Oklahoma Supreme Court denies tribal citizen state income tax exemption

The Oklahoma Supreme Court ruled Tuesday that a member of a Native American tribe who lives on a reservation and works for a tribal government does not qualify for a state income tax exemption in a case that could have led to millions of dollars in state tax refunds. 

The case brought by Alicia Stroble, a citizen of the federally recognized Muscogee (Creek) Nation, hinged on whether the U.S. Supreme Court’s 2020 ruling in McGirt vs Oklahoma, which affirmed about 42% of Oklahoma as tribal reservation land for criminal law purposes, makes that territory federally designated reservation land for state tax purposes. 

In a 6-3 decision, Oklahoma’s high court said it was not empowered to apply McGirt to taxation.

“To date, the United States Supreme Court has not extended its ruling in McGirt to the state’s civil or taxing jurisdiction,” the majority opinion stated. “And it is not this court’s place to do so.”

In a court filing, the Oklahoma Tax Commission said thousands of taxpayers claimed exemptions from the state’s income tax in the wake of McGirt and that tax exemption for tribal members would result in “tens of millions of dollars in tax refunds and deprive the state of billions more in future taxes.”

Stroble appealed the tax commission’s denial of her claim for an exempt tribal income exclusion for state income taxes paid for tax years 2017, 2018, and 2019. The commission had determined Stroble’s residency was not within so-called “Indian Country.”

Oklahoma Gov. Kevin Still called the state supreme court’s decision “a big win” for the state.

“Tribal governments, liberal groups, and some elected officials have pushed for special tax exemptions that would create a two-tiered system — one set of rules for tribal citizens and another for everyone else,” he said in a statement. “That’s wrong. It would divide our state and weaken the public services every family relies on.”

Muscogee Nation Principal Chief David Hill said the ruling departs “from well-settled law originally recognized by the United States Supreme Court over 50 years ago and that is inconsistent with the state’s own administrative tax rules.” 

“We know that this ruling could have broad implications for Indian Country, so we are carefully reviewing the decision with our legal team and preparing for the next steps,” he said in a statement.

The Muscogee, Seminole, Cherokee, Chickasaw, and Choctaw Nations submitted court briefs in support of Stroble’s appeal. 

Legislation signed by Stitt in May reduces the state’s top personal income tax rate to 4.5% from 4.75% and eliminates three tax brackets starting in 2026. Future reductions in 0.25% increments would be triggered when state revenue meets certain benchmarks.

The state’s issuer rating was upgraded to AA-plus from AA in March by S&P Global Ratings and was raised a notch to Aa1 by Moody’s Ratings in September. Fitch Ratings revised its outlook on Oklahoma’s AA rating to positive from stable last year.