United States v. State of Mich.

• Decision Date: 11 October 1985
• Docket Number: No. G82-342 CA5.,G82-342 CA5.
• Parties: UNITED STATES of America, Plaintiff, v. STATE OF MICHIGAN, Defendant.
• Court: U.S. District Court — Western District of Michigan

635 F. Supp. 944

UNITED STATES of America, Plaintiff, v. STATE OF MICHIGAN, Defendant.

No. G82-342 CA5.

United States District Court, W.D. Michigan, S.D.

October 11, 1985.

John A. Smietanka, U.S. Atty. by Brenda A. Braceful, Asst. U.S. Atty., Grand Rapids, Mich., U.S. Dept. of Justice by Glenn L. Archer, Jr., Edward J. Snyder, Charles E. Stratton, Richard A. Correa, Attys., Tax Div., Washington, D.C., for plaintiff.

Frank J. Kelley, Atty. Gen. Richard R. Roesch, Asst. Atty. Gen. by Robert C. Ward, Jr., Lansing, Mich., for defendant.

OPINION ON CROSS MOTIONS FOR SUMMARY JUDGMENT

MILES, District Judge.

Jurisdiction of this action is conferred by 28 U.S.C. §§ 1345 and 2201, granting original jurisdiction in the district courts over any civil action commenced by the United States as plaintiff.

Plaintiff United States of America brought this action seeking a declaratory judgment that federal credit unions within the State of Michigan are "federal instrumentalities" and are thus constitutionally immune from state sales taxes. However, the parties have raised several subsidiary issues which must be addressed:

1. Does the Tax Injunction Act, 28 U.S.C. § 1341 bar this Court from asserting jurisdiction over the case?

2. Are federal credit unions "federal instrumentalities?"

3. Does the legal incidence of the Michigan sales tax fall on the retailer or on the seller?

4. What is the appropriate statute of limitations in this case?

Resolution of these issues does not dispose of the case, as the parties will be required, assuming the Court does find the federal credit unions to be constitutionally immune from state sales tax, to ascertain the exact amount of money to be restored to the United States.

The first federal credit union statute was enacted in 1934. The Federal Credit Union Act, 12 U.S.C. § 1751, et seq. was enacted to charter federal credit unions, defined as

... a cooperative association organized in accordance with the provisions of this chapter for the purpose of promoting thrift among its members and creating a source of credit for provident or productive purposes.

12 U.S.C. § 1752(1).

Federal credit unions are exempt from state taxation as provided in 12 U.S.C. § 1768:

The Federal credit unions organized hereunder, their property, their franchises, capital, reserves, surpluses, and other funds, and their income shall be exempt from all taxation now or hereafter imposed by the United States or by any State, Territorial, or local taxing authority; except that any real property and any tangible personal property of such Federal credit unions shall be subject to Federal, State, Territorial, and local taxation to the same extent as other similar property is taxed.

The Michigan General Sales Tax Act, Mich. Comp.Laws Ann. § 205.51, et seq. provides for the imposition of a 4% sales tax on all retail sales, to be collected and remitted by the retailer. Mich.Comp.Laws Ann. § 205.54(5) provides an exemption from sales tax for all federal instrumentalities:

A person subject to a tax under this act shall not include in the amount of his or her gross proceeds used for the computation of the tax any proceeds of his or her business derived from sales to the United States, its unincorporated agencies and instrumentalities, any incorporated agency or instrumentality of the United States wholly owned by the United States or by a corporation wholly owned by the United States, the American Red Cross and its chapters and branches, and this state or its departments and institutions or any of its political subdivisions.

Thus, the crucial question, to be determined later in this opinion, is "Are federal credit unions federal `instrumentalities?'" Does this Court lack subject matter jurisdiction because of the prohibition contained in 28 U.S.C. § 1341?

The Tax Injunction Act, 28 U.S.C. § 1341 provides:

The district courts shall not enjoin, suspend, or restrain the assessment, levy or collection of any tax under State law where a plain, speedy and efficient remedy may be had in the courts of such State.

Defendant contends that this provision prohibits the Court from assuming jurisdiction over the case.

This argument is unmeritorious and must be rejected. It is uniformly held that 28 U.S.C. § 1341 has no application to suits by the United States challenging the constitutionality of a state tax as applied to it. As the United States Supreme Court held in Department of Employment et al. v. United States et al., 385 U.S. 355, 357-58, 87 S.Ct. 464, 466-67, 17 L.Ed.2d 414 (1966)

... we conclude, in accord with an unbroken line of authority and convincing evidence of legislative purpose, that § 1341 does not act as a restriction upon suits by the United States to protect itself and its instrumentalities from unconstitutional state exaction.

Also see United States v. Anderson County, Tennessee, 705 F.2d 184 (6th Cir.1983); United States v. Arlington County, Virginia, 326 F.2d 929 (4th Cir.1964).

Defendant claims that the threshold question is whether the credit unions are "federal instrumentalities;" only after this question is determined can it be ascertained whether this Court has jurisdiction or is prohibited by 28 U.S.C. § 1341. This contention, too, is unmeritorious. It cannot be argued that this Court lacks jurisdiction to determine whether credit unions are or are not in fact federal instrumentalities; that is a legal determination independent of and subsequent to determination of the propriety of jurisdiction. 28 U.S.C. § 1345 clearly gives this Court original jurisdiction over civil actions brought by the United States as plaintiff. The United States' right to bring such actions in the district courts as sovereign to protect its interests and policies is well established. United States v. Arlington County, Virginia, supra.

Defendant next cites two Supreme Court cases for the proposition that section 1341 enacts an unequivocal barrier to suits in the federal court to enjoin the assessment or collection of any state tax. See, e.g., Moe v. The Confederated Salish and Kootenai Tribes of the Flathead Reservation, et al., 425 U.S. 463, 96 S.Ct. 1634, 48 L.Ed.2d 96 (1976); California v. Grace Brethren Church, 457 U.S. 393, 102 S.Ct. 2498, 73 L.Ed.2d 93 (1982). However, none of the cases cited by defendant concern the right of the United States as plaintiff to challenge the constitutionality of any state tax as applied to it. Both of the cases cited above arose as a result of suits by private plaintiffs claiming exemption from state taxes, not the right of the Sovereign to petition in its own courts.

There is no reason to believe that the holding of Department of Employment v. United States, supra, that section 1341 is inapplicable to suits by the United States, is not valid today.

Are Federal Credit Unions Federal "Instrumentalities?"

A state may not, consistent with the Supremacy Clause of the Constitution, impose a tax directly upon the United States. United States v. New Mexico, 455 U.S. 720, 102 S.Ct. 1373, 71 L.Ed.2d 580; M'Culloch v. Maryland, 4 Wheat 316, 4 L.Ed. 579 (1819). This immunity extends to private entities which "stand in the Government's shoes." United States v. New Mexico, supra. For an entity to qualify for state tax immunity as a federal "instrumentality" it must so intimately be connected with the exercise of power by the federal government that taxation of it would be a direct interference with the function of government itself. Id.

Plaintiff correctly notes that every court which has considered the question of the instrumentality status of federal credit unions has found that they are federal instrumentalities. Particularly, the cases of United States of America v. California State Board of Equalization, 2 Ca.State Tax Rep. (CCH), ¶ 400-071, aff'd, 709 F.2d 1518 (9th Cir. May 13, 1983) and United States v. State of Maine, 524 F.Supp. 1056 (D.Me.1981) have specifically held that federal instrumentality status attaches to federally chartered credit unions.

As the Court stated in United States v. State of Maine, supra at 1058-59,

(1) Federal Instrumentalities? The State's first contention, that federal credit unions are not federal instrumentalities, need not long detain the Court. Federal credit unions are nonprofit cooperative associations of individuals organized under the FCUA `for the purpose of promoting thrift among their members and creating a source of credit for provident or productive purposes.' 12 U.S.C. § 1752(1). They are authorized to make loans to their members and to invest in securities of the United States and in specified other securities. 12 U.S.C. § 1757. They are chartered and extensively regulated by the National Credit Union Administration. 12 U.S.C. § 1754 (chartering); id §§ 1751-90 and 12 C.F.R. §§ 700.1-761-2 (regulation).

Congress originally authorized the establishment of federal credit unions in 1934, primarily to deal with the problems of scarce credit and high interests rates. S.Rep.No. 555, 73d Cong., 2d Sess. (1934). Through the federal credit unions the federal government makes possible low cost loans to members of those credit unions. Without question, they thus perform an important governmental function. See Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95, 102, 62 S.Ct. 1, 5, 86 L.Ed. 65 (1941). Federal credit unions are also authorized to act as fiscal agents of the United States and as depositories of public money, 12 U.S.C. § 1767, functions which have been recognized as important purposes of the federal government. See Smith v. Kansas City Title & Trust Co., supra, 255 U.S. 180 at 209-10, 41 S.Ct. 243 at 248 65 L.Ed. 577.

2 This Court holds, as have other courts addressing this issue, that federal credit unions are instrumentalities of the federal government engaged in the performance of important government functions. See United States v. California State Board of Equalization, No. CV 81-1588-R (C.D.Cal. Aug. 26, 1981); Electrical Federal

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