Immunity of Veterans Administration Medical Facilities

from Alabama State Utility License Tax

The utility license tax imposed by the State of Alabama on public utilities operating within that State, 

whose econom ic burden is passed on by the utilities to their customers by order of the state public 

utility com m ission, is constitutionally valid as applied to federal agencies, since its legal incidence 

falls on the utilities and not on their customers.

In determining w hether the legal incidence of a state tax was intended by the legislature to fall upon 

the federal governm ent, and is thus prohibited under the Supremacy Clause, a tax scheme as a 

whole and the context in which it operates, as well as the terms of the taxing statute, m ust be 

considered.

The fact that the term s of the taxing statute do not require the tax to be passed on to customers, and do 

not provide a mechanism for doing so, is indicative of the legislature’s intent that the incidence of 

the license tax remain on the utilities.

May 26, 1982

MEMORANDUM OPINION FOR THE GENERAL COUNSEL, 

VETERANS ADMINISTRATION

This responds to your request for the opinion of this Office regarding the 

immunity of certain Veterans Administration facilities operating in the State of 

Alabama from the Alabama utility license tax imposed on public utilities by 

§ 40-21-53 of the Code of Alabama, 1975, as amended (hereafter § 53). By 

operation of a 1969 order of the Alabama Public Service Commission, a percentage of this tax is reflected automatically in customer billings, including those sent 

by the Alabama Power Company to the Veterans Administration Medical Centers 

which are the subject of your inquiry.

As you are aware, the Supremacy Clause of the United States Constitution, 

Article VI, clause 2, has been construed to prohibit the states from taxing directly 

the properties, functions, agencies, or instrumentalities of the federal government (hereafter federal agencies) in the absence of congressional consent, Mayo

v. United States, 319 U.S. 441 (1943); McCulloch v. Maryland, 17 U.S. (4 

Wheat.) 316 (1819), as well as from imposing taxes the “ legal incidence” of 

which falls on the federal government. United States v. New Mexico, 455 U.S. 

720 (1982); Alabama v. King & Boozer, 314 U.S. 1 (1941); James v. Dravo

Contracting C o., 302 U.S. 134 (1937). See United States v. County c f Fresno,

429 U.S. 452 (1977); United States v. Mississippi Tax Comm’n, 421 U.S. 599

(1975). Evaluating the constitutionality of any particular state tax in light of these

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prohibitions necessarily requires consideration of the many factors bearing on the 

critical question of whether the incidence of the disputed tax falls upon an agency 

of the United States or whether it falls upon a third party doing business with the 

United States. See United States v. New Mexico, supra; United States v. City cf

Leavenworth, 443 F. Supp. 274, 281 (D. Kan. 1977). See also United States v. 

Allegheny County, 322 U.S. 174, 186 (1944) (“The distinction between taxation 

of private interests and taxation of governmental interests, although sometimes 

d ifficu lt to d efin e, is fundam ental in application of the immunity 

doctrine. . .

For the reasons set forth in detail below, we believe that the utility license tax 

imposed by § 53 of the Public Utilities chapter of the Alabama Revenue Code is a 

tax on the utility companies, the economic burden of which may be—but is not 

required by statute to be—passed on to their customers; the tax is therefore 

constitutionally permissible as applied to customers which are federal agencies.

I. Background

Section 53 imposes a license tax on public utilities operating within the state in 

an amount equal to 2.2 percent of each dollar of the utilities’ gross receipts from 

the preceding year, with certain exceptions.1 Section 53 requires payments of the 

tax to include a statement by the owner, president, or other officer of the utility 

company reflecting the names of the utility’s owners and operators, as well as its 

principal place of business, together with a sworn statement of the amount of the 

utility’s gross receipts for the preceding year.

1 Section 4 0 -2 1 -5 3 of the C ode of A labam a, 1975, as am ended in 1981, provides in pertinent part.

§ 4 0 -2 1 -5 3 . E lectric, hydroelectric, gas, or any other public utility— G enerally— Credit on electric bills for certain persons— A m ount.

(a) Each person, firm or corporation . . operating an electric or hydroelectric public utility

shall pay to the state a license tax equal to two and two-tenths percent on each $1 .00 c f gross receipts

c f such public utility fo r the preceding year, except, that gross receipts from the sale of electricity for 

resale by such electric or hydroelectric public utilities and gross receipts from the sale of electricity to 

the persons identified in subsection (b ) of this section shall be deducted in com puting the am ount of 

tax due hereunder. . . Such license tax shall be paid to the departm ent of revenue by check made 

payable to the treasurer and shall b e paid quarterly. . . . Payment shall be accom panied by a 

statem ent m ade by the president o r o th er officer of the public utility o r by the ow ner thereof, giving 

the nam e o f the perso n , firm or corporation owning and operating such public utility and the principal 

place o f business thereof, together w ith a statem ent under oath of the am ount of gross receipts o f such 

public utility for the preceding year T h e books of every person, firm or corporation operating such 

utility shall be at all tim es open to the inspection of the departm ent of revenue Any person failing to 

m ake such sw orn statem ent or w illfully making a false statem ent of the gross receipts o f such public 

utility shall be guilty o f a m isdem eanor and, upon conviction thereof, shall be fined not exceeding 

$ 5 0 0 .0 0 and shall also forfeit to the state three tim es the am ount o f the license for such public 

utility. .

(b)(1) O n o r after O ctober 1, 1981 any person w ho is 62 years o f age or older or totally and 

perm anently disabled and such person is head of a household and does not share his or her residence 

w ith m ore than one other adult person w ho is less than 62 years of age and who receives electricity at 

such residence from a utility which is subject to the 2 .2 percent license tax levied in subsection (a) of 

this section shall be entitled to qualify, in accordance w ith the provisions of [the D epartm ent of 

Pensions and Security] for a credit on his or her monthly electric bill in the am ount of the exemption 

from the 2 .2 percent license tax w ith respect to sales o f electricity to such person provided in 

subsection (a) o f this section El igibihty for this cred it applies only to the extent and am ount that 

it is billed to the custom ers as a norm al requirem ent under its rates.

(E m phasis added )

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Your present inquiry arises in the context of a dispute between the Alabama 

Power Company and the Alabama District Office of the Veterans Administration 

regarding the immunity of the several Veterans Administration Medical Centers 

(VAMCs) located throughout the State from the § 53 state utility license tax. This 

tax is imposed on the Alabama Power Company in the amount of 2.2 percent of 

the utility’s gross receipts from the preceding year, 1.8 percent of which is 

included as a separate line item in the VAMCs’ utility bills. The District Counsel 

for the Veterans Administration takes the position that the medical centers are 

immune from paying that portion of their utility bills which reflects the license 

tax assessed against the utility company, arguing that the tax, as applied to the 

VAMCs, constitutes an infringement of Article VI, clause 2 because it is a direct 

tax on a federal agency. The Alabama Power Company takes the contrary 

position, arguing that the license tax imposed by § 53 is applicable only to the 

utility companies, is not required by statute to be passed on to the companies’ 

customers and, as such, may be included in the billings sent to customers, 

including federal agencies, without infringing the United States’ constitutional 

immunity.

To support its position that the § 53 license tax is an impermissible tax on a 

federal agency, the District Counsel for the Veterans Administration relies 

heavily on an April 28, 1969, order of the Alabama Public Service Commission. 

That order provides as follows:

Bills shall be increased to offset the applicable proportionate part 

of any taxes, assessments, licenses, franchise fees or rentals 

which may hereafter be imposed upon the Company by any 

Government Authority at rates higher than those in effect December 31, 1967 and which are assessed on the basis of meters, 

customers, the price of or revenues from electric energy sold or 

the volume of energy generated, purchased for resale or sold.

The Alabama Power Company construes this order as merely providing a 

“convenient mechanism for the Company to recover its direct cost of operation,”2 rather than as transferring the legal incidence of the license tax from the 

utility company to its customers.

Prior to the Commission’s promulgation of the 1969 order, the license tax on 

public utilities was 0.4 percent. See Code of Alabama, 1940, T.51, § 178. The 

enactment of § 53 in 1971 raised the tax to the present 2.2 percent. Thus, the 1.8 

percent increment increase in the license tax is reflected separately on the 

customers’ bills as a result of the Public Service Commission’s order. For more 

than two years, the VAMCs have withheld this amount from their electricity bill 

payments upon the advice of the District Counsel for the Veterans Administration 

that any increase in taxes after the 1969 order would constitute a direct tax on the 

agencies. Since the time of your inquiry to this Office, the Comptroller General

2 Letter from C ounsel to the A labam a Power C om pany to D istrict Counsel to the Veterans Administration 

(Aug 3, 1981) at p. 2.

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was requested by the Deputy Administrator of the General Services Administration to consider this matter, and, on February 22, 1982, rendered a decision 

concluding that the legal incidence of the license tax is on the utility company, 

and that the VAMCs should reimburse the Alabama Power Company for payments attributed to the tax increase which heretofore have been withheld. See

Dec. Comp. Gen. B-204517, “ Veterans Administration Medical Centers— 

Payment of Alabama Public Utility License Tax” (February 22, 1982). We turn 

now to our consideration of this matter.

II. State Taxation of Federal Entities

The federal government’s immunity from taxation by the States derives from 

the Supreme Court’s declaration in McCulloch v. Maryland, 17 U.S. (4 Wheat.) 

316 (1819), that such immunity is inherent in the Supremacy Clause of the 

Constitution:

[T]he states have no power, by taxation or otherwise, to retard, 

impede, burden, or in any manner control, the operations of the 

constitutional laws enacted by Congress to carry into execution 

the powers vested in the general government. This is, we think, 

the unavoidable consequence of that supremacy which the constitution has declared.

McCulloch, supra, at 436. See Weston v. City Council, 27 U.S. (2 Pet.) 449 

(1829). Since the decision in McCulloch, supra, the Supreme Court has “ adhered to the rule that States may not impose taxes directly on the Federal 

Government, nor may they impose taxes the legal incidence of which falls on the 

Federal Government.” United States v. County of Fresno, 429 U.S. 452, 459. 

(1977) (footnote omitted). Notwithstanding the clarity of this formulation, the 

determination of where the legal incidence of any particular tax falls necessarily 

requires close analysis of the taxing statute “ in the light of all relevant circumstances,” and is rarely made without some difficulty.3

In James v. Dravo Contracting Co., 302 U.S. 134 (1937), the Court distinguished between the legal incidence and the economic incidence of a state tax 

affecting the federal government. The Court held that a nondiscriminatory West 

Virginia occupation tax on the gross receipts of a private contractor doing 

business with the federal government was constitutionally valid, even though the 

tax might have increased the cost of the contract to the federal government. Such 

a tax, the Court stated, would “ unquestionably increase[] the expense of the 

contractor in performing his service and may, if it enters into the contractor’s 

estimate, increase the cost to the [federal] Government.” 302 U.S. at 160.

3 See, e.g . United States v. Maryland. 471 F. Supp 1030, 1037 (D Md 1979) (em phasis added)

In determ ining w here the legal incidence o f a tax falls, a court must consider the taxing statute in 

the light o f all relevant circum stances. United States v City of Detroit, 355 U S 466, 469 (1957).

The inquiry is a legalistic one, and the result often turns on the interpretation to be given a statute

Small differences in the language o f the statutes or in the facts o f two different cases can therefore 

result in decisions w hich might ap p ear inconsistent in the absence of close analysis.

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Nevertheless, to the extent that the state tax imposed on the contractor “ affects 

the federal government at all, it at most gives rise to a burden which is consequential and remote and not to one that is necessary, immediate or direct.” Id .,

citing Trinity-farm Construction Co. v. Grosjean, 291 U.S. 466 (1934). The 

principles articulated in D ra w were reaffirmed in Graves v. New York ex rel.

O'Keefe, 306U.S. 466(1939), in which the Court sustained a nondiscriminatory 

state tax on the income of a federal employee:

[A] non-discriminatory tax laid on the income of all members of 

the community could not be assumed to obstruct the function 

which [a government entity] had undertaken to perform, or to cast 

an economic burden upon [it], more than does the general taxation of property and income which, to some extent, incapable of 

measurement by economists, may tend to raise the price level of 

labor and materials.

306 U.S. at 484 (footnote omitted).

The Dravo principle was further refined in Alabama v. King & Boozer, 314 

U.S. 1 (1941), and its companion case, Curry v. United States, 314 U.S. 14 

(1941), in which the Court upheld state taxes4 imposed upon contractors performing “ cost-plus-fixed-fee” contracts with the federal government. Even though 

the taxes levied against the contractors were included in the “costs” assessed 

against the federal government, the Court held that the economic impact of the 

tax was not, standing alone, a sufficient basis for invalidation as an unconstitutional taxing by the State of the federal government or its agents.5 The United 

States was not a purchaser within the contemplation of the Alabama sales or use 

tax statutes and, therefore, was not legally obligated to pay the tax. See also

Gurley v. Rhoden, 421 U.S. 200, 204 (1975) (holding that the economic burden 

of taxes on the vendor is traditionally shifted to vendee in the form of increased 

prices for service in the amounts of the taxes, but that such a shift is not indicative 

of a shift in legal incidence, particularly if the statute does not require the vendor 

to pass the tax on to the purchaser-consumer).6

4 The disputed tax in King & Boozer, supra, was a sales tax on lum ber sold by K ing & Boozer (K & B ) for use by 

contractors constructing an arm y cam p for the United Slates. A lthough the tax was chargeable to K &B as the seller, 

K&B was required by the language of the statute to collect the tax from the purchaser— in this case, the governm ent 

contractor In Curry, supra, the dispute involved a use tax im posed upon materials brought into the state for use by a 

contracior.

5 Compare Kern-Limerick v. Scurlock, 347 U S . 110 (1954), holding that an A rkansas gross receipts tax on a 

contractor perform ing a “ cost-plus-fixed-fee” contract w ith the federal governm ent was an unconstitutional 

infringem ent of the federal governm ent’s im m unity w here the contract expressly provided that (1) its contractors 

were purchasing agents for the governm ent, (2) the purchase was made by the governm ent, (3) the governm ent was 

obligated to the vendor for the purchase price; (4) the contractor would handle all paym ents on behalf of the 

governm ent, and (5) title to all m aterials and supplies purchased vested in the governm ent directly from the vendor. 

The Court noted that “ it [was] clear that the G overnm ent [was] the disclosed purchaser and that no liability of the 

purchasing agent lo the seller (arose] from the transaction ” 347 U S. at 120-21 But cf. United States v. New

Mexico. 455 U .S. 720, 724 -2 5 (1982) (discussing the limitations o f the Kern-Limerick, supra, analysis).

6 Indeed, in later years the Court found insignificant the fact that property w hich provided the basis for an 

assessment o f a slate use tax was property owned by the federal governm ent, so long as the uses or im provem ents 

which were subject to the tax were “ being used by a private citizen or corporation and so long as it is the possession 

or use by the private citizen that is being taxed ’’ UmtedStates v County c f Fresno, 4 2 9 U .S 4 5 2 ,4 6 2 (1 9 7 7 ) Such 

use or im provement by a private citizen for his own private ends, or in connection with com m ercial activities carried

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The Court’s most recent consideration of the issues raised by state taxation of 

federal government contractors involved a use tax and a gross receipts tax levied 

on three contractors with “cost-plus-fixed-fee” contracts with the Department of 

Energy. United States v. New Mexico, 455 U.S. 720 (1982). The contracts 

provided that: (1) title to all tangible personal property purchased by the contractors would pass directly from the vendor to the Government; (2) the contractors would place orders with third party suppliers in their own names, 

identifying themselves as the buyers; and (3) the contractors would use an 

“ advanced funding” procedure to meet contracting costs.7 The United States 

unsuccessfully challenged the contractors’ liability for the New Mexico taxes, 

alleging, essentially, that the contractors were “procurement agents” for the 

federal government and were, therefore, immune from taxation by the State.8 

After reviewing its precedents and outlining the limits on the immunity doctrine,9 

the Court concluded:

What the Court’s cases leave room for, then, is the conclusion 

that tax immunity is appropriate in only one circumstance: 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 entities, at least 

insofar as the activity being taxed is concerned. . . .

Thus, a finding of constitutional tax immunity requires something more than the invocation of traditional agency notions: to 

resist the State’s taxing power, a private taxpayer must actually 

“ stand in the Government’s shoes.” City of Detroit v. Murray

Corp., 355 U.S. at 503 (opinion of Frankfurter, J.).

455 U.S. at 735-736. The Court relied heavily on its earlier decision in United

States v. Boyd, supra, in which it rejected “ out-of-hand” the Government’s claim

on for profit, constitutes a “ separate and d istin ct taxable activity.” United States v Boyd, 378 U S. 39, 44 (1964). 

See also City c f Detroit v Murray Corp , 355 U .S. 489 (1958), United States v. Township c f Muskegon, 355 U S 

484 (1958); UnitedStates v. City cf Detroit, 3 5 5 U .S 4 6 6 (1 9 5 8 ) The rule lo be derived from these decisions is that 

the “ econom ic burden on a federal function o f a state lax im posed on those w ho deal w ith the Federal G overnm ent 

d oes not render the tax unconstitutional so long as the tax is im posed equally on the other sim ilarly situated 

constituents o f the State ” County c f Fresno, supra, 429 U S at 462 (footnote omitted).

7 T he “ advanced-funding” mechanism allow ed the contractors to pay their creditors and em ployees with drafts 

draw n on a special bank account in which U nited States Treasury funds were deposited. Thus, only federal funds 

were expended w hen the contractors made purchases. M oreover, if the governm ent failed to provide funding, the 

contractors w ere excused from performance of the contract and the governm ent was held liable for all properly 

incurred claim s. 455 U .S . at 725-26.

8 T he U nited States sought a declaratory judgm ent that advanced funds were not taxable gross receipts to the 

contractors; that the receipts o f vendors sellin g property to the G overnm ent through the contractors were not taxable 

by the States; and that the use o f governm ent-ow ned property by the contractors was not subject to the use tax See

455 U S. at 7 3 2 -3 3 .

9 See 455 U .S at 7 3 4 -3 5 , where the C o u rt discussed at length its decisions in Alabama v. King & Boozer, supra

(“im m unity m ay not be conferred simply because the tax has an effect on the United States, or even because the 

Federal G overnm ent shoulders the entire econom ic burden o f the levy” ); James v Dravo Contracting Co., supra

(“im m unity cannot be conferred simply because the state lax falls on the earnings of a contractor providing services 

to the G overnm ent” ); and United Slates v Boyd, supra (“(On . a situation [where] the [private] contractor’s use of 

[G overnm ent-ow ned] property [to provide the United States with] goods or services [is] in connection with 

com m ercial activities ea rn e d on for profit [, such use constitutes] a separate and distinct taxable activity. . 

Indeed, im m unity cannot be conferred sim p ly because the tax is paid with G overnm ent funds [even] where the 

contractor m ade expenditures under an advanced funding arrangem ent sim ilar lo the one involved h ere” )

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that its advanced-funded contractors were “ ‘so assimilated by the Government as 

to become one of its constituent parts.’” Id., quoting Boyd, supra, 378 U.S. at 

47, quoting United States v. Township cf Muskegon, 355 U.S. 484,486 (1958).10

Thus, the Court in United States v. New Mexico, supra, rejected a claim of 

constitutional immunity on facts which were even more compelling than those in 

Boyd, King & Boozer, and Dravo. The Court reasoned that the extreme difficulties which are involved in determining the allocation of power between coexisting sovereignties requires such a narrow construction of the constitutional 

immunity, and concluded that

[i]f the immunity of federal contractors is to be expanded beyond 

its narrow constitutional limits, it is Congress that must take 

responsibility for the decision, by so expressly providing as 

respects contracts in a particular form, or contracts under particular programs. . . . But absent congressional action, we have 

emphasized that the States’ power to tax can be denied only under 

the clearest constitutional mandate.

455 U.S. at 737-38 (citations omitted).

The Court in United States v. Mexico, supra, set forth in the clearest possible 

terms the narrowness of the limitations that it would construe the Supremacy 

Clause to impose on the ability of states to tax federal contractors—even when the 

tax is paid with federal funds; however, the Court left undisturbed its prior 

decisions finding the immunity appropriate “ when the [state] levy falls [directly] 

on the United States itself.” 455 U.S. at 735. Thus, in contrast to taxes which 

merely pose an economic burden to the federal government, see, e.g.. United

States v. New Mexico, supra, taxes which fall directly on federal agencies 

continue to support claims of immunity by those agencies. As the following 

cases demonstrate, taxes which are required by the terms of the statute to be 

passed on to the purchaser or customer become legal obligations of the customer, 

and, to the extent that such “ legal incidence” bears on the federal government, 

are unconstitutional as applied.

In First Agricultural National Bank v. Massachusetts State Tax Comm’n, 392 

U.S. 339 (1968), the Court invalidated a Massachusetts sales tax levied upon 

vendors of tangible personal property; this tax was required to be “ add[ed] to the 

sales price and . . . collected] from the purchaser . . . [as] a debt from the 

purchaser to the vendor, . . . recoverable at law in the same manner as other 

debts,” id. at 347, when applied to national banks." Similarly, a regulation of the

10 In further defining the limits o f “ agencies” o f the federal governm ent for purposes of the im m unity doctrine, 

the C ourt recalled language in earlier opinions requiring that would-be federal entities be “ virtually . . . arm [s) of 

the G overnm ent," Department c f Employment w. United States, 385 U S 355, 3 5 9 -6 0 (1966); “ integral parts of [a 

governm ental d epartm ent],” and “ arm s of the Governm ent deem ed by it essential for the perform ance of 

governm ental functions,*’ Standard Oil Co v Johnson, 316 U S 481, 485 (1942) UnitedStates v. New Mexico,

supra at 733-38

11 The Court stated.

It would appear to be indisputable that a sales tax which by its terms m ust be passed on to the 

purchaser im poses the legal incidence o f the tax upon the purchaser . There can be no doubt 

from the clear wording of the statute that the M assachusetts Legislature intended that this sales tax be 

passed on to the purchaser. For our purposes, at least, that intent is controlling.

392 U .S . at 3 4 7-48 (citations om itted) (em phasis added)

279
Mississippi State Commission requiring out-of-state distillers and suppliers to 

collect from military installations within the State a sales tax on liquor sold to the 

installations was held invalid as a tax upon instrumentalities of the United States. 

United States v. M ississippi State Tax Comm’ n, 421 U.S. 599 (1975). The Court 

viewed the language of the regulation requiring that all direct orders of alcoholic 

beverages from out-of-state distillers by military facilities bear a wholesale markup price, that the price be paid directly to the distiller, and that the distiller remit 

the wholesale markup to the Tax Commission, as particularly indicative of the 

Commission’s clear intention that the out-of-state distillers and suppliers pass on 

the markup to the military purchasers. In addition, the Court pointed to a letter 

from the Director of the Alcoholic Beverage Control Division of the Commission 

informing distillers

that the wholesale markup “ must be invoiced to the Military and 

collected directly from the Military (Club) or other authorized 

organization located on the Military base,” warning that any 

distiller who sells alcoholic beverages to the military without 

“ collecting said fee directly from said Military organization shall 

be in violation of the Alcoholic Beverage Control laws and 

regulations issued pursuant thereto,” and subject to the penalties 

provided, including delisting.

421 U.S. at 609. However, even in the absence of so clear a statement of the Tax 

Commission’s intent, the Court noted that it was “obvious” that “ economic 

realities compelled the distillers to pass on the economic burden of the markup.” 

421 U.S. at 609-10 n.8. Referring to its decision in First Agricultural National

Bank, supra, the Court concluded that “where a State requires that its sales tax

be passed on to the purchaser and be collected by the vendor from him, this

establishes as a matter of law that the legal incidence cf the tax falls upon the

purchaser.” 421 U.S. at 608 (emphasis added).

The Ninth Circuit recently expanded upon the Court’s suggestion in Mississipp i State Tax Comm’n, supra, that the legal incidence of a particular tax is 

determined upon consideration of the taxation scheme as a whole— including the 

economic realities compelled by the circumstances as well as the literal terms of 

the statute. In United States v. California State Board of Equalization, 650 F.2d 

1127 (9th Cir. 1981), affdm em ., 456 U.S. 901 (1982), the court of appeals held a 

California sales tax unconstitutional when applied to leases of tangible personal 

property to the United States, because the legal incidence of the tax fell on the 

United States, even though the taxing statute provided that the parties to the sales 

agreement could reach an agreement among themselves as to who would pay the 

sales tax.12 Two other components of the taxing statute which were essential to the

12 S ection 1656.1 of the C alifornia Civil C o d e provides in pertinent part

§ 1656.1 Sales tax reim bursem ent to retailer; addition to sales price; rebuttable presum ptions; 

schedule

(a) W hether a retailer may add sales tax reim bursem ent to the sales price of the tangible personal 

property sold at retail to a purchaser d ep en d s solely upon the terms of the agreem ent o f sale !t shall

280
court’s conclusion were § 6051 of the California Revenue and Taxation Code, 

which imposes a sales tax on the seller’s gross receipts,13 and § 6012, which 

provides that the amount of the tax is deducted from the seller’s gross receipts if 

the seller establishes that he collected the sales tax from the buyer.14 Thus, 

although the language of the taxing statute was facially neutral, the court 

determined that the seller maximizes his profit only if he separately states and 

collects the tax from the buyer— thereby creating a strong economic incentive to 

impose the tax on the buyer.15

In reaching this conclusion, the court was guided by the analytical principle, 

reaffirmed in Mississippi State Tax Comm’n, supra, and First Agricultural

National Bank, supra, that the legal incidence of a tax falls on the party whom the 

legislature intends will pay the tax. The court reasoned:

A determination of legal incidence is not, however, an inquiry into 

who is legally obligated to remit the collected tax to the state. That 

is, the legal incidence of a tax does not necessarily fall on the 

party who acts as conduit by forwarding collected taxes to the 

state. . . . The concept of legal incidence must also be

be presum ed that the parties agreed to the addition o f sales tax reim bursem ent to the sales p n ce o f 

tangible personal property sold at retail to a purchaser if.

(1) T he agreem ent of sale expressly provides for such addition of sales tax reim bursem ent;

(2) Sales tax reim bursem ent is shown on the sales check o r other proof of sale; or

(3) The retailer posts in his prem ises in a location visible to purchasers, or includes on a price 

lag or m an advertisem ent or other printed m aterial directed to purchasers, a notice to the effect 

that reim bursem ent for sales tax will be added to the sales p nce of all items o r certain item s, 

w hichever is applicable.

(b) It shall be presum ed that the property, the gross receipts from the sale of which is subject to the 

sales tax, is sold at a price which includes tax reim bursem ent if the retailer posts in his prem ises, o r 

includes on a price tag or in an advertisem ent (w hichever is applicable) one o f the following notices.

(1) “All pnces o f taxable Hems include sales tax reim bursem ent com puted to the nearest m ill.”

(2) “ The price o f this item includes sales tax reim bursem ent com puted to the nearest m ill ”

*****

(d) T he presum ptions created by this section are rebuttable presum ptions.

13 Section 6051 provides in pertinent part:

For the pnvilege o f selling tangible personal property at retail a tax is hereby im posed upon all 

retailers at . . fa specified rate] of the gross receipts of any retailer from the sale of all tangible 

personal property sold at retail in this state. . .

14 Section 6012 provides in pertinent part:

(c)(8) For purposes of the sales lax, if the retailers establish to the satisfaction o f the board that the 

sales tax has been added to the total am ount of the sale price and has not been absorbed by them , the 

totat am ount of the sale pnce shall be deem ed to be the am ount received exclusive of the tax im posed 

Section 1656 1 of the Civil C ode shall apply in determ ining w hether or not the retailers have 

absorbed the sales tax

15 The court explained the w orktngs o f the California sales lax schem e as follows.

The seem ing neutrality of section 1656 I is rendered illusory . . by the interaction o f C alifornia 

Revenue and Taxation Code sections 6012 and 6051 As noted above, the sales tax is levied on the 

seller’s gross receipts, Cal Rev and Tax. Code § 6051 (West Supp. 1980), which are m easured by 

the total [sale] price. If the [seller] requires the [buyer] to pay the tax, the am ount o f the lax is 

deducted from the [seller's] gross receipts. If the [seller] pays the tax him self— absorbs the tax— and 

passes the econom ic burden of the tax on to the [buyer] as an increase in the [sale] price, the am ount 

of the tax paid by the [seller] is not deducted from his gross receipts. Since the sales tax is levied on 

the basis of the [seller’s] gross receipts, the [seller] m ust rem it a larger sum of money to the state as 

taxes if he absorbs the tax him self than if he collects the tax from the [buyer].

650 F.2d at 1131 (citation omitted).

281
distinguished from the notion of economic burden. The constitution only prohibits the state from levying a tax on the United 

States; it does not prohibit the state from enacting a taxing scheme 

whose effect is to increase prices paid by the United States.

In determining who the legislature intends will pay the tax, the 

entire state taxation scheme and the context in which it operates as 

well as the express words of the taxing statute must be considered.

* * * * *

Despite the facial neutrality of Section 1656.1, the strong 

economic incentive created by Section 6012 all but compels the 

lessor to collect the tax from the lessee. In sum, the California 

sales tax scheme manifests a legislative intent that the lessee pay 

the sales tax. It places the legal incidence of the tax on the United 

States and, therefore, violates the United States’ constitutional 

immunity from state taxation.

650 F.2d at 1131-32 (citations omitted).

In addition to presenting a cogent model for “ legal incidence” analysis, the 

California State Board c f Equalization decision is significant for its treatment of 

the legislature’s statement of its intent. Section 1651.1 was enacted with the 

precise, stated purpose of remedying the constitutional infringements posed by 

previous sales tax schemes.16 The Legislative Notes to the new act clearly state 

that § 1651.1

provides for changes in the California Sales and Use Tax Law to 

make it clear that for both federal and state tax purposes the 

incidence of the California sales tax is upon the retailer for the 

privilege of selling tangible personal property at retail and is not 

upon the purchaser.

Sfc * * * 5j5

Although the California sales tax law has uniformly been 

construed by the California Legislature, courts, and administrative agencies as imposing an excise tax upon the retailer and 

as imposing no legal obligation upon a purchaser, the law does not 

prevent the parties from contracting between themselves for

16 S ection 19 o f C al Stat. 1978, c. 1211, pp 3 9 2 5 -2 6 provides som e background to the new legislation.

The Legislature in adopting the Sales Tax Act in 1933 intended that the incidence of the sales tax be 

on th e retailer. In Section 8 o f Chapter 6 8 1 o f the Statutes of 1941, the following statem ent appears:

“ . . the Legislature hereby declares and reaffirm s that the sales tax is not im posed on any purchaser 

of tangible personal property in this state, but is for the privilege of engaging in the business of 

selling such property." Notwithstanding such legislative intent and decisions of C alifornia courts 

holding that the incidence o f the California sales tax is upon the retailer and not upon the purchaser, 

the U nited States S uprem e Court in Diamond National Corp. v. State Board of Equalization [425 

U .S 268 (19 7 6 )], and the C ourt of A ppeals for the Ninth C ircuit in United States of America v State

Board c f Equalization, 536 F2d 294 [(1976) (per cu n a m )], held that for federal purposes the 

incidence o f the C alifornia sales tax is o n the purchaser.

282
collection by the retailer of reimbursement for the sales tax from 

his customer in order to obtain the benefit of a lower sales tax 

measure or income tax deduction of the sales tax reimbursement 

by the purchaser or for any other purpose. . . . Ascertainment of 

this intention is necessary to a determination of a proper measure 

of sales tax and for other purposes. Accordingly, the purpose of 

the Legislature in adding Section 1656.1 to the Civil Code is to 

create a rebuttable presumption as to the intention of the parties 

for use in the absence of evidence of other intention by those who 

have occasion to use this information.

1978 Cal. Stat., §§ 19, 22, c. 1211, pp. 3925, 3926. See also 650 F.2d at 1128. 

Notwithstanding these statements of legislative intent, the Ninth Circuit found 

that the sales tax was intended by the legislature to be a tax on the buyer. Thus, 

this decision makes clear that the federal courts are not bound by state legislative 

and judicial determinations of the legal incidence of a particular state tax with 

respect to the United States or its agencies. See Diamond National Corp. v. State

Board of Equalization, 425 U.S. 268 (1976). “ For the purpose of determining 

whether a tax affects a federally immune institution, the test for incidence must 

be a federal one.” United States v. State Board of Equalization, 450 F. Supp. 

1030, 1035 (N.D. Cal. 1978), citing First Agricultural National Bank v. M assachusetts State Tax Comm'n, supra, 392 U.S. at 347.

Against this general background, two recent district court decisions bear 

directly on your inquiry whether the legal incidence of the Alabama utility 

license tax falls, as a matter of law, on the vendor or the vendee of Alabama Power 

Company’s utility services. The first case, United States v. City of Leavenworth,

443 F. Supp. 274 (D. Kan. 1977), app. dismissed by stipulation cf parties. No. 

79-1088 (10th Cir.), involved a 3 percent franchise fee imposed by the City in 

1963 upon all utility companies, including Kansas Power & Light, which provide 

electricity to the Fort Leavenworth military installation and the United States 

Penitentiary, operated respectively by the United States Department of the Army 

and the Federal Bureau of Prisons. Prior to the City’s imposition of the fee, the 

Kansas State Corporation Commission had authorized public utilities to pass on 

as “hidden costs” to all customers within the boundaries of their respective 

service areas the financial burden occasioned by the franchise fees of particular 

cities. When the City imposed the franchise fee on the utilities’ gross revenues 

from the sale of electricity, the Commission sought to remedy the discriminatory 

effects of the existing regulatory policy by which all utility customers in the State 

were required to contribute equally to the fee, without regard to whether their city 

had chosen to impose a franchise fee. To this end, the Commission ordered in 

1966 that all future franchise fees be directly charged on a pro rata basis to only 

such utility customers as lived within the municipal boundaries of the city 

exacting the fee, and that each customer’s bill reflect as a separate item his pro

rata share of any pertinent franchise fee. The controversy in Leavenworth,

supra, arose when the City annexed the property on which Fort Leavenworth and

283
the federal penitentiary are located, thereby occasioning a 3 percent franchise fee 

addition to their Kansas Power & Light electricity bills. The Bureau of Prisons 

and the Department of the Army refused to pay the 3 percent fee on the ground 

that it was an impermissible tax upon the federal government.

The issue before the court in Leavenworth, supra, was whether the incidence 

of the City’s franchise fee fell upon agencies of the United States, or whether it 

fell upon a third party doing business with the United States, Kansas Power & 

Light. In concluding that the fee did not fall directly upon the federal agencies, 

but rather upon the utility company, the court stated:

[T]he Supreme Court has “ squarely rejected” the proposition that 

the legal incidence of a tax falls always upon the person legally 

liable for its payment. First Agricultural National Bank v. Tax

Commission, 392 U.S. 339 (1968); United States v. Mississippi

Tax Commission, 421 U.S. 599 (1974). Further, the decision as to 

where the legal incidence of a tax falls is not determined by who 

bears the ultimate economic burden thereof. E.g., Gurley v. 

Rhoden, 421 U.S. 200 (1975). These factors however, together 

with considerations as to (1) the legislative history of the tax and 

the intent of the taxing authority; (2) the rights and obligations of 

the parties to the transaction on which the tax is imposed; and

(3) whether the economic burden of the tax, if imposed on a nongovernmental agency, is required to be passed on to the United 

States, must be weighed into the court’s determination.

443 F. Supp. at 281-82. Applying these factors, the Leavenworth court found that 

the City franchise fee was laid upon the privilege extended to utilities to use 

public property in the City for business purposes and to sell electricity to 

municipal residents, and that, as such, legal liability for payment of the exaction 

fell upon Kansas Power & Light. The court observed that the ordinance imposing 

the fee “ contained] no provisions for collection directly from the United States, 

nor [did] it purport to authorize any procedures whereby penalties for nonpayment— such as liens or encumbrances upon government property— [could] be 

sought against the United States property or its treasury.” Id. at 282. The court 

found insignificant the fact that the economic burden of the fee was passed on to 

the federal agencies by the terms of their sales contracts with the utility, “ [n|or 

does the fact that the United States may be required under Kansas State Corporation Commission orders to reimburse Kansas Power & Light for a pro rata share 

of the franchise fee alter the incidence of the tax as originally laid.” Id. at 282-83.

The Leavenworth decision is particularly helpful to our consideration of the 

Alabama license tax, because the franchise fee imposed by the Leavenworth city 

ordinance was not, by the terms of the ordinance— as the Alabama tax is not by 

the terms of its authorizing statute— required to be passed on to the customers of 

the taxed utilities. N evertheless, in both cases the state public utility

284
commissions required the customers of the taxed utilities to raise their bill 

payments by a proportionate share of the utilities’ increased tax liability.17

In 1979, another district court considered a similar challenge to a Maryland 

statutory environmental surcharge as applied to purchases of electricity by 

federal agencies. The challenged statutes in United States v. State cf Maryland,

471 F. Supp. 1030 (D. Md. 1979), involved a surcharge on electric energy 

generated within the State which was first imposed on electric companies in 

1971. Revenues from the surcharge were required by the terms of the statute to be 

collected from the electric companies by the Comptroller of the State and placed 

in a special fund known as the Environmental Trust Fund. For the years 1971 

through 1974, the statute required the Public Service Commission to “ authorize 

the electric companies to add the full amount of the surcharge to customers’ 

bills.” Id. at 1034. In 1974, the Maryland Legislature amended the statute to 

provide that the Public Service Commission

shall authorize the electric companies to add the full amount of the 

surcharge to customers’ bills. To the extent that the surcharge is

not collected from customers, the surcharge shall be deemed a

cost of generation and shall be allowed and computed as such, 

together with other allowable expenses, for rate-making purposes. Revenues from the surcharge shall be collected by the 

Comptroller and placed into the special fund known as the Environmental Trust Fund.

Id. (emphasis added).

The United States challenged the State’s exaction of this surcharge from 

federal agencies pursuant to both the original and the amended legislation as an 

unconstitutional tax by the State on agencies of the United States. The Maryland

court, citing Leavenworth, supra, approvingly, observed that the circumstances 

in the Maryland case were even more supportive of the constitutionality of the

17 The United States filed an appeal of this decision to the Tenth Circuit, but the appeal was later dismissed by 

stipulation of the parties (10th Cir No 79-1088). See Memorandum from Assistant Attorney General Ferguson, 

Tax Division, “ Memorandum for the Solicitor General Re. United States v. City c f Leavenworth, Kansas" at 3 

(Mar. 16, 1979). recommending that the appeal be dismissed, on the ground that “ the ‘exaction’ complained of is 

not a lax but a user fee, rental, or charge imposed on the electric company for the right to use the city’s streets,” to 

which the Supreme Court has held (he intergovernmental constitutional immunities inapplicable See Massachusetts v United Slates, 435 U.S. 444(1978) Nor did ihe impact of the Kansas State Corporation Commission's order 

alter the analysis contained in the Ferguson Memorandum

The fact that the state regulatory commission ordered that all franchise fees were to be charged pro 

rata to the customers within the city exacting the fee does not change the character of the fee from a 

user fee or rental, etc , to a tax imposed on the consumer. It merely reflects an additional cost of doing 

business which is passed on to the subscribers, just as every unsubsidized business must “ pass on” 

and recover from its customers every item of operating expense— including state and federal taxes— 

if it is to operate profitably This, indeed, was the central point of Agron v. Illinois Bell Telephone

Co., 449 F 2d 906 (C. A. 7, 1971), cert, denied, 405 U S 954(1972) In Agron. [the United States] 

argued, and the court of appeals recognized (449 F 2d at 909), that in public utility rate regulation the 

regulatory body charged with establishing a fair rate and return is required to sanction rates that will 

permit the utility to recover or pass on all appropnate expenses, including taxes Galveston Electric

Co. v Galveston. 258 U.S. 388, 399 (1922); Georgia Railway & Power Co v Railroad Commission. 262 U S. 625, 632-33 (1923), FPC v United Gas Pipe Line Co , 386 U.S 237, 243(1967)

Memorandum, supra at 5-6.

285
taxing statute than were the circumstances in Leavenworth. The court concluded 

that “ neither the 1974 Act nor the 1971 Act requires that Maryland’s environmental surcharge be passed along to customers of the electric companies [, and] 

[accordingly, . . . the exactions in question are valid and constitutional.” Id. at 

1038.18

The factors considered by the court in reaching this conclusion were several. 

First, the court noted that the titles of both statutes, as well as their language, 

made clear that the surcharge was a “ direct obligation of the electric companies,” which the companies could, at their option, pass on to customers or 

simply compute as part of their costs of generation and therefore be recovered in 

the form of higher rates. Id. Second, citing the Supreme Court’s decision in 

Gurley v. Rhoden, supra, the district court found persuasive the fact that the 

statutes had no provisions making the customers liable for payment of the 

surcharge if the utility companies themselves did not pay the surcharge.19 Id. at 

1040. Finally, the court relied on the principle recognized in Graves v. New York

ex rel. O ’Keefe, 306U .S. 466,483 (1939), as a guide to construing ambiguous or 

“ awkwardly drafted statutory provisions,” namely, that “ the implied immunity 

of one government and its agencies from taxation by the other should as a 

principle of statutory construction be narrowly restricted.” Id. at 1039.20

18 The United States withdrew its appeal of this decision because the Maryland statutory provisions involved were 

“ so fraught with am biguity" as to render the case an “ {inappropriate vehicle” to support the United States’ 

position Memorandum from Assistant Attorney General Ferguson, Tax Division, “ Supplemental Memorandum 

for the Solicitor General Re United States Maryland" (Nov 30, 1979). The Ferguson Memorandum also raised a 

question whether the district court had “too readily accepted” the United States’ argument that the environmental 

surcharge was a tax, rather than a user charge or fee, in support of its claim of federal immunity Id. See United States

v. Maryland, supra, 471 F Supp. at 1036. See also n. 17, supra

19 In concluding that the legal incidence of the disputed tax fell on the vendor in the taxed transaction, the 

Supreme Court m Gurley v. Rhoden, supra, found the literal language of the taxing statute to be determinative

The wording of the . statute plainly places the incidence of the tax upon the [vendor]. . . . The 

[legislative] purpose to lay the tax on the [vendor] and only upon the [vendor] could not be more 

plainly revealed Persuasive also that such was [the Legislature’s] purpose is the fact that, if the 

[vendor] does not pay the tax, the Government cannot collect it from his vendees, the statute has no 

provision making the vendee liable for its payment.

421 U S at 205-06 (footnote and citation omitted)

In his Memorandum to the Solicitor General regarding an appeal of the Maryland decision, seen 18, supra, the 

Assistant Attorney General for the Tax Division referred to the Court's analysis in Gurley, supra, as the “ mechanical 

approach.” In contrast, the United Slates argued in favor of a “ semantically broader approach— that the legal 

incidence of the tax is on the United States when the statute as a whole, considering both text and context, creates a 

legal compulsion lo pass on the tax ” This broader approach appears to have been followed by the Ninth Circuit in 

United States v California State Board c f Equalization, supra

Although the line of cases representing the “ narrow” or “ mechanical” approach to governmental immunities and 

culminating in the Court s recent decision in United States v New Mexico, supra, may appear to be irreconcilable 

with the “ broader” approach taken by the Court in Mississippi State Tax Comm'n, supra, and most recently 

summarily affirmed in California State Board c f Equalization, supra, the difference between the approaches grows 

out of an underlying distinction between the tw o types of questions raised by analyses of the taxing statutes The 

cases following the “ mechanical” approach involved relatively unambiguous statutes which made clear where the 

legal incidence of the disputed tax fell—the question before the court was whether the taxpaying entities, usually 

federal contractors, constituted “ federal agents” for purposes of tmmumiy analysis, because the economic burden 

of the lax levy was ultimately passed on to the United States, either directly, through specific contractual 

arrangements or advanced funding procedures, or indirectly, through price increases In contrast, the cases 

following the “ broader” approach to governmental immunities involved the initial determination of who the 

legislature intended to pay the tax, i.e., the legal incidence of the tax, in making such a determination, the courts 

looked closely at the language of the taxing statute, as well as the surrounding circumstances— including the 

“ economic realities” — of the tax scheme

20 See also United States v. New Mexico, supra, 455 U S at 735-36 (“a narrow approach to governmental tax 

immunity accords with competing constitutional imperatives, by giving full range to each sovereign’s taxing 

authority” ), citing Graves v. New York, supra; and at 738 (“the States’ power to tax can be denied only under ‘the 

clearest constitutional mandate’”) quoting Michelin Tire Corp v. Wages, 423 U S. 276, 293 (1976)

286
Both the Leavenworth and the Maryland courts relied heavily on the language 

of the taxing statutes to determine whether the legal incidence of the tax fell upon 

the utility or its customers. In Leavenworth, although the State Corporation 

Commission had required the tax to be passed on, the underlying statute had not, 

and the court found as a matter of law that the legal incidence of the tax therefore 

fell upon the utility. Likewise, although less compelling, the Maryland statutes 

required the Public Service Commission to authorize the electric companies to 

pass the tax on to their customers. Nevertheless, in both cases “ the statutory 

provisions in question, construed in the light of all the circumstances, . . . 

controlled] in determining where the incidence of the tax falls.” Maryland,

supra, 471 F. Supp. at 1040.

III. The Law as Applied to the Alabama Utility License Tax

In order to determine the constitutionality of the Alabama license tax as 

applied to federal agencies, the critical question to be resolved is whether the 

legal incidence of the tax falls upon the VAMCs, or whether it falls upon the 

Alabama Power Company, a third party doing business with the VAMCs. As set 

forth in detail above, determination of where the legal incidence of a particular 

tax falls involves close analysis and consideration of the entire State taxation 

scheme and the context in which it operates, as well as the express words of the 

taxing statute. United States v. California State Board cf Equalization, supra,

650 F.2d at 1131. See United States v. Mississippi State Tax Comm’n, supra;

United States v. State of Maryland, supra. As an aid to this determination, the 

Leavenworth court, as discussed above, suggested three primary inquiries:

(1) the legislative history of the tax and the intent of the taxing authority; (2) the 

rights and obligations of the parties to the transaction on which the tax is 

imposed; and (3) whether the economic burden of the tax is required by the terms 

of the statute, or by economic realities, to be passed on to customers which are 

federal agencies. Leavenworth, supra, 443 F. Supp. at 282.

Pursuing these inquiries, we note first that we have available very little of the 

legislative history of the utility license tax. The tax, by its literal terms, imposes a 

fee on “electric or hydroelectric public utilities” in an amount equal to 2.2 

percent of their gross receipts from the preceding year. This language is in 

marked contrast to that of §§ 40-21-82, 86, which impose a 4 percent gross 

receipts tax on public utilities operating within the State,21 but which specifically 

require the utilities to “ add that tax to the price or charge for such utility services 

to every purchaser thereof. . . [and to] collect said amount from every purchaser

21 Section 40-21-82, Code of Alabama, 1975, provides.

There is hereby levied, in addition to all other taxes of every kind now imposed by law, and shall be 

collected as herein provided, a privilege or license tax against every utility in the state of Alabama on 

account of the furnishing of utility services by said utility; and the amount of said tax shall be 

determined by the application of rates against gross sales or gross receipts, as the case may be, from 

the furnishing of utility services in the state of Alabama and shall be computed monthly with respect 

to each person to whom utility services are furnished, in accordance with the . table (provided in 

this section].

(Emphasis added.)

287
of such utility services[, making it] unlawful for any person furnishing utility 

services to fail or refuse to collect from the purchaser the amount required by this 

section to be collected.” § 40-21-86, Code of Alabama, 1975, as amended 

(emphasis added). In addition, § 86 clearly states that the 4 percent gross receipts 

tax is “conclusively presumed to be a direct tax on the purchaser precollected for 

the purpose of convenience and facility only.” Id. (emphasis added). Neither the 

Power Company nor the District Counsel disputes the United States’ immunity 

from this tax, as the terms of the statute clearly indicate that the 4 percent gross 

receipts tax is intended to be a direct tax on the consumer, and, as far as we are 

aware, the Power Company has never attempted to pass this tax on to, or collect it 

from, its customers which are federal agencies. See Letter from Counsel to the 

Alabama Power Company to the District Counsel of the Veterans Administration 

(Aug. 3, 1981).

The statutory language of §§ 82 & 86 of the Public Utilities chapter of the 

Revenue Code suggests a clear and unambiguous legislative intent to tax the 

utility companies’ customers directly, and not to impose a tax on the companies 

themselves; such language presents a clear indication of the legislature’s knowledge of the distinction between direct and indirect taxation of the consumer, and 

is therefore significant in our analysis of the legislative intent of § 53. Had the 

legislature intended to collect the fee directly from the utilities’ customers, it is 

reasonable to assume that it would have manifested its intent with language 

similar to the language in § 86; from its failure to do so, as well as from the plain 

terms of the statutory language that it did use, we may infer that the legislature 

intended to levy the § 53 license tax on the utility companies. See generally East

Brewton M aterials v. Department c f Revenue, 233 So. 2d 751 (Ala. 1970).22

Although we are not aware of this provision’s having been construed by the 

Alabama courts, we do have statements “by the highest officials charged with the 

duty of administering the tax laws,” id. at 754, construing this provision.23 

Officials in the Legal Division and the Franchise Tax Division of the State of 

Alabama Department of Revenue, as well as the Attorney General of the State of 

Alabama, have construed the 2.2 percent utility license tax imposed by § 53 as a 

license tax on the utilities, “ a cost of doing business [which] can be included in 

the rate base allowed by the Alabama Public Service Commission, . . . itemized 

on bills, or . . . absorbed partially or wholly by the utility.” Letter from 

Corporate Tax Specialist, Franchise Tax Division, to Telpage, Inc. (January 3, 

1977). See Letter from Assistant Attorney General, State of Alabama, to 

Abemethy Memorial Hospital (March 10,1975); Memorandum from Counsel to 

the Legal Division, Department of Revenue (March 3, 1975). Further, in a 1977 

letter responding to an inquiry regarding the 2.2 percent license tax, the Franchise Tax Division described the tax as:

22 Although the “ credit allowance” of subsection (b) of § 53, see n. 1 supra, appears lo assume that the utility 

companies would increase their customers’ rates by an amount sufficient to recover the amount paid in license taxes, 

the law is settled that the mere shouldering of the ultimate economic burden of a tax is not determinative of where its 

legal incidence lies See, e.g . Gurley v. Rhoden, supra; King & Boozer, supra; Dravo Contracting Co , supra.

21 See State v. Southern Electric Generating C o., 151 So 2d 216, 218 (Ala 1963), (“The interpretation by the

Attorney General will be given weight as a factor in judicial construction of a statute where its meaning is

doubtful*'), citing Cherokee County v Cunningham, 68 So 2d 507 (Ala. 1953).

288
a cost of doing business just as much as labor, supplies, materials, 

etc. are a cost of doing business. Before the tax was increased 

from 2 and 4 mills to 2.2% in 1971, some of the utilities had the 

rate imbedded in their rate bases and most consumers were not 

even aware of it.

Letter of Jan. 3, 1977, supra.

Notwithstanding these constructions of § 53 by state officials, however, the 

characterization of state taxes for the purpose of determining the legal incidence 

on federally immune institutions is ultimately a federal question. Diamond

National Corp. v. State Board cf Equalization, supra; First Agricultural N ational Bank v. Massachusetts State Tax Comm'n, supra; United States v. California State Board of Equalization, supra. Thus, while the Attorney General and 

Revenue Department statements are instructive of the Alabama legislature’s 

intent, such interpretations are not binding on the federal courts, and are not, 

therefore, necessarily determinative in our inquiry.24

The second factor suggested by the Leavenworth court as indicative of the legal 

incidence of a particular tax involves consideration of the rights and obligations 

of the parties to the transaction on which the tax is imposed. The license tax 

imposed by § 53 is imposed on the privilege of selling electricity by electric or 

hydroelectric public utilities to retail customers within the State. See generally

State v. Southern Electric Generating Co., 151 So. 2d 216 (Ala. 1963). As 

discussed above, the statutory language, by its literal terms as well as its 

construction by the Department of Revenue and the State Attorney General, 

creates a legal obligation only on utility companies. Although the Commission’s 

order purports to impose a legal obligation for a proportionate share of the license 

tax on the utilities’ customers, the statutory obligation to remit the revenue 

collected pursuant to § 53 still rests with the utility companies. Furthermore, the 

statute makes no provisions for direct collection of the fees from the utilities’ 

customers, nor does it impose any penalties on the customers for failure to pay 

that part of their bills which constitutes a proportionate share of the license tax.

Nor do we believe that the statute creates so strong an economic incentive to 

pass the tax on as to compel the utility companies to collect the fees from their 

customers. See, e.g., United States v. California State Board of Equalization,

supra. Although the 1.8 percent increase in license taxes enacted by the legislature does not pose an insignificant financial burden for the utility companies, 

we cannot say, without more, that the increase is evidence of the legislature’s 

intent to shift the legal incidence of the tax from the utilities to the customers.25

24 As in the Leavenworth and Maryland cases discussed supra, an argument may be made that the § 53 license tax 

is a user fee levied on the public utility companies for the privilege of using public lands to operate their businesses 

See nn. 17, 18, supra. As previously noted, such a characterization of the tax would render the analysis contained in 

this section moot, as intergovernmental immunities are not applicable to user fees See United States v Massachusetts, supra However, we do not have sufficient information regarding the purposes of the tax and the 

contractual arrangements between the utilities and the State to make such a determination.

25 Notwithstanding the mandatory language of the Commission's 1969 order, we believe that the Leavenworth

court’s reliance, in analogous circumstances, on the language of the taxing statute was both correct and appropriate 

to the facts before us “ [S]o far as the [taxing authority’s] interest in collection is concerned, there is no requirement 

that [the utility] pass on to the United States all or any part of the financial burden of the [license tax] fee.” 

Leavenworth, supra, 443 F. Supp at 282. See generally Gurley v. Rhoden, supra

289
The fact that the tax was increased with knowledge— whether actual or 

constructive— of the 1969 Commission order is not determinative of the legislature’s intent in enacting § 53; were the Commission’s order purporting to 

construe the statutory predecessors of § 53, the District Counsel’s argument 

might well be conclusive. See East Brewton Materials, supra, 233 So. 2d at 754 

(“The re-enactment without change of a statute which has been given a uniform 

construction by the administrative department [charged with the duty of administering the tax laws] ‘may be treated as legislative approval of the departmental 

construction of the statute, quite as persuasive as the re-enactment of a statute, 

which has been judicially construed, ’ ” citing State v. Southern Electric Generating C o., 151 So. 2d 216 (Ala. 1963)).

As it is, however, we are faced with a regulatory order promulgated in 1969 

which, if applied to the license tax statute that was re-enacted in 1971, would 

conflict with the terms of that statute. We are not aware of the 1969 order’s having 

been construed to apply to the § 53 license tax or to its predecessor; to the 

contrary, we do have statements by the Alabama Revenue Department and the 

Attorney General construing § 53 as a license tax on the utilities, “ a cost of doing 

business [which] can be included in the rate base allowed by the Alabama Public 

Service Commission.” Letter from Corporate Tax Specialist, Franchise, Tax 

Division, supra; see Letter from Assistant Attorney General, supra; Memorandum from counsel to the Legal Division, Department of Revenue, supra.26 In 

circumstances where such ambiguity exists, we believe that the language of the 

taxing statute, construed “ in the light of all the circumstances,” must prevail. 

United States v. Maryland, supra, 471 F. Supp. at 1040. See Gurley v. Rhoden,

supra; United States v. California State Board cf Equalization, supra; East

Brewton M aterials, supra, 233 So. 2d at 754 (the “ legislative ratification of prior 

administrative interpretations” rule of construction cited above should be laid 

aside “ where it seems reasonably certain that the administrator’s interpretation 

has been erroneous and that a different construction is required by the language of 

the act” ).

In addition, the Comptroller General of the United States recently considered 

the § 53 license tax which is presently at issue and determined that the legal 

incidence of the tax falls on the utility companies and not on the United States. 

Dec. Comp. Gen. B-204517, “ Veteran’s Administration Medical Centers— 

Payment of Alabama Public Utility License Tax” (Feb. 22, 1982). The Comptroller General reasoned that the failure of the statutory terms of § 53 to require 

that the tax be passed through to customers, as well as their failure to provide a 

mechanism for doing so, is indicative of the Alabama Legislature’s intent that the

26 We are not unaware of the February 11, 1980, letter from the Director of the Utility Financial Analysis and 

Auditing Division of the Public Service Commission to the District Counsel of the Veterans Administration 

interpreting the Commission’s 1969 order to “ require [the] Alabama Power Company to pass each applicable 

increase in taxes directly through to its retail customers as a line item on the customer’s bill.’’ This interpretation is, 

at best, a construction of its own order as applied to taxing statutes in general, considered without regard to the 

statutory language underlying the specific utility tax with which we are presently concerned. Moreover, we believe 

that the opinion of the Attorney General carries greater weight than that of the Commission See generally State v 

Southern Electric Generating Co., supra, 151 So. 2d at 218

290
incidence of the license tax remain on the utilities. The Comptroller General 

disputed the VAMCs’ claim that the Public Service Commission’s order transferred the legal incidence of the tax to the customers; rather, he found that the 

Commission’s order “ merely provides that the utilities shall pass the economic 

burden of the tax to their customers as part of their rates.” Id. at 3. The 

Comptroller General determined that the VAMCs should return to the Alabama 

Power Company that portion of their utility bills which they have erroneously 

withheld.

Were the statutory terms of § 53 less clear in this case, the Commission’s order, 

as construed by the District Counsel and the Director of the Utility Financial 

Analysis Division of the Public Service Commission, might carry greater weight 

in our determination of where the legal incidence of the tax falls. We also have no 

other indication that the statute was ever intended to impose a direct tax on the 

utilities’ customers; to the contrary, we have statements by the state’s highest 

legal officer construing the license tax as a tax on the utilities. While it is 

reasonable to assume that the legislature believed that any tax increase would be 

recovered in customer billings as a cost of doing business, it is equally clear that it 

did not impose a statutory requirement that the utilities pass the increase on to 

customers. In addition, we have the benefit of the Comptroller General’s consideration of this issue, his analysis and conclusions. In short, we are guided, as was 

the court in United States v. Maryland, supra, by the principle recognized by the 

Supreme Court in Graves v. New York ex rel. O ’Keefe, 306 U.S. 466,483 (1939), 

that “ the implied immunity of one government and its agencies from taxation by 

the other should as a principle of statutory construction be narrowly restricted.” 

See United States v. Maryland, supra, 471 F. Supp. at 1039. See also United

States v. New Mexico, supra, 455 U.S. at 733-38.

IV. Conclusion

In view of the clear language used by the Alabama legislature in imposing the 

§ 53 utility license tax, particularly as it has been interpreted by the Revenue 

Department and the Attorney General of the State of Alabama, and the Comptroller General of the United States, and viewed “ in the light of all the circumstances,” United States v. Maryland, supra, 471 F. Supp. at 1040, we are 

persuaded that the disputed license tax is a constitutionally valid tax levied on the 

public utility companies within the State. Although the 1969 order of the 

Alabama Public Service Commission may have increased the economic burden 

of the license tax on the utility companies, a burden which will ultimately be 

borne by the Veterans Administration and other federal agencies in the State 

which are customers of the taxed utilities, we believe, for all of the reasons 

discussed above, that the legal incidence of the license tax continues to rest on the 

utilities.

L a r r y L . S im m s

Deputy Assistant Attorney General

Office cf Legal Counsel

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