Article VI, Clause 2:
This Constitution, and the Laws of the United States which shall be made in Pursuance thereof; and all Treaties made, or which shall be made, under the Authority of the United States, shall be the supreme Law of the Land; and the Judges in every State shall be bound thereby, any Thing in the Constitution or Laws of any State to the Contrary notwithstanding.
In the course of his opinion in Osborn v. Bank of the United States, 1 Chief Justice Marshall posed the question:
Can a contractor for supplying a military post with provisions, be restrained from making purchases within any state, or from transporting the provisions to the place at which the troops were stationed? Or could he be fined or taxed for doing so? We have not yet heard these questions answered in the affirmative. 2
Today, the question insofar as taxation is concerned is answered in the affirmative. Although the early cases looked toward immunity, 3 in James v. Dravo Contracting Co., 4 by a 5-to-4 vote, the Court established the modern doctrine. Upholding a state tax on the gross receipts of a contractor providing services to the Federal Government, the Court said that
‘[I]t is not necessary to cripple [the state’s power to tax] by extending the constitutional exemption from taxation to those subjects which fall within the general application of non-discriminatory laws, and where no direct burden is laid upon the governmental instrumentality, and there is only a remote, if any, influence upon the exercise of the functions of government.’ 5 A state-imposed sales tax upon the purchase of goods by a private firm having a cost-plus contract with the Federal Government was sustained, it not being critical to the tax's validity that it would be passed on to the government. 6 Previously, it had sustained a gross receipts tax levied in lieu of a property tax upon the operator of an automobile stage line, who was engaged in carrying the mails as an independent contractor 7 and an excise tax on gasoline sold to a contractor with the government and used to operate machinery in the construction of levees on the Mississippi River. 8 Although the decisions have not set an unwavering line, 9 the Court has hewed to a very restrictive doctrine of immunity.
[T]ax immunity is appropriate in only one circumstance: when the levy falls on the United States itself, or on 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. 10 Thus, New Mexico sustained a state gross receipts tax and a use tax imposed upon contractors with the Federal Government which operated on
advanced funding, drawing on federal deposits so that only federal funds were expended by the contractors to meet their obligations. 11 Of course, Congress may statutorily provide for immunity from taxation of federal contractors generally or in particular programs. 12