Washington state statutes impose a sales tax on federal
contractors with respect to the sale of materials to such
contractors for work on federal projects, but with regard to
nonfederal construction projects, the tax is imposed on the
landowner, who pays tax on the full price of the project, including
the contractor's labor costs and markup, as well as the cost of
tangible personal property sold to the contractor. The United
States filed suit in Federal District Court, seeking declaratory
and injunctive relief and an order requiring a refund of sales
taxes for which the Federal Government had reimbursed its
contractors. The District Court granted partial summary judgment
for the United States, holding that the statutes discriminate
against federal contractors in violation of the Supremacy Clause of
the Federal Constitution, and the Court of Appeals affirmed.
Held: The Washington statutes are not invalid under the
Supremacy Clause. Pp.
460 U. S.
540-546.
(a) The Federal Government's constitutional immunity from state
taxation may not be conferred on a third party 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. Nor
can immunity be conferred simply because the state tax falls on the
earnings of a contractor providing services to the Government.
United States v. New Mexico, 455 U.
S. 720,
455 U. S. 734.
"So long as the tax is not directly laid on the Federal Government,
it is valid if nondiscriminatory . . . or until Congress declares
otherwise."
United States v. County of Fresno,
429 U. S. 452,
429 U. S. 460.
P.
460 U. S.
540.
(b) Washington's tax is not invalid on the asserted ground that
the State has circumvented the Federal Government's tax immunity by
identifying a federal activity for different tax treatment.
Washington imposes a sales tax of the same rate on all purchases
from nonfederal contractors. The only deviation from equality
between the Federal Government and federal contractors on one hand,
and every other taxpayer on the other hand, is that the former are
taxed on a smaller proportion of the value of the project than the
latter. Thus the Federal Government and its contractors are
better off than other taxpayers, which is not the
mistreatment of the Federal Government against which the Supremacy
Clause
Page 460 U. S. 537
protects. A tax is not invalid simply because it treats those
who deal with the Federal Government differently than it treats
others.
Phillips Chemical Co. v. Dumas Independent School
District, 361 U. S. 376,
distinguished.
Cf. United States v. County of Fresno, supra;
United States v. City of Detroit, 355 U.
S. 466. Pp.
460 U. S.
541-544.
(c) The important consideration is not whether the State
differentiates in determining what entity shall bear the legal
incidence of the tax, but whether the tax is discriminatory with
regard to the economic burdens that result. The State does not
discriminate against the Federal Government and those with whom it
deals unless it treats someone else better than it treats them.
Here, Washington has not singled out contractors who work for the
United States for discriminatory treatment. It has merely
accommodated for the fact that it may not impose a tax directly on
the United States as the project owner. Pp.
460 U. S.
544-546.
654 F.2d 570, reversed.
REHNQUIST, J., delivered the opinion of the Court, in which
BURGER, C.J., and BRENNAN, POWELL, and O'CONNOR, JJ., joined.
BLACKMUN, J., filed a dissenting opinion, in which WHITE, MARSHALL,
and STEVENS, JJ., joined,
post, p.
460 U. S.
547.
JUSTICE REHNQUIST delivered the opinion of the Court.
The State of Washington's principal source of revenue is a sales
and use tax imposed on the buyer or consumer in all retail sales
and consumer uses of tangible personal property. [
Footnote 1]
Page 460 U. S. 538
In this case, the United States contends that one aspect of that
tax statute -- its application to building construction -- is
invalid under the Supremacy Clause of the United States
Constitution. The statutory provisions are most easily understood
in light of their history.
Before 1941, building contractors were treated as consumers for
sales tax purposes. All sales of tangible personal property, such
as construction materials, to contractors were subject to the sales
tax. The legal incidence of this tax was on the contractor; the tax
was collected by suppliers who sold to contractors, and remitted by
them to the State.
In 1941, Washington changed the sales tax system it applied to
contractors by defining the landowner who purchases construction
work from the contractor, rather than the contractor, as the
"consumer." The legal incidence of the tax was now on the
landowner, who paid tax on the full price of the construction
project. The net result was that contractors' labor costs and
markups were added to the tax base, which had previously included
only the cost of tangible personal property sold to
contractors.
The post-1941 tax system could not, however, be applied to
construction for the Federal Government, because the Supremacy
Clause prohibits States from taxing the United States directly.
United States v. New Mexico, 455 U.
S. 720 (1982). Thus, when the United States was the
landowner, Washington did not collect any tax on the sale either of
tangible personal property to the contractor or of the finished
building to the Government.
In 1975, the Washington Legislature acted to eliminate the
complete tax exemption for construction purchased by the United
States. [
Footnote 2] It did so
by reimposing the pre-1941 tax on
Page 460 U. S. 539
contractors that work for the Federal Government ("federal
contractors"). [
Footnote 3]
Thus, Washington now taxes the sale of nonfederal projects to the
landowner, and taxes the sale of materials to federal contractors.
The net result is that, for federal projects, the legal incidence
of the tax falls on the
Page 460 U. S. 540
contractor, rather than the landowner, and the tax is measured
by a lesser amount than the tax on nonfederal projects, because the
contractor's labor costs and markup are not included in the tax
base.
Shortly after the new statute was enacted, the United States
sued the State in the District Court for the Western District of
Washington, seeking a declaratory judgment and a permanent
injunction against the assessment and collection of the sales tax
from federal contractors, and an order requiring the refund of
sales taxes already so collected, for which the United States had
reimbursed its contractors. The District Court granted the United
States' motion for partial summary judgment, holding that the
statutes discriminate against federal contractors in violation of
the Supremacy Clause. On appeal, the Court of Appeals for the Ninth
Circuit affirmed. 654 F.2d 570 (1981). Washington appealed pursuant
to 28 U.S.C. § 1254(2), and we noted probable jurisdiction. 456
U.S. 970 (1982).
In recent years, this Court has examined in some detail the
history of the Federal Government's constitutional immunity from
state taxation.
United States v. New Mexico, supra, at
455 U. S.
730-738;
United States v. County of Fresno,
429 U. S. 452,
429 U. S.
457-464 (1977). There is no reason to repeat these
discussions here; it suffices to restate our conclusions. In
New Mexico, we explained that
"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. . . . Similarly,
immunity cannot be conferred simply because the state tax falls on
the earnings of a contractor providing services to the
Government."
455 U.S. at
455 U. S. 734.
In
Fresno, we stated the rule that,
"[s]o long as the tax is not directly laid on the Federal
Government, it is valid if nondiscriminatory . . . or until
Congress declares otherwise."
429 U.S. at
429 U. S. 460
(citing
James v. Dravo Contracting Co., 302 U.
S. 134,
302 U. S. 150,
302 U. S. 161
(1937)).
Accord, Memphis Bank & Trust Co. v. Garner,
459 U. S. 392,
459 U. S. 397
(1983).
Page 460 U. S. 541
The United States' principal argument is that the tax is invalid
because Washington has circumvented the Federal Government's tax
immunity by identifying a federal activity for different tax
treatment. Brief for United States 10, 21-31; Tr. of Oral Arg.
29-33, 40-41. Because Washington does not impose a sales tax on
contractors who do not work for the Federal Government, the
argument goes, it discriminates against the Federal Government and
those with whom it deals.
Washington does, however, impose a sales tax on all purchases
from contractors who do not deal with the Federal Government. The
tax is imposed on every construction transaction, and the tax rate
is the same for everyone. The only deviation from equality between
the Federal Government and federal contractors, on one hand, and
every other taxpayer, on the other, is that the former are taxed on
a smaller proportion of the value of the project than the latter.
[
Footnote 4] Thus the Federal
Government and federal contractors
Page 460 U. S. 542
are both
better off than other taxpayers, because they
pay less tax than anyone else in the State. This hardly seems, on
its face, to be the mistreatment of the Federal Government against
which the Supremacy Clause protects.
The United States relies upon
Phillips Chemical Co. v. Dumas
Independent School District, 361 U. S. 376
(1960), in which Texas taxed the lessees of property owned by the
State on the value of their leasehold interest, but taxed some
lessees of property owned by the United States on the full value of
the premises. However, the Court there rejected the United States'
argument that the tax was invalid simply because it treats those
who deal with the Federal Government differently than it treats
others. [
Footnote 5]
Id. at
361 U. S. 382.
We plainly stated that a determination whether a tax is
discriminatory "requires
an examination of the whole tax
structure of the state.'" Id. at 361 U. S. 383
(quoting Tradesmens National Bank v. Oklahoma Tax Comm'n,
309 U. S. 560,
309 U. S. 568
(1940)). [Footnote 6] The Texas
tax was invalid only because it imposed "a heavier tax burden on
lessees of federal property than is imposed on lessees of" state
property. [Footnote 7] 361 U.S.
at 361 U. S. 383,
387. See Memphis Bank & Trust Co. v. Garner, supra, at
459 U. S.
398.
Page 460 U. S. 543
In
United States v. County of Fresno, supra, the county
imposed a tax on the owners of real property. Of course, property
owned by the United States was exempt from the tax. Rather than
forgo all revenue from federally owned land, the county taxed
private lessees' interests in real property rented from the Federal
Government and other tax-exempt owners. [
Footnote 8] It did not tax the interests of any lessees
of nonexempt property. We rejected the United States' contention
that the tax system discriminated against lessees of federal
property. Because the economic burden of a tax imposed on the owner
of nonexempt property is ordinarily passed on to the lessee, we
explained that those who leased property from the Federal
Government were no worse off than their counterparts in the private
sector. 429 U.S. at
429 U. S.
464-465.
Similarly, in
United States v. City of Detroit,
355 U. S. 466,
355 U. S.
473-474 (1958), Michigan taxed private property owners,
but not the United States or other exempt owners. Instead, the
State taxed nonexempt parties' use of exempt property. It did not
tax the use of nonexempt property. We upheld the tax because the
State may "equate the tax burden imposed on private enterprise
using exempt property with that carried by similar businesses using
taxed property." [
Footnote 9]
Id. at
355 U. S. 473.
We explained that
"[t]hose using exempt
Page 460 U. S. 544
property are required to pay no greater tax than that placed on
private owners or passed on by them to their business lessees."
Id. at
355 U. S.
473-474.
In this case, federal contractors are required to pay no greater
tax than that placed on private buyers of construction work or
passed on by them to their contractors. The Court of Appeals sought
to distinguish
Detroit on the ground that the tax burden
in this case is not
necessarily shifted to the nonfederal
contractors. 664 F.2d at 576. But there was no proof in either
Detroit or
Fresno that private owners would
necessarily pass the tax on to their lessees; the
opportunity for the parties to allocate the economic
burden of the tax among themselves was sufficient. No more should
be required here.
The important consideration, therefore, is not whether the State
differentiates in determining what entity shall bear the legal
incidence of the tax, but whether the tax is discriminatory with
regard to the economic burdens that result. The only difference
between this case and
Fresno and
Detroit is that
the taxpayer here is a vendor of services to the United States,
rather than one who receives an economic benefit from the Federal
Government. To rest upon this distinction would be to elevate form
over substance. The entire trend of our decisions since
James
v. Dravo Contracting Co., 302 U. S. 134
(1937), has been to avoid "wooden formalism."
United States v.
New Mexico, 455 U.S. at
455 U. S. 737.
See Fresno, 429 U.S. at
429 U. S.
460-461, and n. 9.
See generally Comment,
Federal Immunity from State Taxation, 45 U.Chi.L.Rev. 695, 700-702
(1978). The State does not discriminate against the Federal
Government and those with
Page 460 U. S. 545
whom it deals unless it treats someone else better than it
treats them. [
Footnote
10]
The Court of Appeals thought that the Washington statutes do not
provide a "political check against abuse of the taxing power,"
Fresno, supra, at
429 U. S. 463, because "there is no broad state
constituency taxed as are the prime contractors who deal with the
federal government." 654 F.2d at 577. A "political check" is
provided when a state tax falls on a significant group of state
citizens who can be counted upon to use their votes to keep the
State from raising the tax excessively, and thus placing an unfair
burden on the Federal Government. It has been thought necessary
because the United States does not have a direct voice in the state
legislatures.
See generally Fresno, supra, at 458-459, and
n. 6.
The Court of Appeals focused only on the taxes levied directly
on contractors, and not on "
the whole tax structure of the
state.'" Phillips, 361 U.S. at 361 U. S. 383
(quoting Tradesmens, 309 U.S. at 309 U. S.
568). The tax on federal contractors is part of the same
structure, and imposed at the same rate, as the tax on the
transactions of private landowners and contractors. Indeed, the tax
on contractors is part of a single sales tax scheme that is imposed
at the same rate on every retail transaction in Washington;
virtually every citizen is affected
Page 460 U. S. 546
by the tax in the same way. As long as the tax imposed on those
who deal with the Federal Government is an integral part of a tax
system that applies to the entire State, there is little chance
that the State will take advantage of the Federal Government by
increasing the tax. [
Footnote
11]
In short, Washington has not singled out contractors who work
for the United States for discriminatory treatment. It has merely
accommodated for the fact that it may not impose a tax directly on
the United States as the project owner. This the State may do
without running afoul of the Supremacy Clause. As the Court stated
in
United States v. New Mexico, supra, at
455 U. S.
737-738:
"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 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). . . .
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).
[
Footnote 12]"
The judgment of the Court of Appeals is
Reversed.
Page 460 U. S. 547
[
Footnote 1]
The sales tax is imposed by Chapters 82.04, 82.08, and 82.14 of
the Revised Code of Washington (1981). The use tax is imposed by
Chapters 82.12 and 82.14 (1981). The terms "buyer" and "consumer"
are quite broadly defined in Wash.Rev.Code §§ 82.08.010, 82.04.190
(1981).
[
Footnote 2]
The statute places public housing authorities in the same
category as the Federal Government. No party has argued that this
circumstance affects the analysis of this case, and public housing
authorities will be disregarded throughout this opinion. The
statute treats all branches of state or local government other than
public housing authorities in the same way as private parties.
[
Footnote 3]
As the Court of Appeals explained, 654 F.2d 570, 573, n. 6
(1981):
"The manner in which this was accomplished is somewhat complex.
The change was effected by substitute House Bill No. 86, enacted
into law as Chapter 90, Laws of 1975 (amending Wash.Rev.Code §§
82.04.050 and 82.04.190); Section 5 of Substitute House Bill No.
2736, enacted into law as Section 5 of Chapter 291, Laws of 1975
(amending Wash.Rev.Code § 82.04.050) and House Bill No. 1229,
enacted into law as Chapter 1, Laws of 1975-76 (amending
Wash.Rev.Code §§ 82.12.010 and 82.12.020). These statutes added the
following definition of 'consumer' to Wash.Rev.Code §
82.04.190:"
" 'Consumer' means the following: . . ."
" (6) Any person engaged in the business of constructing,
repairing, decorating, or improving new or existing buildings or
other structures under, upon or above real property of or for the
United States, any instrumentality thereof, or a county or city
housing authority created pursuant to chapter 35.82 RCW, including
the installing or attaching of any article of tangible personal
property therein or thereto, whether or not such personal property
becomes a part of the realty by virtue of installation. Any such
person shall be a consumer within the meaning of this subsection in
respect to tangible personal property incorporated into, installed
in, or attached to such building or other structure by such
person."
"These statutes further expressly excluded from the definition
of 'consumer'"
"the United States, instrumentalities thereof, and county and
city housing authorities created pursuant to chapter 35.82 RCW in
respect to labor and services rendered to their real property."
"Wash.Rev.Code § 82.04.190(4). Wash.Rev.Code § 82.04.050 was
also amended so as to redefine 'retail sale' and 'sale at retail'
to
exclude expressly from their scope contracts calling
for the improvement, repair or construction of real property owned
by the United States or any of its instrumentalities and to
include sales of materials to prime contractors engaged in
construction work on federally owned property. As with the sales
tax, the liability of federal prime construction contractors for
the State's use tax arose basically from the inclusion of such
contractors within the meaning of the term 'consumer,' and the use
of that term in Wash.Rev.Code § 82.12.020, under which the use tax
is levied."
[
Footnote 4]
The United States argues that it is inappropriate to consider
the economic burden on the contractor and the owner together, and
that we should focus solely on the tax the contractor is required
to pay. When the case is viewed in this light, we are told, it is
apparent that federal contractors pay more than other contractors.
The Court of Appeals apparently accepted this argument.
Id. at 576.
This way of looking at the problem is unrealistic. The
appropriate question is whether a contractor who is considering
working for the Federal Government is faced with a cost he would
not have to bear if he were to do the same work for a private
party. If he works for the Federal Government, the contractor is
required to pay a tax on the materials he buys. The contractor will
count the tax among his costs in setting a price for the
Government. Depending on his bargaining power, he may pass some or
all of the tax on to the Federal Government when he sets his price.
If he works for a private party, the contractor is required to
collect the tax from the purchaser and remit it to the State. The
purchaser will count the tax as part of the price of the building.
Depending on his bargaining power, the contractor may reduce his
price to make up for some or all of the tax the purchaser must pay.
If the tax is the same, and the parties have the same bargaining
power, the amounts the purchasers pay and the amounts the
contractors receive will be identical in the two cases. Thus, it
makes no difference to the contractor (or to the purchasers) which
of them is required to pay the tax to the State, as long as they
have the opportunity to allocate the burden among themselves by
adjusting the price.
[
Footnote 5]
We acknowledged that
Macallen Co. v. Massachusetts,
279 U. S. 620
(1929), supported the United States' argument, but explained that,
"to the extent that it does, it no longer has precedential value."
361 U.S. at
361 U. S. 382.
See also United States v. City of Detroit, 355 U.
S. 466,
355 U. S. 472,
n. 2 (1958).
[
Footnote 6]
We noted that
"nothing in
Miller [v. Milwaukee, 272 U. S.
713 (1927), upon which the United States also seeks to
rely], at least as it has been interpreted in later cases, should
be read as indicating that less is required."
361 U.S. at
361 U. S.
383.
[
Footnote 7]
The United States also relies upon
Moses Lake Homes, Inc. v.
Grant County, 365 U. S. 744
(1961). In that case, like in
Phillips, the State taxed
lessees of property owned by the State on a lower valuation than
lessees of property owned by the United States. We held, on the
authority of
Phillips, that the tax was invalid. 365 U.S.
at
365 U. S. 751.
This holding does not support the United States' position any more
than the holding in
Phillips.
The Court of Appeals in
Moses Lake had attempted to
eliminate the discriminatory aspect of the tax by reducing the tax
"to what it would have been if" it had been levied on a state
lessee. 365 U.S. at
365 U. S. 752.
We held that the Court of Appeals did not have the power to revise
the state tax to cure a constitutional defect.
Ibid. This
was nothing more than a ruling on severability, and has no bearing
on this case.
[
Footnote 8]
Nothing in the case turned on the existence of other tax-exempt
owners.
[
Footnote 9]
This answers the United States' contention that the Washington
tax is invalid simply because it is an attempt to circumvent the
Federal Government's tax immunity. The Washington statute is no
different from any other taxing scheme that switches the incidence
of the tax from one party to a transaction to another when the
party that would ordinarily be taxed is immune. In this respect,
this case is no different from
Fresno or
Detroit.
[
Footnote 10]
In this respect, this case is like
United States v.
Department of Revenue of Illinois, 371 U. S.
21 (1962),
summarily aff'g 202 F.
Supp. 757 (ND Ill.). Illinois imposed a retail sales tax on the
retailer and a tax in an identical amount on the purchaser. The
State permitted the retailer to keep the tax he collected from the
purchaser. Although retailers could not, of course, collect the tax
from the United States when it purchased goods from them, they were
nonetheless required to pay the tax imposed on them. Retailers who
dealt with the United States were economically burdened by this
taxing scheme unless they could adjust their prices to pass their
tax burden on to the Federal Government. Nevertheless, this Court
summarily affirmed the District Court's conclusion,
id. at
760, that such disparate treatment of taxpayers resulting from the
United States' immunity from state taxation is not forbidden by the
Supremacy Clause.
[
Footnote 11]
A different situation would be presented if a State imposed a
sales tax on contractors who work for the Federal Government, and
an entirely different kind of tax, such as a head tax or a payroll
tax, on every other business. That, however, is not this case.
[
Footnote 12]
We note that, when Congress has acted in this field, it has
applied a nondiscrimination rule.
See, e.g., Memphis Bank &
Trust Co. v. Garner, 459 U. S. 392
(1983) (construing 31 U.S.C. § 742). If some other test of the
validity of a state tax was necessary to protect the Federal
Government, it would be reasonable to expect that Congress would,
for at least some situation, have devised one.
JUSTICE BLACKMUN, with whom JUSTICE WHITE, JUSTICE MARSHALL, and
JUSTICE STEVENS join, dissenting.
The Court by its ruling in this case continues its recent
tendency [
Footnote 2/1] to be
sympathetic with States in their urgent quest for new taxes. In my
view, however, the Court now oversteps the important and
significant boundary that separates appropriate state taxation,
having only an incidental effect on federal operations, from
inappropriate state taxation that is imposed directly or indirectly
upon the United States, and is therefore invalid under the
Supremacy Clause, Art. VI, cl. 2, of the United States
Constitution. The State of Washington has sought to circumvent the
United States' absolute constitutional immunity from state
taxation. The District Court and the Court of Appeals in this
litigation upheld the Federal Government's protest against the
incursion, and granted the United States declaratory and injunctive
relief. This Court, by reversing that considered judgment, upholds
Washington's circumvention.
I
The Supremacy Clause, of course, is the foundation of
McCulloch v.
Maryland, 4 Wheat. 316 (1819), where the Court laid
down the principle that the property, functions, and
instrumentalities of the Federal Government are immune from
taxation by its constituent parts. Since
McCulloch, the
Court "has never questioned the propriety of absolute federal
immunity from state taxation."
United States v. New
Mexico, 455 U. S. 720,
455 U. S. 733
(1982). And
"a State may not, consistent with the Supremacy Clause . . . lay
a tax 'directly upon the United States,'
Mayo v. United
States, 319 U. S. 441,
319 U. S.
447 (1943)."
Ibid. Federal immunity is "the unavoidable
Page 460 U. S. 548
consequence of that supremacy which the constitution has
declared."
McCulloch v. Maryland, 4 Wheat. at
17 U. S.
436.
An established corollary of this basic principle is that
"a tax may be invalid even though it does not fall directly on
the United States if it operates so as to discriminate against the
Government or those with whom it deals."
United States v. City of Detroit, 355 U.
S. 466,
355 U. S. 473
(1958).
Accord, Memphis Bank & Trust Co. v. Garner,
459 U. S. 392
(1983). Specifically, it
"remains true . . . that state taxes on contractors are
constitutionally invalid if they discriminate against the Federal
Government, or substantially interfere with its activities."
United States v. New Mexico, 455 U.S. at
455 U. S. 735,
n. 11. To be sure,
"the economic burden on a federal function of a state tax
imposed on those who deal with the Federal Government does not
render the tax unconstitutional so long as the tax is imposed
equally on the other similarly situated constituents of the
State."
United States v. County of Fresno, 429 U.
S. 452,
429 U. S. 462
(1977).
But here, contractors for the Federal Government are singled out
for a special tax that applies to no other contractor within the
State of Washington. A contractor who deals with the Federal
Government is subject to the tax. One who deals with the State or a
private party is not subject to the tax. It is as simple as that.
It necessarily follows that the tax violates the Supremacy Clause,
just as if the tax were laid directly upon the United States. To
hold otherwise, by measuring the perceived economic burden, demeans
the principle of
McCulloch v. Maryland.
II
I agree with the Court that Washington's statutory provisions
are best understood "in light of their history."
Ante at
460 U. S. 538.
But that history reveals, it seems to me, the clear purpose of the
Washington Legislature to "get at" the Federal Government and to
overcome its tax immunity. In contrast with the usual silence of
legislative history behind
Page 460 U. S. 549
state enactments, the history here is clear and the purpose is
specific.
A. Washington's sales and use taxes came into being in 1935.
1935 Wash. Laws, ch. 180. Under that original legislation, all
building contractors were treated in precisely the same manner.
Sales of tangible personal property to the contractor were subject
to the retail sales tax, and use of tangible personal property by
the contractor was subjected to the use tax if it had not first
been subjected to the sales tax. There were no exceptions to this
pattern. It applied to contractors who dealt with the Federal and
State Governments, with local governments, and with private
parties.
B. In 1941, however, a major change was effected in the State's
system as it applied to contractors. The taxable transaction no
longer was the sale
to the contractor; instead, the
taxable transaction became the sale
by the contractor to
the property owner. 1941 Wash. Laws, ch. 178, § 2.
See
Klickitat County v. Jenner, 15 Wash. 2d 373, 130 P.2d 880
(1942). The sale of building items
to the contractor then
became a nontaxable wholesale transaction. This change, for
purposes of the present case, had two important consequences. The
first was that the State's sales tax base was expanded. Before
1941, it had included only property sold to the contractor. Now it
included the contractor's total charge to the owner. This charge,
of course, included not only the costs of material, but labor costs
and the contractor's profit as well. The second consequence of the
1941 statute related to construction for the Federal Government.
Here the tax base was diminished. Most sales of property
to the contractor were immune, because they were at
wholesale. But the transaction between the contractor and the
Federal Government also was immune because of the Government's
vendee status and its constitutional immunity from a direct
tax.
Clearly, this 1941 change in the statute was a knowing one.
Washington accepted Federal Government immunity in exchange, as it
were, for the substantial expansion of the sales
Page 460 U. S. 550
tax base for all other construction. Thus, from 1941 through the
first half of 1975, no sales or use taxes were levied on nonroad
construction projects on real property owned by the Federal
Government in the State of Washington. This was the result of a
considered choice by the legislature generally to enlarge its tax
base.
C. This happy situation for federal construction projects in the
State became the subject of the Washington Legislature's concern
and disapproval in 1975. In an attempt to collect sales and use
taxes with respect to material incorporated in building
construction projects owned by the United States, the legislature
redefined the terms "retail sale" and "consumer" in the State's
sales and use tax statutes. [
Footnote
2/2] It is conceded that the target was specific and the change
purposefully made to catch the burgeoning federal construction in
the State. Brief for Appellants 6-8; Tr. of Oral Arg. 7. As a
result, prime contractors performing construction work on real
property owned by the United States now were required to pay sales
and use taxes on material and personal property incorporated into
such construction projects. In stark contrast, however, the 1975
legislation did not amend the State's sales and use tax laws so as
to impose like obligations on contractors performing construction
work on real property owned by the State or by private persons.
With respect to these, any such taxes imposed continued to be the
obligation of the particular project's owner. The enlargement of
the tax base that had been effectuated in 1941 was thus
preserved.
The consequence of the 1975 change is that prime contractors
performing construction work in the State of Washington were
divided into two separate and distinct categories. The first
consisted of those performing construction work for the United
States; these contractors now were liable for sales and use taxes
on material incorporated in their projects.
Page 460 U. S. 551
The second consisted of prime contractors performing
construction work for the State or a private person; these
contractors were not liable for sales and use taxes with respect to
material incorporated therein. Since the 1975 statutory change, the
State has required prime contractors on United States construction
projects to pay state sales and use taxes as "consumers" of
material. But similarly situated prime contractors for the State
and for private persons are not so taxed.
III
It is easy and convenient to argue, as the Court does,
ante at
460 U. S.
540-542, that Washington imposes a sales tax on all
purchases from contractors who do not deal with the Federal
Government, that the tax rate is the same for everyone, and that
the Federal Government is really better off than others because the
tax consequence to it is a lesser amount inasmuch as the
contractor's labor costs and markup are not included in the tax
base. The latter alleged fact, as I shall endeavor to point out, is
a glib and, in my view, unwarranted assumption.
Three cases, in particular, decided by this Court demand
affirmance of the judgment of the Court of Appeals. The first is
Miller v. Milwaukee, 272 U. S. 713
(1927). There the Court struck down a Wisconsin income tax
provision that, similarly, sought to circumvent the tax immunity of
the United States. It held unconstitutional the State's attempt to
single out the income from corporation-owned Government bonds and
to tax a fraction of corporate dividends equal to the fraction of
the corporation's income derived from Government bonds. It was the
selection of such income for tax, to the exclusion of other income,
that was the basis of the decision. Justice Holmes, in speaking for
the Court, stated:
"A system of taxation that applied to stockholders of all
corporations equally might tax . . . the stockholders of a
corporation that had invested all its property in United States
bonds. But it would be a different matter if the state selected
such corporations . . . and taxed their
Page 460 U. S. 552
stockholders alone. It is a familiar principle that conduct
which in usual situations the law protects may become unlawful when
part of a scheme to reach a prohibited result."
Id. at
272 U. S.
714-715.
Such discriminatory selectivity is forbidden by the
Constitution. This analysis was reaffirmed by a unanimous Court in
Phillips Chemical Co. v. Dumas Independent School Dist.,
361 U. S. 376,
361 U. S. 383
(1960), when it pronounced that
Miller v. Milwaukee stands
for the proposition that "a State may not single out those who deal
with the Government, in one capacity or another, for a tax burden
not imposed on others similarly situated." [
Footnote 2/3]
Phillips is the second case. It demonstrates that
discrimination against the Federal Government need not be explicit
in a State's statute to be prohibited by the Supremacy Clause.
There, Texas legislation provided for taxation of private users of
Government realty, but the tax was less for property held under a
lease for three years or more. Because a federal lease was subject
to termination in the event of sale, the lessee could not qualify
for the preferential tax treatment. Accordingly, the Court held the
Texas statute unconstitutional. It said:
"Here, Phillips is taxed . . . on the full value of the real
property which it leases from the Federal Government, while
businesses with similar leases, using exempt property owned by the
State and its political subdivisions, are not taxed on their
leaseholds at all. The differences . . . seem too impalpable to
warrant such a gross differentiation. It follows that [the
statute], as applied in this case, discriminates unconstitutionally
against the United States and its lessee."
361 U.S. at
361 U. S.
387.
Page 460 U. S. 553
The continuing validity of
Phillips was recognized by a
unanimous Court just a few weeks ago.
Memphis Bank & Trust
Co. v. Gailer, 459 U.S. at
459 U. S. 398.
As the Court acknowledges,
ante at
460 U. S. 542,
the Texas tax was said to be invalid "because it imposed
a
heavier tax burden on lessees of federal property than is imposed
on lessees of' state property." The reference to the comparative
weight of the tax was not one to the rate, but to the quantity of
the property interest taxed. So it is here, for what the State of
Washington taxes with respect to a federal building contractor is
different from what it taxes with respect to any other building
contractor. The holding and principle of Phillips are not
so easily to be explained away.
The third case is
Moses Lake Homes, Inc. v. Grant
County, 365 U. S. 744
(1961). There the county attempted to tax the full value of
improvements on privately owned Wherry Act leaseholds of housing
developments on a military base. It taxed other leaseholds,
however, including privately owned leaseholds of tax-exempt state
lands, at a lower valuation. A unanimous Court held the tax
unconstitutional and void, and it reversed the lower court's
judgment to the effect that the Constitution required only that the
amount collectible be reduced to the level of taxes upon other
leaseholds. The Court today would distinguish
Moses Lake
Homes by saying merely that it "does not support the United
States' position any more than the holding in
Phillips."
Ante at
460 U. S.
542-543, n. 7.
It seems to me that
Miller, Phillips, and
Moses
Lake Homes all require the conclusion that the Washington tax
under submission here is invalid as applied to contractors for the
Federal Government. A State cannot single out the Federal
Government and those with whom it deals for special tax burdens.
For more than 30 years, the State of Washington apparently remained
content with the choice it made in its 1941 restructuring of its
sales and use taxes to gain enhanced revenue from other sources at
the price of sacrificing revenue from Federal Government
contractors. A substantial
Page 460 U. S. 554
expansion of construction activity on behalf of the United
States brought to the attention of the state legislature a prized
target for increased state taxation. A statute singling out those
who serve the United States was the result, and equated with a tax
on the United States itself.
The State asserts, and the Court appears to agree,
ante
at
460 U. S.
541-542 and
460 U. S. 543,
that, so long as the monetary burden on Government contractors is
no greater than the burden on others, the discrimination is
constitutionally acceptable. It asserts, in other words, that the
United States has no ground for complaint unless it is placed at a
competitive disadvantage in the marketplace.
This conclusion is misguided as a matter of law. The decision in
Moses Lake Homes establishes that the Supremacy Clause
guarantees more than that the United States will not be placed at a
competitive disadvantage, for there this Court reversed a ruling
that would have resulted in equal tax burdens on federal and
nonfederal lessees. The Supremacy Clause does not merely guarantee
equality; it absolutely immunizes the contractors and lessees of
the United States from discriminatory state taxation.
The Court's economic burden argument is also questionable as a
matter of fact. That the incidence of the tax as applied to federal
contractors does not include labor and profit components does not
necessarily mean that the total costs to the contractors, and hence
to the United States, are less than the total costs to a nonfederal
contractor. Only the federal contractor is required, under
Washington's system, to put out additional tax money "up front," as
the project progresses, to maintain special records, to hire
personnel for such recordkeeping, and to prepare and file returns.
This is not inexpensive activity, and its costs could exceed what
would have been the tax increment on the labor and profit
components. The record does not disclose the facts. [
Footnote 2/4] In
Page 460 U. S. 555
any event, those facts are inconsequential, for it is
discrimination, not the quality of the burden, that carries
unconstitutional consequences. It is "absolute federal immunity
from state taxation" that this Court "has never questioned."
United States v. New Mexico, 455 U.S. at
455 U. S.
733.
The Court's reliance upon
United States v. County of
Fresno, 429 U. S. 452
(1977), deserves passing mention. There, a possessory use tax was
imposed solely on private citizens who used tax-exempt land. The
individual appellants in that case were United States Forest
Service employees who lived in federally owned houses. The Court
concluded, however, that there was no discrimination, for the tax
did not discriminate against the Forest Service or other federal
employees. Indeed, the United States expressly abandoned any claim
that the tax treated federal employees differently from state
employees who lived in state-owned houses.
Id. at
429 U. S. 464,
n. 13.
Finally, it is of interest to note the Court's obvious
discomfort in evaluating the relative burdens of different methods
of taxation by States of the Federal Government and of those with
whom it does business. In
Minneapolis Star & Tribune Co. v.
Minnesota Comm'r of Revenue, also decided today,
post
at
460 U. S.
589-590, n. 12, the Court struggles with the problem of
the economic incidence of a tax on the Federal Government. There it
says that a State remains free to impose the economic incidence of
a tax on the United States so long as that tax is not
discriminatory, and it explains the
Page 460 U. S. 556
result in this Washington case as a mere accommodation. This,
the Court says, may "force us, within limits, . . . to compare the
burdens of two different taxes." For me, that is a new approach to
state taxation of the Federal Government, and it flies in the face
of the Court's simultaneously expressed view that "courts as
institutions are poorly equipped to evaluate with precision the
relative burdens of various methods of taxation."
Post at
460 U. S. 589;
see post at
460 U. S. 600
(REHNQUIST, J., dissenting). I had thought this measure of state
taxation of the Federal Government absolutely improper as a
constitutional matter.
United States v. New Mexico, 455
U.S. at
455 U. S. 733.
Now the Court, in order to prevent abuse, will have to dissect and
carefully measure every state system that imposes its tax burden
upon the United States.
I respectfully dissent.
[
Footnote 2/1]
See, e.g., United States v. County of Fresno,
429 U. S. 452
(1977);
United States v. New Mexico, 455 U.
S. 720 (1982).
But compare Minneapolis Star &
Tribune Co. v. Minnesota Comm'r of Revenue, post, p.
460 U. S. 575.
[
Footnote 2/2]
See 1975 Wash. Laws, 1st Ex. Sess., ch. 90, and ch.
291, § 5, and 1975 Wash. Laws, 2d Ex. Sess., ch. 1.
[
Footnote 2/3]
Miller v. Milwaukee is not to be explained away, as the
Court attempts to do,
ante at
460 U. S. 542,
n. 6, by intimating that later cases have cut back the holding in
Miller. The quotation from
Miller, set forth in
the Court's footnote, appears on the same page of the
Phillips opinion as the Court's more positive and specific
statement of law I have quoted in the text.
[
Footnote 2/4]
Additionally, the Court's assumption,
ante at
460 U. S.
541-542, n. 4, that a federal contractor will be able to
pass the tax through to the Federal Government is highly suspect.
First, the assumption hardly can be applied to a contract made
prior to the 1975 legislation. A contractor trapped with such a
contract has the burden of the tax; a private contractor is not at
the same risk. Second, the Court seems to believe that a federal
contractor has the same amount of bargaining power with the Federal
Government as his private counterpart has with his contractual
partner. I suspect that, in most circumstances, this is not
correct. Under Washington's tax, a private contractor charges his
client the amount of the state tax on top of the contract price; it
is far from clear that a federal contractor is able to pass the tax
on in the same way to the Federal Government.