Article I, Section 8, Clause 1:
The Congress shall have Power To lay and collect Taxes, Duties, Imposts and Excises, to pay the Debts and provide for the common Defence and general Welfare of the United States; but all Duties, Imposts and Excises shall be uniform throughout the United States; . . .
There is no provision in the Constitution that expressly provides that the federal government is immune from state taxation,1 just as there is no provision in the Constitution that expressly provides that states are immune from federal taxation.2 However, the Supreme Court has applied the intergovernmental tax immunity doctrine to invalidate taxes that impair the sovereignty of the Federal Government or state governments. The intergovernmental tax immunity doctrine is a limitation on federal and state taxing powers by implication.3 The Court has explained that the origins of the intergovernmental tax immunity doctrine lie in the Supremacy Clause,4 the Tenth Amendment, and the preservation of the Constitution’s system of dual federalism.5
The Court first articulated the principles underlying the intergovernmental tax immunity doctrine in 1819 in McCulloch v. Maryland.6 In McCulloch, the Court ruled that the Supremacy Clause barred Maryland from imposing taxes on notes issued by the Second Bank of the United States and related penalties.7 The Court reasoned that if a state had the power to tax the means of the Federal Government, the Supremacy Clause would be empty and without meaning.8 Thus, the Court held states had “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.” 9
Initially, following McCulloch, there were few limitations on federal immunity from state taxation and state immunity from federal taxation.10 The Court applied the intergovernmental tax immunity doctrine to prohibit federal and state governments from imposing a nondiscriminatory tax on the income or the assets an individual or business received from a contract with the other sovereign. In 1842, in Dobbins v. Commissioners of Erie County,11 the Supreme Court held that the compensation of a federal officer was immune from state taxes.12 In 1870, in Collector v. Day,13 the Court relied on the dual federalism principles laid out in McCulloch to hold that the salary of a state officer was immune from federal taxes.14 In 1895, building upon Day, the Court held in Pollock v. Farmers’ Loan & Trust15 that the interest earned from municipal bonds was immune from a nondiscriminatory federal tax because it was a tax on the power of states and their instrumentalities to borrow money, which was repugnant to the Constitution.16
By the beginning of the twentieth century, the Supreme Court began to outline the limits of Day and the scope of state immunity from nondiscriminatory federal taxation. In 1903, the Court upheld a federal succession tax upon a bequest to a municipality for public purposes on the ground that the tax was payable by the executor of an estate before distribution to the legatee, the municipality.17 A closely divided Court declined to “regard it as a tax upon the municipality though it might operate incidentally to reduce the bequest by the amount of the tax.” 18 The Court noted “many, if not all, forms of taxation—indeed it may be said generally that few taxes are wholly paid by the person upon whom they are directly and primarily imposed.” 19 When South Carolina embarked upon the business of dispensing “intoxicating liquors,” its agents were held to be subject to the federal license tax on dealers in intoxicating liquors, the ground of the holding being that agents were not carrying out the ordinary functions of government, but carrying on an ordinary private business.20
Another decision marking a clear departure from the logic of Collector v. Day was Flint v. Stone Tracy Co.,21 in which the Court sustained an act of Congress taxing the privilege of doing business as a corporation, the tax being measured by the income.22 The argument that the tax imposed an unconstitutional burden on the exercise by a state of its reserved power to create corporate franchises was rejected, partly because of the principle of national supremacy and partly on the ground that state immunity did not extend to private businesses.23 This case also qualified Pollock v. Farmers’ Loan & Trust Co. to the extent that it allowed Congress to impose a privilege tax on the income of corporations from all sources, including state bond interest.24
Subsequent cases have sustained an estate tax on a decedent’s estate that included state bonds,25 a federal transportation tax on the transportation of merchandise in performance of a contract to sell and deliver it to a county,26 custom duties on the importation of scientific apparatus by a state university,27 a federal admissions tax on admissions to athletic contests sponsored by a state institution when the state institution used the net proceeds from admissions to support a system of public education,28 and a federal admissions tax on admissions to a municipal corporation’s recreational facilities when the municipal corporation used the admissions charges to cover the recreational facilities’ costs.29 The income derived by independent contractors who were consulting engineers advising states on water supply and sewage disposal systems,30 the compensation of trustees appointed to manage a street railway system temporarily taken over and operated by a state,31 the net profits derived from the sale of state bonds,32 and the net proceeds derived by a trust from the sale of oil produced under a lease of state lands33 have all been held to be subject to federal taxation despite a possible economic burden on the states.
In South Carolina v. Baker,34 the Court finally explicitly confirmed that it had overruled its holding in Pollock that state bond interest was immune from a nondiscriminatory federal tax.35 The Court observed that “the more general rule that neither the federal nor the state governments could tax income an individual directly derived from any contract with another government” 36 had already been rejected in numerous decisions involving immunity under the intergovernmental tax immunity doctrine.37 Thus, the Court concluded,
We see no constitutional reason for treating persons who receive interest on government bonds differently than persons who receive income from other types of contracts with the government, and no tenable rationale for distinguishing the costs imposed on states by a tax on state bond interest from the costs imposed by a tax on the income from any other state contract.38
The specific ruling of Day that the Federal Government was prohibited from taxing the salaries of state government officers has been overruled.39 But the principles underlying that decision—that Congress may not lay a tax that would impair the sovereignty of the states—is still recognized as retaining some vitality.40 The Court in South Carolina v. Baker summarized the modern intergovernmental tax immunity doctrine,41 stating:
States can never tax the United States directly but can tax any private parties with whom it does business, even though the financial burden falls on the United States, as long as the tax does not discriminate against the United States or those with whom it deals [and] the rule with respect to state tax immunity is essentially the same.42
The Court reasoned that under the modern doctrine there were “at least some” nondiscriminatory taxes that the Federal Government could impose directly on states that states could not impose directly on the Federal Government, but it did not address the extent to which states were immune from direct federal taxation.43 In a footnote, the Court reaffirmed the principal from New York v. United States44 that the issue of whether a federal tax violates state tax immunity under the intergovernmental tax immunity does not arise unless the tax is collected directly from a state.45
- Collector v. Day, 78 U.S. (11 Wall.) 113, 127 (1871), overruled by Graves v. New York ex rel. O’Keefe, 306 U.S. 466, 486 (1939).
- Day, 78 U.S. (11 Wall.) at 127.
- Graves, 306 U.S. at 477–78 (1939).
- U.S. Const. art. VI, cl. 2.
- See, e.g., South Carolina v. Baker, 485 U.S. 505, 523, 523 n.14 (1988); United States v. New Mexico, 455 U.S. 720, 735–36 (1982); New York v. United States, 326 U.S. 572, 586–87 (1946); Day, 78 U.S. (11 Wall.) at 123–27; McCulloch, v. Maryland, 17 U.S. (4 Wheat.) 316, 427–37 (1819).
- 17 U.S. (4 Wheat.) at 427–37.
- Id. at 436.
- Id. at 433.
- Id. at 436.
- Jefferson Cnty. v. Acker, 527 U.S. 423, 436 (1999), superseded on other grounds by statute, Removal Clarification Act of 2011, Pub. L. No. 112–51, 125 Stat. 545 (broadening grounds for removal of certain litigation to federal courts); see also Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928) (holding a state tax on the privilege of distributing gasoline measured by gallons of gasoline sold was unconstitutional as applied to sales a distributor made to the United States), abrogated by Alabama v. King & Boozer, 314 U.S. 1 (1941).
- 41 U.S. (16 Pet.) 435, 450 (1842), superseded by statute, Public Salary Act of 1939, Pub. L. No. 76–32, tit. 1, ch. 59, § 4, 53 Stat. 574, 575 (codified as amended at 4 U.S.C. § 111).
- Id. at 450.
- 78 U.S. (11 Wall.) 113 (1871), overruled by Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939).
- Id. at 120–21.
- Pollock v. Farmers’ Loan & Tr. Co., 157 U.S. 429 (1895), overruled by South Carolina v. Baker, 485 U.S. 505 (1988).
- Id. at 586 (citing Weston v. City Council of Charleston, 27 U.S. (2 Pet.) 449, 468 (1829) (holding federal bond interest was immune from state taxation)).
- Snyder v. Bettman, 190 U.S. 249 (1903).
- Id. at 254.
- South Carolina v. United States, 199 U.S. 437 (1905); see also Ohio v. Helvering, 292 U.S. 360 (1394); but see New York v. United States, 326 U.S. 572 (1946) (abandoning the governmental/proprietary distinction in determining state immunity from federal taxation).
- 220 U.S. 107 (1911).
- Id. at 146, 177.
- Id. at 152–58.
- See id. at 162–65.
- Greiner v. Lewellyn, 258 U.S. 384, 387 (1922).
- Wheeler Lumber Bridge & Supply Co. of Des Moines v. United States, 281 U.S. 572, 579 (1930).
- Bd. of Trs. v. United States, 289 U.S. 48, 59–60 (1933) ( “explaining Congress has the exclusive power to regulate foreign commerce under Article I, Section 8, clause 3 of the U.S. Constitution and that the principles underlying state immunity from federal taxation do not provide a basis for state control over importation.” ).
- Allen v. Regents, 304 U.S. 439, 451–453 (1938) (citing South Carolina v. United States, 199 U.S. 437 (1905)).
- Wilmette Park Dist. v. Campbell, 338 U.S. 411, 413–14, 420 (1949).
- Metcalf & Eddy v. Mitchell, 269 U.S. 514, 518, 524–26 (1926).
- Helvering v. Powers, 293 U.S. 214, 225–27 (1934) (citing South Carolina v. United States, 199 U.S. 437 (1905)) and Ohio v. Helvering, 292 U.S. 360 (1394)).
- Willcuts v. Bunn, 282 U.S. 216, 223, 230–34 (1931).
- Helvering v. Mountain Producers Corp., 303 U.S. 376, 385–87 (1938) overruling in part Burnet v. Coronado Oil & Gas Co., 285 U.S. 393, 52 S. Ct. 443, 76 L. Ed. 815 (1932) and Gillespie v. Oklahoma, 257 U.S. 501 (1922).
- 485 U.S. 505 (1988).
- Id. at 524.
- Id. at 517.
- Id. at 518–525 (citing Washington v. United States, 460 U.S. 536 (1983); United States v. New Mexico, 455 U.S. 720 (1982); United States v. Cnty. of Fresno, 429 U.S. 452 (1977); United States v. City of Detroit, 355 U.S. 466 (1958); Oklahoma Tax Comm’n v. Texas Co., 336 U.S. 342 (1949); Alabama v. King & Boozer, 314 U.S. 1 (1941); Graves v. New York ex rel. O’Keefe, 306 U.S. 466 (1939); Helvering v. Gerhardt, 304 U.S. 405 (1938); Mountain Producers Corp., 303 U.S. 376 (1938); James v. Dravo Contracting Co., 302 U.S. 134 (1937)).
- Id. at 524–25.
- Graves v. New York ex rel. O’Keefe, 306 U.S. 466, 486 (1939). Collector v. Day, 78 U.S. (11 Wall.) 113 (1871), was decided in 1871 while the country was still in the throes of Reconstruction. As noted by Chief Justice Stone in a footnote to his opinion in Helvering v. Gerhardt, 304 U.S. 405, 414 n.4 (1938), the Court had not determined how far the Civil War Amendments had broadened the federal power at the expense of the states, but the fact that the taxing power had recently been used with destructive effect upon notes issued by state banks for circulation in Veazie Bank v. Fenno, 75 U.S. (8 Wall.) 533 (1869), suggested the possibility of similar attacks upon the existence of the states themselves. Two years later, the Court took the logical step of holding that a federal tax on railroad bond interest could not be imposed on the interest received by a municipal corporation that issued bonds to provide a loan to a railroad company because the federal tax was a tax on the municipal corporation. United States v. R.R., 84 U.S. (17 Wall.) 322 (1873). Then, the far-reaching extension of state immunity from federal taxation was granted in Pollock v. Farmers’ Loan & Tr. Co., 157 U.S. 429 (1895), when interest received by a private investor on state or municipal bonds was held to be exempt from federal taxation. Though relegated to virtual desuetude, Pollock was not expressly overruled until South Carolina v. Baker, 485 U.S. 505 (1988). As the apprehension of this era subsided, the doctrine of these cases that extended the reach of state immunity from federal taxation was pushed into the background. It never received the same wide application as did McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819), in curbing the power of the states to tax operations or instrumentalities of the Federal Government. The Supreme Court has not issued an opinion significantly narrowing the national taxing power in the name of dual federalism since the early twentieth century. In 1931, the Court held that a federal excise tax on articles sold by manufacturers was inapplicable to the sale of a motorcycle to a municipal corporation for use by the corporation in its police service. Indian Motorcycle Co. v. United States, 283 U.S. 570, 579 (1931). Justices Stone and Brandeis dissented from this decision, and it is doubtful whether it would be followed today. Cf. Massachusetts v. United States, 435 U.S. 444 (1978) (upholding the application of a nondiscriminatory federal user fee on all civil aircraft that fly in U.S. navigable airspace to state-owned aircraft used exclusively for police functions when the user fees defrayed the costs of federal aviation programs). The Court in Indian Motorcycle Co. relied on its decision in Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928), in which it invalidated the application of a state privilege tax to sales of gasoline a distributor made to the United States. The Court later rejected this reasoning from Panhandle Oil Co. in Alabama v. King & Boozer, 314 U.S. 1 (1941). In King & Boozer, the Court stated, “The asserted right of the one to be free of taxation by the other does not spell immunity from paying the added costs, attributable to the taxation of those who furnish supplies to the Government and who have been granted no tax immunity.” King & Boozer, 314 U.S. at 9.
- At least, if the various opinions in New York v. United States, 326 U.S. 572 (1946), retain force, and they may in view of (a later) New York v. United States, 505 U.S. 144 (1992), a Commerce Clause case rather than a tax case. See also South Carolina v. Baker, 485 U.S. 505, 523 n. 14 (1988).
- South Carolina v. Baker, 485 U.S. at 523.
- Id.; see id. at 523 n.14. The Supreme Court’s decision in South Carolina v. Baker came just three years after Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985), where the Court held that the Tenth Amendment’s limit on Congress’s authority to regulate state activities was structural as opposed to substantive and that States must find their protection through the national political process (e.g., elections). The Court in South Carolina v. Baker observed that even in Garcia it “left open the possibility that some extraordinary defects in the national political process might render congressional regulation of state activities invalid under the Tenth Amendment.” Id. In both Garcia and South Carolina v. Baker, the Court declined to identify and define the defects that would lead to invalidation of legislation. Id.; see id. at 520 n.11 ( “To some, Garcia v. San Antonio Metropolitan Transit Authority, 469 U.S. 528 (1985), may suggest further limitations on state tax immunity. We need not, however, decide here the extent to which the scope of the federal and state immunities differ or the extent, if any, to which States are currently immune from direct nondiscriminatory federal taxation.” ); cf. New York v. United States, 326 U.S. 572, 586 (1946) ( “Concededly a federal tax discriminating against a State would be an unconstitutional exertion of power over a coexisting sovereignty within the same framework of government.” ).
- New York v. United States, 326 U.S. 572 (1946) (upholding the application of a nondiscriminatory federal excise tax to state sales of bottled mineral water taken from state-owned springs).
- South Carolina v. Baker, 485 U.S at 523 n.14.