JIMMAlTOX Attorney General

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AnEqualOppOrtUnitYI Affirmative Action Employer 

# TheAttormy General ofTexas

C,ctober 4, 1984

Honorable BobBul:lf,ck Comptroller of PuMic Accounts LB.7State Office :3uilding Austin, Texas 7i3.174 Opinion NO. ~~-207
Re: Whether section 151.311 of the Tax Code unconstitutionally discriminates against the federal government
DearMr. Bullock: Chapter 151 oEthe TaxCodeimposes limited sales, excise anduse taxes on businesses which operate within this state and engage in certain specified activities. Subchapter Hof 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 andused 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,ebyrequest your opinion on whether the recent anendmentto section 151.311, V.T.C.S., the TaxCode, discriminates unconstitutionally against the Un:lzed States, its agencies and instrumentalities. If you conclude that it does not, I hereby request your further opinion onwhether the amendmentunconstitutionally discriminates betveen contractors who improve realty for the federal government under lumpsumcontracts and those who doso under separated contracts.
Weanswer both your questions in the negative. Section 151.311, as amended, does not impermissibly discriminate against either the United States, its agencies. andits instrumentalities or between contractors who improve realty for the federal government under “lump sum” contracts andthose who dosounder “separated” contracts.
Section 151.311 of the TaxCodenowprovides the following:

p. 930Honorable BobRullock - Page!2 (JM-207)

Sec. 151.311. PROPERTY USED FORIMPROVEMRNT **OF** REALTYOF 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 anorganization exempted from the taxes imposed by this chapter by Section 151.309(4) or (5) L>rSection 151.310 of this code is exempted from 1:hetaxes imposed by this chapter to the extent 01’ the value of the tangible personal property used or consumedor 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 wasadded by the amendment. Section 151.309 of the TaxCode sets forth the following:

1151.309. Govt!rnmental Entities
A taxable item sold, leased, or rented to, or stored. used, or c:onsumedby, anyof 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 andis wholly owned by the United States or by another corporation wholllr ownedby 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 TaxCodeacts to exempt religious, educational, andpublic 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 amendmentto 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, andits instrumentalities are nolonger exempted.

.Bonorable BobBullock - Paglr3 (JM-207)

your first concern is l:hat the statute as amendedimpermissibly discriminates against the federal government andits 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. Thefederal government is not being singled out for the imposition of the tax; it is simply being treated in the samewaythz.t,entities in the private sector similarly situated are treated. The amendmentthen does not impose anewtax on the federal government. It serves merely to remove the federal government from its heretcfore favored status. The significance of these twoaspects of the tz.),will be readily apparent whentwo recent United States SupremeCourt decisions are analyzed.
It has long been held that a state maynot impose a tax directly upon the United States or any of its instrumentalities. Mayov. 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, 4Wheat. 316 (1819). No -- such direct tax is imposed here.
Acorollary to this principle is that

a tax maybe 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 whomit deals. (Emphasis added).
United States V. Detroit, 355 U.S. 466. 473 (1958); see also Memphis Bank6Trust Co. v. Garner, 459U.S. 392 (1983). Atax-is not invalid ~~~~ ~- on the basis of pr:ohit1ted discrimination simply because its imposition has aneffect urcn the United States or because the federal government shoulders the en,:ire burden of the economic levy. Alabama
v. King &Boozer. 314U.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. NewMexicc!, 455U.S. 720, 735n.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 BobBullock - Pae;e4 (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 whomit does business have been a:btgled **out** for imposition of the tax. We conclude that they have not.
Theproper teat to be invoked in order to determine dlscrimina**tioa** has not always been dear, nor have the cases been consistent. The SupremeCourt 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. NewMexico, sllprs, at 730. See Annaea. -- 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,muoaedon a contractor was a substantial burden ;pon the governmc!nt*. See, e.g., Helvering v. Mountain Producers Corporation, 303U.S. 376 (1938); Jamesv. DravoContracting Company.302U.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 Companyv. GrczJ, 291 U.S. 466 (1934). Regardless of the teat imposed, It is cL!ar that “in recent years the SupremeCourt 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); OklahomaTax Commission v. Texas Company. 336 U.S. 342 (1949). Tworecent SupremeCourt cases. however. have removed muchof the confusion and enunciated a clear **test.**
In United States v. NewMexico, 455 U.S. 720 (1982). the court restated the rules that il&lied constitutional immunity maynot be conferred merely because the tax has aneffect on the United States or even because the federal government bears the entire economic burden of the levy (citing Alabamav. **King** h Boozer. m); or because the
-- tax falls on the earnings of a contractor providing services to the federal government (citing .lsrnmes v. DravoContracting Company,w); or because the tax is levied onthe 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 mayimmunity be conferred when a contractor is purchasing property for the federal government, even if title I:Othe goods vests in the United States immediately upon shipment by the seller (United States v. New

**0. 933** Honorable BobBullock - Page 5 (JM-207)

bfexico, scrpra. citing Alabamav. King 6 Boozer, s); or when the tax is directly pafd witl; federal government ~funds (citing United States v. Boyd, supra). T1.ecourt in NewMexico concluded:

Whatthe Court’s cases leave room for, then, is the conclusion tt&,ttax immunityla appropriate in only one circumat,snce: whenthe 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.
455U.S. at 592. This is LItest 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 awayseemingl!r mdredisparate 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. ,411sales 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 WZEperformed, The legal incidence of the taxes fell on the contract.,ra; the suppliers whosold 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 whopurchased 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, whopaid 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 amendmentwas 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 newsystem could not be applied t,, construction projects for the federal government because, as wecoted above, the SupremacyClause precludes any such imposition directly upon the federal government. Therefore, whenthe 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 whowork for the federal government. [:I other words, the tax was imposed on the**. I** 

Honorable BobBullock - Page 6 (Jl4-207)

sale of non-federal by the contractor to the the sale of contractors. See 460
Thecourt upheld this richemeof taxation against landowner andon U.S. at 538-540.

anargument 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 whomit dealt. Cts focal point was the legal incidence of the tax andthe disparity ::nwhere that incidence fell. In support of its argument, the United States relied principally upon Phillips Chemical Companyv. DumaaIndependent School District, 361 U.S. 376 (1960). TheSupremeCourt ;,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 downa Texas statute which taxed lessees of property ownedby the United States on the full value of the premises, while lessees of property ownedby 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. Asaresult, 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 mannerin 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 Tradesmen6Nationpl Bankv. OklahomaTaxCommission, 309U.S. 560, 568 (1940)). TheCourt, considering the effect of the entire tax scheme, declared:

Here, Phillips is taxed

. . . on the full value of the real property which it leases fromthe Federal **Government,** while businesses with similar leases. using exempt property ownedby the State ard its political subdirtsiona. are not taxed

. . . at all. Thedifferences

. . . 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 andits lessee.
Id. at 387. -Aonorable BobBullock - **Pags** 7 (JM-207)

In rejecting the argunsnt that Phillips controlled and required the overturning of theWashington tax statute, the Court inWashington distinguished Phillips; unlike the tax scheme attacked in Phillips, which effectively singled out for adverse treatment those engaged in business 

### withthe federal government, the Washington statute merely placed the federal governmslt in a similar position as every private entity engaged in a conatrtction transaction. Thecourt 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 whomit deals unless it treats someone else better than it treats them.

460 U.S. at 544. Andthe court added in afootnote:

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. Whenthe 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:!dlat 576.
This wav 0:: lookinn at the problem is

tax on the-materisls hebuys. The’contractor will count the tax auong his costs in setting a price for the Govemmsznt. Depending on his bargaining power, he mayp.s.;s some or all of the tax on to the Federal Governmentwhen**he** sets his price. If he works for a Ilrivate party, the contractor is required to collect the tax from the purchaser and

**D.** 

### 936Honorable BobBullock - Page8 (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 someor all of the tax the purchaser mustpay: 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 twocases. Thus, it makesnodifference to the contractor (& to the purchasers) which of themis required ‘:o pay the tax to the State, as long as they have:the opportunity to allocate the_ burden amongthemselves by adjusting the price. (Emphasis added).-
Id. at 536n.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 amendmentI:Osection 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 whichwere exemptwere: (1) the state andits 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 amendmentto section 151.311 simply removed the federal government and its instrumentalities from the list of exemptorganizations for the limited purpose of imposing a tax already imposed on con!:::actora engaged in business in the private sector. Theamendmentto :rl!ction 151.311. like the 1975amendmentto **the** Washington tax scheme. simply removes the federal government and those with whomit deals Fromfavored 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.tcompared the federal government and its contractors with the priva,:l! sector andits contractors andconcluded 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.** 937Eonorable BobBullock - Page9 (JM-207)

[T]he opportunity for the parties to allocate the
**economic** burden of the **tax** amongthemselves [is] sufficient. No uore should be required here. (Rmphaais in orlgisal).
Id. at 460 U.S. at 544. I?heamendmentto section 151.311. like the statute in Washington, imposes exactly the same burden, direct aswell 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 whomit deals, in violation of the SupremacyClause of the United States Constitution.
Your second question asks whether the amendment unconstitutionally diacriminatea betrrc:encontractors whoimprove 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 -- Acontract 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 andlabor. If prices of materials andlabor are aererately stated, the fact that the charges are addeji together and a sumtotal given is irrelevant. Coat-plus contracts are generally regarded as aepar,ated contracts.
34Tex. Adm.Code $3.291(a)(S). “Lumpsumcontract” is defined as:

(4) Lump-sumcontract -- A contract in which the agreed contrzct price is one lump-sumamount 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:heinvoices are incorporated into the contract and specifically amendthe original contract. Comptroller of Public Accounts, 8 Tex. Reg. 1585 (1983) adopted, 8 Tex. Reg. 2280 (1983) (ameutling34Tex. Adm.Code03.291(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 BobBullock - Pagl 10 (JM-207)

The State does **not** discriminate against the Federal Governmcrt and those with whomit deals unless it treaI:tI someone else better than it treats them. (Fa,,tnote omitted].
460.U.S. at544-545. 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

VeryItruly you/ 

# &/b

JIM MATTOX Attorney General of Texas
TOM GREEN First Assistant Attorney G(?neral
DAVIDR. RICHARDS Executive Assistant Attornq General Prepared byJimMoellinger Assistant Attorney General
APPROVED: OPINIONCOMMITTEE
Rick Gilpin, Chairman Colin Carl SusanGarrison TonyGuillory JimMoellinger NancySutton

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