Panhandle Oil Co. v. Mississippi ex Rel. Knox, 277 U.S.

218
(1928)

Panhandle Oil Company v. Mississippi ex Rel. Knox

No. 288

Argued March 5, 1928

Decided May 14, 1928

277 U.S. 218

ERROR TO THE SUPREME COURT OF MISSISSIPPI

Syllabus

1. A state tax imposed on dealers in gasoline for the privilege of selling, and measured at so many cents
per gallon of gasoline sold, is void under the federal Constitution as applied to sales to instrumentalities
of the United States, such as the Coast Guard Fleet and a Veterans' Hospital. P. 277 U. S. 222.

2. The substance and legal effect is to tax the sale, and thus burden and tax the United States, exacting
tribute on its transactions for the support of the state. Id.

3. Such an exaction infringes the right of the dealer to have the constitutional independence of the
United States in respect of such purchases remain untrammeled. Id.

147 Miss. 663 reversed.

Error to a judgment of the Supreme Court of Mississippi sustaining a suit brought by the State of
Mississippi to recover taxes assessed on sales of gasoline made by the defendant, plaintiff in error.

Page 277 U. S. 220

MR. JUSTICE BUTLER delivered the opinion of the Court.

Chapter 116 of the Laws of Mississippi of 1922 provided that

"any person engaged in the business of distributor of gasoline or retail dealer in gasoline shall pay for the
privilege of engaging in such business, an excise tax of 1�(one cent) per gallon upon the sale of
gasoline, . . ."

except that sold in interstate commerce or purchased outside the state and brought in by the consumer
for his own use. Chapter 115, Laws of 1924, increased the tax to three cents, and c. 119, Laws of
1926, made it four cents per gallon. Since some time in 1925, petitioner has been engaged in that
business. The state sued to recover taxes claimed on account of sales made by petitioner to the United
States for the use of its Coast Guard fleet in service in the Gulf of Mexico and its Veterans' Hospital at
Gulfport. Some of the sales were made while the Act of 1924 was in force, and some after the rate had
been increased by the Act of 1926. Accordingly, the demand was for three cents a gallon on some and
four cents on the rest. Petitioner defended on the ground that these statutes, if construed to impose
taxes on such sales, are

Page 277 U. S. 221

repugnant to the federal Constitution. The court of first instance sustained that contention, and the
state appealed. The supreme court held the exaction a valid privilege tax measured by the number of
gallons sold; that it was not a tax upon instrumentalities of the federal government, and that the
United States was not entitled to buy such gasoline without payment of the taxes charged dealers. 147
Miss. 663.

The United States is empowered by the Constitution to maintain and operate the fleet and hospital. Art.
I, § 8. That authorization and laws enacted pursuant thereto are supreme (Art. VI), and, in case of
conflict, they control state enactments. The states may not burden or interfere with the exertion of
national power or make it a source of revenue or take the funds raised or tax the means used for the
performance of federal functions. McCulloch v. Maryland, 4 Wheat. 316, 17 U. S. 425, et seq.; 41 U. S.
Commissioners of Erie County, 16 Pet. 435, 41 U. S. 448; Ohio v. Thomas, 173 U. S. 276; Choctaw,
O. & G. R. Co. v. Harrison, 235 U. S. 292; Indian Oil Co. v. Oklahoma, 240 U. S. 522; Johnson v.
Maryland, 254 U. S. 51; Clallam County v. United States, 263 U. S. 341, 263 U. S.
344; Northwestern Mutual Life Ins. Co. v. Wisconsin, 275 U. S. 136; New Brunswick v. United
States,276 U. S. 547. The strictness of that rule was emphasized in Gillespie v. Oklahoma, 257 U. S.
501, 257 U. S. 505. The right of the United States to make such purchases is derived from the
Constitution. The petitioner's right to make sales to the United States was not given by the state, and
does not depend on state laws; it results from the authority of the national government under the
Constitution to choose its own means and sources of supply. While Mississippi may impose charges upon
petitioner for the privilege of carrying on trade that is subject to the power of the state, it may not lay
any tax upon transactions by which the United States secures the things desired for its governmental
purposes.

Page 277 U. S. 222

The validity of the taxes claimed is to be determined by the practical effect of enforcement in respect of
sales to the government. Wagner v. City of Covington, 251 U. S. 95, 251 U. S. 102. A charge at the
prescribed rate is made on account of every gallon acquired by the United States. It is immaterial that
the seller, and not the purchaser, is required to report and make payment to the state. Sale and
purchase constitute a transaction by which the tax is measured and on which the burden rests. The
amount of money claimed by the state rises and falls precisely as does the quantity of gasoline so
secured by the government. It depends immediately upon the number of gallons. The necessary
operation of these enactments, when so construed, is directly to retard, impede, and burden the
exertion by the United States of its constitutional powers to operate the fleet and hospital. McCulloch v.
Maryland, supra, 17 U. S. 436; Gillespie v. Oklahoma, supra, 257 U. S. 505; Jaybird Mining Co. v.
Weir, 271 U. S. 609, 271 U. S. 613. To use the number of gallons sold the United States as a measure
of the privilege tax is, in substance and legal effect, to tax the sale. Telegraph Co. v. Texas, 105 U. S.
460; Frick v. Pennsylvania, 268 U. S. 473, 268 U. S. 494. And that is to tax the United States -- to
exact tribute on its transactions and apply the same to the support of the state.

The exactions demanded from petitioner infringe its right to have the constitutional independence of
the United States in respect of such purchases remain untrammeled. Osborn v. United States Bank, 9
Wheat. 738,22 U. S. 867; Telegraph Co. v. Texas, supra. Cf. Terrace v. Thompson, 263 U. S. 197, 263
U. S. 216. Petitioner is not liable for the taxes claimed.

Judgment reversed.

MR. JUSTICE HOLMES, dissenting.

The State of Mississippi. in 1924 and 1926. imposed upon distributors and retail dealers of gasoline,
for the

Page 277 U. S. 223

privilege of engaging in the business, an excise tax of three cents and four cents, respectively, per gallon
sold in the state. The supreme court of the state declares it to be a privilege tax, but points out that,
whether this tax is on the privilege or on the property, it is imposed before the gasoline has left the
dealer's hands. The plaintiff in error, a dealer, was sued by the state for certain sums that were due
under the statutes. It pleaded that the sales in respect of which the tax was demanded were sales to the
United States for the use of its Coast Guard and Veterans' Hospital, that, these being instrumentalities
of the government, it did not include the amount of the tax in the price charged, and that the statute
did not and could not tax the dealer for them consistently with the Constitution of the United States.
The supreme court of the state upheld the tax and pointed out the extreme consequences to which a
different decision might lead.

It seems to me that the state court was right. I should say plainly right but for the effect of certain dicta
of Chief Justice Marshall which culminated in, or, rather, were founded upon, his often quoted
proposition that the power to tax is the power to destroy. In those days, it was not recognized, as it is
today, that most of the distinctions of the law are distinctions of degree. If the states had any power, it
was assumed that they had all power, and that the necessary alternative was to deny it altogether. But
this Court, which so often has defeated the attempt to tax in certain ways, can defeat an attempt to
discriminate or otherwise go too far without wholly abolishing the power to tax. The power to tax is not
the power to destroy while this Court sits. The power to fix rates is the power to destroy if unlimited,
but this Court, while it endeavors to prevent confiscation, does not prevent the fixing of rates. A tax is
not an unconstitutional regulation in every case where an absolute prohibition of sales would be
one. Hatch v. Reardon, 204 U. S. 152, 204 U. S. 162.

Page 277 U. S. 224

To come down more closely to the question before us, when the government comes into a state to
purchase, I do not perceive why it should be entitled to stand differently from any other purchaser. It
avails itself of the machinery furnished by the state, and I do not see why it should not contribute in the
same proportion that every other purchaser contributes for the privileges that it uses. It has no better
or other right to use them than anyone else. The cost of maintaining the state that makes the business
possible is just as necessary an element in the cost of production as labor or coal. If the plaintiff in error
had paid the tax and had added it to the price, the government would have had nothing to say. It could
take the gasoline or leave it, but it could not require the seller to abate his charge, even if it had been
arbitrarily increased in the hope of getting more from the government than could be got from the
public at large. But, in fact, the government has not attempted to say anything in this case, which is
simply that of dealer trying to cut down a legitimate tax on his business because certain purchasers
proposed to use the goods in a certain way, although, so far as the sale was concerned, they were free
to turn the gasoline into the ocean, use if for private purposes, or sell it again. It does not appear that
the government would have refused to pay a price that included the tax if demanded, but, if the
government had refused, it would not have exonerated the seller. Pierce Oil Corp. v. Hopkins, 264 U. S.
137, 264 U. S. 139.

An imperfect analogy with taxation that affects interstate commerce is relied upon. Even the law on
that subject has been liberalized since the decision of most of the cases cited. Sonneborn Brothers v.
Cureton, 262 U. S. 506. But obviously it does not follow from the invalidity of a tax directly burdening
interstate commerce that a tax upon a domestic seller is bad because he may be able to shift the burden
to a purchaser, even

Page 277 U. S. 225

though an agency of the government, who is willing to pay the price with the tax and who has no
rational ground for demanding favor. I am not aware that the President, the Members of Congress, the
Judiciary or, to come nearer to the case in hand, the Coast Guard or the officials of the Veterans'
Hospital, because they are instrumentalities of government and cannot function naked and unfed,
hitherto having been held entitled to have their bills for food and clothing cut down so far as their
butchers and tailors have been taxed on their sales, and I had not supposed that the butchers and
tailors could omit from their tax returns all receipts from the large class of customers to which I have
referred. The question of interference with government, I repeat, is one of reasonableness and degree,
and it seems to me that the interference in this case is too remote. Metcalf v. Mitchell, 269 U. S. 514.

MR. JUSTICE BRANDEIS and MR. JUSTICE STONE agree with this opinion.

MR. JUSTICE McREYNOLDS, dissenting.

I am unable to think that every man who sells a gallon of gasoline to be used by the United States
thereby becomes a federal instrumentality, with the privilege of claiming freedom from taxation by the
state.

The doctrine of immunity is well established, but it ought not to be extended beyond the reasons which
underlie it. Its limitations well pointed out fifty years ago in Railroad Company v. Peniston, 18 Wall.
5, 85 U. S. 30-31:

"It cannot be that a state tax which remotely affects the efficient exercise of a federal power is, for that
reason alone, inhibited by the Constitution. To hold that would be to deny to the states all power to tax
persons or property. Every tax levied by a state withdraws from the reach of federal taxation a portion
of the property

Page 277 U. S. 226

from which it is taken, and, to that extent, diminishes the subject upon which federal taxes may be laid.
The states are, and they must ever be, coexistent with the national government. Neither may destroy
the other. Hence, the federal Constitution must receive a practical construction. Its limitations and its
implied prohibitions must not be extended so far as to destroy the necessary powers of the states, or
prevent their efficient exercise."

MR. JUSTICE STONE concurs in these views.