JIM MAlTOX 

Attorney General 

Supreme Court Bulldin 

P. 0. Box 12549 

Aus!in,TX. 7571% 2545 

5121475-2501 

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LubbOEk. TX. 794013479 

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McAllen. TX. 78501.lB95 

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Ssn Antonio, TX. 782052797 

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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 unconstitutionally 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 instrumentalities. 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. Contractors 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 dlscriminatioa 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( hen 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 instrumentality 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 inappropriate 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 unconstitutionally 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 instrumentalities 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