      Immunity of Veterans Administration Medical Facilities
            from Alabama State Utility License Tax

T he utility license tax imposed by the State o f Alabam a on public utilities operating w ithin that State,
   w hose econom ic burden is passed on by the utilities to their custom ers by order of the state public
   utility com m ission, is constitutionally valid as applied to federal agencies, since its legal incidence
   falls on the utilities and not on their custom ers.

In determ ining w hether the legal incidence of a state tax was intended by the legislature to fall upon
   the federal governm ent, and is thus prohibited under the Suprem acy Clause, a tax schem e as a
   w hole and the context in w hich it operates, as well as the term s o f the taxing statute, m ust be
   considered.

The fact that the term s of the taxing statute do not require the tax to be passed on to custom ers, and do
  not provide a m echanism for doing so, is indicative of the legislature’s intent that the incidence o f
  the license tax rem ain on the utilities.

                                                                                        May 26, 1982

        MEMORANDUM OPINION FOR THE GENERAL COUNSEL,
                 VETERANS ADMINISTRATION

   This responds to your request for the opinion of this Office regarding the
immunity of certain Veterans Administration facilities operating in the State of
Alabama from the Alabama utility license tax imposed on public utilities by
§ 40-21-53 of the Code of Alabama, 1975, as amended (hereafter § 53). By
operation of a 1969 order of the Alabama Public Service Commission, a percent­
age of this tax is reflected automatically in customer billings, including those sent
by the Alabama Power Company to the Veterans Administration Medical Centers
which are the subject of your inquiry.
   As you are aware, the Supremacy Clause of the United States Constitution,
Article VI, clause 2, has been construed to prohibit the states from taxing directly
the properties, functions, agencies, or instrumentalities of the federal govern­
ment (hereafter federal agencies) in the absence of congressional consent, M ayo
v. United States, 319 U.S. 441 (1943); M cCulloch v. Maryland, 17 U.S. (4
Wheat.) 316 (1819), as well as from imposing taxes the “ legal incidence” of
which falls on the federal government. United States v. New Mexico, 455 U.S.
720 (1982); Alabama v. King & Boozer, 314 U.S. 1 (1941); James v. D ravo
Contracting C o ., 302 U.S. 134 (1937). See United States v. County c f Fresno,
429 U.S. 452 (1977); United States v. M ississippi Tax Comm’n, 421 U.S. 599
(1975). Evaluating the constitutionality of any particular state tax in light of these

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prohibitions necessarily requires consideration of the many factors bearing on the
critical question of whether the incidence of the disputed tax falls upon an agency
of the United States or whether it falls upon a third party doing business with the
United States. See United States v. New M exico, supra; United States v. C ity cf
Leavenworth, 443 F. Supp. 274, 281 (D. Kan. 1977). See also United States v.
Allegheny County, 322 U.S. 174, 186 (1944) (“The distinction between taxation
of private interests and taxation of governmental interests, although sometimes
d iffic u lt to d e fin e , is fu n d a m e n tal in ap p lica tio n of the i mmuni ty
doctrine. . .
   For the reasons set forth in detail below, we believe that the utility license tax
imposed by § 53 of the Public Utilities chapter of the Alabama Revenue Code is a
tax on the utility companies, the economic burden of which may be—but is not
required by statute to be—passed on to their customers; the tax is therefore
constitutionally permissible as applied to customers which are federal agencies.

                                                       I. Background

   Section 53 imposes a license tax on public utilities operating within the state in
an amount equal to 2.2 percent of each dollar of the utilities’ gross receipts from
the preceding year, with certain exceptions.1Section 53 requires payments of the
tax to include a statement by the owner, president, or other officer of the utility
company reflecting the names of the utility’s owners and operators, as well as its
principal place of business, together with a sworn statement of the amount of the
utility’s gross receipts for the preceding year.

   1 S ectio n 4 0 - 2 1 - 5 3 o f th e C ode of A lab a m a, 1975, as am en d ed in 1981, provides in pertinent part.
         § 4 0 - 2 1 - 5 3 . E le c tric , hydroelectric, g as, or any other public utility— G enerally— C red it on elec­
                             tric bills for certain p erso n s— A m ount.

         (a) Each person, firm or corporation . . operating an electric or hydroelectric public utility
         shall p a y to the state a license tax equal to two and two-tenths percent on each $1 .00 c f gross receipts
         c f such public utility fo r the preceding year, except, that gro ss receipts from the sale of electricity for
         resale by such electric o r hydroelectric public utilities an d gross receipts from the sale o f electricity to
         th e persons identified in subsection (b ) of this section shall be deducted in com puting the am ount o f
         tax d u e hereunder. . . Such license tax shall be paid to the dep artm en t o f revenue by check m ade
         payable to th e tre asu re r and shall b e paid quarterly. . . . Payment shall be accom panied by a
         statem en t m ade by the president o r o th e r officer of the p u b lic utility o r by the o w n er thereof, g iving
         th e nam e o f th e p e rso n , firm or corporation ow ning and operating such public utility an d the principal
         place o f b u sin ess thereof, together w ith a statem ent u n d er oath of the am ount o f gross receipts o f such
         p u b lic u tility fo r th e preceding year T h e books o f every perso n , firm o r corporation operating such
         u tility shall be at all tim es open to th e inspection of the departm en t o f revenue Any p erso n failing to
         m ake such sw orn statem ent or w illfully m aking a false statem ent o f the gross receipts o f such public
         utility shall be guilty o f a m isdem eanor and, upon conviction thereof, shall be fined not exceeding
         $ 5 0 0 .0 0 and shall also forfeit to th e state three tim es the am ount o f the license fo r such public
         utility. .
         (b )(1 ) O n o r afte r O ctober 1, 1981 any person w ho is 62 years o f age o r o ld er o r totally and
         perm an en tly d isab led and such person is head o f a ho usehold and does not share his o r her residence
         w ith m ore than one o th e r adult person w ho is less than 62 years of age and w ho receives electricity at
         such resid e n ce from a utility which is su b jec t to the 2 .2 percen t license tax levied in subsection (a) of
         this section shall be entitled to q u alify , in accordance w ith the provisions o f [the D epartm ent o f
         Pensions an d S ecurity] for a credit o n his or her m onthly electric bill in the am ount o f the exem ption
         fro m th e 2 .2 p ercen t license tax w ith respect to sales o f electricity to such person provided in
         su b se ctio n (a) o f this section    E l ig ib ih ty for this c re d it applies o n ly to the extent an d am ount that
         it is b illed to the custom ers as a n o rm a l requirem ent u n d er its rates.

(E m p h asis ad d e d )


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   Your present inquiry arises in the context of a dispute between the Alabama
Power Company and the Alabama District Office of the Veterans Administration
regarding the immunity of the several Veterans Administration Medical Centers
(VAMCs) located throughout the State from the § 53 state utility license tax. This
tax is imposed on the Alabama Power Company in the amount of 2.2 percent of
the utility’s gross receipts from the preceding year, 1.8 percent of which is
included as a separate line item in the VAMCs’ utility bills. The District Counsel
for the Veterans Administration takes the position that the medical centers are
immune from paying that portion of their utility bills which reflects the license
tax assessed against the utility company, arguing that the tax, as applied to the
VAMCs, constitutes an infringement of Article VI, clause 2 because it is a direct
tax on a federal agency. The Alabama Power Company takes the contrary
position, arguing that the license tax imposed by § 53 is applicable only to the
utility companies, is not required by statute to be passed on to the companies’
customers and, as such, may be included in the billings sent to customers,
including federal agencies, without infringing the United States’ constitutional
immunity.
   To support its position that the § 53 license tax is an impermissible tax on a
federal agency, the District Counsel for the Veterans Administration relies
heavily on an April 28, 1969, order of the Alabama Public Service Commission.
That order provides as follows:

          Bills shall be increased to offset the applicable proportionate part
          of any taxes, assessments, licenses, franchise fees or rentals
          which may hereafter be imposed upon the Company by any
          Government Authority at rates higher than those in effect De­
          cember 31, 1967 and which are assessed on the basis of meters,
          customers, the price of or revenues from electric energy sold or
          the volume of energy generated, purchased for resale or sold.

The Alabama Power Company construes this order as merely providing a
 “ convenient mechanism for the Company to recover its direct cost of opera­
tion,” 2 rather than as transferring the legal incidence of the license tax from the
utility company to its customers.
    Prior to the Commission’s promulgation of the 1969 order, the license tax on
public utilities was 0.4 percent. See Code of Alabama, 1940, T.51, § 178. The
enactment of § 53 in 1971 raised the tax to the present 2.2 percent. Thus, the 1.8
percent increment increase in the license tax is reflected separately on the
customers’ bills as a result of the Public Service Commission’s order. For more
than two years, the VAMCs have withheld this amount from their electricity bill
payments upon the advice of the District Counsel for the Veterans Administration
that any increase in taxes after the 1969 order would constitute a direct tax on the
agencies. Since the time of your inquiry to this Office, the Comptroller General

  2 Letter from C ounsel to the A labam a Power C om pany to D istrict C ounsel to the V eterans A dm inistration
(A ug 3, 1981) at p. 2.


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was requested by the Deputy Administrator of the General Services Administra­
tion to consider this matter, and, on February 22, 1982, rendered a decision
concluding that the legal incidence of the license tax is on the utility company,
and that the VAMCs should reimburse the Alabama Power Company for pay­
ments attributed to the tax increase which heretofore have been withheld. See
Dec. Comp. Gen. B-204517, “ Veterans Administration Medical Centers—
Payment of Alabama Public Utility License Tax” (February 22, 1982). We turn
now to our consideration of this matter.
                             II. State Taxation of Federal Entities

   The federal government’s immunity from taxation by the States derives from
the Supreme Court’s declaration in McCulloch v. M aryland, 17 U.S. (4 Wheat.)
316 (1819), that such immunity is inherent in the Supremacy Clause of the
Constitution:
         [T]he states have no power, by taxation or otherwise, to retard,
         impede, burden, or in any manner control, the operations of the
         constitutional laws enacted by Congress to carry into execution
         the powers vested in the general government. This is, we think,
         the unavoidable consequence of that supremacy which the consti­
         tution has declared.
M cCulloch, supra, at 436. See Weston v. C ity Council, 27 U.S. (2 Pet.) 449
(1829). Since the decision in M cCulloch, supra, the Supreme Court has “ ad­
hered to the rule that States may not impose taxes directly on the Federal
Government, nor may they impose taxes the legal incidence of which falls on the
Federal Government.” United States v. County of Fresno, 429 U.S. 452, 459.
(1977) (footnote omitted). Notwithstanding the clarity of this formulation, the
determination of where the legal incidence of any particular tax falls necessarily
requires close analysis of the taxing statute “ in the light of all relevant circum­
stances,” and is rarely made without some difficulty.3
   In James v. D ravo Contracting C o., 302 U.S. 134 (1937), the Court dis­
tinguished between the legal incidence and the economic incidence of a state tax
affecting the federal government. The Court held that a nondiscriminatory West
Virginia occupation tax on the gross receipts of a private contractor doing
business with the federal government was constitutionally valid, even though the
tax might have increased the cost of the contract to the federal government. Such
a tax, the Court stated, would “ unquestionably increase[] the expense of the
contractor in performing his service and may, if it enters into the contractor’s
estimate, increase the cost to the [federal] Government.” 302 U.S. at 160.
  3 See, e.g . United States v. Maryland. 471 F. S upp 1030, 1037 (D               Md    1979) (em phasis added)
         In d eterm in in g w here the legal incidence o f a tax falls, a court m ust co n sid er the taxing statute in
      the light o f all relevant circum stances. United States v City o f Detroit, 355 U S 4 6 6 , 4 6 9 (1957).
      The inquiry is a legalistic one, and the result often turns on the interpretation to be given a statute
      S m all d iffe re n ces in the language o f the statutes o r in th e facts o f tw o different cases can therefore
      result in decisions w hich might a p p e a r inconsistent in th e absence o f close analysis.


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Nevertheless, to the extent that the state tax imposed on the contractor “ affects
the federal government at all, it at most gives rise to a burden which is con­
sequential and remote and not to one that is necessary, immediate or direct.” I d .,
citing Trinity-farm Construction Co. v. Grosjean, 291 U.S. 466 (1934). The
principles articulated in D r a w were reaffirmed in Graves v. New York ex rel.
O'Keefe, 306U .S. 466(1939), in which the Court sustained a nondiscriminatory
state tax on the income of a federal employee:
           [A] non-discriminatory tax laid on the income of all members of
           the community could not be assumed to obstruct the function
           which [a government entity] had undertaken to perform, or to cast
           an economic burden upon [it], more than does the general taxa­
           tion of property and income which, to some extent, incapable of
           measurement by economists, may tend to raise the price level of
           labor and materials.
306 U.S. at 484 (footnote omitted).
   The Dravo principle was further refined in Alabama v. King & Boozer, 314
U.S. 1 (1941), and its companion case, Curry v. United States, 314 U.S. 14
(1941), in which the Court upheld state taxes4 imposed upon contractors perform­
ing “ cost-plus-fixed-fee” contracts with the federal government. Even though
the taxes levied against the contractors were included in the “ costs” assessed
against the federal government, the Court held that the economic impact of the
tax was not, standing alone, a sufficient basis for invalidation as an unconstitu­
tional taxing by the State of the federal government or its agents.5 The United
States was not a purchaser within the contemplation of the Alabama sales or use
tax statutes and, therefore, was not legally obligated to pay the tax. See also
Gurley v. Rhoden, 421 U.S. 200, 204 (1975) (holding that the economic burden
of taxes on the vendor is traditionally shifted to vendee in the form of increased
prices for service in the amounts of the taxes, but that such a shift is not indicative
of a shift in legal incidence, particularly if the statute does not require the vendor
to pass the tax on to the purchaser-consumer).6
   4 The disputed tax in King & Boozer, supra, was a sales tax on lum ber sold by K ing & Boozer (K & B ) for use by
contractors constructing an arm y cam p for the U nited S lates. A lthough the tax was ch arg eab le to K & B as the seller,
K&B was required by the language of the statute to collect the tax from the purchaser— in this case, the governm ent
contractor In Curry, supra, the dispute involved a use tax im posed upon m aterials brought into the state for use by a
contracior.
    5 Compare Kern-Limerick v. Scurlock, 347 U S . 110 (1954), holding that an A rkansas gross receip ts tax on a
contractor perform ing a “ cost-plus-fixed-fee” contract w ith the federal governm ent was an u n constitutional
infringem ent of the federal governm ent’s im m unity w here the contract expressly provided that (1) its contractors
were purchasing agents for the governm ent, (2) the purchase was m ade by the governm ent, (3) the governm ent was
obligated to the vendor for the purchase price; (4) the contractor w ould handle all paym ents o n beh alf o f the
governm ent, and (5) title to all m aterials and supplies purchased vested in the governm ent directly fro m the vendor.
The C ourt noted that “ it [was] clear that the G overnm ent [was] the disclosed p u rch aser and that no liability o f the
purchasing agent lo the seller (arose] from the transaction ” 347 U S . at 120-21 But cf. United States v. New
Mexico. 455 U .S . 720, 7 2 4 -2 5 (1982) (discussing the lim itations o f the Kern-Limerick , supra, analysis).
    6 Indeed, in later years the C ourt found insignificant the fact that property w hich provided th e basis for an
assessm ent o f a slate use tax was property owned by the federal governm ent, so long as the uses o r im provem ents
w hich were subject to the tax w ere “ being used by a private citizen or corporation and so long as it is the possession
o r use by the private citizen that is being taxed ’’ U m tedStates v County c f Fresno, 4 2 9 U .S 4 5 2 ,4 6 2 (1 9 7 7 ) Such
use or im provem ent by a private citizen for his ow n private ends, or in connection w ith com m ercial activities carried


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   The Court’s most recent consideration of the issues raised by state taxation of
federal government contractors involved a use tax and a gross receipts tax levied
on three contractors with “ cost-plus-fixed-fee” contracts with the Department of
Energy. U nited States v. New M exico, 455 U.S. 720 (1982). The contracts
provided that: (1) title to all tangible personal property purchased by the con­
tractors would pass directly from the vendor to the Government; (2) the con­
tractors would place orders with third party suppliers in their own names,
identifying themselves as the buyers; and (3) the contractors would use an
“ advanced funding” procedure to meet contracting costs.7 The United States
unsuccessfully challenged the contractors’ liability for the New Mexico taxes,
alleging, essentially, that the contractors were “ procurement agents” for the
federal government and were, therefore, immune from taxation by the State.8
After reviewing its precedents and outlining the limits on the immunity doctrine,9
the Court concluded:
                What the Court’s cases leave room for, then, is the conclusion
             that tax immunity is appropriate in only one circumstance: when
             the levy falls on the United States itself, or on an agency or
             instrumentality so closely connected to the Government that the
             two cannot realistically be viewed as separate entities, at least
             insofar as the activity being taxed is concerned. . . .
                Thus, a finding of constitutional tax immunity requires some­
             thing more than the invocation of traditional agency notions: to
             resist the State’s taxing power, a private taxpayer must actually
             “ stand in the Government’s shoes.” City o f Detroit v. Murray
             Corp., 355 U.S. at 503 (opinion of Frankfurter, J.).
455 U.S. at 735-736. The Court relied heavily on its earlier decision in United
States v. Boyd, supra, in which it rejected “ out-of-hand” the Government’s claim

on for profit, co n stitu te s a “ separate and d is tin c t taxable activity.” United States v Boyd , 378 U S. 3 9 , 4 4 (1964).
See also City c f Detroit v Murray Corp , 3 5 5 U .S . 489 (1 9 5 8 ), United States v. Township c f Muskegon, 355 U S
484 (1 9 5 8 ); U nitedStates v. C ity c f Detroit, 3 5 5 U .S 4 6 6 (1 9 5 8 ) The rule lo be derived from these d ecisions is that
the “ ec o n o m ic burden on a federal function o f a state lax im posed on th o se w ho deal w ith the Federal G overnm ent
d o es not ren d er th e tax unconstitutional s o long as the tax is im posed equally on the o th er sim ilarly situated
co n stitu en ts o f the S tate ” County c f Fresno, supra, 429 U S at 462 (footnote om itted).
    7 T h e “ ad v an ced -fu n d in g ” m echanism allow ed the contractors to pay th e ir creditors and em ployees w ith drafts
d raw n on a sp ecial bank acco u n t in w hich U nited S tates T reasury funds w ere deposited. T h u s, only federal funds
w ere exp en d ed w hen the contractors m ade purchases. M oreover, if the governm ent failed to provide fu nding, the
contractors w ere ex c u sed from perform ance o f the contract and the g overnm ent w as held liable for all properly
in cu rred claim s. 455 U .S . at 725-26.
    8 T h e U nited S tates so u g h t a declaratory jud g m en t that advanced funds w ere not taxable gross receip ts to the
c o n tracto rs; th a t the receip ts o f vendors se llin g property to th e G overnm ent through the contractors were not taxable
by th e S tates; and that the use o f governm ent-ow ned p ro p erty by the con tracto rs was not subject to the use tax See
455 U S . at 7 3 2 -3 3 .
    9 S ee 455 U .S at 7 3 4 -3 5 , w here the C o u rt discussed at length its d ecisions in Alabama v. King & Boozer, supra
(“ im m u n ity m ay not be co n ferred sim ply because the tax has an effect o n the U nited S tates, o r even because the
F ederal G o v ern m en t sh o u ld ers the entire econom ic burden o f the levy” ); James v Dravo Contracting Co., supra
(“ im m u n ity ca n n o t b e co n ferre d simply b e c a u se the state lax falls on the earnings of a co n tracto r providing services
to the G o v ern m en t” ); and United Slates v Boyd, supra (“ (On                . a situation [where] the [private] co n tracto r’s use o f
[G overnm ent-ow ned] p ro p e rty [to p rovide the U nited S tates with] g o o d s o r services [is] in co n n ectio n with
com m ercial activities e a rn e d on for profit [, such use constitutes] a separate and d istin ct taxable activity. .
In d eed , im m u n ity can n o t be conferred sim p ly because th e tax is paid w ith G overnm ent funds                [even] w here the
co n tracto r m ade e x p e n d itu res under an ad vanced funding arrangem ent sim ilar lo the o ne involved h ere” )


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that its advanced-funded contractors were “ ‘so assimilated by the Government as
to become one of its constituent parts.’” Id., quoting Boyd, supra, 378 U.S. at
47, quoting United States v. Township c f Muskegon, 355 U.S. 484,486 (1958).10
   Thus, the Court in United States v. New Mexico, supra, rejected a claim of
constitutional immunity on facts which were even more compelling than those in
Boyd, King & Boozer, and Dravo. The Court reasoned that the extreme diffi­
culties which are involved in determining the allocation of power between co­
existing sovereignties requires such a narrow construction of the constitutional
immunity, and concluded that
            [i]f the immunity of federal contractors is to be expanded beyond
            its narrow constitutional limits, it is Congress that must take
            responsibility for the decision, by so expressly providing as
            respects contracts in a particular form, or contracts under par­
            ticular programs. . . . But absent congressional action, we have
            emphasized that the States’ power to tax can be denied only under
            the clearest constitutional mandate.
455 U.S. at 737-38 (citations omitted).
   The Court in United States v. Mexico, supra, set forth in the clearest possible
terms the narrowness of the limitations that it would construe the Supremacy
Clause to impose on the ability of states to tax federal contractors—even when the
tax is paid with federal funds; however, the Court left undisturbed its prior
decisions finding the immunity appropriate “ when the [state] levy falls [directly]
on the United States itself.” 455 U.S. at 735. Thus, in contrast to taxes which
merely pose an economic burden to the federal government, see, e.g .. United
States v. New Mexico, supra, taxes which fall directly on federal agencies
continue to support claims of immunity by those agencies. As the following
cases demonstrate, taxes which are required by the terms of the statute to be
passed on to the purchaser or customer become legal obligations of the customer,
and, to the extent that such “ legal incidence” bears on the federal government,
are unconstitutional as applied.
   In First Agricultural National Bank v. Massachusetts State Tax Comm’n, 392
U.S. 339 (1968), the Court invalidated a Massachusetts sales tax levied upon
vendors of tangible personal property; this tax was required to be “ add[ed] to the
sales price and . . . collected] from the purchaser . . . [as] a debt from the
purchaser to the vendor, . . . recoverable at law in the same manner as other
debts,” id. at 347, when applied to national banks." Similarly, a regulation of the
   10 In further defining the lim its o f “ agencies” o f the federal governm ent for p u rp o ses o f the im m unity d o ctrin e,
the C o u rt recalled language in ea rlier opinions requiring that w ould-be federal en tities be “ virtually . . . arm [s) o f
the G o v ern m en t, " Department c f Employment w. United States, 385 U S 355, 3 5 9 -6 0 (1966); “ integral p arts o f [a
governm ental d ep a rtm en t],” and “ arm s of the G overnm ent deem ed by it essen tial for th e perform ance of
governm ental functions,*’ Standard O il Co v Johnson, 316 U S 4 8 1 , 485 (1942) U nitedStates v. New Mexico,
supra at 733-38
   11 T h e C ourt stated.

           It w ould appear to be indisputable that a sales tax w hich by its terms m u st be passed o n to the
        purchaser im poses the legal incidence o f the tax upon the purchaser            . T here can be no doubt
        from the clear w ording o f the statute that the M assachusetts Legislature intended that this sales tax be
        passed on to the purchaser. F or o u r purposes, at least, that intent is controlling.
392 U .S . at 3 4 7 -4 8 (citations om itted) (em phasis added)


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Mississippi State Commission requiring out-of-state distillers and suppliers to
collect from military installations within the State a sales tax on liquor sold to the
installations was held invalid as a tax upon instrumentalities of the United States.
United States v. M ississippi State Tax Comm’n, 421 U.S. 599 (1975). The Court
viewed the language of the regulation requiring that all direct orders of alcoholic
beverages from out-of-state distillers by military facilities bear a wholesale mark­
up price, that the price be paid directly to the distiller, and that the distiller remit
the wholesale markup to the Tax Commission, as particularly indicative of the
Commission’s clear intention that the out-of-state distillers and suppliers pass on
the markup to the military purchasers. In addition, the Court pointed to a letter
from the Director of the Alcoholic Beverage Control Division of the Commission
informing distillers
          that the wholesale markup “ must be invoiced to the Military and
          collected directly from the Military (Club) or other authorized
          organization located on the Military base,” warning that any
          distiller who sells alcoholic beverages to the military without
          “ collecting said fee directly from said Military organization shall
          be in violation of the Alcoholic Beverage Control laws and
          regulations issued pursuant thereto,” and subject to the penalties
          provided, including delisting.
421 U.S. at 609. However, even in the absence of so clear a statement of the Tax
Commission’s intent, the Court noted that it was “ obvious” that “ economic
realities compelled the distillers to pass on the economic burden of the markup.”
421 U.S. at 609-10 n.8. Referring to its decision in First Agricultural National
Bank, supra, the Court concluded that “ where a State requires that its sales tax
be p a ssed on to the purchaser a n d be collected by the vendor from him, this
establishes as a m atter o f law that the legal incidence c f the tax falls upon the
purchaser.” 421 U.S. at 608 (emphasis added).
    The Ninth Circuit recently expanded upon the Court’s suggestion in M ississip­
p i State Tax Com m ’n, supra, that the legal incidence of a particular tax is
determined upon consideration of the taxation scheme as a whole— including the
economic realities compelled by the circumstances as well as the literal terms of
the statute. In United States v. California State Board o f Equalization, 650 F.2d
1127 (9th Cir. 1981), affd m em ., 456 U.S. 901 (1982), the court of appeals held a
California sales tax unconstitutional when applied to leases of tangible personal
property to the United States, because the legal incidence of the tax fell on the
United States, even though the taxing statute provided that the parties to the sales
agreement could reach an agreement among themselves as to who would pay the
sales tax .12Two other components of the taxing statute which were essential to the

  12 S ectio n 1656.1 of th e C alifo rn ia Civil C o d e provides in p ertinen t part
       § 1656.1 S ales tax reim bursem ent to retailer; addition to sales price; rebuttable presum ptions;
       schedule
         (a)     W hether a retailer m ay add sales ta x reim bursem ent to the sales price o f the tan g ib le personal
       pro p erty sold at retail to a purchaser d e p e n d s solely upon th e term s o f the agreem ent o f sale !t shall


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court’s conclusion were § 6051 of the California Revenue and Taxation Code,
which imposes a sales tax on the seller’s gross receipts,13 and § 6012, which
provides that the amount of the tax is deducted from the seller’s gross receipts if
the seller establishes that he collected the sales tax from the buyer.14 Thus,
although the language of the taxing statute was facially neutral, the court
determined that the seller maximizes his profit only if he separately states and
collects the tax from the buyer— thereby creating a strong economic incentive to
impose the tax on the buyer.15
   In reaching this conclusion, the court was guided by the analytical principle,
reaffirmed in M ississippi State Tax Com m ’n, supra, and First Agricultural
National Bank, supra, that the legal incidence of a tax falls on the party whom the
legislature intends will pay the tax. The court reasoned:

           A determination of legal incidence is not, however, an inquiry into
           who is legally obligated to remit the collected tax to the state. That
           is, the legal incidence of a tax does not necessarily fall on the
           party who acts as conduit by forwarding collected taxes to the
           state. . . . The concept of legal incidence must also be

        be presum ed that the parties agreed to the addition o f sales tax reim bursem ent to the sales p n c e o f
        tangible personal property sold at retail to a purchaser if.
              (1) T h e agreem ent of sale expressly provides for such addition o f sales tax reim bursem ent;
              (2) Sales tax reim bursem ent is show n on the sales check o r o ther proof o f sale; o r
              (3) T he retailer posts in his prem ises in a location visible to pu rch asers, o r includes on a price
           lag o r m an advertisem ent or other printed m aterial directed to pu rch asers, a notice to the effect
           that reim bursem ent for sales tax w ill be added to the sales p n ce o f all item s o r certain item s,
           w hichever is applicable.
           (b) It shall be presum ed that the property, the gross receipts from the sale of w hich is subject to the
        sales ta x , is sold at a price w hich includes tax reim bursem ent if the retailer posts in his prem ises, o r
        includes on a price tag or in an advertisem ent (w hichever is applicable) one o f the follow ing n otices.
              (1) “All p n ces o f taxable Hems include sales tax reim bursem ent com puted to the nearest m ill.”
              (2) “ T he price o f this item includes sales tax reim bursem ent com puted to the nearest m ill ”
                                     *         *          *         *         *
           (d) T h e presum ptions created by this section are rebuttable presum ptions.
   13 Section 6051 provides in pertinent part:
           For th e pn v ileg e o f selling tangible personal property at retail a tax is hereby im posed upon all
        retailers at . . fa specified rate] of the gross receipts of any retailer from the sale o f all tan g ib le
        personal property sold at retail in this state. . .
   14 Section 6012 provides in pertinent part:

         (c)(8) F or purposes of the sales lax, if the retailers establish to the satisfaction o f the board that the
         sales tax has been added to the total am ount of the sale price and has n ot been absorbed by them , the
         totat am ount of the sale p nce shall be deem ed to be the am ount received exclusive of the tax im posed
         Section 1656 1 of the C ivil C ode shall apply in determ ining w hether o r not the retailers have
         absorbed the sales tax
   15 T he court explained the w orktngs o f the C alifornia sales lax schem e as follows.

           T he seem ing neutrality of section 1656 I is rendered illusory . . by the interaction o f C alifornia
        Revenue and Taxation C ode sections 6012 and 6051 A s noted ab o v e, the sales tax is levied on the
        seller’s gross receipts, C al Rev and Tax. C ode § 6051 (W est Supp. 1980), w hich are m easured by
        the total [sale] price. If the [seller] requires the [buyer] to pay th e tax , the am ount o f the lax is
        deducted from the [seller's] gross receipts. If the [seller] pays the tax him self— absorbs the tax— and
        passes th e econom ic burden o f the tax on to the [buyer] as an increase in the [sale] price, the am ount
        of the tax paid by the [seller] is not deducted from his gross receipts. S ince the sales tax is levied on
        the basis o f the [seller’s] gross receipts, the [seller] m ust rem it a larg er sum o f money to the state as
        taxes if h e absorbs the tax him se lf than if he collects the tax from the [buyer].

6 5 0 F.2d at 1131 (citation om itted).


                                                              281
          distinguished from the notion of economic burden. The constitu­
          tion only prohibits the state from levying a tax on the United
          States; it does not prohibit the state from enacting a taxing scheme
          whose effect is to increase prices paid by the United States.

            In determining who the legislature intends will pay the tax, the
          entire state taxation scheme and the context in which it operates as
          well as the express words of the taxing statute must be considered.
                    *            *          *           *          *
            Despite the facial neutrality of Section 1656.1, the strong
         economic incentive created by Section 6012 all but compels the
         lessor to collect the tax from the lessee. In sum, the California
         sales tax scheme manifests a legislative intent that the lessee pay
         the sales tax. It places the legal incidence of the tax on the United
         States and, therefore, violates the United States’ constitutional
         immunity from state taxation.
650 F.2d at 1131-32 (citations omitted).
   In addition to presenting a cogent model for “ legal incidence” analysis, the
California State B oard c f Equalization decision is significant for its treatment of
the legislature’s statement of its intent. Section 1651.1 was enacted with the
precise, stated purpose of remedying the constitutional infringements posed by
previous sales tax schemes.16The Legislative Notes to the new act clearly state
that § 1651.1
         provides for changes in the California Sales and Use Tax Law to
         make it clear that for both federal and state tax purposes the
         incidence of the California sales tax is upon the retailer for the
         privilege of selling tangible personal property at retail and is not
         upon the purchaser.
                         Sfc                *                  *                 *                  5j5



            Although the California sales tax law has uniformly been
         construed by the California Legislature, courts, and adm in­
         istrative agencies as imposing an excise tax upon the retailer and
         as imposing no legal obligation upon a purchaser, the law does not
         prevent the parties from contracting between themselves for

 16 S ectio n 19 o f C al Stat. 1978, c. 1211, p p 3 9 2 5 -2 6 provides so m e b ackground to the new legislation.

          T h e L eg islatu re in ado p tin g the Sales Tax A ct in 1933 in tended that the incidence of the sales tax be
      o n th e retailer. In S ection 8 o f Chapter 6 8 1 o f the Statutes o f 1941, the follow ing statem ent appears:
      “ . . the L egislature hereby declares and reaffirm s that the sale s tax is not im posed on any purchaser
      of ta n g ib le personal pro p erty in this s ta te , b u t is for the privileg e o f en gaging in the business of
      sellin g such p roperty." N otw ithstanding su ch legislative in ten t and d ecisions o f C alifornia courts
      h o ld in g that th e incidence o f the California sales tax is upon th e retailer and not upon the purchaser,
      the U n ite d S tates S uprem e C ourt in D iam ond National Corp. v. State Board of Equalization [425
      U .S 268 (1 9 7 6 )], and the C o u rt of A ppeals for the Ninth C irc u it in United States o f America v State
      B oard c f Equalization, 536 F 2 d 294 [(1 9 7 6 ) (per c u n a m )], held that fo r federal purp o ses the
      incidence o f the C alifo rn ia sales tax is o n th e purchaser.


                                                             282
       collection by the retailer of reimbursement for the sales tax from
       his customer in order to obtain the benefit of a lower sales tax
       measure or income tax deduction of the sales tax reimbursement
       by the purchaser or for any other purpose. . . . Ascertainment of
       this intention is necessary to a determination of a proper measure
       of sales tax and for other purposes. Accordingly, the purpose of
       the Legislature in adding Section 1656.1 to the Civil Code is to
       create a rebuttable presumption as to the intention of the parties
       for use in the absence of evidence of other intention by those who
       have occasion to use this information.

1978 Cal. Stat., §§ 19, 22, c. 1211, pp. 3925, 3926. See also 650 F.2d at 1128.
Notwithstanding these statements of legislative intent, the Ninth Circuit found
that the sales tax was intended by the legislature to be a tax on the buyer. Thus,
this decision makes clear that the federal courts are not bound by state legislative
and judicial determinations of the legal incidence of a particular state tax with
respect to the United States or its agencies. See Diamond National Corp. v. State
Board of Equalization, 425 U.S. 268 (1976). “ For the purpose of determining
whether a tax affects a federally immune institution, the test for incidence must
be a federal one.” United States v. State Board of Equalization, 450 F. Supp.
 1030, 1035 (N.D. Cal. 1978), citing First Agricultural National Bank v. M as­
sachusetts State Tax Comm'n, supra, 392 U.S. at 347.
   Against this general background, two recent district court decisions bear
directly on your inquiry whether the legal incidence of the Alabama utility
license tax falls, as a matter of law, on the vendor or the vendee of Alabama Power
Company’s utility services. The first case, United States v. City of Leavenworth,
443 F. Supp. 274 (D. Kan. 1977), app. dism issed by stipulation c f parties. No.
79-1088 (10th Cir.), involved a 3 percent franchise fee imposed by the City in
1963 upon all utility companies, including Kansas Power & Light, which provide
electricity to the Fort Leavenworth military installation and the United States
Penitentiary, operated respectively by the United States Department of the Army
and the Federal Bureau of Prisons. Prior to the City’s imposition of the fee, the
Kansas State Corporation Commission had authorized public utilities to pass on
as “ hidden costs” to all customers within the boundaries of their respective
service areas the financial burden occasioned by the franchise fees of particular
cities. When the City imposed the franchise fee on the utilities’ gross revenues
from the sale of electricity, the Commission sought to remedy the discriminatory
effects of the existing regulatory policy by which all utility customers in the State
were required to contribute equally to the fee, without regard to whether their city
had chosen to impose a franchise fee. To this end, the Commission ordered in
1966 that all future franchise fees be directly charged on a pro rata basis to only
such utility customers as lived within the municipal boundaries of the city
exacting the fee, and that each customer’s bill reflect as a separate item his pro
rata share of any pertinent franchise fee. The controversy in Leavenworth,
supra, arose when the City annexed the property on which Fort Leavenworth and

                                        283
the federal penitentiary are located, thereby occasioning a 3 percent franchise fee
addition to their Kansas Power & Light electricity bills. The Bureau of Prisons
and the Department of the Army refused to pay the 3 percent fee on the ground
that it was an impermissible tax upon the federal government.
   The issue before the court in Leavenworth, supra, was whether the incidence
of the C ity’s franchise fee fell upon agencies of the United States, or whether it
fell upon a third party doing business with the United States, Kansas Power &
Light. In concluding that the fee did not fall directly upon the federal agencies,
but rather upon the utility company, the court stated:

        [T]he Supreme Court has “ squarely rejected” the proposition that
        the legal incidence of a tax falls always upon the person legally
        liable for its payment. F irst Agricultural National Bank v. Tax
        Commission, 392 U.S. 339 (1968); United States v. Mississippi
        Tax Commission, 421 U.S. 599 (1974). Further, the decision as to
        where the legal incidence of a tax falls is not determined by who
        bears the ultimate economic burden thereof. E.g., Gurley v.
        Rhoden, 421 U.S. 200 (1975). These factors however, together
        with considerations as to (1) the legislative history of the tax and
        the intent of the taxing authority; (2) the rights and obligations of
        the parties to the transaction on which the tax is imposed; and
        (3) whether the economic burden of the tax, if imposed on a non­
        governmental agency, is required to be passed on to the United
        States, must be weighed into the court’s determination.

443 F. Supp. at 281-82. Applying these factors, the Leavenworth court found that
the City franchise fee was laid upon the privilege extended to utilities to use
public property in the City for business purposes and to sell electricity to
municipal residents, and that, as such, legal liability for payment of the exaction
fell upon Kansas Power & Light. The court observed that the ordinance imposing
the fee “ contained] no provisions for collection directly from the United States,
nor [did] it purport to authorize any procedures whereby penalties for nonpay­
ment— such as liens or encumbrances upon government property— [could] be
sought against the United States property or its treasury.” Id. at 282. The court
found insignificant the fact that the economic burden of the fee was passed on to
the federal agencies by the terms of their sales contracts with the utility, “ [n|or
does the fact that the United States may be required under Kansas State Corpora­
tion Commission orders to reimburse Kansas Power & Light for a pro rata share
of the franchise fee alter the incidence of the tax as originally laid.” Id. at 282-83.
   The Leavenworth decision is particularly helpful to our consideration of the
Alabama license tax, because the franchise fee imposed by the Leavenworth city
ordinance was not, by the terms of the ordinance— as the Alabama tax is not by
the terms of its authorizing statute— required to be passed on to the customers of
the taxed u tilities. N evertheless, in both cases the state public utility

                                         284
commissions required the customers of the taxed utilities to raise their bill
payments by a proportionate share of the utilities’ increased tax liability.17
   In 1979, another district court considered a similar challenge to a Maryland
statutory environmental surcharge as applied to purchases of electricity by
federal agencies. The challenged statutes in United States v. State c f Maryland,
471 F. Supp. 1030 (D. Md. 1979), involved a surcharge on electric energy
generated within the State which was first imposed on electric companies in
1971. Revenues from the surcharge were required by the terms of the statute to be
collected from the electric companies by the Comptroller of the State and placed
in a special fund known as the Environmental Trust Fund. For the years 1971
through 1974, the statute required the Public Service Commission to “ authorize
the electric companies to add the full amount of the surcharge to customers’
bills.” Id. at 1034. In 1974, the Maryland Legislature amended the statute to
provide that the Public Service Commission
           shall authorize the electric companies to add the full amount of the
           surcharge to customers’ bills. To the extent that the surcharge is
           not collected from customers, the surcharge shall be deemed a
           cost of generation and shall be allowed and computed as such,
           together with other allowable expenses, for rate-making pur­
           poses. Revenues from the surcharge shall be collected by the
           Comptroller and placed into the special fund known as the En­
           vironmental Trust Fund.
Id. (emphasis added).
   The United States challenged the State’s exaction of this surcharge from
federal agencies pursuant to both the original and the amended legislation as an
unconstitutional tax by the State on agencies of the United States. The M aryland
court, citing Leavenworth, supra, approvingly, observed that the circumstances
in the M aryland case were even more supportive of the constitutionality of the

   17 The United States filed an appeal of this decision to the Tenth Circuit, but the appeal was later dismissed by
stipulation of the parties (10th Cir No 79-1088). See Memorandum from Assistant Attorney General Ferguson,
Tax Division, “ Memorandum for the Solicitor General Re. United States v. City c f Leavenworth, Kansas" at 3
(Mar. 16, 1979). recommending that the appeal be dismissed, on the ground that “ the ‘exaction’ complained of is
not a lax but a user fee, rental, or charge imposed on the electric company for the right to use the city’s streets,” to
which the Supreme Court has held (he intergovernmental constitutional immunities inapplicable See M assachu­
setts v United Slates, 435 U.S. 444(1978) Nor did ihe impact of the Kansas State Corporation Commission's order
alter the analysis contained in the Ferguson Memorandum
          The fact that the state regulatory commission ordered that all franchise fees were to be charged pro
       rata to the customers within the city exacting the fee does not change the character of the fee from a
       user fee or rental, etc , to a tax imposed on the consumer. It merely reflects an additional cost of doing
       business which is passed on to the subscribers, just as every unsubsidized business must “ pass on”
       and recover from its customers every item of operating expense— including state and federal taxes—
       if it is to operate profitably This, indeed, was the central point of Agron v. Illinois Bell Telephone
       C o., 449 F 2d 906 (C. A. 7, 1971), cert, denied, 405 U S 954(1972) In Agron. [the United States]
       argued, and the court of appeals recognized (449 F 2d at 909), that in public utility rate regulation the
       regulatory body charged with establishing a fair rate and return is required to sanction rates that will
       permit the utility to recover or pass on all appropnate expenses, including taxes Galveston Electric
       Co. v Galveston. 258 U.S. 388, 399 (1922); Georgia Railway & Power Co v Railroad Commis­
       sion. 262 U S. 625, 632-33 (1923), FPC v United Gas Pipe Line Co , 386 U.S 237, 243(1967)
Memorandum, supra at 5-6.


                                                         285
taxing statute than were the circumstances in Leavenworth. The court concluded
that “ neither the 1974 Act nor the 1971 Act requires that Maryland’s environ­
mental surcharge be passed along to customers of the electric companies [, and]
[accordingly, . . . the exactions in question are valid and constitutional.” Id. at
 1038.18
   The factors considered by the court in reaching this conclusion were several.
First, the court noted that the titles of both statutes, as well as their language,
made clear that the surcharge was a “ direct obligation of the electric com­
panies,” which the companies could, at their option, pass on to customers or
simply compute as part of their costs of generation and therefore be recovered in
the form of higher rates. Id. Second, citing the Supreme Court’s decision in
G urley v. Rhoden, supra, the district court found persuasive the fact that the
statutes had no provisions making the customers liable for payment of the
surcharge if the utility companies themselves did not pay the surcharge.19 Id. at
1040. Finally, the court relied on the principle recognized in Graves v. New York
ex rel. O ’Keefe, 306U .S. 466,483 (1939), as a guide to construing ambiguous or
“ awkwardly drafted statutory provisions,” namely, that “ the implied immunity
of one government and its agencies from taxation by the other should as a
principle of statutory construction be narrowly restricted.” Id. at 1039.20
   18 The United States withdrew its appeal of this decision because the Maryland statutory provisions involved were
“ so fraught with am biguity" as to render the case an “ {inappropriate vehicle” to support the United States’
position M emorandum from Assistant Attorney General Ferguson, Tax Division, “ Supplemental Memorandum
for the Solicitor General Re United States M aryland" (Nov 30, 1979). The Ferguson Memorandum also raised a
question whether the district court had “ too readily accepted” the United States’ argument that the environmental
surcharge was a tax, rather than a user charge o r fee, in support of its claim of federal immunity Id. See United States
v. Maryland, supra, 471 F Supp. at 1036. See also n. 17, supra
   19 In concluding that the legal incidence o f the disputed tax fell on the vendor in the taxed transaction, the
Supreme C ourt m Gurley v. Rhoden, supra, found the literal language of the taxing statute to be determinative
        The wording of the .      statute plainly places the incidence of the tax upon the [vendor]. . . . The
        [legislative] purpose to lay the tax on the [vendor] and only upon the [vendor] could not be more
        plainly revealed Persuasive also that such was [the Legislature’s] purpose is the fact that, if the
        [vendor] does not pay the tax, the Government cannot collect it from his vendees, the statute has no
        provision making the vendee liable for its payment.
421 U S at 2 05-06 (footnote and citation omitted)
   In his Memorandum to the Solicitor General regarding an appeal of the Maryland decision, see n 18, supra, the
Assistant Attorney General for the Tax Division referred to the Court's analysis in Gurley, supra, as the “ mechanical
approach.” In contrast, the United Slates argued in favor of a “ semantically broader approach— that the legal
incidence o f the tax is on the United States when the statute as a whole, considering both text and context, creates a
legal compulsion lo pass on the tax ” This broader approach appears to have been followed by the Ninth Circuit in
U nited States v California State Board c f Equalization, supra
   Although the line o f cases representing the “ narrow ” or “ m echanical” approach to governmental immunities and
culminating in the Court s recent decision in United States v New Mexico, supra, may appear to be irreconcilable
with the “ broader” approach taken by the C ourt in Mississippi State Tax Comm'n, supra, and most recently
summarily affirmed in California State Board c f Equalization, supra, the difference between the approaches grows
out o f an underlying distinction between the tw o types of questions raised by analyses of the taxing statutes The
cases following the “ m echanical” approach involved relatively unambiguous statutes which made clear where the
legal incidence o f the disputed tax fell—the question before the court was whether the taxpaying entities, usually
federal contractors, constituted “ federal agents” for purposes of tmmumiy analysis, because the economic burden
of the lax levy was ultimately passed on to the United States, either directly, through specific contractual
arrangem ents or advanced funding procedures, or indirectly, through price increases In contrast, the cases
following the “ broader” approach to governmental immunities involved the initial determination of who the
legislature intended to pay the tax, i.e., the legal incidence of the tax, in making such a determination, the courts
looked closely at the language o f the taxing statute, as well as the surrounding circumstances— including the
“ econom ic realities” — of the tax scheme
   20 See also U nited States v. N ew Mexico, supra, 455 U S at 735-36 (“a narrow approach to governmental tax
immunity accords with competing constitutional imperatives, by giving full range to each sovereign’s taxing
authority” ), citing Graves v. New York, supra; and at 738 (“the States’ power to tax can be denied only under ‘the
clearest constitutional mandate’ ”) quoting Michelin Tire Corp v. Wages, 423 U S. 276, 293 (1976)


                                                          286
   Both the Leavenworth and the Maryland courts relied heavily on the language
of the taxing statutes to determine whether the legal incidence of the tax fell upon
the utility or its customers. In Leavenworth, although the State Corporation
Commission had required the tax to be passed on, the underlying statute had not,
and the court found as a matter of law that the legal incidence of the tax therefore
fell upon the utility. Likewise, although less compelling, the Maryland statutes
required the Public Service Commission to authorize the electric companies to
pass the tax on to their customers. Nevertheless, in both cases “ the statutory
provisions in question, construed in the light of all the circumstances, . . .
controlled] in determining where the incidence of the tax falls.” Maryland,
supra, 471 F. Supp. at 1040.

          III. The Law as Applied to the Alabama Utility License Tax

   In order to determine the constitutionality of the Alabama license tax as
applied to federal agencies, the critical question to be resolved is whether the
legal incidence of the tax falls upon the VAMCs, or whether it falls upon the
Alabama Power Company, a third party doing business with the VAMCs. As set
forth in detail above, determination of where the legal incidence of a particular
tax falls involves close analysis and consideration of the entire State taxation
scheme and the context in which it operates, as well as the express words of the
taxing statute. United States v. California State Board c f Equalization, supra,
650 F.2d at 1131. See United States v. M ississippi State Tax Comm’n, supra;
United States v. State o f Maryland, supra. As an aid to this determination, the
Leavenworth court, as discussed above, suggested three primary inquiries:
(1) the legislative history of the tax and the intent of the taxing authority; (2) the
rights and obligations of the parties to the transaction on which the tax is
imposed; and (3) whether the economic burden of the tax is required by the terms
of the statute, or by economic realities, to be passed on to customers which are
federal agencies. Leavenworth, supra, 443 F. Supp. at 282.
   Pursuing these inquiries, we note first that we have available very little of the
legislative history of the utility license tax. The tax, by its literal terms, imposes a
fee on “ electric or hydroelectric public utilities” in an amount equal to 2.2
percent of their gross receipts from the preceding year. This language is in
marked contrast to that of §§ 40-21-82, 86, which impose a 4 percent gross
receipts tax on public utilities operating within the State,21 but which specifically
require the utilities to “ add that tax to the price or charge for such utility services
to every purchaser thereof. . . [and to] collect said amount from every purchaser

  21 Section 40 -2 1 -8 2 , Code of Alabama, 1975, provides.
          There is hereby levied, in addition to all other taxes of every kind now imposed by law, and shall be
       collected as herein provided, a privilege or license tax against every utility in the state of Alabama on
       account of the furnishing of utility services by said utility; and the amount of said tax shall be
       determined by the application of rates against gross sales or gross receipts, as the case may be, from
       the furnishing of utility services in the state of Alabama and shall be computed monthly with respect
       to each person to whom utility services are furnished, in accordance with the          . table (provided in
       this section].
(Emphasis added.)


                                                         287
of such utility services[, making it] unlawful for any person furnishing utility
services to fail or refuse to collect from the purchaser the amount required by this
section to be collected.” § 40-21-86, Code of Alabama, 1975, as amended
(emphasis added). In addition, § 86 clearly states that the 4 percent gross receipts
tax is “conclusively presum ed to be a direct tax on the purchaser precollected for
the purpose of convenience and facility only.” Id. (emphasis added). Neither the
Power Company nor the District Counsel disputes the United States’ immunity
from this tax, as the terms of the statute clearly indicate that the 4 percent gross
receipts tax is intended to be a direct tax on the consumer, and, as far as we are
aware, the Power Company has never attempted to pass this tax on to, or collect it
from, its customers which are federal agencies. See Letter from Counsel to the
Alabama Power Company to the District Counsel of the Veterans Administration
(Aug. 3, 1981).
   The statutory language of §§ 82 & 86 of the Public Utilities chapter of the
Revenue Code suggests a clear and unambiguous legislative intent to tax the
utility companies’ customers directly, and not to impose a tax on the companies
themselves; such language presents a clear indication of the legislature’s knowl­
edge of the distinction between direct and indirect taxation of the consumer, and
is therefore significant in our analysis of the legislative intent of § 53. Had the
legislature intended to collect the fee directly from the utilities’ customers, it is
reasonable to assume that it would have manifested its intent with language
similar to the language in § 86; from its failure to do so, as well as from the plain
terms of the statutory language that it did use, we may infer that the legislature
intended to levy the § 53 license tax on the utility companies. See generally East
Brewton M aterials v. Department c f Revenue, 233 So. 2d 751 (Ala. 1970).22
   Although we are not aware of this provision’s having been construed by the
Alabama courts, we do have statements “ by the highest officials charged with the
duty of administering the tax law s,” id. at 754, construing this provision.23
Officials in the Legal Division and the Franchise Tax Division of the State of
Alabama Department of Revenue, as well as the Attorney General of the State of
Alabama, have construed the 2.2 percent utility license tax imposed by § 53 as a
license tax on the utilities, “ a cost o f doing business [which] can be included in
the rate base allowed by the Alabama Public Service Commission, . . . itemized
on bills, or . . . absorbed partially or wholly by the utility.” Letter from
Corporate Tax Specialist, Franchise Tax Division, to Telpage, Inc. (January 3,
 1977). See Letter from Assistant Attorney General, State of Alabama, to
Abemethy Memorial Hospital (March 10,1975); Memorandum from Counsel to
the Legal Division, Department of Revenue (March 3, 1975). Further, in a 1977
letter responding to an inquiry regarding the 2.2 percent license tax, the Fran­
chise Tax Division described the tax as:

   22 Although the “ credit allowance” of subsection (b) of § 53, see n. 1 supra, appears lo assume that the utility
companies would increase their customers’ rates b y an amount sufficient to recover the amount paid in license taxes,
the law is settled that the mere shouldering of the ultimate economic burden of a tax is not determinative of where its
legal incidence lies See, e.g . Gurley v. Rhoden, supra; King & Boozer, supra; Dravo Contracting Co , supra.
   21 See State v. Southern Electric Generating C o ., 151 So 2d 216, 218 (Ala 1963), (“The interpretation by the
Attorney General           will be given weight as a factor in judicial construction of a statute where its meaning is
doubtful*'), citing Cherokee County v Cunningham, 68 So 2d 507 (Ala. 1953).

                                                        288
           a cost of doing business just as much as labor, supplies, materials,
           etc. are a cost of doing business. Before the tax was increased
           from 2 and 4 mills to 2.2% in 1971, some of the utilities had the
           rate imbedded in their rate bases and most consumers were not
           even aware of it.
Letter of Jan. 3, 1977, supra.
   Notwithstanding these constructions of § 53 by state officials, however, the
characterization of state taxes for the purpose of determining the legal incidence
on federally immune institutions is ultimately a federal question. Diamond
National Corp. v. State Board c f Equalization, supra; First Agricultural N a­
tional Bank v. Massachusetts State Tax Comm'n, supra; United States v. Califor­
nia State Board of Equalization, supra. Thus, while the Attorney General and
Revenue Department statements are instructive of the Alabama legislature’s
intent, such interpretations are not binding on the federal courts, and are not,
therefore, necessarily determinative in our inquiry.24
   The second factor suggested by the Leavenworth court as indicative of the legal
incidence of a particular tax involves consideration of the rights and obligations
of the parties to the transaction on which the tax is imposed. The license tax
imposed by § 53 is imposed on the privilege of selling electricity by electric or
hydroelectric public utilities to retail customers within the State. See generally
State v. Southern Electric Generating Co., 151 So. 2d 216 (Ala. 1963). As
discussed above, the statutory language, by its literal terms as well as its
construction by the Department of Revenue and the State Attorney General,
creates a legal obligation only on utility companies. Although the Commission’s
order purports to impose a legal obligation for a proportionate share of the license
tax on the utilities’ customers, the statutory obligation to remit the revenue
collected pursuant to § 53 still rests with the utility companies. Furthermore, the
statute makes no provisions for direct collection of the fees from the utilities’
customers, nor does it impose any penalties on the customers for failure to pay
that part of their bills which constitutes a proportionate share of the license tax.
   Nor do we believe that the statute creates so strong an economic incentive to
pass the tax on as to compel the utility companies to collect the fees from their
customers. See, e.g ., United States v. California State Board of Equalization,
supra. Although the 1.8 percent increase in license taxes enacted by the legis­
lature does not pose an insignificant financial burden for the utility companies,
we cannot say, without more, that the increase is evidence of the legislature’s
intent to shift the legal incidence of the tax from the utilities to the customers.25

   24 As in the Leavenworth and Maryland cases discussed supra, an argument may be made that the § 53 license tax
is a user fee levied on the public utility companies for the privilege o f using public lands to operate their businesses
See nn. 17, 18, supra. As previously noted, such a characterization o f the tax would render the analysis contained in
this section moot, as intergovernmental immunities are not applicable to user fees See United States v M as­
sachusetts, supra However, we do not have sufficient information regarding the purposes of the tax and the
contractual arrangements between the utilities and the State to make such a determination.
   25 Notwithstanding the mandatory language of the Commission's 1969 order, we believe that the Leavenworth
court’s reliance, in analogous circumstances, on the language of the taxing statute was both correct and appropriate
to the facts before us “ [S]o far as the [taxing authority’s] interest in collection is concerned, there is no requirement
that [the utility] pass on to the United States all or any part of the financial burden of the [license tax] fee.”
Leavenworth, supra, 443 F. Supp at 282. See generally Gurley v. Rhoden, supra


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   The fact that the tax was increased with knowledge— whether actual or
constructive— of the 1969 Commission order is not determinative of the legis­
lature’s intent in enacting § 53; were the Commission’s order purporting to
construe the statutory predecessors of § 53, the District Counsel’s argument
might well be conclusive. See East Brewton M aterials, supra, 233 So. 2d at 754
(“The re-enactment without change of a statute which has been given a uniform
construction by the administrative department [charged with the duty of admin­
istering the tax laws] ‘may be treated as legislative approval of the departmental
construction of the statute, quite as persuasive as the re-enactment of a statute,
which has been judicially construed, ’ ” citing State v. Southern Electric Generat­
ing C o ., 151 So. 2d 216 (Ala. 1963)).
   As it is, however, we are faced with a regulatory order promulgated in 1969
which, if applied to the license tax statute that was re-enacted in 1971, would
conflict with the terms of that statute. We are not aware of the 1969 order’s having
been construed to apply to the § 53 license tax or to its predecessor; to the
contrary, we do have statements by the Alabama Revenue Department and the
Attorney General construing § 53 as a license tax on the utilities, “ a cost of doing
business [which] can be included in the rate base allowed by the Alabama Public
Service Commission.” Letter from Corporate Tax Specialist, Franchise, Tax
Division, supra; see Letter from Assistant Attorney General, supra; Memoran­
dum from counsel to the Legal Division, Department of Revenue, supra.26 In
circumstances where such ambiguity exists, we believe that the language of the
taxing statute, construed “ in the light of all the circumstances,” must prevail.
United States v. M aryland, supra, 471 F. Supp. at 1040. See Gurley v. Rhoden,
supra; United States v. California State B oard c f Equalization, supra; East
Brewton M aterials, supra, 233 So. 2d at 754 (the “ legislative ratification of prior
administrative interpretations” rule of construction cited above should be laid
aside “ where it seems reasonably certain that the administrator’s interpretation
has been erroneous and that a different construction is required by the language of
the act” ).
   In addition, the Comptroller General of the United States recently considered
the § 53 license tax which is presently at issue and determined that the legal
incidence of the tax falls on the utility companies and not on the United States.
Dec. Comp. Gen. B-204517, “ Veteran’s Administration Medical Centers—
Payment of Alabama Public Utility License Tax” (Feb. 22, 1982). The Comp­
troller General reasoned that the failure of the statutory terms of § 53 to require
that the tax be passed through to customers, as well as their failure to provide a
mechanism for doing so, is indicative of the Alabama Legislature’s intent that the

   26 We are not unaware of the February 11, 1980, letter from the Director of the Utility Financial Analysis and
Auditing Division o f the Public Service Commission to the District Counsel of the Veterans Administration
interpreting the C om m ission’s 1969 order to “ require [the] Alabama Power Company to pass each applicable
increase in taxes directly through to its retail customers as a line item on the customer’s bill.’’ This interpretation is,
at best, a construction of its own order as applied to taxing statutes in general, considered without regard to the
statutory language underlying the specific utility tax with which we are presently concerned. Moreover, we believe
that the opinion of the Attorney General carries greater weight than that of the Commission See generally State v
Southern Electric Generating Co., supra, 151 So. 2d at 218


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incidence of the license tax remain on the utilities. The Comptroller General
disputed the VAMCs’ claim that the Public Service Commission’s order trans­
ferred the legal incidence of the tax to the customers; rather, he found that the
Commission’s order “ merely provides that the utilities shall pass the economic
burden of the tax to their customers as part of their rates.” Id. at 3. The
Comptroller General determined that the VAMCs should return to the Alabama
Power Company that portion of their utility bills which they have erroneously
withheld.
   Were the statutory terms of § 53 less clear in this case, the Commission’s order,
as construed by the District Counsel and the Director of the Utility Financial
Analysis Division of the Public Service Commission, might carry greater weight
in our determination of where the legal incidence of the tax falls. We also have no
other indication that the statute was ever intended to impose a direct tax on the
utilities’ customers; to the contrary, we have statements by the state’s highest
legal officer construing the license tax as a tax on the utilities. While it is
reasonable to assume that the legislature believed that any tax increase would be
recovered in customer billings as a cost of doing business, it is equally clear that it
did not impose a statutory requirement that the utilities pass the increase on to
customers. In addition, we have the benefit of the Comptroller General’s consid­
eration of this issue, his analysis and conclusions. In short, we are guided, as was
the court in United States v. Maryland, supra, by the principle recognized by the
Supreme Court in Graves v. New York ex rel. O ’Keefe, 306 U.S. 466,483 (1939),
that “ the implied immunity of one government and its agencies from taxation by
the other should as a principle of statutory construction be narrowly restricted.”
See United States v. Maryland, supra, 471 F. Supp. at 1039. See also United
States v. N ew Mexico, supra, 455 U.S. at 733-38.

                                  IV. Conclusion

   In view of the clear language used by the Alabama legislature in imposing the
§ 53 utility license tax, particularly as it has been interpreted by the Revenue
Department and the Attorney General of the State of Alabama, and the Comp­
troller General of the United States, and viewed “ in the light of all the circum­
stances,” United States v. Maryland, supra, 471 F. Supp. at 1040, we are
persuaded that the disputed license tax is a constitutionally valid tax levied on the
public utility companies within the State. Although the 1969 order of the
Alabama Public Service Commission may have increased the economic burden
of the license tax on the utility companies, a burden which will ultimately be
borne by the Veterans Administration and other federal agencies in the State
which are customers of the taxed utilities, we believe, for all of the reasons
discussed above, that the legal incidence of the license tax continues to rest on the
utilities.
                                                    L a r r y L . S im m s
                                          Deputy Assistant Attorney General
                                              Office c f Legal Counsel

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