I\                OFFICE   OF THE ATTORNEY    GENERAL   OF TEXAS
lb.
0                                    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 for 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
gonoreble        Weaver B. Baker, page 2


        g a s~o mp a y,a r ido ~mp ~y h a slignlfled        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-
penisa (vhether it be a Sra~Ohiae See or rental or an oaoupation
tax) vhioh is measured by the groaa reeelpta of the aoqpany eon-
rtltute  a tax upon a governmental lnatrumantalfty    lnaofar aa it
ia baaed on the gross reaelpta   Srom gas and eleatrioity    Surniah-
ed to    state     eleemoaynary   inrtltutionr?

           (2) &Laythe 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, as amended
by Aota 1941, 47th Laglalature,     R. S., Iiouae Bill 8 Article
V, nor a rental or S-rmchl~e fee Imposed by a city (under the
authority of aaid Aat) upon a utility      for 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 to
    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-
    81168 of the contract.      Conoededly, such a tax may
    validly be laid.       Property taxes sre naturally,     as
    Ln this oaae, reckoned as a part of the expense of
    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 for 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-
    iate or dIreot.*       But a tax of that sort uupuestlon-
    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, 282 U. S. 509) might have increased         tha Oost
    to the Government of the aarriage of the malls did
    not lmpreaa the Court as 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-
gaged In conatruow     an umy opnrp for the United %tatsa under a
                                                                                   :, ,..
                                                                               . :i




*oFable   Weaver   H. Baker, page 4


Qoat-plus-a-fixed-fee”      oontxaot.            we quote I’IWIUthe 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 lovereigntlea.      The
     asserted   right of the one to be Sree of taxation by
     the other doea not spa11 Immunity StrompayWg 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 as a dISSeraAt
     view haa prevailed,   aee Panhandle 011 Co. v. Mlaa-
     iaaippl    277 U.S. 218) and Qravea v. Texaa Co. (298
     U.S. 393 I , ve think it no longer tenable.”
           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 UumuneSrom dlreot taxa-
tion haa been adopted by the Su eme Court of Texas.     See Qray-
burg 011 Co. v. State, 3 S. W? r 26) $27.   In State of Texas v.
Cltt OS El Paso, 135 Tex. 359, 143 9. W. (2d) 366, J6r. Juatloe
Orits deolared,:
           “we AOV oometo 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
     State ia exempt from the four’oenta  per gallon motor
     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 luoh
     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      to
     pay the atatutory Sour oenta per gallon motor fuel
     tax levied by our rotor fuel tax lava.”
          The   foregoing   authorltlea    amply support our conolualon
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 8UOhinrtitUtiOIL

            We turn POWto 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 to contract rater
&me     that in each lmtanoe the rate8 are preeoribed iy ln-
dlvidu81 oontraota between the reupectlve       utility   company and
the Board of Control, rather than by munlolpal ordinance in the
oitlea vhere the Snatltutlona     are located.     If we are oorreot in
our aammptlon that the rate8 for the aeveral inrtitution8           are
pre8orlbed by contract -- then the term8 of luoh exlatlng con-
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 for 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
      Income) levied or aa8e88ed age-t      the fkmp8uy or
      upon it8 electric   bu8ine88 a8 the result of pay nev
      or amended IJWS or ordlnanoea after Janwry 1, 1938.”
           Under a contract containLug the foregoing     or a 8lmllar
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
47th Legislature   or by a nev munloipal tax woeed      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
gonorableWeaver H. Baker, page 6


Q-tamer,     any nev tax impo8ed upon the utility    oould not    affect
the rates presoribed     in the oontraat.  Plria d.laow8lon,     we re-
pat,    ia baaed on the assumption that the rates for gee        and
eleotriclty    being paid by the aeveral etate eleemosynary       inati-
tution&    are not fixed by muniaipal ordinanoe.
                                            Yours very truly
                                      ATTORNEY
                                             OEHERALOF TEXAS
