New York v. United States
326 U.S. 572, 66 S. Ct. 310, 1946 U.S. LEXIS 3140 (1946)
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Rule of Law:
A state is not immune from a non-discriminatory federal tax on its commercial activities, even if those activities could be characterized as governmental. The distinction between a state's "governmental" versus "proprietary" functions is no longer a valid basis for determining intergovernmental tax immunity.
Facts:
- The State of New York acquired and managed the mineral springs at Saratoga Springs, New York, to conserve them for public benefit.
- The state, through a public authority, operated the Saratoga Springs Reservation as a health resort and spa.
- As part of this operation, the state bottled mineral water from the springs and sold it to the public.
- The state's sale of mineral water was in direct competition with private companies selling similar products.
- The federal Revenue Act of 1932 imposed a tax of 2 cents per gallon on the sale of all mineral waters, applicable to any producer or bottler.
- Profits from New York's water sales were used to partially offset the operating expenses of the state-run health resort.
Procedural Posture:
- The United States brought suit against the State of New York in the U.S. District Court to recover assessed taxes on mineral water sales.
- The District Court rejected New York's claim of sovereign immunity and entered judgment for the United States.
- The State of New York, as appellant, appealed the judgment to the U.S. Circuit Court of Appeals for the Second Circuit.
- The Circuit Court of Appeals affirmed the trial court's judgment in favor of the appellee, the United States.
- The U.S. Supreme Court granted certiorari to review the case.
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Issue:
Does the imposition of a non-discriminatory federal excise tax on the sale of mineral water by the State of New York violate the principle of intergovernmental tax immunity?
Opinions:
Majority - Mr. Justice Frankfurter
No. The imposition of a non-discriminatory federal tax on a state-run commercial enterprise does not violate the Constitution. The Court rejected the distinction between 'governmental' and 'proprietary' functions as an unworkable and 'shifting a basis for determining constitutional power.' The reasoning is that so long as Congress generally taxes a source of revenue and does not discriminate against a state, the tax is valid even if its incidence falls on a state. When a state enters the marketplace to sell goods, it must pay its share for the national government that enables it to pursue its policies, just like any private enterprise.
Concurring - Mr. Chief Justice Stone
No. The tax should be sustained, but the majority's non-discrimination formula is insufficient. A non-discriminatory tax could still unconstitutionally interfere with a state's sovereign functions, such as a tax on a statehouse. The proper analysis requires a practical construction that balances the federal government's need to tax against the potential for undue interference with the state's performance of its sovereign functions. In this case, taxing a state's mineral water business, a subject traditionally within federal taxing power, does not unduly impair the state's functions of government.
Concurring - Mr. Justice Rutledge
No. The tax is valid because the shift away from broad state immunity is necessary to support the nation's financial requirements, especially as states increasingly enter traditionally private, taxable enterprises. However, there is grave doubt that Congress, by using general statutory language, actually intended to tax state activities. While a rule requiring an express statement from Congress to tax a state would be preferable, precedent from cases like South Carolina v. United States compels acquiescence in this judgment.
Dissenting - Mr. Justice Douglas
Yes. The tax unconstitutionally infringes on New York's sovereign immunity guaranteed by the Tenth Amendment. Any activity a state undertakes within its police power is a legitimate governmental function, whether it is traditional or resembles a private enterprise. Allowing the federal government to tax state activities makes states subservient and threatens the constitutional balance, as 'the power to tax lightly is the power to tax severely.' The immunity of states from federal taxation is implied in the Constitution, and their sovereignty should not depend on the 'will of a transient majority of Congress.'
Analysis:
This case marked a significant shift in the doctrine of intergovernmental tax immunity, effectively discarding the unwieldy 'governmental versus proprietary' function test. It established a new precedent that when a state participates in the marketplace, it can be subject to the same non-discriminatory federal taxes as private businesses. This decision expanded the federal government's taxing power over state activities and replaced a rigid categorical analysis with a more flexible, practical approach focused on non-discrimination and the nature of the taxed activity.
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