Case Name: JAMES, STATE TAX COMMISSIONER, v. DRAVO CONTRACTING CO.
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1937-12-06
Citations: 302 U.S. 134
Docket Number: No. 3
Parties: JAMES, STATE TAX COMMISSIONER, v. DRAVO CONTRACTING CO.
Judges: MR. Justice McReynolds, Mr. Justice Sutherland and Mr. Justice Butler join in this opinion.
Reporter: United States Reports
Volume: 302
Pages: 134–186

Head Matter:
JAMES, STATE TAX COMMISSIONER, v. DRAVO CONTRACTING CO.
No. 3.
Argued April 26, 27, 1937.
Reargued October 12, 1937.
Decided December 6, 1937.
Mr. Clarence W. Meadows, Attorney General of West Virginia, for appellant, on the original argument and the reargument. Messrs. Homer A. Holt, former Attorney General, and W. Holt Wooddell, Assistant Attorney General, were with him on the briefs.
Mr. William S. Moorhead for appellee, on the original argument and the reargument. Messrs. Lawrence D. Blair, W. Chapman Revercomb, and W. Elliott Nefflen were with him on the briefs.
Solicitor General Reed, with whom Attorney General Cummings, Assistant Attorney General Morris, and Messrs. Sewail Key, J. Louis Monarch, Arnold Raum, and Francis A. LeSourd were on the brief, for the United States as amicus curiae, by special leave of Court, on the reargument.

Opinion:
Mr. Chief Justice Hughes
delivered the opinion of the Court.
This case presents the question of the constitutional validity of a tax imposed by the State of West Virginia upon the gross receipts of respondent under contracts with the United States.
Respondent, The Dravo Contracting Company, is a Pennsylvania corporation engaged in the general contracting business, with its principal office and plant at Pittsburgh in that State, and is admitted to do business in the State of West Virginia. In the years 1932 and 1933, respondent entered into four contracts with the United States for the construction of locks and dams in the Kanawha River and locks in the Ohio River, both navigable streams. The State Tax Commissioner assessed respondent for the years 1933 and 1934 in the sum of $135,761.51 (taxes and penalties) upon the gross amounts received from the United States under these contracts.
Respondent brought suit in the District Court of the United States for the Southern District of West Virginia to restrain the collection of the tax. The case was heard by three judges (28 U. S. C. 380) and upon findings the court entered a final decree granting a permanent injunction. 16 F. Supp. 527. The case comes here on appeal.
The statute is known as the Gross Sales and Income Tax Law. Code of West Virginia 1931, c. 11, Art. 13, amended effective May 27, 1933. Acts of 1933, c. 33. It provides for "annual privilege taxes" on account of "business and other activities." The clause in question here is as follows:
"Upon every person engaging or continuing within this state in the business of contracting, the tax shall be equal to two per cent, of the gross income of the business."
The tax was in addition to other state taxes upon respondent, to wit, the license tax on foreign corporations (Code of West Virginia, c. 11, Art. 12, § 69, 71) and ad valorem taxes upon real and personal property of the contractor within the State.
The questions presented are (1) whether the State had territorial jurisdiction to impose the tax, and (2) whether the tax was invalid as laying a burden upon the operations of the Federal Government.
After hearing we directed reargument and requested the Attorney General of the United States to present the views of the Government upon the two questions above stated. Reargument has been had and the Government has been heard.
First. As to territorial jurisdiction. — Unless the activities which are the subject of the tax were carried on within the territorial limits of West Virginia, the State had no jurisdiction to impose the tax. Hans Rees' Sons v. North Carolina, 283 U. S. 123, 133, 134; Shaffer v. Carter, 252 U. S. 37, 57; Surplus Trading Co. v. Cook, 281 U. S. 647. The question has two aspects (1) as to work alleged to have been done outside the exterior limits of West Virginia and (2) as to work done within those limits but (a) in the bed of the rivers, (b) on property-acquired by the Federal Government on the banks of the rivers, and (c) on property leased by respondent and used for the accommodation of his equipment.
1. A large part of respondent's work was performed at its plant at Pittsburgh. The stipulation of facts shows that respondent purchased outside the State of West Virginia materials used in the manufacture of the roller gates, lock gates, cranes, substructure racks and spur rims, structural steel, patterns, hoisting mechanism and equipment, under each of its contracts, and fabricated the same at its Pittsburgh plant. The roller gates and the appurtenant equipment were preassembled at respondents' shops at Pittsburgh and were there inspected and tested by officers of the United States Government. The materials and equipment fabricated at Pittsburgh were there stored until time for delivery, and the appropriate units as prepared for shipment were then transported by respondent to the designated sites in West Virginia and there installed. The United States knew at the time the contracts were made that the above described work was to be performed at the plaintiff's rrmin plant. The contracts provided for partial payments as the work progressed and that all the material and work covered by the partial payments should thereupon become "the sole property of the Government." Payments by the Government were made from time to time accordingly.
It is clear that West Virginia had no jurisdiction to lay a tax upon respondent with respect to this work done in Pennsylvania. As to the material and equipment there fabricated, the business and activities of respond ent in West Virginia consisted of the installation at the respective sites within that State and an apportionment would in any event be necessary to limit the tax accordingly. Hans Rees' Sons v. North Carolina, supra.
2. As to work done within the exterior limits of West Virginia, the question is whether the United States has acquired exclusive jurisdiction over the respective sites. Wherever the United States has such jurisdiction the State would have no authority to lay the tax. Surplus Trading Co. v. Cook, supra.
(a) As to the beds of the Kanawha and Ohio rivers. The present question is not one of the paramount authority of the Federal Government to have the work performed for purposes within the federal province (Scranton v. Wheeler, 179 U. S. 141, 163; United States v. Chandler-Dunbar Co., 229 U. S. 63, 61, 62; Lewis Blue Point Oyster Co. v. Briggs, 229 U. S. 82, 88), or whether the tax lays a burden upon governmental operations; it is simply one of territorial jurisdiction.
The title to the beds of the rivers was in the State. Pollard v. Hagan, 3 How. 212, 230; Shively v. Bowlby, 152 U. S. 1, 26; Port of Seattle v. Oregon-Washington R. Co., 255 U. S. 66, 63; Borax Consolidated v. Los Angeles, 296 U. S. 10, 15, 16. It was subject to the power of Congress to use the lands under the streams "for any structure which the interest of navigation in its judgment may require." Lewis Blue Point Oyster Co. v. Briggs, supra. But, although burdened by that servitude, the State held the title. Gibson v. United States, 166 U. S. 269, 271, 272; Port of Seattle v. Oregon-Washington R. Co., supra; Borax Consolidated v. Los Angeles, supra. There does not appear to have been any acquisition by the United States of title to those lands, unless, as respondent urges, the occupation of the beds for the purpose of the improvements constituted an acquisition of title. But as the occupation was simply the exercise of the dominant right of the Federal Government (Gibson v. United States, supra, p. 276) the servient title continued as before. No transfer of that title appears. The Solicitor General conceded in his argument at bar that the State of West Virginia retained its territorial jurisdiction over the river beds and we are of the opinion that this is the correct view.
(b) As to lands acquired by the United States by purchase or condemnation for the purposes of the improvements. Lands were thus acquired on the banks of the rivers from individual owners and the United States obtained title in fee simple. Respondent contends that by virtue of Article I, Section 8, Clause 17, of the Federal Constitution the United States acquired exclusive jurisdiction.
Clause 17 provides that Congress shall have power "to exercise exclusive legislation" over "all places purchased by the consent of the legislature of the State in which the same shall be, for the erection of forts, magazines, arsenals, dock-yards, and other needful buildings." "Exclusive legislation" is consistent only with exclusive jurisdiction. Surplus Trading Co. v. Cook, supra, p. 652. As we said in that case, it is not unusual for the United States to own within a State lands which are set apart and used for public purposes. Such ownership and use without more do not withdraw the lands from the jurisdiction of the State. The lands "remain part of her territory and within the operation of her laws, save that the latter cannot affect the title of the United States or embarrass it in using the lands or interfere with its right of disposal." Id., p. 650. Clause 17 governs those cases where the United States acquires lands with the consent of the legislature of the State for the purposes there described. If lands are otherwise acquired, and jurisdiction is ceded by the State to the United States, the terms of the cession, to the extent that they may lawfully be prescribed, that is, consistently with the carrying out of the purpose of the acquisition, determine the extent of the federal jurisdiction. Fort Leavenworth R. Co. v. Lowe, 114 U. S. 527, 538, 539 ; Palmer v. Barrett, 162 U. S. 399, 402, 403; Arlington Hotel Co. v. Fant, 278 U. S. 439, 451; United States v. Unzeuta, 281 U. S. 138, 142; Surplus Trading Co. v. Cook, supra.
Are the locks and dams in the instant case "needful buildings" within the purview of Clause 17? The State contends that they are not. If the clause were construed according to the rule of ejusdem generis, it could be plausibly contended that "needful buildings" are those of the same sort as forts, magazines, arsenals and dockyards, that is, structures for military purposes. ' And it may be that the thought of such "strongholds" was uppermost in the minds of the framers. Elliot's Debates, Vol. 5, pp. 130, 440, 511; Cf. Story on the Constitution, Vol. 2, § 1224. But such a narrow construction has been found not to be absolutely required and to be unsupported by sound reason in view of the nature and functions of the national government which the Constitution established.
In Sharon v. Hill, 24 Fed. 726, 730, 731, Justice Field (sitting with Judge Sawyer) considered the provision to be applicable to a court building and custom house on land which had been purchased with the consent of the State. In Battle v. United States, 209 U. S. 36, 37, we held that "post offices are among the 'other needful buildings' " within Clause 17. See, also, United States v. Wurtzbarger, 276 Fed. 763, 766; Arlington Hotel v. Fant, supra. Locks and dams for the improvement of navigation, which are as clearly within the federal authority as post offices, have been regarded as "needful buildings." United States v. Tucker, 122 Fed. 518, 522. We take that view. We construe the phrase "other needful buildings" as embracing whatever structures are found to be necessary in the performance of the functions of the Federal Government.
The legislature of West Virginia by general statute had given its consent to the acquisition by the United States, but questions are presented as to the construction and effect of the consent. The provision is found in § 3 of Chapter 1, Article 1, of the Code of West Virginia of 1931. The full text is set out in the margin. By the first paragraph the consent of the State is given "to the acquisition by the United States, or under its authority, by purchase, lease, condemnation, or otherwise, of any land acquired, or to be acquired in this State by the United States, from any individual, body politic or corporate, for sites for . . . locks, dams, . or any needful buildings or structures or proving grounds, or works for the improvement of the navigation of any watercourse . or for any other purpose for which the same may be needed or required by the government of the United States." By the second paragraph provision is made for gifts by municipalities to the United States of land for any of the purposes described in the first paragraph. The third paragraph cedes to the United States "concurrent jurisdiction with this State in and over any land so acquired . for all purposes." The jurisdiction so ceded is to continue only during the ownership of the United States and is to cease if the United States fails for five consecutive years to use any such land for the purposes of the grant.
By a further provision in § 4 the State reserves the right to execute process within the limits of the land acquired "and such other jurisdiction and authority over the same as is not inconsistent with the jurisdiction ceded to the United States by virtue of such acquisition."
The contention is made that the third paragraph of § 3 as to "concurrent jurisdiction" was not in the Code of 1923, but was a later addition (1931), and should not be taken as qualifying the first paragraph. But the third paragraph was added before the acquisition here in question and "any land so acquired" manifestly refers to the acquisitions previously described which expressly embraced all such acquisitions in the future. The suggestion that the third paragraph applies only to the lands given by municipalities to the United States under the second paragraph is without force. The third paragraph appears to have been taken from the provision, in the same language, of § 19 of the Code of Virginia of 1919 which was not qualified by any intervening provision as to municipalities. See Code of West Virginia, 1931, c. 1, Art. 1, § 3, Revisers' Note. The revisers say it was added to "make more definite the provisions as to jurisdiction." Id. We are not referred to any decision of the Supreme Court of West Virginia construing this paragraph.
Reference is also made to the provision of § 4 as to service of process. This is said to be unnecessary if only concurrent jurisdiction is granted. But this provision was a part of the former statute (1923) and cannot be taken as derogating from the force of the explicit amendment by the later addition in the third paragraph of the present § 3. And apparently to prevent misunderstanding, there was an amendment at the same time of the provision now in § 4 by the addition of the last clause in order to make the reservation of the State's jurisdiction "more comprehensive." Code of West Virginia, 1931, c. 1, Art. 1, § 4, Revisers' Note.
The third paragraph of § 3 carefully defines the jurisdiction ceded by the State and there is no permissible construction which would ignore this definite expression of intention in considering the effect upon jurisdiction of the consent given by the first paragraph.
But it is urged that if the paragraph be construed as seeking to qualify the consent of the State, it must be treated as inoperative. That is, that the State cannot qualify its consent, which must be taken as carrying with it exclusive jurisdiction by virtue of Clause 17. The point was suggested by Justice Story in United States v. Cornell, Fed. Cas. No. 14,867; 2 Mason 60, 65, 66, but the construction placed upon the consent in that case made decision of the point unnecessary. There the place (Fort Adams in Newport Harbor) had. been purchased with the consent of the State, to which was added a reservation for the service of civil and criminal process. Justice Story held that such a reservation was not incompatible with a cession of exclusive jurisdiction to the United States, as the reservation operated "only as a condition" and "as an agreement of the new sovereign to permit its free exercise as quoad hoc his own process." Reservations of that sort were found to be frequent in grants made by the States to the United States in order to avoid the granted places being made a sanctuary for fugitives from justice. Story on the Constitution, Vol. 2, § 1225. Reference is made to statements in the general discussion in the opinion in Fort Leavenworth R. Co. v. Lowe, supra, but these are not decisive of the present question. The decision in that case was that the State retained its jurisdiction to tax the property of a railroad company within the Fort Leavenworth Military Reservation, as federal jurisdiction had not been reserved when Kansas was admitted as a State and, when the State subsequently ceded jurisdiction to the United States, there was saved to the State the right "to tax railroad, bridge, and other corporations, their franchises and property, on said Reservation." The terms of the cession in this respect governed the extent of the federal jurisdiction. See Surplus Trading Co. v. Cook, supra. There are obiter dicta in other cases but the point now raised does not appear to have been definitely determined.
It is not questioned that the State may refuse its consent and retain jurisdiction consistent with the governmental purposes for which the property was acquired The right of eminent domain inheres in the Federal Government by virtue of its sovereignty and thus it may, regardless of the wishes either of the owners or of the States, acquire the lands which it needs within their borders. Kohl v. United States, 91 U. S. 367, 371, 372. In that event, as in cases of acquisition by purchase without consent of the State, jurisdiction is dependent upon cession by the State and the State may qualify its cession by reservations not inconsistent with the governmental uses. Story on the Constitution, Vol. 2, § 1227; Kohl v. United States, supra, p. 374; Fort Leavenworth R. Co. v. Lowe, supra; Surplus Trading Co. v. Cook, supra; United States v. Unzeuta, supra. The result to the Federal Government is the same whether consent is refused and cession is qualified by a reservation of concurrent jurisdiction, or consent to the acquisition is granted with a like qualification. As the Solicitor General has pointed out, a transfer of legislative jurisdiction carries with it not only benefits but obligations, and it may be highly desirable, in the interest both of the national government and of the State, that the latter should not be entirely ousted of its jurisdiction. The possible importance of reserving to the State jurisdiction for local purposes which involve no interference with the performance of governmental functions is becoming more and more clear as the activities of the Government expand and large areas within the States are acquired. There appears to be no reason why the United States should be compelled to accept exclusive jurisdiction or the State be compelled to grant it in giving its consent to purchases.
Normally, where governmental consent is essential, the consent may be granted upon terms appropriate to the subject and transgressing no constitutional limitation. Thus, as a State may not be sued without its consent and "permission is altogether voluntary," it follows "that it may prescribe the terms and conditions on which it consents to be sued." Beers v. Arkansas, 20 How. 527, 529 ; Smith v. Reeves, 178 U. S. 436, 441, 442. Treaties of the United States are to be made with the advice and consent of the Senate, but it is familiar practice for the Senate to accompany the exercise of this authority with reservations. Hyde, International Law, Vol. 2, § 519. The Constitution provides that no State without the consent of Congress shall enter into a compact with another State. It can hardly be doubted that in giving consent Congress may impose conditions. See Arizona v. California, 292 U. S. 341, 345.
Clause 17 contains no express stipulation that the consent of the State must be without reservations. We think that such a stipulation should not be implied. We are unable to reconcile such an implication with the freedom of the State and its admitted authority to refuse or qualify cessions of jurisdiction when purchases have been made without consent or property has been acquired by condemnation. In the present case the reservation by West Virginia of concurrent jurisdiction did not operate to deprive the United States of the enjoyment of the property for the purposes for which it was acquired, and we are of the opinion that the reservation was applicable and effective.
(c) As to property leased by respondent and used for the accommodation of its equipment. There can be no question as to the jurisdiction of the State over this area.
We conclude that, so far as territorial jurisdiction is concerned, the State had authority to lay the tax with respect to the respondent's activities carried on at the respective dam sites.
Second. Is the tax invalid upon the ground that it lays a direct burden upon the Federal Government? The Solicitor General speaking for the Government supports the contention of the State that the tax is valid. Respondent urges the contrary.
The tax is not laid upon the Government, its property or officers. Dobbins v. Commissioners, 16 Pet. 435, 449, 450.
The tax is not laid upon an instrumentality of the Government. McCulloch v. Maryland, 4 Wheat. 316; Osborn v. Bank of the United States, 9 Wheat. 738; Gillespie v. Oklahoma, 257 U. S. 501; Federal Land Bank v. Crosland, 261 U. S. 374; Clallam County v. United States, 263 U. S. 341; New York ex rel. Rogers v. Graves, 299 U. S. 401. Respondent is an independent contractor. The tax is non-discriminatory.
The tax is not laid upon the contract of the Government. Osborn v. Bank of the United States, supra, p. 867; Weston v. Charleston, 2 Pet. 449, 468, 475; Pollock v. Farmers' Loan & Trust Co., 157 U. S. 429, 581, 582, 586; Telegraph Company v. Texas, 105 U. S. 460, 464, 466; Leloup v. Port of Mobile, 127 U. S. 640, 646; Williams v. Talladega, 226 U. S. 404, 418, 419; Federal Land Bank v. Crosland, supra; Willcuts v. Bunn, 282 U. S. 216; Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U. S. 218, 222; Indian Motocycle Co. v. United States, 283 U. S. 570, 574; Graves v. Texas Company, 298 U. S. 393, 401. The application of the principle which denies validity to such a tax has required the observing of close distinctions in order to maintain the essential freedom of government in performing its functions, without unduly limiting the taxing power which is equally essential to both Nation and State under our dual system. In Weston v. Charleston, supra, and Pollock v. Farmers' Loan & Trust Co., supra, taxes on interest from government securities were held to be laid on the government's contract — upon the power to borrow money — and hence were invalid. But we held in Willcuts v. Bunn, supra, that the immunity from taxation does not extend to the profits derived by their owners upon the sale of government bonds. We said (Id., p. 225): "The power to tax is no less essential than the power to borrow money, and, in preserving the latter, it is not necessary to cripple the former by extending the constitutional exemption from taxation to those subjects which fall within the general application of non-discriminatory laws, and where no direct burden is laid upon the governmental instrumentality, and there is only a remote, if any, influence upon the exercise of the functions of government." Many illustrations were given.
In Telegraph Company v. Texas, supra, a specific state tax was imposed on each message sent by an officer of the United States on public business over the lines of the Telegraph Company. In holding the tax to be invalid the Court leaned heavily upon the fact that the Company had accepted the terms of the Act of Congress of 1866 (14 Stat. 221) authorizing the use of the military and post roads and requiring in return that government messages have priority over all other business and be transmitted at rates fixed annually by the Postmaster General. The Court considered that the Company had thus become an agent of the Government for the transmission of messages on public business. See to the same effect Lelcmp v. Port of Mobile, supra. The same point was taken in Williams v. Talladega, supra, involving a local license fee applicable to the same Telegraph Company. The Court said that the tax was laid upon "the privilege, of carrying on a business a part of which is that of a governmental agency constituted under a law of the United States and engaged in an essential part of the public business — communication between the officers and departments of the Federal Government." The emphasis put in these cases upon the effect of the acceptance of the obligation of the Act of Congress shows that they cannot be regarded as sustaining the broad claim of immunity here advanced.
In Panhandle Oil Co. v. Mississippi ex rel. Knox, supra, and Indian Motocycle Co. v. United States, supra, the taxes were held to be invalid as laid on the sales to the respective governments, the one being a state tax on a sale to the United States, and the other a federal tax on the sale to a municipal corporation of Massachusetts. A similar result was reached in Graves v. Texas Company, supra. These cases have been distinguished and must be deemed to be limited to their particular facts. Thus, in Wheeler Lumber Co. v. United States, 281 U. S. 572, 579, the federal tax on transportation as applied to lumber which the vendor had engaged to sell to a county for public bridges and to deliver f. o. b. at the place of destination at a stated price, was held to be laid not on the sale but on the transportation. Although the transportation was with a view to a definite sale, it was held to be not part of the sale but preliminary to it and "wholly the vendor's affair." In Liggett & Myers Co. v. United States, 299 U. S. 383, 386, the federal tax as applied to tobacco purchased by a. State for use in a state hospital was sustained as a tax upon the manufacture of the tobacco and not upon the sale. Hence, the Court said, "the effect upon the purchaser was indirect and imposed no prohibited burden."
In Alward v. Johnson, 282 U. S. 509, 514, the Court sustained a state tax upon the gross receipts of an independent contractor carrying the mails. The taxpayer operated an automotive stage line. Two-thirds of his gross receipts, upon the whole of which he was taxed, were derived from carriage of United States mails and the remainder from carriage of passengers and freight. The Court found that the property used in earning these receipts was devoted chiefly to carrying the mails and that without his contract with the Government the stage line could not be operated profitably. In upholding the tax upon his gross receipts we distinguished Panhandle Oil Co. v. Mississippi ex rel. Knox, supra, saying: "There was no tax upon the contract for such carriage; the burden laid upon the property employed affected operations of the Federal Government only remotely . . . The facts in Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U. S. 218, and New Jersey Bell Tel. Co. v. State Board, 280 U. S. 338, were held to establish direct interference with or burden upon the exercise of a Federal right. The principles there applied are not controlling here."
These decisions show clearly the effort of the Court in this difficult field to apply the practical criterion to which we referred in Willcuts v. Bunn, supra, and again in Graves v. Texas Company, supra. There is no ineluctable logic which makes the doctrine of immunity with respect to government bonds applicable to the earnings of an independent contractor rendering services to the Gov ernment. That doctrine recognizes the direct effect of a tax which "would operate on the power to borrow before it is exercised" (Pollock v. Farmers' Loan & Trust Co., supra) and which would directly affect the Government's obligation as a continuing security. Vital considerations are there involved respecting the permanent relations of the Government to investors in its securities and its ability to maintain its credit, — considerations which are not found in connection with contracts made from time to time for the services of independent contractors. And in dealing with the question of the taxability of such contractors upon the fruits of their work, we are not bound to consider or decide how far immunity from taxation is to be deemed essential to the protection of Government in relation to its purchases of commodities or whether the doctrine announced in the cases of that character which we have cited deserves revision or restriction.
The question of the taxability of a contractor upon the fruits of his services is closely analogous to that of the taxability of the property of the contractor which is used in performing the services. His earnings flow from his work; his property is employed in securing them. In both cases, the taxes increase the cost of the work and diminish his profits. Many years ago the Court recognized and enforced the distinction between a tax laid directly upon a government contract or an instrumentality of the United States and a tax upon the property employed by an agent or contractor in performing services for the United States. "Taxation of the agency is taxation of the means; taxation of the property of the agent is not always, or generally, taxation of the means." Thomson v. Pacific Railroad, 9 Wall. 579, 591. In expounding the grounds for the conclusion that the property of the contractor was taxable, the Court envisaged the serious consequences which would follow if immunity were maintained. In Railroad, Company v. Peniston, 18 Wall. 5, 33, 36, the Court said:
"It may, therefore, be considered as settled that no constitutional implications prohibit a State tax upon the property of an agent of the government merely because it is the property of such an agent. A contrary doctrine would greatly embarrass the States in the collection of their necessary revenue without any corresponding advantage to the United States. A very large proportion of the property within the States is employed in execution of the powers of the government. It belongs to governmental agents, and it is not only used, but it is necessary for their agencies. United States mails, troops, and munitions of war are carried upon almost every railroad. Telegraph lines are employed in the National service. So are steamboats, horses, stage-coaches, foundries, shipyards, and multitudes of manufacturing establishments. They are the property of natural persons, or of corporations, who are instruments or agents of the General government, and they are the hands by which the objects of the government are attained. Were they exempt from liability to contribute to the revenue of the States it is manifest the State governments would be paralyzed. While it is of the utmost importance that all the powers vested by the Constitution of the United States in the General government should be preserved in full efficiency, and while recent events have called for the most unembarrassed exercise of many of those powers, it has never been decided that State taxation of such property is impliedly prohibited. . . .
"It is, therefore, manifest that exemption of Federal agencies from State taxation is dependent, not upon the nature of the agents, or upon the mode of their constitution, or upon the fact that they are agents, but upon the effect of the tax; that is, upon the question whether the tax does in truth deprive them of power to serve the government as they were intended to serve it, or does hinder the efficient exercise of their power. A tax upon their property has no such necessary effect. It leaves them free to discharge the duties they have undertaken to perform. A tax upon their operations is a direct obstruction to the exercise of Federal power."
The dissenting opinion of Justice Bradley (with whom Justice Field concurred) while considering that the state tax was invalid as applied to property of the Union Pacific Railroad because of its special relation to the Government which had chartered it, emphasized the distinction between such a situation as he conceived it and one where the Government has entered into a contract for services to aid in the discharge of governmental functions. His observations are strikingly pertinent here (id. pp. 41, 42):
"The case differs toto ccelo from that wherein the government enters into a contract with an individual or corporation to perform services necessary for carrying on the functions of government — as for carrying the mails, or troops, or supplies, or for building ships or works for government use. In those cases the government has no further concern with the contractor than in his contract and its execution. It has no concern with his property or his faculties independent of that. How much he may be taxed by, or what duties he may be obliged to perform towards, his State is of no consequence to the government, so long as his contract and its execution are not interfered with. In that case the contract is the means employed for carrying into execution the powers of the government, and the contract alone, and not the contractor, is exempt from taxation or other interference by the State government."
The question of immunity from taxation of the earnings of an independent contractor under a government contract arose in Metcalf & Eddy v. Mitchell, 269 U. S. 514. The services were rendered to a political subdivison of a State and the contractors' earnings were held to be subject to the federal income tax. That was a pivotal decision, for we had to meet the question whether the earnings of the contractor stood upon the same footing as interest upon government securities or the income of an instrumentality of government. It is true that the tax was laid upon net income. But if the tax upon the earnings of the contractor had been regarded as imposing a direct burden upon a governmental agency, the fact that the tax was laid upon net' income would not save it under the doctrine of Gillespie v. Oklahoma, supra. And if the doctrine of the immunity of interest upon government bonds had been deemed to apply, the tax would have been equally bad whether the tax was upon net or gross income. The ruling in Pollock v. Farmers' Loan & Trust Co., supra, related to net income. The uniform ruling in such a case has been that the interest upon government securities cannot be included in gross income for the purpose of an income tax computed upon net income. The pith of the decision in the case of Metcalf & Eddy is that government bonds and contracts for the services of an independent contractor are not upon the same footing. The decision was a definite refusal to extend the doctrine of cases relating to government securities, and to the instrumentalities of government, to earnings under contracts for labor.
The reasoning upon which that decision was based is controlling here. We recognized that in a broad sense "the burden of federal taxation necessarily sets an economic limit to the practical operation of the taxing power of the states, and vice versa." "Taxation by either the state or the federal government affects in some measure the cost of operation of the other." As "neither government may destroy the other nor curtail in any substantial manner the exercise of its powers," we said that the limi tation upon the taxing power of each, so far as it affects the other, "must receive a practical construction which permits both to function with the minimum of interference each with the other; and that limitation cannot be so varied or extended as seriously to impair either the taxing power of the government' imposing the tax . or the appropriate exercise of the functions of the government affected by it." Metcalf & Eddy v. Mitchell, supra, pp. 523, 524.
We said further that the nature of the governmental agencies or the mode of their constitution could not be disregarded in passing on the question of tax exemption, as it was obvious that an agency might be of such a character or so intimately connected with the exercise of a power or the performance of a duty by the one government "that any taxation of it by the other would be such a direct interference with the functions of government itself as to be plainly beyond the taxing power." And it was on that principle that "any taxation by one government of the salary of an officer of the other, or the public securities of the other, or an agency created and controlled by the other, exclusively to enable it to perform a governmental function," was prohibited. We concluded that a non-discriminatory tax upon the earnings of an independent contractor derived from services rendered to the Government could not be said to be imposed "upon an agency of government in any technical sense" and could not "be deemed to be an interference with government, or an impairment of the efficiency of its agencies in any substantial way." Id., pp. 524, 525.
While the Metcalf case was one of a federal tax, the reasoning and the practical criterion it adopts are clearly applicable to the case of a state tax upon earnings under a contract with the Federal Government.
As we have observed, the fact that the tax in the present case is laid upon the gross receipts, instead of net earnings, is not a controlling distinction. Respondent invokes our decisions in the field of interstate commerce, where a tax upon the gross income of the taxpayer derived from interstate commerce has long been held to be an unconstitutional burden. Philadelphia & Southern S. S. Co. v. Pennsylvania, 122 U. S. 326; Crew Levick Co. v. Pennsylvania, 245 U. S. 292, 297; United States Glue Co. v. Oak Creek, 247 U. S. 321, 328, 329; Fisher's Blend Station v. Tax Commission, 297 U. S. 650, 655, 656.
But the difference is plain. Persons have a constitutional right to engage in interstate commerce free from burdens imposed by a state tax upon the business which constitutes such commerce or the privilege of engaging in it or the receipts as such derived from it. Minnesota Rate Cases, 230 U. S. 352, 400. Interstate commerce is not an abstraction; it connotes the transactions of those engaged in it and they enjoy the described immunity in their own right. Here, respondent's activities at the dam sites are local and not in interstate commerce. Respondent has no constitutional right to immunity from nondiscriminatory local taxation and the mere fact that the tax in question burdens respondent is no defense. The defense is that the tax burdens the Government and respondent's right is at best a derivative one. He asserts an immunity which, if it exists, pertains to the Government and which the Government disclaims.
In Alward v. Johnson, supra, as already noted, the tax was upon gross receipts and these were derived from a contract for carrying the mails, but the tax was upheld. It there appeared that the tax was in lieu of taxes upon the property and had been treated by the state court as a property tax. But if the tax as actually laid upon the gross receipts placed a direct burden upon the Federal Government so as to interfere with the performance of its functions, it could not be saved because it was in lieu of a tax upon property or was so characterized. See Hanover Insurance Co. v. Harding, 272 U. S. 494, 509, 510.
In Fidelity & Deposit Co. v. Pennsylvania, 240 U. S. 319, we sustained the tax upon the gross premiums received by a company as surety upon bonds running to the United States for "internal revenue, customs, United States government officials, United States government contracts and banks for United States deposits," and "bonds given in courts of the United States in litigation there pending." While the challenged tax was "an exaction for the privilege of doing business," we held it to be valid as "mere contracts between private corporations and the United States do not necessarily render the former essential governmental agencies and confer freedom from state control." Id., pp. 320, 323. The premiums, of course, were paid by those who were required to obtain the bonds, but the fact that the contracts were with the United States and that the tax was laid upon gross receipts from the writing of such contracts, did not make the tax an invalid exaction.
In both the Alward case and that of the Fidelity & Deposit Company, the argument, pressed here, that the State withheld for its use "a part of every dollar" received by the taxpayer, was equally pertinent and equally unavailing.
The contention ultimately rests upon the point that the tax increases the cost to the Government of the service rendered by the taxpayer. But this is not necessarily so. The contractor, taking into consideration the state of the competitive market for the service, may be willing to bear the tax and absorb it in his estimated profit rather than lose the contract. In the present case, it is stipulated that respondent's estimated cost of the respective works, and the bids based thereon, did not include, and there was not included in the contract price paid to respondent, any specified item to cover the gross receipts tax, although respondent knew of the West Virginia act .imposing it, and respondent's estimates of cost did include "compensation and liability insurance, construction bond and property taxes."
But if it be assumed that the gross receipts tax may increase the cost to the Government, that fact would not invalidate the tax. With respect to that effect, a tax on the contractor's gross receipts would not differ from a tax on the contractor's property and equipment necessarily used in the performance of the contract. Concededly, such a tax may validly be laid. Property taxes are naturally, as in this case, reckoned as a part of the expense of doing the work. Taxes may validly be laid not only on the contractor's machinery but on the fuel used to operate it. In Trinityfarm Construction Co. v. Grosjean, 291 U. S. 466, the taxpayer entered into a contract with the Federal Government for the construction of levees in aid of navigation and gasoline was used to supply power for taxpayer's machinery. A state excise tax on the gasoline so used was sustained. The Court said that if the payment of the state taxes imposed on the property and operations of the taxpayer "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." But a tax of that sort unquestionably increases the expense of the contractor in performing his service and may, if it enters into the contractor's estimate, increase the cost to the Government. The fact that the tax on the gross receipts of the contractor in the Alward case, supra, might have increased the cost to the Government of the carriage of the mails did not impress the Court as militating against its validity.
There is the further suggestion that if the present tax of two per cent, is upheld, the State may lay a tax of twenty per cent, or fifty per cent, or even more, and make it difficult or impossible for the Government to obtain the service it needs. The argument ignores the power of Congress to protect the performance of the functions of the National Government and to prevent interference therewith through any attempted state action. In Thomson v. Pacific Railroad, supra, the Court pointedly referred to the authority of Congress to prevent such an interference through the use of the taxing power of the State. "It cannot," said the Court, "be so used, indeed, as to defeat or hinder the operations of the National government; but it will be safe to conclude, in general, in reference to persons and State corporations employed in government service, that when Congress has not interposed to protect their property from State taxation, such taxation is not obnoxious to that objection." See Van Allen v. Assessors, 3 Wall. 673, 585; Fidelity & Deposit Co. v. Pennsylvania, supra.
We hold that the West Virginia tax so far as it is laid upon the gross receipts of respondent derived from its activities within the borders of the State does not interfere in any substantial way with the performance of federal functions and is a valid exaction. The decree of the District Court is reversed and the cause is remanded for further proceedings in conformity with this opinion.
Reversed.
See Act of July 3, 1930, c. 847, 46 Stat. 928; H. Doc. No. 190, 70th Cong., 1st sess.; Act of August 30, 1935, c. 831, 49 Stat. 1035; H. Doc. No. 31, 73d Cong., 1st sess.
Prior to May 27, 1933, the tax was three-tenths of one per cent, and the assessment on receipts prior to that date was at that rate. Two of the contracts of respondent were made before the rates were changed.
That provision is as follows:
"The Congress shall have power . . .
"To exercise exclusive Legislation in all Cases whatsoever, over such District (not exceeding ten Miles square) as may, by Cession of particular States, and the acceptance of Congress, become the Seat of the Government of the United States, and to exercise like Authority over all Places purchased by the Consent of the Legislature of the State in which the Same shall be, for the Erection of Forts, Magazines, Arsenals, dock-Yards, and other needful Buildings."
"Sec. 3. Acquisition of Lands by United States; Jurisdiction. — The consent of this State is hereby given to the acquisition by the United States, or under its authority, by purchase, lease, condemnation, or otherwise, of any land acquired, or to be acquired in this State by the United States, from any individual, body politic or corporate, for sites for lighthouses, beacons, signal stations, post offices, customhouses, courthouses, arsenals, soldiers' homes, cemeteries, locks, dams, armor plate manufacturing plants, projectile factories or factories of any kind or character, or any needful buildings or structures or proving grounds, or works for the improvement of the navigation of any watercourse, or work of public improvement whatever, or for the conservation of the forests, or for any other purpose for which the same may be needed or required by the government of the United States. The evidence of title to such land shall be recorded as in other' cases.
"Any county, magisterial district or municipality, whether incorporated under general law or special act of the legislature, shall have power to pay for any such tract or parcel o'f land and present the same to'the government of the United States free of cost, for any of the purposes aforesaid, and to issue bonds and levy taxes for the purpose of paying for the same; and, in the case of a municipal corporation, the land so purchased and presented may be within the corporate limits of such municipality or within five miles thereof: Provided, however, That no such county, magisterial district or municipality shall, by the issue and sale of such bonds, cause the aggregate of its debt to exceed the limit fixed by the Constitution of this State: Provided, further, That the provisions of the Constitution and statutes of this State, or of the special act creating any municipality, relating to submitting the question of the issuing of bonds and all questions connected with the same to a vote of the people, shall, in all respects, be observed and complied with.
"Concurrent jurisdiction with this State in and over any land so acquired by the United States shall be, and the same is hereby, ceded to the United States for all purposes; but the jurisdiction so ceded shall continue no longer than the United States shall be the owner of such lands, and if the purposes of any grant to the United States shall cease, or the United States shall for five consecutive years fail to use any such land for the purposes of the grant, the jurisdiction hereby ceded over the same shall cease and determine, and the right and title thereto shall reinvest in this State. The jurisdiction ceded shall not vest until the United States shall acquire title of record to such land. Jurisdiction heretofore ceded to the United States over any land within this State by any previous acts of the legislature shall continue according to the terms of the respective cessions,"
"Sec. 4. Execution of Process and Other Jurisdiction as to Land Acquired by United States. — The State of West Virginia reserves the right to execute process, civil or criminal, within the limits of any lot or parcel of land heretofore or hereafter acquired by the United States as aforesaid, and such other jurisdiction and authority over the same as is not inconsistent with the jurisdiction ceded to the-United States by virtue of such acquisition."
See note 5.