Attorney General Opinion JM-0207

JIM MAlTOX Attorney General Supreme Court Bulldin P. 0. Box 12549 Aus!in,TX. 7571% 2545 5121475-2501 Telex 9101874.1287 Telecopier 51214750266 714 Jackson. Suite 700 Dallas. TX. 752024M6 214/742-0944 4824 Alberta Ave.. Suite 180 El Paso, TX. 79305.2793 915153534a4 1001 Texas. Suite 700 “ouston.TX. 77CQ2C3111 713/2235895 808 Broadway, Suite 312 LubbOEk. TX. 794013479 808/747-5238 4339 N. Tenth. Suite B McAllen. TX. 78501.lB95 5121882.4547 200 Main Plaza, Suite 400 Ssn Antonio, TX. 782052797 51212254191 An Equal OppOrtUnitYI Affirmative Action Employer The Attormy General of Texas C,ctober 4, 1984 Honorable Bob Bul:lf,ck Comptroller of PuMic Accounts LB.7 State Office :3uilding Austin, Texas 7i3.174 Opinion NO. ~~-207 Re: Whether section 151.311 of the Tax Code unconstitu- tionally discriminates against the federal government Dear Mr. Bullock: Chapter 151 oE the Tax Code imposes limited sales, excise and use taxes on businesses which operate within this state and engage in certain specified activities. Subchapter H of chapter 151 sets forth specific exemptions to the imposition of such a tax. One such exemption, set forth in section 151.311, removes from the ambit of the tax tangible personal property purchased by a contractor and used for the improvement c’f realty belonging to entities which themselves are exempt from the inposition of the tax. Legislation enacted during the 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. you ask us the following tvo questions: I he:r,eby request your opinion on whether the recent anendment to section 151.311, V.T.C.S., the Tax Code, discriminates unconstitutionally against 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 amendment unconstitutionally discriminates betveen contractors who improve realty for the federal government under lump sum contracts and those who do so under separated contracts. 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. PROPERTY USED FOR 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 improvement of 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 1 ted 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 <If’ Freano. 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 hen g( y, 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 .lsrnmes v. 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 the sale of contractors. See 460 The court upheld this richeme of taxation against landowner and on U.S. at 538-540. 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 JIM MATTOX Attorney General of Texas TOM GREEN 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