......................................................................................................... passim

Moses v. Dep’t of Corr., 736 N.W. 2d 269 (Mich. Ct. App. 2007) ...........................................................................22, 34

Muscogee (Creek) Nation v. Pruitt, 669 F.3d 1159 (10th Cir. 2012) ...............................................................................................17

Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450 (1995) ...............................................................................................................1, 3

Oklahoma Tax Comm’n v. Citizen Band Potawatomi Indian Tribe of Oklahoma, 498 U.S. 505 (1991) .................................................................................................................17

Otoe-Missouria Tribe of Indians v. N.Y. State Dep’t of Fin. Servs., 769 F.3d 105 (2d Cir. 2014)...............................................................................................24, 25

Ramah Navajo Sch. Bd. v. Bureau of Revenue, 458 U.S. 832 (1982) ......................................................................................................... passim


3

Rodewald v. Kan. Dep’t Revenue, 297 P.3d 281 (Kan. 2013) ........................................................................................................22

Saginaw Chippewa Indian Tribe v. Granholm, No. 05-10296, 2011 U.S. Dist. LEXIS 53765 (E.D. Mich. May 18, 2011) ......................22, 34

Seminole Tribe of Fla. v. Stranburg, 799 F.3d 1324 (11th Cir. 2015) ...................................................................................12, 13, 31

Seminole Tribe of Florida v. Florida, 517 U.S. 44 (1996) ...................................................................................................................24

State v. Cummings, 679 N.W.2d 484 (S.D. 2004) .............................................................................................21, 22

State of Washington v. Washington State Commercial Passenger Fishing Vessel Ass’n, 443 U.S. 658 (1979) .................................................................................................................42

Tulalip Tribes v. Washington, No. 15-CV-940 BJR, 2018 U.S. Dist. LEXIS 172013 (W.D. Wash. Oct. 4, 2018) ..................................................................................................................................12, 13

Tulalip Tribes v. Washington, No. 2:15-cv-00940-BJR, 2017 U.S. Dist. LEXIS 1646 (W.D. Wash. Jan. 5, 2017) ........................................................................................................................................13

United States v. Baker, 63 F.3d 1478 (9th Cir. 1995) ...................................................................................................14

United States v. Michigan, 471 F. Supp. 192 (W.D. Mich. 1979) ................................................................................40, 43

United States v. Parry, Case No. 13-cr-291, 2015 U.S. Dist. LEXIS 18004 (W.D. Mo. 2015) ...................................14

United States v. Peltier, 344 F. Supp. 2d 539 (E.D. Mich. 2004) .......................................................................21, 22, 34

United States v. Winans, 198 U.S. 371 (1905) .................................................................................................................39

Warren Trading Post Co. v. Arizona Tax Commission, 380 U.S. 685 (1965) ...........................................................................................................4, 7, 8

Washington v. Confederated Tribes of Colville Reservation, 447 U.S. 134 (1980) ......................................................................................................... passim


4

White Mountain Apache Tribe v. Bracker, 448 U.S. 136 (1980) ......................................................................................................... passim

Worcester v. Georgia, 31 U.S. 515 (1832) ...................................................................................................................43

Statutes

18 U.S.C. § 1151 ............................................................................................................................39

25 U.S.C. §§ 261-264 ......................................................................................................4, 7, 29, 32

25 U. S. C. § 261 et seq....................................................................................................................8

25 U.S.C. § 2710(d)(4) ....................................................................................................................7

25 U.S.C. § 5302(b) .....................................................................................................................7, 8

42 U.S.C. § 1983 ..........................................................................................................28, 29, 30, 31

Act of Dec. 18, 1854, 10 Stat. 598 .................................................................................................38

Act of March 1, 1847, 9 Stat. 146-47 ............................................................................................35

Contraband Cigarette Trafficking Act, 18 U.S.C. 2341(2)(b) .......................................................26

Contraband Cigarette Trafficking Act, Pub. L. No. 95-575, 92 Stat. 2463 (1978) (codified at 18 USCS §2341-2346, 2345(a)) ...........................................................................14

Tax Injunction Act, 28 U.S.C. § 1341 ...........................................................................................30


1

INTRODUCTION

In this action, the Keweenaw Bay Indian Community (“the Community”) alleges that

Defendants’ imposition of the Sales, Use, and Tobacco Taxes on transactions involving the

Community and its members in the Community’s Reservation and trust lands (“the Reservation”)

violates federal law. At issue in this Motion are the Community’s claims based on the balancing

of interests analysis established in White Mountain Apache Tribe v. Bracker, 448 U.S. 136

(1980); the Community’s rights of sovereignty and self-government; the Interstate and Indian

Commerce clauses of the United States Constitution; and the Treaty of 1842, which extends the

Community and members’ federal tax immunities beyond the Reservation into the area ceded

under the Treaty (“the Ceded Area”).

Defendants’ Motion for Partial Summary Judgment rests on incorrect statements of

federal law and indefensible characterizations of the facts of this case. Their statement of law on

Bracker balancing is particularly egregious—many of the citations are drawn from cases that did

not even apply Bracker (because other law controlled).1 Defendants included those citations

solely because they contain language that, taken out of context, appears favorable to their

position, and Defendants apparently hope the Court will overlook this fact.

Lacking any sound legal argument, Defendants impugn the Community’s motives,

claiming that the Community and its members—who have suffered hundreds of years of

mistreatment, but have survived with their political community intact—are exploiting some

unfair advantage over non-Indians. Defendants hope that reciting rhetoric about “manipulation

of transactions,” “contractual creativity,” and “tax avoidance” will sway the Court.

1 For example, in Okla. Tax Comm’n v. Chickasaw Nation, 515 U.S. 450 (1995), the Supreme Court confirmed the categorical rule that a state cannot tax reservation activity when the legal incidence of a tax falls on an Indian tribe or member. As discussed in more detail below, it is not a Bracker balancing case, but Defendants mistakenly contend that it is.


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Defendants’ 1842 Treaty arguments are cut from the same cloth. Defendants speciously

argue that Article II of the Treaty was abrogated by statutes that do not even mention the Treaty,

much less terminate Article II. Defendants then set forth a supposedly plain language

interpretation of Article II that deprives it of any effect, in gross violation of the principles of

treaty interpretation as well as their own expert’s opinions. Finally, Defendants set forth a

supposed “Indian understanding” of Article II that contradicts historical evidence, rests on

unsupported conjectures of one of their experts, and contradicts the explicit language of Article

II.

For all of these reasons, and as explained in detail below, the Court should deny

Defendants’ Motion for Partial Summary Judgment.2

ARGUMENT

I. DEFENDANTS’ ENFORCEMENT OF THE SALES TAX IS PREEMPTED BY FEDERAL LAW UNDER BRACKER BALANCING.

The Community showed in its November 5, 2018 Summary Judgment Brief (“Opening

Brief”) 3 that Defendants’ imposition of the Sales Tax upon sales to the Community or its

members within the Reservation is prohibited by the Bracker balancing test because the

Community and federal interests decisively outweigh any state interest in imposing the tax.4

The Community and its members have a strong interest against imposition of a tax whose

economic burden falls directly on them within their Indian country and which reduces funds

2 For this Memorandum, the Community relies upon the documents already in the record and the Declaration of James K. Nichols in Opposition to Defendants’ Motion for Summary Judgment (“Nichols Opp. Decl.”) and the exhibits attached thereto. 3 The Community originally filed its brief on October 19, 2018 and refiled it without redactions on November 5 pursuant to the Court’s November 1, Order. 4 The Community’s Bracker argument is in the alternative, because it maintains that the Indian Trader Statutes per se preempt the Sales Tax in these circumstances.


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available to the Community to provide essential governmental programs and services. The

federal government, too, has a robust interest against imposition of the tax because it interferes

with three comprehensive federal regulatory schemes: the Indian Trader Statutes, the Indian

Gaming Regulatory Act (“IGRA”), and the Indian Self-Determination and Education Assistance

Act (“ISDEAA”). Finally, the State lacks a “specific, legitimate regulatory interest” on the

Reservation paid for by the tax, as is required under Bracker.

For these reasons, the Sales Tax is preempted under the Bracker test with respect to

purchases by the Community and its members within the Reservation. Preemption of state

transaction taxes with respect to these purchases is consistent with the known policies of every

state in the country – except Michigan. PageID.1735-1762 (exemption certificates reflecting

immunity of tribal members from state transaction taxes on their reservation purchases in

Arizona, Idaho, New York, Washington, and Wisconsin). Defendants’ arguments do not

undermine the preemption conclusion.

1. Defendants Erroneously Deny that the Economic Burden of the Challenged Tax is Relevant Under Bracker.

Defendants erroneously contend that “the economic realities or burdens of a tax are

irrelevant to determining whether federal law preempts it.” PageID.3569, citing Oklahoma Tax

Commission v. Chickasaw Nation, 515 U.S. 450, 458-60 (1995). Nothing in Chickasaw supports

this claim. On the contrary, Chickasaw affirms the traditional balancing of federal, tribal, and

state interests, without limiting these interests to non-economic factors, while at the same time

articulating the categorical rule against imposing any state tax the legal incidence of which falls

directly upon Indians in Indian country. Id. Similarly, Defendants misconstrue a statement in

Cotton Petroleum Corp. v. New Mexico, 490 U.S. 163, 185-87 (1989), that “[f]ederal law does

not preempt a nondiscriminatory state tax on non-Indians even though the financial burden of the

tax may fall on the . . . tribe.” PageID.3569 (quoting Cotton, 490 U.S. at 175). Read in context,


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the Court’s point is that such a transaction is not “automatically exempt from state taxation,” but

the tax may still be preempted under Bracker balancing. 490 U.S. at 175-77.

In cases involving situations in which Indians in Indian country bear the direct economic

burden of a state tax, the Supreme Court has uniformly ruled against the state. See Warren

Trading Post Co. v. Arizona Tax Commission, 380 U.S. 685, 691 (1965) (striking down gross

receipts tax imposed on Indian retailer making sales to Indians within reservation on grounds that

the “financial burdens” imposed by the tax “could thereby disturb and disarrange” the

comprehensive federal scheme regulating Indian purchases under the Indian Trader Statutes, 25

U.S.C. §§ 261-264); Cent. Mach. Co. v. Ariz. State Tax Comm’n, 448 U.S. 160 (1980) (striking

down state gross receipts tax on non-Indian corporation for sales made to Indian tribe on the

basis of federal preemption); Bracker, 448 U.S. at 151 (striking down state vehicle taxes where

the economic burden of the tax would directly be passed on to Indian tribe); Ramah Navajo Sch.

Bd. v. Bureau of Revenue, 458 U.S. 832, 844 (1982) (striking down state gross receipts tax on

non-Indian construction contractor where the economic burden of the tax would be borne

directly by Indian tribe). It is the mere existence of that economic burden, and not its weight,

that qualifies as a strong tribal interest against the tax. Indian Country, U.S.A., Inc. v. Oklahoma,

829 F.2d 967, 987 n.9 (10th Cir. 1987) (balancing test “cannot turn on the severity of a direct

economic burden on tribal revenues caused by the state tax”); see also Bracker, 448 U.S. at 148

(striking down state’s 1% tax).5

Under these authorities, where the economic burden of a challenged tax falls is a critical

5 Defendants assert, contrary to established law, that there is some requirement that the Community show that the challenged tax injures its ability to provide “specific governmental services,” that there is a specific conflict between the challenged tax and a tribal law, or that there is some specific amount of economic hardship on its members. PageID.3571. Defendants cite no authority to support these assertions because there is no such authority.


5

element of the Bracker analysis. Defendants do not, and cannot, deny that the Community and

its members bear the direct economic burden of the Sales Tax in their purchases on the

Reservation. Even Defendant Fratzke admitted that there is an economic burden on the

Community when it pays unrefunded Sales Tax on a purchase: the Community loses the power

to decide how that money will be spent and cannot use it to fund economic development, pay

salaries, or provide services. PageID.4529 (Fratzke Tr.) at 180:7-18. Defendants’ proffered

expert, tax analyst Scott Darragh agreed. Id., PageID.4760 (Darragh Tr.) at 182:1-19. The same

is clearly true for Community members with respect to their purchases.

2. Defendants’ Statements Regarding Other Community Interests are Factually and Legally Incorrect.

Defendants assert that the Community has no “legitimate tribal interest favoring

preemption” and “simply wants to excuse itself and its members from assuming the ordinary

costs of participating in the marketplace when they make purchases.” PageID.3571. In the

context of the Sales Tax, where the Community and its members are purchasers rather than

sellers, Defendants’ reliance on the absence of “reservation value” in the products purchased is

specious. “Reservation value” is important only in cases involving state taxes imposed on non-

Indian purchasers of products from Indian sellers, in which the courts assess the impact of the

less direct economic effect of state taxation on Indian sellers than is present in cases in which

Indians are the purchasers. Colville, 447 U.S. at 157. The decisive factors in preemption cases

involving Indian purchasers are whether the Indian purchasers bear the direct economic burden

of the tax and whether the tax is imposed with respect to activity that is comprehensively

regulated by the federal government. Bracker, 448 U.S. at 151; Ramah, 458 U.S at 844; Indian

Country, U.S.A., 829 F.2d at 987.

The federal courts also have held that Indian tribes have strong interests in economic

development, self-determination, and self-government. Ramah, 458 U.S. at 844; Bracker, 448


6

U.S. at 151; accord Indian Country, U.S.A., 829 F.2d at 985. The Sales Tax interferes with

achievement of these interests. Moreover, with particular respect to the Community’s purchases

of goods for use in its revenue-raising enterprises, these enterprises play a critical role in

supporting the Community’s self-determination and economic development goals.

PageID.4290-91 (Swartz Decl. ¶ 16). The Community has invested millions of dollars in its

enterprises, and they are government services in their own right, providing employment

opportunities for members and generating economic activity on the Reservation. Id. The

enterprises also fund the Community’s essential government programs and services provided to

the Reservation community, including tribal members and other residents, visitors, employees,

and vendors. Id. Defendant Fratzke acknowledged the importance of these interests, testifying

that “the department recognizes that the Community has interests and services that it needs to

provide to its members and to maintain self governance such as . . . police, fire, taking care of the

elderly, children, things like that,” and he acknowledged that there are legitimate tribal interests

in sovereignty and “deriv[ing] revenue.” PageID.4489; 4503 (Fratzke Tr.) at 83:3-23; 127:4-6.

3. Federal Interests Align with and Support the Community’s Interests.

Defendants incorrectly contend that “[t]he Community has not identified a federal statute

that purports to preempt state sales taxes on non-Indian retailers who sell to Indians and tribes

inside Indian country.” PageID.3573. It is well-established, however, that preemption under

Bracker balancing does not require express prohibition of a state tax. Ramah, 458 U.S. at 838

(federal preemption of state jurisdiction over Indians “is not limited to those situations where

Congress has announced an intention to preempt”). Defendants fail to address the strong federal

interests embodied in the Indian Trader Statutes, the IGRA, ISDEAA, as well as the numerous

statements of federal policy supporting strong tribal self-government and economic

development. Each of these statutes creates a comprehensive scheme of federal regulation, to


7

which courts assign decisive weight under the Bracker test. Bracker, 448 U.S. at 148; Ramah,

458 U.S. at 839; Indian Country, U.S.A., 829 F.2d at 985-86; Hoopa Valley Tribe v. Nevins, 881

F.2d 657, 659-60 (9th Cir. 1989).

The Indian Trader Statutes give the federal government exclusive authority to regulate

non-Indians trading with Indians on a reservation. 25 U.S.C. §§ 261-264; 25 C.F.R. § 140. The

Supreme Court has repeatedly held that the Indian Trader Statutes categorically bar a state from

imposing a transaction or excise tax—like the Sales Tax—the legal incidence of which falls on

an Indian trader, for sales, leases, or rentals of property to Indian tribes or tribal members within

their Indian country. Central Machinery, 448 U.S. at 160; Warren Trading, 380 U.S. at 690. As

explained in the Community’s November 9, 2017 Summary Judgment Motion Memorandum

(the “First SJ Motion”) and in its November 5, 2018 Opening Memorandum, the Court should

find that the Indian Trader Statutes categorically bar Defendants’ imposition of the Sales Tax,

but if it does not, there can be no question that the Indian Trader Statutes demonstrate a strong

federal interest against imposing the tax.

Similarly, IGRA comprehensively regulates tribal gaming and the State’s regulatory role

in that gaming. IGRA prohibits a State from “impos[ing] any tax, fee, charge, or other

assessment upon an Indian tribe or upon any other person or entity authorized by an Indian tribe

to engage in a class III activity,” 25 U.S.C. § 2710(d)(4). This ensures that intended benefits of

tribal gaming enterprises flow to the tribes, and not state or local taxation. Flandreau Santee

Sioux Tribe v. Sattgast, 325 F. Supp. 3d 995 (D.S.D. 2018) (state tax on contractor for services to

tribal gaming enterprise preempted based on federal and tribal interests set forth in IGRA).

ISDEAA created a framework for the federal government to transition from providing

certain government services directly to tribes to supporting and funding tribal governments in

designing and operating the programs for themselves. 25 U.S.C. § 5302(b). ISDEAA supports


8

“the development of strong and stable tribal governments, capable of administering quality

programs and developing the economies of their respective communities.” 25 U.S.C. § 5302(b).

The Community operates healthcare, law enforcement, and court programs under ISDEAA

compacts and contracts. PageID.4283-84 (Swartz Decl. ¶ 4). The Community also contributes

its own funds to those programs. When the Sales Tax is enforced and collected on purchases by

the Community, that diminishes the funding for these programs and undermines the federal (and

Community) interests in strong self-government and economic development.

4. Defendants’ Alleged State Interests are not Sufficient to Justify Imposing the Sales Tax.

It is well-established that off-reservation services provided by a state are not relevant

interests in Bracker balancing. In Ramah, the Supreme Court stated in no uncertain terms that a

state’s provision of services in relation to “activities off the reservation . . . is not a legitimate

justification for a tax whose ultimate burden falls on the tribal organization.” 458 U.S. at 844

(emphasis in original).

Defendants erroneously assert interests in collecting and enforcing the Sales Tax on the

Community and its members because the tax revenue funds public education, roads, emergency

services, and local government units. PageID.3571-72. The Community addressed these

interests fully in its opening memorandum, PageID.5269-71, demonstrating that Defendants had

failed to show, as required under the Bracker test, “any regulatory function or service performed

by the State that would justify the assessment of taxes for activities” on the Reservation, and that

the Community already compensates the State and local governments for any such services

provided on the Reservation. PageID.5269-71; 5287.

Defendants claim that the State’s road maintenance establishes an interest that weighs in

their favor, but the State funds road maintenance almost entirely from motor vehicle and gasoline

taxes, which are not at issue in this litigation. PageID.4793 (Darragh Rpt.). Moreover, the


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Community makes significant—at least $1.5 million since 2015—financial contributions to road

projects on or near the Reservation. PageID.4465-69 (Road Contrib.); PageID.4800 (Darragh

Rpt.) at SOM-FED00014066. Additionally, the State would need to maintain the roads at issue,

whether or not the Community or members used them at all, because the roads connect Michigan

cities and are essential for transit through the state.

5. Defendants’ Allegations Regarding the Marketing of a Tax Exemption are Nonsensical and Do Not Establish a Legitimate State Interest.

Defendants misleadingly claim a State interest in “maintain[ing] a level playing field

among the non-Indian retailers that sell to the Indian and non-Indian residents of the

Community’s [R]eservation” and, relatedly, in preventing the Community from “manipulating

transactions to market a sales tax exemption.” PageID.3572. Defendants have made similar

claims before, and even denied Refund Claims on those grounds. PageID.4480 (Fratzke Tr.); see

also Nichols Decl. Ex. 26 (10-8-2015 Claim) at Doc. No. 348-2 (filed under seal Oct. 19, 2018);

PageID.4536 (Pos’n Stmt.) (alleging State interest in “level playing field” and precluding tribes

from using tax exemptions “as a competitive advantage”).

Defendants’ argument is all rhetoric and no substance. Where, as here, an Indian tribe or

member is the purchaser and seeks to exercise a tax immunity, there can be no legitimate

concern that the tribe or member is “market[ing] an exemption from state taxation to persons

who would normally do their business elsewhere.” Colville, 447 U.S. at 155. To the extent that

the immunity is exercised, it only relieves the Indian purchaser of the economic burden of the tax

and makes no economic difference to the retailer. There is no comparative advantage to a

retailer from doing business on the Reservation.

In addition, Defendants do not explain how recognizing the Community’s federal rights

would be at odds with a “level playing field” or how the Community and members have

“market[ed] a sales tax exemption” when they are merely making purchases for their own use.


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When Defendant Fratzke was asked to explain the purported state interest in preventing the

Community from “marketing an exemption” as a seller; he testified that “[w]here a Federally-

recognized Indian Tribe does not have to pay a particular tax, it lowers the costs in a commercial

situation which gives it an unfair advantage” and “puts [non-Indian companies] at a

disadvantage.” PageID.4480-81 (39:10-40:14). Fratzke admitted, however, that this theory of

state interest “is speculation,” and he could not articulate any actual injury to any state interest.

Id. (39:10-40:14). When asked whether “the Tribe’s [alleged] marketing of an exemption” is a

factor in his determinations of whether the Tribe is entitled to a refund under Federal law,

Fratzke responded, “Absolutely not.” PageID.4482 (45:11-15). But Fratzke did deny Refund

Claims based on that precise rationale. E.g., Nichols Decl. Ex. 26 (10-8-2015 Claim) at Doc.

No. 348-2 (filed under seal Oct. 19, 2018). The result was even worse for Defendants when their

proffered expert, tax analyst Scott Darragh, was asked if the Community’s Sales Tax claims put

at risk the equity of the State’s administration of the tax and treatment of other taxpayers;

Darragh confirmed that such concerns were not relevant to the State’s interests in administration

or collection of the Sales Tax. PageID.4744 (113:12-20).

Defendants’ argument falls apart completely upon examination of the specific

transactions that were allegedly “manipulate[ed] . . . to market a sales tax exemption.”

PageID.3572-73. Specifically, Defendants challenge the Refund Claims submitted by the

Community Assistance Program (“CAP”), one of the Community’s most important social service

programs. Id. The Community pays utility bills for Community members who could otherwise

not afford to pay the bills, and submitted Refund Claims for CAP payments on behalf of

individual Community members for purchases of electricity and gas within the Reservation.

PageID.4287; see also, e.g., Nichols Decl. Ex. 14 (4-3-2014 Claim) at Doc. No. 346-2 (filed

under seal Oct. 19, 2018) (CAP purchase of natural gas from SEMCO for Community member)).


11

Defendants contend that the Community’s CAP payments represent “purchases which—but for

contractual creativity—would have occurred on non-Indian land.” PageID.3573. Defendants

fail to identify the “contractual creativity” in this straightforward program for assisting needy

Community members in paying for electricity and natural gas delivered to their homes on the

Reservation, and their unsupported accusation of “manipulation” reflects the lack of respect

Defendants have for the Community and its members.

6. Defendants’ Reliance on Two Recent Federal Balancing Decisions is Misplaced.

Defendants rest their argument on the assertion that the state interests they rely on “are

similar to those in other cases in which the courts have held the balance of interests does not

preempt a state tax,” citing Seminole Tribe of Fla. v. Stranburg, 799 F.3d 1324 (11th Cir. 2015),

and Tulalip Tribes v. Washington, No. 15-CV-940 BJR, 2018 U.S. Dist. LEXIS 172013 (W.D.

Wash. Oct. 4, 2018). PageID.3574. Neither Seminole nor Tulalip help Defendants’ argument:

Seminole rejected arguments virtually identical to the ones that Defendants make in this case,

and Tulalip addresses a tax situation that has no bearing on the facts of this case.

In Seminole, the Eleventh Circuit found that a state rental tax was preempted under

Bracker balancing and confirmed that, for a state to demonstrate a legitimate interest in imposing

a tax, “the state state’s tax must relate to services it provides in connection with the entity and

activity being taxed and not merely serve a generalized interest in raising revenue.” 799 F.3d at

1337.6 The court rejected the argument that the tribe had to specify the “impact of the Rental tax

6 The court also determined that a second state tax, a gross-receipts tax imposed on non-Indian utility companies, was not preempted. The lower court had not addressed the issue, and the Eleventh Circuit thus decided it without a fully-developed record. Seminole, 799 F.3d at 1353. The court’s analysis was thus limited, and, contrary to Defendants’ assertion, it did not even address state interests. Id.


12

on the Tribe’s business operations or its sovereignty” or “put forth evidence that it was less able

to lease the property, had to engage in unique marketing efforts, or had to reduce the rent to

accommodate the tax.” Id. at 1341. The court determined that the State’s provision of “law

enforcement, criminal prosecution, and health services, as well as ‘intangible off-reservation

benefits . . . such as infrastructure and transportation services’” was irrelevant to the Bracker

analysis because those services were not related to the lease transactions on the Reservation that

were being taxed. Id. The court held that even though “the presence of law enforcement or off-

reservation roads” might make doing business on-reservation “more attractive,” those services

were not “critically connected” to doing business on the Seminole Reservation. Id. at 1342.

Thus, Seminole discredits most7 of the arguments that Defendants make in favor of state

interests here.

Tulalip does not help Defendants either. Tulalip involved a challenge to state taxation of

transactions “where non-Indians are transacting with other non-Indians” within the Tribe’s

Indian country. Tulalip Tribes v. Washington, No. 2:15-cv-00940-BJR, 2017 U.S. Dist. LEXIS

1646, at *16 (W.D. Wash. Jan. 5, 2017); see also Tulalip Tribes v. Washington, No. 15-CV-940

BJR, 2018 U.S. Dist. LEXIS 172013, at *22 (W.D. Wash. Oct. 4, 2018). While the court

ultimately ruled that the taxes at issue were not preempted, that decision was based on a finding

that federal interests do not extend to transactions between non-Indians, and that tribal interests

are limited under the same rationale. The court’s statements of law regarding Bracker are

consistent with the Community’s position here. The critical difference is that in this case, the

Community and members are parties to the taxed transactions, they bear the direct economic

7 The State defendants in Seminole refrained from making some of the extreme arguments raised by Defendants here. The Seminole defendants apparently did not allege that the Tribe had no legitimate interests or that it was marketing a tax exemption.


13

burden of the Sales Tax, and they have shown that the Sales Tax injures the Community and

federal interests in self-governance, self-determination, and economic development.

II. DEFENDANTS’ ENFORCEMENT OF THE TOBACCO TAX IS PREEMPTED UNDER BRACKER BALANCING.

1. The CCTA Does Not Expand State Authority over Indian Tribes.

Defendants attempt to avoid application of Bracker to the Tobacco Tax by claiming

incorrectly that the federal government expanded state jurisdiction by enacting the Contraband

Cigarette Trafficking Act (“CCTA”). The CCTA does not, as Defendants contend, expand state

jurisdiction over Indian tribes or make “the Bracker test inapplicable.” PageID.3550-51. Rather,

the CCTA expressly states that it does not “affect the concurrent jurisdiction of a State or local

government” with respect to cigarette tax laws. Contraband Cigarette Trafficking Act, Pub. L.

No. 95-575, 92 Stat. 2463 (1978) (codified at 18 USCS §2341-2346, 2345(a)). The CCTA

merely creates federal penalties for non-compliance with “applicable State or local taxes.” Id. §

2341(2) (emphasis added); United States v. Baker, 63 F.3d 1478, 1486 (9th Cir. 1995) (holding

that “a violation of the CCTA requires, as a predicate, the failure to comply with state tax laws”);

United States v. Parry, Case No. 13-cr-291, 2015 U.S. Dist. LEXIS 18004, *17 (W.D. Mo.

2015). Thus, if state law does not apply in a given circumstance, neither does the CCTA—and

the CCTA itself does not inform the analysis of whether state law applies. Baker, 63 F.3d at

1486. Indeed, Congress stated in the conference report that accompanied its enactment of the

CCTA that (1) the “phrase ‘applicable State cigarette taxes’ makes it clear that this legislation is

not intended to affect transportation or sale by Indians or Indian tribes acting in accordance with

legally established rights,” and (2) nothing in the CCTA affects “the current exemption from

state taxation of cigarette sales on Indian reservations and nothing in this bill is intended to affect

this or any other immunity from state tax held by any Indian or Indian tribe.” H.R. Conf. Rep.

No. 1778, 95th Cong., 2d Sess. 1, 9 n.1, reprinted in 1978 U.S. Code and Cong. Admin. News


14

5535, 5538.

Defendants disregard the plain text, legislative history, and case law applications of the

CCTA. Defendants rely on just one case that does not actually support their argument, Grey

Poplars Inc. v. One Million Three Hundred Seventy-One Thousand One Hundred (1,371,100)

Assorted Brands of Cigarettes, 282 F.3d 1175, 1177 (9th Cir. 2002). PageID.3550-51. In Grey

Poplars, the court expressly held that it “need not address the question of state power” because it

was “the federal government, not the State” that “entered Indian country and seized these

cigarettes.” Grey Poplars, 282 F.3d at 1177. With respect to the federal government’s

enforcement action, the court assumed the validity of Washington’s tobacco tax law, and there

was no claim that the tax was unlawful under Bracker. Id. (citing Washington v. Confederated

Tribes of Colville Reservation, 447 U.S. 134, 150-51 (1980). Grey Poplars does not establish

that the CCTA grants authority to enforce the TPTA in any circumstance where it would

otherwise be unlawful.

Defendants’ alternative argument, that the CCTA is evidence of a federal interest relevant

to Bracker balancing, fails for the same reasons. Nothing in the CCTA indicates any federal

intent to alter the tax immunities or other rights of Indian tribes, and Congress expressly stated

that the CCTA preserved any “immunity from state tax held by any Indian or Indian tribe.” H.R.

Conf. Rep. No. 1778, 95th Cong., 2d Sess. 1, 9 n.1, reprinted in 1978 U.S. Code and Cong.

Admin. News 5535, 5538.

2. Defendants’ Wrongly Dismiss the Community’s Significant Interests in Economic Development and Self-Determination.

Defendants are dismissive of Community’s important interests and wrongly claim that


15

the Community cannot show anything to support those interests.8 Indeed, the Community’s

strong interests in self-determination, economic development, and protecting value generated on

the Reservation from burdens of state taxation weigh heavily against imposition of the Tobacco

Tax. Revenue from the Community’s sale of untaxed tobacco goes to the General Welfare

Support Program which provides a payment for eligible Tribal Members as reimbursement for

certain expenses, generally in the form of a “Christmas Gift” distribution to Community

members. PageID.4842 (Tob. Code) at KBIC_TAX0009819. The Community made significant

investments—millions of dollars—to create the Gaming Enterprises and service stations where it

sells its tobacco products, and the Community’s tobacco sales at those establishments meet a

demand that the Community created. PageID.4392 (Henson Rpt.). Tobacco products are

complements to gaming, and many casino patrons feel that their gaming experience is enhanced

by the use of tobacco. Id. at 24-26. Similarly, many service station customers expect to be able

to purchase tobacco products at the same time they purchase gasoline. Id. The Community has

an especially strong interest in value “generated on the reservation” by these “activities in which

[it has] a significant interest.” Colville, 447 U.S. at 156-57; Indian Country, U.S.A., 829 F.2d at

986.

The Tobacco Tax burdens the Community and its pursuit of self-determination and

economic development. Defendants assert—with no support—that the Community would have

to show that sale of untaxed tobacco is “the sole” or “largest” source of tribal revenue in order to

prevail on its claims. PageID.3552. As noted above, it is the very existence of the economic

8 Defendants claim Rising upheld their imposition of the Tobacco Tax and the refund method (PageID.3554) – but it did not do so against a Bracker challenge. Keweenaw Bay Indian Cmty. v. Rising, 477 F.3d 881, 890 n.3 (6th Cir. 2007) (noting that the Community is not litigating a balancing claim).


16

burden that injures the tribal interest in self-determination. Indian Country, U.S.A., 829 F.3d at

987 n. 9. But here, the magnitude of the economic burden of the tax is also significant. Paying

the tax increases the Community’s cost of acquiring products, and the Community must therefore

absorb the cost of the tax, and thus lose revenue, or pass the tax on to the consumer.

PageID.4386 (Henson Rpt.). If the Community passes the tax on to consumers, this leads to a

decrease in the quantity of products that consumers purchase. Id. In either event, the

Community loses revenue that would otherwise contribute directly to the welfare of its members,

thereby advancing the goals of economic development and self-determination. Id. In addition,

the Community would likely lose customers at its casinos, hotel, and service stations—customers

that value the Community’s sale of untaxed tobacco to complement the gaming experience might

be more inclined to take their business elsewhere if the Community could no longer offer that

amenity. Id.

The Community’s tobacco commerce takes place in circumstances markedly different

from those present in the cases upon which Defendants rely, Moe v. Confederated Salish &

Kootenai Tribes of Flathead Reservation, 425 U.S. 463 (1976), and Colville.9 In Moe, which

9 Defendants also misleadingly claim that they “have not found a single Supreme Court case holding that raising revenue from untaxed tobacco products is an important tribal interest.” PageID.3553, fn.5. Defendants cite four cases that purportedly substantiate their claim, but those cases did not involve Bracker balancing, and thus, did not address the question of whether raising revenue from the sale of untaxed tobacco products is an important tribal interest. Id. (citing Oklahoma Tax Comm’n v. Citizen Band Potawatomi Indian Tribe of Oklahoma, 498 U.S. 505, 512 (1991) (not a Bracker balancing case; addressed whether “sovereign immunity of the Tribe prevents it from being liable for the collection of state taxes on the sale of cigarettes to nonmembers of the Tribe”); California State Bd. of Equalization v. Chemehuevi Indian Tribe, 474 U.S. 9, 12 (1985) (not a Bracker balancing case; addressed whether the legal incidence of tax was on non-Indian consumer); see also Dep’t of Taxation & Fin. of New York v. Milhelm Attea & Bros., 512 U.S. 61, 75 (1994) (not a Bracker balancing case; addressed whether administrative burdens imposed on an Indian trader were permissible under the Indian Trader Statutes); Muscogee (Creek) Nation v. Pruitt, 669 F.3d 1159, 1174 (10th Cir. 2012) (summarizing Colville and Milhelm)).


17

was decided several years before Bracker, the Court did not conduct a balancing analysis and

thus did not address the significance of tribal interests in self-determination, economic

development, and protecting value generated on the reservation from burdens of state taxation.

425 U.S. at 481-83. And in Colville, also decided before Bracker, the Court found:

[T]he value marketed by the smokeshops to persons coming from outside is not generated on the reservations by activities in which the tribes have a significant interest. What the smokeshops offer these customers, and what is not available elsewhere, is solely an exemption from state taxation.

447 U.S. at 155 (citations omitted). The Colville Court specifically contrasted the situation in the

case before it with a situation in which the revenues burdened by the tax “are derived from value

generated on the reservation by activities involving the Tribes,” and therefore the tribal interests

are strong. Id. at 156-57. Here, tobacco sales are an integral part of the Community’s gaming,

hospitality, and retail enterprises, all of which attract customers to the Reservation where they

benefit from the Community’s offerings and government services. PageID.4392 (Henson Rpt. at

24-26). Additionally, the Community’s interests in tribal self-governance, self-determination,

and economic development align with the federal interests. See Colville, 447 U.S. at 156-57;

Indian Country, 829 F.2d at 986.

3. Defendants Cannot Identify any Legally Relevant State Interest Favoring Imposition of the TPTA.

As noted above, in Ramah, the Supreme Court stated that a state’s provision of services

in relation to “activities off the reservation . . . is not a legitimate justification for a tax whose

ultimate burden falls on the tribal organization.” 458 U.S. at 844 (emphasis in original).

Defendants fail to identify state services within the Reservation that are funded by the Tobacco

Tax.

First, Defendants claim a State interest because Tobacco Tax collections fund some

“health-care costs” attributable to the “Community’s non-Indian customers who reside in


18

Michigan.” PageID.3554. By definition, these off-Reservation services are irrelevant to Bracker

balancing for a tax imposed on the Reservation. See Ramah, 458 U.S. at 844 n. 9 (finding that

“state tax revenues derived from [the contractor’s] off-reservation business activities are

adequate to reimburse the State for the services it provides to [the contractor]”). The federal

government, in fact, has a trust responsibility, exclusive of the states, to provide healthcare to

Indians, and the Community’s health programs are funded by the federal government and the

Community itself, not the State of Michigan. PageID.4814-18; PageID.4283-84. Though

Defendants suggest that “state health-care services funded from the tobacco tax” might be

available to Community members if federal and Community programs are not, this argument is

simply counterfactual speculation and does not establish any legitimate state interest.

PageID.3554.

Second, Defendants misleadingly claim that Tobacco Tax collections benefit Community

members living in the Community’s Indian country by providing some funding for local public

schools. PageID.3554. The Community, however, adequately compensates the State and local

governments for any educational services provided. In 2017, the Community contributed

$549,288 to local governments. PageID.4428. Since 2013, the Community has contributed

more than $100,000 per year directly to public schools in Baraga and Marquette counties, with

nearly $182,000 going to L’Anse Area Schools and $366,775.91 going to Baraga Area Schools

over the five year period. PageID.4434-63 (School Contrib.)

Finally, Defendants claim strong state interests in Tobacco Tax enforcement and

administering a “simple and enforceable” tax system that limits “unfair competition” and permits

the State to comply with its obligations under the Master Settlement Agreement.10

10 The Master Settlement Agreement’s requirement that Michigan enforce its tobacco tax laws


19

PageID.3555. These generalized state interests are present in every case and do not constitute a

“specific, legitimate regulatory interest” that is paid for by the tax at issue, state interests cannot

tip the scales in favor of upholding the tax. See Ramah, 458 U.S. at 843; Bracker, 448 U.S. at

150.11

4. The Balance of Interests Favors the Community.

Defendants do not establish a legally sufficient interest in imposing the Tobacco Tax on

the transactions at issue that outweighs the strong Community and federal interests in self-

determination and economic development.

III. DEFENDANTS’ ENFORCEMENT OF THE SALES AND TOBACCO TAXES VIOLATES THE COMMUNITY’S RIGHTS OF SELF-GOVERNMENT AND SOVEREIGNTY.

A. Defendants’ Enforcement of the TPTA and Sales Tax Acts Usurps the Community’s Power to Regulate Activity within its Reservation.

Tribal sovereignty is an independent barrier to the exercise of a state’s authority if it

“unlawfully infringe[s] ‘on the right of reservation Indians to make their own laws and be ruled

by them.’” Bracker, 448 U.S. at 142 (citing Williams, 358 U.S. at 220). The power to make

decisions about taxation on the reservation is “[c]hief among the powers of sovereignty

recognized as pertaining to an Indian tribe” and “this power may be exercised over members of

the tribe and over nonmembers.” Colville, 447 U.S. at 153 (quotations omitted). Defendants

contend, wrongly, that “The Community does not allege that the TPTA or Defendants prevent it

from adopting its own laws to govern its own members.” PageID.3557. But Defendants’ failure

has no application to a state tax that is preempted by federal law, whether under Bracker balancing or otherwise. See also, Nichols Opp. Decl. Ex. 3 (Darragh Tr.) at 120:4-14 (agreeing that MSA does not prevent Michigan from complying with federal law). 11 There is nothing “unfair” about the Community, a tribal government, engaging in economic development activities on the Reservation—including gaming, hospitality, and retail operations in which tobacco sales are an important element—and retaining the benefit of the value it created. Colville, 447 U.S. at 156-57.


20

(or refusal) to understand the Community’s claims does not change the nature of those claims.

The Community has made deliberate choices about the laws and regulations it enacts in order to

regulate activities on the Reservation in the manner the Community, through its governing body

– the Tribal Council – deems appropriate. PageID.4284-86 (Swartz Decl. ¶ 5). Without legal

basis, Defendants attempt to enter the Reservation and usurp the Community’s authority to make

or modify that tax decision by imposing their own Sales, Use12, and Tobacco Taxes on activities

in the Community’s jurisdiction – a tax that benefits the State, not the Tribe. There can be no

greater infringement on the Community’s sovereign authority than another government seeking

to enter the Community’s jurisdiction and impose a tax on the Community and members’

activities.

B. Defendants’ Law Enforcement Operations on the Reservation Infringe the Community’s Sovereignty and Right of Self-Government.

Defendants do not address at all the surveillance and investigations they have conducted

against the Community and its members on the Reservation in violation of the Community’s

sovereignty. The December 11, 2015 stop and seizure, along with the State Criminal

Prosecutions, were the direct result of surveillance conducted on the Reservation against the

Community and members by Defendant Croley and MSP troopers under his command.

PageID.4709-10 (Croley Tr.) at 40:13-42:14.13

It is a well-established principle of federal Indian law that states like Michigan have no

jurisdiction to conduct law enforcement activity of any kind against the Community and its

12 As explained in the Community’s First SJ Motion, the legal incidence of the Use Tax falls on the Community and members, and is therefore categorically barred as a matter of federal law—the balancing analysis does not apply. PageID.1629-31. 13 The Community does not know the full extent of Defendants’ misconduct in this respect and is seeking discovery on that subject. Doc. No. 259 (Opposition to Defendants’ Appeal of Discovery Order).


21

members on Reservation and trust lands—the State cannot conduct surveillance or other

investigative activities, and it cannot make arrests. United States v. Peltier, 344 F. Supp. 2d 539,

546-47 (E.D. Mich. 2004); State v. Cummings, 679 N.W.2d 484, 487-89 (S.D. 2004) (both

holding that state police officers cannot conduct an on-Reservation search even with a warrant or

in connection with alleged off-Reservation crimes); see also Saginaw Chippewa Indian Tribe v.

Granholm, No. 05-10296, 2011 U.S. Dist. LEXIS 53765, at *9 (E.D. Mich. May 18, 2011)

(indicating that Cummings properly articulated the scope of state police authority in Indian

country); Rodewald v. Kan. Dep’t Revenue, 297 P.3d 281, 289-91 (Kan. 2013) (holding that

State lacked jurisdiction to investigate drunk driving offenses on the Reservation because “a state

has no civil or criminal jurisdiction over tribal members unless Congress has expressly said so”);

Moses v. Dep’t of Corr., 736 N.W. 2d 269, 279 (Mich. Ct. App. 2007) (accepting that Michigan

police do not have jurisdiction to conduct investigations or make arrests in Indian country).

Defendants’ conduct here is even more offensive to tribal sovereignty than the conduct at

issue in Cummings and Peltier. In Cummings, a state officer was engaged in an off-Reservation

investigation, aimed at regulating off-Reservation conduct, and followed the suspect onto a

Reservation. 679 N.W.2d at 485. The court still found the tribe’s sovereignty was injured by the

State’s attempt “to extend its jurisdiction into the boundaries of the Tribe’s Reservation without

consent” and tribal sovereignty was properly invoked “as a shield to protect the Tribe’s

sovereignty from incursions by the State.” Id. at 487. The injury was serious, and the court

imposed an appropriate consequence – suppressing all evidence obtained from the unlawful on-

Reservation investigation. Id. at 489. Similarly, in Peltier, the court found that a warrant to

search an on-Reservation home in connection with suspected controlled substance and fire-arms

offenses outside the Reservation was not valid. 344 F. Supp. 2d at 546-48. But there was

nothing in either case to suggest that the state officers’ conduct was part of a larger effort to


22

regulate the activities of the Tribe or its members on the Reservation. In this case, Defendants

started an unlawful on-Reservation investigation to regulate the Community’s tobacco commerce

on its own Reservation. Defendants’ conduct on its own is a recognized injury to the

Community’s sovereign rights, and the injury is compounded because it interferes with the

Community’s ability to carry out activities that are within its federal rights and a critical

component of its self-determination and economic development efforts.

IV. DEFENDANTS’ ENFORCEMENT OF THE TOBACCO TAXES VIOLATES THE INDIAN COMMERCE CLAUSE OF THE U.S. CONSTITUTION.14

Count XI of the Community’s complaint claims that enforcement of the Tobacco Tax and

the TPTA under the circumstances of this case violates the Indian Commerce Clause in Article I,

Section 8, Clause 3 of the United States Constitution. Defendants’ effort to dismiss that claim on

summary judgment should be rejected.

The Indian Commerce Clause gives Congress, not states, the authority “[t]o regulate

Commerce . . . with the Indian tribes.” and commerce consists “of selling, buying, and bartering,

as well as transporting for these purposes.” Adoptive Couple v. Baby Girl, 570 U.S. 637, 659

(2013). The Indian Commerce Clause “conferred on Congress the [ ] power to regulate trade

with Indian tribes . . . who had not been incorporated into the body-politic of any State,” and the

Clause therefore leaves a state with the limited authority exercise its “general police powers with

respect to Indians who were citizens of the [ ] State.” Id. at 660. In another case, the Supreme

Court described the Indian Commerce Clause’s broad proscription of state authority over Indian

tribes as follows:

14 The Community’s complaint also alleged that Defendants’ enforcement of the Sales Tax violates the Indian Commerce Clause. The Community has determined to rest its Sales Tax claims on per se preemption, Bracker balancing, and other grounds set forth in its pending motions for summary judgment, rather than the independent ground of the Indian Commerce Clause itself.


23

The answer to that question [i.e., whether the Indian Commerce Clause, like the Interstate Commerce Clause, is a grant of authority to the Federal Government at the expense of the States] is obvious. If anything, the Indian Commerce Clause accomplishes a greater transfer of power from the States to the Federal Government than does the Interstate Commerce Clause. This is clear enough from the fact that the States still exercise some authority over interstate trade but have been divested of virtually all authority over Indian commerce and Indian tribes.

Seminole Tribe of Florida v. Florida, 517 U.S. 44, 62 (1996). As the Second Circuit

recently summarized, “states may regulate tribal activities, but only in a limited manner, one

constrained by tribes’ fundamental right to self-government, and Congress’s robust power to

manage tribal affairs,” and “[t]he breadth of a state’s regulatory power depends upon two

criteria—the location of the targeted conduct and the citizenship of the participants in that

activity.” Otoe-Missouria Tribe of Indians v. N.Y. State Dep’t of Fin. Servs., 769 F.3d 105, 112-

13 (2d Cir. 2014). State authority is at its weakest with respect to commerce involving Indians

or tribes in Indian country. Id.

Here, the State impermissibly exceeded its authority, in violation of the Indian Commerce

Clause, by enforcing the TPTA against the Community and its members, because “the location

of the targeted conduct” was primarily within Indian country. Otoe-Missouria Tribe, 769 F.3d at

113. For purposes of its claim in Count XI, it is especially significant that the Community’s

commerce at issue occurred within a larger tribal economy involving multiple tribal communities

on reservations located in several states. This larger tribal economy falls squarely within

Congress’s purview “to regulate Commerce with the Indian tribes,” an economy in which

logically the role for individual states is even more circumscribed than in a situation in which

there is only one tribe or tribal community involved. The Community purchased the cigarettes at

issue from entities that are owned by tribes or tribal members and have places of business on

Indian lands within the states of Nebraska and New York. PageID.4583-84; Ho-Chunk, Inc. v.


24

Sessions, 253 F. Supp. 3d 303 (D.D.C. 2017). There is no dispute that the cigarettes were

destined for sale at the Community’s establishments on the Reservation, and thus, there can be

no dispute that the Community was engaged in “commerce,” i.e. selling, buying, bartering, or

transporting. Adoptive Couple, 570 U.S. at 659. Furthermore, because the Community itself was

a party to the tobacco acquisitions and planned retail sales, those transactions constitute

“commerce with Indian tribes” or “trade with Indians.” Id. And although Defendants seized the

cigarettes at a location just outside of the Community’s reservation, they did so while the

cigarettes were in transit to the Reservation. PageID.1439-40; 3512-13. In fact, with respect to

the December 2015 seizure, Defendants seized the cigarettes while they were in transit from one

Community establishment to another—both of which are in the Community’s Indian country,

though separated by land that is not Indian country. PageID.1439-40; PageID.4590-91; Nichols

Opp. Decl. Ex. 2 (Croley Tr.) at 64;18-65:11. Thus, Defendants effectively “reache[d] across a

reservation’s borders [where] its power diminishes.” Otoe-Missouria Tribe, 769 F.3d at 113.

Defendants rely primarily on Cotton and Colville for their argument that the

Community’s claim in Count XI must be rejected, contending based on these cases that “there is

no dormant Indian Commerce Clause.” PageID.3560. Defendants’ reliance on Cotton and

Colville is misplaced. Cotton’s discussion of the Indian Commerce Clause occurred only in the

context of addressing Cotton Petroleum’s claim based on that clause that overlapping state and

tribal taxes on the same activity should be apportioned, and the Court merely noted there that the

“central function” of the Indian Commerce Clause is to provide Congress with plenary power to

legislate in the field of Indian affairs. The language Defendants’ quoted from Colville is actually

found on page 157 of its opinion, not page 148 as indicated in Defendants’ brief. On page 148,

the Court stated that the notion that the Indian Commerce Clause provides an “automatic

exemption” from state taxation is a “stark and rather unhelpful notion.” Of course the Indian


25

Commerce Clause’s limitations on state taxation and other regulation of Indian country activities

is not “automatic,” and the Community’s claim is addressed to the specific circumstances of this

case.

V. DEFENDANTS’ SEIZURES OF TOBACCO FROM A COMMON CARRIER VIOLATED THE INTERSTATE COMMERCE CLAUSE.

Defendants violated the Interstate Commerce Clause of the United States Constitution,

Art. I, Section 8, Cl. 3, by seizing the Community’s cigarettes while they were in transit from

Native Wholesale Supply, in New York, to the Community’s Reservation, in Michigan, because

the Community was unequivocally engaged in interstate commerce and was transporting the

cigarettes by common carrier. PageID.3512-13; U.S. Department of Transportation Federal

Motor Carrier Safety Administration at https://safer.fmcsa.dot.gov/CompanySnapshot.aspx,

DOT#241829 (accessed Nov. 16, 2018). The Interstate Commerce Clause provides that “the

Congress shall have Power . . . To regulate Commerce . . . among the several States . . . .” U.S.

Const., Art. I, § 8, cl. 3. Thus, only Congress may regulate interstate commerce, and by negative

implication this “imposes limitations on the States in the absence of congressional action.” C &

A Carbone v. Town of Clarkstown, 511 U.S. 383, 401 (1994). It “forbids States and their

subdivisions to regulate interstate commerce.” Id. at 402.

Presumably, the state court in the Community’s pending parallel state court action will

conclude that the seizures of cigarettes in February 2016 violated the TPTA, because the seizures

were made from an interstate commerce carrier not subject to the TPTA’s licensing or stamping

requirements. Under the TPTA, Michigan’s regulatory requirements are triggered only after

cigarettes transported by common carrier come to rest or storage in Michigan. MCL

§§205.422(y); 423(1). Even if these seizures were valid under the TPTA (which they were not),

the Supreme Court has specifically held that the Interstate Commerce Clause applies to bar state

regulation that interferes with the travel of goods via common carriers. In Bowman v. Chicago,


26

the Supreme Court struck down an Iowa law that required an out-of-state railroad to certify that

an Iowa shipper had a license to sell alcohol before shipping alcohol into the state. 125 U.S. 465,

500 (1888).15 There, an Illinois railroad refused to ship barrels of beer into Iowa and the would-

be shipper sued the railroad for lost income from the non-delivery of beer. Id. at 466. The

shipper also sued for a declaration that the Iowa law is unconstitutional. Id. at 470. Finding that

the Iowa licensing scheme impermissibly disrupted interstate commerce, the Court stated that “it

may safely be said that state legislation, which seeks to impose a direct burden upon interstate

commerce, or to interfere directly with its freedom, does encroach upon the exclusive power of

Congress.” Id. at 486 (quoting Hall v. De Cuir, 95 U.S. 485, 488 (1877)). The Court reasoned

that although the Iowa licensing scheme was “purport[ed] only to control the carrier when

engaged within the state,” the imposition of the licensing requirement “must necessarily

influence his conduct to some extent in the management of his business throughout his entire

voyage.” Id. at 487. Thus, Bowman stands for the proposition that a state licensing requirement

that influences the conduct of a common carrier outside the state is an impermissible violation of

the interstate (dormant) commerce clause.

Here, Defendants’ seizures from an interstate commerce carrier in February 2016

similarly interfered with interstate commerce. Defendants seized the tobacco while it was in

transit with an interstate carrier (and under circumstances in which such seizures did not even

comport with the TPTA). Defendants could only have been operating under a theory that the tax

15 Bowman remains good authority. The Michigan TPTA accounts for Bowman – and the Interstate Commerce Clause itself – by excluding interstate commerce carriers from the definition of a “transporter” so that they are not subject to the licensing requirements applicable to transporters. Even transporters, much less interstate commerce carriers, are not subject to stamping requirements under the TPTA. Similarly, cigarettes in the possession of an interstate commerce carrier are categorically excluded from the definition of “contraband cigarettes” in the Contraband Cigarette Trafficking Act, 18 U.S.C. 2341(2)(b).


27

payment and stamping should have occurred before the cigarettes even entered Michigan. Thus,

like the shipper in Bowman, the state of Michigan imposed requirements upon the Community

and its trading partners that shaped the conduct of a common carrier outside of the state.

Furthermore, by enforcing its licensing and tobacco stamp regulations on goods traveling by

common carrier through the State, but not ultimately resting in the state, the state of Michigan

regulated purely interstate commercial conduct in excess of its authority under the United States

Constitution. Accordingly, the Court should deny the State’s motion for summary judgment on

Count XII given the state’s conduct in enforcing its tobacco stamp and transportation regulations

on common carrier transporters at a minimum raises factual issues regarding whether the State

acted in a manner proscribed by the Interstate Commerce Clause.

VI. THE COMMUNITY IS ENTITLED TO RELIEF ON ITS § 1983 CLAIMS.

A. The Sixth Circuit Confirmed that “the Community has a private right of action to sue for violations of its Constitutional rights under 42 U.S.C. § 1983.”

It is well-established in the Sixth Circuit that the Community is entitled to brings claims

under 42 U.S.C. § 1983 unless the claims arise “only as a result of its sovereignty.” Keweenaw

Bay Indian Cmty. v. Rising, 569 F.3d 589, 596 (6th Cir. 2009) (emphasis added). The Sixth

Circuit confirmed in prior litigation that “the Community has a private right of action to sue for

violations of its Constitutional rights under 42 U.S.C. § 1983,” Keweenaw Bay Indian

Community. v. Rising, 477 F.3d 881, 894 n.6 (6th Cir. 2007), and has chastised Defendants

predecessors for “wav[ing] this away as mere dicta,” Rising II, 569 F.3d at 596 n.5. The Sixth

Circuit’s holdings were based on the Supreme Court’s decision in Inyo County v. Paiute-

Shoshone Indians of the Bishop Community of the Bishop Colony, 538 U.S. 701 (2003). In Inyo

County, the Supreme Court held that the Paiute-Shoshone Tribe may not use Section 1983 to

vindicate a violation of its sovereign immunity by the County and its agents in executing a search


28

warrant against the Tribe and its property. 538 U.S. at 711-12. The Court stated that the

“particular claim of relief” brought by the Tribe would determine whether the tribe qualified as a

person entitled to bring suit under 42 U.S.C. §1983:

It is only by virtue of the Tribe’s asserted “sovereign” status that it claims immunity from the County’s processes. . . . Section 1983 was designed to secure private rights against government encroachment, . . . not to advance a sovereign’s prerogative to withhold evidence relevant to a criminal investigation. . . . Accordingly, we hold that the Tribe may not sue under §1983 to vindicate the sovereign right it here claims.

Id. (emphasis added).

The Community’s claims under Section 1983 assert that Defendants’ unlawful imposition

of Sales and Tobacco Taxes, unnecessary and burdensome Refund and Exemption Process, and

unlawful seizures violate the Community’s federal rights, among others, to exercise immunities

from Sales Tax guaranteed by the Indian Trader Statutes and Article II of the 1842 Treaty,

immunities from Tobacco Tax guaranteed by the Indian Commerce Clause of the United States

Constitution, and the right to equal protection of the laws and due process of law guaranteed by

the Fourteenth Amendment of the United States Constitution. PageID.847-49. Thus, despite

Defendants protestations’, the Community has squarely identified the basis for which Section

1983 “provides a remedy for actions under color of law which contravene federally protected

rights, whether those rights derive from the Constitution or from a federal statute.” Day v.

Wayne County Bd. of Auditors, 749 F.2d 1199, 1202 (6th Cir. 1984). None of these rights

depend on the Community’s status as a sovereign Indian tribe but also are available to private

persons, in some cases individual Indians (rights to exercise immunities from Sales Tax and

Tobacco Tax that are available to any reservation Indian or to any member of a tribe that is a

beneficiary of a treaty, not just to tribes) and in others private persons generally (rights to equal

protection of the laws and due process of law).


29

See also Rising II, 569 F.3d at 596 (citing Georgia v. Evans, 316 U.S. 159, 163 (1942), holding

that a government entity acting as a private purchaser is entitled to redress for injuries arising

from such purchases to the same extent as other person). The Community seeks nothing more

than to vindicate rights that also are available to private persons.16

B. The Community is Entitled to Damages, Including Refunds on the Denied Exemplar Claims, under Section 1983 as a Remedy for Defendants’ Violations of the Community’s Federal Rights.

As explained in this memorandum, the Community’s opening memorandum, and the

Community’s First SJ Motion, the Sales, Use, and Tobacco Taxes are imposed unlawfully.

Moreover, the refund application system is unlawful under equal protection. As a result,

Defendants’ have collected at least $21,424.76 unlawfully. PageID.5136.

Moreover, the Community was forced to expend significant resources dealing with

Defendants’ onerous and burdensome refund and exemption system. Nichols Opp. Decl. Ex. 1

(Fratzke Tr.) at 193:12-194:3. Defendants created that system knowing precisely the nature of

the burden it would inflict on the Community. They refuse to even consider measures that would

make the system more efficient. Id. at 194:13-19. In fact, Defendants likely implemented the

system for the very purpose of imposing a burden on the Community and its members in order to

discourage them from attempting to exercise their federal tax immunities.

Even as Defendants criticize the Community for expending resources to pursue Sales and

Use Tax refunds, they claim that the Community should have done even more—including filing

appeals in state court of each denied claim. PageID.3591. Defendants disregard the

Community’s established right to seek state tax refunds in federal court. Lac Du Flambeau Band

16 Defendants complain that the Members assigned their refund claims to the Community, but Defendants do not question the validity of the assignments or the Community’s right to pursue refunds based on those assignments. PageID.3592.


30

of Lake Superior Chippewa Indians v. Zeuske, 145 F. Supp. 2d 969, 972 (W.D. Wisc. 2000)

(noting a tribe’s right to challenge a “state's authority to tax tribal members” in federal court

when “it is seeking to vindicate rights of the tribe”); Assiniboine & Sioux Tribes v. Montana, 568

F. Supp. 269, 276 (D. Mont. 1983) (explaining that the district court “has jurisdiction to hear the

claims of the Tribes . . . for [tax] refunds”).

Defendants claim that Community cannot pursue refunds of the CAP claims because “a

nontaxpayer may not sue for a refund of taxes paid by another” and § 1983 “only establishes

“liability to the party injured[.]” PageID3592. Through CAP, a tribal government program, the

Community pays utility bills for members on the Reservation who could otherwise not afford to

do so. PageID.4287; Nichols Decl. Ex. 14 (4-3-2014 Claim) at Doc. No. 346-2 (filed under seal

Oct. 19, 2018). Defendants earlier characterized the Community’s operation of this program as

contractual creativity to manipulate the location of a transaction. Now Defendants assert—

contrary to facts in the record—that the Community did not even pay the bills. PageID.3592

(asserting that the Community cannot seek refunds for Sales Tax on CAP payments because “a

nontaxpayer may not sue for a refund of taxes paid by another”). It is unclear why Defendants

have so much contempt for the Community’s generosity to needy members.

C. The Community’s Claims are not Barred by the Tax Injunctions Act or Comity Principles.

Defendants argue that the Tax Injunction Act, 28 U.S.C. § 1341, and “comity principles”

preclude the Community’s § 1983 claims because there is a “‘plain, adequate, and complete’

remedy available to the plaintiff in state court.” PageID.3565 (citing Chippewa Trading Co. v.

Cox, 365 F.3d 538, 544-46 (6th Cir. 2004)). Defendants are wrong on both points.

Moe established a tribal exception to the Tax Injunction Act, 28 U.S.C. § 1341,

confirming that Indian tribes may bring suit in federal court to “dispute imposition of state

personal property taxes and sales taxes as applied to on-reservation Indians.” Mashantucket


31

Pequot Tribe v. Town of Ledyard, 722 F.3d 457, 464 (2d Cir. 2013) (citing Moe, 425 U.S. at 474-

75). Defendants are incorrect in claiming that Moe precludes tribes from bringing § 1983 claims

or otherwise seeking money damages when injured by state officials unlawful enforcement of

state tax laws. Defendants do not identify any authority supporting such an interpretation of

Moe. In fact, it is well-established that the TIA does not apply at all when a tribe brings suit in

federal court to advance the “interest of the United States in securing immunity to the Indians

from taxation.” 722 F.3d at 465.

Defendants’ comity argument fares no better. There are “‘strong policies . . . favoring a

federal forum to vindicate deprivations of federal rights,’” and for litigation brought by Indian

tribes, federal courts should exercise their lawful jurisdiction.” Mashantucket, 722 F.3d at 466

(citing McNary, 454 U.S. at 119(Brennan, J., concurring)). Thus, the Second and Eleventh

Circuits have rejected comity arguments identical to the ones that Defendants raise, and in doing

so, both courts noted that their dismissal of a tribe’s state-tax challenge on comity grounds would

be “the first such dismissal of an Indian tribe’s challenge by a federal court ever.” Seminole

Tribe of Fla. v. Stranburg, 799 F.3d 1324, 1345 (11th Cir. 2015) (citing Mashantucket, 722 F.3d

at 466 n.7). Chippewa Trading is not an exception; in that case, the Sixth Circuit upheld the

dismissal on comity grounds of a lawsuit brought by a private enterprise owned by an individual

Indian. 365 F.3d at 544. In doing so, the court explicitly relied on the fact that the plaintiff

“[wa]s not an ‘Indian tribe or band,’ as the statutory exception [to the TIA] requires.” Id. at 545.

Thus, the very case that Defendants cite for the proposition that comity principles require

abstention concludes the opposite. The court explicitly stated that when “the plaintiff [is] an

‘Indian tribe or band,’” neither principles of comity nor the Tax Injunction Act (“TIA”) prevent

the district court from hearing a tribe’s constitutional challenge to a state tax because “civil

actions brought by [a recognized] Indian tribe or band” are exempted from the TIA jurisdictional


32

bar. Id. at 545-46. Here, because the Community itself brings claims under § 1983 to obtain

remedy for unlawfully imposed state taxes, the Community fits squarely within the exception to

the TIA jurisdictional bar.

D. Defendants are Not Entitled to Qualified Immunity.

The Community is suing Defendants in their individual and official capacities, and they

are not entitled to qualified immunity. PageID.794-795 (TAC ¶¶ 7-12) (All Defendants except

Johnson are sued in their individual and official capacities.). The Community alleges, and

Defendants cannot deny, that Defendant Khouri, as Treasurer, is responsible for the policies and

actions of the Department, PageID.861, and that Defendant Fratzke carried out those policies,

with respect to imposition of the Sales and Use Taxes on the Community and Members,

PageID.861; PageID.4476-77 (Fratzke Tr. 10:15-11:5). Similarly, Defendant Croley carried out

the unlawful surveillance of the Community on the Reservation and the seizures of the

Community’s property. PageID.4712; PageID.4589. Defendants Grano and Sproull enforced the

TPTA against the Community and its members through criminal prosecution of members.

PageID.862; PageID.4254-72. Defendant Johnson is responsible for carrying out Treasury

policy with respect to Sales and Use Tax on motor vehicles. PageID.861. No Defendant can

claim that the Community is attempting to hold them vicariously, rather than personally or

officially, liable under § 1983.

Defendants contend that federal law does not clearly establish the Community and

members’ federal tax immunities, and that Defendants thus could not have known that they were

violating federal law. This is disingenuous. Nearly ten years ago, the Sixth Circuit put

Defendants on notice that they were not applying federal law correctly: “Michigan’s briefs and

statements at oral argument may misstate the law in certain respects, such as the preemptive

effect of the Indian trader statutes, 25 U.S.C. §§ 261-264, or the necessity of apportioning the use


33

tax under certain circumstances.” Keweenaw Bay Indian Cmty. v. Rising, 569 F.3d 589, 592 (6th

Cir. 2009). Defendants chose to ignore that warning, and instead compounded the injury to the

Community and members by establishing the refund and exemption system, and committing

additional violations of law in administering it:

Defendants decided the refund applications based on rules that they now admit are

contrary to federal law. The Department recognized the Community’s Sales Tax

immunity only for purchases that Fratzke thought served “essential government

functions”—and denied all other Community and member claims. PageID.1696

(Defs. Resp. Interrog. No. 1). Fratzke could not explain the source of the

“essential government functions” concept, and even admitted that it contradicts

the holding of Bracker. PageID.4515-16 (Fratzke Tr.) at 160:4-161:20. It is

telling that even though the essential government services concept was the

guiding principle for their handling of refund and exemption, Defendants do not

even attempt to defend it now.

Defendants denied other refund applications based on speculation (and then

claimed that they did not do that). Some denial letters relied on a purported State

interest regarding the economic impact on non-Indians of recognizing the

Community’s tax immunity; the denial letters asserted that “State interests are

significantly harmed where the Tribe is able to market its exemptions via

commercial activities that compete against non-Indian competitors.” Nichols

Decl. Ex. 26 (Oct. 2015 Claim) at Doc. No. 348-2 (filed under seal Oct. 19,

2018). Fratzke admitted that this concern was based on “speculation”—and then

denied that it was even a factor in deciding the Refund and Exemption Claims.

PageID.4480-82 (Fratzke Tr.) at 39:10-40:14; 45:11-15.


34

Defendants disregarded other rules just because they didn’t like the result. For

example, the Department seeks to assess the location of transactions so as to

“prevent the structuring of a transaction to take place in Indian Country.”

PageID.4535 (Pos’n Stmt.) at SOM-FED00013755. Apparently for this reason,

the Department determined that the Sales Tax Sourcing Rule does not apply to

determine the location of Community transactions. PageID.4485-88 (Fratzke Tr.)

at 74:13-75:7; 76:21-77:3; 77:9-18.

Defendants also cannot avoid liability by claiming that Fratzke and Khouri did not keep

the unlawfully-collected tax payments for their personal use and the “funds were deposited in the

Michigan Treasury.” PageID.3591. The Community’s claims do not depend on what

Defendants did with the funds they unlawfully collected. The injury, and the Community’s

claims, arise from the fact that Defendants collected and retained the tax payments unlawfully.

Similarly, Defendants’ enforcement of the TPTA against the Community and members is

based on the law enforcement investigations conducted on the Reservation—even though federal

law is clear that Defendants have no authority to conduct such investigations. Moreover, state

and federal courts in Michigan have recognized this and Defendants therefore cannot plausibly

claim that there is anything unclear about it. Saginaw Chippewa Indian Tribe v. Granholm, No.

05-10296, 2011 U.S. Dist. LEXIS 53765, at *9 (E.D. Mich. May 18, 2011); U.S. v. Peltier, 344

F. Supp. 2d 539, 546-47 (E.D. Mich. 2004); Moses v. Dep’t of Corr., 736 N.W. 2d 269, 279

(Mich. Ct. App. 2007).

Defendants acted outside the lawful scope of their authority and are not entitled to

qualified immunity or any other form of immunity.


35

VII. THE 1842 TREATY PRECLUDES DEFENDANTS FROM IMPOSING MICHIGAN SALES OR USE TAXES AGAINST THE COMMUNITY OR ITS MEMBERS FOR TRANSACTIONS WITHIN THE CEDED AREA.

The Community demonstrated in its November 5, 2018 Summary Judgment brief that

Article II of the 1842 Treaty continues in force the federal Indian trade and intercourse laws

within the area ceded by the 1842 Treaty (the “Ceded Area”). PageID.5293-99 (Pl. Br. at 44-

50). The Community also established that the Article II trade and intercourse provision, like the

hunting and fishing provision in the same Article, has never been abrogated by a subsequent

statute, treaty provision, or any other legally sufficient means, and thus continues to apply to the

Ceded Area. PageID.5272. The Community further showed that the 1842 Treaty’s signatories

and contemporaries understood that the federal Indian trade and intercourse laws continued by

Article II within the Ceded Area would preempt contrary state law. PageID.5293. Defendants

contest each of these points, but, as explained in detail below, Defendants’ arguments against the

Community’s Article II Treaty claim have no merit.

A. Article II Remains in Force and was Never Repealed or Abrogated.

Defendants’ claim that Congress repealed Article II by passing the Act of March 1, 1847,

9 Stat. 146-47 (the “Lake Superior Land District Act”), is not supported by evidence. The

standard for termination of treaty rights is high: Congress “may abrogate Indian treaty rights, but

it must clearly express its intent to do so.” Minnesota v. Mille Lacs Band of Chippewa Indians,

526 U.S. 172, 202 (1999) (emphasis added). Treaty rights cannot be repealed by implication, but

rather “[t]here must be clear evidence that Congress actually considered the conflict between its

intended action on the one hand and Indian treaty rights on the other hand and chose to resolve

that conflict by abrogating the treaty.” Id. at 203-04. The Lake Superior Land District Act fails

to satisfy the test for abrogation of Article II treaty rights.


36

First, the Lake Superior Land District Act does not mention the 1842 Treaty, much less

Article II specifically, and mentions no intention, much less a clear intention, to terminate Article

II or any other provision of the 1842 Treaty. The Lake Superior Land District Act creates a

federal land district for Michigan’s northern peninsula, authorizes a geological examination of

the land, and provides for the sale under specified terms of lands containing copper or other ores.

9 Stat. 146-47. The statute replaced the policy of leasing mineral lands with a sale policy that

did not conflict with or affect Article II or any other provision of the 1842 Treaty.

Second, nothing in the legislative background to the Lake Superior Land District Act

indicates that Congress intended the Act to terminate Article II. Defendants cite resolutions by

the Michigan legislature, a Michigan Senate committee report and statements by Michigan’s

governor protesting that Article II is an obstacle to the exercise of state jurisdiction within the

Ceded Area. PageID.3578 (Def. Br. at 33). But, to the extent that Michigan’s objections to

federal management of the Ceded Area had any impact, it was only with respect to changing the

land leasing policy. Under pressure from Michigan, the United States Secretary of War prepared

an 1846 report on leasing Lake Superior mineral lands. PageID.4036. The report included

letters that emphasized the questionable legal authority and the unfair, uneconomical and short-

sighted nature of the existing leasing system. The problems identified in the report and

continuing pressure from Michigan convinced Congress to enact the Lake Superior Land District

Act. The report did not mention Article II, except in a statement by William Bartlit and David

Tod that opined that miners could not lawfully enter the Ceded Area absent congressional

authorization pursuant to Article II, PageID.4041, a legal opinion that no other known

contemporary expressed and which the War Department had plainly rejected since it had issued

permits to miners to explore for ore within the Ceded Area since 1843, PageID.5097 (White

Report). Defendants’ expert Emily Greenwald admitted that she found no documents “from the


37

state perspective that explicitly connect the state’s objections to Article 2 with its protest of the

federal mineral leases.” PageID.4885 (Greenwald Rpt). Michigan’s objections to Article II are

distinct from its objections to the federal policy of leasing (rather than selling) mineral lands

within the Ceded Area, and there is no evidence that the Article II concerns played any role in

the enactment of the Lake Superior Land District Act.

Third, Defendants erroneously insist that Article II must have been repealed by the Lake

Superior Land District Act because Michigan failed to complain about Article II after passage of

the Act. PageID.3580-81. This “argument from silence” is pure conjecture and fails to

recognize that such “silence” could have resulted from numerous other variables, such as

Michigan’s belated acceptance of Article II or focus on other state issues. More importantly, the

argument is directly refuted by facts showing continued enforcement of the federal trade and

intercourse laws within the Ceded Area. The federal government issued Indian trader’s licenses

for locations within the Ceded Area after 1847: for example, a license issued September 14, 1848

to Henry M. Rice for trading at Lapointe, Fond du Lac and Rainy Lake; and a license issued

March 13, 1849 to John S. Watrous for trading at La Pointe, Fond du Lac, Crow Wing and Grand

Portage. Nichols Opp. Decl. Ex. 6 (Licenses). Additionally, licensed Indian trader Julius

Austrian submitted a claim for reimbursement from the federal government for sales made to

Indians within the Ceded Area at La Pointe and Fond du Lac in 1851. Id. Ex. 7 (J. Austrian

Docs.) at KBIC_TAX0019234-36 (Austrian testified that he traded with the Ojibwe from 1846 to

1852 at La Pointe and Fond du Lac and that “his trade with said Indians consisted wholly of

articles permitted by the Intercourse Law of the United States.”). Thus, Defendants’ claim that

the United States stopped enforcing Article II after 1847 because Article II had been terminated

is factually incorrect.


38

Fourth, Defendants erroneously argue that the 1854 Treaty confirms that the Lake

Superior Land District Act repealed Article II. But the 1854 Treaty does not even mention

Article II, much less terminate the provision. The 1854 Treaty provided for the cession of

additional Ojibwe land in Minnesota and the creation of “permanent homes” – reservations – for

Ojibwe bands located in the Ceded Area as well as in Minnesota. Defendants point to Article

VII of the 1854 Treaty as evidence that Article II had been earlier terminated: “No spirituous

liquors shall be made, sold, or used on any of the lands herein set apart for the residence of the

Indians, and the sale of the same shall be prohibited in the territory hereby ceded, until otherwise

ordered by the President.” Contrary to Defendants’ claims, this clause is not evidence of the

termination of Article II because several of the reservations created by the 1854 Treaty and all of

the land ceded in 1854 were outside the Ceded Area and were not covered by Article II.17

In short, neither the language nor the legislative background of the 1847 Lake Superior

Land District Act indicate a clear intent to terminate Article II and the factual evidence shows the

Article II continued to be enforced long after the Act was passed. The 1854 Treaty did not

mention Article II, much less terminate it, and did not confirm that it had been terminated at an

earlier date. Defendants’ termination argument, therefore, must be rejected.

B. The Plain Language of Article II Requires that the Ceded Area be Treated as Indian Country for Purposes of Applying Federal Indian Trade and Intercourse Laws.

Defendants argue in favor of a “plain language interpretation” of Article II that ignores

the express language of Article II, the clear intention of its drafter Robert Stuart, the

17 Defendants also cite an act authorizing the negotiation of treaties to cede Ojibwe land in Minnesota and Wisconsin which provided that the 20th section of the 1834 Act (excluding liquor) would apply to the ceded territory. See Act of Dec. 18, 1854, 10 Stat. 598. Contrary to Defendants’ contention, this provision would never have applied to the Ceded Area because by its terms it concerned only newly ceded Ojibwe land in Minnesota and Wisconsin.


39

understanding of Article II by contemporaries (both proponents and opponents), the opinions of

both the Community’s and Defendants’ experts, and settled principles of Indian law. In essence,

Defendants argue that Article II was a nullity because it purported to continue the federal Indian

trade and intercourse laws within the Ceded Area, but such federal laws (then and now) applied

by their terms only to Indian country, and thus do not apply in the Ceded Area, notwithstanding

the terms of Article II. Both Defendants’ expert Emily Greenwald and the Community’s expert

Bruce White, however, testified in their reports that Robert Stuart crafted the language of Article

II to continue the federal Indian trade and intercourse laws within the Ceded Area even though

such federal laws by their terms applied only to Indian country; that Commissioner of Indian

Affairs Crawford held that the federal Indian trade and intercourse laws must be enforced within

the Ceded Area “in the same manner as if the Indian title to the lands ceded have not been

extinguished;” and that the Michigan legislature protested loudly against Article II because it

limited state jurisdiction by providing that the federal Indian trade and intercourse laws “shall be

especially applicable to the territory acquired under this [1842] treaty.” PageID.4877, 4881,

4885 (Greenwald Rep.); PageID.5086-87, 5101, 5091 (White Rep.). If Article II was a nullity,

then the Michigan legislature would have had no reason to instruct its congressional delegation

in 1845 “to procure ‘the passage of a law, terminating the assertion of jurisdiction by the general

government’ under the 1842 treaty,” as Dr. Greenwald states quoting a resolution of the

Michigan legislature. PageID.4885 (Greenwald Rpt.). Defendants’ “plain language

interpretation” not only contradicts the plain language of the treaty and their own expert’s

conclusions about Article II, it also directly violates a cardinal principle of Indian treaty

interpretation, which prevents a court from interpreting a treaty provision as granting to Indians

“no rights but such as they have without the treaty.” United States v. Winans, 198 U.S. 371, 380

(1905).


40

Defendants rest their “plain language interpretation” on a misreading of an offhand

statement made in dicta by the Sixth Circuit. Addressing the Community’s 1842 Treaty

argument in the first sales and use tax case, the Sixth Circuit emphasized that the Article II

question “is not properly before us” and “we decline to grant a broad declaratory judgment” on

the issue. Keweenaw Bay Indian Community v. Rising, 569 F.3d 589, 594 (6th Cir. 2009). It

further remarked in dicta that the preemptive effect of Article II “would seem to be a question of

whether the ceded territory is Indian country within the meaning of 18 U.S.C. § 1151.” Id. This

remark simply repeats the Community’s argument, made then and now, that in enforcing Article

II, the Ceded Area must be treated as if it were Indian country. The Community’s argument on

Article II was accepted by an earlier decision by the Sixth Circuit, which directly held that “[t]he

1842 Treaty plainly makes federal law applicable to the Ceded Area” (quoting the lower court)

and implicitly held that the Ceded Area must be treated as if it were Indian country, because it

allowed collection of Michigan’s tobacco tax from the Community based on federal caselaw that

permitted such collection within Indian country. Keweenaw Bay Indian Community v. Rising,

477 F.3d 881893 (6th Cir. 2007) (citing Moe v. Confederated Salish & Kootenai Tribes of the

Flathead Reservation, 425 U.S. 463, 483 (1976)).

C. Defendants Cannot Use Specious Claims of “Indian Understanding” to Deprive the Community of its Treaty Rights.

Lastly, Defendants argue that, if Article II is ambiguous, it must be interpreted in

accordance with the Indian understanding, which was, Defendants claim, that Article II applied

only to the regulation of alcohol and had no preemptive effect against state law. This argument

has no merit. The Indian understanding canon cannot be—and has not been—used to deprive

Indians of a treaty right that is apparent from the plain meaning of the treaty. The canon exists

solely to benefit the tribes and prevent inequitable results that might otherwise arise from

imposing a technical or legalistic interpretation of ambiguous treaty terms that were forced upon


41

the Indians in a foreign language. United States v. Michigan, 471 F. Supp. 192, 249-250 (W.D.

Mich. 1979).

First, Article II is not ambiguous. It provides in perfectly clear language that, within the

Ceded Area, “the laws of the United States shall be continued in force, in respect to [the

Indians’] trade and intercourse with the whites, until otherwise ordered by Congress.” The plain

wording of Article II provides that all the federal Indian trade and intercourse laws apply, not

simply those relating to alcohol.

Second, the only direct contemporary evidence of the Indian understanding of Article II

indicates the Indians understood that all of the federal Indian trade and intercourse laws would be

continued in the Ceded Area, not just the alcohol laws, and that the federal laws would have a

preemptive effect on state law. At the 1842 Treaty council, Robert Stuart’s explained Article II

as follows (in a passage also quoted in Defendants’ brief):

You are to have the privilege of living on your lands to Hunt & fish, till your great father requires you to remove, you understand the he does not want the land now, it is only the Minerals he wants. It will be better for you to have the same laws over you, then to have the laws of the States. The laws of the U.S. are to remain over you as at present. I am very glad that some of your chiefs are so wise as to ask and desire it to be so.

PageID.5082 (White Rpt.). Stuart’s statement, recorded by missionary Leonard Wheeler, was

not disputed by any Indian at the treaty council and indicates that some of the Indians

specifically requested Article II, which continued all federal Indian trade and intercourse laws

within the Ceded Area. Moreover, Stuart’s statement that “[i]t will be better for you to have the

same laws over you, then to have the laws of the States” made clear to the Indians that the federal

Indian trade and intercourse laws would continue to prevail over contradictory state law.18

18 To support their position, Defendants point to the fact that the Ojibwe had “their own well-


42

Third, Defendants’ reliance on their putative expert Dr. Paul Driben’s testimony on the

Indian understanding is misplaced. Not only does Dr. Driben ignore the only contemporary

evidence of Indian understanding, he relies on irrelevant evidence for his opinions. Federal Rule

of Evidence 702 requires that any person seeking to testify as an expert, among other things,

show that “the testimony is the product of reliable principles and methods; and . . . the expert has

reliably applied the principles and methods to the facts of the case.” Dr. Driben cannot meet

either of these factors. In describing his methodology, Dr. Driben claimed that he relied on field

notes of ethnologists as well as his own experiences living with Ojibwe communities in northern

Ontario. Nichols Opp, Decl. Ex. 5 (Driben Rpt.) at SOM-FED00016393. But Dr. Driben had no

contact with any Community member—and in fact no Michigan Indian tribe. Id. Ex. 4 (Driben

Tr.) at 16:7-17:13. Dr. Driben even admitted the fundamental flaw of his approach—that “each

band has it[s] own leadership, it has it[s] own membership, it has it[s] own local rules,” (Id.,

40:6-41:10), and that he knew of no historical contact between the Community and any of the

Ojibwe communities in Canada with which he worked, (Id., 207:13-208:4). Dr. Driben just

assumes that all Indian communities across time and space are alike and asks the Court to take

his word that the Community understood the Treaty in a manner different from what it is

advocating now. Dr. Driben’s “improper extrapolation” is a “red flag” sufficient to demonstrate

a lack of reliability and exclude his testimony under Daubert, and the Court should give no

weight to his opinions. Best v. Lowe’s Home Ctrs., Inc., 563 F.3d 171, 177 (6th Cir. 2009).19

Finally, Defendants’ contrived reading of Article II not only ignores the plain and

obvious language of the provision, it also violates the federal principles of interpretation of

developed law” (PageID.3587) but the interpretation question in this case concerns the relationship between federal law and state law.

19 The Community intends to move to exclude the opinion testimony of Dr. Driben.


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Indian treaties. The United States Supreme Court has repeatedly held that “The language used in

treaties with the Indians shall never be construed to their prejudice, if words be made use of

which are susceptible of a more extended meaning . . . .” Choate v. Trapp, 224 U.S. 665, 675

(1912) (quoting The Kansas Indians, 72 U.S. 737 (1867)) (internal quotation marks omitted).

This court has similarly held that “Native American treaties must be liberally construed in favor

of Native Americans.” Keweenaw Bay Indian Cmty. v. Naftaly, 370 F. Supp. 2d 620, 624 (W.D.

Mich. 2005) (citing State of Washington v. Washington State Commercial Passenger Fishing

Vessel Ass’n, 443 U.S. 658, 676 (1979)). The requirement that “treaties with Indians must be

interpreted as the Indians would have understood them” exists so that “[t]he language used

in treaties with the Indians [will] never be construed to their prejudice.” United States v.

Michigan, 471 F. Supp. 192, 249 (W.D. Mich. 1979) (citing Worcester v. Georgia, 31 U.S. 515

(1832) (concurring opinion of Justice McLean)). No case exists where the courts have used the

Indian understanding principle to restrict and narrow the protections guaranteed by an Indian

treaty. Defendants’ Indian understanding argument must therefore be rejected.

For the reasons set forth above and those made in the Community’s summary judgment

brief, Article II of the 1842 Treaty preempts the state from enforcing the Sales and Use Tax Acts

against the Community within the Ceded Area. Accordingly, the Court should deny Defendants’

motion for summary judgment on Count VI and enter summary judgment in favor of the

Community on the same.

VIII. THE REFUND AND EXEMPTION SYSTEM VIOLATES THE COMMUNITY’S FEDERAL RIGHTS

As shown above, in the Community’s First SJ Motion, and in the Community’s

November 5, 2018 Brief in Support of its Motion for Partial Summary Judgment, Defendants’

imposition of the Sales and Use Taxes on transactions involving the Community and its members

in the Community’s Reservation is unlawful. The Refund and Exemption process impermissibly


44

burdens the Community and members’ exercise of their federal tax immunities. Defendants

claim that the Refund and Exemption process is permitted as a “minimal burden” under Milhelm,

512 U.S. at 74. But Milhelm does not permit states to burden Indian tribes and members at all in

their exercise of federal tax immunities—it only permits states to impose regulatory and record-

keeping requirements on tribes, members, and Indian traders with respect to taxable sales to non-

Indians. Id. Defendants do not, and cannot, cite any authority permitting a state to impose a

burden like the Refund and Exemption process on a tribe or member in the exercise of their own

federal immunity.

IX. THE COMMUNITY IS ENTITLED TO A PERMANENT INJUNCTION AND TO RELIEF UNDER § 1988.

Defendants claim that even if the Court finds that they have violated federal law by

imposing taxes, or burdensome refund procedures, on the Community and members, there

should be no permanent injunction against such conduct because, according to Defendants,

“there is no evidence that the Community or its members will suffer continuing irreparable

harm.” PageID.3593. This is nonsense. If the Court determines, as it should, that Defendants’

conduct is unlawful, Defendants should not be permitted to continue the conduct. Defendants

attempt to reassure the Court that they will comply with any order it issues with the statement

that “Treasury intends to review the court’s decision in this case and act accordingly.”

PageID.3593. This is underwhelming, and suggests that Defendants will continue to interpret

federal law, including this Court’s decision, in a manner that favors the State’s position and does

not respect the Community’s federal rights. There is no other explanation for asking that no

injunction be issued or making such a faint commitment to comply with the Court’s decision.

Defendants’ position is especially concerning in light of the fact that they have knowingly

disregarded a fundamental element of Bracker, PageID.4515-16 (Fratzke Tr.) at 160:4-161:20,

and the Sixth Circuit’s warning about “misstat[ing] the law in certain respects, such as the


45

preemptive effect of the Indian trader statutes, 25 U.S.C. §§ 261-264, or the necessity of

apportioning the use tax under certain circumstances,” Rising, 569 F.3d at 592.

Defendants also claim that the Community is not “entitled to costs and fees” even if it

prevails on the merits because “the Community has incurred unreasonable costs.” PageID.3594.

Defendants’ argument is premature and conclusory. If the Community prevails, the Court will

have the opportunity to review the Community’s actual costs and fees relating to the claims it

prevails on, and enter an award accordingly. Defendants’ assertion—unsupported by any

citation to the record or authority—is irrelevant to that process and should be disregarded.

CONCLUSION

For all of these reasons, Defendants’ Motion for Partial Summary Judgment should be

denied.

Dated: November 16, 2018 Respectfully submitted,

Danielle Webb (MI Bar No. P77671) Tribal Attorney’s Office Keweenaw Bay Indian Community 16429 Beartown Road Baraga, Michigan 49908 Telephone: (906) 353-4107 Fax: (906) 353-7174

DORSEY & WHITNEY LLP By s/James K. Nichols_____________ Skip Durocher (MN Bar No. 208966) Mary J. Streitz (MN Bar No. 016186X) James K. Nichols (MN Bar No. 0388096) Suite 1500 50 South Sixth Street Minneapolis, MN 55402 Tel: (612) 340-7855 Fax: (612) 340-2807 Attorneys for Plaintiff the Keweenaw Bay Indian Community


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UNITED STATES DISTRICT COURT FOR T UNITED STATES … · 2021. 7. 14. · united states district court for t united states district court for the western district of michigan keweenaw