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Reservation Source Income not Subject to Taxation

Purpose of Bulletin

To inform staff of our clarification and recent decision about its position regarding tribal source income and changes to FTB Form 674, Income Taxation of Native Americans.

Background

Questions have arisen regarding the definition of "reservation source income" relating to taxation of tribal members.  Under McClanahan v. Arizona State Tax Commission ((1973) 411 U.S. 164), tribal members who live on the reservation and who derive income from reservation sources are not subject to state tax on that income. However, McClanahan and subsequent cases do not specifically define "income derived from reservation sources."

We examined the issue of whether "reservation source income" should be interpreted as income paid by any employer, public or private, and earned by a tribal member while that member is physically located within the geographic borders of their reservation, or more narrowly limited to income earned on the reservation and paid only by a tribal payer. We concluded that income earned for services performed by tribal members who live on their reservation and perform the services while on their reservation is tax-exempt, whether it is paid by the tribe or by a third party.

FTB Form 674 is being revised to reflect this clarification.

How to File a Claim for Refund

Taxpayers who previously included "reservation source income", as discussed above, in taxable income on a tax return for which the statute of limitations is open, are entitled to claim a refund. To claim this refund, the taxpayer or representative should mail us an amended return with "RESERVATION SOURCE INCOME" written at the top in red and should include a computation of the claimed refund amount.

For regular mail, send to:

RESERVATION SOURCE INCOME CLAIM FOR REFUND 347 MSF381
FRANCHISE TAX BOARD
PO BOX 1779
RANCHO CORDOVA CA 95741-1779

For private carrier or overnight delivery service, send to:

FRANCHISE TAX BOARD
RESERVATION SOURCE INCOME CLAIM FOR REFUND 347 MS F381
SACRAMENTO CA 94267-0001