U.S. v. State of Wash., 78-1424

• Decision Date: 24 August 1981
• Docket Number: No. 78-1424,78-1424
• Parties: 29 Cont.Cas.Fed. (CCH) 81,852 UNITED STATES of America, Plaintiff-Appellee, v. STATE OF WASHINGTON; Department of Revenue of the State of Washington; and Charles W. Hodde, Director of Revenue, and his successors in office, Defendants-Appellants.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 570

654 F.2d 570

29 Cont.Cas.Fed. (CCH) 81,852

UNITED STATES of America, Plaintiff-Appellee, v. STATE OF WASHINGTON; Department of Revenue of the State of

Washington; and Charles W. Hodde, Director of

Revenue, and his successors in office,

Defendants-Appellants.

No. 78-1424.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 7, 1980.

Decided Aug. 24, 1981.

Leland T. Johnson, Washington, D. C., for defendants-appellants; Slade Gorton, Atty. Gen. and Richard H. Holmquist, Senior Asst. Atty. Gen., Olympia, Wash., on brief.

John J. McCarthy, Jr., Tax Div., U. S. Dept. of Justice, Washington, D. C., for plaintiff-appellee; Carr Ferguson, Asst. Atty. Gen., Tax Division, U. S. Dept. of Justice, Washington, D. C., on brief.

On Appeal from the United States District Court for the Western District of Washington.

Before ANDERSON and SKOPIL, Circuit Judges, and BYRNE, ^* District Judge.

WM. MATTHEW BYRNE, Jr., District Judge:

This appeal is from an order of the district court, which declared unconstitutional three 1975 sales and use tax statutes of the State of Washington (the "State") insofar as those statutes imposed such taxes on prime contractors for construction activity performed on federally-owned land. The district court's order also permanently enjoined the State from assessing or collecting the challenged taxes and directed the State to refund such taxes as had been theretofore collected.

The primary issue presented in this appeal is whether the challenged tax statutes unconstitutionally discriminate against those with whom the United States deals, in violation of the Supremacy Clause of the United States Constitution. ¹ This issue requires application of the principles enunciated in the long line of cases from McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819), through, most recently, United States v. County of Fresno, 429 U.S. 452, 97 S.Ct. 699, 50 L.Ed.2d 683 (1977).

I. THE CHALLENGED TAXES

Pursuant to Chapters 82.04, 82.08 and 82.14 of the Revised Code of Washington, the State assesses and collects a "sales" tax on every retail sale of tangible personal property within the State. Pursuant to Chapters 82.12 and 82.14 thereof, a "use" tax is similarly assessed and collected on certain specified consumer uses of such property within the State. ² These taxes are imposed on the "consumer" or "buyer" of the property, terms that are quite broadly defined by Wash.Rev.Code §§ 82.04.190 and 82.08.010. Prior to July 1, 1975, the statutes in question defined the terms "retail sale," "consumer," and "buyer" in such a way that no sales or use tax was imposed on any prime contractor or subcontractor with respect to the purchase or use of personal property, if such property was to be incorporated into a construction project. ³ As a result of the definitions of these terms, the contract between the prime contractor and the owner of the realty became the only taxable "retail sale" of the construction project or of any personal property incorporated therein. The owner of the realty ⁴ was thus statutorily defined as the only "consumer" or "buyer" and was, therefore, the only one directly liable for the sales or use taxes imposed. These taxes were collected from the owner of the realty by the prime contractor for eventual payment to the State.

Under the tax scheme described above, no sales or use tax was imposed with regard to construction projects or material incorporated into construction projects on real property owned by the United States or an instrumentality thereof. The State has conceded that any tax levied directly upon the federal government's own acquisition or use of personal property within the State would have violated the Supremacy Clause, which grants to the United States and its instrumentalities complete immunity from state taxes, unless the federal government consents to such taxes. ⁵

Effective July 1, 1975, the State amended the above statutes, so that, with respect to construction on federally-owned land, the prime contractor came to be treated as the "consumer" or "buyer," and thus became directly liable for the State's sales and use taxes on materials it acquired or was furnished for incorporation into such federal projects. ⁶ However, prime contractors on non-federal projects, other than local housing authority projects, ⁷ continued not to be treated as "consumers" and paid no tax on their purchase or use of materials incorporated into such projects.

II. PROCEDURAL BACKGROUND

The United States filed its original complaint on February 16, 1976 against the State, the Department of Revenue of the State, and Mary Ellen McCaffree, Director of Revenue of the State, and her successors in interest (the "Defendants"). The complaint sought: (1) a declaratory judgment that the Washington Sales and Use Tax Act, Chapters 82.08, 82.12 and 82.14, Revised Code of Washington, as amended, as applied to construction activity involving the United States within the State, was unconstitutional under the Supremacy Clause; (2) a permanent injunction against the State imposing, assessing or collecting such taxes; and (3) an order directing the refund of such taxes as had been collected, with appropriate interest. ⁸ After all Defendants answered, the parties filed cross-motions for summary judgment as to all issues except the precise amount of refund that might be due. ⁹ Defendants appeal from the district court's order, which amended and supplemented its original order on the cross-motions for summary judgment.

III. DISCUSSION

The United States contends, and the district court ruled, that the imposition of the State sales and use taxes upon prime contractors' acquisition and use of tangible personal property for ultimate incorporation into federal construction projects unconstitutionally discriminates against such contractors because prime contractors on non-federal projects are not similarly taxed.

The State concedes the principle that "a tax may be invalid even though it does not fall directly on the United States if it operates so as to discriminate against the Government or those with whom it deals." United States v. City of Detroit, 355 U.S. 466, 473, 78 S.Ct. 474, 478, 2 L.Ed.2d 424, 429 (1958). See also Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 576, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960). The State argues, however, that the Supreme Court has recognized that mere disparate treatment of those dealing with the United States is not enough to render a state tax law unconstitutional. The State contends that the district court erred in concluding that there exists in this case the sort of discriminatory taxation against which the Supremacy Clause protects the federal government and those with whom it deals.

The State relies chiefly on United States v. County of Fresno, 429 U.S. 452, 97 S.Ct. 699, 50 L.Ed.2d 683 (1977), and United States v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424 (1958). At issue in Fresno was a "possessory interest" tax that the State of California imposed upon renters of housing on tax-exempt real property and not upon renters of housing on taxable real property. The United States Forest Service had furnished housing on federal property to certain of its employees as partial compensation for the services they rendered to the Forest Service. California determined that the employees "rented" the housing they were furnished. Because the housing was on tax-exempt property, California assessed the employees an annual possessory interest tax on the value of their interest in the housing.

The Court held the California tax constitutionally valid. The Court reviewed its line of cases since McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316, 4 L.Ed. 579 (1819), and explained that, in McCulloch, the Court had rejected Maryland's argument that the State's power to tax the Bank of the United States only involved the impermissible power to destroy the Bank when the State's taxing power was abused, and that the states should be trusted not to abuse their power to tax a federal function just as a state must be trusted not to abuse its power to tax its own citizens. That argument was rejected, according to the Fresno court,

because the political check against abuse of the power to tax a State's constituents is absent when the State taxes only a federal function. A State's constituents can be relied on to vote out of office any legislature that imposes an abusively high tax on them. They cannot be relied upon to be similarly motivated when the tax is instead solely on a federal function. (footnote omitted).

Fresno, 429 U.S. at 458-59, 97 S.Ct. at 703, 50 L.Ed.2d at 689-90.

Reviewing the cases since McCulloch, the Fresno Court concluded that,

(s)o long as the tax is not directly laid on the Federal Government, it is valid if nondiscriminatory .... The rule to be derived from the Court's more recent decisions ... is that the economic burden on a federal function of a state tax imposed on those who deal with the Federal Government does not render the tax unconstitutional so long as the tax is imposed equally on the other similarly situated constituents of the State. (citations omitted).

429 U.S. at 460-62, 97 S.Ct. at 704-05, 50 L.Ed.2d at 691-92.

Thus, the Court held that the tax imposed on renters of tax-exempt real property was nondiscriminatory and therefore constitutional, because the State of California imposed a property tax on owners of non-exempt property which is "passed on by them to their ... lessees." Consequently, the appellants who rent from the Forest Service are no worse off ... than those who work for private employers and rent houses in the private sector.

429 U.S. at 465, 97 S.Ct. at 706, 50 L.Ed.2d at 694.

Similarly, in Detroit, the Supreme Court upheld a Michigan law that imposed on users of tax-exempt property a use tax comparable to the property tax imposed on owners of taxable property. The Court...