Sandia Corporation and Zia Company have contracts with the
Federal Government to manage certain Government-owned atomic
laboratories located in New Mexico. Los Alamos Constructors, Inc.,
has a Government contract for construction and repair work at one
of the laboratories. The contracts use an "advanced funding"
procedure to meet contractor costs whereby the contractor is
allowed to pay creditors and employees with drafts drawn on a
special bank account in which United States Treasury funds are
deposited, so that only federal funds are expended when the
contractor meets its obligations. New Mexico imposes a gross
receipts tax and a compensating use tax on those doing business
within the State. The gross receipts tax in effect operates as a
tax on the sale of goods and services. The use tax is imposed on
property acquired out-of-state in a transaction that would have
been subject to the gross receipts tax if it had occurred within
the State. The Government brought suit in Federal District Court,
seeking a declaratory judgment that advanced funds are not taxable
gross receipts to the contractors; that the receipts of vendors
selling property to the Government through the contractors cannot
be taxed by the State; and that the use of Government-owned
property by the contractors is not subject to the- use tax. The
District Court granted summary judgment for the Government. The
Court of Appeals reversed, taking the view that the
Government-contractor relationships in question did not so
incorporate the contractors into the Government structure as to
make them "instrumentalities of the United States" immune from the
New Mexico taxes.
Held: The contractors, as independent taxable entities,
are not protected by the Constitution's guarantee of federal
supremacy, and hence are subject to the state taxes in question.
Pp.
455 U. S.
730-744.
(a) Federal immunity from state taxation cannot be conferred
simply because the tax has an effect on the United States, or
because the Federal Government shoulders the entire economic burden
of the levy, or because the tax falls on the earnings of a
contractor providing services to the Government. And where a use
tax is involved, immunity cannot be conferred simply because the
State levies the tax on the use of federal property in private
hands, or, indeed, simply because the tax is paid with
Page 455 U. S. 721
Government funds. Tax immunity is appropriate only when the
state levy falls on the United States itself, or on an agency or
instrumentality so closely connected to the Government that the two
cannot realistically be viewed as separate entities, at least
insofar as the activity being taxed is concerned. A finding of
constitutional tax immunity therefore requires something more than
the invocation of traditional agency notions. Pp.
455 U. S.
730-738.
(b) With respect to the New Mexico use tax, the contractors
cannot be termed "constituent parts" of the Federal Government. The
congruence of professional interests between the contractors and
the Government is not complete, the contractors' relationship with
the Government having been created for limited and carefully
defined purposes. Allowing a State to apply use taxes to such
entities does not offend the notion of federal supremacy.
United Sates v. Boyd, 378 U. S. 39. For
similar reasons, the New Mexico gross receipts tax must be upheld
as applied to funds received by the contractors to meet salaries
and internal costs. As to the tax on sales to the contractors, the
facts that Sandia and Zia make purchases in their own names and
presumably are themselves liable to the vendors, that the vendors
are not informed that the Government is the only party with an
independent interest in the purchase, and that the contractors need
not obtain Government approval for each purchase, all demonstrate
that the contractors have a substantial independent role in making
purchases, and that the identity of interests between the
Government and the contractors is far from complete. As a result,
sales to Sandia and Zia are in neither a real nor a symbolic sense
sales to the "United States itself."
Kern-Limerick, Inc. v.
Scurlock, 347 U. S. 110,
distinguished. The fact that title passes directly from the vendor
to the Government cannot alone make the transaction a purchase by
the United States, so long as the purchasing entity, in its role as
purchaser, is sufficiently distinct from the Government. Pp.
455 U. S.
738-743.
624 F.2d 111, affirmed.
BLACKMUN, J., delivered the opinion for a unanimous Court.
Page 455 U. S. 722
JUSTICE BLACKMUN delivered the opinion of the Court.
We are presented here with a recurring problem: to what extent
may a State impose taxes on contractors that conduct business with
the Federal Government?
I
A
This case concerns the contractual relationship between three
private entities and the United States. The three agreements
involved are typical in most respects of management contracts
devised by the Atomic Energy Commission
Page 455 U. S. 723
(AEC), now the Department of Energy (DOE). [
Footnote 1] Like many of the Government's
contractual undertakings, DOE management contracts generally
provide the private contractor with its costs plus a fixed fee. But
in several ways, DOE agreements are a unique species of contract,
designed to facilitate long-term private management of
Government-owned research and development facilities. As the
parties to this case acknowledge, the complex and intricate
contractual provisions make it virtually impossible to describe the
contractual relationship in standard agency terms.
See
App.196-197; Hiestand & Florsheim, The AEC Management Contract
Concept, 29 Federal B.J. 67 (1969) (Hiestand & Florsheim).
While subject to the general direction of the Government, the
contractors are vested with substantial autonomy in their
operations and procurement practices. [
Footnote 2]
The first of the contractors, Sandia Corporation, was organized
in 1949 as a subsidiary of Western Electric Company, Inc. Sandia
manages the Government-owned Sandia Laboratories in Albuquerque,
N.M., and engages exclusively in federally sponsored research. It
receives no fee under its contract, and owns no property except for
$1,000 in United States bonds that constitute its paid-in capital.
But Sandia and Western Electric are guaranteed royalty-free,
irrevocable licenses for any communications-related discoveries or
inventions developed by most Sandia employees during the
Page 455 U. S. 724
course of the contract, App. 335, and the company receives
complete reimbursements for salary outlays and other expenditures.
Id. at 402. [
Footnote
3]
The Zia Company, another of the contractors, is a subsidiary of
Santa Fe Industries, Inc. Since 1946, Zia has performed a variety
of management, maintenance, and related functions at the
Government's Los Alamos Scientific Laboratory, for which it
receives its costs as well as a fixed annual fee. While Zia owns
property and performs private work, virtually none of its property
is used in the performance of its contract with the Government, and
all of its private activities are conducted away from Los Alamos by
a separate workforce.
The third contractor is Los Alamos Constructors, Inc. (LACI),
since 1953 a subsidiary of Zia. LACI's operations are limited to
construction and repair work at the Los Alamos facility. The
company owns no tangible personal property and makes no purchases;
it procures needed property and equipment through its parent, Zia.
And like Zia, LACI receives its costs plus a fixed annual fee from
the Government.
The management contracts between the Government and the three
contractors have a number of significant features in common. As in
most DOE atomic facility management agreements, the contracts
provide that title to all tangible personal property purchased by
the contractors passes directly from the vendor to the Government.
App. 231a (Zia);
id. at 34 (Sandia). [
Footnote 4] Similarly, the Government bears
the
Page 455 U. S. 725
risk of loss for property procured by the contractors. Zia and
LACI must submit an annual voucher of expenditures for Government
approval.
Id. at 20 (Zia);
id. at 27 (LACI).
[
Footnote 5] And the agreements
give the Government control over the disposition of all property
purchased under the contracts, as well as over each contractor's
property management procedures. Disputes under the contracts are to
be resolved by a DOE contracting official.
Id. at 128-129
(Zia standard terms) and 157-158 (Sandia standard terms).
On the other hand, the contractors place orders with third-party
suppliers in their own names, and identify themselves as the
buyers.
See id. at 36-37 (Sandia contract) and 120 (Zia
standard terms). Indeed, the Government acknowledged during
discovery that Sandia, Zia, and LACI
"may be . . . 'independent contractor[s],' rather than . . .
'servant[s]' for . . . given 'function[s] under' the contract[s]
(
e.g., directing the details of day-to-day . . .
operations and the hiring and direct supervision of
employees),"
id. at 197, and the Government does not claim that the
contractors are federal instrumentalities.
Id. at 201;
see Department of Employment v. United States,
385 U. S. 355
(1966). Similarly, the United States disclaims responsibility for
torts committed by the contractors' employees, and maintains that
such employees have no claim against the United States for
labor-related grievances.
See 624 F.2d 111, 116-117, n. 6
(CA10 1980).
Finally, and most importantly, the contracts use a so-called
"advanced funding" procedure to meet contractor costs. Advanced
funding, an accounting device developed shortly after the
conclusion of the Manhattan Project, is designed to provide
"up-to-date meaningful records of costs and controls of property,"
as well as to "speed up reimbursement of contractors."
Page 455 U. S. 726
App. 204 (Fifth Semiannual Report of the Atomic Energy
Commission (1949)). The procedure allows contractors to pay
creditors and employees with drafts drawn on a special bank account
in which United States Treasury funds are deposited. [
Footnote 6]
To put the advanced funding mechanism in place, the United
States, the contractor, and a bank establish a designated bank
account, pursuant to a three-party contract. The Government
dispatches a letter of credit to a Federal Reserve Bank in favor of
the contractor, making Treasury funds available in the designated
account. The contractor pays its expenses by drawing on the
account, at which time the bank or the contractor executes a
payment voucher in an amount sufficient to cover the draft. The
voucher is forwarded to the Federal Reserve Bank. The United States
owns the account balance.
See id. at 19-20, 84 9Oa,
109-113. As a result of all this, only federal funds are expended
when the contractor makes purchases. If the Government fails to
provide funding, the contractor is excused from performance of the
contract, and the Government is liable for all properly incurred
claims.
Prior to July 1, 1977, the Government's contracts with Sandia,
Zia, and LACI did not refer to the contractors as federal "agents."
On that date -- some two years
after the commencement of
this litigation -- the agreements were modified to state that each
contractor "acts as an agent [of the Government] . . . for certain
purposes," including the disbursement of Government funds and the
"purchase, lease, or other acquisition" of property.
Id.
at 50-51, 55-56, 590. This was designed to recognize what was
described as the "longstanding agency status and authority" of the
contractors.
Id. at 50, 55, 59. Thus it was made clear
that Sandia and
Page 455 U. S. 727
Zia were authorized to "pledge the credit of the United States,"
id. at 52 and 56, and the Government declared that it
"considers all obligations properly incurred" in accordance with
the contractual provisions to be Government obligations "from their
inception."
Id. at 52 (Sandia), 56 (Zia), and 60 (LACI).
At the same time, however, the United States denied any intent
"formally and directly [to] designat[e] the contractors as agents,"
id. at 64, and each modification stated that it did not
"create rights or obligations not otherwise provided for in the
contract."
Id. at 52, 57, 61.
B
New Mexico imposes a gross receipts tax and a compensating use
tax on those doing business within the State. With limited
exceptions,
"[f]or the privilege of engaging in business, an excise tax
equal to four per cent [4%] of gross receipts is imposed on any
person engaging in business in New Mexico."
N.M.Stat.Ann. § 72-16A-4 (Supp.1975). [
Footnote 7] In effect, the gross receipts tax operates
as a tax on the sale of goods and services. The State also levies a
compensating use tax, equivalent in amount to the gross receipts
tax, "[f]or the privilege of using property in New Mexico." §
72-16A-7. This is imposed on property acquired out-of-state in a
"transaction that would have been subject to the gross receipts tax
had it occurred within [New Mexico]." § 72-16A-7(A)(2). [
Footnote 8] Thus the compensating use
tax functions
Page 455 U. S. 728
as an enforcement mechanism for the gross receipts tax by
imposing a levy on the use of all property that has not already
been taxed; the State collects the same percentage regardless of
where the property is purchased. Neither tax, however, is imposed
on the "receipts of the United States or any agency or
instrumentality thereof," or on the "use of property by the United
States or any agency or instrumentality thereof." §§ 72-16A-12.1,
72-16A-12.2.
Without objection, Zia and LACI each year paid the New Mexico
gross receipts tax on the fixed fees they received from the Federal
Government. But the Government argued that the contractors' other
expenditures and operations are constitutionally immune from state
taxation. In July, 1975, the United States therefore initiated this
suit in the United States District Court for the District of New
Mexico, seeking a declaratory judgment that advanced funds are not
taxable gross receipts to the contractors; that the receipts of
vendors selling tangible property to the United States through the
contractors cannot be taxed by the State; and that the use of
Government-owned property by the contractors is not subject to the
State's compensating use tax. App. 11-12. [
Footnote 9]
The District Court granted the United States summary judgment.
Relying on
Kern-Limerick, Inc. v. Scurlock, 347 U.
S. 110 (1954), the court determined that the crucial
inquiry is whether the contractors are "procurement agents"
Page 455 U. S. 729
for the Government. The court answered that question in the
affirmative, noting that the Government
"maintains control over the contractors' procurement systems,
property management and disposal practices, method of payment of
operational costs, and other operations under the contracts."
455 F.
Supp. 993, 997 (1978). That analysis led the court to identify
an agency relationship existing even in the years prior to the 1977
contract modifications.
Ibid. The court therefore held
that the gross receipts tax cannot constitutionally be applied to
purchases by the contractors; because the court viewed the
compensating use tax as a correlative of the receipts tax, it
determined that the use tax also was invalid as applied to Sandia,
Zia, and LACI.
Id. at 998. Finally, the court ruled that
advanced funds do not serve as compensation to the contractors, and
therefore cannot be taxed as gross receipts.
Id. at
998-999.
The United States Court of Appeals for the Tenth Circuit
reversed. 624 F.2d 111 (1980). In its view, this Court's decisions
in the tax immunity area have been
"more concerned with preserving the delicate financial balance
between our coexisting sovereignties than with rigid adherence to
agency law terminology."
Id. at 116. Advanced funding, the court declared,
"is simply another means of reimbursement devised by accountants
to eliminate major weaknesses in the government's bookkeeping
practices."
Id. at 119. In meeting overhead and salaries with
Government funds, the contractors were satisfying their own
obligations, and they exercised dominion over the funds by issuing
drafts to obligees. And insofar as the claims of third-party
vendors are concerned, the court found federal "responsibility for
properly incurred claims to be inherent in all cost-type
contracts,"
id. at 119, n. 9; any number of businesses act
under letters of credit from banks and other sureties, and the
Federal Government itself finances a variety of organizations --
including States and local governments -- in such a manner.
Page 455 U. S. 730
The other contractual provisions relied on by the District Court
-- federal control over procurement systems, management practices,
and the like -- failed to impress the Court of Appeals. It
concluded that the Government-contractor relationship, viewed as a
whole, did not "
so incorporat[e] [the contractors] into the
government structure as to [make them] instrumentalities of the
United States. . . .'" Id. at 118, quoting United
States v. Boyd, 378 U. S. 39,
378 U. S. 48
(1964). And that Sandia received no fee for its services was of
little consequence, in the court's view, because "decisions on the
amount of fee, if any, to be paid a government contractor are not
made primarily with agency consequences in mind." 624 F.2d at 120.
Since the 1977 contractual amendments, by their terms, added
nothing of substance to the agreements, they did not affect the
court's analysis. The District Court was directed to enter summary
judgment for New Mexico. Id. at 121.
The United States sought certiorari, and we granted the writ to
consider the seemingly intractable problems posed by state taxation
of federal contractors. 450 U.S. 909 (1981).
II
A
With the famous declaration that "the power to tax involves the
power to destroy,"
McCulloch v.
Maryland, 4 Wheat. 316,
17 U. S. 431
(1819), Chief Justice Marshall announced for the Court the doctrine
of federal immunity from state taxation. In so doing he introduced
the Court to what has become a "much litigated and often confused
field,"
United States v. City of Detroit, 355 U.
S. 466,
355 U. S. 473
(1958), one that has been marked from the beginning by inconsistent
decisions and excessively delicate distinctions.
McCulloch itself relied on generalized notions of
federal supremacy to invalidate a state tax on the Second Bank of
the
Page 455 U. S. 731
United States. The Court gave broad scope to state power: the
opinion declined to
"deprive the States of any resources which they originally
possessed. It does not extend to . . . a tax imposed on the
interest which the citizens of Maryland may hold in [the Bank], in
common with other property of the same description throughout the
State."
4 Wheat. at
17 U. S. 436.
Not long afterwards, however, Chief Justice Marshall, speaking for
the Court, seemingly disregarded the
McCulloch dictum in
striking down a state tax on interest income from federal bonds,
explaining that such levies cannot constitutionally fall on an
"operation essential to the important objects for which the
government was created."
Weston v. City Council of
Charleston, 2 Pet. 449,
27 U. S. 467
(1829). During the following century, the Court took to heart
Weston's expansive analysis of federal tax immunity,
invalidating, among many others, state taxes on the income of
federal employees,
Dobbins v. Commissioners of
Erie County, 16 Pet. 435 (1842); on income derived
from property leased from the Federal Government,
Gillespie v.
Oklahoma, 257 U. S. 501
(1922); and on sales to the United States,
Panhandle Oil Co. v.
Mississippi ex rel. Knox, 277 U. S. 218
(1928). [
Footnote 10]
These decisions, it has been said, were increasingly divorced
both from the constitutional foundations of the immunity doctrine
and from "the actual workings of our federalism,"
Graves v. New
York ex rel. O'Keefe, 306 U. S. 466,
306 U. S. 490
(1939) (Frankfurter, J., concurring), and in
James v. Dravo
Contracting Co., 302 U. S. 134
(1937), by a 5-4 vote, the Court marked a major change in course.
Over the dissent's
Page 455 U. S. 732
justifiable objections that it was "overrul[ing],
sub
silentio, a century of precedents,"
id. at
302 U. S. 161,
the Court upheld a state tax on the gross receipts of a contractor
providing services to the Federal Government:
"'[I]t is not necessary to cripple [the State's power to tax] by
extending the constitutional exemption from taxation to those
subjects which fall within the general application of
nondiscriminatory laws, and where no direct burden is laid upon the
governmental instrumentality, and there is only a remote, if any,
influence upon the exercise of the functions of government.'"
Id. at
302 U. S. 150,
quoting
Willcuts v. Bunn, 282 U.
S. 216,
282 U. S. 225
(1931).
The Court's more recent cases involving federal contractors
generally have hewed to the
James analysis.
Alabama v.
King & Boozer, 314 U. S. 1 (1941),
upheld a state tax on sales to a federal contractor, overruling
Panhandle Oil Co. v. Mississippi ex rel. Knox, supra.
Decisions such as
United States v. City of Detroit, supra,
have validated state use taxes on private entities holding federal
property.
Even the Court's post-
James decisions, however, cannot
be set in an entirely unwavering line.
United States v.
Allegheny County, 322 U. S. 174
(1944), invalidated a state property tax that included in the
assessment the value of federal machinery held by a private party;
14 years later, that decision, in large part, was overruled by
United States v. City of Detroit, supra. See United
States v. County of Fresno, 429 U. S. 452,
429 U. S.
462-463, n. 10 (1977). In
Livingston v. United
States, 364 U. S. 281
(1960),
summarily aff'g 179 F. Supp.
9 (EDSC 1959), the Court, without opinion or citation, approved
the invalidation of a state use tax as applied to a federal
contractor. Yet
United States v. Boyd, supra, upheld a
virtually identical state tax, seemingly confining
Livingston to its "extraordinary" facts. 378 U.S. at
378 U. S. 45, n.
6.
Similarly, the decisions fail to speak with one voice on the
relevance of traditional agency rules in determining the tax
Page 455 U. S. 733
immunity status of federal contractors. Thus,
Alabama v.
King & Boozer, supra, declined to find immunity in part
because the contractors involved lacked the "status of agents," 314
U.S. at
314 U. S. 13, and
United States v. Township of Muskegon, 355 U.
S. 484,
365 U. S. 486
(1958), upheld a use tax on a federal contractor with the caveat
that the "case might well be different if [the contractor] . . .
could properly be called a
servant' of the United States in
agency terms." See Kern-Limerick, Inc. v. Scurlock,
347 U. S. 110
(1954). Yet James v. Dravo Contracting Co., supra, stated
flatly that tax immunity is not dependent "`upon the nature of the
agents, or upon the mode of their constitution, or upon the fact
that they are agents.'" 302 U.S. at 302 U. S. 154,
quoting Railroad Co. v.
Peniston, 18 Wall. 5, 85 U. S. 36 (1873)
(plurality opinion). And United States v. Boyd, supra,
rejected the Government's argument that its contractors were
federal agents, and therefore tax immune, stating simply that the
private entities were not "instrumentalities of the United States."
378 U. S:, at 378 U. S.
48.
B
We have concluded that the confusing nature of our precedents
counsels a return to the underlying constitutional principle. The
one constant here, of course, is simple enough to express: a State
may not, consistent with the Supremacy Clause, U.S.Const., Art. VI,
cl. 2, lay a tax "directly upon the United States."
Mayo v.
United States, 319 U. S. 441,
319 U. S. 447
(1943). While
"[o]ne could, and perhaps should, read
M'Culloch . . .
simply for the principle that the Constitution prohibits a State
from taxing discriminatorily a federally established
instrumentality,"
First Agricultural Bank v. State Tax Comm'n,
392 U. S. 339,
392 U. S. 350
(1968) (dissenting opinion), the Court has never questioned the
propriety of absolute federal immunity from state taxation. And
after 160 years, the doctrine has gathered "a momentum of authority
that reflects, if not a detailed exposition of considerations of
policy demanded by our federal system, certainly a deep
instinct
Page 455 U. S. 734
that there are such considerations. . . ."
City of Detroit
v. Murray Corp., 355 U. S. 489,
355 U. S.
503-504 (1958) (opinion of Frankfurter, J.).
But the limits on the immunity doctrine are, for present
purposes, as significant as the rule itself. Thus, immunity may not
be conferred simply because the tax has an effect on the United
States, or even because the Federal Government shoulders the entire
economic burden of the levy. That is the import of
Alabama v.
King & Boozer, where a sales tax was imposed on the gross
receipts of a vendor selling to a cost-plus Government contractor.
The Court found it constitutionally irrelevant that the United
States reimbursed all the contractor's expenditures, including
those going to meet the tax: the Government's right to be free from
state taxation
"does not spell immunity from paying the added costs
attributable to the taxation of those who furnish supplies to the
Government and who have been granted no tax immunity."
314 U.S. at
314 U. S. 9. That
the contractor is purchasing property for the Government is
similarly irrelevant; in
King & Boozer, title to goods
purchased by the contractor vested in the United States immediately
upon shipment by the seller.
Id. at
314 U. S. 13.
Similarly, immunity cannot be conferred simply because the state
tax falls on the earnings of a contractor providing services to the
Government.
James v. Dravo Contracting Co., supra. And
where a use tax is involved, immunity cannot be conferred simply
because the State is levying the tax on the use of federal property
in private hands,
United States v. City of Detroit, supra,
even if the private entity is using the Government property to
provide the United States with goods,
United States v. Township
of Muskegon, supra; City of Detroit v. Murray Corp., supra, or
services,
Curry v. United States, 314 U. S.
14 (1941);
United States v. Boyd, supra. In
such a situation, the contractor's use of the property "in
connection with commercial activities carried on for
Page 455 U. S. 735
profit," is "a separate and distinct taxable activity."
United States v. Boyd, 378 U.S. at
378 U. S. 44.
Indeed, immunity cannot be conferred simply because the tax is paid
with Government funds; that was apparently the case in
Boyd, where the contractor made expenditures under an
advanced funding arrangement similar to the one involved here.
Id. at
378 U. S.
41.
What the Court's cases leave room for, then, is the conclusion
that tax immunity is appropriate in only one circumstance: when the
levy falls on the United States itself, or on an agency or
instrumentality so closely connected to the Government that the two
cannot realistically be viewed as separate entities, at least
insofar as the activity being taxed is concerned. This view, we
believe, comports with the principal purpose of the immunity
doctrine, that of forestalling "clashing sovereignty,"
McCulloch v. Maryland, 4 Wheat. at
17 U. S. 43, by
preventing the States from laying demands directly on the Federal
Government.
See City of Detroit v. Murray Corp., 355 U.S.
at
355 U. S.
504-505 (opinion of Frankfurter, J.). As the federal
structure -- along with the workings of the tax immunity doctrine
[
Footnote 11] -- has
evolved, this command has taken on essentially symbolic importance,
as the visible "consequence of that [federal] supremacy which the
constitution has declared."
McCulloch v. Maryland, 4
Wheat. at
17 U. S. 436.
At the same time, a narrow approach to governmental tax immunity
accords with competing constitutional imperatives,
Page 455 U. S. 736
by giving full range to each sovereign's taxing authority.
See Graves v. New York ex rel. O'Keefe, 306 U.S. at
306 U. S.
483.
Thus, a finding of constitutional tax immunity requires
something more than the invocation of traditional agency notions:
to resist the State's taxing power, a private taxpayer must
actually "stand in the Government's shoes."
City of Detroit v.
Murray Corp., 355 U.S. at
355 U. S. 503
(opinion of Frankfurter, J.). That conclusion is compelled by the
Court's principal decisions exploring the nature of the
Constitution's immunity guarantee. Chief Justice Hughes' opinion
for the Court in
James, which set the doctrine on its
modern course, suggested that a state tax is impermissible when the
taxed entity is "so intimately connected with the exercise of a
power or the performance of a duty" by the Government that taxation
of it would be "
a direct interference with the functions of
government itself.'" 302 U.S. at 302 U. S. 157,
quoting Metcalf & Eddy v. Mitchell, 269 U.
S. 514, 269 U. S. 524
(1926). And the point is settled by Boyd, the Court's most
recent decision in the field. There, the Government argued that its
contractors were tax-exempt because they were federal agents.
Without any discussion of traditional agency rules, the Court
rejected that suggestion out-of-hand, declaring that "we cannot
believe that [the contractors are] `so assimilated by the
Government as to become one of its constituent parts.'" 378 U.S. at
378 U. S. 47,
quoting United States v. Township of Muskegon, 355 U.S. at
355 U. S. 486.
And the Court continued:
"Should the [Atomic Energy] Commission intend to build or
operate the plant with its own servants and employees, it is well
aware that it may do so and familiar with the ways of doing it. It
chose not to do so here. We cannot conclude that [the contractors],
both cost-plus contractors for profit, have been so incorporated
into the government structure as to become instrumentalities of the
United States, and thus enjoy governmental immunity."
378 U.S. at
378 U. S. 48.
The Court's other cases describing the nature of a federal
instrumentality have used similar language: "virtually . . . an
Page 455 U. S. 737
arm of the Government,"
Department of Employment v. United
States, 385 U.S. at
385 U. S.
359-360; "integral parts of [a governmental
department]," and "arms of the Government deemed by it essential
for the performance of governmental functions,"
Standard Oil
Co. v. Johnson, 316 U. S. 481,
316 U. S. 485
(1942).
Granting tax immunity only to entities that have been
"incorporated into the government structure" can forestall, at
least to a degree, some of the manipulation and wooden formalism
that occasionally have marked tax litigation -- and that have no
proper place in determining the allocation of power between
coexisting sovereignties. In this case, for example, the Government
and its contractors modified their agreements two years into the
litigation in an obvious attempt to strengthen the case for
nonliability. Yet the Government resists using its own employees
for the tasks at hand -- or, indeed, even formally designating
Sandia, Zia, and LACI as agents -- because it seeks to tap the
expertise of industry without subjecting its contractors to
burdensome federal procurement regulations.
See Hiestand
& Florsheim at 81; App. 182-184. Instead, the Government
earnestly argues that its contractors are entitled to tax immunity
because, among other things, they draw checks directly on federal
funds, instead of waiting a time for reimbursement. Brief for
United States 32-35. We cannot believe that an immunity of
constitutional stature rests on such technical considerations, for
that approach allows "any government functionary to draw the
constitutional line by changing a few words in a contract."
Kern-Limerick, Inc. v. Scurlock, 347 U.S. at
347 U. S. 126
(dissenting opinion).
If the immunity of federal contractors is to be expanded beyond
its narrow constitutional limits, it is Congress that must take
responsibility for the decision, by so expressly providing as
respects contracts in a particular form, or contracts under
particular programs.
James v. Dravo Contracting Co., 302
U.S. at
302 U. S. 161;
Carson v. Roane-Anderson Co., 342 U.
S. 232,
342 U. S. 234
(1952). And this allocation of responsibility is wholly
Page 455 U. S. 738
appropriate, for the political process is "uniquely adapted to
accommodating the competing demands" in this area.
Massachusetts v. United States, 435 U.
S. 444,
435 U. S. 456
(1978) (plurality opinion).
See United States v. City of
Detroit, 355 U.S. at
355 U. S. 474.
But, absent congressional action, we have emphasized that the
States' power to tax can be denied only under "the clearest
constitutional mandate."
Michelin Tire Corp. v. Wages,
423 U. S. 276,
423 U. S. 293
(1976).
III
It remains to apply these principles to the Sandia, Zia, and
LACI contracts. The Government concedes that the legal incidence of
the gross receipts and use taxes falls on the contractors, Brief
for United States 25, and we do not disagree.
See United States
v. New Mexico, 581 F.2d 803, 806 (CA10 1978). The issue, then,
is whether the contractors can realistically be considered entities
independent of the United States. If so, a tax on them cannot be
viewed as a tax on the United States itself.
So far as the use tax is concerned,
United States v. Boyd,
supra, controls this case. The contracts at issue in
Boyd were standard AEC management contracts, in all
relevant respects identical to the ones here. The contractors
performed maintenance and construction work at Government
facilities, under the general direction of the Government. They
procured materials, and paid for the goods with Government funds
under an advanced funding arrangement; title passed directly from
the vendor to the United States. The contractors owned none of the
property involved, and received a fixed annual fee. Indeed, one of
the contractor's purchase orders stated that it made purchases "for
and on behalf of the Government." 378 U.S. at
378 U. S. 42, n.
4. And the Tennessee use tax did not differ in any significant way
from the use tax now before us. [
Footnote 12]
Page 455 U. S. 739
As noted above, the Government argued that this close
contractual relationship made the contractors federal agents, and
therefore tax-immune. Yet the Court had no difficulty upholding the
application of the Tennessee tax, concluding that "
[t]he vital
thing' is that [the contractors are] `using the property in
connection with [their] own commercial activities.'" Id.
at 378 U. S. 45,
quoting United States v. Township of Muskegon, 355 U.S. at
355 U. S. 486.
That the federal property involved was being used for the
Government's benefit -- something that, by definition, will be true
in virtually every management contract -- was irrelevant, for the
contractors remained distinct entities pursuing "private ends," and
their actions remained "commercial activities carried on for
profit." 378 U.S. at 378 U. S. 44.
For that reason, the contractors
Page 455 U. S. 740
had not become "instrumentalities" of the United States.
Id. at
378 U. S. 48.
[
Footnote 13]
The same factors are at work here. The tax, the taxed activity,
and the contractual relationships do not differ from those involved
in
Boyd. The contractors here are privately owned
corporations; "Government officials do not run [their] day-to-day
operations nor does the Government have any ownership interest."
First Agricultural Bank v. State Tax Comm'n, 392 U.S. at
392 U. S. 354
(dissenting opinion). In contrast to federal employees, then,
Sandia and its fellow contractors cannot be termed "constituent
parts" of the Federal Government. It is true, of course, that
employees are a special type of agent, and, like the contractors
here, employees are paid for their services. But the differences
between an employee and one of these contractors are crucial. The
congruence of professional interests between the contractors and
the Federal Government is not complete; their relationships with
the Government have been created for limited and carefully
defined
Page 455 U. S. 741
purposes. Allowing the States to apply use taxes to such
entities does not offend the notion of federal supremacy. [
Footnote 14]
For similar reasons, the New Mexico gross receipts tax must be
upheld as applied to funds received by the contractors to meet
salaries and internal costs. Once it is conceded that the
contractors are independent taxable entities, it cannot be disputed
that their gross income is taxable. This conclusion follows
directly from
James v. Dravo Contracting Co., supra, where
the Court upheld a state tax reaching "gross amounts received from
the United States." 302 U.S. at
302 U. S. 137.
In any event, incurring obligations to achieve contractual ends is
not significantly different from using property for the same
purposes. And despite the Government's arguments, the use of
advanced funding does not change the analysis. That device is, at
heart, an efficient method of reimbursing contractors -- something
the Government has apparently recognized in contexts other than tax
litigation.
See App. 31 (Sandia contract), 189 (Ninth
Semiannual Report of the Atomic Energy Commission (1951)), 191
(same). If receipt of advanced funding is coextensive with status
as a federal instrumentality, virtually every federal contractor
is, or could easily become, immune from state taxation.
New Mexico's tax on sales to the contractors presents a more
complex problem. So far as the use tax discussed above is
concerned, the subject of the levy is the taxed entity's beneficial
use of the property involved.
See United States v. Boyd,
378 U.S. at
378 U. S. 44.
Unless the entity as a whole is one of the Government's
"constituent parts," then, a
Page 455 U. S. 742
tax on its use of property should not be seen as falling on the
United States; in that situation, the property is being used in
furtherance of the contractor's essentially independent commercial
enterprise. In the case of a sales tax, however, it is arguable
that an entity serving as a federal procurement agent can be so
closely associated with the Government, and so lack an independent
role in the purchase, as to make the sale -- in both a real and a
symbolic sense -- a sale to the United States, even though the
purchasing agent has not otherwise been incorporated into the
Government structure.
Such was the Court's conclusion in
Kern-Limerick, Inc. v.
Scurlock, supra, a decision on which the Government heavily
relies. The contractor in that case identified itself as a federal
procurement agent, and, when it made purchases, title passed
directly to the Government; the purchase orders themselves declared
that the purchase was made by the Government, and that the United
States was liable on the sale. Equally as important, the contractor
itself was not liable for the purchase price, and it required
specific Government approval for each transaction.
See 347
U.S. at
347 U. S.
120-121. And, as the Court emphasized, the statutory
procurement scheme envisioned the use of federal purchasing agents.
Id. at
347 U. S. 114.
The Court concluded that a sale to the contractor was, in effect, a
sale to the United States, and therefore not a proper subject for
the Arkansas sales tax. [
Footnote 15] As we have noted elsewhere,
Kern-Limerick "stands only for the proposition that the
State may not impose a tax the legal incidence of which falls on
the Federal Government."
United States v. County of
Fresno, 429 U.S. at
429 U. S.
459-460, n. 7.
We think it evident that the
Kern-Limerick principle
does not invalidate New Mexico's sales tax as applied to purchases
made by the contractors here. Even accepting the Government's
representation that it is directly liable to vendors for
Page 455 U. S. 743
the purchase price,
see Tr. of Oral Arg. 425, [
Footnote 16] Sandia and Zia
nevertheless make purchases in their own names -- Sandia, in fact,
is contractually obligated to do so, App. 37 -- and presumably they
are themselves liable to the vendors. Vendors are not informed that
the Government is the only party with an independent interest in
the purchase, as was true in
Kern-Limerick, and the
Government disclaims any formal intention to denominate the
contractors as purchasing agents. Similarly, Sandia and Zia need
not obtain advance Government approval for each purchase. [
Footnote 17] These factors
demonstrate that the contractors have a substantial independent
role in making purchases, and that the identity of interests
between the Government and the contractors is far from complete. As
a result, sales to Zia and Sandia are, in neither a real nor a
symbolic sense, sales to the "United States itself." It is true
that title passes directly from the vendor to the Federal
Government, but that factor alone cannot make the transaction a
purchase by the United States, so long as the purchasing entity, in
its role as a purchaser, is sufficiently distinct from the
Government.
Alabama v. King & Boozer, 314 U.S. at
314 U. S. 13.
There is a final irony in this case. In
Carson v.
Roane-Anderson Co., 342 U. S. 232
(1952), the Court considered a state sales and use tax imposed on
AEC management contractors. The terms of the contracts were, in
most relevant respects, identical to the ones here, and, insofar as
they differed, they established an even closer relationship
between
Page 455 U. S. 744
the Government and the contractors.
See Brief for
United States, O.T. 1951, Nos. 186 and 187, pp. 8-12. The Court
held that, in the last sentence of § 9(b) of the Atomic Energy Act
of 1946, 60 Stat. 76 -- which barred state or local taxation of AEC
"activities" -- Congress had statutorily exempted the contractors
from state taxation because the operations of management
contractors were Commission activities. 342 U.S. at
342 U. S. 234.
Congress responded by repealing the last sentence of § 9(b), Pub.L.
262, 67 Stat. 575, in an attempt to "place the Commission and its
activities on the same basis, with respect to immunity from State
and local taxation, as other Federal agencies." S.Rep. No. 694, 83d
Cong., 1st Sess., 3 (1953). In doing so, Congress endorsed the
principle that
"constitutional immunity does not extend to cost plus fixed fee
contractors of the Federal Government, but is limited to taxes
imposed directly upon the United States."
Id. at 2.
We do not suggest that the repeal of § 9(b) waives the
Government's constitutional tax immunity; Congress intended AEC
contractors to be shielded by constitutional immunity principles
"as interpreted by the courts." S.Rep. No. 694 at 3. But it is
worth remarking that DOE is asking us to establish as a
constitutional rule something that it was unable to obtain
statutorily from Congress. For the reasons set out above, we
conclude that the contractors here are not protected by the
Constitution's guarantee of federal supremacy. If political or
economic considerations suggest that a broader immunity rule is
appropriate, "[s]uch complex problems are ones which Congress is
best qualified to resolve."
United States v. City of
Detroit, 355 U.S. at
355 U. S.
474.
Accordingly, the judgment of the Court of Appeals is
Affirmed.
[
Footnote 1]
Responsibility for the Nation's nuclear program was transferred
from the AEC to the Energy Research and Development Administration
in 1975, and to the Department of Energy in 1977.
See
Energy Reorganization Act of 1974, Pub.L. 93-438, 88 Stat. 1233, 42
U.S.C. § 5801
et seq.; Exec.Order No. 11834, 3 CFR 943
(1971-1975 Comp.); Department of Energy Organization Act, Pub.L.
95-91, 91 Stat. 565, 42 U.S.C. § 7101
et seq. (1976 ed.,
Supp. IV).
[
Footnote 2]
AEC management contracts were developed in an attempt to secure
Government control over the production of fissionable materials,
while making use of private industry's expertise and resources.
See Carson v. Roane-Anderson Co., 342 U.
S. 232,
342 U. S.
234-236 (1952); Tr. of Oral Arg. 4-6.
[
Footnote 3]
Sandia and its parent receive a variety of additional benefits
from the contract. Most obviously, they develop expertise and
acquire valuable technical information.
See generally
Newman, The Atomic Energy Industry: An Experiment in Hybridization,
60 Yale L.J. 1263, 1320-1321 (1951). They receive more tangible
benefits as well: through Sandia's contract, Western Electric is
paid for furnishing a variety of products and services.
See 624 F.2d 111, 120, n. 12 (CA10 1980).
[
Footnote 4]
LACI does not purchase goods, and the Government retains title
to property it furnishes to the company. App. 29.
[
Footnote 5]
Sandia must obtain written approval before advancing suppliers
or subcontractors more than $15,000,
id. at 31, and must
obtain written approval before entering into any "procurement
transaction" involving more than $100,000.
Id. at 36.
[
Footnote 6]
Advanced funding may be used whenever the program involved
requires "advances to finance the recipient organization's
activities," 31 CFR § 205.2(a) (1981). Recipients may include "any
State and local government." § 205.3(a).
[
Footnote 7]
Since the initiation of this litigation, the New Mexico tax
statutes have been amended, and are now found at N.M.Stat.Ann. §§
7-9-1 through 7-9-81 (1978). While the tax rate has been lowered to
3.5%, no other substantive change, pertinent here, has been made.
For consistency, and to conform to the pleadings and primary
references in the briefs, citations herein are to the old
codification.
[
Footnote 8]
The statute also has a catchall provision, imposing the
compensating use tax on property acquired in any transaction that
was not initially subject to tax "but which transaction, because of
the buyer's subsequent use of the property, should have been
subject to the compensating tax." N.M.Stat.Ann. § 72-16A-7(A)(3)
(Supp.1975).
[
Footnote 9]
Prior to 1967, the New Mexico Bureau of Revenue did not attempt
to tax the contractors. In that year, the State sought to impose
gross receipts and compensating use taxes on Zia and LACI for the
period January 1, 1966, through June 30, 1967. The United States
challenged the assessment, and the New Mexico Court of Appeals held
that the State Commissioner of Revenue was estopped from assessing
the taxes for the period in question.
United States v. Bureau
of Revenue, 87 N.M. 164,
531 P.2d
212 (1975). One judge, specially concurring, concluded that,
even if estoppel was unavailable, the taxes could not be imposed.
Id. at 166, 531 P.2d at 214. The New Mexico court did not
address the constitutional validity of the tax.
[
Footnote 10]
It is in the case last cited that Justice Holmes, in dissent,
joined by Justice Brandeis and Justice Stone, countered the great
Chief Justice's observation with other well-known words: "The power
to tax is not the power to destroy while this Court sits." 277 U.S.
at
277 U. S. 223.
Justice Frankfurter, concurring, in
Graves v. New York ex rel.
O'Keefe, 306 U. S. 466,
306 U. S. 490
(1939), observed: "The web of unreality spun from Marshall's famous
dictum was brushed away by one stroke of Mr. Justice Holmes'
pen."
[
Footnote 11]
With the abandonment of the notion that the economic -- as
opposed to the legal -- incidence of the tax is relevant, it
becomes difficult to maintain that federal tax immunity is designed
to insulate federal operations from the effects of state taxation.
It remains true, of course, that state taxes on contractors are
constitutionally invalid if they discriminate against the Federal
Government or substantially interfere with its activities.
See
United States v. County of Fresno, 429 U.
S. 452,
429 U. S. 463,
n. 11,
429 U. S. 464
(1977);
Moses Lake Homes, Inc. v. Grant County,
365 U. S. 744
(1961);
City of Detroit v. Murray Corp., 355 U.
S. 489,
355 U. S. 495
(1958). New Mexico, however, is not discriminating here.
[
Footnote 12]
The Government advances only one ground for distinguishing
Boyd; it contends that the Tennessee use tax was a
"privilege-type use tax," while New Mexico's is a "compensating use
tax." Brief for United States 25, 39, n. 15; Reply Brief for United
States 4. As we understand its argument, the Government means to
suggest that Tennessee was attempting to tax the privilege of using
property, while New Mexico's levy is designed only to enforce its
gross receipts tax, and therefore should be analyzed as a sales
tax. In our view, this distinction is without substance. The
Tennessee tax at issue in
Boyd imposed a general levy on
those "exercising a taxable privilege" by "selling tangible
personal property" or "us[ing] or consum[ing] . . . any item or
article of tangible personal property," 12 Tenn.Code Ann. § 67-3003
(1963 Cum.Supp.), but the tax was not imposed if the sales or use
tax had already been paid. § 67-3003(b). Section 67-3004
specifically applied this tax to the use of property by a
contractor "unless such property has been previously subjected to a
sales or use tax."
The New Mexico use tax under consideration here operates in
precisely the same way. Both taxes, in terms, reach the use of
property; both have the effect of serving as enforcement mechanisms
for the state sales tax. Both serve to ensure that either the sale
or the use of all property in the hands of non-immune entities will
be taxed, no matter where the property is purchased. And both, in
terms, tax the privilege of doing business in the State.
See N.M.Stat.Ann. § 72-16A-4 (Supp.1975) (gross receipts
tax imposed "[f]or the privilege of engaging in business"); §
72-16A-7, (use tax imposed "[f]or the privilege of using
property"). In short, the two taxes have the same "practical
operation and effect."
City of Detroit v. Murray Corp.,
355 U.S. at
355 U. S.
493.
[
Footnote 13]
The Government argues that the tax here is supported by
Livingston v. United States, 364 U.
S. 281 (1960),
aff'g 179 F. Supp.
9 (EDSC 1959). There, the Court summarily affirmed the District
Court's invalidation of a state sales and use tax, as applied to
the purchase and use of property by an AEC contractor. The District
Court noted the "extraordinary" nature of the contract involved,
id. at 16, finding that the contractor had entered into
the agreement entirely as a "contribution to the defense effort."
Id. at 17. The contractor received a one dollar fee, and
otherwise operated "without hope of gain,"
id. at 17-18.
The District Court found that the research conducted and experience
gained by the contractor's employees were unlikely to benefit the
corporation.
Id. at 23. And the court found that the
contractor acted "as the
alter ego of the [Atomic Energy]
Commission."
Id. at 18.
Boyd distinguished
Livingston by confining it to its "extraordinary" facts,
finding crucial "the factual determination that [the
Livingston contractor] received no benefits from the
contract." 378 U.S. at
378 U. S. 45, n.
6.
Livingston is inapplicable here for the same reasons.
Zia and LACI, of course, receive fixed fees for their services.
Sandia does not receive a cash fee, but it obtains obvious benefits
from its contractual relationship with the United States.
See
supra at
455 U. S.
723-724, and n. 3. There has been no suggestion -- let
alone a finding below -- that Sandia and Western Electric entered
into the contract for only altruistic reasons.
[
Footnote 14]
While a use tax may be valid only to the extent that it reaches
the contractor's interest in Government-owned property,
cf.
City of Detroit v. Murray Corp., 355 U.S. at
355 U. S. 494;
United States v. Colorado, 627 F.2d 217 (CA10 1980),
summarily aff'd sub nom. Jefferson County v . United
States, 450 U.S. 901 (1981), there has been no suggestion here
that the contractors are being taxed beyond the value of their
use.
[
Footnote 15]
Arkansas did not impose a corresponding use tax, and the Court
therefore considered only whether the sale itself was a taxable
transaction.
[
Footnote 16]
It is not entirely clear that the Government's representation is
accurate.
See, e.g., Continental Illinois Nat. Bank & Trust
Co. of Chicago v. United States, 112 Ct.Cl. 563, 81 F. Supp.
596 (1949) (no contract action against the United States in the
Court of Claims absent privity of contract). In light of our
conclusion about the significance of other aspects of the
contracts, there is no need for us to address this issue.
[
Footnote 17]
For Zia and LACI, the Government contents itself with an annual
review of expenditures, App. 20, 27; for Sandia, it requires
advance approval of transactions involving $100,000 or more.
Id. at 36.