United States v. Boyd

• Decision Date: 15 June 1964
• Docket Number: No. 185,185
• Citation: 378 U.S. 39,84 S.Ct. 1518,12 L.Ed.2d 713
• Parties: UNITED STATES et al., Appellants, v. B. J. BOYD, Commissioner
• Court: U.S. Supreme Court

378 U.S. 39

84 S.Ct. 1518

12 L.Ed.2d 713

UNITED STATES et al., Appellants,

v B. J. BOYD, Commissioner.

No. 185.

Argued April 20, 21, 1964.

Decided June 15, 1964.

Sol. Gen. Archibald Cox and R. R. Kramer, Knoxville, Tenn., for appellants.

Milton P. Rice, Nashville, Tenn., for appellee.

Mr. Justice WHITE delivered the opinion of the Court.

In Carson v. Roane-Anderson Co., 342 U.S. 232, 72 S.Ct. 257, 96 L.Ed. 257, it was held that § 9(b) of the Atomic Energy Act¹ barred the collection of the Tennessee sales and use tax in connection with sales to private companies of personal property used by them in fulfilling their contracts with the Atomic Energy Commission. In 1953, Congress repealed the statutory immunity for activities and properties of the AEC contained in § 9(b) in order to place Atomic Energy Commission contractors on the same footing as other contractors performing work for the Government.² In 1955 Tennessee amended its statute by adding a contractor's use tax which imposes a tax upon contractors using property in the performance of their contracts with others, irrespective of the ownership of the property and of the place where the goods are purchased. This tax, at the sales and use tax rate, is measured by the purchase price or fair market value of the property used by the contractor and is to be collected only when a sales tax on local purchases or a compensating use tax on out-of-state goods has not previously been collected in connection with the same property. ³

Union Carbide Corp. and H. K. Ferguson Co. have contracts with the Atomic Energy Commission relating to work and services to be performed at the Oak Ridge, Tennessee, complex. Carbide's contract obligates it to manage, operate and maintain the Oak Ridge plants and facilities in accordance with such directions and instructions not inconsistent with the contract as the Commission deems necessary to issue from time to time. In the absence of applicable instructions, Carbide is to use its best judgment, skill and care in all matters pertaining to performance. Carbide is charged with the duty of procuring materials, supplies, equipment and facilities although the Government retains the right to furnish any of these items. Payment for purchases is to be made with government funds, and title to all property passes directly from the vendor to the United States.⁴ Carbide is generally free to make purchases up to $100,000 without prior approval.

Although Carbide exercises considerable managerial discretion from day to day in performing the contract, the Commission retains the right to contrtol, direct and supervise the performance of the work and has issued directions and instructions governing large areas of the operation. Carbide has no investment in the Oak Ridge facility and at the time of this litigation employed some 12,000 employees and supervisors to perform the contract. Its annual fee, renegotiated periodically, was $2,751,000 at the time of suit.

The Ferguson contract was a contract to perform construction services relating both to new facilities and to the modification of the existing plant. The contract called for performing those projects ordered by the Commission. Ferguson also operated under instructions and directions of the AEC, it owned none of the property used in the performance of its contract and its purchases of property were handled in a manner similar to that employed in the case of Carbide except that Ferguson was free to purchase without the consent of the Commission only up to $10,000. Ferguson's compensation is negotiated twice a year on the basis of the value of the services Ferguson performed during the preceding six months, a fee of $20,000 having been paid for the six months preceding suit.

Tennessee collected from Carbide and Ferguson a sales and contractor's use tax upon purchases made by them under thei contracts with the Commission. The companies and the AEC sued to recover these taxes claiming that their collection infringed upon the implied constitutional immunity of the United States. The Tennessee Supreme Court refused to permit the collection of the sales tax⁵ but sustained the collection of the contractor's use tax. This tax, it was held, is imposed upon the use by a contractor of tangible personal property whether the title is in him or in another, and whether or not the other has immunity from state taxation. The contractor's tax 'was intended to be and is a tax upon the use per se by such a contractor. * * * (T)he tax is on (his) private use for (his) own profit and gain, and not a tax directly upon the Government.' 211 Tenn. 139, 163, 164, 363 S.W.2d 193, 203, 204. We noted probable jurisdiction to resolve another of the recurring conflicts between the power of the State to tax persons doing business within its borders and the immunity of the Federal Government, its instrumentalities and property from state taxation. 375 U.S. 808, 84 S.Ct. 55, 11 L.Ed.2d 46. We affirm.

The Constitution immunizes the United States and its property from taxation by the States, M'Culloch v. Maryland, 4 Wheat. 316, 4 L.Ed. 579, but it 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. James v. Dravo Contracting Co., 302 U.S. 134, 58 S.Ct. 208, 82 L.Ed. 155; Graves v. New York, 306 U.S. 466, 59 S.Ct. 595, 83 L.Ed. 927; Alabama v. King & Boozer, 314 U.S. 1, 62 S.Ct. 43, 86 L.Ed. 3. Nor is it forbidden for a State to tax the beneficial use by a federal contractor of property owned by the United States, even though the tax is measured by the value of the Government's property, United States v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424, and even though his contract is for goods or services for the United States. Curry v. United States, 314 U.S. 14, 62 S.Ct. 48, 86 L.Ed. 9; Esso Standard Oil Co. v. Evans, 345 U.S. 495, 73 S.Ct. 800, 97 L.Ed. 1174; United States v. Township of Muskegon, 355 U.S. 484, 78 S.Ct. 483, 2 L.Ed.2d 436. The use by the contractor for his own private ends—in connection with commercial activities carried on for profit—is a separate and distinct taxable activity.

The United States accepts all this but insists that under the present contracts Carbide's and Ferguson's use of government property is not use by them for their own commercial advantage which the State may tax but a use exclusively for the benefit of the United States. Since they are paid for their services only, make no products for sale to the Government or others, have no investment in the Oak Ridge Facility, do not stand to gain or lose by their efficient or nonefficient use of the property, and take no entrepreneurial risks, their use of government property, it is claimed, is in reality use by the United States.

We are not persuaded. In the first place, from the facts in this record it is incredible to conclude that the use of government-owned property was for the sole benefit of the Government. Both companies have a substantial stake in the Oak Ridge operation and a separate taxable interest. Both companies maintain a sizable number of employees at Oak Ridge, Carbide some 12,000 men and Ferguson at times over 1,000, and both companies were paid sizable fees over and above their cost, Carbide over $2,000,000 a year. No one suggests that either Carbide or Ferguson has put profit aside in contracting with the Commission, that the fee of either company is not set with commercial, profit-making considerations in mind or that the operations of either company at Oak Ridge were not an important part of their regular business operations. 'The vital thing' is that Carbide, as well as Ferguson, 'was using the property in connection with its own commercial activities.' United States v. Township of Muskegon, 355 U.S. 484, 486, 78 S.Ct. 483, 485, 2 L.Ed.2d 436.⁶

Secondly, it does not help at all to say that the companies were engaged in furnishing services only, had no investment or risks and made no products for sale to the Government or to others. Undoubtedly a service industry has different characteristics than a manufacturing operation, but the differences are irrelevant for present purposes. The commercial world is replete with profitmaking service industries contracting with the Government on a cost-plus basis, using government properties in the performance of the contract and pursuing their own commercial ends within the meaning of United States v. Township of Muskegon, supra. Whether manufacturing products for sale to the Government or furnishing services, the cost-plus contractor has undertaken contractual obligations. If he properly performs his contract, he earns his fee; if he does not, he may lose the contract, be liable for damages and be forced to liquidate the organization which was built to perform the contract. Whatever limitations there are on entrepreneurial risks derive from the fact the companies perform under cost-plus-fixed-fee contracts, a widespread method of contracting with the Government. The Government's argument, if accepted, would not only insulate the cost-plus management contractor from state taxation but also those who make products or perform construction work on a cost-plus basis, a result foreclosed by the Court's prior decisions which the Government seems to accept. Curry v. United States, supra; United States v. Township of Muskegon, supra.

In Muskegon, supra, the Court remarked that '(t)he case might well be different if the Government had reserved such con rol over the activities and financial gain of Continental that it could properly be called a 'servant' of the United States in agency terms.' The Government urges that this is such a case. According to the Government, this case should be viewed as though the Commission was doing its own work through its own employees, the legal incidence of the tax therefore...