POLSON - The state Department of Revenue has dropped its lawsuit against tribally owned Best Western KwaTaqNuk Resort in Polson for failure to collect from customers and pay to the state Montana's "bed tax."

A state government boycott of the resort as lodging for government employees on expense accounts apparently remains in effect as negotiations in the matter continue.

The original case was filed in Lake County District Court two years ago. District Judge C.B. McNeil found against the state, saying enterprises operated on the Flathead Reservation by the Confederated Salish and Kootenai Tribes were exempt from state taxation. McNeil agreed with tribal lawyers, who maintained that the state lacks jurisdiction and authority to impose an accommodation tax upon the tribes and its wholly owned corporation, S&K Development Corp.

S&K Development operates the resort on tribal land within the Flathead Reservation.

The state challenged McNeil's decision, but dropped the appeal earlier this month.

The circumstances are similar to a case decided by the Supreme Court in June that came from the Fort Peck Reservation called Flat Center Farms vs. Montana.

That case involved the state's Corporation License Tax, essentially a state tax on corporations in the state, similar to a city business license.

In 1996, the Department of Revenue assessed the tax against Flat Center Farms, a tribally chartered corporation. Flat Center appealed, and the state tax appeals board upheld the state assessment.

The corporation sued in state court and a district court judge ruled the state couldn't assess or collect the tax. The Revenue Department appealed to the Supreme Court, which ruled against the state tax agency in a June opinion.

The long-standing rule of law is that a state is without power to tax reservation lands and Indian income generated from on-reservation activities, absent the express authorization of Congress, the state Supreme Court said in the decision written by Justice Terry Trieweiller.

David Ohler, chief legal counsel for the Revenue Department, said the Supreme Court's Flat Center ruling played a role in his decision not to litigate the KwaTukNuk matter further.

"We also have been talking to the tribes trying to resolve this outside of litigation," he said. "We have had some productive discussions. We haven't reached agreement but we seem to be going in the right direction. That fact as well as the Farms decision convinced us to drop the appeal," he said.

In a press release from the St. Ignatius law firm of Decker & Desjarlais, which was involved in the litigation on behalf of S&K Development Corp., Fred Matt, chair of the Confederated Salish and Kootenai Tribes said the tribes' legal arguments were based on sound principals previously adopted by the state high court.

"I am pleased that the Department of Revenue chose to withdraw the appeal and avoid the cost of further litigation," Matt said.

Meanwhile, a state boycott of the KwaTaqNuk for not paying the bed tax is still in effect, according to Department of Revenue officials. The boycott was announced in September, 2000 by a previous Department of Revenue director. The boycott advised all state employees to avoid staying at KwaTaqNuk or doing business there because KwaTaqNuk was in arrears on paying the accommodations tax.

Government employees traveling on business must pay the tax when they stay overnight on official business, just like any other motel or hotel guest.

Created in 1987 to help pay for state and local tourism programs, the 4 percent tax brings in more than $10 million a year.

As a "goodwill gesture to Montana taxpayers," the KwaTaqNuk Resort for several years has offered state employees a reduced government rate, despite the boycott.

Corky Sias, Best Western KwaTaqNuk board chairman, said he assumes the state "will now lift its state government boycott and we hope that in the future the Department of Revenue fully investigates and acquires the necessary authority to impose a tax prior to taking action in boycotting a business."

The KwaTaqNuk case was dismissed "with prejudice," meaning it can not be filed again. It was dismissed before legal briefs on the merits of the case were submitted by litigants.

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