United States v. Boyd

PETITIONER:United States , et al.
RESPONDENT:B. J. Boyd, Commissioner
LOCATION: Oak Ridge, Tennessee

DOCKET NO.: 185
DECIDED BY: Warren Court (1962-1965)
LOWER COURT:

CITATION: 378 US 39 (1964)
ARGUED: Apr 20, 1964 / Apr 21, 1964
DECIDED: Jun 15, 1964
GRANTED: Oct 14, 1963

ADVOCATES:
Archibald Cox, Jr. – for the appellant
Milton P. Rice – for the appellee
R. R. Kramer – for the appellant

Facts of the case

In 1955, Tennessee amended a statute that was based on the Atomic Energy Act and allowed the Atomic Energy Commission (AEC) and its contractors to operate without paying sales tax. Under the amended statute, contractors must pay a contractor’s tax, regardless of the source or destination of the product. Union Carbide Corp, H.K. Ferguson Co. — both of which hold AEC contracts — and the AEC sued Tennessee to recover the sales and contractor’s tax.

The trial court dismissed the suit due to the existing statute, and the plaintiffs appealed. The Tennessee Supreme Court upheld state’s right to collect a contractor’s tax, but found that the companies should be reimbursed for the sales tax.

Question

Does the imposition of the contractor’s tax violate the federal immunity from state taxation?

Earl Warren:

Number 185, United States et al., Appellants, versus B. J. Boyd, Commissioner.

Mr. Solicitor General.

Archibald Cox:

Mr. Chief Justice, may it please the Court.

This is an appeal by the United States and two government contractors from an adverse decision by the Supreme Court of Tennessee in an intergovernmental immunity tax case.

The question presented is whether Tennessee may constitutionally asses a tax upon the use of Government property in the operation of the Government’s Oak Ridge atomic energy facilities, the operation for the sole account of the Government by contractors who engaged to supply managerial skills and services without risk of loss or hope of profit beyond the flat fee for their services and overhead expenses.

The facts of the case are essentially very simple.

The Atomic Energy Act of 1946 and 1954 contemplate that production facilities, like Oak Ridge, will be owned by the United States or technically, by the Atomic Energy Commission as agent for the United States.

But they authorized the Commission to draw upon private industry for managerial skill and administrative services and the like by entering into management contract of bringing those services and skills to service for the Government’s account.

The identity of the contractors at any given facility may change from time to time or it maybe continuous, as indeed it has in the case of Union Carbide here.

In the present case, Carbide and Ferguson were the contractors at Oak Ridge at all times material to this proceeding.

The Carbide contract can be summarized in four points.

I shall refer to it in a little more detail in the course of the argument but it’s enough for now, I think, simply to mention these highlights.

The first place, Carbide undertakes, and this is frankly the language of the contract, to manage, operate and maintain the plants in accordance with instructions from the Atomic Energy Commission.

The character of the work done, impart the schedule of production entirely, is determined by the Atomic Energy Commission.

Carbide, in effect, undertakes to run the plants, not to sell anything to the Government and except in the sense of running the plants not even to make anything that it is to deliver to the Government.

Indeed, the contract expressly stipulates that Carbide makes no representation or warranty whatsoever and assumes no responsibility or obligation that the plants can be operated successfully.

It just goes in there and supplies its services.

Third, I would emphasize that all the plant and facilities, all the equipment, all the materials and product belong to the Government in every substantial sense.

The working capital leave and this is supplied by the Government.

Carbide doesn’t bring any of its money to the enterprise.

It all comes from special government bank accounts on which it withdrew.

All the risks are on the Government.

And fourth, it should be noted that what Carbide receives is a flat fee for performing what I call leave services.

The fee covers its profit and in addition, it covers salaries of corporate officials, a certain amount of backup administrative services for them in the home office and perhaps other branch offices and a certain amount of overhead.

I suppose it’s theoretically possible, perhaps practically possible that Carbide can increase the amount of its net income a little bit by curtailing the amount of corporate officers and services that goes to this or the amount of overhead.

But that is the only conceivable way that — that Carbide can affect its net income.

In all other respects, it’s exactly like a salary and that is certainly small.

This was, in other words, essentially in undertaking the supply management services for a fee in operating the properties of the United States subject to such directions as the United States chose to give and for the sole use and benefit of the public or of the United States.

Ferguson’s contract was essentially similar, although it related to modification of the facilities in the nature of construction work rather than to their operation in terms of producing products or research.

And it involved the kind of services that are preformed under other construction contracts.But here again, the only undertaking you will find when you read the contract was to supply services for a fee.

Archibald Cox:

There was no responsibility for the result.

No promise in the contract to build any particular building and indeed, at the time the contract was executed, no one knew just what the work would be.

Ferguson, like Carbide, used exclusively government property, government equipment, all the way through the operations from start to finish and government money unlike any other edge.

This contract was unlike other construction contracts.

Indeed, unlike other construction contracts even cost-plus-fixed-fee contract that the Commission has at Oak Ridge.

We’re not claiming that the doctrines we espouse here apply to all use of property under all construction contracts.

Under these contracts there was acquired a very large quantity and a very great variety of property for use at Oak Ridge either in operating the facilities or in the modification and enlargement of the Ferguson contract.

Potter Stewart:

I’m not quite clear what the Ferguson did.

Did it actually supply the — the carpenters and electricians and so on?

Archibald Cox:

Yes.

Potter Stewart:

Did it —

Archibald Cox:

It hired the carpenters and electricians.

It supplied —

Potter Stewart:

Probably sub-contractors actually —

Archibald Cox:

I think there were some sub-contractors and there were, no doubt, some direct employees as on any construction job.

What I conceive that it brought to the operation was the organization, administrative organization, the managerial, the executive talent and a considerable amount of construction know-how.

These were really the things the AEC got from.

Potter Stewart:

It kind of coordinating and planning?

Archibald Cox:

Coordinating and planning but also seeing that it was done through employees they hired.

The reason, Mr. Justice Stewart, that it was done this way instead of by the usual structure program — contract was three-fold.

In the first place, these modifications came in the course of a rapidly changing technology.

The AEC knew it was going to have to make modification.

At the time they signed the contract, they didn’t really know just what it was going to be.

Second, Ferguson’s contract, except for one subsequent aspect of it, related almost exclusively to facilities that were in production.

That’s why they build something new on a vacant lot.

And the work, therefore, had to be tied in very closely with the production schedules, in other words, the Carbide was doing and coordinated with them.

And then there were aspects where they didn’t know just how they were going to do some of these things that they would fit in with production.

So Ferguson said, in effect, “Well, we’ll come and do this work as you schedule it, as you tell us to do it.

We will supply the know-how that a big construction company has.

And we will supply the executive organization.

Archibald Cox:

Now, you give us the property, you give us the money, you assume all of risks, you supply the working capital and equipment and we’ll do this work of pooling our skill with your directions.”

And with Carbide, as a matter of fact, looking over their shoulder too because it had to be fitted in with the Carbide’s — Carbide’s (Voice Overlap) —

Potter Stewart:

And that’s — who — who supplied the bricks and the lumber and the structural steel and the (Voice Overlap) —

Archibald Cox:

The bricks and — the bricks and lumber —

Potter Stewart:

For the Ferguson Company.

Archibald Cox:

— structural steel, the cranes, the automobiles, the typewriters are on the Carbide side of the operation.

The chemicals, the computers, all was owned and supplied we would say, I’ll explain that in a moment, by the United States.

It was procured in two ways.

Part of it, the lesser part in the case of the Carbide operations, but part of it may substantial impart, was obtained by Carbide or Ferguson as agent for the United States using government money withdrawn from a special account with title being bought — title being taken in the name of the United States and the only obligation to pay being that of the United States.

And that is true of absolutely everything except to few Carbide automobiles that happen to be there and even those were leased to the United States for use in this operation.

That covered absolutely all the property and equipment.

Now, much of this property, which was used, as Tennessee says, by this contractor, was direct procurement by the AEC.

The larger part of it, indeed, in case of the Carbide contract, it place the order, the materials, the bricks and mortar as you say or the chemicals, supplies and equipment were shipped on the AEC’s directions and were used in operating the facilities or in making the modifications.

What Carbide and Ferguson did was essentially what any agent would do in obtaining property for its principle and in using the property of its principle.

Tennessee has a —

Earl Warren:

How long will this contract to run, General?

Was it to run —

Archibald Cox:

Substantial periods.

They have, in fact, run for a period of years.

They’d been extended from time to time.

Earl Warren:

And the termination of the contract, is there any — to be any change in the ownership of any of the property?

Archibald Cox:

But — all would continue in the United States.

Earl Warren:

All remain in the United States?

Archibald Cox:

It would all remain in the United States.

None of it could pass, could possibly pass to either of these contractors.

The Tennessee, as I say, had a — has a sales tax, the ordinary retail and sales tax and the compensating use tax with which the Court is familiar that cover articles obtained outside the State and paid a sales tax and are used inside the State.

In addition, it has a correlative provision that it’s a special applicability here that appears on page 55 of the Government’s brief.

The critical words, I skipped the unimportant ones, provide that, it’s right — just about the middle of 55 it begins, provide that where a contractor uses tangible personal property in the performance of his contract, whether the title be in the contractor or any other person or whether the title holder of such property would be subject to pay the sales or use tax, except where there’s a church, such contractor or sub-contractor shall pay a tax at the rate prescribed by Section 67 something around there which, of course, is the rate prescribe for the state sales tax measured by the purchase price or fair market value of the property whichever is greater.

And last, there has perviously been a sales or use tax collected.

Acting under the Tennessee statutes, the Tennessee taxing authorities collected both sales taxes on these sales to the United States and use taxes.

Archibald Cox:

The taxes were paid by the contractor with money furnished by the United States.

Of course, it had to be money furnished by the United States because all the money in this enterprise was put up by the United States.

And suit was brought for refunds by the United States and the two contractors as nominal titles.

I would emphasize that the Government, here, is the only real party in interest that the outcome of this suit, and any doctrine laid down in it, cannot operate to the benefit of any private contractor.

The actual money involved in these cases is small because they were confined to two single months, one for contractor, as you will imagine the total amount of money involved is enormous.

We estimate that there is about $10,000,000 in back taxes and this would operate in Tennessee in the future and undoubtedly, in other States where the AEC is involved in similar operation.

The best of my —

Byron R. White:

Mr. Solicitor, this is a — this is just a one shot tax, I take it on — it’s only taxed once on the property that’s acquired.

Archibald Cox:

Yes, yes, that was —

Byron R. White:

It’s not a — it’s not an annual tax on the property it would seem that (Voice Overlap) do you —

Archibald Cox:

No, so I confess, I don’t see why the arguments made here shouldn’t be made in terms of an annual tax on the use of the old plant.

Byron R. White:

Yes, yes, yes.

Archibald Cox:

I’m unable to distinguish that case —

Byron R. White:

Yes, oh, I —

Archibald Cox:

— if they’re contention is out.

Byron R. White:

Yes, but as a matter of fact, the tax that’s collected here, the $10,000,000 is just one tax on new property acquired.

Archibald Cox:

Just from these enormous procurements, that’s right.

The other thing I was about to say in order to complete the practical picture is that to the best of my knowledge, this method of contracting is confined to the Atomic Energy Commission but this would not — does not affect, one way or the other, government procurements.

Now, I say to the best of my knowledge, there may be a few exceptions but that’s the information I have been able to get.

The court below —

(Inaudible)

Archibald Cox:

Well, it may — it — it maybe, Mr. Justice and I hadn’t thought of — in that sense but I’m glad I put in the qualification.

It does not — I do know that in general, it does not affect the Defense Department, I suppose and others like that.

William J. Brennan, Jr.:

But suppose (Inaudible) either I think it — what we’re talking about here in material is not embraced by the proviso at page 55.

I don’t really (Voice Overlap) —

Archibald Cox:

These are materials not — you’re speaking of the atomic materials, you —

William J. Brennan, Jr.:

Yes.

Archibald Cox:

–say.

These —

William J. Brennan, Jr.:

Well, I —

Archibald Cox:

— are materials not embraced by the proviso.

Furthermore, in order to be absolutely accurate, these are also materials which had — these does not include materials that the Government had been using it some prior atomic energy facility and transferred to Oak Ridge.

The administrative authorities in Tennessee have said they won’t tax that but this does involve all new procurements where the title has taken in Oak Ridge or whether directly by the United States which is the larger part of it or by the contractors as agents for the United States which is also a very large amount.

Arthur J. Goldberg:

(Inaudible)

Archibald Cox:

Except — well, I — in general, I accept that but there is one point toward the end of my argument that may not be consistent, Mr. Justice, with an unqualified answer.

Arthur J. Goldberg:

(Inaudible)

Archibald Cox:

If this is said to be a tax on the privilege or rendering services admitting that the United States gets the beneficial use of the property, then I would say it was discriminatory and be invalid for that reason.

Now, I can elaborate that better as we go along.

But it — the privilege or rendering services is not generally taxed in Tennessee, that’s the gist.

The court below held that the sales tax could not constitutionally be levied on these sales because there were sales to the United States with Carbide and Ferguson acting as agents and it judge that Kern-Limerick against Scurlock was decisive.

The court sustained the use tax upon the ground that Carbide and Ferguson had sufficient discretion to be independent contractors.

In other words, if the court assumed explicitly that the decisive question was the question of agent versus independent contractor and then making control or discretion on this old test, it said that Carbide and Ferguson have enough discretion to be independent contractors from which it assumed it followed that the tax would do.

I think the issue here, in view of the precedents, can be very quickly narrowed to small companies.

A State may not collect, even from a third person, a tax upon the property or activities of the United States.

A tax upon the United States use of its own property is clearly invalid.

I think Tennessee could see this one.

But second, we must concede on our side that the State may tax a private person for the privilege of using government-owned property in the taxpayer’s business for the taxpayer’s advantage.

So that it’s the taxpayer that enjoys the fruits of the use, that’s United States against City of Detroit and the companion cases in 355 Unites States and we have no power with them.Thus, as we see it, the real question here is, did the United States, on the one hand, or Carbide and Ferguson enjoy the beneficial use of this property?

Arthur J. Goldberg:

(Inaudible)

Archibald Cox:

Well, it’s — it’s — here, we would say that any beneficial use that Carbide or Ferguson get is so small.

It’s like the beneficial use I get at the library of the Solicitor General.

It’s so small that that is really a tax on the property around the use of the property by the United States.

Now, I suppose some of the benefits, Mr. Justice Goldberg, are always divided.

Arthur J. Goldberg:

(Inaudible)

Archibald Cox:

No, no, they get paid.

Of course, any servant gets paid.

And I will have to argue later, so I didn’t suppose there was any real question about it that a State could not tax the chauffer of the President’s limousine for the value of the car or the captain of Air Force One, for the value of Air Force One or the Solicitor General for the value of the library.

It —

Arthur J. Goldberg:

(Inaudible)

Archibald Cox:

No, but the tax is not on the privilege of employing employees.

Arthur J. Goldberg:

(Inaudible)

Archibald Cox:

First, I would say that whether Carbide is a servant or not and the element of control, in that sense, element of discretion, is utterly irrelevant.

I think that is our first quarrel with the opinion below.

Second, we say that the question, the true test, is to be asking in whose enterprise is the property use?

Who stands to profit or lose from — in the — in the sense of an entrepreneur, not of a salary first, from the use of the property?

Who, in other words, enjoys the fruits of the enterprise and therefore of the use to which the property is devoted?

And we say that judged by that test, neither Carbide nor Ferguson enjoyed the beneficial use of the property in present.

Now, if time forbids and it’s going very rapidly, Mr. Kramer, who’s associated with the Government in this case, will deal with the matter of control or service.

But so far as my argument goes, it is that that element, on this fact, is quite beside the point.

I think the best way to get at the proposition that neither Carbide nor Ferguson enjoyed the beneficial use of this property, so as to make it taxable to them, is by comparing United States against City of Detroit and the companion cases with the facts of the present case.

You will recall it in the City of Detroit, the United States owned industrial properties in Detroit and leased it to Borg-Warner, a private manufacturing business, for use in the conduct of its manufacturing business.

The Michigan statute provided that where exempt property is leased, loaned or otherwise made available to and used by a private person in connection with the business conducted for profit, then the user, the lessee should pay a tax as if he were the owner.

It was held that that tax was constitutional because Borg-Warner was using the plant, in the phrase in the case, for its own beneficial personal use and advantage and this was contrasting where they tax on government property.

The facts of the case make entirely clear, if there’s any doubt about it, the meaning of that phrase for its own beneficial personal use and advantage.

Borg-Warner was free to use the property substantially as it wish.

It was free to carry on what business there it wanted to decide what levels of production, what it would make, what it would sell for and so forth.

Borg-Warner, in other words, suffered the profits — suffered the losses and obtained profit.

Under those circumstances, to have said that the technical United States ownership of the fee or of the reversion exempted this property from taxation would give Borg-Warner, what the Court pointed out, was an unjustifiable advantage because the use of exempt property, in the Court’s words, is worth as much as use of comparable tax property during the same interval.

If there were no tax on the properties, I say and as the Court pointed out, it might well give Borg-Warner a distinct economic preference, as the Court said, over the neighboring competitors as well as escaping their fair share of the local tax responsibility.

Now, this case, I submit, is really quite indisputably at the other end of the scale.

There’s no question here of a private business getting the benefit as an entrepreneur from the use of this tax-free property.

Tennessee isn’t taxing a property that is used for any private advantage in the sense that it wasn’t Borg-Warner.

Indeed, it seems to us that it is trying to raise money out of the activities of the United States.

When you go through the contract in more detail, more detail than we have an opportunity to do now, I think this will become wholly clear.

But I would like to take a minute just to point out five particular points.

The contract — the Carbide contract begins on page 428.

You’ll see that the undertaking of the corporation, at the very bottom of 428, is to manage, operate and maintain said plants and facilities and to perform said work and services upon the terms of conditions and in accordance with the directions and instructions, not inconsistent with this contract, which the Commission may deem necessary or give to the Corporation from time to time then the specific plants that Carbide will deal wether mentioned, there at the very bottom of the page and speaking of the K-25 Plant.

The Corporation shall manage, operate and maintain the K-25 Plant in plant C in accordance with programs that prove in rating from time to time by the Commission to produce product K-25 in the amount and that the rate required by schedules to be provided by the Commission.

There is no obligation to produce or to sell anything, as I said before.

The obligation is on the part of Carbide to use its best efforts and that is clearly set forth in Article 9 over on page 450.

Archibald Cox:

Second, I would emphasize that all the proofs of the enterprise, except the benefit of getting experience in rendering services, belong to the United States.

That’s true, not only have the main province but it’s through of incidental thing.

For example, all sketches, descriptions, notebooks on experiments, all kinds of papers and books of accounts and other proof, all belong to the Unites States from beginning to end and remain, Mr. Chief Justice, in the United States if at any times Carbide leaves the facilities.

Again, all inventions, discoveries, any right to patent or any patents that are taken out, all go to the United States.

So I think it’s literally true to say that except for the experience that results from the use of the property, all the proofs go to the United States.

I pointed out in stating the facts that Carbide cannot gain or lose appreciably even by its own skill or ineptness in carrying out contract.

All expenses, losses, all risks, all liabilities are born by the United States under Article 11 of the contract.

And I emphasized again that in the most literal sense, Carbide has no money or property invested here, saved a few automobiles.

And finally, Carbide must not only do the work as scheduled by the United States but it must do it under such directions and instructions as the Atomic Energy Commission may have given.

We realize — first, let me say that this case, appears to us to be as radically different from the City of Detroit case in terms of use or benefit as any two cases could be.

And second, that it comes squarely within the decision of the three-judge court involving a similar operation at Savannah River in South Carolina which was affirmed by this Court in United States against Livingston.

Now, I realized that some of the companion cases with the City of Detroit, it involved less opportunity for entrepreneurial gain, probably the Borg-Warner had in the City of Detroit case because they involved contracts with the Government and in one instance, a cost-plus contract with the Government.

But the Court made it very clear that the reason the tax was constitutional was that you couldn’t distinguish a business conducted from — for private profits that’s sold to the Government from any other business conducted for private proper — property.

And that the basis for the tax was that the individual enterprise had the right to use the property in the course of its own business.

Ferguson’s situation, we submit, is essentially the same.

It is a little harder to distinguish from an ordinary government construction contract than Carbide’s arrangement is from the ordinary government procurement contract of the supplies or goods because, of course, a larger part of what a contractor — construction contractor does is render services.

But if one asked the essential question, has Ferguson agreed to build a building, which is what the contractor does?

Or has Ferguson — any opportunities for gain or loss, anything invested here?

Then I think that it becomes clear that it falls on the same side of the line too.

It would seem to us that the futility, really, of the claim that Carbide or Ferguson upholds any government property for its own use and advantage, is revealed by the appellee’s own arguments.

Now, the first thing appellee says is that Carbide has the beneficial use of this property because it enables it to sell its products made at the other plant to the United States for use at Oak Ridge.

Now, first, I think I can say without fear of contradiction that there’s not a shred of evidence to support the insinuation that Carbide somehow is getting an advantage over other contractors in selling chemicals and such supplies to the United States.

Indeed, although I regret the record doesn’t show it, this procurement from Carbide is by direct procurement, usually on a competitive bid.

The situation is no different than what it would be if General Electric or du Pont were running the Oak Ridge facility.

And in any event, certainly, the profit from the sales to the Oak Ridge facility is no part of the beneficial use of the property employed at Oak Ridge.

Second, the appellee say, “Well, the experience in using this property gives valuable training to Carbide’s employees and officials,” and then when they’re taken from Oak Ridge to other parts of the Carbide business, that is a benefit to Carbide.

Well, of course, the experience is valuable but the experience gained in rendering services, we submit, cannot be called the beneficial use of the property.

For example, if I were at a private practice, I would consider it — of use to my firm to send a young man to work in the office of the Solicitor General and to some other Solicitor General for a period of two or three years and when he came back to my firm, I would think my firm would be to better off.

But I don’t see how it could be said that my firm has the benefits of the use of the Department Of Justice Library or of the desk or typewriters that he uses or of books or papers or anything else.Similarly, it’s argued here that Carbide receives compensation, as Mr. Justice Goldberg suggested that they weren’t engaged in this as a — out of share altruism.

In that respect, Mr. Justice, I suggest that what Carbide does is just like any employee or official does.

Archibald Cox:

He expects to get compensated for his services and Carbide expects to get compensated for its services.

Now, if they said that Carbide has relatively greater discretion.

In the first place, I would question whether that was true if I can continue to be egocentric, I suspect that I have more discretion in relation to the use of the Justice Department Library or the conduct of government litigation in this Court than Carbide has in relation to the performance at Oak Ridge.

But the real point is that the item of control which seemed to be irrelevant because there is no rational connection between the element of control and the automatic imposition of the tax.

This isn’t tax on the exercise of discretion in performing services for the Government.

This purports to be a tax related to the benefits of property and Carbide gets neither greater nor less benefit from the property in the sense of an entrepreneur whether it has wide discretion or some discretion, but not a great deal, or no discretion at all.

It has its widest discretion in fact in the area that Mr. Justice Goldberg mentioned earlier in the direction of the employment of the workforces and its lease discretion, probably, in the use of the property and in the scheduling of production.

But in either event, it has no interest in the fruits of the enterprise and it has no investment in the enterprise.

And I submit that the mere element of control is not something that Tennessee can tax or has really purported to tax.

Now, it would seem to us that that is really the end of the case.

But I suppose that in the exact analysis, there is one question left, that if one agrees, as I think one must, that Carbide has no beneficial use in any other sense than a government servant or employee or official, a post master, a lawyer or a chauffeur or a computer operation or a laboratory technician, then, I suppose, it might be said, strictly — well, can’t the State — says to tax upon the privilege of rendering services to the Government and at the government enterprises measured by the value of the government property utilized in rendering the services so that the president chauffeur would be taxed on the value of the limousine, the laboratory scientist would be taxed on the value of the equipment and supplies he uses, the man who digs with a shovel would pay a tax on the shovel and the one who digs with a $50,000 crane would pay a tax on the crane.

But first, we say, that this is simply not such a tax.

It doesn’t purport to be that kind of a tax.

At such a tax as that would be so arbitrary and capricious in its incidence because I think my illustration show that one, there’d be no relation to anything gained by the employee or enjoined by the employee and the tax that he was required to pay.

That very arbitrariness suggests to me that that isn’t what Tennessee is trying to do that they are trying to tax the beneficial use of the property.

And we say that here, the benefits go so exclusively to the United States that this is a tax on Federal Government activities.

But if this does purport to be such a tax, we would say that it is unconstitutional for two reasons or really, because one reason or the other must be applicable and here, I come to the point about discrimination.

In the first place, we would say that such a tax on what was called the privilege of rendering services to the United States, measured by the value of the property that you put — utilized in rendering the services, is really a tax on the United States and that no emphasis upon form or rather than substance could blind anyone to that point, the measures took place.

On the other hand, if it be said that the form must be decisive that we cannot go beyond saying that this is a tax on the privilege of rendering services for the United States, then we say that it’s discriminatory because as it operates, no one is made to pay a tax on the privilege of rendering services to anybody else.

The sales or use tax would be collected, it virtually — all other cases.

Now, I don’t think it can be said that this is an effort to equalize taxation without falling back on the other harm of the dilemma, then it is really an effort to tax tax-exempt property or tax-exempt activities.

And consequently, we say, if the tax must be viewed in this artificial light, then it is unconstitutional as being either discriminatory or really a tax upon the United States enjoinment of its property.

Potter Stewart:

I don’t understand why it would be discriminatory.

As I understand the Tennessee statute, it would apply, probably, privilege of rendering services to a — the private owner of — of the materials from which building were going to be built and he’d hire the contractor to put the materials together and —

Archibald Cox:

Well, in those cases, if he bought ticket —

Potter Stewart:

— and — and make the building.

Archibald Cox:

— in those cases, if he bought the materials, he would already have paid the sales tax on them.

If this would bear only in the case where the sales tax couldn’t be collected because it was government tax-exempt property, which I say in effect is just the same as taxing only the Government or only the rendering of services.

Potter Stewart:

For you to pay all — pay the sales tax or use tax be (Inaudible) is it not?

Archibald Cox:

Yes, yes.

Archibald Cox:

So that in its actual operation, the only place this would bear is a tax on the privilege of rendering services would be services to a — tax-exempt persons —

Potter Stewart:

How many —

Archibald Cox:

— for the Government.

Potter Stewart:

— exempt from the sales for this tax.

Archibald Cox:

Yes.

Potter Stewart:

tax.

Archibald Cox:

Yes, and it doesn’t apply to churches.

Potter Stewart:

Right.

Archibald Cox:

It’s even more precise than that.

I would like to give a few minutes to Mr. Kramer and then save the rest of our time for rebuttal.

Earl Warren:

You may.

Mr. Kramer.

R. R. Kramer:

Mr. Chief Justice and members of the Court.

The Court — Supreme Court of Tennessee, in determining that this use by the Government of government-owned property was taxable, rendered it’s conclusion largely or based its conclusion largely, in note from its opinion, on a decision it made that the relationship which existed between Carbide on the one hand and Ferguson on the other and the Atomic Energy Commission for the relationship of a principle and an independent contractor and not a principle in agent or principle in service.

Getting back toward the question that Mr. Justice Goldberg asked a moment ago, I want to address myself for just a few moments to that question.

I want to point out without reading from the contract, the force of which was read by my co-counsel here, that the Atomic Energy Commission, in awarding this contract for the operation of this great complex to the equipment and the operations at Oak Ridge, included also the operations of the atomic energy at Paducah, Kentucky and it — under its contract, made with — I’ll talk first about Carbide, with Carbide turned over to them the operation.

But how did it turn over those operations?

In order to be an independent contractor, the person to whom the operations were turned over, must have surrendered all control except as to end results.

There’s no doubt about that principle.

But what did we do here?

They reserved — the Atomic Energy Commission or the Government reserved the right to alter, to change, to control, a portion of that was read to Your Honors.

What did they do?

This record shows that pursuant to that authority, the Atomic Energy Commission issued to Carbide and similar to Ferguson manuals.

Those manuals, numbers, I don’t recall the number, amounting to several hundred pages in each one.

And in those manuals were set out in detail what do Carbide must do, how you must handle this, how you must handle that, not just the end result of the appreciable or the nuclear materials but how we must do it.

How far did we go in that?

They went so far, and may it please this Honorable Court, and we must remember that every item of machinery, every item of equipment, every chair down there, every automobile, every piece of pencil, every piece of paper, every pencil, every pen that Carbide used or its employees used there in the operation of this contract belong to the Federal Government.

Carbide had nothing there but eight automobiles which is really — which is leased to the Federal Government.

Everything that was there that Carbide used to the last analysis belongs to the Federal Government.

Now, how close did the Federal Government control the use of those?

R. R. Kramer:

Why it’s said that only these people can operate the automobile, only these people can drive a truck, you can only go here with a truck, you can only go here with an automobile.

They exercise that complete control just as in the illustration.

Now, I want to get back to the question that Your Honor asked a moment ago on how far on the labor question did to go on which Your Honor has had something they argue with and then in which I have — fortunately — unfortunately had some connection as some they know.

But how far did they go?

It is true that this contract specify, I don’t recall the page number here, that the employees of Carbide, the same is true in Ferguson, and one argument I make is to — what I want to make is to the other except the different nature of jobs, that the employees, and there were some 10,000 or 12,000 of them from time to time employed at a single time by Carbide, there was 1000 to 1,500 a times employed by Ferguson maybe a few more, that those — while the Government itself had about 1000 to 1200 employees there on the Carbide job, supervising as I’ll come to, but what those employees, what was the relationship?

It’s true they were the employees of the agent.

They were Carbide’s employees, Carbide pay them but pay them with money furnished by the Government.

But, Carbide was not free, may it please the Court, generally, in the field of labor relations.

Here’s what actually happened, both Carbide and Ferguson were under this situation that the atomic energy actually controlled those employees the numbers of them, the hours they worked.

If, may it please the Court, Carbide decided that they wanted to work overtime, any group of employees, before they could do it, Carbide had to go with the Atomic Energy Commission and say, “Can we work with these employees overtime?”

If Carbide wanted to give merits, increases and wages, it had to go to the Atomic Energy Commission.

If Carbide wanted to negotiate the collective bargaining agreement with its employees in which it did that some members may know, but what did it had to do?

It had to get that employ — that — that collective bargaining agreement approved by the Atomic Energy Commission.

It had to — it was obligated also that it had to work its employees under the Tennessee Elective Workmen’s Compensation Law, Workmen’s Compensations Elective Remedy in Tennessee rather than the — and thus getting around both by an employer or an employee.

Arthur J. Goldberg:

(Inaudible)

R. R. Kramer:

No, it —

Arthur J. Goldberg:

(Inaudible)

R. R. Kramer:

No.

Arthur J. Goldberg:

(Inaudible)

R. R. Kramer:

And I understand your —

Arthur J. Goldberg:

(Inaudible)

R. R. Kramer:

The Company determined in its discretion that it wanted to have the Union job, if they we wanted to, of course, they couldn’t have in Tennessee, but it wanted to have a (Inaudible), a union shop, and a (Inaudible) on certain conditions.

But before it could go ahead and — I enter in to an agreement for that union shop, it had to get the approval of the Atomic Energy Commission.

The Atomic Energy Commission could refuse that and did refuse it as the certain groups at one time or another.

But the whole basis of this and true and part of this is on control of cost, Your Honor, but not entirely on control of cost.

AEC control the hours.

Let me indicate another thing in this matter.

Arthur J. Goldberg:

Hours relate to cost (Inaudible)

R. R. Kramer:

Yes, hours relate to cost, but may it please the Court, hours also rate — relate to rate of production.

Hours do not relate solely to cost, hours relate to relate — rate of production in which was the thing that AEC was interested in.

R. R. Kramer:

Let me point out this, this record shows that from time to time, one of these inspectors, and there were many of them, supervisors, of — for Carbide by AEC, AEC had a 1000 to 1200 on there came along and he said, “Why Carbide you’ve got 25 — you’ve got 25 weekly on this job today, you want to have but five, get 20 of them more.”

And they’ve got 20 more.

Now, Your Honor may say — reason this out that that was again a saving of cost but they could say to Carbide, “Put those quickly over on another job and let them work over there.”

And they didn’t do that.

Arthur J. Goldberg:

(Inaudible)

R. R. Kramer:

In cost-plus-fixed-fee contractors, they, of course, enters a — but they — may it please the Court, we say they do not exercise the same degree of control.

This — their degree of control was greater than it’s in the ordinary cost-plus-fixed-fee contract and I think that’s established clearly in the testimony of these witnesses.

One thing more I want to point out is to how far these controls went.

If a lawsuit were brought against Carbide down there of something going on with the operation, who looks after the defense of that?

Carbide has to go to the Atomic Energy Commission and say, “What shall I do with this lawsuit?

Shall I defend it?

Shall we employ counsel?

You don’t employ counsel you’re going to turn it over to the Department of Justice?”

The same thing was true with reference to many of this activity.

I could go on indefinitely, if time permitted, to show —

Hugo L. Black:

What actually happens to those lawsuits?

R. R. Kramer:

Pardon?

Hugo L. Black:

What actually happens in connection with those lawsuits?

R. R. Kramer:

Lawsuits, well —

Hugo L. Black:

Who — who defend it?

R. R. Kramer:

Occasionally, the Atomic Energy says, “We’re going to take care of them.”

Occasionally, Atomic Energy says, “We’re going to ask to the Department of Justice.

They may refuse and then or you go ahead and employ private counsel.”

Hugo L. Black:

Occasionally, what generally happens?

R. R. Kramer:

Generally, Your Honor, I think 50% of the time, private counsels employed, that’s only an approximation.

Hugo L. Black:

By whom?

R. R. Kramer:

Private counsel is employed by the contractor.

Hugo L. Black:

Is that charged up to the Government with regards to the expense?

R. R. Kramer:

Yes sir, the expense of defending those fee — those fees for the counsel are refunded.

Carbide gets the refund of those, they are paid back and they paid out of this government money.

Hugo L. Black:

Does cost added to that?

R. R. Kramer:

No, sir, no cost added to that.

Hugo L. Black:

You mean you don’t put that in as a part of the expenses on which they get a fee?

R. R. Kramer:

Your Honor, may it please the Court.

The fee of Carbide is not based exactly on any percentage of expenditure.

The expenditures by Carbide in its contract may go up and down thousands of dollars during a period of six months or a year or there is no adjustment to the fees.

Now, of course, if a great big new project is added on to Carbide, Carbide run the laboratories, Carbide run the machine shops, Carbide run the machine — the operating park where the materials were refined, Carbide ordered the large part of the chemicals, Carbide had a broad scope not only here but at Paducah, Kentucky and on those propositions, Carbide’s — there’s fluctuated from day to day, the amount of work, they did fluctuate from day to day.

They may have had 14,000 people employed by the one day.

Carbide may have had 8,000 the next, that didn’t mean a necessary a change in fee.

Hugo L. Black:

How many employees does the Government have to supervise (Voice Overlap) —

R. R. Kramer:

The Government had the Carbide from 1000 to 12,000 people sitting there, sitting over their hand, over the —

Hugo L. Black:

How many of them supervise, in detail, to what Carbide does?

R. R. Kramer:

I don’t — most of those supervise the details, may it please the Court.

They supervise them to this extent.

They start — would start to put in a piece of machinery or a piece of equipment.

Carbide with top to AEC people, we think that you can do a better job, you can save a little time, you can save a little money, you can do something by changing this piece of machinery and install somebody else.

We have some know-how.

AEC said, “No, we don’t think that’s proper.

Before we’ll agree to that, we are going to examine ourselves and we are going to give the final word on whether you can put that in or whether you can’t put that in.”

“We think,” says Carbide, “we — you can save money and time by moving this piece of equipment or this, this series of this change or from here over to here.”

Who controls?

Not Carbide.

Carbide can recommend but Carbide’s engineer will sit down beside the engineer of AEC and AEC makes the final decision in all of those instances under this record.

Hugo L. Black:

But what does the — what does Carbide do for its money?

R. R. Kramer:

Carbide, may it please the Court, maintains a large purchasing organization and buys millions of dollars worth of material.

Carbide has expert engineers who study this proposition and sit down there with the AEC engineers and participate in the discovery.Remember that this is a new piece of industrial development.

And AEC or Carbide does have a lot to know-how but not with atomic energy but it has capable engineers and “We want the best engineers we can get” says the Atomic Energy Commission.

You put your good engineers down here.

We’re — you’re going to get your salaries out of us but we’re not going to let that engineer go ahead and just say what shall be done.

We’re going to reserve the right to control him and direct him but we want the benefit of his services and we’re willing to pay for it because he can help us.

R. R. Kramer:

We can’t go out and employ all these engineers ourselves.

First —

Hugo L. Black:

Was this led by competitive bidding?

R. R. Kramer:

No sir, Your Honor this was not led by competitive bidding.

Carbide went in in 1940 — well, I don’t remember the year, way back under the Manhattan District before the Atomic Energy Act and Carbide had done some similar work not quite as broad as this work.

And then because Carbide had know-how and had experience and knew the situation, the Government went to Carbide and negotiated out this contract and it was in negotiated contract and it’s been in effect.

The contractor is — I think Chief Justice asked about how long it ran, it was originally and executed back in 1946 and it was renewed again in the final long run in the 1960 then an extension later on.

There was — it was the intention to be continued from time to time right on and on.

Carbide rendered enormous services.

You take Carbide’s chemist and so on.

We didn’t have perhaps the time to — and we didn’t — I mean — I’m saying the Atomic Energy Commission, though Carbide is my client, Atomic Energy Commission needed someone to run its laboratories.

It employed as a part of its laboratory for that new chemical processes and for medical health and for discovery purposes.

It said to Carbide, “Give us some chemists, give us some people who can understand the chemistry of this product then what do we do?

They put that chemist into our library.

We put our chemist into the library.

They study the effect on health and conditions.

They study all of these effects.

But before the decision is reached on what to do and how to do it, Carbide says to them, “This is what we’re going to do but we do get the valuable health and assistance from these people.

Highest trained people in America is high.”

But nevertheless, it is not subject as a matter of this handling.

It’s not subject to — only the end-product by the contractor.

It is a detailed supervision from day to day, week by week, month by month and year by year and we work it out together.

But we, AEC says, it has the final control.

Hugo L. Black:

Did I understand you to say — did I understand you to say that the Atomic Energy people, Atomic Energy has 12,000 people and they are supervised from Carbide?

R. R. Kramer:

No, no, it has 1000 to 1200 people.

Carbide had about 12,000 at that time when it — AEC if I said, I — I misstated myself.

Hugo L. Black:

You probably didn’t realize it.

R. R. Kramer:

Now, Carbide has a thousand — I think it — it shows Carbide sometimes has managed 1500 to 1800.

Hugo L. Black:

And they actually engage and supervise into details of what Carbide (Voice Overlap) —

R. R. Kramer:

Oh, not entirely.

R. R. Kramer:

Supervising they were engaged in sitting down here at the drafting table and having their draft.

They were engaged in helping work out the details with these people.

They were supervising the installation of machinery and that sort of thing and part of them.

But others were chemist sitting here in the laboratory helping to study along with the —

Hugo L. Black:

They’re acting in partnership?

R. R. Kramer:

They were not in partnership because we did not agree to the partnership but we did supervise what the appellate did.

Here’s the chemist from AEC sitting here, here’s the chemist from Carbide sitting here.

The chemist from Carbide said, “That’s wrong.

Let’s try it this way.”

And (Inaudible) the chemist some Carbide control.

They were not in partnership, they work together but they were not — this is not a partnership agreement or partnership arrangement or operation.

(Inaudible)

R. R. Kramer:

No, Your Honor.

(Inaudible)

R. R. Kramer:

That’s correct.

I agree with Your Honor.

But the difference is here, if Your Honor awarded said — employ a contractor to build a house and the contractor agreed to build it at so much a day or a month or a year on this particular time.

And if Your Honor reserve the right and exercise this right that was done here to change from two-storey to three-storey, to change the type of placing on that house from brick to stone, to change the whole interior and the number of rooms on it.

Your Honor went there from day to day or have somebody else go there from day to day and supervise that, then Your — he would not be an independent contractor.

Arthur J. Goldberg:

The contractor under the (Inaudible) the owner always does that.

R. R. Kramer:

Well, I think sometimes that happens, Your Honor, but I’m not — I’m not going to argue with that question.

But I’m saying that there is a vast difference between what we are doing here and the suggestion that — the question suggested by Your Honor.

Earl Warren:

Mr. Solicitor General, you may have five minutes for rebuttal and — and counsel you may have five extra minutes if you wish —

R. R. Kramer:

I’m sorry I don’t (Inaudible)

Earl Warren:

— if you wish.

Alright.

Mr. Rice.

Milton P. Rice:

Mr. Chief Justice, may it please the Court.

I think that it’s well-established, I take it that it is that a state tax is not invalid purely because the economic burden of that tax can be shown to fall upon the Federal Government.

It seems to me that principle has been to our established refute at this late date.

Milton P. Rice:

In the Dravo case, the case of Alabama versus King & Boozer, the Esso Standard Oil Company against Evans case and in the Michigan property tax cases to which allusion has been made.

I’ve been a little puzzled by the absence of any reference to the second and third of those cases that I mentioned, namely the King & Boozer case and the Esso Standard case because it seems to me that they control the situation presented by this case to an even greater extent than do the Michigan property tax cases, although we think that they are wholly consistent in principle.

In both the King & Boozer case and the Esso Standard case, I would emphasize that title to the property in question was solely and exclusively in the United States Government.

The contractor had no ultimate beneficial use of that property whatever.

The only use he had was during the time that he was handling that property and fashioning things out of it for the sole and exclusive benefit of the Government.

He was paid a fee in those cases in the King & Boozer case that was a cost-plus-fixed-fee contract just like this one is.

In the Esso Standard case that was a fee based on the amount of gallon each handle.

But in neither instance, it should be emphasized and it can’t be emphasize too strongly.

The contractor didn’t have any personal interest whatever in that property.

All of it were downed to the ultimate benefit of the Government and the contractor got through with it, he was through with it.

His interest though was consistent all the way throughout.

He had interest in that property so long as he was using it because that was his business.

It was Esso’s business to handle and store this gasoline for the Government.

It was King & Boozer’s business to build an army camp for the Government.

Now, I think it’s further well-established that a state tax burdening the Government will be stricken down as invalid only in three instances.

One, if it is imposed directly upon the Government, such a thing is almost unthinkable has been since M’Culloch against Maryland anyway.

And certainly that’s not what’s happened in this case.

This tax is not imposed upon the Federal Government.

It’s imposed on a private party.

Secondly, this Court has stricken down taxes which do not impose directly upon the Government itself were imposed upon one whose relationship to the Government were so close as to make it an agency relationship.

In other words, if you can’t tax the Government, you can’t tax the Government’s agent either.

We have no quarrel with that concept.

Thirdly, taxes will be stricken down if they burden the Government, if they discriminate against the Government or those with whom it deals.

We most honestly submit that these taxes are not in any sense discriminatory.

They have not been applied in a discriminatory manner.

Well, this is not a reported case, I can tell the Court that upon the authority of this case, as before us today in the Tennessee Supreme Court’s opinion in it, a tax was sustained as against a contractor with a local government in Tennessee where the local government had bought the materials used and turn them over to the contractor but the contractor had no interest whatsoever in the materials that he used.

Byron R. White:

That would be true to the church prior to construction.

Milton P. Rice:

We have made an exception in the case of church construction, if Your Honor please, and that is the only exception.

And in that connection, I would invite the Court’s attention to the Illinois case of Owen Madison.

Byron R. White:

(Inaudible)

Milton P. Rice:

Yes, sir, I do.

Byron R. White:

Well, never mind (Voice Overlap) —

Milton P. Rice:

You have to know in Madison against Illinois if the three-judge federal court opinion and this Court dismissed it summarily.

Now, the three-judge opinion held that that did not work discrimination.

The fact that Illinois had made an exception in the case of charities, of course, this is confined strictly to the churches, not just to Owen charities.

The property has got to be for church construction and otherwise the use tax has to be paid upon it.

Now, I can’t emphasize too strongly here.

Byron R. White:

The three categories what you concede that — make immunities.

Milton P. Rice:

Yes, sir.

Byron R. White:

It makes three.

How about the fourth?

How about the taxes on government property?

Milton P. Rice:

Well, if the tax is on Government property itself, I think that U.S. against Allegheny County undoubtedly would control.

Byron R. White:

Well, this is (Voice Overlap) —

Milton P. Rice:

We’re talking about an ad valorem property tax there.

Byron R. White:

And this — this is the fourth category.

Milton P. Rice:

Yes, sir.

This is a privilege tax case, however, and I eliminated that category for this reason, this is not an ad valorem tax but a privilege tax as well as the case in King & Boozer and Esso Standard.

Earl Warren:

Mr. Rice, have we substituted in this contract for the Government, let us say General Electric, would — would the petitioner still be liable for the tax?

Milton P. Rice:

You mean if the contractee or owner where General Electric rather than the Atomic Energy Commission.

Earl Warren:

Right.

Milton P. Rice:

Yes, sir, he would if —

Earl Warren:

You mean exactly —

Milton P. Rice:

— the taxed are not been theretofore been paid on it on the acquisition of purchase.

Earl Warren:

Yes.

But where that — where would the incidents of that tax fall under your Tennessee law?

Milton P. Rice:

Assuming that the property have been acquired under some circumstances whereby —

Earl Warren:

But the —

Milton P. Rice:

— not necessary.

Earl Warren:

— it was acquired exactly as it is here so — and the relationship between the — the General Electric and the — these people is exactly the same as the relationship between the Government and these people.

Milton P. Rice:

The instance of the tax, if Your Honor please, would be on the contractor.

Now, that’s — that’s the case invariably.

Now, of course, if — so we have, really, in Tennessee, this is a little bit peculiar, we have the normal retail sales tax.

We have also the conventional complimentary use tax.

Earl Warren:

Yes.

Milton P. Rice:

And we have added this third category now in which we tax use per se but we give credit of course during the sales tax previously paid with respect to the same property.

Oh, I’ll say this, had General Electric acquired the property under some circumstances whereby it had not born sales tax and then brought it into Tennessee and turned it over to Carbide here or Ferguson.

The taxable incident would be Carbide or Ferguson’s use of it just as it is in this case.

Byron R. White:

Well, if I have a — if I’m into the State where there’s no sales tax and I moved to your State, bring my automobile, all my household furniture, everything I owed and it’s all five years old and I move their, I get taxed for used property in your state once.

Milton P. Rice:

Yes, sir.

One time only.

Byron R. White:

Everybody.

Milton P. Rice:

Yes, sir.

Byron R. White:

Everybody — doesn’t it make any difference — can you get credit from car sales and used tax (Inaudible).

Milton P. Rice:

Yes, sir, we have a reciprocal provision in our statute.

We give that credit to States to give it to us.

But in general, that’s — that’s the correct statement.

I mean everybody is subject to tax once with the provision for credit for any previous taxes paid either to Tennessee or to some other State.

Now, this Tennessee statute — there’s two places that make it abundantly clear the nature of this tax.

Section 67-3003 Tennessee Code Annotated provides that every person is exercising a taxable privilege who uses or consumes tangible personal property irrespective of the ownership of that property or any tax immunity which the owner of that property might enjoy.

These taxes, the ones that have been imposed here, I would emphasize, are not upon procurement.

They are not upon procurement at all.

Now, that question is out of the way incidentally because the Tennessee Supreme Court resolved that in favor of these appellants.

The Chancery Court of Davidson County, which was the trial court, held liability under the statute as a whole.

When the case was appealed to the Tennessee Supreme Court, the — that judgment was modified to the extent that it was held that these contractors, insofar of their procurement activities were concerned, were agents of the Government for the purpose of procurement only and that the Kern-Limerick case controlled.

They held however that in the general performance of their contractual duties, they were contractors and not agents of AEC.

Therefore, the contractors’ use tax, and we have another provision here which I shall read, that’s the following section of the Code, it provides that where a contractor uses his tangible personal property in the performance of his contract or to fulfill contract obligations, the tax shall be paid unless it is previously been paid.

Now, insofar as the Government is concerned, we have two sections of our sales tax statute that exempt the Government.

Section 67-3012 exempts the State and local governments any sale to the State of Tennessee directly or to a political subdivision of the State of Tennessee made directly is exempt from the tax.

We have accorded the Federal Government the same advantage.

Milton P. Rice:

In 67-3004 we specifically provide that direct sales to the Federal Government or to any agency of the Federal Government created by Congress are exempt from the Tennessee sales and use tax.

We’ve gone further than that and make them take some special recognition of the Atomic Energy Commission and that we have exempted specifically broad categories of materials which are used there, atomic weapons, atomic weapons parts and special nuclear materials, source materials and several other categories.

We have pointed them out specifically for exemption.

So I would certainly urge in all sincerity that there isn’t any purpose or intent whatsoever in the Tennessee sales and use tax statute to discriminate against the Atomic Energy Commission.

We consider them to be a valuable addition to our State.

And we certainly do not discriminate against them and don’t want to.

I think our statute makes that clear.

Earl Warren:

(Voice Overlap) would the tax prevail?

Milton P. Rice:

Yes, sir.

Earl Warren:

The charge —

Milton P. Rice:

No question about it.

Earl Warren:

Just the same.

Milton P. Rice:

Yes, sir.

It has in one case that ended in the trial court.

Hugo L. Black:

What kind of case was that?

Milton P. Rice:

This was a contract, if Your Honor please, with the town of Millington which is a small place in Shelby County near Memphis.

They engaged the contractor to lay some sewer pipe for them.

They bought the sewer pipe themselves thinking they’re going to save the sales tax, turned it over to the contractor.

When the tax them on it, they brought a suit.

And it was tried before the same trial judge who decided this cause and he had just decided it about only a month or so forth.

And on the strength of the holding that he made in this case, he did what he had to do there.He sustained the tax.

Hugo L. Black:

What was the tax that was imposed to them?

Milton P. Rice:

Sales or use tax on the use of —

Hugo L. Black:

Sales tax?

Milton P. Rice:

Well, it’s the same tax, the contractor use tax on the materials.

Hugo L. Black:

You hold the use (Inaudible) of that tax —

Milton P. Rice:

Yes, sir.

Hugo L. Black:

Not the sale tax.

Milton P. Rice:

The city had gone and acquired the — the sewer pipe and other materials directly.

Of course, there was no tax collected by the vendor and non-paid for the city, then the city turned it over to these private contractor to use in fulfilling its contract with the City of Millington.

Hugo L. Black:

Was that an ad valorem tax?

Milton P. Rice:

No, sir, it’s a sale or use tax.

It’s the same one we have here.

Hugo L. Black:

Privilege tax?

Milton P. Rice:

Yes, sir.

No question it’s a privilege tax.

Hugo L. Black:

Measured by the value?

Milton P. Rice:

Measured by the cost price or fair market value —

(Inaudible)

Milton P. Rice:

— whichever is greater.

(Inaudible)

Milton P. Rice:

Those decisions, if Your Honor please, antedate the enactment of this statue we’ve been talking about.

(Inaudible)

Milton P. Rice:

They establish the proposition that under the Tennessee construction, the contractor is the user or consumer and not a reseller.

And when I say both of them antedate, one of them does not, the S. M. Lawrence case.

(Inaudible)

Milton P. Rice:

Yes, that’s a — a more recent case and it does involve the application of — of this Section we’re talking about.

Now, that was a case of a purchase of some air conditioning equipment by the City of Jackson and some of its agencies.

And the tax was sustained there also.

But most important in this case, I think this Court is aware that this is actually the second round of this controversy.

The first one culminated in this Court’s decision in Roane-Anderson against Carson where the question before the Court at that time was the effect of what was formerly the last sentence of Section 9 (b) of the Atomic Energy Act, whether that language served to exempt Carbide and certain other contractors who were involved in that suit from the Tennessee sales taxes.

This Court held, construing that section that exempted the property, activities and income of the Commission, construed it to include the activities carried on by the contractors.

That was in 1952.

Now, what happened thereafter?

In 1953, the Congress of the United States amended the Atomic Energy Act in one particular own and that is to strike that last sentence from Section 9 (b).

Why was that done?

Well, the committee reports are revealing as to the purpose and intention of that action.

S. Rep. No. 694 and I believe that I have excerpts from it on page 23 of my brief, contains this statement, “Thus, the Atomic Energy Commission’s contractors, by reason of the statutory exemption as interpreted by the Supreme Court, are entitled to an exemption from taxation which is not enjoyed by comparably situated contractors of other agencies and departments.”

That was the conclusion of the Senate Committee after studying the Section 9 (b) in this Court’s decision construing it.

Among other things found in this Senate Report, is a letter from the Atomic Energy Commission with respect to the proposed repealing legislation.

Milton P. Rice:

This letter was addressed to the Honorable Sterling Cole, who’s the chairman of the joint committee on atomic energy.

It was written by the then chairman of the Atomic Energy Commission, Mr. Lewis Strauss.

And here’s what Mr. Strauss said, “Reducing the Commission’s exemption from state and local taxes to the constitutional immunity generally applicable would result in an increase of several million dollars annually in the cost of the atomic energy program in the form of added state and local taxes born by the Federal Government.”

There, if the Court please, we have a statement by the Atomic Energy Commission itself, “Congress, if you passed this legislation, you are going to cost us several million dollars a year.”

Byron R. White:

Yes, but that doesn’t say that the counts of legislation that takes the way this kind of a time of the tax?

Milton P. Rice:

If Your Honor please, if they were entitled to the doctrine of implied constitutional immunity, it wouldn’t cause them anything.

Byron R. White:

Well, I know.

But all — all they intend to do is reduce immunity to constitutional limit.

Milton P. Rice:

But reducing it —

Byron R. White:

But do you think they intended — they didn’t intend — they didn’t intend to revoke the constitutional immunity.

Milton P. Rice:

No, sir.

I would suggest they did.

Byron R. White:

The one there in the legislative history is of just the facts like this is not within what Congress thought with the constitutional immunity of the Government.

Milton P. Rice:

Well, I don’t think we can disregard Mr. Strauss’ opinion, if Your Honor please.

Byron R. White:

I didn’t hear anything like that in his opinion that — that this kind of attack that we’re talking about in this case is outside the constitutional immunity.

Milton P. Rice:

Well, it seems to me that if the repeal is going to cause the Atomic Energy Commission served a million of dollars.

Byron R. White:

(Inaudible)

Milton P. Rice:

Well, if Your Honor please, the Carson against Roane-Anderson which prompted this thing was a sales or use tax —

Byron R. White:

I know but —

Milton P. Rice:

— case.

Byron R. White:

— that’s all they wanted to do is to get the — in Carson they stopped.

They stopped that looking at 9 (b).

They didn’t get the constitutional immunity but it maybe considerate.

You don’t know what’s the outcome of that case could have been if it hasn’t gotten in the constitutional immunity.

Milton P. Rice:

Perhaps so, if Your Honor please, but the Tennessee Supreme Court — it held — it agreed with this Court to Section 9 (b) example but it did also held on a very exhausted opinion that they were independent contractors.

Now, when the case came up here, there was no assignment of error made by the other side on that store.

Byron R. White:

Well, there’s nothing in the opinion in that case rather than the fact that 9 (b) is addressed to it.

Milton P. Rice:

Yes, sir, it’s statutory entirely.

Byron R. White:

(Voice Overlap) so they had to get — doesn’t — did they consider what the Constitution is?

Milton P. Rice:

Oh, it was — it was free the minute entirely.

Byron R. White:

But then the Congress came along and said, “Well, let’s get rid of the statutory that’s used for — for exempting the — even state taxation.

Let’s just get rid of it and reduce it to a constitutional question,” and there is no suggestion that (Inaudible) — how Congress thought a case like this ought to be prepared.

Milton P. Rice:

Well, it does involve sales or use taxes, if Your Honor please, just as the first case did.

And there were numerous States who were interested in — at that time by reason of their sales and use taxes.

Byron R. White:

Yes, but they wanted to get rid of the statutory if — if the statute was a part — if the statute was a part in taxing this kind of — this — if they want to get rid of it.And one thing that they could do to get rid of the constitutional immunity I suppose.

Milton P. Rice:

Well, I would certainly infer that the States who sponsored this were of the opinion that they could prevail on the matter of implied constitutional immunity if you just get rid of the statutory exemption.

Byron R. White:

But why they — they might have been — they might have been in that opinion but the — but the — the finding in the legislative history if Congress was?

Milton P. Rice:

No, sir, I can’t say they said so in so many words in there.

But I can escape the significance of Mr. Strauss’ statement that is going to cost us a vast sum of money, if you repeal the statutory exemption.

Byron R. White:

That maybe so, that maybe so.

It might even — not even been passed after the Tennessee case.

It maybe that the (Inaudible)

Milton P. Rice:

Well, perhaps so, we can only guess about that.

William J. Brennan, Jr.:

Well, I suppose the fact — the question of constitutional immunity is now before us to (Inaudible)

Milton P. Rice:

Yes, sir, I think that’s true.

William J. Brennan, Jr.:

(Inaudible)

Milton P. Rice:

In this particular case.

William J. Brennan, Jr.:

— what happens if he would (Inaudible)

Milton P. Rice:

I don’t think, however, if Your Honor please, that we can lose sight of the history of — of this thing.

Byron R. White:

Well, you can state — wasn’t this — Livingston draw on the Constitution (Inaudible)

Milton P. Rice:

Yes, sir, it did.

This Court did not deliver an opinion in Livingston though, it simply affirmed —

Byron R. White:

Well —

Milton P. Rice:

— per curiam.

Byron R. White:

The District Court — the District Court do.

Milton P. Rice:

The three-judge District Court did deliver an opinion by divided court and this Court affirmed per curiam.

Byron R. White:

On the constitutional basis of the use tax.

Milton P. Rice:

Yes, sir.

William J. Brennan, Jr.:

We affirmed that.

We didn’t dismiss.

Milton P. Rice:

But now, I’m coming to that.

I don’t — don’t want to overlook that point at all.Livingston is a different situation from this in two very important respects.

The most important is that brought the tax that was imposed on du Pont in Livingston was the normal retailer sales tax.

There was no tax on use per se like we have here.

Byron R. White:

There was the use tax.

Milton P. Rice:

There was a complimentary — conventional complimentary use tax but there was no tax on use per se by a contractor.

So, that is an important difference.

I — second and more compelling difference, in my mind even, is the fact that du Pont’s undertaking in Livingston was just a free gratis proposition.

They were paid $1.

Byron R. White:

Court — but the District Court didn’t go on that basis.

District Court said even if this is what — even if — even if this was actuated by profitability who just — for the financial benefit of du Pont nevertheless, there was immunity here.

William J. Brennan, Jr.:

Yes, sir, I know the District Court held that.

Byron R. White:

(Voice Overlap) there was an affirmance.

Milton P. Rice:

There was an affirmance which I assumed indicates the concurrence with the result.

Hugo L. Black:

You don’t think — you don’t think it adapted all the reasoning that they have.

Milton P. Rice:

No, sir, I think it’s — its normal — normal statement that per curiam affirmance would not indicate a complete endorsement of the reasoning necessarily.

We think this case is different in any event.

Hugo L. Black:

They did refer to the fact, did they not, that they were getting no fee of any kind?

Milton P. Rice:

Yes, sir.

That’s made abundantly clear in the statement of facts there.

Hugo L. Black:

And of course, those who voted the affirmance that they have affirmed it on that ground.

Milton P. Rice:

Well, that’s possible I assume.

What they got was $1 for eight years.

Now, what Carbide is getting here for one essence is the quarter of million dollars a month.

Hugo L. Black:

They were not making a business copied out and they were doing it for nothing, is that right?Is that what you’re arguing?

Milton P. Rice:

No, sir, I don’t think that —

Hugo L. Black:

Is that what you’re arguing?

Milton P. Rice:

Yes, sir.

The only benefits that could possibly have gotten out of is a very indirect and intangible benefits.

In fact, the record stated in there that du Pont had undertaken the assignment rather reluctantly and over the objection or some of its shareholders and directors and had been impelled by patriotic motives only.

Milton P. Rice:

Now, in this case, we — it’s — it’s vastly different.

Carbide has the same motive in this case that any contractor has.

It’s a profit motive and I don’t sanction them for it.

Certainly, nobody can be expected to work for nothing but there is a — a vast difference between a contractor making a quarter of a million dollars a month, $2,750,000 a year on a capital investment of nothing.

And there are not many contractors I know of that are doing that well, cost-plus, cost-plus-fixed-fee, lump sum, time and material to what have you.

There’s a lot of them whose loss money.

The Car — Carbide has got a guaranteed return which compares very favorably with the compensation derived by anyone doing that sort of work.

Ferguson’s fee is not set, it’s the renegotiated periodically and it’s geared to the amount of work done.

I think their fee during the period, we’re concerned with here, was $20,000 or a — something like a quarter of a million dollar contract.

But I don’t think that we can contend for a moment that there isn’t any relationship between the compensation received and the property which they actually are using.

Now, what is used anyhow?

Hugo L. Black:

How do you — does your — does your tax — do you have a use tax —

Milton P. Rice:

Yes, sir.

Hugo L. Black:

— on the company where it’s — there’s no profit coming from the Government?

Milton P. Rice:

Well, it makes no difference as far as there is any profit — profit coming from it or not.

Hugo L. Black:

Your taxes define just the same.

Milton P. Rice:

Yes, sir.

They may be incurring a loss with it.

That won’t affect their liability for a use tax with respect to it.

Now, we define “use” in our statute and I think it’s rather conventional definition as the exercise of any power or dominion over that property which the owner could exercise because certainly, taking it and putting it together and reshaping it and evolving something new is a use of the — if the owner could put the property to it.

Why is the question of property have anything to do with the constitutional question?

Milton P. Rice:

I don’t think that it does, if Your Honor please.

Profit you said, didn’t you?

Yes.

You have decided that difference between this case and the du Pont case.

It’s the reason I asked the question.

Milton P. Rice:

Well, I think the absence of profit certainly would come to the negative any suggestion that — that the contractor was — was getting any use out of it at all.

The real essence of this case is whether this is a government activity, isn’t it?

Milton P. Rice:

Yes, sir, I suppose it — it could be put that way.

Not — not — even the government activities, certainly, the Government’s interest in it would have to be conceded.

Milton P. Rice:

It is so exclusively a government activity though that is beyond the pail of taxation by a concurrent survey.

This is undoubtedly government business.

Now, we are not denying that for a moment and never have but we insist also that it’s Carbide’s and Ferguson’s business, business that they’re — they’re being paid for just like any other contractor is.

Hugo L. Black:

Whose benefit?

Milton P. Rice:

The ultimate benefit is of course like in the case of any contract and the owner of the property.

Byron R. White:

Suppose (Inaudible) for a year —

Milton P. Rice:

Yes, sir.

Byron R. White:

— for Carbide for their benefits or —

Milton P. Rice:

Yes, sir.

That’s all the benefit any contractor gets out of it.

He gets the bricks and the lumber and the nails all put together and turns it over to the owner, he no longer has got any interest in it at all.

Byron R. White:

Would you agree that they could have put a use — either a use or sales tax, your characteristic kind of it (Inaudible) but you could not like impose a sales tax on purposes like Carbide but it —

Milton P. Rice:

No, sir, our Court so held.

Byron R. White:

That term?

Milton P. Rice:

Yes.

We held so on the authority of Kern.

Byron R. White:

Yes.

And no — and not in the characteristic each had.

Milton P. Rice:

No, sir, the use tax or taxes when property is brought in to the State from without the State for use or consumption.

Of course, it came in and the title being in the Government or actually being in the Government’s hands that it came from supply depots as some other did.

So you’re correct.

The conventional sales or use tax would not have been applicable in this case.

Byron R. White:

Now, why do you only told it once?

If — if I — a piece of machinery from outside the State to bring it in, you couldn’t — either the sales in the ordinary use tax on it, would you say I want to tax it for the privilege of using it, the privilege of using it, the contract.

Now (Inaudible)

Milton P. Rice:

No, sir.

Byron R. White:

Why not?

Milton P. Rice:

Well, the statute simply doesn’t provide.

Byron R. White:

Doesn’t that make really a tax out of your argument of what the tax really is?

It’s not a tax on the privilege of using (Inaudible)

Milton P. Rice:

Well, no, sir.

The conventional complimentary use tax now is a tax on the privilege of using that which is brought into the State from without the States.

Byron R. White:

Now, do — you do say that this isn’t like the conventional use tax.

Milton P. Rice:

Yes, sir, except that it will reach profit as acquired within the State too, if it’s required under

Byron R. White:

So do you —

Milton P. Rice:

— circumstances.

Byron R. White:

— think that has been a conventional use tax?

Milton P. Rice:

It’s a conventional use tax with a little bit broader application and that it will reach property acquired originally within the State but under non-taxable circumstances.

Byron R. White:

I would think Kern (Inaudible)

Milton P. Rice:

I’m — I’m sorry, I didn’t understand you.

Byron R. White:

I would think Kern (Inaudible)

Milton P. Rice:

Well, perhaps it would.

Now, you can’t tax per curiam.

I think that’s the essence of Kern.

Byron R. White:

That’s right, that’s right.

But what are you taxing with that here when you tax it only once?

Milton P. Rice:

Also, the tax doesn’t tax until it’s actually — until the contractor actually exercises some right or power or dominion over it.

Byron R. White:

Yes, but he doesn’t tax here too.

Milton P. Rice:

Well, I don’t think that we’re obliged to tax it every year, if Your Honor please.

Byron R. White:

Oh, I know you’re obliged but — but your — your time has expired, what kind of a tax you’ve got?

And you say it for the privilege of using.

I thought for the privilege of using, what?

For a year in Tennessee or just —

Milton P. Rice:

Well, now, take the case — this illustrate — our conventional sales tax exempts casual or isolated sales like if you are — would sell our personal automobile.

Under those circumstances, the one who purchased it would not have a sales tax to pay on it but the minute he put a license plate on it to drive, he would have to show that a sales or use tax has been paid on if he could not so show, he had have to pay it to the county court clerk but he wouldn’t pay it for once.

Byron R. White:

(Inaudible)

Milton P. Rice:

But I’m not convinced from what you were driving at there that Kern would reach that.

In the Kern, I think, reaches only where the things are procured for in the name of the Government.

Byron R. White:

Which is undoubtedly is.

You have to — I think your own court (Inaudible)

Milton P. Rice:

Yes, sir.

And they held immunity as far as that aspect of it is concerned.

They applied the tax only on the privilege of using.

Byron R. White:

(Inaudible)

Milton P. Rice:

I don’t think, if Your Honor please —

Byron R. White:

(Inaudible)

Milton P. Rice:

That’s right.

The transfer of it is.

Byron R. White:

Or to use of it, is it not?

Milton P. Rice:

The use of it by a private person, yes, sir.

Byron R. White:

Well, it does cover (Inaudible)

Milton P. Rice:

I suppose that — that it probably would.

I had not ever considered a case exactly like that but I — I believe that it fits the statutory requisite said.

It would be an exercise of power or dominion consistent with ownership.

I think that including —

Tom C. Clark:

Did Detroit handle — Detroit control this case?

Milton P. Rice:

I think it controls along with other cases that I have mentioned.

Tom C. Clark:

There, the uses of dealing itself, wasn’t it, at least the building to the contractor?

Milton P. Rice:

That’s the — that was the Borg-Warner case I believe, if Your Honor please.

It did that —

Tom C. Clark:

Here, there’s no — no building listed there.

Milton P. Rice:

No, sir.

Tom C. Clark:

This is just property that’s put together under —

Milton P. Rice:

Just tangible personal property, that’s all we reach in Tennessee.

Tom C. Clark:

It’s owned by the Government and this — this contract to put you together in the manner in which the Government’s instruction to do it.

Milton P. Rice:

In the manner in which the Government generally instruction to do it.

Also the Government’s reservation of control, I’m glad that’s brought up, is a general control and that’s spelled out in the contract.

Tom C. Clark:

So how does they use the property — how’s the contractor use it?

It looks like to me performing services rather than using (Inaudible) in the Detroit cases while he was using a — a house, a building.

Here, he takes knick-knacks, uses his know-how to put them together and he turns the knick-knacks all together.

Tom C. Clark:

They already — the Government — does the Government use the whole period of time as he was dealing with them.

Milton P. Rice:

Well, there’s too much — there’s too great an area of discretion exercised by the contractor in this case, if Your Honor please —

Tom C. Clark:

(Voice Overlap) —

Milton P. Rice:

— I think now in terms of a mere service.

Tom C. Clark:

Your point is that they have more discretion?

Milton P. Rice:

Yes, sir —

Tom C. Clark:

Yes.

Milton P. Rice:

— they do.

The contract spells out that they shall follow the general directions of the Commission.

But in the absence of specific directions, the contractor is expected to use his own best skill and judgment.

And the history of this thing demonstrates why that had to be.

The Atomic Energy Commission has no skill or experience or know-how in the operation of a vast industrial complex.

They went and got one of the titans of American industry who did have that experience.

That’s the very reason they were engaged.

They were engaged because AEC had to engage and that’s the way to get the job done.

And —

(Inaudible)

Milton P. Rice:

Well, I think you find, they insist, if Your Honor please, that there’s an agency relationship there and —

(Inaudible)

Milton P. Rice:

Well, there is a distinct difference, of course, now between the incidents of relationship of agency and that one of the independent contractors.

And a great point —

(Inaudible)

Milton P. Rice:

If Your Honor please, I think we have to go back to the Esso Standard case.

Now, right there, you can say that was just performance of services that —

(Inaudible)

Milton P. Rice:

I don’t think you’ll get a stronger one than that is though on the point.

Earl Warren:

We’ll recess now.