ArtVI.C2.1.7.5 Ad Valorem Taxes Under the Doctrine

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.

Property owned by a federally chartered corporation engaged in private business is subject to state and local ad valorem taxes. This was conceded in McCulloch v. Maryland1 and confirmed a half century later with respect to railroads incorporated by Congress. 2 Similarly, a property tax may be levied against the lands under water that are owned by a person holding a license under the Federal Water Power Act. 3 However, when privately owned property erected by lessees on tax-exempt state lands is taxed by a county at less than full value, and houses erected by contractors on land leased from a federal Air Force base are taxed at full value, the latter tax, solely because it discriminates against the United States and its lessees, is void. 4 Likewise, when, under state laws, a school district does not tax private lessees of state and municipal realty, whose leases are subject to termination at the lessor's option in the event of sale, but does levy a tax, measured by the entire value of the realty, on lessees of United States property used for private purposes and whose leases are terminable at the option of the United States in an emergency or upon sale, the discrimination voided the tax collected from the latter. A state tax may not discriminate against the government or those with whom it deals in the absence of significant differences justifying levy of higher taxes on lessees of federal property. 5 Land conveyed by the United States to a corporation for dry dock purposes was subject to a general property tax, despite a reservation in the conveyance of a right to free use of the dry dock and a provision for forfeiture in case of the continued unfitness of the dry dock for use or the use of land for other purposes. 6 Also, where equitable title has passed to the purchaser of land from the government, a state may tax the equitable owner on the full value thereof, despite retention of legal title; 7 but, in the case of reclamation entries, the tax may not be collected until the equitable title passes. 8 In the pioneer case of Van Brocklin v. Tennessee, 9 the state was denied the right to sell for taxes lands which the United States owned at the time the taxes were levied, but in which it had ceased to have any interest at the time of sale. Similarly, a state cannot assess land in the hands of private owners for benefits from a road improvement completed while it was owned by the United States. 10

In 1944, with two dissents, the Court held that where the government purchased movable machinery and leased it to a private contractor the lessee could not be taxed on the full value of the equipment. 11 Twelve years later, and with a like number of Justices dissenting, the Court upheld the following taxes imposed on federal contractors: (1) a municipal tax levied pursuant to a state law which stipulated that when tax exempt real property is used by a private firm for profit, the latter is subject to taxation to the same extent as if it owned the property, and based upon the value of real property, a factory, owned by the United States and made available under a lease permitting the contracting corporation to deduct such taxes from rentals paid by it; the tax was collectible only by direct action against the contractor for a debt owed, and was not applicable to federal properties on which payments in lieu of taxes are made; (2) a municipal tax, levied under the authority of the same state law, based on the value of the realty owned by the United States, and collected from a cost-plus-fixed-fee contractor, who paid no rent but agreed not to include any part of the cost of the facilities furnished by the government in the price of goods supplied under the contract; (3) another municipal tax levied in the same state against a federal subcontractor, and computed on the value of materials and work in process in his possession, notwithstanding that title thereto had passed to the United States following his receipt of installment payments. 12

In sustaining the first tax, the Court held that it was imposed, not on the government or on its property, but upon a private lessee, that it was computed by the value of the use to the contractor of the federally leased property, and that it was nondiscriminatory; that is, it was designed to equalize the tax burden carried by private business using exempt property with that of similar businesses using taxed property. Distinguishing Allegheny County, the Court maintained that in that older decision, the tax invalidated was imposed directly on federal property and that the question of the legality of a privilege on use and possession of such property had been expressly reserved. Also, insofar as the economic incidents of such tax on private use curtails the net rental accruing to the government, such burden was viewed as insufficient to vitiate the tax. 13

Deeming the second and third taxes similar to the first, the Court sustained them as taxes on the privilege of using federal property in the conduct of private business for profit. With reference to the second, the Court emphasized that the government had reserved no right of control over the contractor and, hence, the latter could not be viewed as an agent of the government entitled to the immunity derivable from that status. 14 As to the third tax, the Court asserted that there was no difference between taxing a private party for the privilege of using property he possesses, and taxing him for possessing property which he uses; for, in both instances, the use was private profit. Moreover, the economic burden thrust upon the government was viewed as even more remote than in the administration of the first two taxes. 15


  1.  17 U.S. (4 Wheat.) 316, 426 (1819).
  2.  Thomson v. Union Pac. R.R., 76 U.S. (9 Wall.) 579, 588 (1870); Union Pacific R.R. v. Peniston, 85 U.S. (18 Wall.) 5, 31 (1873).
  3.  Susquehanna Power Co. v. Tax Comm’n (No. 1), 283 U.S. 291 (1931).
  4.  Moses Lake Homes v. Grant County, 365 U.S. 744 (1961).
  5.  Phillips Chemical Co. v. Dumas School Dist., 361 U.S. 376, 383, 387 (1960). In Offutt Housing Co. v. Sarpy County, 351 U.S. 253 (1956), a housing company was held liable for county personal property taxes on the ground that the government had consented to state taxation of the company's interest as lessee. Upon its completion of housing accommodations at an Air Force Base, the company had leased the houses and the furniture therein from the Federal Government.
  6.  Baltimore Shipbuilding Co. v. Baltimore, 195 U.S. 375 (1904).
  7.  Northern Pacific R.R. v. Myers, 172 U.S. 589 (1899); New Brunswick v. United States, 276 U.S. 547 (1928).
  8.  Irwin v. Wright, 258 U.S. 219 (1922).
  9.  117 U.S. 151 (1886).
  10.  Lee v. Osceola Imp. Dist., 268 U.S. 643 (1925).
  11.  United States v. Allegheny County, 322 U.S. 174 (1944).
  12.  United States v. City of Detroit, 355 U.S. 466 (1958). The Court more recently has stated that Allegheny County in large part was overruled by Detroit. United States v. New Mexico, 455 U.S. 720, 732 (1982).
  13.  United States v. City of Detroit, 355 U.S. 478, 482, 483 (1958). See also California Bd. of Equalization v. Sierra Summit, 490 U.S. 844 (1989).
  14.  United States v. Township of Muskegon, 355 U.S. 484 (1958).
  15.  City of Detroit v. Murray Corp., 355 U.S. 489 (1958). In United States v. County of Fresno, 429 U.S. 452 (1977), these cases were reaffirmed and applied to sustain a tax imposed on the possessory interests of United States Forest Service employees in housing located in national forests within the county and supplied to the employees by the Forest Service as part of their compensation. A state or local government may raise revenues on the basis of property owned by the United States as long as it is in possession or use by the private citizen that is being taxed.