First Agricultural National Bank of Berkshire County v. State Tax Commission/Opinion of the Court

by Hugo Black

United States Supreme Court

392 U.S. 339

First Agricultural National Bank of Berkshire County  v.  State Tax Commission

 Argued: April 22, 1968. --- Decided: June 17, 1968

The principal issue raised by this case concerns the extent to which States may tax a national bank. The 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, 4 L.Ed. 579, 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. City of Owensboro, 173 U.S. 664, 668, 19 S.Ct. 537, 538, 43 L.Ed. 850; Des Moines Nat. Bank v. Fairweather, 263 U.S. 103, 106, 44 S.Ct. 23, 24, 68 L.Ed. 191; First Nat. Bank v. City of Hartford, 273 U.S. 548, 550, 47 S.Ct. 462, 463, 71 L.Ed. 767; Iowa-Des Moines Nat. Bank v. Bennett, 284 U.S. 239, 244, 52 S.Ct. 133, 135, 76 L.Ed. 265. 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:

'In those respects in which the Red Cross differs from the usual government agency-e.g., in that its employees are not employees of the United States, and that government officials do not direct its everyday affairs-the Red Cross is like other institutions-e.g., national banks-whose status as tax-immune instrumentalities of the United States is beyond dispute.' Department of Employment v. United States, 385 U.S. 355, 360, 87 S.Ct. 464, 467, 17 L.Ed.2d 414. (Emphasis added.)

The decision below recognized the strong precedents against taxation, but the Massachusetts Supreme Judicial Court was of the opinion that the status of national banks has been so changed by the establishment of the Federal Reserve System ^[2] that they should no longer be considered nontaxable by the States as instrumentalities of the United States. Essentially the reasoning of the Supreme Judicial Court is that under present-day conditions and regulations there is no substantial difference between national banks and state banks; and the implication of this is, of course, that national banks lack any unique quality giving them the character of a federal instrumentality. Because of pertinent congressional legislation in the banking field, we find it unnecessary to reach the constitutional question of whether today national banks should be considered nontaxable as federal instrumentalities.

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 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 Sumner of Massachusetts, who said:

'If you allow the State to interfere with the proposed system (of national banks) in any way, may they not embarrass it? Where shall they stop? Where will you run a line?

'Now, sir, every consideration, every argument which goes to sustain this great judgment (M'Culloch v. Maryland) may be employed against the proposed concession to the States of the power to tax this national institution in any particular, whether directly or indirectly.' Cong. Globe, 38th Cong., 1st Sess., 1893-1894 (1864).

On the other side, proposed amendments expressly permitting much broader state and local taxation of national banks were introduced, debated, and rejected by the Congress. Among these was an amendment introduced in the House which would have made national banks subject, without exception, to all state and local general taxes on personal as well as real property:

'And the said associations or corporations shall severally be subject to State and municipal taxation upon their real and personal estate, the same as persons residing at their respective places of business are subject to such taxation by State laws.' Cong. Globe, 38th Cong., 1st Sess., 1392 (1864).

The result of this conflict was that the legislation, when finally passed, was a compromise which permitted state taxation of national banks in certain ways, but prohibited all other forms of state taxation. Senator Fessenden, Chairman of the Finance Committee, clearly defined the compromise that was being enacted:

'If the Senator reads this bill he will perceive that all the power of taxation upon the operations of the bank itself, all upon the circulation, all upon the deposits, all upon everything which can properly be made by a tax is reserved to the General Government; that the States cannot touch it in any possible form; that they are limited and controlled; the simple right is given them to say that the property which their own citizens have invested in it shall contribute to State taxation precisely as other property.' Cong. Globe, 38th Cong., 1st Sess., 1895 (1864).

It seems clear to us from the legislative history that 12 U.S.C. § 548 was intended to prescribe the only ways in which the States can tax national banks. And this is certainly not a novel interpretation of the section, as shown by previous decisions of this Court. As early as 1899 the Court declared:

'This section (R.S. § 5219, 12 U.S.C. § 548), then, of the Revised Statutes is the measure of the power of a state to tax national banks, their property or their franchises. By its unambiguous provisions the power is confined to a taxation of the shares of stock in the names of the shareholders and to an assessment of the real estate of the bank. Any state tax, therefore, which is in excess of, and not in conformity to, these requirements, is void.' Owensboro Nat. Bank v. City of Owensboro, 173 U.S. 664, 669, 19 S.Ct. 537, 539, 43 L.Ed. 850.

A more complete explanation of § 548 and its meaning appears in this Court's opinion in Bank of California National Association v. Richardson, 248 U.S. 476, 39 S.Ct. 165, 63 L.Ed. 372, where it was said:

'There is also no doubt from the section (R.S. § 5219, 12 U.S.C. § 548) that it was intended to comprehensively control the subject with which it dealt and thus to furnish the exclusive rule governing state taxation as to the federal agencies created as provided in the section. * * *

'Two provisions in apparent conflict were adopted. First, the absolute exclusion of power in the states to tax the banks, the national agencies created, so as to prevent all interference with their operations, the integrity of their assets, or the administrative governmental control over their affairs. Second, preservation of the taxing power of the several states so as to prevent any impairment thereof from arising from the existence of the national agencies created, to the end that the financial resources engaged in their development might not be withdrawn from the reach of state taxation * * *.

'The first aim was attained by the non-recognition of any power whatever in the states to tax the federal agencies, the banks, except as to real estate specially provided for, and, therefore, the exclusion of all such powers. The second was reached by a recognition of the fact that, considered from the point of view of ultimate and beneficial interest, every available asset possessed or enjoyed by the banks would be owned by their stockholders and would be, therefore, reached by taxation of the stockholders as such. * * *' 248 U.S., at 483, 39 S.Ct. at 166.

Finally, so there can be no doubt, consider these words of the Court in Des Moines Bank v. Fairweather, 263 U.S. 103, 44 S.Ct. 23, 68 L.Ed. 191:

'This section (R.S. § 5219, 12 U.S.C. § 548) shows, and the decisions under it hold, that what Congress intended was that national banks and their property should be free from taxation under state authority, other than taxes on their real property and on shares held by them in other national banks; and that all shares in such banks should be taxable to their owners, the stockholders, much as other personal property is taxable * * *.' 263 U.S., at 107, 44 S.Ct. at 24.

Thus, at least since the Owensboro decision, supra, in 1899, it has been abundantly clear that 12 U.S.C. § 548 marks the outer limit within which States can tax national banks. Now this Court is asked to change what legislative history and prior decisions have established is the precise meaning of an Act of Congress. This we cannot do. For, as we pointed out above, the banking field has traditionally been an area of particular congressional concern marked by legislation responsive to new problems. This can be illustrated by the history of § 548 alone. It was originally passed in 1864 because the 1863 Currency Act ^[4] contained no provision for state taxation of national banks or their shares. In 1868 a technical amendment was made to the section. ^[5] Then in 1923 a substantive amendment was made which, among other things, authorized the state taxation of national bank income and dividends. ^[6] Another important part of this amendment was the declaration that 'bonds, notes, or other evidences of indebtedness' in the hands of individual citizens were not to be considered 'moneyed capital * * * coming into competition with the business of national banks.' Just two years before, this Court had ruled in Merchants' Nat. Bank of Richmond v. Richmond, 256 U.S. 635, 41 S.Ct. 619, 65 L.Ed. 1135 (1921), that such bonds and notes were moneyed capital in competition with national banks and thus covered by § 548. Senator Pepper, who spoke for the amendment, made clear that it was offered as a response to this Court's decision which had placed an erroneous interpretation on the section. ^[7] Then again in 1926, § 548 was amended to permit States to levy franchise and excise taxes on national banks measured by the entire income (including income from tax-exempt securities) of the banks. ^[8] Finally, in 1950, a bill was sent to the Senate Committee on Banking and Currency which expressly permitted the levying of state sales and use taxes on national banks, but Congress did not pass it. ^[9]

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 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 in City of Cleveland v. Bowers, 349 U.S. 143, 151, 75 S.Ct. 607, 611, 99 L.Ed. 950, 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, 74 S.Ct. 403, 410, 98 L.Ed. 546. Also see Carson v. Roane-Anderson Co., 342 U.S. 232, 72 S.Ct. 257, 96 L.Ed. 257.

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 of St. Paul v. Bismarck Lumber Co., 314 U.S. 95, 99, 62 S.Ct. 1, 3, 86 L.Ed. 65. Subsection 3 of the Massachusetts sales tax provides:

'Reimbursement for the tax hereby imposed shall be paid by the purchaser to the vendor and each vendor in this commonwealth shall add to the sales price and shall collect from the purchaser the full amount of the taximposed by this section, or an amount equal as nearly as possible or practicable to the average equivalent thereof; and such tax shall be a debt from the purchaser to the vendor, when so added to the sales price, and shall be recoverable at law in the same manner as other debts.' Acts and Resolves, 1966, c. 14, § 1, subsec. 3. (Emphasis added.)

This subsection reads to us as a clear requirement that the sales tax be passed on to the purchaser. And this interpretation is reinforced by subsection 23 which prohibits as unlawful advertising the holding out by any vendor that he will assume or absorb the tax on any sale that he may make. We cannot accept the reasoning of the court below that simply because there is no sanction against a vendor who refuses to pass on the tax (assuming this is true), this means the tax is on the vendor. There can be no doubt from the clear wording of the statute that the Massachusetts Legislature intended that this sales taxbe passed on to the purchaser. For our purposes, at least, that intent is controlling. And it seems clear to us that the force of the law, especially the language in subsection 3, is such that, regardless of sanctions, businessmen will attempt, in their everyday commercial affairs, to conform to its provisions as written.

For these reasons we reverse and hold that appellant is immune from both the Massachusetts use and sales taxes.

Reversed.

Mr. Justice FORTAS took no part in the consideration or decision of this case.

Mr. Justice MARSHALL, with whom Mr. Justice HARLAN and Mr. Justice STEWART join, dissenting.

Notes

1. Acts and Resolves, 1966, c. 14, §§ 1 and 2.
2. The Federal Reserve Act of December 23, 1913, c. 6, 38 Stat. 251, 12 U.S.C. § 221 et seq.
3. This section provides in pertinent part:
4. Act of February 25, 1863, c. 58, 12 Stat. 665.
5. Act of February 10, 1868, c. 7, 15 Stat. 34.
6. Act of March 4, 1923, c. 267, 42 Stat. 1499.
7. 64 Cong.Rec. 1454 (1923).
8. Act of March 25, 1926, c. 88, 44 Stat. 223.
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).