With growth from the gaming industry leveling off in most locations, many Native American tribes are now considering a brand new source of income in states where marijuana has been legalized, either medically and recreationally. As more and more states–including New York–legalize marijuana in one form or another, Native Americans will have a huge advantage over other retailers in the business: Tribal earnings are not subject to federal income tax laws, as long as they are earned on the reservation and are not distributed to individuals as earnings.
The Native American Tax Advantage
The advantages that would be enjoyed by Native American tribes for the sale of marijuana would be similar to the tax-exempt status they already enjoy in those states where gaming is conducted on reservations. 422 tribal gambling facilities in 28 different states earned $26.5 billion, $27.9 billion, and $28 billion from 2011 through 2013, none of which was taxable by the federal government.
Even if commercial activities are conducted on tribal lands, they are exempt from taxes, as long as they are not conducted by individuals. Individuals within the tribes are U.S. citizens and they can be taxed, which is why corporations are usually formed before embarking on a gaming enterprise, and why the same would likely be true of the marijuana business. The legal status of the corporation prevents any federal intervention or taxation on the income from gaming currently, and barring legislation that alters this status the same would be true of income generated from growing and selling legal marijuana.
Tribes must be careful, however, not to distribute earnings from gaming or marijuana sales to individuals as compensation for their work in the industry. These earnings can be taxed, but there is another federal law which comes to the individual tribe members’ aid in this situation. Earnings can be distributed to individuals as payments from a general welfare program that is earmarked for the needs of families and individuals, relative to health, food, and other essentials that are not related to compensation for services.
State Tax Laws
At the state level, Native Americans cannot be taxed on income that is generated from reservation resources unless that income is generated within the state but not within the boundaries of the reservation. In effect, this neutralizes attempts by state agencies to levy any kind of tax on the potential earnings of Native Americans from either gaming or marijuana growing. Marijuana grown on the reservation would thus be completely un-taxable in any state where it is grown.
As one might expect, this kind of exemption makes both the federal government and state governments very uneasy, and inclined to eye the legislation which currently grants such sweeping freedom from taxation very closely. As Native American enterprises begin entering the preliminary phases of entering the retail marijuana market and the media notes the enormous taxation advantages they would enjoy, federal agencies and state agencies are both taking hard looks at the situation.
It is hard to estimate exactly how lucrative the marijuana growing industry could be for Native Americans, but assuming it is on par with the gaming industry, a huge windfall would accrue to tribes all across the country. Some experts feel so strongly that they’ve said that growing marijuana could eventually eclipse the gaming industry as a source of income, and for tribes that have precious few sources of income on reservations, the allure of huge profits is likely to be overwhelming.