Case Information

*1 I\ OFFICE OF THE ATTORNEY GENERAL OF TEXAS lb. AUSTIN

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flonoreble Weaver 3. Baker, Chelrman

atate Board of control

Awtin, Texas

Dear ;ir:

Your letter

a1 fOllOV8 :

e aame article pro- pollti.oal rubalvialorliJ rges upon 6uoh public the uue of street@, Vaya, 8u@ ohargee not to exoeed e equivalent of 2% of the groa6 by the list ettaohed hereto, eevoral eemoeynary insltftutiano are r4ov pay- ing dlreotly their proportionate part of the Increai- ed grors reoeipts tax levied under Howe Bill 6, eupra, in the form of additions made to the con- Weat rates on their monthly bill5 electrio service. Alao etteehed iii a certified copy of an ordinance of’ the City of Terrell, enacted under au- thority of House Bill8, levying E etreet and alley Qee tax bared upon the gross rectiipts of the local *2 gonoreble Weaver B. Baker, page 2

gas ~ompay, arid o~mp~y has l ignlfled its lnten- tlon to add the amount of this tax to the nmnthly gaa bills OS the Terre11 State Hospital, vhleh is located within the oity llmlta of the olty of Ter- rell.

“Your opiaio~ is requested as to vhether or not the State eleemoaynary lnatltutiana are chargeable with the State groae reoeipta and n~unioipal street and alley use taxes dlnauaaed above.’

Your ~ueation, It seems to ua, lnvolvaa tvo diatinot popoaitlons :

(1) Doer 6 state or olty tar upon publio utLl.lty mm- it be a Sra~Ohiae See or rental or an oaoupation penisa (vhether tax) vhioh is measured by the groaa reeelpta of the aoqpany eon- a tax upon a governmental lnatrumantalfty lnaofar aa it rtltute ia baaed on the gross Srom gas and eleatrioity Surniah- reaelpta ed to state eleemoaynary inrtltutionr?

(2) &Lay the rates for gaa and eleotriolty Surriiahed by the utiUty oompany to atate eleaaoaynery lnst~tutlona be in- creased by the emouub OS awh tax?

With reference to the Sirat of t$.eae tvo propoaltlone, it is our opinion that rulther the atate oooupation t4x upon utilltlea levied by &Mole 7060, B. C. S., 1925, amended by Aota 1941, 47th Laglalature, R. S., Iiouae Bill Article V, nor a rental or S-rmchl~e fee Imposed by a city (under the authority of aaid Aat) upon a utility uae of the streets cmd alleys, not In exaeaa of 22 OS the gross reoelpta OS auoh util- ity tithin euoh city can be conatrued ae being 4 tax upon a government*1 Inatrumentalftg (vhether Federal, State or Hunloi- pal) by reaam of the SaOt thet the gross reoelpta OS auah util- ity mey include, in part, reaeipta Srom gas, electrtalty or vater. furnished to governmental agencies. The tax or See is levied upon the utility end not upon the governmental agency. The aon- neCtiOA betvew the gas, water arnd,eleatrloity bought sad pstd Sor by the governmental agenoy and the tax upon the utility measured in part by the groae receipts therefrom ie too remote to offend the oonatitutlonel tax iunaunlty OS governmental lnatru- Prentautiea.

The altuetion la amlagoua to that before the United Btatea Supreme Court IR Jesea v. Dravo Controeting Co., 302 U.S.

Honorable Weaver B. ESkeP, page 3

134, wherein It var held that the &ate of West Virginia might collect a tax of 2% on the groaa reoeipta of a oontraotor S~om vork performed by him In the oonatruotlon of dm end looka for the Federal Government iA the State. Chief JuStiCe Hughes, In the opinion In that cese declared, at page 160:

“But IS it be assumed that the groaa recelpta tax may Increase the aoat to the Government, thet feet would not invalidate the tax. With respeot that effeot, a tax OA the OOntPeotOP’S gross reOeipt5 would not dfffer from a tax OA the aontraotorta pro- perty and equipment neceaaarlly uaed in the perform- Conoededly, such a tax may 81168 of the contract. validly be laid. Ln this oaae, reckoned as a part of the expense of Property taxes sre naturally, as doing the vork. Texea may validly be laid not only OA the contractor’s macbine~y but on the fuel used to 02erate It. In Trinity SaPm Conatruotion Co. v. Oroajean, 291 U. 3. 466, the taxpayer entered Into a eontract with the Federal Government the conatruo- tlon of levees In aid of navigation end gasoline vu) used to supply power for taxpayer*e machinery. A state excise tax on the gasoline 80 used was suataln- ed. The Court said that $S the payment of the atate taxes imposed on the property aud operations of the taxpayer (affects the federal goVeFMtsnt et all, It at mat gives rime to a burden which Ia oonaequentlal and remote end not to one that is neoeasary, ipoaed- But a tax of that sort uupuestlon- iate or dIreot.* ably increases the expense of the contraolmr in per- forming his aervioe md may, if it enter5 into the oontraetor(a estimate, lnareaae the coat to the Gov- ernment . The Saot that the tax on the groaa reoeipta of the contraOtoP In the Alvard aa8e (Alvard v. John- son, U. S. 509) might have increased tha Oost to the Government of the aarriage of the malls did not lmpreaa the Court mllItatIng sgalnat its validity. n

While the *avo case vaa decided by a divided Court, its authority cannot nov be questiened, having been reoently cited with approval by the Uaited jtatea Yupreme Couct in the

inion by Chief Juatloe Stone, 5nnowwIng the unanlmoua deol- 2 a on of the oorrrt ln Alabama v. EIng bc Bobaer, 86 L. Ed. l.,

wherein a state sales tax of 2% upon btild%ng materisle was sua- tained as applying to materials purohaaed by a aontrabtor an- an umy opnrp for the United %tatsa under a gaged In conatruow *4 :, ,..

. :i

*oFable Weaver H. Baker, page 4

Qoat-plus-a-fixed-fee” oontxaot. we quote I’IWIU the OpiniOA in *& King L Boozer arae:

“So far as such a nondisorimlnatory state tax upon the contraotor enters into the ooat of the .materiala to the ~ovemment, that is but a normal insideAt of the organlaatlon WithIn tha aame terrl- tory, of tvo independent WxIng l overeigntlea. The asserted right of the one to be Sree of taxation by the other doea not spa11 Immunity Strom payWg the added ooata, attributable to the taxation of those vho furnish supplies to the Qovernment and vho have been groated PO tax Immunity. So far a dISSeraAt view haa prevailed, aee P anhandle 011 Co. v. Mlaa- iaaippl 277 U.S. 218) and Qravea v. Texaa Co. (298 U.S. 393 , ve think it no longer tenable.” I

This dootrlne announced by the United States Supreme Coopt IA the Ilfavo and King & Booser aaaea, that a tax, other- xtre~velld, will not be atrloken down beoauae the eaonomI5 burden OS the tax may be “passed on” by the taxpayer to governmanta agemiea or other eAtItIea thamaelvsa Uumune Srom dlreot taxa- tion haa been adopted by the Su eme Court of Texas. See Qray- burg 011 Co. v. State, S. W? 26) $27. In State of Texas v. r Cltt OS El Paso, 135 Tex. 359, 143 9. W. (2d) 366, J6r. Juatloe Orits deolared,:

“we AOV oome to determine whether OF not a dealer who aella motor fuel to a city for muuiol- pal uae by auoh olty on~the publlo highvaya OS the ia exempt from the four’oenta per gallon motor State Sub1 tax levied by our motor fuel tax lava. Agaln referring to #a above quoted atatutoa, we find that they OOAt5IA A0 diIWit prOvi5IQA MkIAg l uoh bxemptlon. Alao, ve Si.nd that such atatutea oon- taln no language vh%oh would jwtI.Sy ua In aonstru- Ing them aa l.ntenAl.ng auah an exelpgt&on. It Sol- lova that dealera who sell motdr fuel to cities IA thIa State for use 00. pub110 highwaya are liable pay the atatutory Sour oenta per gallon motor fuel tax levied by our rotor fuel tax lava.” amply support our conolualon

The foregoing authorltlea that a taq or See, ‘be it state or munIuipa1, measured by a per-

gonorable Ueaver Ii. Baker, page 5

oentage of the gross reoeipts of a utility doe8 not oomtitute a tax upon a atate eleemoaynary lnatitution to the extent of the utility’s reVenU38 fiOXI 8UOh inrtitUtiOIL

We turn POW to the second phase of your quertlon -- *ether the rate6 for gas and eleotriolty furnished by the utll- Lty oompang to atate eleemoaynary inatltutlona may be inoreaaed by the amount of the taxi or in other word8 vhether the atate ~oupation tax or the city franohlae fee may be “pa88ed on” by the utility to the atate in8titution lo the form of higher rater. m anaver to thla que8tion would in each inrtanoe deperid upon the contract under vhioh the eleotrlclt~ or gaa le be- f$miz-

Since in your letter you refer contract rater the rate8 are preeoribed &me that in each lmtanoe iy ln- dlvidu81 oontraota between the reupectlve utility company and the Board of Control, rather than by munlolpal ordinance in the If we are oorreot in oitlea vhere the Snatltutlona are located. our aammptlon that the rate8 for the aeveral inrtitution8 are -- then the term8 of l uoh exlatlng con- pre8orlbed by contract tracta vi11 determine vhether the nev taxer may be ‘parred on” by the utility.

We have exmined one of the contract8 involved in your quertion, being an *Agreement Indw5trlal and Com8eroial Eleotrloal Service,* dated July, 1940, between the Zexaa Power C Mght Company and the State of Texa8, acting by and through the State Board of Control for eleotriolty to be delivered at the State Iiome for Dependent aud gegleoted Children at Uaoo. Thir contract, ‘after aettlng out the rchedule of rate8, oontaia8 the f ollowlng prOVi8ion I

‘Plu8 the proportionate part of 85~ new tax, or increa8ed rate of tax, oc governmental lmporl- tion or oharge (except atate, oounty. city and rpe- air1 dialplot ad valorem taxer 8.nd any taxee on net the fkmp8uy or Income) levied or aa8e88ed age-t upon it8 electric bu8ine88 a8 the result of pay nev or amended IJWS or ordlnanoea after Janwry 1, 1938. ” or a 8lmllar Under a contract containLug the foregoing provl8lon, the utlllty would be authmlmed to lnorea8e the rate6 8peoified in the contract by the “proportionate part of any nev tax” ruoh a8 that provided by Artiole V of House Bill 8, Act8 or by a nev munloipal tax woeed 47th Legislature slnoe the date of the aontraot. In the absenoe of 8uoh a provision in the oon- traot under which ger or electricity 5.8 being fuminhed to a *6 gonorable Weaver H. Baker, page 6 any nev tax impo8ed upon the utility oould not affect

Q-tamer, the rates presoribed in the oontraat. Plria d.laow8lon, we re- pat, ia baaed on the assumption that the rates gee and eleotriclty being paid by the aeveral etate eleemosynary inati- tution& are not fixed by muniaipal ordinanoe.

Yours very truly ATTORNEY OEHERAL OF TEXAS