- . 

'THEAITORNEY GENERAL 

OF TEXAS 

GERALD C. MANN 

Honorable George H. Sheppard 

Comptroller of Public Accounts 

Austin, Texas 

Overruled in part 

by O-4192 

Dear Sir: Opinion No. O-2317 

Re: Is a Post Exchange, operated and 

maintained for the convenience of 

officers and enlisted men of the 

Army engaged in war games in East 

Texas and Louisiana, such an lnstrumentality or agency of the 

Federal government as to confer 

immunity from the cigarette stamp 

tax (Article 7047c-1, Vernon's 

Annotated Civil Statutes) upon 

either the sale in Texas of unstamped cigarettes to the Exchange 

by licensed distributors in the 

State, or the importation of unstamped 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 this Department 

the two following questj~~ons and factual statement, which we 

quote: 

"We have been asked by several qualified 

cigarette distributors whether or not they would 

be liable for the tax on cigarettes if sold unstamped and delivered in their own trucks to a 

post exchange, or one of its branches, which is 

being operated in connection with the regular 

United States Army maneuvers now taking place in 

the vfcinity of San Augustine, Texas. The cigarette tax above referred to is levied under Chapter 

241, Regular Session of the Forty-fourth Legislature 

and amended by Senate Bill 247, Regular Session 

of the Forty-fifth Legislature. 

"The facts pertaining to the prospective 

purchasers of unstamped cigarettes from the qualified cigarette distributors 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 its branches, which 

operate exclusively for the benef'l~t of the Regular 

U. S. Army troops, are not located on property over 

which jurisdiction has been ceded to the United 

States government by the State of Texas. 

“3. The buildings used by the Post Exchange for 

warehouses, storeroom and office are rented from 

local interest and not owned or constructed by the 

United States government. The rent for all such 

buildings is paid out of Post Exchange funds. 

“4 . The capital for stocking and paying the 

expenses of operation of the Post Exchange and its 

branches is raised by the sale of shares to various 

companies for which it is operated. The companies 

pay for these shares out of surplus funds accumulated 

from unused appropriations by Congress for company 

mess purposes. 

“5 . The Post Exchange and its branches are 

operated by Army personnel and supervised by officers 

of the Regular Army. 

“6 . All books and records, pertaining to the 

receipts and disbursements and general operations 

of the Post Exchange, are audited by Army auditors. 

“7 . All bills for merchandise, purchased by 

either the Post Exchange or its branches, 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 entertainment or other things 

beneficial which may be thought advisable by the 

Company Commander. 

“9 . The Post Exchange does not sell cigarettes 

to the general public. 

"WLll you 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 

delivered by him to a Regular Army Post Exchange or 

its branches, 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 cigarette distributor, as 

defined by Subsection 'in' of Section 1 of Article 

7047c-1, Vernon's Annotated Civil Statutes, and llable for the tax on the 'first sale' in this 'State of 

cigarettes imported from other States, as levied by 

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 taxes upon the sale 

or use of commodities by and through Post Exchanges operated 

in connection with the Army of the United States, turns upon 

either of two grounds or theories: (1) the absence of constitutional and legislative jurisdiction over the territory within which the sale or use of the commodity sought to be taxed 

is consummated or occurs, and (2) the immunity, under the 

Constitution of the United States, of the Federal government, 

or any of its departments, agents, or instrumentalltFes, 

created to discharge the constitutional functions of government, from taxation at the hands of the State under its revenue powers. 

The first theory of tax immunity is removed from thZs 

case, because it is made to appear from your letter that the 

Post Exchanges involved are not located within the confines 

of a military reservation or other territory over which exclusive constitutional and legislative jurisdiction has been 

ceded by the Chief Executive of Texas to the United States, 

so as to remove sales consummated within such territory from 

the State's taxing power, under the authority of Standard Oil 

Co. of California vs. California, 291 U. S. 242; 54 Sup. Ct. 

381; 78 Ed. 775. 

The single issue for our determination In the instant 

case, and the one upon which turns the answer to both questions 

submitted by you, is whether 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 jurisdiction of the State, are departments, 

agencies or instrumentalities of the Federal government, SO 

as to allow the purchase by them tax free, of cigarettes from 

licensed dealers in Texas, or the importation of such unstamped 

cigarettes from outside the State, andtie sale or use of such 

cigarettes without the affixing of the State revenue stamps. 
Hon. George H. Sheppard, page 4 O-2317 

For the historical background and development of a 

Post Exchange as constituted under modern conditions, the~language of the court in the case of Keane vs. United States, 

272 Fed. 577, is enlightening: 

'We have no definite information at hand as 

to how or when the first post exchange known in 

modern parlance was established; but it can safely be said that such a post exchange as we are now 

discussing Is a descendant of the old sutler's camp. 

The dictionary tells us that a sutler was or is a 

small trader, who follows an army, and who is licensed to sell goods, especially edibles, to the 

soldiers. In other words, the post exchange is 

nothing more nor less than a stationary soldiers' 

co-operative sutler's camp or store. When troops 

are in active warfare 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 considerable periods of time at a post, then it becomes feasible for them to do away with the inconvenience of trading with 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 

of Army life, in ministering to such daily requirements of 

Army personnel as the Government has not deemed necessary to 

provide, cannot be gainsaid, and this fact finds recognition 

In the special Post Exchange regulations issued by the War 

Department, and by appropriations by Congress for the construction and equipment of suitable buildings for the purpose. 

But the authorities, although taking cognizance of these facts, 

have, with the exception of one hereinafter dlscussed, uniformly held that Post Exchanges were not thereby made agencies 

or instrumentalities of 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 indictment would lie 

for defrauding in connection therewith, we consider the case 

of Reane vs. United States, supra, to be highly persuasive, 

in holding that the prosecution would fail because a Post Exchange was not a department of the government and the United 

States was not responsible for its contracts and obligations 

and had no interest in its funds, although Its business was 
Hon. George R. Sheppard, page 5 o-2317 

conducted by an officer detailed for the purpose. We quote 

Copiously from this opinion because the modus operand1 of the 

Post Exchange involved therein closely parallels the ones in 

the instant case: 

"Nowhere in this pamphlet of special regulations is it required or commanded that post 

exchanges shall be establlshed. Indeed, it Is 

expressly stated in these Special Regulations 

that these exchanges are 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 soldiers at such post a license or 

privilege to form such a co-operative store. The 

Secretary of War, in effect, says, in these regulations, to the soldiers, that while they are 

not required to establish post exchanges, yet, if 

they do establish them, that they should have for 

their purpose the supplying to the troops at reasonable prices of the articles of ordinary use, 

wear, and consumption, not supplied by the government, and to afford them means of rational recreation and amusement, and through exchange profits 

to provide, when necessary, the means for improving the messes. The regulations suggest that an 

assessment should be made upon the several organizations contributing to the exchange for the 

purpose of procuring necessary articles, and that 

all articles thus procured must be paid for by the 

first profits of the institution; it being distinctly understood that the officers incurring debts 

on behalf of the exchange, and not the government, 

are responsible for the payment thereof. 

"Members of the exchange must be organizations, 

companies, detachments, and individual enlisted men 

cannot become members, unless three or more of them 

are associated in a mess. The special management 

of the exchange is conducted by an officer deslgnated and detailed by the commanding officer, and 

this officeris responsible for the management of 

the exchange, and is regarded as the custodian of 

the funds belonging 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 specific purposes, and the 
Hon. George H. Sheppard, page 6 O-2317 

remainder may be divided among the organizations contributing to the exchange on an equitable basis; and 

a division of the cash resources of the exchange is 

made whenever the troops belonging to the exchange, 

or any part of them, change their station, and when 

all the units composing membership in an exchange 

have gone away or removed from the post, the exchange 

stock must 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, together with the cash, are distributed among the organizations according to the 

number of shares held by each. Post exchange funds, 

when deposited in a bank, must be placed under their 

official designations,and not to the credit of the 

officer who is their custodian, and such funds of a 

post exchange are especially declared to be not public moneys 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 that under 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 specifically upon the taxability by a state 

of a commodity sold to a post exchange of a IJnFted States 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 the United States for officl.al 

use of said government. Manifestly these sales 

are neither to a 'department' of the government 

nor for official use. The gasoline was sold to 

the exchange for resale to certain classes of 

persons for their private consumption. We have 

no hesitation in concluding that the legislative 

Intent was to include the sales in question in 

computing the tax- But these observations do not 

determine the cause. 

"We are pointed to the decision of the Supreme 

Court of the United 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 important question 

is here involved. There, as here, the state of Mississippi imposed an excise tax upon distrLbutors of 

gasoline measured by sales wlthln that state. The 

state sued the 011 company to recover balances 

represented by sales to the United States for use 

of its Coast Guard service operating in the Gulf 

of Mexico and for its veterans' hospital at Gulfport.. The sales were made directly to the government, and the court held that said statute was inoperative as to them, using language in part as 

follows: 'The states may 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 secured by the government. It 

depends immediately upon the number of gallons. 

The necessary operation of these enactments when 

so construed Is directly to retard, impede, and 

burden the exertion by the United States of its 

constitutional powers to operate the fleet and 

hospital. * * *' This was a five-four decision 

of the court; Justices Holmes, Brandeis, McReynolds, 

and Stone dissented, Justices Holmes and McReynolds writing opinions. 

"But it seems to us that a well-founded distinction may be found between the sales there 

involved and sales to an army post exchange. The 

commanding officer of an army post is not required 

to organize the post exchange unless there is need 

for it or unless the units present desire to participate therein or unless the personnel is suf--' 

ficient to profitably maintain and support such an 

institution. In other words, 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 vegetable market or gasoline 

station, or a restaurant, gymnasium, recreation 

room, llbrary, or theater. Thus it is not properly 

described by 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 supervised by an exchange council, com- 
Hon. George H. Sheppard, page 8 O-2317 

posed of the commanding officers of the respective 

units represented in the organization. The funds 

of~the exchange are not public moneys within the 

meaning of the Revised Statutes of the United States 

!&77)). 

Stats. 1 1 5488, 5490, 5492 (18 USCA 1 1 173, 

The exchange is not instituted-by the 

aid'of funds from the United States nor are its 

avails paid into the treasury. It Is a voluntary, 

unincorporated, co-operative assoclatLon in which 

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 organizations which participate in it 

are supposed themselves to pay off all such obligations In proportion to their respective interests 

in the exchange. Neither the government nor 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 the United States. The exchange itself is 

liable for certain federal taxes, such as the stamp 

tax imposed by the Internal Revenue Act, the freight 

tax imposed by theVar Revenue Act of 1917 (40 Stat. 

300), a floor tax on tobacco under the Revenue Act 

of 1918, 1 702 (40 Stat. 1.118); sales of ice 

cream and soft drinks by a post exchange are subject to tax under 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 should not be beyond the reach of 

the taxing power of the state wherein it is located 

and that it is not one of those agencies through 

which the federal government directly exercises its 

constitutional or sovereign power." 

Although the judgment of the Supreme Court of Californ1a In the above case was 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, likewise upholds 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 instrumentality thereof. On the contrary, a post exchange is a voluntary, unincorporated, co-operative association of army organizations in which all share as partners in 

the profits and losses. The government has no 

share in the profits, 

losses s 

and is not bound by the 

We are therefore of the opinion that 

sales made 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 P 

le 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 the United 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, established pursuant to statutory authority and operated for the welfare of the camp's enrollees 

is a Federal instrumentality not subject to the license ta; 

imposed by State statute on the privilege of selling certain 

articles, and not subject to the supervisory authority of the 

State Tax Commission. Title 16, USCA, Section 584p, appropriates money out of the Federal Treasury "to pay any expense 

in connection with the conduct, 

any camp exchange" 

operation or management of 

established and operated in accordance 

with regulations prescribed by the Director. 

its opinion, 

The court, in 

seizes upon 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 have we found an act of Congress authorizing 

any appropriation except for the construction of the buildings which house such exchanges. This point of difference 

may serve to reconcile the apparent conflict between these 

authorities, but if not, we are not inclined to follow this 

decision of a Federal district.court against the three well 

considered decisions of appellate courts, both State and 

Federal, which, to our mind, have announced the better rule 

of law. 

But even conceding that we have incorrectly interpreted 
, 

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

. 

the decisions of our courts to hold that a Post Exchange, 

organized and maintained in connection with the regular Army, 

is not an agency or instrumentality of the Federal government in the constitutional sense, it would nevertheless be 

our opinion that the excise stamp tax levied upon the sable 

of cigarettes to or by a Post Exchange for the personal use 

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 examination of the recent trend.'df decisions of the Supreme Court of the United States, and~inferior Federal and State tribunals, we would have said that this 

question was conclusively foreclosed by the decision of the 

Supreme Court of the United 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 collection by a state of an excise 

tax from a local distributor of motor fuel, upon motor fuels 

sold by such distributor directly to the Navy for use in certain boats belonging to the United States Navy. The contention 

was made In this case that the tax was levied as an occupatYon 

tax'upon the local dealer or distributor, measured by 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~is contention was rejected by the Su reme Court, a vigorous dissent 

was entered by Mr. Justice R olmes, who pointed out that, 

carried to its ultimate conclusion, such principle of law 

would result in employees of the various departments and bureaus of the Federal government being allowed to purchase 

clothes and various other articles and commodities upon 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. Justice Holmes was 

vindicated when the Supreme Court, in the case of James vs. 

Dravo Contracting Co., 302 u. S. 134; 82 L. Ed. 155, limited 

its own decision in the Panhandle case discussed above, by 

holding~that an occupation tax measured by gross income is 

not invalid when imposed by a State upon a contractor with 

the United States as laying a direct burden on the Federal 

government, even though the imposition of the tax may increase 

the cost to the government of the work contracted to be done. 

Although not expressly overruled, the Supreme Court inthis 

case expressly mentioned the decision in the case of Panhandle 

Oil Co. vs. Mississippi, supra, and stated that it and similar 
Hon. George H. Sheppard, page 11 O-2317 

cases had been distinguished and 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 

Contracting Co., supra, and numerous other decisions of the 

Supreme Court of the United 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 state upon 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 income upon the contractor 

in the leading case of James vs. Dravo Contracting Co., supra, 

the cigarette tax levy involved in the instant question is an 

excise tax levied upon the sale or use of cigarettes by licensed distributors in Texas. This tax is not levied upon 

Post Exchanges of the Army, as such, and the fact that such 

'oax is passed on to such Post Exchanges by licensed distri~- 

butors in Texas as part of the purchase price, constitutes' 

t,oo remote a burden to render such a tax unconstitutional as 

a tax upon an agency or an instrumentality of the Federal 

government, under the recent trend of authorities modifying 

if not indirectly overruling the 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 instrumentalities of the Federal government may 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 personal use and 

convenience of officers and men of the Army falls within this 

classification and should be subject to the excise tax levied 

thereon by the State of Texas. The point we stress is that 

for a Federal agency or instrumentality to be immune from 

Sta,te taxation, its activities and functions must be in fur- 

,therance of the constitutional powers of the Federal government. We can find no rational relationship between smoking cigarettes by 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 instrumentalities which also 

engage in extragovernmental functions may not invoke Federal 

immunity from taxation unless the Federal functions are un- 
Hon. George H. Sheppard, page 12 o-2317 

duly burdened, are Educational Films Corporation of America 

vs. Ward, 51 Sup. Ct. 170; 282 U. S. 379; Santa Clara Co. vs. 

Southern Pacific Rg., la Fed. 385, aff. 118 u. s. 394; Alward 

Johnson 282 U. 

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; Tirrell bs. 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 exchanges resort to the expediency of importing cigarettes 

to escape the tax collectible on intra-state sales, because 

they in turn would 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 Committee By s/BwB Chairman