Taxation of Government Contractors.

In the course of his opinion in Osborn v. Bank of the United States,125 Chief Justice Marshall posed the question: “Can a contractor for supplying a military post with provisions, be restrained from making purchases within any state, or from transporting the provisions to the place at which the troops were stationed? Or could he be fined or taxed for doing so? We have not yet heard these questions answered in the affirmative.”126

Today, the question insofar as taxation is concerned is answered in the affirmative. Although the early cases looked toward immunity,127 in James v. Dravo Contracting Co.,128 by a 5-to-4 vote, the Court established the modern doctrine. Upholding a state tax on the gross receipts of a contractor providing services to the Federal Government, the Court said that “ ‘[I]t is not necessary to cripple [the state’s power to tax] 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.’ ”129 A state-imposed sales tax upon the purchase of goods by a private firm having a cost-plus contract with the Federal Government was sustained, it not being critical to the tax’s validity that it would be passed on to the government.130 Previously, it had sustained a gross receipts tax levied in lieu of a property tax upon the operator of an automobile stage line, who was engaged in carrying the mails as an independent contractor131 and an excise tax on gasoline sold to a contractor with the government and used to operate machinery in the construction of levees on the Mississippi River.132 Although the decisions have not set an unwavering line,133 the Court has hewed to a very restrictive doctrine of immunity. “[T]ax 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.”134 Thus, New Mexico sustained a state gross receipts tax and a use tax imposed upon contractors with the Federal Government which operated on “advanced funding,” drawing on federal deposits so that only federal funds were expended by the contractors to meet their obligations.135 Of course, Congress may statutorily provide for immunity from taxation of federal contractors generally or in particular programs.136


22 U.S. (9 Wheat.) 738 (1824). [Back to text]
22 U.S. at 867. [Back to text]
The dissent in James v. Dravo Contracting Co., 302 U.S. 134, 161 (1937), observed that the Court was overruling “a century of precedents.” See, e.g., Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928) (voiding a state privilege tax on dealers in gasoline as applied to sales by a dealer to the Federal Government for use by Coast Guard). It was in Panhandle that Justice Holmes uttered his riposte to Chief Justice Marshall: “The power to tax is not the power to destroy while this Court sits.” Id. at 223 (dissenting). [Back to text]
302 U.S. 134 (1937). [Back to text]
302 U.S. at 150 (quoting Willcuts v. Bunn, 282 U.S. 216, 225 (1931)). [Back to text]
Alabama v. King & Boozer, 314 U.S. 1 (1941), overruling Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928), and Graves v. Texas Co., 298 U.S. 393 (1936). See also Curry v. United States, 314 U.S. 14 (1941). “The Constitution . . . does not forbid a tax whose legal incidence is upon a contractor doing business with the United States, even though the economic burden of the tax, by contract or otherwise, is ultimately borne by the United States.” United States v. Boyd, 378 U.S. 39, 44 (1964) (sustaining sales and use taxes on contractors using tangible personal property to carry out government cost-plus contract). [Back to text]
Alward v. Johnson, 282 U.S. 509 (1931). [Back to text]
Trinityfarm Const. Co. v. Grosjean, 291 U.S. 466 (1934). [Back to text]
United States v. Allegheny County, 322 U.S. 174 (1944) (voiding property tax that included in assessment the value of federal machinery held by private party); Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1954) (voiding gross receipts sales tax applied to contractor purchasing article under agreement whereby he was to act as agent for government and title to articles purchased passed directly from vendor to United States). [Back to text]
United States v. New Mexico, 455 U.S. 720, 735 (1982). See South Carolina v. Baker, 485 U.S. 505, 523 (1988). [Back to text]
“[I]mmunity 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.” United States v. New Mexico, 455 U.S. 720, 734 (1982). Arizona Dep’t of Revenue v. Blaze Constr. Co., 526 U.S. 32 (1999) (the same rule applies when the contractual services are rendered on an Indian reservation). [Back to text]
James v. Dravo Contracting Co., 302 U.S. 134, 161 (1937); Carson v. Roane-Anderson Co., 342 U.S. 232, 234 (1952); United States v. New Mexico, 455 U.S. 720, 737 (1982). Roane-Anderson held that a section of the Atomic Energy Act barred the collection of state sales and use taxes in connection with sales to private companies of personal property used by them in fulfilling their contracts with the AEC. Thereafter, Congress repealed the section for the express purpose of placing AEC contractors on the same footing as other federal contractors, and the Court upheld imposition of the taxes. United States v. Boyd, 378 U.S. 39 (1964). [Back to text]