Massachusetts sales tax (which by its terms must be passed on to the purchaser) and use tax are invalid as applied to national banks since such taxes are not among the only four specified methods of taxation in addition to taxes on real estate by which, under 12 U.S.C. 548, Congress has permitted States to tax national banks. Pp. 339-348.
___ Mass. ___, 229 N. E. 2d 245, reversed.
Ronald H. Kessel argued the cause for appellant. With him on the brief were John P. Weitzel and Alex J. McFarland.
Alan J. Dimond, Assistant Attorney General of Massachusetts, argued the cause for appellee. With him on the brief were Elliot L. Richardson, Attorney General, Walter H. Mayo III, Assistant Attorney General, and Mark L. Cohen, Deputy Assistant Attorney General.
Briefs of amici curiae were filed by James Lawrence White for the Colorado Bankers Assn.; by William C. Sennett, Attorney General, John J. Gain, Assistant Attorney General, and Edward T. Baker and George W. Keitel, Deputy Attorneys General, for the Commonwealth of Pennsylvania; by Louis J. Lefkowitz, Attorney General, Ruth Kessler Toch, Solicitor General, and Robert W. Bush, Assistant Attorney General, for the State of New York, and by James F. Bell and Brian C. Elmer for the National Association of Supervisors of State Banks.
MR. JUSTICE BLACK delivered the opinion of the Court.
The principal issue raised by this case concerns the extent to which States may tax a national bank. The [392 U.S. 339, 340] Supreme Judicial Court for the Commonwealth of Massachusetts held that appellant, First Agricultural National Bank of Berkshire County, was subject to Massachusetts' recently enacted sales and use taxes 1 on purchases for its own use of tangible personal property. For reasons to be stated we believe this decision was erroneous, and we reverse.
As long ago as 1819, in the historic case of M`Culloch v. Maryland, 4 Wheat. 316, this Court declared unconstitutional a state tax on the bank of the United States since, according to Chief Justice Marshall, this amounted to a "tax on the operation of an instrument employed by the government of the Union to carry its powers into execution." 4 Wheat., at 436-437. A long line of subsequent decisions by this Court has firmly established the proposition that the States are without power, unless authorized by Congress, to tax federally created, or, as they are presently called, national, banks. Owensboro Nat. Bank v. Owensboro, 173 U.S. 664, 668 ; Des Moines Nat. Bank v. Fairweather, 263 U.S. 103, 106 ; First Nat. Bank v. Hartford, 273 U.S. 548, 550 ; Iowa-Des Moines Nat. Bank v. Bennett, 284 U.S. 239, 244 . As recently as 1966, MR. JUSTICE FORTAS, speaking for a unanimous Court, thought this ancient principle so well established that he used national banks as an example in holding the American Red Cross immune from state taxation:
As will be seen, Congress has been far from reluctant to pass legislation in the banking field. There are important committees on banking and currency in both Houses which continually monitor banking affairs and propose new legislation when changes are felt to be needed. For purposes of this case, the most important piece of banking legislation is 12 U.S.C. 548 3 which [392 U.S. 339, 342] originated as part of the Act of June 3, 1864, c. 106, 41, 13 Stat. 111. This section allows state taxation of national banks in any one of four specified ways in addition to taxes on their real estate. Before this legislation was originally enacted in 1864, there was sharp controversy in the Congress over the extent to which the States should be allowed to tax national banks. A vocal opponent to any state taxation of national banks was the powerful Senator Summer of Massachusetts, who said:
Because of 548 and its legislative history, we are convinced that if a change is to be made in state taxation of national banks, it must come from the Congress, which has established the present limits.
With this primary question out of the way, there is one additional issue which must be resolved. The court below held, contrary to appellant's contention, that the Massachusetts sales tax is not imposed upon the bank as a purchaser, but is a tax upon vendors who sell tangible personal property to the bank. Of course if [392 U.S. 339, 347] this is true, the bank cannot object if a particular vendor decides to pass the burden of the tax on to it through an increased price. But if this is not true, and if the tax is on the bank as a purchaser, then, because it is a national bank, appellant is exempt under 12 U.S.C. 548. Because the question here is whether the tax affects federal immunity, it is clear that for this limited purpose we are not bound by the state court's characterization of the tax. See Society for Savings v. Bowers, 349 U.S. 143, 151 , and the cases cited therein. And essentially the question for us is: On whom does the incidence of the tax fall? See Kern-Limerick, Inc. v. Scurlock, 347 U.S. 110, 121 -122. Also see Carson v. Roane-Anderson Co., 342 U.S. 232 .
It would appear to be indisputable that a sales tax which by its terms must be passed on to the purchaser imposes the legal incidence of the tax upon the purchaser. See Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95, 99 . Subsection 3 of the Massachusetts sales tax provides:
For these reasons we reverse and hold that appellant is immune from both the Massachusetts use and sales taxes.
[ Footnote 2 ] The Federal Reserve Act of December 23, 1913, c. 6, 38 Stat. 251, 12 U.S.C. 221 et seq.
[ Footnote 3 ] This section provides in pertinent part:
[ Footnote 4 ] Act of February 25, 1863, c. 58, 12 Stat. 665.
[ Footnote 5 ] Act of February 10, 1868, c. 7, 15 Stat. 34.
[ Footnote 6 ] Act of March 4, 1923, c. 267, 42 Stat. 1499.
[ Footnote 7 ] 64 Cong. Rec. 1454 (1923).
[ Footnote 8 ] Act of March 25, 1926, c. 88, 44 Stat. 223.
[ Footnote 9 ] See Hearing on S. 2547 before the Subcommittee on Federal Reserve Matters of the Senate Committee on Banking and Currency, 81st Cong., 2d Sess., 9 (1950).
MR. JUSTICE MARSHALL, with whom MR. JUSTICE HARLAN and MR. JUSTICE STEWART join, dissenting.
I would make clear that the Constitution of its own force does not prohibit Massachusetts from applying its uniform sales and use taxes to, among other things, appellant's wastebaskets. 1 It seems to me necessary to [392 U.S. 339, 349] decide that constitutional question in order properly to interpret 12 U.S.C. 548, upon which the Court bases its decision. Moreover, the refusal to decide the issue gives further life to a largely outmoded doctrine.
Mr. Justice Brandeis rightly cautioned that "[i]n cases involving constitutional issues . . . this Court must, in order to reach sound conclusions, feel free to bring its opinions into agreement with experience and with facts newly ascertained, so that its judicial authority may . . . `depend altogether on the force of the reasoning by which it is supported.'" 2 I think that in light of the present functions and role of national banks they should not in this day and age be considered constitutionally immune from nondiscriminatory state taxation, and that 548 should not be construed as giving them a statutory immunity from the taxes here involved.
In Osborn v. Bank of the United States, 9 Wheat. 738 (1824), M`Culloch was applied to strike down an Ohio statute that attempted to extract an annual tax of $50,000 from each branch of a business operating in the State without its authority. The statutes found unconstitutional in both of those cases were patently discriminatory against the Second Bank of the United States (the Ohio statute specifically mentioned it), for the taxes did not apply to state-chartered banks. Chief Justice Marshall, however, did not limit his opinions in the two cases to discriminatory taxation, and they were applied by the Court in Owensboro Nat. Bank v. Owensboro, 173 U.S. 664 (1899), with little independent analysis to hold that Kentucky could not collect a nondiscriminatory franchise tax from a national bank. There was no discussion of the possible differences between federal functions performed by the kind of national bank involved there, which existed by virtue of legislation enacted in 1863 and 1864, and the quite distinct functions performed by the Second Bank of the United States involved in M`Culloch and Osborn.
Virtually all of the later cases in which national banks have been held to be federal instrumentalities immune from state taxation depend upon these three cases. One could, and perhaps should, read M`Culloch and Osborn simply for the principle that the Constitution prohibits a State from taxing discriminatorily a federally established instrumentality. On that view, Chief Justice Marshall's statement that "the power to tax involves the power to destroy," M`Culloch v. Maryland, supra, at 431, did not relate to a principle entirely necessary to the decision. As Mr. Justice Frankfurter pointed out in reference to what he called that "seductive cliche":
Such a limited view of those hoary cases would, of course, require a re-evaluation of the validity of the doctrine of intergovernmental tax immunities - a doctrine which does not rest upon any specific provisions of the [392 U.S. 339, 352] Constitution, but rather upon this Court's concepts of federalism. See M`Culloch v. Maryland, supra, at 426; Graves v. New York ex rel. O'Keefe, 306 U.S. 466, 487 -492 (1939) (Frankfurter, J., concurring); T. Powell, Vagaries and Varieties in Constitutional Interpretation, c. IV (1956). I have no doubt that Congress could provide (and has provided, see infra, at 362) statutory immunity from state taxation for the federal instrumentalities it may establish. See, e. g., United States v. City of Detroit, 355 U.S. 466, 474 (1958); Maricopa County v. Valley Nat. Bank, 318 U.S. 357, 361 (1943); Railroad Co. v. Peniston, 18 Wall. 5, 37-38 (1873) (concurring in judgment). Given that congressional power, there is little reason for this Court to cling to the view that the Constitution itself makes federal instrumentalities immune from state taxation in the absence of authorizing legislation. The disparate kinds of instrumentalities and forms of state taxation create difficulties for ad hoc resolution of the immunity issue by this Court based only upon abstract concepts of federalism. See generally Powell, Waning of Intergovernmental Tax Immunities, 58 Harv. L. Rev. 633 (1945); Powell, Remnant of Intergovernmental Tax Immunities, 58 Harv. L. Rev. 757 (1945). As the Court has sometimes realized:
As the Court said last Term, "there is no simple test for ascertaining whether an institution is so closely related to governmental activity as to become a tax-immune instrumentality," Department of Employment v. United States, 385 U.S. 355, 358 -359 (1966) (holding Red Cross immune). Various formulations of the controlling test have been used to determine whether institutions or individuals are immune: whether they "have been so incorporated into the government structure as to become instrumentalities of the United States and thus enjoy governmental immunity," United States v. Boyd, 378 U.S. 39, 48 (1964); whether they "are arms of the Government deemed by it essential for the performance of governmental functions," and "are integral parts of [a government department and] . . . share in fulfilling the duties entrusted to it," Standard Oil Co. v. Johnson, 316 U.S. 481, 485 (1942) (Army post-exchanges immune); whether they have been so "assimilated by the Government as to become one of its constituent parts," United States v. Township of Muskegon, 355 U.S. 484, 486 (1958); and whether the institution is regarded "virtually as an arm of the Government," Department of Employment v. United States, supra, at 359-360.
Under those general rubrics, the Court has looked to various specific factors and characteristics to determine the status of the specific institution: whether it is organized for private profit, and whether the Government has retained such control over it so that "it could properly be called a `servant' of the United States in agency terms," United States v. Township of Muskegon, supra, at 486; whether it was organized to effectuate a specific [392 U.S. 339, 354] governmental program, Federal Land Bank of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 102 (1941); whether its ownership, substantially or totally, lies in the Government, Clallam County v. United States, 263 U.S. 341, 343 (1923); Railroad Co. v. Peniston, 18 Wall., at 32; whether government officials handle and control its operations, Standard Oil Co. v. Johnson, supra; whether its officers or any significant portion of them are appointed by the Government, Department of Employment v. United States, supra; compare Railroad Co. v. Peniston, supra; whether the Government gives it significant financial aid, whether it is charged by law with carrying out some of the Government's international commitments, and whether it performs "functions indispensable to the workings" of a governmental unit, Department of Employment v. United States, supra, at 359.
Under any of those rubrics and applying the factors listed above - a list not intended to be exhaustive - a national bank cannot be considered a tax-immune federal instrumentality. It is a privately owned corporation existing for the private profit of its shareholders. It performs no significant federal governmental function that is not performed equally by state-chartered banks. Government officials do not run its day-to-day operations nor does the Government have any ownership interest in a national bank.
Appellant points to two factors as leading to the conclusion that national banks are federal instrumentalities: that they "owe their very existence to congressional legislation," and that they are subject to extensive federal regulation. But the fact that institutions "owe their existence to," i. e., are chartered by, the Government, has been definitely rejected as a basis alone for determining they should be tax immune. Railroad Co. v. Peniston, supra; cf. Broad River Power Co. v. Query, 288 U.S. 178 (1933). Similarly, a whole host of businesses and [392 U.S. 339, 355] institutions are subject to extensive federal regulation and that has never been thought to bring them within the scope of the "federal instrumentalities" doctrine. The plain fact is that one could hold that national banks have a constitutional tax-immune status today only by mechanically applying the three seminal cases of M`Culloch, Osborn, and Owensboro. It is instructive, therefore, to examine the functions performed by the national banks involved in those cases.
The Second Bank of the United States, involved in M`Culloch and Osborn, would clearly be a federal instrumentality under the Court's most recent discussion of the doctrine (Department of Employment, supra): the United States owned 20% of its capital stock (the remainder being owned by private persons); the President appointed five of its 25 directors, and the Government, as a shareholder, participated in the election of the others; the Secretary of the Treasury was required to deposit all of the public funds in the bank, unless he could give reasons to Congress why he should not do so; the bank was required to transmit funds for the United States without charge; the bank issued currency which was established as legal tender for all debts owing to the Government; and the bank clearly acted as the fiscal agent of the Government, handling its foreign exchange transactions. See P. Studenski & H. Krooss, Financial History of the United States 83-88, 103-106 (2d ed. 1963); Federal Reserve System, Banking Studies 7-8, 18, 39-41 (1941).
Even the national bank involved in Owensboro might warrant tax-immune status were it in existence today. It was established pursuant to the National Currency Acts of 1863 and 1864 5 which were enacted largely to [392 U.S. 339, 356] bolster the Union's financial status, shaky because of the Civil War. Banking Studies, supra, at 43-46. Most importantly, from the standpoint of analyzing the federal functions such banks served, national banks under the Civil War legislation, 6 to which national banks today trace their history, had important and significant functions concerning currency. They were authorized to issue currency, printed for them by the Treasury Department, and such currency was established as legal tender for all debts owing to, or payable by, the Government. To insure the stability of the national currency by insuring the stability of the issuing banks, as well as to provide a ready market for the Government, each such national bank was required to secure its currency by depositing United States bonds with the Treasury Department. Banking Studies, supra, 14-16, 41-46; Studenski & Krooss, supra, 154-155.
All of this was radically changed with the passage of the Federal Reserve Act of 1913, 38 Stat. 251, as amended, 12 U.S.C. 221 et seq., and by subsequent developments with respect both to the Federal Reserve System and to national banks. To capsulize those developments greatly, suffice it to say that the Federal Reserve banks (and System) are now the monetary and fiscal agents of the United States. 12 U.S.C. 391. By 1935, the power of national banks to issue currency had ceased and now Federal Reserve banks are the only banking institutions that can do so. Banking Studies, supra, at 240; Federal Reserve System, The Federal Reserve System: Purposes and Functions c. X (5th rev. ed. 1967). The diminished importance of national banks as federal functionaries was compensated for by the enactment of legislation designed to make them more competitive with state banks, e. g., [392 U.S. 339, 357] branch banking, 44 Stat. 1228 (1927), as amended, 12 U.S.C. 36 (c); fiduciary powers, 76 Stat. 668 (1962), 12 U.S.C. 92a; rate of interest on loans, 48 Stat. 191 (1933), as amended, 12 U.S.C. 85; capitalization, 48 Stat. 185 (1933), 12 U.S.C. 51; and interest on time and savings deposits, 44 Stat. 1232 (1927), 12 U.S.C. 371.
To be sure, the Federal Reserve System could not function without national banks, which are required to be members therein, 12 U.S.C. 222, and in that sense they are part and parcel of the establishment and effectuation of the national fiscal and monetary policies. But, in my view, that does not make them sufficiently quasi-public to enjoy the tax-immune status of federal instrumentalities. If that alone were enough, then it would seem that state banks which elect to join the Federal Reserve System should also be tax-immune federal instrumentalities. 7
In any event, there is little difference today between a national bank and its state-chartered competitor: the ownership, control and capital source of each is private; each exists for private profit. More importantly, neither may issue legal tender:
In Graves v. New York ex rel. O'Keefe, 306 U.S., at 483 , Mr. Justice Stone wrote for the Court:
Section 548 expressly mentions four specified types of taxes: those on national bank shares, on dividends on shares in the hands of stockholders, on the income of the [392 U.S. 339, 360] bank, and taxes "according to or measured by" a bank's income. It provides that the imposition of any one of the four listed taxes "shall be in lieu of the others." That statement, together with language of the section omitted in the Court's note as not pertinent (ante, at 341-342, n. 3), 10 makes clear that the purpose of the section was to [392 U.S. 339, 361] insure the competitive equality of the banks with other businesses by preventing the bank or its shareholders from being subjected to more than one of the four enumerated types of taxes, other than real property taxes, so as to prevent multiple taxation of the same income, unless the States taxed the income of other businesses in similar multiple fashion. See 12 U.S.C. 548, subsections 1 (b), (c), and (d), supra, n. 10. All that the majority can point to in the legislative history of 548 is that the Congress was well aware of M`Culloch v. Maryland. And that decision specifically stated the following:
Moreover, whatever else may be said of the statute, it most assuredly does not provide specifically that it is the sole measure of the State's power of taxation. One could argue that, given the state of constitutional law as it then existed, Congress saw no need to say specifically in 548 that national banks were immune from state taxation except as that section permitted. Aside from the misreading of M`Culloch that such a view entails, the constitutional immunity of federal instrumentalities was just as plain when Congress provided statutory immunity for such agencies as, e. g., the Federal Reserve banks, 38 Stat. 258 (1913), 12 U.S.C. 531; Federal land banks, 39 Stat. 380 (1916), 12 U.S.C. 931; many other federal banking institutions; 11 the Reconstruction Finance Corporation, 47 Stat. 9 (1932), 15 U.S.C. 607; and the Public Housing Administration, 50 Stat. 890 (1937), 42 U.S.C. 1405 (e), and a host of government-owned corporations. 12
It is not without relevance in construing 548, it seems to me, that the kinds of state taxes here involved did not exist at the time the section was adopted and were not a significant factor in the raising of state revenue until the early 1930's, subsequent to the last amendment of 548 in 1926. See generally H. R. Rep. No. 565, 89th Cong., 1st Sess., 608 (1965). I think we should be reluctant to interpret a statute having such narrow [392 U.S. 339, 363] scope as 548 as encompassing such a broad prohibitory application. It seems to me that we would do far better to recognize that the Constitution does not prohibit nondiscriminatory state taxation of national banks, and that 548 limits only the kinds of taxes specifically set forth therein. Only in that way is Congress free to re-evaluate the situation. That is, so far as construing 548 is concerned, in practical effect the issue is who shall bear the burden of seeking congressional action. I would put the burden where it ought to be, namely, on the private profit-making corporation that seeks exemption from nondiscriminatory state taxation.
Finally, a major national banking policy has been to foster competitive equality of national and state banks. See, e. g., First Nat. Bank v. Walker Bank, 385 U.S. 252 (1966); Lewis v. Fidelity & Deposit Co., 292 U.S. 559 (1934). We ought, if other considerations are not decisive, to promote rather than retard that strong policy.
For the reasons stated, I would affirm.
[ Footnote 1 ] The reductio ad absurdum in the text is, unlike most, somewhat accurate. One item upon which, appellant informed its supplier, it should not have to pay the sales tax was a wastebasket (as well as, e. g., "1 Box 5 x 7 Index Cards"). The record does not reveal the extent of appellant's liability for use taxes; appellant paid a total of $575.66 in sales taxes for the three months of the year 1966 that are specifically at issue here.
[ Footnote 4 ] Owensboro might also be viewed simply as prohibiting a franchise tax, i. e., as holding that a State may not condition the privilege to operate within its borders granted to the bank by Congress, by exacting that kind of tax. (Such a tax is permissible under 12 U.S.C. 548, as amended after Owensboro, see Tradesmens Nat. Bank v. Tax Comm'n, 309 U.S. 560 (1940).) The taxes in M`Culloch and Osborn, apart from their discriminatory aspects, might be similarly viewed: the Maryland tax was directly upon the bank's operations, and alternatively upon its privilege to operate within the State; the Ohio tax in Osborn was also a condition upon the bank's privilege to transact business there. While the language and holdings of later cases go well beyond that limited view, that view would seem preferable to me to interpreting those constitutional decisions as flatly prohibiting all forms of state taxation, aside from exceptions listed in M`Culloch, 4 Wheat., at 436 (see infra, at 361).
[ Footnote 5 ] Act of February 25, 1863, 12 Stat. 665 ("An Act to provide a national Currency . . ."); Act of June 3, 1864, 13 Stat. 99 ("An Act to provide a National Currency . . .").
[ Footnote 6 ] See n. 5, supra; see also revenue acts, Act of March 3, 1865, 6, 7, 13 Stat. 484; Act of July 13, 1866, 9, 14 Stat. 146.
[ Footnote 7 ] As of December 31, 1966, membership in the Federal Reserve System was composed of 1,351 state-chartered, and 4,799 national, banks. The Federal Reserve System: Purposes and Functions, supra, at 24-25.
[ Footnote 9 ] Compare the rejection of a national bank's contention that it, as a federal instrumentality, should be exempt from the federal labor laws, NLRB v. Bank of America, 130 F.2d 624, 627 (C. A. 9th Cir. 1942) (footnote omitted):
[ Footnote 10 ] The relevant omitted portions of 548 read:
[ Footnote 11 ] E. g., federal intermediate credit banks, 12 U.S.C. 1111; Federal Home Loan Bank, 12 U.S.C. 1433; federal savings and loan associations, 12 U.S.C. 1464 (h).
[ Footnote 12 ] E. g., Federal Deposit Insurance Corp., 12 U.S.C. 1825. See Government Corporation Control Act of 1945, 59 Stat. 597, as amended, 31 U.S.C. 841 et seq.
MR. JUSTICE HARLAN: In addition to the reasons given in my Brother MARSHALL'S opinion, which I have joined, I would affirm the judgment below on the basis of that part of Justice Reardon's opinion for the Supreme Judicial Court of Massachusetts which upheld the application of Massachusetts' use tax to national banks. See ___ Mass. ___, ___ _ ___, 229 N. E. 2d 245, 251-260. [392 U.S. 339, 364]