United States v. New Mexico
1982 U.S. LEXIS 31, 102 S. Ct. 1373, 71 L. Ed. 2d 580 (1982)
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Rule of Law:
A state may impose a nondiscriminatory tax on private contractors with the Federal Government, even if the tax's financial burden is passed on to the government, unless the legal incidence of the tax falls directly on the United States or the contractor is an agent or instrumentality so integrated into the government structure as to be considered one of its constituent parts.
Facts:
- The United States Department of Energy contracted with three private corporations, Sandia Corporation, The Zia Company, and Los Alamos Constructors, Inc. (LACI), to manage government-owned atomic research and development facilities in New Mexico.
- The contracts for Zia and LACI were on a cost-plus-fixed-fee basis. Sandia received no fee, but its parent company, Western Electric, received royalty-free licenses and other benefits.
- The contractors made purchases of tangible personal property from third-party vendors in their own names.
- Contract provisions stated that title to all property purchased by the contractors passed directly from the vendor to the U.S. Government.
- The contractors paid for their purchases and other expenses, including salaries, by drawing drafts on a special bank account containing only U.S. Treasury funds, a system known as 'advanced funding'.
- The U.S. Government disclaimed liability for torts committed by the contractors' employees and maintained such employees had no claims against the U.S. for labor grievances.
- Two years after litigation began, the contracts were amended to state that each contractor 'acts as an agent [of the Government]' for purposes including purchasing property and disbursing funds.
Procedural Posture:
- The United States sued New Mexico in the U.S. District Court for the District of New Mexico, seeking a declaratory judgment that the state's gross receipts and compensating use taxes could not be applied to its contractors.
- The District Court granted summary judgment for the United States, finding the contractors were procurement agents for the government and thus constitutionally immune from the taxes.
- New Mexico appealed to the U.S. Court of Appeals for the Tenth Circuit.
- The Court of Appeals reversed the District Court's decision, concluding the contractors were not federal instrumentalities and directing entry of summary judgment for New Mexico.
- The United States sought and was granted a writ of certiorari by the Supreme Court of the United States.
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Issue:
Does New Mexico's imposition of its gross receipts and compensating use tax on private contractors managing government-owned atomic facilities violate the Supremacy Clause when the contractors are paid from federal funds and purchase property for which title passes directly to the United States?
Opinions:
Majority - Justice Blackmun
No, New Mexico's tax on the federal contractors does not violate the Supremacy Clause because the legal incidence of the tax falls on the contractors as independent entities, not on the United States itself. Tax immunity is appropriate only when the levy falls directly on the United States or on an agency so closely connected to the government that the two cannot be viewed as separate entities. Here, the contractors are not so incorporated into the government structure as to become its instrumentalities. They are privately owned corporations with substantial autonomy, pursuing private ends and commercial activities for profit or other benefits. The use of an 'advanced funding' mechanism, where contractors pay bills with drafts on federal funds, is merely an efficient method of reimbursement and does not convert the contractors into government instrumentalities. Similarly, while title to purchased goods passes directly to the government, the contractors have a substantial independent role in the procurement process, distinguishing this case from situations where a contractor acts purely as a government purchasing agent. Therefore, the state's nondiscriminatory gross receipts and use taxes on these contractors are constitutionally permissible.
Analysis:
This decision significantly clarified and narrowed the doctrine of implied constitutional tax immunity for federal contractors. It moved away from a formalistic analysis based on contractual agency language towards a substantive inquiry into whether the contractor is so integrated with the government as to be indistinguishable from it. The Court established that the economic burden of a tax passing to the federal government is irrelevant; the critical factor is where the legal incidence of the tax falls. By upholding the state taxes, the Court placed a high bar for contractors seeking immunity and shifted the responsibility to Congress to explicitly grant statutory exemptions if it wishes to shield federal contractors from state taxation.
