Washington v. United States

• Decision Date: 29 March 1983
• Docket Number: No. 81-969,81-969
• Parties: WASHINGTON, et al., Appellants v. UNITED STATES
• Court: U.S. Supreme Court

460 U.S. 536

103 S.Ct. 1344

75 L.Ed.2d 264

WASHINGTON, et al., Appellants

v UNITED STATES.

No. 81-969.

Argued January 10, 1983.

Decided March 29, 1983.

Syllabus

Washington state statutes impose a sales tax on federal contractors with respect to the sale of materials to such contractors for work on federal projects, but with regard to nonfederal construction projects, the tax is imposed on the landowner, who pays tax on the full price of the project, including the contractor's labor costs and markup as well as the cost of tangible personal property sold to the contractor. The United States filed suit in Federal District Court, seeking declaratory and injunctive relief and an order requiring a refund of sales taxes for which the Federal Government had reimbursed its contractors. The District Court granted partial summary judgment for the United States, holding that the statutes discriminate against federal contractors in violation of the Supremacy Clause of the Federal Constitution, and the Court of Appeals affirmed.

Held: The Washington statutes are not invalid under the Supremacy Clause. Pp. 540-546.

(a) The Federal Government's constitutional immunity from state taxation may not be conferred on a third party 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. Nor can immunity be conferred simply because the state tax falls on the earnings of a contractor providing services to the Government. United States v. New Mexico, 455 U.S. 720, 734, 102 S.Ct. 1373, 1382, 71 L.Ed.2d 580. "So long as the tax is not directly laid on the Federal Government, it is valid if nondiscriminatory . . . or until Congress declares otherwise." United States v. County of Fresno, 429 U.S. 452, 460, 97 S.Ct. 699, 703, 50 L.Ed.2d 683. P. 540.

(b) Washington's tax is not invalid on the asserted ground that the State has circumvented the Federal Government's tax immunity by identifying a federal activity for different tax treatment. Washington imposes a sales tax of the same rate on all purchases from nonfederal contractors. The only deviation from equality between the Federal Government and federal contractors on one hand, and every other taxpayer on the other hand, is that the former are taxed on a smaller proportion of the value of the project than the latter. Thus the Federal Government and its contractors are better off than other taxpayers, which is not the mistreatment of the Federal Government against which the Supremacy Clause protects. A tax is not invalid simply because it treats those who deal with the Federal Government differently than it treats others. Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384, distinguished. Cf. United States v. County of Fresno, supra; United States v. City of Detroit, 355 U.S. 466, 78 S.Ct. 474, 2 L.Ed.2d 424. Pp. 541-544.

(c) The important consideration is not whether the State differentiates in determining what entity shall bear the legal incidence of the tax, but whether the tax is discriminatory with regard to the economic burdens that result. The State does not discriminate against the Federal Government and those with whom it deals unless it treats someone else better than it treats them. Here, Washington has not singled out contractors who work for the United States for discriminatory treatment. It has merely accommodated for the fact that it may not impose a tax directly on the United States as the project owner. Pp. 544-546.

654 F.2d 570, reversed.

Kenneth O. Eikenberry, Atty. Gen., Olympia, Wash., for appellants.

Stuart A. Smith, Washington, D.C., for appellee.

Justice REHNQUIST delivered the opinion of the Court.

The State of Washington's principal source of revenue is a sales and use tax imposed on the buyer or consumer in all retail sales and consumer uses of tangible personal property.¹ In this case the United States contends that one aspect of that tax statute—its application to building construction—is invalid under the Supremacy Clause of the United States Constitution. The statutory provisions are most easily understood in light of their history.

Before 1941, building contractors were treated as consumers for sales tax purposes. All sales of tangible personal property, such as construction materials, to contractors were subject to the sales tax. The legal incidence of this tax was on the contractor; the tax was collected by suppliers who sold to contractors, and remitted by them to the state.

In 1941, Washington changed the sales tax system it applied to contractors by defining the landowner who purchases construction work from the contractor, rather than the contractor, as the "consumer." The legal incidence of the tax was now on the landowner, who paid tax on the full price of the construction project. The net result was that contractors' labor costs and markups were added to the tax base, which had previously included only the cost of tangible personal property sold to contractors.

The post-1941 tax system could not, however, be applied to construction for the Federal Government because the Supremacy Clause prohibits states from taxing the United States directly. United States v. New Mexico, 455 U.S. 720, 102 S.Ct. 1373, 71 L.Ed.2d 580 (1982). Thus, when the United States was the landowner, Washington did not collect any tax on the sale either of tangible personal property to the contractor or of the finished building to the Government.

In 1975, the Washington Legislature acted to eliminate the complete tax exemption for construction purchased by the United States.² It did so by re-imposing the pre-1941 tax on contractors that work for the federal government ("federal contractors").³ Thus, Washington now taxes the sale of non-federal projects to the landowner, and taxes the sale of materials to federal contractors. The net result is that for federal projects the legal incidence of the tax falls on the contractor rather than the landowner, and the tax is measured by a lesser amount than the tax on non-federal projects because the contractor's labor costs and markup are not included in the tax base.

Shortly after the new statute was enacted, the United States sued the State in the District Court for the Western District of Washington, seeking a declaratory judgment and a permanent injunction against the assessment and collection of the sales tax from federal contractors, and an order requiring the refund of sales taxes already so collected, for which the United States had reimbursed its contractors. The District Court granted the United States' motion for partial summary judgment, holding that the statutes discriminate against federal contractors in violation of the Supremacy Clause. On appeal, the Court of Appeals for the Ninth Circuit affirmed. 654 F.2d 570 (1981). Washington appealed pursuant to 28 U.S.C. § 1254(2), and we noted probable jurisdiction. --- U.S. ----, 102 S.Ct. 2231, 72 L.Ed.2d 843 (1982).

In recent years this Court has examined in some detail the history of the federal government's constitutional immunity from state taxation. United States v. New Mexico, supra, 455 U.S., at 730-738, 102 S.Ct., at 1380-1384; United States v. County of Fresno, 429 U.S. 452, 457-464, 97 S.Ct. 699, 702-705, 50 L.Ed.2d 683 (1977). There is no reason to repeat these discussions here; it suffices to restate our conclusions. In New Mexico, we explained that "immunity 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. . . . Similarly, immunity cannot be conferred simply because the state tax falls on the earnings of a contractor providing services to the Government." 455 U.S., at 734, 102 S.Ct., at 1382. In Fresno, we stated the rule that, "[s]o long as the tax is not directly laid on the Federal Government, it is valid if nondiscriminatory . . . or until Congress declares otherwise." Id., at 460, 97 S.Ct., at 703 (citing James v. Dravo Contracting Co., 302 U.S. 134, 150, 161, 58 S.Ct. 208, 216, 221, 82 L.Ed. 155 (1937)). Accord, Memphis Bank & Trust Co. v. Garner, --- U.S. ----, ----, 103 S.Ct. 692, 696, 74 L.Ed.2d 562 (1983).

The United States' principal argument is that the tax is invalid because Washington has circumvented the Federal Government's tax immunity by identifying a federal activity for different tax treatment. Brief for the United States 10, 21-31; Tr. of Oral Arg., 29-33, 40-41. Because Washington does not impose a sales tax on contractors who do not work for the Federal Government, the argument goes, it discriminates against the Federal Government and those with whom it deals.

Washington does, however, impose a sales tax on all purchases from contractors who do not deal with the Federal Government. The tax is imposed on every construction transaction, and the tax rate is the same for everyone. The only deviation from equality between the Federal Government and federal contractors on one hand, and every other taxpayer on the other, is that the former are taxed on a smaller proportion of the value of the project than the latter.⁴ Thus the Federal Government and federal contractors are both better off than other taxpayers because they pay less tax than anyone else in the state. This hardly seems, on its face, to be the mistreatment of the Federal Government against which the Supremacy Clause protects.

The United States relies upon Phillips Chemical Co. v. Dumas Independent School District, 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384 (1960), in which Texas taxed the lessees of property owned by the State on the value of their leasehold interest, but taxed some lessees of property owned by the United States on the full value of the premises. However, the Court there rejected the United States' argument that the tax was invalid simply because it treats those who deal with the federal...