## Facts

- The federal government contracted with Sandia Corporation and Zia Company to manage government-owned atomic laboratories in New Mexico, and with Los Alamos Constructors, Inc. to perform construction and repair work at a laboratory.
- The contracts used an “advanced funding” method: contractors paid employees and creditors using drafts on a special account holding U.S. Treasury funds, so payments were made from federal funds.
- New Mexico imposed a gross receipts tax on the sale of goods and services and a compensating use tax on certain out-of-state property acquisitions that would have been taxed if purchased in-state.
- The United States sought to bar application of these taxes to (1) contractors’ receipts funded through advanced-funding accounts, (2) vendors’ receipts from sales routed through the contractors to the United States, and (3) contractors’ use of government-owned property.
- The United States argued that, under the Supremacy Clause and intergovernmental tax immunity, the contractors should be treated as federal instrumentalities or that the taxes unconstitutionally burdened the federal government.

## Issues

1. Whether intergovernmental tax immunity under the Supremacy Clause bars New Mexico from imposing gross receipts and use taxes on private contractors performing federal work under detailed federal control and paid from federal funds.
2. Whether the contractors were federal “agencies or instrumentalities” so closely connected to the United States that they were constitutionally immune from the state taxes.

## Decision

- The Supreme Court (Justice Blackmun) affirmed the Tenth Circuit.
- The Court held the contractors were independent taxable entities and not constitutionally immune from New Mexico’s gross receipts and use taxes.
- Tax immunity applied only if the legal incidence of the tax fell on the United States itself or on an entity so closely connected to the Government that they cannot realistically be treated as separate for the taxed activity.
- Neither federal reimbursement, advanced funding, nor extensive federal control converted the contractors into immune federal instrumentalities.

## Legal Principles

- A state tax is not unconstitutional merely because it economically burdens the United States, even if the federal government ultimately bears the entire cost.
- Federal immunity from state taxation is limited to taxes imposed directly on the United States or on an agency or instrumentality so closely connected to the federal government that separateness is unrealistic as to the taxed activity.
- The controlling question is the tax’s legal incidence, not whether payment is made with federal funds or whether the taxed activity supports federal functions.
- Ordinary government contractors remain taxable by states even when their contracts are highly regulated and their costs are fully funded by the federal government.

## Conclusion

New Mexico could apply its gross receipts and use taxes to private contractors working for federally owned laboratories because the taxes fell on separate legal entities rather than on the United States or a truly inseparable federal instrumentality, and federal payment of the economic burden did not create immunity.


United States v. New Mexico, 455 U.S. 720 (1982)