Keweenaw Bay Indian Cmty. v. Khouri

• Citation: 549 F.Supp.3d 662
• Decision Date: 13 July 2021
• Docket Number: No. 2:16-cv-121,2:16-cv-121
• Parties: KEWEENAW BAY INDIAN COMMUNITY, Plaintiff, v. Nick A. KHOURI, et al., Defendants.
• Court: U.S. District Court — Western District of Michigan

549 F.Supp.3d 662

KEWEENAW BAY INDIAN COMMUNITY, Plaintiff,

v.Nick A. KHOURI, et al., Defendants.

No. 2:16-cv-121

United States District Court, W.D. Michigan, Northern Division.

Signed July 13, 2021

Danielle Nicole Webb, Keweenaw Bay Indian Community, Baraga, MI, James K. Nichols, Vernle (Skip) Durocher, Dorsey & Whitney LLP, Minneapolis, MN, for Plaintiff.

Jaclyn Shoshana Levine, Kelly Marie Drake, Laura Rose LaMore, MI Dept. Attorney General (ENRA-Lansing), Environment, Natural Resources & Agriculture Division, Lansing, MI, for Defendants Nick A. Khouri, Walter Fratzke, Christopher Croley.

OPINION AND ORDER RESOLVING CROSS MOTIONS FOR PARTIAL SUMMARY JUDGMENT

Paul L. Maloney, United States District Judge

Michigan collects sales taxes, use taxes, and tobacco taxes from transactions involving members of the Keweenaw Bay Indian Community and Keweenaw Bay Indian Community itself. Unlike many other federally recognized Indian tribes in Michigan, Keweenaw Bay Indian Community (KBIC) has not negotiated a tax agreement with Michigan. As a result, Michigan requires KBIC and its members to submit forms requesting exemptions and refunds from the various state taxes. In 2012, KBIC and four of its members began submitting sales and use tax claims to the State. Sometimes, Michigan grants the requested refunds. For example, Michigan granted a refund for the taxes imposed on the purchase of building materials by KBIC's public works department that were used for the construction of a transfer station. (ECF No. 155-23.) Other times, Michigan denied the request for a tax refund, including when the casino requested a refund on the tax paid for the delivery of thirty-four pizzas. (ECF No. 155-8).

Using the results of the requested refunds as exemplary claims, KBIC filed this lawsuit, its third, seeking declaratory and injunctive relief and damages. KBIC contends the enforcement and collection of state taxes violates federal law. KBIC also seeks monetary damages under § 1983.

In its third amended complaint, KBIC asserts sixteen causes of action.¹ Two the claims, Counts 13 and 14, have already been dismissed. (ECF No. 82.) The parties filed three dispositive motions which are addressed in this Opinion and Order.² KBIC filed a motion for partial summary judgment. (ECF No. 125.) Defendants filed a motion for summary judgment. (ECF No. 316.) KBIC then filed a second motion for partial summary judgment.³ (ECF No. 327.) The Court held a hearing on the three motions. (ECF No. 405.)

The Court will grant in part and deny in part the motions for partial summary judgment. Because Michigan does not permit apportionment of its use tax, the Court will grant KBIC summary judgment on Count 5. For all other counts and claims, the Court will grant summary judgment to Defendants.

I.

KBIC has filed multiple lawsuits challenging Michigan's taxes. A brief history provides some context for this third action.

KBIC is a federally recognized Indian tribe and is the successor in interest to the L'Anse and Ontonagon bands of Chippewa Indians. Keweenaw Bay Indian Cmty. v. Rising , 569 F.3d 589, 591 (6th Cir. 2009) ( Rising II ). KBIC "exercises powers of self-governance and sovereign jurisdiction over the L'Anse Indian Reservation in the Upper Peninsula of Michigan, as well as over extensive lands held in trust by the United States outside of the reservation in the western half of the Upper Peninsula."⁴ Id. In 1977, Michigan and KBIC entered into a comprehensive tax agreement for the assessment and collection of state taxes involving the Tribe and its members. Id. In 1997, Michigan terminated its tax agreements with the twelve federally recognized Tribes in Michigan as part of an effort to obtain uniformity in the agreements. Id. While Michigan has reached new agreements with most of the Tribes, Michigan and KBIC have not reached a new agreement.⁵ Id. As a result, KBIC and its members must request exemptions and refunds from state taxes on a transaction-by-transaction basis. Id.

In 2003, KBIC filed a lawsuit to enjoin Michigan from collecting state taxes on cigarettes sold by KBIC at its gaming facilities. Keweenaw Bay Indian Cmty. , No. 2:03-cv-111 (W.D. Mich.) Michigan collects taxes on cigarettes before a retail sale by requiring tobacco products to bear a stamp indicating the tax has been paid. KBIC challenged the prepayment of taxes, asserting that the process imposed too much of a burden. Judge Robert Bell upheld Michigan's system for refunding cigarette taxes to retail sellers located on Indian country for sales to KBIC and its members. Id. , Keweenaw Bay Indian Community v. Rising, 2005 WL 2207224 at *10 (W.D. Mich. Sept. 12, 2005). Judge Bell also held that Article II of the 1842 Treaty did not prohibit Michigan from collecting taxes on cigarettes sold by KBIC to non-Indians. Id. at *11. The Sixth Circuit upheld both of these findings. Keweenaw Bay Indian Cmty. v. Rising , 477 F.3d 881, 892-93 (6th Cir. 2007) ( Rising I ).

In 2005, KBIC filed a lawsuit to enjoin Michigan from collecting both sales taxes and use taxes on its members. Keweenaw Bay Indian Cmty. v. Kleine , No. 2:05-cv-224 (W.D. Mich.) Judge Gordon Quist held that KBIC had standing to challenge the enforcement of the sales and use taxes as a violation of federal law. Id. , Keweenaw Bay Indian Cmty. v. Kleine , 546 F.Supp.2d 509, 520-21 (W.D. Mich. 2008). Judge Quist explained that the enforcement scheme for the sales and use taxes was similar to the enforcement scheme for cigarette taxes in Rising I , but less burdensome because KBIC and its members were not required to prepay the taxes. Id. at 525. Ultimately, Judge Quist held that KBIC's challenge to the sales and use tax enforcement scheme was not ripe because the parties had not presented specific factual situations where either KBIC or one of its members sought and was denied a tax exemption. Id. at 526. The Sixth Circuit agreed that KBIC's tax-related claims should be dismissed as unripe. Rising II , 569 F.3d at 594.

Following Rising II , Michigan created two forms that non-agreement tribes and their members must use when seeking an exemption or a refund.⁶ Form 4765 is used by individual members of a Tribe for their own transactions. (ECF No. 128-2 PageID.1684.) Form 4766 is used by federally recognized tribes for its transactions. (ECF No. 128-3 PageID.1687.) By completing either form and submitting it to the Michigan Department of Treasury, KBIC and its members may seek a determination in advance whether a particular transaction is subject to taxation. (ECF No. 58 Third Amended Complaint "Compl." ¶ 41 PageID.803.) Without an advanced determination, the purchaser must pay any tax at the time of the transaction and then submit a completed form to request a refund of the sales or use tax paid. (Id. )

KBIC and four of its members have since filed request for exemptions and refunds in an effort to create the record for this lawsuit. KBIC itself submitted request forms using the process established by Michigan. Between January 2013 and February 2017, KBIC submitted approximately 991 claims for exemptions or refunds. (Compl. ¶ 44 PageID.804.) The claims related to purchases of a variety of tangible personal property (e.g. , motor vehicles, office furniture, linens, uniforms, and housekeeping items) and for various services (e.g. , telephone and telecommunication services). (Id. ) Of the 991 claims, 33 had not been ruled upon when the complaint was filed. (Id. ) Michigan granted only 58 and denied the other 900 claims. (Id. )

Four members of KBIC also submitted forms following the process. Between January 2012 and February 2017, the four members submitted approximately 254 claims for exemption or refund. (Compl. ¶ 45 PageID.804.) The members sought exemptions and refunds for transactions involving a variety of tangible personal property and services. (Id. PageID.805.) Of the 254 claims, KBIC has no records indicating what decision was made concerning 25 of the claims. (Id. ) Michigan granted 68 claims and denied 161 claims. (Id. )

The parties have each submitted their own summary tables for the refund and exemption claims. The parties have also submitted declarations in which the declarants describe the process and offer some explanations about the information the tables. (ECF No. 128 Nichols Dec. (Plaintiff) PageID.1642; ECF No. 152-2 Fratzke Dec. (Defendants) PageID.2141; ECF No. 152-9 Thelen Dec. (Defendants) PageID.2176.) KBIC filed a single comprehensive table identifying 1339 claims that were submitted between July 2012 and August 2017. (ECF No. 128-1 KBIC Summary Chart PageID.1649-82.) Defendants filed three documents. Defendants filed a similar comprehensive table identifying 1345 claims that were submitted between May 2012 and September 2017.⁷ (ECF No. 152-10 PageID.2190-2230.) Defendants filed a table summarizing information about the claims and results identified in the first table. (ECF No. 152-11 PageID.2232-36.) The third table provides the same summary information as the second table, but only for claims submitted between January 1, 2014, and September 5, 2017. (ECF No. 152-12 PageID.2238-41.) Defendants insist that Plaintiff's table "does not fully or accurately account for the claims or how Treasury decided them." (ECF No. 152 at 8 PageID.2104.) Thelen explains why Defendants submitted a second summary table: (1) most of the claims were submitted after 2013 and (2) a delay occurred in 2013 in the computer systems for refunds and checks. (ECF No. 152-9 ¶ 43 PageID.2187.) Other than KBIC's claims for damages in Counts 13 15 and 16, any differences between the two comprehensive tables are not material differences that affect the cross motions for summary judgment.

According to Defendants, each claim for an exemption or a refund receives an individual review and determination. (See ECF No. 15-2 Fratzke Dec. ¶ 4.c. PageID.2142 and ¶¶ 34-40 PageID.2149-50; ECF No. 152-9 Thelen Dec. ¶¶ 8 and 9 PageID.2178.) Generally, Michigan responds...