JUSTICE BLACKMUN delivered the opinion of the Court.
We are presented here with a recurring problem: to what extent may a State impose taxes on contractors that conduct business with the Federal Government?
I
A
This case concerns the contractual relationships between three private entities and the United States. The three agreements involved are typical in most respects of management contracts devised by the Atomic Energy Commission
The first of the contractors, Sandia Corporation, was organized in 1949 as a subsidiary of Western Electric Company, Inc. Sandia manages the Government-owned Sandia Laboratories in Albuquerque, N. M., and engages exclusively in federally sponsored research. It receives no fee under its contract, and owns no property except for $1,000 in United States bonds that constitute its paid-in capital. But Sandia and Western Electric are guaranteed royalty-free, irrevocable licenses for any communications-related discoveries or inventions developed by most Sandia employees during the
The Zia Company, another of the contractors, is a subsidiary of Santa Fe Industries, Inc. Since 1946, Zia has performed a variety of management, maintenance, and related functions at the Government's Los Alamos Scientific Laboratory, for which it receives its costs as well as a fixed annual fee. While Zia owns property and performs private work, virtually none of its property is used in the performance of its contract with the Government, and all of its private activities are conducted away from Los Alamos by a separate work force.
The third contractor is Los Alamos Constructors, Inc. (LACI), since 1953 a subsidiary of Zia. LACI's operations are limited to construction and repair work at the Los Alamos facility. The company owns no tangible personal property and makes no purchases; it procures needed property and equipment through its parent, Zia. And like Zia, LACI receives its costs plus a fixed annual fee from the Government.
The management contracts between the Government and the three contractors have a number of significant features in common. As in most DOE atomic facility management agreements, the contracts provide that title to all tangible personal property purchased by the contractors passes directly from the vendor to the Government. App. 231a (Zia); id., at 34 (Sandia).
On the other hand, the contractors place orders with third-party suppliers in their own names, and identify themselves as the buyers. See id., at 36-37 (Sandia contract) and 120 (Zia standard terms). Indeed, the Government acknowledged during discovery that Sandia, Zia, and LACI "may be. . . `independent contractor[s],' rather than . . . `servant[s]' for . . . given `function[s] under' the contract[s] (e. g., directing the details of day-to-day . . . operations and the hiring and direct supervision of employees)," id., at 197, and the Government does not claim that the contractors are federal instrumentalities. Id., at 201; see Department of Employment v. United States, 385 U.S. 355 (1966). Similarly, the United States disclaims responsibility for torts committed by the contractors' employees, and maintains that such employees have no claim against the United States for labor-related grievances. See 624 F.2d 111, 116-117, n. 6 (CA10 1980).
Finally, and most importantly, the contracts use a so-called "advanced funding" procedure to meet contractor costs. Advanced funding, an accounting device developed shortly after the conclusion of the Manhattan Project, is designed to provide "up-to-date meaningful records of costs and controls of property," as well as to "speed up reimbursement of contractors."
To put the advanced funding mechanism in place, the United States, the contractor, and a bank establish a designated bank account, pursuant to a three-party contract. The Government dispatches a letter of credit to a Federal Reserve Bank in favor of the contractor, making Treasury funds available in the designated account. The contractor pays its expenses by drawing on the account, at which time the bank or the contractor executes a payment voucher in an amount sufficient to cover the draft. The voucher is forwarded to the Federal Reserve Bank. The United States owns the account balance. See id., at 19-20, 84-90a, 109-113. As a result of all this, only federal funds are expended when the contractor makes purchases. If the Government fails to provide funding, the contractor is excused from performance of the contract, and the Government is liable for all properly incurred claims.
Prior to July 1, 1977, the Government's contracts with Sandia, Zia, and LACI did not refer to the contractors as federal "agents." On that date — some two years after the commencement of this litigation — the agreements were modified to state that each contractor "acts as an agent [of the Government]. . . for certain purposes," including the disbursement of Government funds and the "purchase, lease, or other acquisition" of property. Id., at 50-51, 55-56, 59-60. This was designed to recognize what was described as the "longstanding agency status and authority" of the contractors. Id., at 50, 55, 59. Thus it was made clear that Sandia and
B
New Mexico imposes a gross receipts tax and a compensating use tax on those doing business within the State. With limited exceptions, "[f]or the privilege of engaging in business, an excise tax equal to four per cent [4%] of gross receipts is imposed on any person engaging in business in New Mexico." N. M. Stat. Ann. § 72-16A-4 (Supp. 1975).
Without objection, Zia and LACI each year paid the New Mexico gross receipts tax on the fixed fees they received from the Federal Government. But the Government argued that the contractors' other expenditures and operations are constitutionally immune from state taxation. In July 1975 the United States therefore initiated this suit in the United States District Court for the District of New Mexico, seeking a declaratory judgment that advanced funds are not taxable gross receipts to the contractors; that the receipts of vendors selling tangible property to the United States through the contractors cannot be taxed by the State; and that the use of Government-owned property by the contractors is not subject to the State's compensating use tax. App. 11-12.
The District Court granted the United States summary judgment. Relying on Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110 (1954), the court determined that the crucial inquiry is whether the contractors are "procurement agents"
The United States Court of Appeals for the Tenth Circuit reversed. 624 F.2d 111 (1980). In its view, this Court's decisions in the tax immunity area have been "more concerned with preserving the delicate financial balance between our co-existing sovereignties than with rigid adherence to agency law terminology." Id., at 116. Advanced funding, the court declared, "is simply another means of reimbursement devised by accountants to eliminate major weaknesses in the government's bookkeeping practices." Id., at 119. In meeting overhead and salaries with Government funds, the contractors were satisfying their own obligations, and they exercised dominion over the funds by issuing drafts to obligees. And insofar as the claims of third-party vendors are concerned, the court found federal "responsibility for properly incurred claims to be inherent in all cost-type contracts," id., at 119, n. 9; any number of businesses act under letters of credit from banks and other sureties, and the Federal Government itself finances a variety of organizations — incleding States and local governments — in such a manner.
The United States sought certiorari, and we granted the writ to consider the seemingly intractable problems posed by state taxation of federal contractors. 450 U.S. 909 (1981).
II
A
With the famous declaration that "the power to tax involves the power to destroy," McCulloch v. Maryland, 4 Wheat. 316, 431 (1819), Chief Justice Marshall announced for the Court the doctrine of federal immunity from state taxation. In so doing he introduced the Court to what has become a "much litigated and often confused field," United States v. City of Detroit, 355 U.S. 466, 473 (1958), one that has been marked from the beginning by inconsistent decisions and excessively delicate distinctions.
McCulloch itself relied on generalized notions of federal supremacy to invalidate a state tax on the Second Bank of the
These decisions, it has been said, were increasingly divorced both from the constitutional foundations of the immunity doctrine and from "the actual workings of our federalism," Graves v. New York ex rel. O'Keefe, 306 U.S. 466, 490 (1939) (Frankfurter, J., concurring), and in James v. Dravo Contracting Co., 302 U.S. 134 (1937), by a 5-4 vote, the Court marked a major change in course. Over the dissent's
The Court's more recent cases involving federal contractors generally have hewed to the James analysis. Alabama v. King & Boozer, 314 U.S. 1 (1941), upheld a state tax on sales to a federal contractor, overruling Panhandle Oil Co. v. Mississippi ex rel. Knox, supra. Decisions such as United States v. City of Detroit, supra, have validated state use taxes on private entities holding federal property.
Even the Court's post-James decisions, however, cannot be set in an entirely unwavering line. United States v. Allegheny County, 322 U.S. 174 (1944), invalidated a state property tax that included in the assessment the value of federal machinery held by a private party; 14 years later that decision in large part was overruled by United States v. City of Detroit, supra. See United States v. County of Fresno, 429 U.S. 452, 462-463, n. 10 (1977). In Livingston v. United States, 364 U.S. 281 (1960), summarily aff'g 179 F.Supp. 9 (EDSC 1959), the Court, without opinion or citation, approved the invalidation of a state use tax as applied to a federal contractor. Yet United States v. Boyd, supra, upheld a virtually identical state tax, seemingly confining Livingston to its "extraordinary" facts. 378 U. S., at 45, n. 6.
Similarly, the decisions fail to speak with one voice on the relevance of traditional agency rules in determining the tax-immunity
B
We have concluded that the confusing nature of our precedents counsels a return to the underlying constitutional principle. The one constant here, of course, is simple enough to express: a State may not, consistent with the Supremacy Clause, U. S. Const., Art. VI, cl. 2, lay a tax "directly upon the United States." Mayo v. United States, 319 U.S. 441, 447 (1943). While "[o]ne could, and perhaps should, read M'Culloch . . . simply for the principle that the Constitution prohibits a State from taxing discriminatorily a federally established instrumentality," First Agricultural Bank v. State Tax Comm'n, 392 U.S. 339, 350 (1968) (dissenting opinion), the Court has never questioned the propriety of absolute federal immunity from state taxation. And after 160 years, the doctrine has gathered "a momentum of authority that reflects, if not a detailed exposition of considerations of policy demanded by our federal system, certainly a deep instinct
But the limits on the immunity doctrine are, for present purposes, as significant as the rule itself. Thus, 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. That is the import of Alabama v. King & Boozer, where a sales tax was imposed on the gross receipts of a vendor selling to a cost-plus Government contractor. The Court found it constitutionally irrelevant that the United States reimbursed all the contractor's expenditures, including those going to meet the tax: the Government's right to be free from state taxation "does not spell immunity from paying the added costs, attributable to the taxation of those who furnish supplies to the Government and who have been granted no tax immunity." 314 U. S., at 9. That the contractor is purchasing property for the Government is similarly irrelevant; in King & Boozer, title to goods purchased by the contractor vested in the United States immediately upon shipment by the seller. Id., at 13.
Similarly, immunity cannot be conferred simply because the state tax falls on the earnings of a contractor providing services to the Government. James v. Dravo Contracting Co., supra. And where a use tax is involved, immunity cannot be conferred simply because the State is levying the tax on the use of federal property in private hands, United States v. City of Detroit, supra, even if the private entity is using the Government property to provide the United States with goods, United States v. Township of Muskegon, supra; City of Detroit v. Murray Corp., supra, or services, Curry v. United States, 314 U.S. 14 (1941); United States v. Boyd, supra. In such a situation the contractor's use of the property "in connection with commercial activities carried on for
What the Court's cases leave room for, then, is the conclusion that tax immunity is appropriate in only one circumstance: when the levy falls on the United States itself, or on an agency or instrumentality so closely connected to the Government that the two cannot realistically be viewed as separate entities, at least insofar as the activity being taxed is concerned. This view, we believe, comports with the principal purpose of the immunity doctrine, that of forestalling "clashing sovereignty," McCulloch v. Maryland, 4 Wheat., at 430, by preventing the States from laying demands directly on the Federal Government. See City of Detroit v. Murray Corp., 355 U. S., at 504-505 (opinion of Frankfurter, J.). As the federal structure — along with the workings of the tax immunity doctrine
Thus, a finding of constitutional tax immunity requires something more than the invocation of traditional agency notions: to resist the State's taxing power, a private taxpayer must actually "stand in the Government's shoes." City of Detroit v. Murray Corp., 355 U. S., at 503 (opinion of Frankfurter, J.). That conclusion is compelled by the Court's principal decisions exploring the nature of the Constitution's immunity guarantee. Chief Justice Hughes' opinion for the Court in James, which set the doctrine on its modern course, suggested that a state tax is impermissible when the taxed entity is "so intimately connected with the exercise of a power or the performance of a duty" by the Government that taxation of it would be " `a direct interference with the functions of government itself.' " 302 U. S., at 157, quoting Metcalf & Eddy v. Mitchell, 269 U.S. 514, 524 (1926). And the point is settled by Boyd, the Court's most recent decision in the field. There, the Government argued that its contractors were tax-exempt because they were federal agents. Without any discussion of traditional agency rules the Court rejected that suggestion out-of-hand, declaring that "we cannot believe that [the contractors are] `so assimilated by the Government as to become one of its constituent parts.' " 378 U. S., at 47, quoting United States v. Township of Muskegon, 355 U. S., at 486. And the Court continued:
The Court's other cases describing the nature of a federal instrumentality have used similar language: "virtually . . . an
Granting tax immunity only to entities that have been "incorporated into the government structure" can forestall, at least to a degree, some of the manipulation and wooden formalism that occasionally have marked tax litigation — and that have no proper place in determining the allocation of power between coexisting sovereignties. In this case, for example, the Government and its contractors modified their agreements two years into the litigation in an obvious attempt to strengthen the case for nonliability. Yet the Government resists using its own employees for the tasks at hand — or, indeed, even formally designating Sandia, Zia, and LACI as agents — because it seeks to tap the expertise of industry, without subjecting its contractors to burdensome federal procurement regulations. See Hiestand & Florsheim, at 81; App. 182-184. Instead, the Government earnestly argues that its contractors are entitled to tax immunity because, among other things, they draw checks directly on federal funds, instead of waiting a time for reimbursement. Brief for United States 32-35. We cannot believe that an immunity of constitutional stature rests on such technical considerations, for that approach allows "any government functionary to draw the constitutional line by changing a few words in a contract." Kern-Limerick, Inc. v. Scurlock, 347 U. S., at 126 (dissenting opinion).
If the immunity of federal contractors is to be expanded beyond its narrow constitutional limits, it is Congress that must take responsibility for the decision, by so expressly providing as respects contracts in a particular form, or contracts under particular programs. James v. Dravo Contracting Co., 302 U. S., at 161; Carson v. Roane-Anderson Co., 342 U.S. 232, 234 (1952). And this allocation of responsibility is wholly
III
It remains to apply these principles to the Sandia, Zia, and LACI contracts. The Government concedes that the legal incidence of the gross receipts and use taxes falls on the contractors, Brief for United States 25, and we do not disagree. See United States v. New Mexico, 581 F.2d 803, 806 (CA10 1978). The issue, then, is whether the contractors can realistically be considered entities independent of the United States. If so, a tax on them cannot be viewed as a tax on the United States itself.
So far as the use tax is concerned, United States v. Boyd, supra, controls this case. The contracts at issue in Boyd were standard AEC management contracts, in all relevant respects identical to the ones here. The contractors performed maintenance and construction work at Government facilities, under the general direction of the Government. They procured materials, and paid for the goods with Government funds under an advanced funding arrangement; title passed directly from the vendor to the United States. The contractors owned none of the property involved, and received a fixed annual fee. Indeed, one of the contractor's purchase orders stated that it made purchases "for and on behalf of the Government." 378 U. S., at 42, n. 4. And the Tennessee use tax did not differ in any significant way from the use tax now before us.
The same factors are at work here. The tax, the taxed activity, and the contractual relationships do not differ from those involved in Boyd. The contractors here are privately owned corporations; "Government officials do not run [their] day-to-day operations nor does the Government have any ownership interest." First Agricultural Bank v. State Tax Comm'n, 392 U. S., at 354 (dissenting opinion). In contrast to federal employees, then, Sandia and its fellow contractors cannot be termed "constituent parts" of the Federal Government. It is true, of course, that employees are a special type of agent, and like the contractors here employees are paid for their services. But the differences between an employee and one of these contractors are crucial. The congruence of professional interests between the contractors and the Federal Government is not complete; their relationships with the Government have been created for limited and carefully defined
For similar reasons, the New Mexico gross receipts tax must be upheld as applied to funds received by the contractors to meet salaries and internal costs. Once it is conceded that the contractors are independent taxable entities, it cannot be disputed that their gross income is taxable. This conclusion follows directly from James v. Dravo Contracting Co., supra, where the Court upheld a state tax reaching "gross amounts received from the United States." 302 U. S., at 137. In any event, incurring obligations to achieve contractual ends is not significantly different from using property for the same purposes. And despite the Government's arguments, the use of advanced funding does not change the analysis. That device is, at heart, an efficient method of reimbursing contractors — something the Government has apparently recognized in contexts other than tax litigation. See App. 31 (Sandia contract), 189 (Ninth Semiannual Report of the Atomic Energy Commission (1951)), 191 (same). If receipt of advanced funding is coextensive with status as a federal instrumentality, virtually every federal contractor is, or could easily become, immune from state taxation.
New Mexico's tax on sales to the contractors presents a more complex problem. So far as the use tax discussed above is concerned, the subject of the levy is the taxed entity's beneficial use of the property involved. See United States v. Boyd, 378 U. S., at 44. Unless the entity as a whole is one of the Government's "constituent parts," then, a
Such was the Court's conclusion in Kern-Limerick, Inc. v. Scurlock, supra, a decision on which the Government heavily relies. The contractor in that case identified itself as a federal procurement agent, and when it made purchases title passed directly to the Government; the purchase orders themselves declared that the purchase was made by the Government and that the United States was liable on the sale. Equally as important, the contractor itself was not liable for the purchase price, and it required specific Government approval for each transaction. See 347 U. S., at 120-121. And, as the Court emphasized, the statutory procurement scheme envisioned the use of federal purchasing agents. Id., at 114. The Court concluded that a sale to the contractor was in effect a sale to the United States, and therefore not a proper subject for the Arkansas sales tax.
We think it evident that the Kern-Limerick principle does not invalidate New Mexico's sales tax as applied to purchases made by the contractors here. Even accepting the Government's representation that it is directly liable to vendors for
There is a final irony in this case. In Carson v. Roane-Anderson Co., 342 U.S. 232 (1952), the Court considered a state sales and use tax imposed on AEC management contractors. The terms of the contracts were in most relevant respects identical to the ones here, and insofar as they differed they established an even closer relationship between
We do not suggest that the repeal of § 9(b) waives the Government's constitutional tax immunity; Congress intended AEC contractors to be shielded by constitutional immunity principles "as interpreted by the courts." S. Rep. No. 694, at 3. But it is worth remarking that DOE is asking us to establish as a constitutional rule something that it was unable to obtain statutorily from Congress. For the reasons set out above, we conclude that the contractors here are not protected by the Constitution's guarantee of federal supremacy. If political or economic considerations suggest that a broader immunity rule is appropriate, "[s]uch complex problems are ones which Congress is best qualified to resolve." United States v. City of Detroit, 355 U. S., at 474.
Accordingly, the judgment of the Court of Appeals is
Affirmed.
FootNotes
The New Mexico use tax under consideration here operates in precisely the same way. Both taxes in terms reach the use of property; both have the effect of serving as enforcement mechanisms for the state sales tax. Both serve to ensure that either the sale or the use of all property in the hands of nonimmune entities will be taxed, no matter where the property is purchased. And both, in terms, tax the privilege of doing business in the State. See N. M. Stat. Ann. § 72-16A-4 (Supp. 1975) (gross receipts tax imposed "[f]or the privilege of engaging in business"); § 72-16A-7 (use tax imposed "[f]or the privilege of using property"). In short, the two taxes have the same "practical operation and effect." City of Detroit v. Murray Corp., 355 U. S., at 493.
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