Comptroller of Treasury v. Pittsburgh-Des Moines Steel Co.

Prescott, J., delivered the opinion of the Court. In April, 1961, the Comptroller of the Treasury, the appellant and cross-appellee (often hereafter referred to as the appellant), made an assessment, for the period June 1, 1960, through January 30, 1961, for sales taxes against PittsburghDes Moines Steel Company, the appellee and cross-appellant, (often hereafter referred to as the appellee) of $17,980.65, representing tax on materials incorporated into the Woodrow Wilson Memorial Bridge, constructed by Pittsburgh under a lump-sum contract with the Department of Commerce of the United States Government. In addition, an assessment of $2,409.18 was imposed on rentals of floating equipment used by Pittsburgh in the construction of the bridge. Following a formal hearing before the Comptroller, the hearing officer sustained the entire assessment.

An appeal was taken by Pittsburgh to the Circuit Court for Anne Arundel County, where Judge Duckett abated the assessment against the materials, but sustained the assessment on rentals. Both parties appealed. The appeal presents four questions: 1. Does Rule 70 of the sales tax rules and regulations discriminate against the appellee by exempting certain sales to contractors with the State of Maryland and its political subdivisions while taxing sales to federal contractors? ¹³⁶ 2.

If Rule 70 discriminates against the appellee, is such discrimination unconstitutional ? 3. If the Court finds there is unconstitutional discrimination against the appellee, what is the result? 4. Does the Maryland sales tax apply to rentals of tangible personal property? The facts are few and undisputed: assessments were made against Pittsburgh as above noted, and, during the time of the construction of the bridge involved, Maryland did not assess a sales or use tax on materials which were incorporated into “jobs” under contracts with the State of Maryland, or its political subdivisions.

I The appellant argues that under the facts of this case, there has been no discrimination against Pittsburgh. He asserts that the sales tax has been imposed by statute (Code, 1962, Cum. Supp., Art. 81, § 324, (f) (3), and § 325) on the sale to all contractors of tangible personal property to be used in constructing real estate; hence contractors with “the Federal Government are, of course, included and contractors for the State are also included except for the provisions of Rule 70.” 1 The latter part of the above quotation cannot be sustained. The Comptroller has no power or authority to create an exemption by Rule.

Rule 70 derives whatever force it has from the fact that it is a correct interpretation of the statutes promulgated by the Legislature. Article 81, § 326 (a), exempts from the sales tax “sales to the State of Maryland or any of its political subdivisions.” In John McShain, Inc. v. Comp ¹³⁷ troiler, 202 Md. 68 , 95 A. 2d 473 , (wherein it was conceded that the Comptroller lacked the power to create an exemption beyond that granted by statute) this Court upheld a part of Rule 70 (as it now reads), and held that the exemption applied when the tangible personal property was acquired through an intermediary contractor, as well as when it was acquired directly from a supplier. Cf. Comptroller v. Joseph P. Hughes, 209 Md. 141 , 120 A. 2d 343 .

Hence, we see that the exemption of sales to the State of Maryland and its political subdivisions stems from Article 81, § 326 (a), and the exemption in Rule 70 to contractors who are performing jobs for the State or its political subdivisions has been confirmed by this Court as a proper interpretation of the exemptions created by statute. It is impossible, under the adjudicated cases, to sustain the Comptroller’s claim that the record discloses no discrimination against the appellee as a contractor with the Federal Government. In Phillips Chemical Co. v. Dumas School Dist., 361 U. S. 376 , the State of Texas had imposed a tax upon lessees of tax-exempt real estate owned by the Federal Government. This tax was measured by the full value of the property.

However, by Texas law a distinctly lesser burden was placed upon the lessees of tax-exempt property owned by the State, or its political subdivisions. Under these circumstances, the Supreme Court stated: “The discrimination against the United States and its lessee seems apparent.” In 1961, the Supreme Court again had occasion to consider the question of discrimination against the United States and its lessees. In Moses Lake Homes v. Grant County, 365 U. S. 744 , Grant County, pursuant to the laws of the State of Washington, attempted to tax the full value of the buildings and improvements on privately owned Wherry Act leaseholds of housing developments on a federally owned Air Force base, although, under the laws of Washington, other leaseholds, including privately owned leaseholds of tax-exempt State lands, were taxed at a lower valuation. The Court quoted from United States v. City of Detroit (355 U. S. at 473) as follows: “It still remains true, as it has from the beginning, that a tax may be invalid even though it does not fall directly on the United States if it operates so as to discriminate against the Govern ¹³⁸ ment or those with whom it deals.” It then followed the Phillips Chemical Co. case, supra, and held the tax to be unconstitutional and void, because it discriminated against the United States and its lessees.

These two cases dealt with “property” taxes, but it has been held that the principles there involved are equally applicable in the case of sales taxes. The State of Illinois imposed a retailer’s occupation tax (a tax on the seller’s privilege to sell tangible personal property at retail based on the amount of the sales price) upon the vendors of tangible personal property. An 'exemption was granted to vendors to the State and its political subdivisions, but no such exemption was afforded vendors to the Federal Government. In United States and Olin Mathieson Chemical Corp. v. Dep't of Revenue of State of Illinois, 191 F. Supp. 723 (1961) (D.C., N.D. Ill.), a three-judge Federal Court stated that in its view a retailer who deals with the Federal Government falls within the same class as a retailer who deals with the State of Illinois, and it was very difficult to perceive a reasonable distinction which grants the State freedom from contributing to the cost of government and imposes the burden on the Federal Govermnent.

It then pointed out that the imposition of the tax on one and not the other permitted the State to deal with retailers at a lower cost and imposed an increased cost upon the Federal Government dealing with the same class of persons. The tax was held to be unconstitutional and void as discriminating against the Federal Government, or those with whom it dealt. The State of Illinois appealed to the Supreme Court. While this appeal was pending, the Supreme Court of Illinois found the exemption section of the occupation tax law to be unconstitutional.

Thereafter, the General Assembly of Illinois enacted an exemption section, which did not exempt the tax on sales to the State or its political subdivisions, but did exempt charitable institutions. The Supreme Court vacated the judgment “in the light of developments which have occurred,” and remanded the case for further consideration. 368 U. S. 30 . On remand, the case was tried on the issue of whether the' exemption of charitable institutions created an unconstitutional ¹³⁹ discrimination. The Court determined that it did not, but issued an injunction restraining the collection of taxes on the proceeds of sales to the Government “for the period when the State of Illinois did not assess or collect any taxes with respect to proceeds of sales to the State of Illinois,” or its political subdivisions.

This determination was affirmed by the Supreme Court. United States v. Dep’t of Revenue, 371 U. S. 21 . The three-judge Federal Court was correct, we think, in determining that the same principles enunciated in Phillips Chemical Co. and Moses Lake Homes, Inc. were applicable to sales taxes, and we hold that the record discloses discrimination against the Federal Government and those with whom it dealt. See also People v. Isaacs, 176 N. E. 2d 889 (Ill. 1961).

II The appellant’s next contention is that assuming the law does discriminate against the appellee, such discrimination is not unconstitutional, because there is “a reasonable basis for treating state contractors as one class and federal contractors as another.” At the outset of the consideration of this contention, we note that there seems to be a considerable difference of opinion in the briefs as to the tests or standards to be applied in determining what, or how much, discrimination by a State against the Federal Government, or those with whom it deals, is necessary to render such discrimination unconstitutional. The brief of the United States, as amicus curiae, argues that the classifications and discriminations permissible under the Equal Protection Clause have nothing whatever to do with the problems herein involved, claiming that they should be solved solely by reference to the Supremacy Clause of the United States Constitution. It points to the fact that the seminal case upon the subject, McCulloch v. Maryland, 4 Wheat. 316 , was decided fifty years before the Fourteenth Amendment was adopted. It quotes from Phillips Chemical Co., supra, wherein the Court said: “We have made it clear, in the equal protection cases, that our decisions in that field are not necessarily controlling where problems of intergovernmental tax immunity are involved. * * * But where taxation of the private use of ¹⁴⁰ the Government’s property is concerned, the Government’s interests must be weighed in the balance,” and from the opinion in United States v. Allegheny County, 322 U. S. 174, 191 , to the following effect: “The questions in this case [taxation by a State of property owned by the Federal Government, in the custody of its bailee] do not arise under the Fourteenth Amendment.

They depend on provisions adopted and principles settled long before the Fourteenth Amendment and which exist independently of it.” It also cites Martin Co. v. State Tax Comm., 225 Md. 404, 421 , 171 A. 2d 479 , where Chief Judge Brune, for the Court, said: “In view of the conclusion which we have reached [on the facts of the case] we do not find it necessary to express an opinion on the question of possible discrimination against the Government on the basis of either statutory provisions or actual tax administration. Of course, no such discrimination would be permissible.” Consequently, the amicus curiae concludes that any State tax “levied in a discriminatory manner against those who deal with the Federal Government is prohibited and invalid.” The Comptroller counters by claiming that the tests of discrimination used in the equal protection cases are applicable here; that the last clause of Article 15 of the Declaration of Rights [“yet fines, duties or taxes may properly and justly be imposed, or laid with a political view for the good government and benefit of the community”] permits a higher degree of discrimination in imposing excise taxes than in imposing property taxes; that in the Phillips Chemical Co. and Moses Lake Homes, Inc. cases, supra, there is no discussion (with the possible exception of Phillips) “of what might constitute discrimination” ; and in Phillips Chemical Co., the Court, after pointing out that discrimination against the United States and its lessees was apparent, stated, “the question, however, is whether it can be justified,” which can only mean that even if there be admitted discrimination, the statute creating the discrimination is not unconstitutional if the discrimination can be justified. We find it unnecessary to answer these contentions in detail, or to lay down a rule relative to the tests and standards to be applied in all cases where it is claimed that a State tax dis ¹⁴¹ criminates against the Federal Government and those with whom it deals. For the purposes of this case, we shall adopt the simple test set forth by the Supreme Court in Phillips Chemical Co., supra, when it said: “The imposition of a heavier tax burden on lessees of federal property than is imposed on lessees of other exempt public property must be justified by significant differences between the two classes. ***.*** where taxation of the private use of the Government’s property is concerned, the Government’s interests must be weighed in the balance.

Accordingly, il does not seem too much to require that the State treat those who deal with the Government as well as it treats those with whom it deals itself (italics ours).” The appellant argues this contention (No. II) elaborately, but an analysis of his brief discloses the following is the claimed “reasonable basis” for placing state and federal contractors in different classes: “In the case at bar, the distinctions are quite evident. The exemption of State contractors does not increase the burden on anyone else. As a matter of fact, it lessens the burden on all since it is perfectly obvious that there are expenses attendant upon the handling of any tax funds * * *. The direct benefit to the State and its political subdivisions is so amply