Petition for Writ of Certiorari — Lohman v. United States

95-1 7280

| Supreme Court, U.S.

ces LRP

No.

IN THE oe

SUPREME COURT OF THE UNITED S ES

October Term, 1995

JANETTE LOHMAN, THE MISSOURI DEPARTMENT

OF REVENUE AND THE STATE OF MISSOURI,

Petitioners,

V

THE UNITED STATES OF AMERICA.

Respondent.

Petition For Wnt Of Certiorari

To The United States Court of Appeals

For The Eighth Circuit

PETITION FOR WRIT OF CERTIORARI

JEREMIAH W. (JAY) NIXON

Attorney General

JAMES R. McADAMS

Counsel of Record

ALANA M. BARRAGAN-SCOTT

C. GAIL VASTERLING

Assistant Attorneys General

Post Office Box 899

Jefferson City, Missouri 65102

Phone: (573) 751-3321

ATTORNEYS FOR PETITIONERS

QUESTIONS PRESENTED

l. Does federal sovereign tax immunity supplant

Missoun''s sovereign right to raise revenue by imposing a

sales tax on the transfer of electricity to a federal contractor

that orders, uses, is billed for, and, with its own funds, pays

for the electricity?

p Does the legal incidence of a state sales tax fall on

a purchaser claiming federal sovereign tax immunity when

the state's taxing statute does not require a purchaser to pay

the tax?

ii

LIST OF PARTIES

The defendants-appellants to the proceedings below

were the petitioners State of Missour, the Missoun

Department of Revenue, and the Director of the Missouri

Department of Revenue. The office of director is now held

by Janette Lohman, and she has been listed as a petitioner.

Rule 35.3. The United States of America was the plaintiff-

appellee below and is the respondent herein. Kansas City

Power and Light Company was named as a defendant

before the district court, but did not participate in the appeal

of this matter.

ec

TABLE OF CONTENTS

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CONSTITUTIONAL AND STATUTORY

Prrvenmans INVOLVED ..............

I. The Eighth Circuit's holding, that federal

sovereign tax immunity entirely supplants

the states’ sovereign right to raise revenue by

imposing a sales tax on the transfer of

electricity to a federal contractor which

orders, uses, and, with its own funds, pays

for the electricity, significantly disrupts the

balance this Court has established between

the interests of the states and those of the

Ee eee

II. The Eighth Circuit's opinion is an affront to

State sovereignty because it determines that

the legal incidence of a state's sales tax falls

on a purchaser claiming federal sovereign

SM Ratna His ne

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tax immunity even though the state taxing

statute does not require the purchaser to pay

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CONT ATIIN 55s o0G Fi RIA OE AD A eae 27

Ah Ree nate ate tom tee

Vv

TABLE OF AUTHORITIES

Cases:

Alabama v. King & Boozer.

PPR OLE PAMMN AD 6 1A 246 ota 12, 18-20

American Oil Co. v. Neill. 380 U.S. 451

CURR Sd SAE Ce ae a, ae 2, 24, 27

Diamond Nat'l Corp. v. State Bd. of Equalization,

SEP TAS: DOPING Beles b. 24

Fabick and Co. v. Schaffner, 492 S.W.2d 737

Oe Se 6s oi on a ok 23

Farm and Home Sav. Ass'n v. Spradling.

338 S.W.2d 313 (Mo. 1976) ........5... 23

First Agric. Nat'l Bank v. State Tax Comm'n.

son UB Soe TIMER) Nw eS: 13, 22, 24, 27

Gurley v. Rhoden. 421 U.S. 200 (1975) ....... 26, 27

James v. Dravo Contracting Co.. 302 U.S. 134

GORD SS REE IS gs ek Sa 22

Kern-Limerick Inc. v. Scurlock, 347 U.S. 110 (1954) . 20

Mavo v. U.S., 319 U.S. 441 (1943) ............. 1]

Michelin Tire Corp. v. Wages. 423 U.S. 276

te Sa Cae ae Pee ee oe Oe | 12

Panhandle Oil Co. v. Miss. ex rel. Knox.

277 Mae SAO CIGED) 0635. CIA soc vst 26

vi

State ex rel. Thompson-Sterns-Roger v. Schaffner.

Sap 5.0.46 ae! O60. 1973) | obs 56 waa 6 an 14

U.S. v. Benton, 772 F. Supp. 453 (W.D. Mo. 1990).

affd. 975 F.2d 511 (8th Cir. 1992),

cert. granted and opinion vacated

sub nom. U.S. v. Melcher. 508 U.S. 957

(1993) and rev'd sub nom. U.S. v. Lohman.

21 F.3d 844 (8th Cir. 1994) ........... 3, 10

US. ¥. Bag. S16 an ee eis ee es 22

U.S. v. District of Columbia, 669 F.2d 738

(DA. CH SUSE sen eos 2a eee 17, 18

U.S. v. Forst, 442 F. Supp. 920 (W.D. Va. 1977),

affd. 569 F.2d 811 (4th Cir. 1978) ........ 18

U.S. v. Marvland. 471 F. Supp. 1030

(DB: MG. 1979) 0 VOI ARES 22, 23

U.S. v. New Mexico, 455 U.S. 720 (1982) . 2, 11-13. 16.

17, 19, 20, 22, 23

Statutes:

Ze Ue, § 1S. a ee eae 2

seUSA. § 1531) 2.6.52 Ree eae I

20 UBL. § 1368. bet VET ae Aa |

ie Ul B BAO. bade baa eee I

Mo. Rev. Stat. § 144.010.1(8) ................ ot

Vii

Mo. Rev. Stat. § 144.010.1(8)(b) .....------+-- 14

Mo. Rev. Stat. § 144.020.) ......:-----+-+ee: 23

Mo. Rev. Stat. § 144.020.1(1) ...---------+ee> 13

Mo. Rev. Stat. § 144.020.1(3) ......------++5> 14

Mo. Rev. Stat. § 144.021 ........---- +e eeeee 23

Mo. Rev. Stat. § 144.060 .......------+eeeee: 26

Mo. Rev. Stat. § 144.080.4 .....----.---+-+eee 26

Mo. Rev. Stat. § 144.0805 .......---+--+eee: 25

Mo. Rev. Stat. § 144.285 ......----- eee eeees 26

Mo. Rev. Stat. § 144.285.5 ......----+2+eeeee 25

Mo. Rev. Stat. § 149.015.4 ......----e ee eeeee 25

Other Authorities:

Mo. Code Regs. tit. 12, § 10-3.464(1) (1994) ...------+> 26

Supremacy Clause, U.S. Const. Art. Ry eae 22

he Federalist No. 32 (Alexander Hamilton)

(Clinton Rossiter ed.. 1961) ....--------- 12

Mo. Code Regs. tit. 12, § 10-3.464(1) (1994) ....-. 26

FP

PETITION FOR WRIT OF CERTIORARI

TO THE UNITED STATES COURT OF APPEALS

FOR THE EIGHTH CIRCUIT

Petitioners, Janette Lohman, the Director of the

Missouri Department of Revenue; the Missouri Department

of Revenue; and the State of Missouri respectfully pray that

the Court issue a writ of certiorari to review the opinion of

the United States Court of Appeals for the Eighth Circuit in

United States of America v. Janette Lohman. Director of

Revenue. State of Missouri; Missouri Department of

Revenue; and State of Missouri. No. 93-3303 (January 22.

1996).

OPINIONS BELOW

The opinion of the Eighth Circuit Court of Appeals

is reported at 74 F.3d 863 and reprinted in the Appendix

("App.") at A-l. The final order of the district court

granting the injunctive relief requested by the United States

is unreported and reprinted in the Appendix at A-14. The

district court's order on the summary judgment motions is

unreported and reprinted in the Appendix at A-19.

JURISDICTION

Invoking federal jurisdiction under 28 U.S.C. §§

1331, 1345 and 2201, the respondent brought this suit in the

United States District Court for the Western District of

Missouri. On September 8, 1992, the district court granted

respondent's motion for summary judgment, App. at A-19,

and entered a judgment. App. at A-17. Missouri's appeal

from the 1992 order was dismissed on the agreed motion of

the parties for want of finality and the case was remanded

for further proceedings. App. at A-16. The district court

2

entered final injunctive relief on July 12, 1993. App. at A-

14.

On January 22, 1996, the United States Court of

Appeals for the Eighth Circuit affirmed the judgment of the

district court on alternative grounds. App. at A-1.

The jurisdiction of this court to review the judgment

of the court of appeals is invoked under 28 U.S.C. §

1254(1).

CONSTITUTIONAL AND STATUTORY

PROVISIONS INVOLVED

This case involves the supremacy clause of the

Constitution of the United States and parts of Chapter 144

of the Revised Statutes of Missouri. Those provisions are

reprinted in the appendix beginning at A-25.

STATEMENT

This case concerns two rights of the fifty states: the

right to tax sales to federal contractors that order. pay for,

and use commodities to fulfill their federal contractual

obligations; and the right to conclusively determine the

legal incidence of their revenue laws when the states’

constructions are reasonable. In its landmark opinion in

U.S. v. New Mexico. 455 U.S. 720 (1982), this Court

clarified and re-enshrined the right of the states to tax sales

to federal contractors. Even earlier this Court determined

that states were empowered to conclusively determine the

legal incidence of state revenue laws when the states’

interpretations are consistent with a reasonable statutory

construction. American Oil Co. v. Neill. 380 U.S. 451

(1965). In this case the court of appeals radically departed

from this Court's instructions on these important matters

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3

and wounded the heart of the states’ retained sovereign

power.

The district court enjoined Missouri's taxation of

electricity sold by Kansas City Power and Light Company

("KCPL"). The electricity is ordered, paid for, and used by

Olin Corporation ("Olin") in its operation of the Lake City

Army Ammunition Plant (the "Plant"). Olin operates the

federally-owned Plant pursuant to a management and

operation contract ("M & O Contract"), using the electricity

to produce ammunition for delivery to the federal

government and for sale to other entities. The district court

found, at the federal government's behest, that Olin

purchased the electricity and resold it to the federal

government, thereby excluding such sales from tax pursuant

to Missouri law. App. at A-23. The district court relied on

the now discredited case of U.S. v. Benton. 772 F. Supp.

453 (W.D. Mo. 1990), aff'd. 975 F.2d 511 (8th Cir. 1992),

cert. granted and opinion vacated sub nom. U.S. v.

Melcher. 508 U.S. 957 (1993), and rev'd sub nom. U.S. v.

Lohman, 21 F.3d 844 (8th Cir. 1994). App. at A-23.

The Eighth Circuit disagreed with the district court's

conclusion that Olin purchased the electricity. Rather, the

court of appeals found that the federal government was the

purchaser of the electricity and then affirmed, holding that

the legal incidence of Missouri's sales tax was laid on the

purchaser of electricity. App. at A-13.

A. Army's Relationship with KCPL

and Remington

The Plant, a federally-owned facility located in

Independence, Missouri, which has been in operation since

1941. It is used principally to manufacture ammunition for

small arms. On April 1, 1951, KCPL entered into a

4

Negotiated Electrical Services Contract ("Contract") with

the United States Department of the Army. Under the

Contract KCPL contracted to sell and deliver, and the Army

agreed to purchase and receive, electrical power for the

purpose of operating the Plant.

In July 1960, the federal government issued a letter

to Remington Arms Company ("Remington"), the then-

operator of the Plant, referencing the "Procedure Covering

Purchases by CPFF Contractors [Plant operators] Under

Indefinite Delivery Type Contracts Negotiated by

Governmental Agencies." Emphasis added. The federal

government advised Remington that a method of “direct

ordering and direct payment" by Remington for

commodities, including electricity, would alleviate problems

for the federal government.

This new procedure was applicable to other contract

operators of government-owned facilities across the nation.

Operators at various government installations, including the

Plant, would order and directly pay for electrical services.

The objective of the procedure was the elimination of any

need for the federal government to issue purchase orders

and "pay the [electrical services] vendor by U.S. Treasury

check." The government recognized that the revised

purchasing procedure would lead to additional state

taxation:

In certain instances it is possible that the

Government will suffer tax disadvantages as

a result of this revised procedure. The

procedure has been adopted with due

advertence to this fact on the basis that the

overall savings possible theveby will more

than offset any possitie cost increases

resulting from taxes.

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5

On August 10, 1960, Remington issued its own

purchase order (not an Army purchase order) for electricity,

which KCPL accepted. Thereafter, Remington ordered,

used and paid for the electricity delivered to the Plant.

Additionally, Remington claimed a sales tax exemption for

the electricity delivered to the Plant. The exemption letter,

sent to KCPL, discusses "purchases" made by Remington.

In April 1962, the federal government and KCPL

formalized the arrangement established by the government's

previously-issued procedure and modified the Contract.

According to this modification, the parties agreed that so

long as the Plant was managed by an operator, the operator

could purchase electricity “to the same extent" that the

federal government had done so. The modification

provided:

orders for services under this contract may

be placed with [KCPL] by such [operator]

and will be honored to the same extent as

will orders placed by the Government ... .

Furthermore, during such period of time

[KCPL] agrees that placing of such orders,

and payment thereof by such [operator], will

satisfy the requirements of this contract

concerning minimum monthly accounts to be

ordered and paid for by the Government.

Since April 3. 1962, the checks, drafts or money orders

used to pay for electricity delivered to the Plant have been

issued or drawn on the accounts of Remington or Olin, the

Plant's operators.

Under the Contract, the federal government agreed

that electrical service furnished would be subject to

regulation by the state regulatory commission. The

6

government agreed to pay those rates established by the

commission. The bills submitted for electricity delivered to

the Plant are submitted under Rate Schedule PL, which is

approved by the Missouri Public Service Commission.

Following the decision of the United States to have the

operators of the Piant order and pay for electricity, Rate

Schedule PL was modified to provide: "Tax Schedule TA

shall be applicable to all customer billings under this

schedule." Tax Schedule TA, not surprisingly, provides for

tax collection:

There shall be added to the monthly bill of

a customer, as separate items, a surcharge

equal to the proportionate part of any

license, occupation, or other similar fee or

tax applicable to electric service by the

Company [KCPL] to the customer, which

fee or tax is imposed upon the Company by

taxing authonities on the basis of the gross

receipts, net receipts, or revenues from

electrical sales by the Company.

Pursuant to this Schedule, Olin has paid local gross receipts

taxes imposed on the electricity delivered to the Plant and

the federal government has reimbursed Olin for those tax

payments.

B. Olin's Relationship with the Army

and KCPL

Olin succeeded Remington as the operator of the

Plant. On July 2, 1985, Olin entered into the M&O

Contract with the Department of the Army to operate and

maintain the Plant. This contract required Olin to become

fully responsible for the operation and maintenance of the

Plant. The M&O Contract provided that Olin, as an

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7

independent contractor and not as a government agent,

would furnish all the equipment, supplies and maternal

necessary to operate the Plant except those "furnished by

the Government.” Olin, and Remington. before it, requested

reimbursement for payments made to KCPL for electrical

services on a form labeled "Public Voucher for Purchases

and Services Other than Personnel.” The contract operators

of the Plant have been reimbursed in full by the federal

government for all amounts they have paid to KCPL for

electrical services. The federal government does not

reimburse Olin for its acquisition of government-furnished

material. Hence, the electricity is, by definition, not

government-furnished material.

Neither the district court nor the court of appeals

found that Olin was anything other than what it claims to

be: an independent contractor. It is not the government's

purchasing agent, nor one of its constituent parts. Olin is

a private, for profit, business corporation. Olin is neither a

federal instrumentality nor the federal government's

disbursing officer. Olin is contractually obligated to pay

KCPL's bills for electrical service, and KCPL has made a

demand on Olin for sales taxes due. Neither Remington

nor Olin exercised dominion over federal funds when they

issued checks to KCPL for electrical services, and the

federal government is not a signatory on the accounts used

by the contract operators to pay KCPL for electrical

services. The monies delivered by the Plant's contract

operators were private corporate funds, not federal

government funds. The federal government has no

ownership interest in Olin, and the congruence of

professional interest between the two is not complete. The

federal contractors were not required to secure the federal

government's specific approval for their payments of

electrical services.

8

Furthermore on May 8, 1986, Olin issued a purchase

order for electricity to be delivered to the Plant. The M&O

Contract does not require the contract operator of the Plant

to issue a purchase order for electricity. As a result of

Olin's purchase order, KCPL's invoices were subsequently

directed to "Olin Corp." as the "Customer" and reference

the M&O Contract number and Olin's purchase order

number, not the number of the federal government's

contract with KCHL. The purchase order indicates that the

buyer or the U.S. government can terminate the purchase

order upon thirty-day wmnitten notice. The word “buyer” in

Olin's purchase order refers to Olin. Olin assigned a rating

on the purchase order it sent to KCPL. This rating, DO-C-

3, is to be used by operators such as Olin "for the purchase

of maintenance, repair, and operating supplies and

installation material for production equipment." Emphasis

added. The M&O Contract requires the government to

reimburse Olin for moneys paid in state taxes unless an

exemption is available to Olin.

CG Olin's Use of Electricity

The electricity delivered to the Plant is used in the

manufacture of small-arms ammunitions, for related support

and administrative functions, and by Plant housing. These

physical activities, which use and consume the electricity at

the Plant, are performed by Olin. Olin orders the electricity

delivered to the Plant; even if Olin's purchase order were

ignored, the order occurs and delivery is accomplished

when Olin flips the switch completing the circuit using

electrical power. The electricity is used instantly when it

is delivered.

Olin controls the Plant equipment and facilities that

consume electricity, turning on and off the electricity on a

day-to-day basis. In doing so Olin not only orders and uses

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9

the electricity, it also fulfills its obligation under the M&O

Contract to economically manage its use. To maximize

energy conservation and minimize energy consumption,

Olin has reduced lighting levels and taken other steps that

do not require the federal government's approval. Olin has

created an energy awareness program to encourage the

conservation of energy and created energy conservation

teams to coordinate energy conservation efforts. No

government employees are on these conservation teams.

Olin has two important interests in reducing peak

demand charges for electricity: cost reduction and energy

conservation. Olin has been successful in its conservation

activities at the Plant and has received federal energy

awards. For the purpose of determining any award fee

under the M&O Contract, Olin is evaluated on energy

consumption and energy conservation.

D. The Audit

In connection with a 1986-1988 audit of KCPL. the

Department of Revenue assessed KCPL $737,893.68, which

KCPL paid under protest. Of this assessment, $561,413.07

represented sales tax, interest, and penalties on sales from

January 1986 - December 1988 of electrical power by

KCPL delivered to Olin for use at the Plant.'

' During the audit, the Department of Revenue discovered that

the federal government had submitted tax exemption certificates (issued

to the Amy by the Missouri Department of Revenue) to KCPL. These

exemption certificates, covering electricity delivered to the Plant,

provide that exempt purchases must be paid for by check or draft drawn

on funds of the Department of the Army and that the exemption was not

assignable or transferable. But the monies to pay for electricity

delivered to the Plant were funds belonging to Olin. The federal

goverment has not denied this misuse of the exemption certificates

issued by Missouri.

10

Petitioners now seek review of the appellate court's

decision prohibiting Missouri from taxing KCPL's sales to

Olin, the federal contractor who ordered, used, and paid for

the electricity. Petitioners also seek review of the appellate

court's decision that the legal incidence of Missouri's tax is

on the purchaser because Missouri's taxing statute permits

the seller to absorb the tax as a cost of doing business.

REASONS FOR GRANTING THE WRIT

Before the Court is a case of extraordinary

importance to the fifty states. It directly and negatively

impacts their sovereign right to raise revenues and, thus,

interferes with their ability to provide an effective balance

to the exercise of federal power. This is the second in a

series of cases to reach this Court in which the federal

government has attempted to interfere with Missouri's

power to raise revenue.” The Eighth Circuit decided that

federal sovereign tax immunity prevented Missouri from

imposing a sales tax on the seller of electricity that is

delivered to a federal contractor even though that contractor

ordered, used, and, with its own funds, paid for the

electricity. | Additionally, the Eighth Circuit labeled

“unreasonable” the decisions of the Missouri Supreme Court

construing the statute as one placing the legal incidence of

the tax on the seller, despite the consistency of Missouri's

construction with this Court's rulings on the issue. These

conclusions conflict with the prior decisions of this Court

and will confuse other circuit courts in applying the Court's

precedents. Furthermore, the questions presented in this

petition raise significant questions going to the core of

> US. v. Benton, 772 F. Supp. 453 (W.D. Mo. 1990), aff'd, 975

F.2d 511 (8th Cir. 1992), cert. granted and opinion vacated sub nom.

U.S. v. Melcher, 508 U.S. 957 (1993) and rev'd sub nom. US. v.

Lohman, 21 F.3d 844 (8th Cir. 1994).

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federal/state relations. Only this Court can now restore the

necessary and constitutionally-enshrined balance of power

between the sovereign parties to this case.

I. The Eighth Circuit's holding, that federal

sovereign tax immunity entirely supplants

the states’ sovereign right to raise revenue

by imposing a sales tax on the transfer of

electricity to a federal contractor which

orders, uses, and, with its own funds, pays

for the electricity, significantly disrupts

the balance this Court has established

between the interests of the states and

those of the federal government.

There is but "one constant” in the field of federal

sovereign tax immunity: "a State may not, consistent with

the Supremacy Clause. . . , lay a tax ‘directly upon the

United States." U.S. v. New Mexico. 455 U.S. 720, 733

(1982), quoting Mayo v. U.S., 319 U.S. 441, 447 (1943).

The Eighth Circuit has interpreted that “constant” so

broadly that it obliterates another principle established in

New Mexico: the need to preserve our federal system's

“competing constitutional imperatives, by giving full range

to each sovereign's taxing authority." New Mexico. 455

US. at 735-36. This Court should review this case to

eliminate the considerable confusion caused by the Eighth

Circuit's reluctance to apply this Court's precedents and the

Eighth Circuit's implicit endorsement of the notion that the

fifty states’ taxing power is but a nuisance that is easily

turned aside by the government's mere assertion of federal

sovereign tax immunity on behalf of its contractors. Private

operators of federal installations throughout the nation

order, use, and pay for commodities. Pursuant to the

Eighth Circuit's opinion, all may now claim the benefits of

federal sovereign tax immunity if the federal government

12

ever had any involvement in selecting the seller of the

commodity.

The inherent incongruity of allowing one sovereign

to interfere with another's revenue collection has long been

apparent to those sensitive to our nation's federal system.

Alexander Hamilton commented favorably on_ the

Constitution's intolerance for federal efforts to interfere with

state revenue collection systems:

[A]n attempt on the part of the national

government to abridge them [the States] in

the exercise of-it [their independence and

uncontrollable authority to raise their own

revenues] would be a violent assumption of

power, unwarranted by any article or clause

of its Constitution.

The Federalist No. 32, at 198 (Alexander Hamilton)

(Clinton Rossiter ed., 1961). The Eighth Circuit's opinion

evidences no concern for its "violent assumption of power,"

utterly fails to regard the fifty states’ retained sovereign

right to raise revenues and misses the entire tenor of current

tax immunity law. This deficiency is apparent in the

appellate opinion when it declares that New Mexico and

Alabama v. King & Boozer. 314 U.S. | (1941) "do not

require the denial of immunity here." App. at A-10.

Federal immunity from taxation is the exception, not

the rule, when a state seeks to impose a sales tax on a

private company. The rule articulated by this Court is that

a State's power to tax can be denied only with "the clearest

constitutional mandate." Michelin Tire Corp. v. Wages, 423

U.S. 276, 293 (1976). Until the Eighth Circuit ruled, there

were two clear requirements antecedent to a finding of

federal sovereign tax immunity: the federal government had

13

to be the purchaser of the property taxed, and the legal

incidence of the state's tax had to fall on the purchaser.

New Mexico, 455 U.S. at 742-43 and First Agric. Nat'l

Bank v. State Tax Comm'n, 392 U.S. 339, 347 (1968). The

Eighth Circuit has adopted a reading of those requirements

that will, if left uncorrected, erode the power of the states

to raise revenues and diminish their ability to act as an

effective balance to federal power.

With due regard to the sovereign rights of both the

federal government and the State of Missouri, the demands

of dual sovereignty in our federal system require that a

court first examine a state's taxing statute to determine what

activity the state proposes to tax.’ Upon each act of

making a retail sale of tangible personal property within the

state, Missouri imposes a tax of four percent of the

purchase price or other consideration paid or charged. Mo.

Rev. Stat. § 144.020.1(1) (1994).* A retail sale is defined

by reference to a change in “ownership.”

Any transfer made by any person engaged in

business . . . of the ownership of, or title to,

tangible personal property to the purchaser

for use or consumption and not for

resale . . . for a valuable consideration.

* This Court observed that it is the activity being taxed that

drives tax immunity analysis. "[T]ax immunity is appropriate in only

one circumstance: when the levy falls on the United States itself, or 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." New Mexico, 455 US.

at 735 (emphasis added).

4 All references to Missouri statutory materials will be to the

1994 statutes unless otherwise noted.

14

Mo. Rev. Stat. § 144.010.1(8) (Supp. 1995). Ownership

includes the exercise of dominion or control over the

property transferred. State ex rel. Thompson-Sterns-Roger

v. Schaffner. 489 S.W.2d 207, 215 (Mo. 1973). Sales at

retail specifically include "sales of electricity [or] electrical

current . . . to domestic, commercial or industrial

consumers." Mo. Rev. Stat. § 144.010.1(8)(b) (emphasis

added). Furthermore, Mo. Rev. Stat. § 144.020.1(3)

specifically imposes a sales tax on transfers of electricity or

electrical current to commercial or industrial consumers.

Pursuant to this statutory scheme Missouri, like

many other states, imposes its sales tax on the seller of

property who transfers the control of that property to

another for use or consumption for a valuable consideration.

Under the facts of this case, Missouri does not impose a tax

directly on the federal government. KCPL is the seller of

the electricity and Olin accepts control of it, uses it, and

pays KCPL for it.

To reach its veiled conclusion, that Missouri is

attempting to "rummage through the federal pocketbook"

(App. at A-13), the Eighth Circuit begins its discussion not

with an examination of Missouri's tax law or its

applicability to Olin's behavior, but with an analysis of the

activities undertaken by the federal government. Contrary

to the decision of the lower court, the court of appeals

concludes that the federal government is the purchaser of

the electricity delivered to the Plant because, when it long

ago negotiated a requirements contract for the delivery of

electricity to the Plant, it secured a rate and a vendor, and

because it remains ultimately liable on the sale of

15

electricity.’ However, none of these events constitute a

taxable activity under the law of Missoun or most offer

States.

A brief examination of the contractual relationship

between the parties is revealing. There is little remaining

of the 1951 Contract. Originally the Contract provided that

the federal government would “purchase and receive” the

electricity. In 1962 the federal government and KCPL

modified the Contract to reflect the government's earlier

issued, nation-wide policy changing the identity of the party

performing the acts of purchase. The modification obligates

KCPL to sell electricity to private companies in lieu of

sales to the federal government.

Orders for service under this Contract may

be placed with [KCPL] by the [operators of

the Plant] and will be honored to the same

extent as will orders placed by the

Government .... Furthermore, . . . [KCPL]

agrees that placing of such orders, and

payment thereof by such [operators], will

satisfy the requirements of te contract

concerning minimum monthly amounts to be

ordered and paid by the Government.

The federal government referred to the activities of the

operators as “purchases” of electricity. Following the

Contract modification the operators of the Plant, including

Olin, performed the acts of purchase -— they ordered the

electricity and they paid for it.

‘ In reality there is no special rate. Rather, the federal

government has agreed to pay whatever rate the Missouri Public Service

Commission authorized KCPL to charge for large commercial users in

KCPL's service area.

16

In an unprecedented departure from this Court's

jurisprudence, the Eighth Circuit found these purchases

made by a private contractor with its own funds cloaked

with the federal government's tax immunity, despite the fact

that the private contractor is "sufficiently distinct from" the

federal government and is not the government's agent. See

New Mexico, 455 U.S. at 743. The sales in New Mexico

were subject to sales tax even though “only federal funds"

were exnended when the pnvate contractors made the

purchases. 455 U.S. at 726. Olin expended only private

funds. Further, to be entitled to the government's tax

immunity, a private contractor must actually stand in the

federal government's shoes and have become so assimilated

by the federal government as to have become one. of its

constituent parts. /d. at 736. Here the federal government

has admitted that Olin did not meet this test.

Ignoring the considerations set forth by this Court in

New Mexico, the Eighth Circuit has announced a new

constitutional rule: that state taxes are impermissible if the

federal government might ultimately be required to pay for

a product purchased by a contractor. The Eighth Circuit's

new rule allowed it to jump over the litany of factors that

were critical under the New Mexico analysis; that Olin is a

private, for-profit, business corporation and an independent

contractor, not the govemment's purchasing agent,

instrumentality, disbursing officer or one of its constituent

parts. The Eighth Circuit instead found it important only

that “the terms of the supplemental agreement do not

unconditionally discharge the federal government from its

obligations." App. at A-12. This result-driven rule is not

found in this Court's jurisprudence nor is it supported by

the purposes underlying federal sovereign tax immunity.

Even in New Mexico, where the federal government was

directly liable to the vendors, that fact did not persuade this

Court to find immunity. Rather, as the operators were also

g Poe Ts —

sis debian ‘niitiicetiasitilt, A iinasaicaaiih kite

17

“presumably” liable to the vendors, this Court found

immunity inappropriate. 455 U.S. at 743. The Eighth

Circuit turns that holding on its head and only action by

this Court can upright it.

The only other circuit to approach this issue had a

significantly different understanding of the constitutional

rule. The United States Court of Appeals for the District of

Columbia Circuit spoke to the issue in United States v.

District of Columbia. 669 F.2d 738 (D.C. Cir. 1981). There

a federal employee selected and negotiated with a hotel to

provide conference facilities for a federal conference and

agreed to the dates and prices. This was similar to the

effect of the federal government's contract with KCPL; it

identified the vendor and established the pricing

mechanism. Thereafter, in District of Columbia. the federal

government hired a conference manager to organize the

conference. This manager entered into an agreement with

the hotel for the conference, similar to Olin's purchase order

issued to KCPL. Just as Olin pays KCPL and is

reimbursed, the manager paid the charges for the conference

and was later reimbursed by the government.

The District of Columbia district court granted the

federal government's motion for summary judgment, as did

the Eighth Circuit here, finding that the contractor was the

government's agent and that the city was attempting to lay

an unconstitutional tax directly upon the United States.

669 F.2d at 741. Writing for the court of appeals, Judge

Ginsburg reversed, noting that "“[p]recedent securely

indicates that any municipality other than the District of

Columbia could tax sales of this sort." /d. at 739. After

synthesizing this Court's cases, the District of Columbia

Circuit found that a federal contractor “qualifies as a

purchaser subject to sales tax exactions" with but one

exception: if the contractor is “explicitly designated by the

18

federal contract as an agent with authority to pledge the

credit of the United States." Id. at 744 (emphasis in

original). See also U.S. v. Forst, 442 F. Supp. 920 (W.D.

Va. 1977), aff'd, 569 F.2d 811 (4th Cir. 1978) (the court

held material procured by a government contractor subject

to sales tax, despite the high degree of control the

government maintained over the procurement, because the

"key factor" is whose credit is bound up in the transaction).

In Olin's case, as that of most federal contractors,

the Contract does not "explicitly" or otherwise allow Olin

to "pledge the credit of the United States" when it

purchases commodities. In the District of Columbia

Circuit, that would be dispositive. A contractor operating

a federal facility in the District of Columbia under a

contract like Olin's could be charged sales tax on the

transfer of electricity. But in the Eighth Circuit, Olin and

other federal contractors are excused from that obligation.

The holdings of the District of Columbia and Fourth

Circuits had their origin in Alabama v. King & Boozer. 314

U.S. 1 (1941). There this Court defined a purchaser as "the

person who orders and pays for [goods] when the sale is for

cash or who is legally obligated to pay for them if the sale

is on credit." 314 U.S. at 10. There is no material dispute

in the case at bar that Olin ordered and paid for the

electricity. The Eighth Circuit finds this fact irrelevant,

labeling Olin as the government's “paymaster." App. at A-

10. The significance of this labeling is not disclosed in the

appellate court's opinion nor is it disclosed in this Court's

prior decisions in this area. The court of appeals cannot

have overlooked the federal government's numerous

admissions in this case that Olin is a private, for profit

business corporation, not the government's purchasing agent

or disbursing officer, and not a federal instrumentality or a

19

constituent part of the federal government. Hence, Olin

meets the test for a cash purchaser under King & Boozer.

Even if KCPL's sales of electricity were considered

on credit, Olin would meet this Court's test for a credit

purchaser. The King & Boozer court determined that sales

were for credit when the contractors were obligated to pay

for the material purchased despite the fact that the

government reserved the right “to pay directly . . . all sums

due from the Contractor.” Jd. The federal government did

not even reserve that right here; it transferred the obligation

to pay for electricity to the Plant's operator. Olin, and Olin

issued a purchase order and paid for the electricity. °

Pursuant thereto. KCPL billed Olin for the electricity,

labeling Olin as the customer, and received payment from

Olin. Surely if this case involves a credit sale, Olin's credit

* The Eighth Circuit noies that the contractors in New Mexico

and King & Boozer, “made purchases in their own names and had direct

contractual liability to the vendors" (App. at A-10), and then concludes

that Olin’s purchase order does not perform this function. App. at A-,

A-10, nn.5, 6 and 9. The court concludes that Olin’s purchase order is

a mere procedural document, even though the contract documents make

no mention of procedural purchase orders. App. at A-10. The court

also says that the purchase order incorporates the 1951 Contract. App.

at A-4. In reality Olin's purchase order specifically incorporates a

contract bearing the date April 30, 1947. Confirming petitioners’

assertion that this is a results-orientated decision, the court describes this

as a typographical - error (App. at A-4, n.5), despite evidence that the

Army's contractual relationship with KCPL began in 1941 and the only

witness to testify concerning a contract with the 1947 date professed an

absence of knowledge on the subject. Missouri directed the district and

circuit courts to these facts concerning the contested nature of the

applicability of the 1951 Contract, but the court, affirming the entry of

summary judgment, decided without discussion that this evidence was

insufficient for a fact finder to conclude that Olin’s purchase order

worked a novation of an earlier contract.

20

stood behind the sale of the electricity just as the

contractor's credit did in King & Boozer.

Thus, the Eighth Circuit's conclusion that the federal

government is the purchaser of the electricity which Olin

orders, uses and pays for is an unsupported and

insupportable departure from this Court's precedents. The

Eighth Circuit's conclusion appears to be premised on but

one point; so long as the Contract between the federal

government and KCPL remains in force, labeling the

federal government the purchaser and establishing the

pricing mechanism for the electricity delivered to the Plant,

the government is the purchaser of the electricity regardless

of the limited function the Contract performs. The resort to

“wooden formalism" has been rejected by this Court, New

Mexico, 455 U.S. at 737, and should have been rejected

here. Missouri is constitutionally entitled to tax the seller

of electricity delivered to a private corporation who orders,

uses and pays for it.

The situation before the Court is similar to the study

tours that are arranged by bar associations throughout the

country. The bar associations contract with tour operators

for the provision of a tour package available at a set price

to members of the bar and their families. The tours are

then ordered and paid for by the members of the bar.

Under the Eighth Circuit's decision, if the bar association's

and the tour operator's contract designates the bar

association as the purchaser, that designation is inviolate.

This is not an appropriate statement of the law.’ It is the

” "We can not believe that an immunity of constitutional stature

rests on . . . [an] approach [that] allows any government functionary to

draw the constitutional line by changing a few words in a contract.”

New Mexico, 455 US. at 737, quoting Kern-Limerick Inc. v. Scurlock,

347 U.S. 110, 126 (1954). Labeling is simply not dispositive in

21

bar member who orders and pays for the tour and is its

purchaser. The bar association merely negotiated the

contract which established the price for the purchases made

by its members.

Similarly, the 1951 Contract now fulfills (if it has

not been replaced with Olin's purchase order) only one

function; it establishes the price, at the state-regulated rate,

for the class of electricity which Olin purchases from the

electrical utility in the area. The federal government's

negotiation of a contract incorporating the state-approved

rate for electrical service to be delivered to the Plant is

simply insufficient to cloak Olin's order, use and payment

for the electricity with federal sovereign tax immunity.

Missouri does not tax what remains of the federal

government's contractual relationship with KCPL. Rather,

Missouri taxes, pursuant to its retained sovereign power,

KCPL's transfer to Olin of electricity which Olin orders,

uses and pays for.

The Eighth Circuit's decision is Alexander

Hamilton's foretold event: a violent assumption of power on

the part of the national government to abridge a state's

exercise of its independence and authority to raise revenues,

unwarranted by any article or clause of the Constitution.

Il. The Eighth Circuit's opinion is an affront

to state sovereignty because it determines

that the legal incidence of a state's sales

tax falls on a purchaser claiming federal

sovereign tax immunity even though the

state taxing statute does not require the

purchaser to pay the sales tax.

identifying the purchaser. The issue is who performs the act of

purchase.

22

This Court stated the test to determine, for federal

sovereign tax immunity purposes, on whom the legal

incidence of a state sales tax falls in terms that seemed,

until now, to be eminently clear and concrete: "a sales tax

which by its terms must be passed on to the purchaser

imposes the legal incidence of the tax on the purchaser."

First Agric. Nat'l Bank v. State Tax Comm'n, 392 U.S. 339,

347 (1968) (emphasis added). The Eighth Circuit has

rejected this rule and substituted its own; deciding that the

incidence of a state's sales tax falls on the purchaser even

though the state's taxing statutes do not require that the tax

be passed on to the purchaser.

There is no dispute that the Supremacy Clause, U.S.

Const. Art. VI, cl. 2, prohibits a state from "directly" laying

a tax on the United States. New Mexico, 455 US. at 733

(1982). However, the Constitution permits states to tax

federal contractors even though the economic burden of the

tax is borne by the United States. U.S. v. Boyd, 378 US.

39, 44 (1964).

Deciding upon whom the legal incidence of a tax is

placed is an exacting activity. This Court has said that

courts must observe

close distinctions in order to maintain the

essential freedom of government in

performing its functions without unduly

limiting the taxing power which is equally

essential to both nation and state under our

dual system.

James v. Dravo Contracting Co.. 302 U.S. 134, 150 (1937).

In fact, the inquiry is highly legalistic where small

differences in two statutes can result, absent close analysis,

in apparently inconsistent decisions. U.S. v. Maryland. 471

23

F. Supp. 1030, 1037 (D. Md. 1979). In Maryland. the court

found the state's environmental surcharge did not constitute

an unconstitutional levy on the federal government because

the surcharge statute did not require that the charge be

passed on to the consumer. /d. Like Missouri's sales tax

statute, Maryland's statute provided that an inability on the

seller's part to collect the surcharge did not diminish the

seller's liability for the surcharge.

Missouri's taxing scheme is ___ relatively

straightforward. The tax is imposed on sellers for the

privilege of engaging in the business of selling tangible

personal property and certain services: Mo. Rev. Stat. §

144.020.1. The express purpose of Missouri's tax is to

reach sellers, not purchasers:

The purpose and intent [of the sales tax law]

is to impose a tax upon the privilege of

engaging in the business, in this state, of

selling tangible personal property and

[certain] services... .

Mo. Rev. Stat. § 144.021. These two sections reflect

Missouri's intention that the legal incidence of its sales tax

is to fall on the sellers of taxable property and Missouri

courts have so held on repeated occasions. Farm and

Home Sav. Ass'n v. Spradling. 538 S.W.2d 313, 316 (Mo.

1976); Fabick and Co. v. Schaffner. 492 S.W.2d 737 (Mo.

1973). Obviously, Missouri law permits the seller to pass

on the economic incidence of its sales tax. But this Court

has explicitly abandoned “the notion that the economic-as

opposed to the legal-incidence of the tax is relevant" to tax

immunity claims. New Mexico. 455 U.S. at 735 n.11.

Federal courts resolving questions of federal

sovereign tax immunity from state taxation are not bound

24

by the state court's determination of where the legal

incidence of tax falls. Diamond Nat'l Corp. v. State Bd. of

Equalization. 425 U.S. 268, 269 (1976). "On the other

hand, we are not free simply to disregard the state court's

determination." /d. Rather, "[w]e give this finding great

weight in determining the natural effect of the statute, and

if it is consistent with the statute's reasonable interpretation

it will be deemed conclusive." American Oil Co. v. Neill.

380 U.S. 451, 455-56 (1965).

The Eighth Circuit ignored this Court's admonition,

determining that "the Missouri Courts’ construction [is]

inconsistent with the statutes’ reasonable interpretation."

App. at A-8. It did so without even referencing the key

section of Missouri's statute, the one that makes passing on

the sales tax elective. The Eighth Circuit looked not at

Missoun law, but at the Massachusetts tax statute

considered in First Agric. Nat'l Bank. Unfortunately, the

court's comparison of the two statutes began and ended

with their prohibitions on advertising. The court did not

consider their differing treatments of the seller's obligation

to pass on the sales tax.

Unlike the relevant Méissouri_ statute, the

Massachusetts statute provided that the tax

shall be paid by the purchaser to the vendor

and each vendor .. . shall add to the sales

price and shall collect from the purchaser

the full amount of the tax . . . and such tax

shall be a debt from the purchaser to the

vendor ....

392 U.S. at 347 (emphasis in original).

25

Missouri's taxing statute is quite different. It

permits a seller to choose whether to separately identify the

sales tax applicable to the transaction and, only when that

is done. does the statute require the purchaser to pay the

sales tax.

Argounts which a vendor [seller] charges to

and receives from the purchaser in

accordance with this section shall not be

includable in his gross receipts if the

amounts are separately charged or stated.

Mo. Rev. Stat. § 144.285.5 (emphasis added). The word

"if." though small, is significant. It discloses the option of

Missouri sellers to pass along the sales tax to the purchaser

or consider the tax a cost of doing business.

A Missouri seller is directly prohibited from

communicating to the purchaser that the tax “will not be

separately stated and added to the selling price.” Mo. Rev.

Stat. § 144.080.5. - If a seller were prohibited from

absorbing sales tax as a cost of business, the statute would

so indicate; all Missouri's statute prohibits is advertising to

the purchaser the statutorily permissible failure to separately

state the tax. Missouri's statute permits a seller to

separately state and pass on the sales tax on the transaction

to the purchaser. Conversely, the seller may decline to

separately state the sales tax charge and make the duty to

* When Missouri wishes to pass the legal incidence of a tax to

the buyer it does so in unmistakable language. Compare Mo. Rev. Siat.

§ 149.015.4, concerning cigarette taxes with Missouri's sales tax. The

cigarette tax statute provides that the tax "shall . . . be added to the

price of the cigarettes and recovered from the ultimate consumer or user

with the person first selling the cigarettes acting as an agent of the state

for the payment and collection of the tax to the state.” No similar

language appears in Missouri's sales tax statute.

26

pay the sales tax part of the seller's cost of doing business.

This is what happens, for example, with sales of liquor by

the drink. The state imposes a sales tax on each drink sold,

but when the seller does not elect to separately state the

sales tax charged for the drink, the seller must pay sales tax

on his total receipts.’

The Eighth Circuit's decision, declaring that this

taxing scheme places the legal incidence of the tax on the

purchaser, implicitly resurrects the now-discredited decision

of Panhandle Oil Co. v. Miss. ex rel. Knox, 277 U.S. 218

(1928). Panhandle found that taxes the state imposed on

the seller of gasoline levied an unconstitutional tax on

federal activities because the state taxed "the means used

for the performance of federal functions." 277 U.S. at 221.

The tax in Panhandle was objectionable to the majority

because “the distributors were able to shift its burden to the

purchaser." Gurley v. Rhoden. 421 U.S. 200, 210 (1975)

(emphasis added). "The Court has since expressly

* The court of appeals makes much of the fact that a purchaser

is required to pay the sales tax when it is passed on by the seller and

that the seller “shall collect from the purchaser” the amount of the tax

due, referencing Mo. Rev. Stat. §§ 144.060 and 144.080.4. However,

reading these sections as part of the entire statute they can only be

concemed with the purchaser's duty to pay the tax to the extent the

seller elects to separately set it forth. Each of these sections specifically

incorporate Mo. Rev. Stat. § 144.285, quoted in the text, which pernits

the election. Any confusion with regard to the seller's option to pass the

sales tax on to the purchaser is readily resolved by reference to the

pertinent regulation, Mo. Code Regs. tit. 12, § 10-3.464(1) (1994),

which provides: "The sales tax collected by a seller from the purchaser

may be deducted from the seller's gross receipts if those amounts are

separately stated to the purchaser and added to the purchase price.”

Emphasis added. Missouri law simply does not require that the sales

tax charged be passed on to the purchaser.

ne

27

abandoned that view and has accepted the analysis of the

dissent." Jd.

Under this Court's current precedents, the legal

incidence of a tax is upon the seller unless the taxing

“statute required [the seller] to pass the tax on to the

purchaser-consumer.” Jd. at 204. Missoun's taxing statute

imposes no such requirement. Following First Agric. Nat'l

Bank and Gurley, the legal incidence of Missouri's sales tax

is on the seller -- not the purchaser. Hence, Missoun's

sales tax is not laid directly on the federal government.

Missouri reasonably, and thus conclusively, decided that the

legal incidence of its sales tax is upon seller. American Oil

Co.. 380 U.S. at 455-56. Any other result ignores this

Court's development of legal incidence jurisprudence,

improperly rejects Missouri's reasonable construction of its

own sales tax law, and unjustifiably interferes with

Missouri's right to raise revenues.

CONCLUSION

Petitioners urge this Court to clarify the issues

presented in this case, restore the proper balance of the

sovereign powers between the federal government and the

states, and respectfully request this Court to grant a writ of

certiorari.

28

Respectfully submitted,

JEREMIAH W. (JAY) NIXON

Attorney General

JAMES R. McADAMS

Counsel of Record

ALANA M. BARRAGAN-SCOTT

C. GAIL VASTERLING

Assistant Attorneys General

P.O. Box 899

Jefferson City, Missouri 65102

(573) 751-3321

Attomeys for Petitioners