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## 'THEAITORNEY GENERAL

OF TEXAS

GERALD C. MANN

Honorable George H. Sheppard Comptroller of PublicAccounts Austin, Texas Overruled in part by O-4192

Dear Sir: OpinionNo. O-2317 Re: Is a Post Exchange, operated and maintained for the convenience of officers and enlistedmen of the Army engaged inwar games in East Texas and Louisiana, such an lnstrumentality or agency of the Federal government as to confer immunity from the cigarette stamp tax (Article7047c-1,Vernon's Annotated Civil Statutes)upon either the sale in Texas ofunstamped cigarettes to the Exchange by licenseddistributors in the State, or the importationofunstamped cigarettes from other states by said Post Exchange and the sale of such cigarettes to Army personnel?

We have for a,ttention and answer your letter of May 2, 1940,wherein you submit for the opinion of thisDepartment the two followingquestj~~ons and factual statement,which we quote:

"Wehavebeen asked by severalqualified cigarettedistributorswhether ornot theywould be liable for the tax on cigarettes if soldunstamped and delivered in their own trucks to a post exchange, or one of itsbranches,which is being operated in connectionwith the regular United States Army maneuvers now taking place in the vfcinity of San Augustine, Texas. The cigarette tax above referred to is leviedunder Chapter 241, Regular Session of the Forty-fourthLegislature and amended by Senate Bill 247, Regular Session of the Forty-fifth Legislature.

"The facts pertaining to the prospective purchasers ofunstamped cigarettes from the qualified cigarettedistributors are as follows:Hon. George R. Sheppard, page 2 O-2317

"1

. All troops taking part in the maneuvers are members of the regular U. S. Army and not National Guard or State Militia troops.

"2

. The Post Exchange and itsbranches,which operate exclusively for the benef'l~t of the Regular U. S. Army troops,are not located on property over which jurisdictionhas been ceded to theUnited States governmentby the State of Texas. 

## “3. The buildingsused by the Post Exchange for warehouses, storeroomand office are rented from local interestand not owned or constructedby the United States government. The rent for all such buildings is paid out of Post Exchange funds.


## “4

. The capital for stockingand paying the expenses of operation of the PostExchange and its branches is raised by the sale of shares to various companies forwhich it is operated. The companies pay for these shares out of surplus funds accumulated fromunused appropriationsby Congress for company mess purposes. 

## “5

. The Post Exchange and itsbranches are operatedby Army personnel and supervisedby officers of the Regular Army. 

## “6

. All books and records, pertaining to the receipts and disbursements and general operations of the Post Exchange, are auditedby Army auditors.


## “7

. All bills for merchandise,purchasedby either the Post Exchange or itsbranches,must be submitted to the officer in chcrgs of the Post Exchange for payment.

"8

. Any profit made from the operation of the Post Exchanre is divided among the companies according to the number of shares held by each company.
This profit is deposited to the Company fund and may be expended for entertainmentor other things beneficialwhich may be thought advisableby the Company Commander. 

## “9

. The Post Exchange does not sell cigarettes to the general public.

"WLllyou please advise me of your opfnlon in regard to the following questions:Hon. George H. Sheppard, page 3 o-2317

"(a) Would a Texas cigarette 'distributor'be liable for the tax on unstamped cigarettes sold and deliveredby him to a Regular Army Post Exchange or itsbranches,when operated In the manner and under the conditions as above described?

"(b) Is a Post Exchange,when operated In the
manner above described, a cigarettedistributor, as defined by Subsection 'in' of Section 1 ofArticle 7047c-1,Vernon's Annotated Civil Statutes, and llable for the tax on the 'firstsale' in this 'Stateof cigarettes imported from other States, as leviedby Section 2 of the above mentioned Article?"

Under the authorities,as we read them, the right of a state to levy and collect various excise taxesupon the sale
oruse of commoditiesby and through Post Exchanges operated in connectionwith theArmy of theUnited States, turnsupon either of two grounds or theories: (1) the absence of constitutional and legislative jurisdictionover the territorywithinwhich the sale oruse of the commodity sought to be taxed is consummated or occurs, and (2) the immunity,under the Constitutionof theUnited States, of the Federal government,
or any of itsdepartments, agents, or instrumentalltFes, created to discharge the constitutional functions of government, from taxation at the hands of the State under its revenuepowers.
The first theory of tax immunity is removed from thZs case, because it is made to appear from your letter that the Post Exchanges involvedare not locatedwithin the confines of a military reservation or other territory overwhich exclusive constitutionaland legislative jurisdictionhas been ceded by the Chief Executive of Texas to the United States,
so as to remove sales consummatedwithin such territory from the State's taxing power, under the authority of Standard Oil Co. of Californiavs. California, 291U. S. 242; 54 Sup. Ct. 381; 78 Ed. 775.

The single issue for our determination In the instant case, and the oneupon which turns the answer to both questions submittedby you, iswhether or not Post Exchanges, organized, maintained and operated,under the facts and circumstances outlined, at various points In Texas subject to the political and legislative jurisdictionof the State, are departments, agencies or instrumentalitiesof the Federal government, **SO** as to allow the purchase by them tax free, of cigarettes from licensed dealers in Texas, or the importationof suchunstamped cigarettes from outside the State, andtie sale or use of such cigaretteswithout the affixing of the State revenue stamps.Hon. George H. Sheppard, page 4 O-2317

For the historicalbackground and development of a Post Exchange as constitutedunder modern conditions, the~language of the court in the case of Keane vs.United States, 272 Fed. 577, is enlightening:

'Wehave no definite informationat hand as to how orwhen the first post exchange known in modern parlancewas established;but it can safely be said that such a post exchangeas we are now discussing Is a descendant of the old sutler's camp. The dictionary tellsus that a sutlerwas or is a small trader,who follows an army, and who is licensed to sellgoods, especially edibles, to the soldiers. In otherwords, the post exchange is nothing more nor less than a stationary soldiers' co-operative sutler's camp or store. When troops
are in activewarfare and constantly on the march,' manifestly a post exchange could not be maintained, and under such circumstances the sutler plies his trade, being authorized to do so by the commanding officer;but where soldiers are stationed for considerableperiods of time at a post, then it becomes feasible for them to do away with the inconvenience of tradingwith a poorly equipped sutler, and with the necessity of paying him profits on his sales, and, Instead, to establish for their own convenience and pleasure the soldiers'modern private store or exchange."

That Post Exchanges are a convenient and useful part ofArmy life, in ministering to such daily requirements of Army personnel as the Government has not deemed necessary to provide, cannotbe gainsaid, and this fact finds recognition In the special Post Exchange regulations issuedby theWar Department, and by appropriationsby Congress for the construction and equipment of suitablebuildings for the purpose. But the authorities, although taking cognizance of these facts, have,with the exception of one hereinafterdlscussed,uniformly held that Post Exchangeswere not thereby made agencies
or instrumentalitiesof the Federal government.
Although not Involving a tax question, but rather a question of whether or not funds realized from a Post Exchange belonged to the United States so that an indictmentwould lie for defrauding in connection therewith,we consider the case of Reane vs.United States, supra, to be highly persuasive, in holding that the prosecutionwould fail because a **Post** Exchangewas not a department of the government and theUnited States was not responsible for its contracts and obligations and hadno interest in its funds, although Its businesswasHon. George R. Sheppard, page 5 o-2317

conductedby an officerdetailed for the purpose. We quote Copiously from this opinionbecause the modus operand1 of the Post Exchange involved therein closely parallels the ones in the instant case:

"Nowhere in this pamphlet of specialregulations is it required or commanded that post exchanges shallbe establlshed. Indeed, it Is expressly stated in these SpecialRegulations that these exchangesare voluntary organizations among the soldiers themselves. As best we can gather from these regulations, a post exchange Isa voluntary,unincorporated co-operative store at, near, or on a military post; the Secretary of War giving the soldiersat such post a license or privilege to form such a co-operative store. The Secretary ofWar, in effect, says, in these regulations, to the soldiers, thatwhile they are not required to establishpost exchanges,yet, if they do establish them, that they should have for their purpose the supplying to the troops at reasonableprices of the articles of ordinaryuse, wear, and consumption,not suppliedby the government, and to afford them means of rational recreation and amusement, and through exchangeprofits to provide,when necessary, the means for improving the messes. The regulations suggest that an assessment shouldbe made upon the several organizations contributing to the exchange for the purpose of procuringnecessary articles, and that all articles thus procured must be paid for by the first profits of the institution; it being distinctlyunderstood that the officers incurringdebts
on behalf of the exchange,and not the government,
are responsible for the payment thereof.

"Membersof the exchangemust be organizations, companies,detachments, and individual enlistedmen cannotbecome members, unless three or more of them
are associated in a mess. The specialmanagement of the exchange is conductedby an officerdeslgnated and detailed by the commanding officer, and this officeris responsible for the management of the exchange,and is regarded as the custodian of the fundsbelonging to it. When the exchange is free from debt, at the end of each quarter, a sum sufficient to cover anticipated debts is set aside
as a reserve fund, and a percentage of the remainder is distributed among the members, and other parts thereof are set aside for specificpurposes, and theHon. George H. Sheppard, page 6 O-2317

remainder may be divided among the organizationscontributing to the exchange on an equitablebasis; and
a division of the cash resources of the exchange is madewhenever the troops belonging to the exchange,
or any part of them, change their station, and when all the units composingmembership in an exchange have gone away or removed from the post, the exchange stockmust be reduced to the lowest extent possible and converted into cash; and prior to the departure of the troops the property of the exchange is sold and the proceeds, togetherwith the cash, are distributed among the organizationsaccording to the number of shares held by each. Post exchange funds, when deposited in a bank, must be placed under their officialdesignations,andnot to the credit of the officerwho is their custodian,and such funds of a post exchangeare especiallydeclared to be not publicmoneys within the meaning of sections 5488, 5499, and 5492 of the Revised Statutes (Corn?. St. 1 1 10255, 10302, 10259), and misapplication of such funds by an officer having their custody is punishable, not under the general law,but under the Articles of War. Nowhere In these regulations do we find a rule or even a suggestion thatunder any possible contingency does or would the government
ever receive or come into possession of any of the funds or assets of the exchange."
Bearing more specificallyupon the taxabilityby a state of a commodity sold to a post exchange of a IJnFtedStates Army,
we cite the case of People vs. Standard Oil Co. of California, 22 Pac. (2d) 2, and quote therefrom the following conclusive language:

"It is next urged that a sale to the army post exchange is a sale to a department of the government of theUnited States for officl.al use of saidgovernment. Manifestly these sales
are neither to a 'department'of the government
nor for officialuse. The gasolinewas sold to the exchange for resale to certain classes of persons for their private consumption. We have
no hesitation in concluding that the legislative Intentwas to include the sales in question in computing the tax- But these observationsdo not determine the cause.

"We are pointed to the decision of the Supreme Court of theUnited States in the case of Panhandle Oil co. v. Mississippi, 277 U. S. 218, 48 S. Ct. 451,.

Hon. George H. Sheppard, page 7 O-2317

452, 72 L. Ed. 857, 56 A. L. R. 583, where the court used language showing that an importantquestion is here involved. There, as here, the state of Mississippi imposedan excise tax upon distrLbutors of gasolinemeasured by saleswlthln that state. The state sued the 011 company to recoverbalances representedby sales to the United States foruse of its CoastGuard service operating in the Gulf of Mexico and for its veterans' hospital at Gulfport.. The saleswere made directly to the government, and the court held that said statutewas inoperative as to them,using language in part as follows: 'Thestatesmay not burden or interfere with the exertion of national power or make It a source of revenue or take the funds raised or tax the means used for the performance of federal functions. * * * The amount of money claimed by the State rises and falls precisely as does the quantity of gasoline so securedby the government. It depends immediatelyupon the number of gallons. The necessary operation of these enactmentswhen
so construed Is directly to retard, impede, and burden the exertionby theUnited States of its constitutionalpowers to operate the fleet and hospital. * * *' This was a five-fourdecision of the court; JusticesHolmes, Brandeis, McReynolds, and Stone dissented, JusticesHolmes and McReynolds writing opinions.

"But it seems tous that a well-founded distinctionmay be found between the sales there involved and sales to an army post exchange. The commanding officer of an army post isnot required to organize the post exchangeunless there is need for it orunless the units present desire to participate therein or unless the personnel is suf--' ficient to profitablymaintain and support such an institution. In otherwords, a post exchange Is at most but a government agency, designed to operate for the welfare of the troops such activities as a general store,meat or vegetablemarket or gasoline station, or a restaurant, gymnasium, recreation room, llbrary, or theater. Thus it is not properly describedby the word 'department'of the government in its activities. It is largely a co-operative institution, intended to supply the needs and promote the moral and civic betterment of the troops at the post.

"It Is supervisedby an exchange council, com-Hon. GeorgeH. Sheppard, page 8 O-2317

posed of the commanding officers of the respective units represented in the organization. The funds of~the exchangeare not public moneys within the meaning of the Revised Statutes of theUnited States
!&77)). Stats. 1 1 5488, 5490, 5492 (18USCA 1 1 173,

The exchange is not instituted-by the aid'of funds from theUnited States nor are its avails paid into the treasury. It Is a voluntary, unincorporated, co-operative assoclatLon inwhich all units share the benefits and all assume a posltion analogous to that of partners. In the event of the inability of the post exchange to pay its debts, the organizationswhich participate in it
are supposed themselves to pay off all such obligations In proportion to their respective interests in the exchange. Neither the governmentnor the.' officers of the post wherein the exchange is located
are liable for its debts. The property of the post exchange is not to be treated as property belonging to theUnited States. The exchange itself is liable for certain federal taxes, such as the stamp tax imposedby the InternalRevenue Act, the freight tax imposedby theVar Revenue Act of 1917 (40Stat. 300), a floor tax on tobaccounder the Revenue Act of 1918, 1 702 (40Stat. 1.118);sales of ice
cream and soft drinks by a post exchangeare subject to taxunder the same act. From these and other observations that might be made, touching the nature of the organization of an army post exchange,we are of the opinion that it is an organization largely engaged in business of a private nature and that sales to it shouldnot be beyond the reach of the taxing power of the statewherein it is located and that it is not one of those agencies through which the federalgovernment directly exercises its constitutional or sovereign power."
Although the judgment of the Supreme Court of Californ1a In the above casewas reversed by the Supreme Court of the United States in the case of Standard Oil Co. of California vs. Callfornla, cited at the outset of this opinion, such reversal was not upon the point of law now under discussion, but rather upon a question of territorial jurisdiction. Consequently, the discussion of the court, above quoted, is not in anywise discounted thereby.

The case of Pan-American Petroleum Corp. vs. State'of Alabama, 67 Fed. (2d) 590, likewiseupholds the right of a state to tax the sale of a commodity, even though the tax is passed on to the Post Exchange of the regular Army, as the,

Bon. George H. Sheppard, page 9 O-2317

purchaser thereof. In this connection, the court said:

II

....Furthermore.a post exchange is, of course,not the government;nor is it a department or instrumentalitythereof. On the contrary, a post exchange is a voluntary,unincorporated, co-operativeassociation of army organizations in which all share as partners in the profits and losses. The government hasno share in the profits, lossess and isnot bound by the

We are therefore of the opinion that salesmade by appellant to the post exchanges at Camp McClellan and Maxwell Field are not exempt from the state excise taxes. Peo Standard Oil Co. (Cal.Sup.) 22 P. (2d Ple v. 2."

The case of United States vs. Query et al., 21 Fed. Sup. 784, stands alone in opposition to the principle of law announced in the above discussed cases. On an injunction brought by theUnited States to enjoin the South Carolina Tax Commission from enforcing certain provisions of its
revenue statutes, the court held that a Civilian Conservation Corps Post Exchange, establishedpursuant to statutoryauthority and operated for thewelfare of the camp's enrollees is a Federal instrumentalitynot subject to the license ta; imposedby State statute on the privilege of selling certain articles, and not subject to the supervisoryauthority of the State Tax Commission. Title 16,USCA, Section 584p, appropriates money out of the Federal Treasury "topay any expense in connectionwith the conduct, any camp exchange" operation ormanagement of establishedand operated in accordance with regulations prescribedby theDirector. its opinion, The court, in

seizesupon this recognition by Congress and the utilization of Federal funds to pay current operating expenses of the camp exchange,as stamping such exchanges'withthe character of Federal agencies or instrumentalities,protected, under general principles of constitutional law, from State taxation. Under the facts before us, it does not appear that funds from the Federal Treasury are used to defray operating expenses,nor havewe found an act of Congressauthorizing any appropriation except for the construction of the buildingswhich house such exchanges. This point of difference may serve to reconcile the apparent conflictbetween these authorities,but ifnot, we are not inclined to follow this decision of a Federal district.courtagainst the threewell considereddecisions of appellate courts, both State and Federal, which, to our mind, have announced the better rule of law.

But even conceding thatwe have incorrectly interpreted,

Hon. George H. Sheppard, page 10 O-2317

. the decisions of our courts to hold that a Post Exchange, organizedand maintained in connectionwith the regularArmy, isnot an agency or instrumentalityof the Federal government in the constitutional sense, itwould neverthelessbe
our opinion that the excise stamp tax leviedupon the sable of cigarettes to or by a Post Exchange for the personaluse of officers and men of the regular Army, would not be a burden upon a Federal function, obnoxious to the Federal Constitution.

Prior to our examinationof the recent trend.'dfdecisions of the Supreme Court of theUnited States, and~inferior Federal and State tribunals,we would have said that this question was conclusively foreclosedby the decision of the Supreme Court of theUnited States in the case of Panhandle Oil Co. vs. State of Mississippi, 277 U. S. 218; 48 Sup. Ct.' 451~;72 L. Ed. 857. This case involved the constitutionality of an attempted levy and collectionby a state of an excise tax from a local distributor ofmotor fuel,upon motor fuels soldby such distributor directly to the Navy for use in certain boats belonging to the United StatesNavy. The contention
was made In this case that the taxwas levied as an occupatYon tax'upon the local dealer or distributor,measuredby the gal-~ lonage sold, and the mere fact that such dealer or distributor,
as a business practice, passed such tax on to the consumer, who in this instance chanced to be the United States'government, would not render such tax unconstitutional as a direct burden upon a Federal instrumentality. Although th~iscontentionwas rejected by the Su reme Court, a vigorous dissent
was enteredby Mr. Justice Rolmes,who pointed out that, carried to itsultimate conclusion, such principle of law would result in employees of the various departments and bureaus of the Federal governmentbeing allowed to purchase clothes and various other articles and commoditiesupon which the various states had levied.sales taxes, merely by virtue of the fact that such tax was passed on to the consumer as part of the cost of the product.

This dlssentlng opinion of Mr. JusticeHolmes was vindicatedwhen the Supreme Court, in the case of James vs. Dravo Contracting Co., 302u. S. 134; 82 L. Ed. 155, limited its own decision in the Panhandle case discussed above, by holding~thatan occupation tax measured by gross income is not invalidwhen imposedby a Stateupon a contractorwith theUnited States as laying a direct burden on the Federal government, even though the imposition of the taxmay increase the cost to the government of the work contracted to be done. Although not expressly overruled,the Supreme Court inthis
case expresslymentioned the decision in the case of Panhandle Oil Co. vs. Mississippi, supra, and stated that it and similarHon. George H. Sheppard,page 11 O-2317

cases had been distinguishedand limited to their particular facts.

Federal Land Bank of St. Paul vs.D. E. Ochfora, 287 N.W. 522, cites and follows the authority of James vs.Dravo ContractingCo., supra, and numerous other decisions of the Supreme Court of theUnited States,modifying the principle of Federal imrrmnity established inthe Panhandle case, and holds that a Federal Land Bank, although admittedly an instrument or agency of the Federal government,was yet subject to an excise tax levied by a stateupon the sale to I~t of motor fuel.

Like the motor fuel tax in the case last cited and the occupation tax measured by gross incomeupon the contractor in the leading case of James vs.Dravo Contracting Co., supra, the cigarette tax levy involved in the instantquestion is an excise tax leviedupon the sale or use of cigarettes by licensed distributors in Texas. This tax is not leviedupon Post Exchanges of theArmy, as such, and the fact that such 'oaxis passed on to such Post Exchanges by licenseddistri~- butors in Texas as part of the purchaseprice, constitutes' t,oo remote a burden to render such a taxunconstitutional as a taxupon an agency or an instrumentalityof the Federal government,under the recent trend of authoritiesmodifying if not indirectly overrulingthe much-discussed and muchcriticised principle of Federal tax immunity announced in the
case of Panhandle Oil Co. vs. State of Mississippi, supra.

Even agencies and instrumentalitiesof theFederal governmentmay engage in practices and functions outside the protec~tlon

of the Constitution and thereby become subject to the laws of a &ate regulating or taxing such extragovernmental function. The sale of cigarettes for the personaluse and convenience of officersand men of theArmy fallswithin this classificationand shouldbe subject to the excise tax levied thereonby the State of Texas. The pointwe stress is that for a Federal agency or instrumentalityto be immune from Sta,tetaxation, itsactivities and functionsmust be in fur- ,theranceof the constitutionalpowers of the Federal government. We can find no rational relationshipbetween smoking cigarettesby officers and men, insofar as the constitutional functions and purposes of the government is concerned, and the proper functioning of the Army. To hold otherwise would be to extend the tax immunity to smokers of cigarettes in the postal service and in the various other departments of the Federa'l

government. Authorities supporting our posItiOn here, that Federal agencies or instrumentalitieswhich also engage in extragovernmentalfunctionsmay not invokeFederal immunity from taxationunless the Federal functions are un-Hon. George H. Sheppard, page 12 o-2317

duly burdened, are EducationalFilms Corporation of America
vs.Ward, 51 Sup. Ct. 170; 282U. S. 379; Santa Clara Co. vs. Southern PacificRg., la Fed. 385, aff. 118 u. s. 394;Alward Johnson 282U. GSihuts vs: Bunn 5. 509; 51 SUP. Ct. 273; 75 L. Ed. 496; 282 U. S. 216; 51 Sup. Ct. 125; 75 L. Ed. 304; Tirrellbs. johnston, 171 Atl. 641.

We answer both questions submitted in the affirmative. Licensed cigarette distributors in Texas may not lawfully sell unstamped cigarettes to regular Army Post Exchanges .or branches, operated in the mode and manner outlined,nor may such exchangesresort to the expediency of importing cigarettes to escape the tax collectible on intra-state sales,because they in turnwould become "distributors"and liable for the tax accruing on a "first sale" as defined by the Cigarette Tax Law of Texas.

Yours very truly

ATTORNEY GENERAL OF TEXAS

By s/Pat PI.

Neff, Jr. Pat M. Neff, Jr. Assistant

PMN/oe/wc

APPROVED MAY 7, 1940 s/Gerald C.Mann ATTORNEY GENERAL OF TEXAS
Approved Opinion CommitteeBy s/BwB Chairman