Becker, Carl R.

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Taxation: State Taxation of Federal Agencies and Instrumentalities

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Marquette Law ReviewVolume 13Issue 2 February 1929 Article 8Taxation: State Taxation of Federal Agencies andInstrumentalitiesCarl R. BeckerFollow this and additional works at: http://scholarship.law.marquette.edu/mulrPart of the Law CommonsThis Article is brought to you for free and open access by the Journals at Marquette Law Scholarly Commons. It has been accepted for inclusion inMarquette Law Review by an authorized administrator of Marquette Law Scholarly Commons. For more information, please contactmegan.obrien@marquette.edu.Repository CitationCarl R. Becker, Taxation: State Taxation of Federal Agencies and Instrumentalities, 13 Marq. L. Rev. 117 (1929).Available at: http://scholarship.law.marquette.edu/mulr/vol13/iss2/8NOTES AND COMMENThard Stern and Son v. Bodden3 holds that if the rule of taxation isuniform, proper classification may be made and different rates appliedto each class. Classification, however, must be based upon substantialdistinction which make real differences, is the ruling of Kily v. Chi-cago, Milwaukee and St. Paul Ry. Co.4 The state can tax all privilegesor select certain classes leaving others untaxed. Beals v. State.5 In thecase of Pick v. Rubicon Hydraulic Co., the court held that the legis-lature can impose other restrictions upon corporations as to method ofacquiring easements, than those applied to individuals.LEwis I. CoaL-NTaxation: State Taxation of Federal Agencies and Instrumentali-ties.The application of the doctrine prohibiting state interference withthe agencies and the instrumentalities of the federal government hasbeen greatly enlarged by two recent decisions of the United StatesSupreme Court. Both of the cases were decided by a divided court,and it would seem from a summary review of the decided cases andthe principles therein enunciated that the limits of the application ofthis doctrine are reached in this type of case.The first of these cases is that of Long v. Rockford, 48 S.Ct. 463,in which it was held that royalties for use of patents cannot be taxedby the states. The argument being, that the primary object in grantingand securing the monopoly to the inventor was the benefit to the publicand community at large and secondarily to promote the progress of sci-ence and the useful arts. That the patent is the instrument by whichthat end is accomplished, and like a franchise granted by the UnitedStates is not subject to state taxation. If the state "cannot tax the.patent, it cafnnot tax the royalties received from its use."The second case arose under a law enacted by the state of Missis-sippi providing that dealers in gasoline shall pay for the privilege ofengaging in such business an excise tax of a designated amount pergallon upon the sale of gasoline. Defendant company sold gas to theUnited States Government for use in operation of Coast Guard fleetand Veteran's IHospital. The company defended the action broughtto-recover taxes levied on this sale with the contention that the taxwas void since it was an interference with the instrumentalities of thefederal government. This view was upheld by the Supreme Court inPanhandle v. State of Mississippi, 48 S.Ct. 451. Quoting Mr. Justice165 Wis. 75.4 142 W. 154.139 W. 544.27 W. 433.MARQUETTE LAW REVIEWButler, "A charge at the prescribed rate is made on account of everygallon required by the United States. It is immaterial that the sellerand not the purchaser is required to report and make payment to thestate. Sale and purchase constitute a transaction by which the tax ismeasured and on which the burden rests. The amount of moneyclaimed by the state rises and falls precisely as does the quantity ofgasoline so secured by the government. It depends immediate uponthe number of gallons. The necessary operation of these enactmentswhen so construed is directly to retard, impede and burden the exertionby the United States of its constitutional powers to operate the fleetand the hospital."That the state has no right to tax any of the constitutional meansemployed by the federal government to execute its constitutionalpowers, and no power by taxation or otherwise to retard, impede,burden or in any other manner control the operation of the constitu-tional laws enacted by Congress to carry into effect the powers vestedin the national government are principles so well established as to beregarded now as fundamental and elementary. There are no expressconstitutional restrictions upon the states, except such as are involvedin the exclusive power over foreign commerce and concurrent powerin internal taxation given to Congress. By judicial construction fromthe necessary relation between the power of state taxation and thesupremacy of the federal authority this doctrine has been evolved. Itwas first announced by Chief Justice Marshall in the celebrated case ofMcCulloch v. Maryland, 4 Wheat. 316. Therein it was held that thestate could not without violating the constitution tax the notes of anUnited States Bank established within that state.The language of Marshall has become classical, "That the powerto tax involves the power to destroy; that the power to destroy anddefeat may render useless the power to create; that there is a plainrepugnance in conferring on one government a power to control theconstitutional measures of another which other with respect to thosevery measures, is declared to be supreme over that which exerts con-trol."In a later case,' Marshall applied the rule to prevent state taxationobstructing or defeating the federal power to regulate commerce. Themanifold application of the doctrine will be observed by a review ofthe following cases in which state taxation has been held invalid; atax upon United States securities, 2 salaries of United States officials,3'Brown v. Maryland, 12 Wheat. 419.'Weston v. Charleston, 2 Peters 435.'Dobbins v. Erie County, 16 Peters 435.NOTES AND COMMENTupon interstate passengers,4 lands and other property of the UnitedStates,5 lands held by Indians, under patents issued by virtue oftreaties made with their tribes,, railroad franchises granted by theUnited States,7 the incorporeal right secured by patent as distinguishedfrom the product."The following cases demonstrated the application of the doctrinewhere the interference with the federal government was more remote.In the case of Choctaw, 0. & G. R. R. v. Harrison9 where the FederalGovernment under a contract with the Indian tribes was obliged tooperate a coal mine, it was held that a lessee from the Government isan intrumentality of the United States and cannot be subjected to anoccupation or privilege tax by the state. Under a similar set of facts,the Supreme Court held in Indian Oil Co. v. Oklahoma'0 that the lesseebeing a Federal instrumentality, the state could not tax its interest inthe leases. But in Gillespie v. Oklahoma" the Supreme Court wentmuch further and held that a lessee of restricted Creek and Osagelands is in effect an instrumentality used by the United States in ful-filling its duties to the Indians, and that therefore the net incomederived by such lessee from sales of his share of oil and gas receivedunder the lease, could not be taxed by the state.The cases upon this subject are not in harmony. Nor can all bereconciled. The most that can be said is that there is a distinct tend-ency manifested to hold invalid all interferences with the property,agencies, obligations and officers of the Federal Government.It is apparent that the application of the recognized principles to themanifold situations that arise out of the exercise of their powers by thetwo sovereigns does of necessity in some instances present considerabledifficulty. The broad language of Marshall in McCulluch v. Virginiahas unfortunately been the cause of the application of the doctrine tosituations where the interference with the Federal Government hasbeen very remote.The power to tax may be the power to destroy, yet this maxim can-not be applied to its logical conclusion. In the minutest analysis everystate tax effects or diminishes the subject of federal taxation, and fromthe very necessities of the situations presented by two sovereignties' Crandall v. Nevada, 6 Wall. 35.r Van Brocklin v. Tennessee, 117 U.S. 5I1.'Case of Kansas Indians, 5 Wall. 737.' California v. Pac. R.R. Co., 127 U.S. 3' Weber v. Virginia, 103 U.S. 344.9235 U.S. 292.10 240 U.S. 292.1 257 U.S. 501.MARQUETTE LAW REVIEWhaving the same territorial limits but with different jurisdictionalspheres the proper functioning of either in raising revenues will attimes indirectly affect the other. "It cannot be that a state tax whichremotely affects the efficient exercise of a Federal power is for thatreason inhibited by the Constitution. To hold that would deny to thestates all power to tax persons and property. ' 12 Nor should it be aninvasion of this principle that a tax levied by one government mayeventually be borne by the other.The rule is well established that in order for a tax by one govern-ment to invade the province of the other, it must directly and im-mediately constitute a burden upon the latter's governmental function.The two inquiries therefore common to all cases should be first, whetherthe tax imposed by the state does in fact invade the domain of theFederal Government, and secondly whether the extent or the mannerof the interference renders it unwarranted.Now with these principles in mind the extreme consequences result-ing from the late decisions of the Supreme Court in Long v. Rockwoodand Panhandle v. M11ississippi are more apparent. Justice Holmeswrites the dissenting opinion in both cases. In the Rockwood caseHolmes takes issue with the statement that patents are instrumentalitiesof the Federal Government, for he says, "they are used by thepatentees for their private advantage alone" and that "the most thatcan be said is that a tax is a discouragement so far as it goes, andto that extent in its immediate operation runs counter to the govern-ment intent." And in the Panhandle case speaking of the analogy ofa tax or commodities sold to the Federal Government with that affect-ing interstate commerce, "But obviously it does not follow from theinvalidity of a tax directly burdening interstate commerce that a taxupon a domestic seller is bad because he may be able to shift the burdento a purchaser, even though an agency of the Government, who iswilling to pay the price with the tax and who has no rational groundfor demanding favor. I am not aware that the President, the Membersof Congress, the Judiciary, or to come nearer to the case at hand, thecoast guard or the officials of the Veterans' Hospital because they areinstrumentalities of the government and cannot function naked andunfed, hitherto having been entitled to have their bills for food andclothing cut down so far as their butchers and tailors have been taxedon their sales."The interference in either of these cases is certainly not immediate,in the one instance the tax is levied on the patentee, and the second onthe domestic seller. It is true that in each instance there may be someUnzion Pac. R. Co. v. Peniston, 18 Wall. 5.120NOTES AND COMMENT 121slight effect upon the Federal agency or instrumentality, yet with duedeference they seem extremely remote.As Justice Holmes points out, the power to tax is not the power todestroy as long as the United States Supreme Court sits with powerto prevent an abuse of such privilege. In those cases where the onlyobjection to the tax is that it remofely effects the functions of theFederal Government, it would be better to regulate such taxationrather than prohibit it entirely. In any event it is apparent that thesetwo late cases materially enlarge the application of the doctrine, if notbeyond its proper scope, certainly beyond the limits previously recog-nized.CARL R. BECKER

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Taxation: State Taxation of Federal Agencies and Instrumentalities

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