A Tennessee statute imposes a tax on the net earnings of banks
doing business in the State, and defines net earnings to include
interest received on obligations of the United States and its
instrumentalities and of other States, but not interest earned on
obligations of Tennessee and its political subdivisions. Appellant
bank brought an action in a Tennessee state court to recover taxes
paid on interest earned on various federal obligations, alleging
that the bank tax, as applied to appellant, violated 31 U.S.C. §
742 -- which exempts obligations of the United States from state
and local taxation except where the taxes are "nondiscriminatory
franchise or other nonproperty taxes in lieu thereof imposed on
corporations" or estate or inheritance taxes -- and thus was
unconstitutional under the Supremacy Clause. The trial court
granted appellant's motion for a summary judgment. The Tennessee
Supreme Court reversed, holding that the bank tax fell within the
exception for "nondiscriminatory franchise taxes" set forth in §
742.
Held: The Tennessee bank tax violates the immunity of
obligations of the United States from state and local taxation. The
tax cannot be characterized as nondiscriminatory under § 742. It
discriminates in favor of securities issued by Tennessee and its
political subdivisions and against federal obligations by including
in the tax base income from federal obligations while excluding
income from otherwise comparable state and local obligations, and
thus improperly discriminates against the Federal Government and
those with whom it deals. Pp.
459 U. S.
395-399.
624
S.W.2d 551, reversed and remanded.
MARSHALL, J., delivered the opinion for a unanimous Court.
Page 459 U. S. 393
JUSTICE MARSHALL delivered the opinion of the Court.
The Tennessee bank tax imposes a tax on the net earnings of
banks doing business within the State, and defines net earnings to
include income from obligations of the United States and its
instrumentalities, but to exclude interest earned on the
obligations of Tennessee and its political subdivisions. Tenn.Code
Ann. § 67-751 (Supp.1982). This appeal presents the question
whether the Tennessee bank tax violates the immunity of obligations
of the United States from state and local taxation.
I
Appellant Memphis Bank & Trust Co. (Memphis Bank) brought
this action in state court to recover $56,696.81 in taxes covering
the years 1977 and 1978 which had been assessed pursuant to the
Tennessee bank tax, Tenn.Code Ann. § 67-751 (Supp..1982). [
Footnote 1] Each bank doing business in
Tennessee
Page 459 U. S. 394
is required under § 67-751 to pay to local governments of the
State a tax of 3% of the bank's net earnings for the preceding
fiscal year, less a portion of the
ad valorem taxes paid
by the bank for that year. [
Footnote 2] Under the statute, net earnings include
interest received by the bank on the obligations of the United
States and its instrumentalities, as well as interest on bonds and
other obligations of States other than Tennessee, but exclude
interest on obligations of Tennessee and its political
subdivisions. [
Footnote 3]
Appellant alleged that the bank tax, as applied to it, violated
31 U.S.C. § 742, and thus was unconstitutional under the Supremacy
Clause. The parties stipulated that the amount of tax paid by
appellant for the years 1977 and 1978 was based entirely on
interest earned on various federal
Page 459 U. S. 395
obligations, primarily notes and bills of the United States
Treasury and obligations of Federal Credit Banks. [
Footnote 4] They also stipulated that, if the
interest earned on such federal obligations were excluded from the
computation, Memphis Bank would owe no taxes for the years in
question.
The Chancery Court of Shelby County granted Memphis Bank's
motion for summary judgment, holding that 31 U.S.C. § 742 prohibits
the inclusion of interest on obligations of the United States and
its instrumentalities in the computation of taxable "net earnings"
under the Tennessee bank tax. The Supreme Court of Tennessee
reversed.
624
S.W.2d 551 (1981). It held that the bank tax fell within the
exception for "nondiscriminatory franchise . . . taxes" set forth
in 31 U.S.C. § 742. We noted probable jurisdiction, 456 U.S. 943
(1982), and we reverse.
II
Title 31 U.S.C. § 742 establishes a broad exemption of federal
obligations from state and local taxation:
"Except as otherwise provided by law, all stocks, bonds,
Treasury notes, and other obligations of the United States, shall
be exempt from taxation by or under State or municipal or local
authority. This exemption extends to every form of taxation that
would require that either the obligations or the interest thereon,
or both, be considered, directly or indirectly, in the computation
of the tax, except nondiscriminatory franchise or other
nonproperty
Page 459 U. S. 396
taxes in lieu thereof imposed on corporations and except estate
taxes or inheritance taxes."
The exemption established in § 742 applies not only to Treasury
notes and bills, but also to the obligations of such
instrumentalities of the United States as Federal Farm Credit
Banks.
Cf. Smith v. Davis, 323 U.
S. 111,
323 U. S. 117
(1944) ("other obligations" must be interpreted "in accord with the
long established Congressional intent to prevent taxes which
diminish in the slightest degree the market value or the investment
attractiveness of obligations issued by the United States in an
effort to secure necessary credit"). Because no federal statutes
have "otherwise provided," § 742 applies to income from the types
of federal obligations held by Memphis Bank. [
Footnote 5] Therefore, the bank tax is
impermissible unless the tax is a "nondiscriminatory franchise or
other nonproperty ta[x] in lieu thereof" under § 742. [
Footnote 6]
We have not previously had occasion to determine whether a state
or local tax is "nondiscriminatory" within the meaning of § 742.
However, we have frequently considered this concept in our
decisions concerning the constitutional immunity
Page 459 U. S. 397
of Federal Government property, including bonds and other
securities, from taxation by the States. Our decisions have treated
§ 742 as principally a restatement of the constitutional rule.
See, e.g., New Jersey Realty Title Ins. Co. v. Division of Tax
Appeals, 338 U. S. 665,
338 U. S. 672
(1950);
Missouri ex rel. Missouri Ins. Co. v. Gehner,
281 U. S. 313,
281 U. S.
321-322 (1930).
Under the constitutional rule of tax immunity established in
McCulloch v.
Maryland, 4 Wheat. 316 (1819),
"States may not impose taxes directly on the Federal Government,
nor may they impose taxes the legal incidence of which falls on the
Federal Government."
United States v. County of Fresno, 429 U.
S. 452,
429 U. S. 459
(1977) (footnote omitted). Where, as here, the economic but not the
legal incidence of the tax falls on the Federal Government, such a
tax generally does not violate the constitutional immunity if it
does not discriminate against holders of federal property or those
with whom the Federal Government deals.
See, e.g., United
States v. County of Fresno, supra, at
429 U. S.
459-464;
United States v. City of Detroit,
355 U. S. 466,
355 U. S. 473
(1958);
Werner Machine Co. v. Director of Division of
Taxation, 350 U. S. 492
(1956);
Tradesmens National Bank of Oklahoma v. Oklahoma Tax
Comm'n, 309 U. S. 560,
309 U. S. 564
(1940). [
Footnote 7]
A state tax that imposes a greater burden on holders of federal
property than on holders of similar state property impermissibly
discriminates against federal obligations.
See, e.g., United
States v. County of Fresno, supra, at
429 U. S. 462
("a state tax imposed on those who deal with the Federal
Government" is unconstitutional if the tax "is imposed [un]equally
on . . . similarly situated constituents of the State"). Our cases
establish, however, that, if the
"tax remains the
Page 459 U. S. 398
same whatever the character of the [property] may be, no claim
can be sustained that this taxing statute discriminates against the
federal obligations."
Werner Machine Co. v. Director of Division of Taxation,
supra, at
350 U. S.
493-494. In
Schuylkill Trust Co. v.
Pennsylvania, 296 U. S. 113,
296 U. S.
119-120 (1935), we held invalid a Pennsylvania tax
levied upon the shares of a trust company that was measured by the
company's net assets. In calculating net assets, the statute
excluded shares owned by the trust company in Pennsylvania
corporations, but included shares owned in United States
obligations. The Court found that the tax statute discriminated in
favor of securities issued by Pennsylvania corporations and against
United States bonds or other obligations.
Similarly, in
Phillips Chemical Co. v. Dumas Independent
School District, 361 U. S. 376
(1960), we held unconstitutional a local tax upon private lessees
which was imposed on the estimated full value of the leased
premises. The tax statute applied to lessees of United States
Government property, but not to lessees of exempt real property
owned by the State and its political subdivisions. We held that the
tax "discriminates unconstitutionally against the United States and
its lessee."
Id. at
361 U. S.
387.
It is clear that, under the principles established in our
previous cases, the Tennessee bank tax cannot be characterized as
nondiscriminatory under § 742. Tennessee discriminates in favor of
securities issued by Tennessee and its political subdivisions, and
against federal obligations. The State does so by including in the
tax base income from federal obligations, while excluding income
from otherwise comparable state and local obligations. [
Footnote 8] We conclude, therefore,
that
Page 459 U. S. 399
the Tennessee bank tax impermissibly discriminates against the
Federal Government and those with whom it deals.
The judgment of the Supreme Court of Tennessee is reversed, and
the case is remanded for further proceedings not inconsistent with
this opinion.
It is so ordered.
[
Footnote 1]
Excise tax on bank earnings -- Rate. -- There is hereby created
a subclassification of intangible personal property which shall be
designated as the "shares of banks and banking associations." All
property in this subclassification shall be taxed in the following
manner: Commencing in 1977 and each year thereafter, in lieu of the
assessment according to the value and taxation of its intangible
personal property, each bank doing business in this state shall pay
to local governments of Tennessee an excise tax of three percent
(3%) of the net earnings for the next preceding fiscal year less
ten percent (10%) of the
ad valorem taxes paid by the bank
on its real property and tangible personal property for the next
preceding year. The net earnings shall be calculated in the same
manner as prescribed by chapter 27 of title 67. The tax herein
imposed shall be in lieu of all taxes on the redeemable or cash
value of all of their outstanding shares of capital stock, customer
savings and checking accounts, certificates of deposit and
certificates of investment, by whatever name called, including
other intangible corporate property of such bank or banking
association provided that such bank or banking association shall
nonetheless continue to be subject to
ad valorem taxes on
its real and tangible personal property, the excise tax imposed
under chapter 27 of title 67 and all other taxes to which it is
currently subject.
[
Footnote 2]
A "minimum tax" provides, that under § 67-751, the bank shall be
taxed no less than an
ad valorem tax calculated on 60% of
the bank's book value. Tenn.Code Ann. § 67-752 (Supp.1982). The
parties apparently did not consider the "minimum tax" described in
§ 67-752 to be an alternative basis of tax liability in the event
that 67-751 was held unconstitutional. Accordingly, the courts
below had no occasion to consider the constitutionality of §
67-752, and we do not reach this question.
[
Footnote 3]
For purposes of the bank tax, the term "net earnings" is defined
as "[f]ederal taxable income" with specified adjustments. Tenn.Code
Ann. § 67-2704 (Supp.1982). "Federal taxable income" includes
interest on obligations of the United States and its
instrumentalities, but does not include interest on state or
municipal obligations.
See 26 U.S.C. § 103(a). Tennessee
Code Ann. § 67-2704(b)(1)(B) adjusts "federal taxable income" by
adding "[i]nterest income earned on bonds and other obligations of
other states or their political subdivisions, less allowable
amortization." However, no similar adjustment is made to include
interest on obligations of the State of Tennessee or its political
subdivisions in the definition of "net earnings" subject to the
bank tax.
[
Footnote 4]
There are 37 Farm Credit Banks: 12 Federal Land Banks, 12
Federal Intermediate Credit Banks, and 13 Banks for Cooperatives.
They are federal instrumentalities designed to provide a reliable
source of credit for agriculture. Pub.L. 92-181, 85 Stat. 583, 12
U.S.C. § 2001
et seq. See generally United States v.
Mississippi Chemical Corp., 405 U. S. 298,
405 U. S.
301-305 (1972).
The tax on Memphis Bank was also based in part on income from
obligations of the Farmers Home Administration and the Federal
National Mortgage Association.
[
Footnote 5]
In establishing the Federal Farm Credit Banks, Congress made
clear that the obligations of these banks would be immune from
taxation by the States. 12 U.S.C. §§ 2055, 2079, and 2134. We have
no occasion to determine whether the immunity described in these
provisions is broader than that otherwise provided by 31 U.S.C. §
742. We note, however, that, for purposes of federal tax immunity,
our cases have made no distinction between the obligations of the
United States Treasury and the obligations of the Federal Credit
Banks.
See, e.g., Tradesmens National Bank of Oklahoma v.
Oklahoma Tax Comm'n, 309 U. S. 560
(1940);
Schuylkill Trust Co. v. Pennsylvania, 296 U.
S. 113 (1935);
Federal Land Bank v. Crosland,
261 U. S. 374
(1923);
Macallen Co. v. Massachusetts, 279 U.
S. 620 (1929);
Smith v. Kansas City Title &
Trust Co., 255 U. S. 180
(1921).
[
Footnote 6]
The nondiscrimination requirement applies to both franchise
taxes and other nonproperty taxes.
Cf. S.Rep. No. 909,
86th Cong., 1st Sess., 8 (1959). Because we hold that the Tennessee
bank tax discriminates against federal obligations, we need not
reach the question whether the tax may be characterized as a
"franchise or other nonproperty ta[x] in lieu thereof."
[
Footnote 7]
Although the scope of the Federal Government's constitutional
tax immunity has been interpreted more narrowly in recent years,
there has been no departure from the principle that state taxes are
constitutionally invalid if they discriminate against the
Government.
See, e.g., United State v. New Mexico,
455 U. S. 720,
455 U. S. 735,
n. 11 (1982).
[
Footnote 8]
We cannot regard the impact of the discrimination as
de
minimis. According to the United States, which filed a brief
as
amicus curiae in support of reversal, if all 50 States
enacted provisions comparable to the Tennessee bank tax, the United
States would incur additional annual borrowing costs estimated at
$280 million at an interest rate of 12%. Brief for United States as
Amicus Curiae 2.