Washington v. United States

460 U.S. 536

Opinions

Justice Rehnquist

delivered the opinion of the Court.

The State of Washington’s principal source of revenue is a sales and use tax imposed on the buyer or consumer in all retail sales and consumer uses of tangible personal property.¹ In this case the United States contends that one aspect of that tax statute — its application to building construction — is invalid under the Supremacy Clause of the United States Constitution. The statutory provisions are most easily understood in light of their history.

Before 1941, building contractors were treated as consumers for sales tax purposes. All sales of tangible personal property, such as construction materials, to contractors were subject to the sales tax. The legal incidence of this tax was on the contractor; the tax was collected by suppliers who sold to contractors, and remitted by them to the State.

In 1941, Washington changed the sales tax system it applied to contractors by defining the landowner who purchases construction work from the contractor, rather than the contractor, as the “consumer.” The legal incidence of the tax was now on the landowner, who paid tax on the full price of the construction project. The net result was that contractors’ labor costs and markups were added to the tax base, which had previously included only the cost of tangible personal property sold to contractors.

The post-1941 tax system could not, however, be applied to construction for the Federal Government because the Supremacy Clause prohibits States from taxing the United States directly. United States v. New Mexico, 455 U. S. 720 (1982). Thus, when the United States was the landowner, Washington did not collect any tax on the sale either of tangible personal property to the contractor or of the finished building to the Government.

In 1975, the Washington Legislature acted to eliminate the complete tax exemption for construction purchased by the United States.² It did so by reimposing the pre-1941 tax on contractors that work for the Federal Government (“federal contractors”).³ Thus, Washington now taxes the sale of non-federal projects to the landowner, and taxes the sale of materials to federal contractors. The net result is that for federal projects the legal incidence of the tax falls on the contractor rather than the landowner, and the tax is measured by a lesser amount than the tax on nonfederal projects because the contractor’s labor costs and markup are not included in the tax base.

Shortly after the new statute was enacted, the United States sued the State in the District Court for the Western District of Washington, seeking a declaratory judgment and a permanent injunction against the assessment and collection of the sales tax from federal contractors, and an order requiring the refund of sales taxes already so collected, for which the United States had reimbursed its contractors. The District Court granted the United States’ motion for partial summary judgment, holding that the statutes discriminate against federal contractors in violation of the Supremacy Clause. On appeal, the Court of Appeals for the Ninth Circuit affirmed. 654 F. 2d 570 (1981). Washington appealed pursuant to 28 U. S. C. §1254(2), and we noted probable jurisdiction. 456 U. S. 970 (1982).

In recent years this Court has examined in some detail the history of the Federal Government’s constitutional immunity from state taxation. United States v. New Mexico, supra, at 730-738; United States v. County of Fresno, 429 U. S. 452, 457-464 (1977). There is no reason to repeat these discussions here; it suffices to restate our conclusions. In New Mexico, we explained that “immunity may not be conferred simply because the tax has an effect on the United States, or even because the Federal Government shoulders the entire economic burden of the levy. . . . Similarly, immunity cannot be conferred simply because the state tax falls on the earnings of a contractor providing services to the Government.” 455 U. S., at 734. In Fresno, we stated the rule that, “[s]o long as the tax is not directly laid on the Federal Government, it is valid if nondiscriminatory... or until Congress declares otherwise.” 429 U. S., at 460 (citing James v. Dravo Contracting Co., 302 U. S. 134, 150, 161 (1937)). Accord, Memphis Bank & Trust Co. v. Garner, 459 U. S. 392, 397 (1983).

The United States’ principal argument is that the tax is invalid because Washington has circumvented the Federal Government’s tax immunity by identifying a federal activity for different tax treatment. Brief for United States 10, 21-31; Tr. of Oral Arg. 29-33, 40-41. Because Washington does not impose a sales tax on contractors who do not work for the Federal Government, the argument goes, it discriminates against the Federal Government and those with whom it deals.

Washington does, however, impose a sales tax on all purchases from contractors who do not deal with the Federal Government. The tax is imposed on every construction transaction, and the tax rate is the same for everyone. The only deviation from equality between the Federal Government and federal contractors on one hand, and every other taxpayer on the other, is that the former are taxed on a smaller proportion of the value of the project than the latter.⁴ Thus the Federal Government and federal contractors are both better off than other taxpayers because they pay less tax than anyone else in the State. This hardly seems, on its face, to be the mistreatment of the Federal Government against which the Supremacy Clause protects.

The United States relies upon Phillips Chemical Co. v. Dumas Independent School District, 361 U. S. 376 (1960), in which Texas taxed the lessees of property owned by the State on the value of their leasehold interest, but taxed some lessees of property owned by the United States on the full value of the premises. However, the Court there rejected the United States’ argument that the tax was invalid simply because it treats those who deal with the Federal Government differently than it treats others.⁵ Id., at 382. We plainly stated that a determination whether a tax is discriminatory “requires ‘an examination of the whole tax structure of the state.’” Id., at 383 (quoting Tradesmens National Bank v. Oklahoma Tax Comm’n, 309 U. S. 560, 568 (1940)).⁶ The Texas tax was invalid only because it imposed “a heavier tax burden on lessees of federal property than is imposed on lessees of” state property.⁷ 361 U. S., at 383, 387. See Memphis Bank & Trust Co. v. Garner, supra, at 398.

In United States v. County of Fresno, supra, the county imposed a tax on the owners of real property. Of course, property owned by the United States was exempt from the tax. Rather than forgo all revenue from federally owned, land, the county taxed private lessees’ interests in real property rented from the Federal Government and other tax-exempt owners.⁸ It did not tax the interests of any lessees of nonexempt property. We rejected the United States’ contention that the tax system discriminated against lessees of federal property. Because the economic burden of a tax imposed on the owner of nonexempt property is ordinarily passed on to the lessee, we explained that those who leased property from the Federal Government were no worse off than their counterparts in the private sector. 429 U. S., at 464-465.

Similarly, in United States v. City of Detroit, 355 U. S. 466, 473-474 (1958), Michigan taxed private property owners, but not the United States or other exempt owners. Instead, the State taxed nonexempt parties’ use of exempt property. It did not tax the use of nonexempt property. We upheld the tax because the State may “equate the tax burden imposed on private enterprise using exempt property with that carried by similar businesses using taxed property.”⁹ Id., at 473. We explained that “[tjhose using exempt property are required to pay no greater tax than that placed on private owners or passed on by them to their business lessees.” Id., at 473-474.

In this case, federal contractors are required to pay no greater tax than that placed on private buyers of construction work or passed on by them to their contractors. The Court of Appeals sought to distinguish Detroit on the ground that the tax burden in this case is not necessarily shifted to the nonfederal contractors. 654 F. 2d, at 576. But there was no proof in either Detroit or Fresno that private owners would necessarily pass the tax on to their lessees; the opportunity for the parties to allocate the economic burden of the tax among themselves was sufficient. No more should be required here.

The important consideration, therefore, is not whether the State differentiates in determining what entity shall bear the legal incidence of the tax, but whether the tax is discriminatory with regard to the economic burdens that result. The only difference between this case and Fresno and Detroit is that the taxpayer here is a vendor of services to the United States, rather than one who receives an economic benefit from the Federal Government. To rest upon this distinction would be to elevate form over substance. The entire trend of our decisions since James v. Dravo Contracting Co., 302 U. S. 134 (1937), has been to avoid “wooden formalism.” United States v. New Mexico, 455 U. S., at 737. See Fresno, 429 U. S., at 460-461, and n. 9. See generally Comment, Federal Immunity from State Taxation, 45 U. Chi. L. Rev. 695, 700-702 (1978). The State does not discriminate against the Federal Government and those with whom it deals unless it treats someone else better than it treats them.¹⁰

The Court of Appeals thought that the Washington statutes do not provide a “political check against abuse of the taxing power,” Fresno, supra, at 463, because “there is no broad state constituency taxed as are the prime contractors who deal with the federal government.” 654 F. 2d, at 577. A “political check” is provided when a state tax falls on a significant group of state citizens who can be counted upon to use their votes to keep the State from raising the tax excessively, and thus placing an unfair burden on the Federal Government. It has been thought necessary because the United States does not have a direct voice in the state legislatures. See generally Fresno, swpra, at 458-459, and n. 6.

The Court of Appeals focused only on the taxes levied directly on contractors, and not on “ ‘the whole tax structure of the state.’” Phillips, 361 U. S., at 383 (quoting Trades-mens, 309 U. S., at 568). The tax on federal contractors is part of the same structure, and imposed at the same rate, as the tax on the transactions of private landowners and contractors. Indeed, the tax on contractors is part of a single sales tax scheme that is imposed at the same rate on every retail transaction in Washington; virtually every citizen is affected by the tax in the same way. As long as the tax imposed on those who deal with the Federal Government is an integral part of a tax system that applies to the entire State, there is little chance that the State will take advantage of the Federal Government by increasing the tax.¹¹

In short, Washington has not singled out contractors who work for the United States for discriminatory treatment. It has merely accommodated for the fact that it may not impose a tax directly on the United States as the project owner. This the State may do without running afoul of the Supremacy Clause. As the Court stated in United States v. New Mexico, supra, at 737-738:

“If 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. James v. Dravo Contracting Co., 302 U. S., at 161; Carson v. Roane-Anderson Co., 342 U. S. 232, 234 (1952). And this allocation of responsibility is wholly appropriate, for the political process is ‘uniquely adapted to accommodating the competing demands’ in this area. Massachusetts v. United States, 435 U. S. 444, 456 (1978) .... But absent congressional action, we have emphasized that the States’ power to tax can be denied only under ‘the clearest constitutional mandate.’ Michelin Tire Corp. v. Wages, 423 U. S. 276, 293 (1976).”¹²

The judgment of the Court of Appeals is

Reversed.

2 The statute places public housing authorities in the same category as the Federal Government. No party has argued that this circumstance affects the analysis of this case, and public housing authorities will be disregarded throughout this opinion. The statute treats all branches of state or local government other than public housing authorities in the same way as private parties.

3 As the Court of Appeals explained, 654 F. 2d 570, 573, n. 6 (1981):

“The manner in which this was accomplished is somewhat complex. The change was effected by substitute House Bill No. 86, enacted into law as Chapter 90, Laws of 1975 (amending Wash. Rev. Code §§ 82.04.050 and 82.04.190); Section 5 of Substitute House Bill No. 2736, enacted into law as Section 5 of Chapter 291, Laws of 1975 (amending Wash. Rev. Code §82.04.050) and House Bill No. 1229, enacted into law as Chapter 1, Laws of 1975-76 (amending Wash. Rev. Code §§82.12.010 and 82.12.020). These statutes added the following definition of ‘consumer’ to Wash. Rev. Code §82.04.190:

“ ‘ “Consumer” means the following: . . .

“‘(6) Any person engaged in the business of constructing, repairing, decorating, or improving new or existing buildings or other structures under, upon or above real property of or for the United States, any instrumentality thereof, or a county or city housing authority created pursuant to chapter 35.82 RCW, including the installing or attaching of any article of tangible personal property therein or thereto, whether or not such personal property becomes a part of the realty by virtue of installation. Any such person shall be a consumer within the meaning of this subsection in respect to tangible personal property incorporated into, installed in, or attached to such building or other structure by such person.’

“These statutes further expressly excluded from the definition of ‘consumer’ ‘the United States, instrumentalities thereof, and county and city housing authorities created pursuant to chapter 35.82 RCW in respect to labor and services rendered to their real property.’ Wash. Rev. Code §82.04.190(4). Wash. Rev. Code §82.04.050 was also amended so as to redefine ‘retail sale’ and ‘sale at retail’ to exclude expressly from their scope contracts calling for the improvement, repair or construction of real property owned by the United States or any of its instrumentalities and to include sales of materials to prime contractors engaged in construction work on federally-owned property. As with the sales tax, the liability of federal prime construction contractors for the State’s use tax arose basically from the inclusion of such contractors within the meaning of the term ‘consumer,’ and the use of that term in Wash. Rev. Code § 82.12.020, under which the use tax is levied.”

4 The United States argues that it is inappropriate to consider the economic burden on the contractor and the owner together, and that we should focus solely on the tax the contractor is required to pay. When the case is viewed in this light, we are told, it is apparent that federal contractors pay more than other contractors. The Court of Appeals apparently accepted this argument. Id., at 576.

This way of looking at the problem is unrealistic. The appropriate question is whether a contractor who is considering working for the Federal Government is faced with a cost he would not have to bear if he were to do the same work for a private party. If he works for the Federal Government, the contractor is required to pay a tax on the materials he buys. The contractor will count the tax among his costs in setting a price for the Government. Depending on his bargaining power, he may pass some or all of the tax on to the Federal Government when he sets his price. If he works for a private party, the contractor is required to collect the tax from the purchaser and remit it to the State. The purchaser will count the tax as part of the price of the building. Depending on his bargaining power, the contractor may reduce his price to make up for some or all of the tax the purchaser must pay. If the tax is the same, and the parties have the same bargaining power, the amounts the purchasers pay and the amounts the contractors receive will be identical in the two cases. Thus, it makes no difference to the contractor (or to the purchasers) which of them is required to pay the tax to the State, as long as they have the opportunity to allocate the burden among themselves by adjusting the price.

5 We acknowledged that Macallen Co. v. Massachusetts, 279 U. S. 620 (1929), supported the United States’ argument, but explained that, “to the extent that it does, it no longer has precedential value.” 361 U. S., at 382. See also United States v. City of Detroit, 355 U. S. 466, 472, n. 2 (1958).

6 We noted that “nothing in Miller [v. Milwaukee, 272 U. S. 713 (1927), upon which the United States also seeks to rely], at least as it has been interpreted in later eases, should be read as indicating that less is required.” 361 U. S., at 383.

7 The United States also relies upon Moses Lake Homes, Inc. v. Grant County, 365 U. S. 744 (1961). In that ease, like in Phillips, the State taxed lessees of property owned by the State on a lower valuation than lessees of property owned by the United States. We held, on the authority of Phillips, that the tax was invalid. 365 U. S., at 751. This holding does not support the United States’ position any more than the holding in Phillips.

The Court of Appeals in Moses Lake had attempted to eliminate the discriminatory aspect of the tax by reducing the tax “to what it would have been if” it had been levied on a state lessee. 365 U. S., at 752. We held that the Court of Appeals did not have the power to revise the state tax to cure a constitutional defect. Ibid. This was nothing more than a ruling on severability and has no bearing on this case.

8 Nothing in the case turned on the existence of other tax-exempt owners.

9 This answers the United States’ contention that the Washington tax is invalid simply because it is an attempt to circumvent the Federal Government’s tax immunity. The Washington statute is no different from any other taxing scheme that switches the incidence of the tax from one party to a transaction to another when the party that would ordinarily be taxed is immune. In this respect, this case is no different from Fresno or Detroit.

10 In this respect, this case is like United States v. Department of Revenue of Illinois, 371 U. S. 21 (1962), summarily aff’g 202 F. Supp. 757 (ND Ill.). Illinois imposed a retail sales tax on the retailer and a tax in an identical amount on the purchaser. The State permitted the retailer to keep the tax he collected from the purchaser. Although retailers could not, of course, collect the tax from the United States when it purchased goods from them, they were nonetheless required to pay the tax imposed on them. Retailers who dealt with the United States were economically burdened by this taxing scheme unless they could adjust their prices to pass their tax burden on to the Federal Government. Nevertheless, this Court summarily affirmed the District Court’s conclusion, id., at 760, that such disparate treatment of taxpayers resulting from the United States’ immunity from state taxation is not forbidden by the Supremacy Clause.

11 A different situation would be presented if a State imposed a sales tax on contractors who work for the Federal Government, and an entirely differrent kind of tax, such as a head tax or a payroll tax, on every other business. That, however, is not this case.

12 We note that when Congress has acted in this field, it has applied a nondiscrimination rule. See, e. g., Memphis Bank & Trust Co. v. Garner, 459 U. S. 392 (1983) (construing 31 U. S. C. § 742). If some other test of the validity of a state tax was necessary to protect the Federal Government, it would be reasonable to expect that Congress would, for at least some situation, have devised one.

1 See, e. g., United States v. County of Fresno, 429 U. S. 452 (1977); United States v. New Mexico, 455 U. S. 720 (1982). But compare Minneapolis Star & Tribune Co. v. Minnesota Comm’r of Revenue, post, p. 575.