NCAI wants states to refund Native veterans' taxes

By Alysa Landry
Special to the Times

WASHINGTON, August 22, 2013

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S tate governments may owe Native veterans as much as $20 million in income tax reimbursements.

This is according to the National Congress of American Indians, which recently approved a resolution urging Congress to refund state personal income taxes improperly withheld from Native service members' paychecks while they were on active duty.

Eligible service members are those who served between 1977 and 2001 and whose permanent residence was on tribal land during the time they served. The resolution targets 26 states with American Indian reservations - including Arizona, New Mexico and Utah - that illegally taxed Native service members for 24 years.

"Hopefully this is going to right a wrong," said Derrick Beetso, a staff attorney for the National Congress of American Indians. "This was wrongfully imposed for a number of years, so the action we're looking for is to right the wrong and get back the money."

New Mexico refunds

The resolution comes six months after a settlement fund for Native veterans in New Mexico expired. The state paid out $1.5 million to eligible veterans, said Alan Martinez, deputy secretary of the New Mexico Department of Veterans' Services.

The settlement addressed claims from veterans groups that the state owed them hundreds of thousands of dollars illegally withheld from their personal income checks. In some cases, veterans claimed they were paid in cash and had no paper trail to prove how much taxes were withheld.

Initial estimates identified more than 7,000 Native veterans in New Mexico who were eligible for refunds, though fewer than 6,000 applied for them, Martinez said. That settlement program started in 2008 when then-Gov. Bill Richardson signed a bill to create a settlement fund. Money was appropriated for the fund in 2009. It expired Dec. 31, 2012.

No one has applied for a refund in the last eight months, Martinez said, though he believes the state still owes money to some veterans.

"We pushed for any Native American who felt he had been taxed to apply for the program," he said. "There's probably still some out there that are affected."

The Department of Veterans' Services verified that veterans seeking refunds were domiciled in New Mexico at the time of their service, that they served after 1977 and that their permanent addresses were on tribal land. The state finance department and Taxation and Revenue Department worked together to issue refunds, Martinez said.

Navajo veterans

Although courts for decades have wrangled over the legal questions of taxing American Indians serving in the military, New Mexico was the first state to address it.

It all started with a group of Navajo veterans from Shiprock, Martinez said. Because the statute of limitations for tax claims is three years, members of the Shiprock Agency Veterans Organization took their claim to district court.

"Many of these veterans had already passed the three-year mark," he said. "When the district court kicked it out, they went to their senators and began attacking this legislatively."

Sen. John Pinto, D-Tohatchi, sponsored the bill that called for creation of a settlement fund and instructed the secretary of Veterans' Services to count Native veterans owed refunds and the amount owed.

Shiprock veterans claimed all who served between 1942 and 1977 were eligible for refunds. The state disagreed, however, and found that New Mexico signed an agreement with the federal Department of Defense in 1977 to withhold taxes. The settlement fund was extended only to veterans serving after 1977.

Raymond Jim, former president of the Shiprock Agency Veterans Organization, spearheaded the efforts in 2008 to force the state to count veterans and calculate refunds. He believes the settlement fund short-changed veterans serving in a 35-year period.

"We wanted to reimburse veterans from World War II to Vietnam," said Jim, a Vietnam veteran. "We also wanted to investigate all the way to Washington, D.C., to see what was deducted from all Native veterans' paychecks. We knew the state was hiding something. They didn't want to pay everyone back."

Jim believes New Mexico still owes veterans $30 million in tax refunds.

"We know the government violated the law," he said. "When you violate the law, that's when you have to pay back."

While Navajo veterans on the New Mexico side of the reservation were reimbursed, those in Arizona and Utah had no avenue for recourse. According to the National Congress of American Indians, all three states comprising parts of the Nation may have improperly withheld taxes. Only seven states with reservations did not tax Native service members - Florida, Nevada, South Dakota, Texas, Washington and Wyoming.

"New Mexico was the only one to make money available," said David Nez, manager of the Navajo Nation Department of Veterans Affairs.

Nez, whose address was in Arizona while he served in the Army for 22 years, said he doesn't believe he was improperly taxed. He has not heard any complaints from Navajo veterans in Arizona or Utah, he said.

"All of us were supposed to be exempt," he said. "When you're an Indian in the military, you don't have to pay state taxes. Those states that taxed, they will owe that money back."

National changes

The current tax dilemma follows decades of changing federal policy regarding the taxation of service members and American Indians.

The Soldiers and Sailors Civil Relief Act of 1940 specifically prohibited states from imposing income tax on military wages of Native service members who were domiciled on reservations. The law was amended in 1976 when the Department of Defense, by request of the states, began withholding state income taxes from military pay. Forty-two states entered into agreements to have those taxes withheld, but those with reservations failed to exempt American Indians living on tribal lands.

The federal Department of Justice in 2000 clarified that taxing Native service members with homes on reservations was illegal. In 2003, Congress passed a law stating that "an Indian service member whose legal residence or domicile is a federal Indian reservation will only pay taxes under the laws of the federal Indian reservation and not to the state where the reservation is located."

In its resolution, the National Congress of American Indians is seeking legislative changes that will clarify tax code.

"The tax law in Indian Country is pretty complicated," Beetso said. "When taxation of service members started in 1977, the Treasury Department didn't have a way to distinguish reservation domicile as opposed to state domicile."

A remedy is crucial, Beetso said. Nearly 16 percent of the total adult American Indian population is veterans. American Indians have served in every U.S. conflict since the Revolutionary War.

Beetso believes New Mexico may become a model for the other 25 states that improperly withheld taxes.

Because the three-year statute of limitations has expired, there are two ways to fix this, Beetso said. Tribes can push for states to set aside money and offer reimbursements like New Mexico did or they can push for Congress to act.

"Not all states have good relationships with their tribes, so we are asking for a legislative fix," he said. "Our best bet is to start contacting committees and asking tribal members to contact their senators and representatives. From our perspective, Congress needs to take our resolution and act on it."