Untitled Texas Attorney General Opinion ( 1984 )

The Attormy General of Texas
JIM MAlTOX C,ctober 4, 1984
Attorney General
Supreme Court Bulldin Honorable Bob Bul:lf,ck Opinion NO. ``-207
P. 0. Box 12549 Comptroller of PuMic Accounts
Aus!in,TX. 7571% 2545 LB.7 State Office :3uilding Re: Whether section 151.311
5121475-2501 Austin, Texas 7i3.174 of the Tax Code unconstitu-
Telex 9101874.1287
Telecopier 51214750266
tionally discriminates against
the federal government
714 Jackson. Suite 700 Dear Mr. Bullock:
Dallas. TX. 752024M6
214/742-0944
Chapter 151 oE the Tax Code imposes limited sales, excise and use
taxes on businesses which operate within this state and engage in
4824 Alberta Ave.. Suite 180 certain specified activities. Subchapter H of chapter 151 sets forth
El Paso, TX. 79305.2793 specific exemptions to the imposition of such a tax. One such
915153534a4 exemption, set forth in section 151.311, removes from the ambit of the
tax tangible personal property purchased by a contractor and used for
1001 Texas. Suite 700 the improvement c’f realty belonging to entities which themselves are
“ouston.TX. 77CQ2C3111 exempt from the inposition of the tax. Legislation enacted during the
713/2235895 recent special aculsion amended section 151.311 to remove the United
States, its ager:cies. and its instrumentalities from the list of
organizations receiving the section 151.311 exemption. Accordingly.
808 Broadway, Suite 312
LubbOEk. TX. 794013479 you ask us the following tvo questions:
808/747-5238
I he:r,eby request your opinion on whether the
recent anendment to section 151.311, V.T.C.S., the
4339 N. Tenth. Suite B
McAllen. TX. 78501.lB95
Tax Code, discriminates unconstitutionally against
5121882.4547 the Un:lzed States, its agencies and instrumen-
talities. If you conclude that it does not, I
hereby request your further opinion on whether the
200 Main Plaza, Suite 400
amendment unconstitutionally discriminates betveen
Ssn Antonio, TX. 782052797
51212254191
contractors who improve realty for the federal
government under lump sum contracts and those who
do so under separated contracts.
An Equal OppOrtUnitYI
Affirmative Action Employer We answer both your questions in the negative. Section 151.311, as
amended, does not impermissibly discriminate against either the United
States, its agencies. and its instrumentalities or between contractors
who improve realty for the federal government under “lump sum”
contracts and those who do so under “separated” contracts.
Section 151.311 of the Tax Code now provides the following:
p. 930
Honorable Bob Rullock - Page! 2 (JM-207)
Sec. 151.311. PROPERTYUSEDFOR IMPROVEMRNT OF
REALTY OF AN IGMPT ORGANIZATION. Tangible
personal property Purchased by a contractor for
use in the perfo:naance of a contract for the
improvementof recif.ty for an organization exempted
from the taxes imposed by this chapter by Section
151.309(4) or (5) L>r Section 151.310 of this code
is exempted from 1:he taxes imposed by this chapter
to the extent 01’ the value of the tangible
personal property used or consumed or both in the
performance of the! contract. 0hnphasis added).
Acts 1983, 68th Leg., 2nd C.S., ch. 31. art. XII, 51, at 551. The
second portion of the underscored language was added by the amendment.
Section 151.309 of the Tax Code sets forth the following:
1151.309. Govt!rnmental Entities
A taxable item sold, leased, or rented to, or
stored. used, or c:onsumed by, any of the following
governmental entitles is exempted from the taxes
imposed by this chapter:
(1) the United !Itates;
(2) an uninco~:porated instrumentality of the
United States;
(31 a corporation that is an agency or
instrumentality of the United States and is wholly
owned by the United States or by another
corporation wholllr owned by the United States;
(4) this state; or
(5) a county, city, special district, or other
political subdivis:.on of this state.
Section 151.310 of the Tax Code acts to exempt religious, educational,
and public service organizat:.ons as defined therein.
Prior to its amendment, section 151.311 exempted from the
impoeition of the tax tangible personal property used by a contractor
for the improvement of realty belonging to all organizations listed as
exempt in section 151.309. With the amendment to section 151.311. the
only contractors of governmental entities so exempted are those which
contract with the state a:?,! all its political subdivisions. Con-
tractors of the United States, its agencies, and its instrumentalities
are no longer exempted.
.
Bonorable Bob Bullock - Paglr 3 (JM-207)
your first concern is l:hat the statute as amended impermissibly
discriminates against the federal government and its instrumentalities
and thereby violates the Ur;ited States Constitution. Section 151.311
does not affect the tratl:.tional immunity from taxation afforded
political entities and impose a tax directly on political entities;
all that is involved is the tax on tangible personal property used by
a contractor to improve rei.1, property. The federal government is not
being singled out for the imposition of the tax; it is simply being
treated in the same way thz.t, entities in the private sector similarly
situated are treated. The amendment then does not impose a new tax on
the federal government. It serves merely to remove the federal
government from its heretcfore favored status. The significance of
these two aspects of the tz.), will be readily apparent when two recent
United States Supreme Court decisions are analyzed.
It has long been held that a state may not impose a tax directly
upon the United States or any of its instrumentalities. Mayo v.
United States, 319 U.S. 441 (1943). Such immunity from taxation is
grounded in the Supremacy Clause of the United States Constitution,
article VI, clause 2. --
McCulloch v. Maryland, 4 Wheat. 316 (1819). No
such direct tax is imposed here.
A corollary to this principle is that
a tax may be InvLid even though it, does not fall
directly on the lnited States if it operates so as
to discriminate against the Government or those
with whom it deals. (Emphasis added).
United States V. Detroit, 355 U.S. 466. 473 (1958); see also Memphis
Bank 6 Trust Co. v. Garner,
````~- 459 U.S. 392 (1983). A tax-is not invalid
on the basis of pr:ohit 1ted discrimination simply because its
imposition has an effect urcn the United States or because the federal
government shoulders the en,:ire burden of the economic levy. Alabama
v. King & Boozer. 314 U.S. 1 (1941). Specifically,
state taxes on :)ntractors [performing work for
the federal gclvernment] are constitutionally
invalid if they t,iscriminate against the Federal
Government. or substantially interfere with its
activities.
United States v. New Mexicc!, 455 U.S. 720, 735 n.11 (1982). Moreover,
the economic burc:en on a federal function of A
state tax imposed on those who deal with the
Federal Governm,r,lt does not render the tax
unconstitutional so long as the tax is imposed
e
Bonorable Bob Bullock - Pae;e 4 (a-207)
equally on th! other similarly situated
constituent8 of tbe State.
United States v. County 429 U.S. 452, 462 (1977). At
Issue, then, la whether th;federal government or those with whom it
does business have been a:btgled out for imposition of the tax. We
conclude that they have not.
The proper teat to be invoked in order to determine dlscrimina-
tioa has not always been dear, nor have the cases been consistent.
The Supreme Court itself :~a recently indicated that cases in this
field have “been marked from the beginning by inconsistent decisions
and excessively delicate &!cisions.” United States v. New Mexico,
sllprs, at 730. --See Anna ea. 2 L. Ed. 2d 441, 96 L. Ed. 263; see
generally, Annot. 44 L.Ed.27692. For example, one line of cases set
forth an “economic burden” teat, under which the validity of the tax
turned upon whether a tax i,muoaed on a contractor was a substantial
burden ;pon the governmc!nt*. See, e.g., Helvering v. Mountain
Producers Corporation, 303 U.S. 376 (1938); James v. Dravo Contracting
Company. 302 U.S. 134 (1937). Other cases imposed a “legal incidence
teat, which determined whether the interest taxed is that of the
federal government or that of the contractor. See, e.g., United
States V. County of Allegheny, 322 U.S. 174 (1944); Trinltyfana
Construction Company v. GrczJ, 291 U.S. 466 (1934). Regardless of
the teat imposed, It is cL!ar that “in recent years the Supreme Court
has curtailed sharply the doctrine of implied delegated immunity.”
United States v. County of’ Alle g(heny, supia, at 177. See United
States v. Detroit, 355 U.% 466 1958); Oklahoma Tax Commission v.
Texas Company. 336 U.S. 342 (1949). Two recent Supreme Court cases.
however. have removed much of the confusion and enunciated a clear
test.
In United States v. New Mexico, 455 U.S. 720 (1982). the court
restated the rules that il&lied constitutional immunity may not be
conferred merely because the tax has an effect on the United States or
even because the federal government bears the entire economic burden
of the levy (citing Alabama v. King h Boozer. m);
-- or because the
tax falls on the earnings of a contractor providing services to the
federal government (citing .lsrnmesv. Dravo Contracting Company, w);
or because the tax is levied on the use of federal property in private
hands (citing United States-v. City of Detroit, supra); or even in an
instance in which the pr:.\‘ate entity is using federal government
property to provide the government with goods (citing United States v.
Township of Muskegon, w!; City of Detroit v. Murray Corporation,
355 U.S. 489 (1958)) or serrices (citing Curry v. United States. 314
U.S. 14 (1941); United Sta,s!a v. Boyd, supra). Nor may immunity be
conferred when a contractor is purchasing property for the federal
government, even if title I:O the goods vests in the United States
immediately upon shipment by the seller (United States v. New
0. 933
Honorable Bob Bullock - Page 5 (JM-207)
bfexico, scrpra. citing Alabama v. King 6 Boozer, s); or when the
tax is directly pafd witl; federal government ~funds (citing United
States v. Boyd, supra). T1.e court in New Mexico concluded:
What the Court’s cases leave room for, then, is
the conclusion tt&,t tax immunity la appropriate in
only one circumat,snce: when the levy falls on the
United States itself, or on an agency or instru-
mentality so closely connected to the Government
that the two cannot realistically be viewed as
separate entitial:3, at least insofar as the
activity being tcu:ed is concerned.
455 U.S. at 592. This is LI test of legal incidence to be applied when
the taxable entity’s relat:.cln to the federal government is at issue.
In Washington V. Un+d States, 460 U.S. 536 ‘on remand United
States v. Washington, 707 I.2d 381 (9th Cir. 1983), the court upheld
the scheme of sales taxes imooaed bv the state of Washington which
operated in a way seemingl!r mdre disparate in its treatment of federal
contractors than that prcpoaed for imposition in Texas. Prior to
1941, all building contractsrs were treated as consumers for purposes
of the state sales tax. ,411 sales of tangible personal property to
contractors, such as goodzi and materials used in construction, were
subject to the tax regardless of the identity of the organization for
which the construction WZE performed, The legal incidence of the
taxes fell on the contract.,ra; the suppliers who sold the materials
collected the taxes and I:c!mitted them to the state. In 1941, the
state altered the way :ln which its sales tax system affected
contractors by amending its definition of “consumer.” The landowners
who purchased construction work from the contractor, rather than the
contractor himself, were placed within the ambit of the statute. The
legal incidence of the tax fell on the landowner, who paid a tax on
the full price of the conr;truction project rather than just on the
price of the materials us& to constmct the project. The effect of
the amendment was that contractors’ labor costs and markups were
included in the tax base, rather than merely the cost of the tangible
personal property sold to :he contractors. Obviously, this new system
could not be applied t,, construction projects for the federal
government because, as we coted above, the Supremacy Clause precludes
any such imposition directly upon the federal government. Therefore,
when the federal government was the landowner or “consumer”, the state
was not permitted to collz:t any tax on the sale either of tangible
personal property to the cYltractor or of the finished building to the
federal government. In 1975, the state sought to eliminate the
effective tax exemption E.,r construction purchased by the federal
government by re-imposing tie pre-1941 tax on contractors who work for
the federal government. [:I other words, the tax was imposed on the
.
I
Honorable Bob Bullock - Page 6 (Jl4-207)
sale of non-federal by the contractor to the landowner and on
the sale of contractors. See 460 U.S. at 538-540.
The court upheld this richeme of taxation against an argument that
it violated the Supremacy Clause. The federal government’s principal
argument was that the a::ilte singled out a federal activity for
different tax treatment; b(?:auae the state did not impose a sales tax
on contractors who did r,ct work for the federal government, the
argument ran, it diacriml.nated against the federal government and
those with whom it dealt. Cts focal point was the legal incidence of
the tax and the disparity ::n where that incidence fell. In support of
its argument, the United States relied principally upon Phillips
Chemical Company v. Dumaa Independent School District, 361 U.S. 376
(1960). The Supreme Court ;,ejected the argument in Phillips that the
tax was invalid merely because it treated those dealing with the
federal government differeul:ly from those not dealing with the federal
government. Because it has been suggested that Phillips controls the
result in this opinion, we ~111 turn to a discussion of that case.
In Phillips ChemicsJ Company v. Dumaa Independent School
District, supra, the Suprese Court struck down a Texas statute which
taxed lessees of property owned by the United States on the full value
of the premises, while lessees of property owned by the state were
taxed under another statute on the value of the leasehold interest
only. The statute govemi,rg lessees of state-owned property, on its
face, reached the lessees of all property exempt in the hands of its
owner. As a result, only Lzaaz of federal property were singled out
for imposition of a greater tax burden. The court rejected the
argument that the tax was invalid simply because it treated those who
deal with the federal government differently from the manner in which
it treated others. Id. at 379-81. The court declared that a
determination whether7 tax is discriminatorv “requires ‘an
examination of the whole tax structure of the state.“’ ‘Id. at 383
(quoting Tradesmen6 Nationpl Bank v. Oklahoma Tax Commission, 309 U.S.
560, 568 (1940)). The Court, considering the effect of the entire tax
scheme, declared:
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 ard its
political subdirtsiona. are not taxed . . . at
all. The differences . . . seem too impalpable to
warrant such a (:roaa differentiation. It follows
that [the statlce], as applied in this case,
discriminates unconstitutionally against the
United States and its lessee.
-Id. at 387.
Aonorable Bob Bullock - Pags 7 (JM-207)
In rejecting the argunsnt that Phillips controlled and required
the overturning of the Washington tax statute, the Court in Washington
distinguished Phillips; unlike the tax scheme attacked in Phillips,
which effectively singled out for adverse treatment those engaged in
business with the federal government, the Washington statute merely
placed the federal governmslt in a similar position as every private
entity engaged in a conatrtction transaction. The court declared:
In this case, fe,il:ral contractors are required to
pay no greater tax than that placed on private
buyers of constrl:tion work or passed on by them
to their contract,crs. . . .
The important :onsiderstion, therefore, is not
whether the Sta!:o differentiates in determining
what entity shall bear the legal incidence of the
tax. but whethex 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.
460 U.S. at 544. And the court added in a footnote:
The United SNtea argues that it is inappro-
priate to consider the economic burden on the
contractor and t’se 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 Appc!r.ls apparently accepted this
argument. [654 F:!dl at 576.
This wav 0:: lookinn at the problem is
tax on the-materisls he buys. The’contractor will
count the tax auong his costs in setting a price
for the Govemmsznt. Depending on his bargaining
power, he may p.s.;s some or all of the tax on to
the Federal Government when he sets his price. If
he works for a Ilrivate party, the contractor is
required to collect the tax from the purchaser and
D. 936
Honorable Bob Bullock - Page 8 (JM-207)
remit it to the State. The purchaser will count
the tax as part of the price of the building.
Depending on his bargain.ing power, the contractor
may reduce his price to make UD for some or all of
the tax the purchaser must pay: If the tax is the
same. and the p.irtlea have the same bargaining
power, the amoulz:a the purchasers pay and the
amounts the contl?ctors receive will be identical
in the two cases. Thus, it makes no difference to
the contractor (& to the purchasers) which of
them is required ‘:o pay the tax to the State, as
long as they have: the opportunity to allocate the_
burden among themselves by adjusting the price.
(Emphasis added).-
Id. at 536 n.4. Thus, the Court shifted the issue for resolution from
oiaparity in legal inc:.tlence -- an indisputable element of the
Washington tax scheme -- to a question of whether there was an
impermissible disparity in the economic incidence of the tax.
Such a method of analysis is instructive in considering the
effect of the amendment I:O section 151.311. Prior to the recent
amendment, all contractor:3 paid sales taxes on tangible personal
property, except that purchased for use in improving the real property
of organizations which were! themselves exempt. The three kinds of
organizations which were exempt were: (1) the state and its political
aubdivisiona; (2) the feda!ral government and its instrumentalities;
and (3) religioua, educatlcnal, and public service organizations as
defined by the code.
Unlike the tax schemz attacked in Phillips, which effectively
singled out for adverse eccnomic treatment those engaged in business
with the federal government, the recent amendment to section 151.311
simply removed the federal government and its instrumentalities from
the list of exempt organizations for the limited purpose of imposing a
tax already imposed on con!:::actora engaged in business in the private
sector. The amendment to :rl!ction 151.311. like the 1975 amendment to
the Washington tax scheme. simply removes the federal government and
those with whom it deals From favored status and treats them like
similarly situated entities in the private sector. Insofar as this
change involves only the lenal incidence of the tax. it is not
determined under the-court’s teat in Washington v. United-States.
In Washington, the Cou1.t compared the federal government and its
contractors with the priva,:l! sector and its contractors and concluded
that if the burdens imposed on each, direct as well as indirect, are
equal, no problem of impernissible discrimination will arise. As the
opinion states:
0. 937
Eonorable Bob Bullock - Page 9 (JM-207)
[T]he opportunity for the parties to allocate the
economic burden of the tax among themselves [is]
sufficient. No uore should be required here.
(Rmphaais in orlgisal).
Id. at 460 U.S. at 544. I?he amendment to section 151.311. like the
statute in Washington, imposes exactly the same burden, direct as well
es indirect, on the fedeM government and its fontrectors that it
places on private businesses and their contractors. Accordingly, we
conclude that the amendneat does not impermiaaibly discriminate
against either the federal government or those with whom it deals, in
violation of the Supremacy Clause of the United States Constitution.
Your second question asks whether the amendment unconstitu-
tionally diacriminatea betrrc:en contractors who improve realty for the
federal government under “:lump sum” contracts and those who do so
under “separated” contracts. “Separated contract” is defined in your
regulations as follows:
(5) Separate*-contract -- A contract in which
the agreed contract price is divided into a
separately stated agreed contract price for
materials and a separately stated agreed contract
price for skill and labor. If prices of materials
and labor are aererately stated, the fact that the
charges are addeji together and a sum total given
is irrelevant. Coat-plus contracts are generally
regarded as aepar,ated contracts.
34 Tex. Adm. Code $3.291(a)(S). “Lump sum contract” is defined as:
(4) Lump-sum contract -- A contract in which
the agreed contrzct price is one lump-sum amount
and in which the charges for materials are not
separate from tlu! charges for skill and labor.
Separated invoicc!r, issued to the customer will not
change a lump-sus contract into a separated
contract unless c:he invoices are incorporated into
the contract and specifically amend the original
contract.
Comptroller of Public Accounts, 8 Tex. Reg. 1585 (1983) adopted, 8
Tex. Reg. 2280 (1983) (ameutling 34 Tex. Adm. Code 03.291(a)(4)).
The court in Washingl:on has made clear that any distinction
between these two types of contract is a distinction without a
difference:
The important consideration, therefore, is not
whether the Stat.? 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. . . .
9
Ronorable Bob Bullock - Pagl 10 (JM-207)
The State does not discriminate against the
Federal Governmcrt and those with whom it deals
unless it treaI:tI someone else better than it
treats them. (Fa,,tnote omitted].
460.U.S. at 544-545. --- See also Washington. supra (dissenting opinion),
at 274. We conclude thul: section 151.311 does not impermisafbly
discriminate between contractors who improve realty for the federal
government under “lump a&’ contracts and those who do so under
"separated" contracts.
SUMMARY
Section 151.311 of the Tax Code, as amended,
does not impermi``ribly discriminate against either
the United States. its agencies, and its instru-
mentalities or tetween contractors who improve
realty for the federal government under "lump
sum" contracts and those who do so under
“separated” cont’cxts.
I Very I truly you/
&/b MATTOX
JIM
Attorney General of Texas
TOMGREEN
First Assistant Attorney G(?neral
DAVID R. RICHARDS
Executive Assistant Attornq General
Prepared by Jim Moellinger
Assistant Attorney General
APPROVED:
OPINION COMMITTEE
Rick Gilpin, Chairman
Colin Carl
Susan Garrison
Tony Guillory
Jim Moellinger
Nancy Sutton
p. 939