Do CPAs who work for the federal government still have to pay the Texas $200 accountant licensing fee increase?

Plain-English summary

Texas raised the licensing fee for certified public accountants by $200, and a state senator wanted to know whether CPAs who work only for the federal government had to pay it too. The worry was an old constitutional idea: that a state cannot tax the federal government or its employees, because that would let the state interfere with the work of the United States.

The Attorney General explained that this idea, called intergovernmental tax immunity, used to be read very broadly, going back to the famous 1819 case of McCulloch v. Maryland, under which almost any state tax that touched the federal government, its contractors, or its employees was suspect. But the Supreme Court spent the second half of the twentieth century shrinking the doctrine. The modern rule is simple: a state can tax people who deal with the federal government as long as it taxes everyone else in the same situation the same way. The tax just cannot single out federal workers.

Measured against that rule, the $200 CPA fee was fine. It is charged to the accountants personally, not to the federal government, and it applies to every CPA licensed in Texas, federal employee or not. The Attorney General did flag one loose end. There were conflicting reports about whether accountants who work for state agencies actually pay the fee or get reimbursed, and if the state were quietly exempting its own people while charging federal employees, that could be a problem. But sorting out what is actually happening is a factual question the opinion process does not answer, so the opinion went no further than holding the fee constitutional on its face.

Currency note

This opinion was issued in 1993. Subsequent statutory amendments, court decisions, or later AG opinions may have changed the analysis. Treat this page as historical context, not current legal advice. Verify current law before relying on any specific rule, deadline, or remedy mentioned here. The Public Accountancy Act has since been recodified into the Occupations Code, and intergovernmental tax immunity doctrine continues to evolve; confirm current law before relying on anything described here.

Background and statutory framework

House Bill 11 of the First Called Session of the 72d Legislature (Acts 1991, 72d Leg., 1st C.S., ch. 5, § 10.06) amended the Public Accountancy Act of 1991, adding section 9A, which imposes an additional biennial fee of $200 on licensees. The question was whether the fee could validly be levied on CPAs who work exclusively for the federal government.

The Attorney General framed the answer through intergovernmental tax immunity doctrine. The broad, older version, traced to McCulloch v. Maryland, once forbade taxes that might increase the cost of doing business for the federal government, including taxes on those who contracted with or worked for it (Dobbins v. Commissioners of Erie County; Panhandle Oil Co. v. Mississippi ex rel. Knox). The modern trend, beginning with James v. Dravo Contracting Co. and Graves v. New York ex rel. O'Keefe (which expressly overruled Dobbins), and running through the 1958 Detroit cases (City of Detroit v. Murray Corp.; United States v. City of Detroit; United States v. Township of Muskegon), United States v. County of Fresno, United States v. New Mexico, and South Carolina v. Baker, narrowed the doctrine substantially.

The most succinct modern statement, from Fresno, is that the economic burden on a federal function of a state tax imposed on those who deal with the federal government does not render the tax unconstitutional so long as the tax is imposed equally on the other similarly situated constituents of the state. That yields two questions: whether the legal (not economic) incidence of the levy falls on the United States, and whether the tax discriminates against federal employees. The Attorney General concluded the legal incidence of the fee falls on the accountants, not their employers, and the fee is of general application to all Texas-licensed CPAs, so it does not discriminate. The opinion distinguished Davis v. Michigan Department of the Treasury, where Michigan exempted its own retirees' benefits while taxing federal retirees' benefits, violating the Public Salary Tax Act of 1939 (4 U.S.C. § 111) and the anti-discrimination principle of tax immunity doctrine. Because the senator raised conflicting accounts of whether state-agency CPAs actually pay or are reimbursed, the AG noted an as-applied question might exist, but declined to make the factual determinations that question would require, concluding only that the fee is not facially unconstitutional.

Citations

• 4 U.S.C. § 111 (Public Salary Tax Act of 1939)
• McCulloch v. Maryland, 4 Wheat. 316 (1819) (origin of intergovernmental tax immunity; Supremacy Clause)
• United States v. County of Fresno, 429 U.S. 452 (1977) (modern test: state tax on those who deal with the federal government is valid if imposed equally on similarly situated state constituents)
• Dobbins v. Commissioners of Erie County, 16 Pet. 435, 10 L. Ed. 1022 (1842) (state tax on federal employee's income unconstitutional; later overruled)
• Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928)
• James v. Dravo Contracting Co., 302 U.S. 134 (1937) (state gross-receipts tax on federal contractor upheld)
• Graves v. New York ex rel. O'Keefe, 306 U.S. 466 (1939) (overruling Dobbins)
• City of Detroit v. Murray Corp., 355 U.S. 489 (1958)
• United States v. City of Detroit, 355 U.S. 466 (1958)
• United States v. Township of Muskegon, 355 U.S. 484 (1958)
• United States v. New Mexico, 455 U.S. 720 (1982)
• South Carolina v. Baker, 485 U.S. 505 (1988)
• Davis v. Michigan Department of the Treasury, 489 U.S. 803 (1989) (state cannot exempt its own retirees while taxing federal retirees)

Common questions

Do federally employed CPAs have to pay the $200 Texas fee?
The Attorney General concluded the fee is not facially unconstitutional as applied to them. The fee falls on the accountants themselves and applies to all Texas-licensed CPAs, so neither the Public Salary Tax Act nor intergovernmental tax immunity doctrine required exempting federal employees.

Why doesn't the old rule against taxing federal employees apply?
Because the Supreme Court narrowed that rule over the twentieth century. The modern doctrine, as the opinion explained, permits a state tax on those who deal with the federal government so long as it is imposed equally on similarly situated state constituents.

What would have made the fee unconstitutional?
Discrimination against federal employees. The opinion pointed to Davis v. Michigan, where a state exempted its own retirees' benefits but taxed federal retirees'. A blanket exemption for state employees only would likely be impermissible discrimination.

Did the Attorney General decide how the fee is actually applied to state CPAs?
No. There were conflicting accounts of whether state-agency accountants pay the fee or are reimbursed. The opinion said that as-applied question turns on factual determinations the opinion process does not make, so it concluded only that the fee is facially constitutional.

Source

• Landing page: https://www.texasattorneygeneral.gov/opinions/dan-morales/dm-0237
• Original PDF: https://www.texasattorneygeneral.gov/sites/default/files/opinion-files/opinion/1993/dm0237.pdf

Original opinion text

Best-effort transcription from a scanned PDF. Minor errors may remain — the linked PDF is authoritative.

Office of the Attorney General
State of Texas

DAN MORALES
ATTORNEY GENERAL

July 21, 1993

Honorable Gonzalo Barrientos
Chairman
Committee on Nominations
Texas State Senate
P.O. Box 12068
Austin, Texas 78711

Opinion No. DM-237

Re: Validity of a state licensing fee assessed on certified public accountants who are employed by the federal government (RQ-485)

Dear Senator Barrientos:

You have asked this office to consider whether certified public accountants employed by the federal government may validly be subjected to the $200 fee increase mandated by House Bill 11 of the First Called Session of the 72d Legislature.

Article 10, section 10.06 of House Bill 11 amends the Public Accountancy Act of 1991. It adds section 9A to read as follows:

(b) In addition to the fee imposed under Subsection (a) of this section, an additional biennial fee of $200 is imposed. . . . A licensee who does not pay the additional biennial fee and all late fees before the first anniversary of the due date of the additional biennial fee may only receive a renewal license by submitting an application, all accrued fees, and the direct administrative costs incurred by the board in issuing the renewal license. The board shall by rule provide the information that must be contained in the application. The board shall have no authority to waive the collection of any fee or penalty.

Acts 1991, 72d Leg., 1st C.S., ch. 5, § 10.06, at 180 (emphasis added).

You ask whether this fee may properly be levied upon certified public accountants who work exclusively for the federal government. You note that differing views have been expressed on this question. It has been suggested, on the one hand, that certified public accountants who provide services solely to the federal government are exempt from this fee. On the other hand, it has been argued that the additional $200 licensing fee imposed by § 9A(b) of the Public Accountancy Act of 1991 is not unconstitutional by virtue of its applicability to federal employees. After consideration of the relevant case law and statutory provisions, we agree with the latter conclusion.

The argument that a state cannot impose a licensing fee on an employee of the federal government rests upon an antiquated understanding of the doctrine of intergovernmental tax immunity, a doctrine whose origins are to be found in McCulloch v. Maryland, 4 Wheat. 316 (1819). In McCulloch, Chief Justice Marshall overturned a tax levied directly by the State of Maryland on the Bank of the United States. The basis for the decision was the Supremacy Clause of the United States Constitution. As Justice White summarized the McCulloch argument in United States v. County of Fresno, 429 U.S. 452 (1977):

An Act of Congress had created the bank in order to carry out functions of the National Government enumerated in the United States Constitution. The Court noted that the power to tax the bank "by the States may be exercised so as to destroy it," 4 Wheat, at 427, 4 L. Ed. 579, and reasoned that the power to tax, if admitted, could be exercised so as effectively to repeal the Act of Congress which created the Bank.

Fresno, 429 U.S. at 458.

McCulloch establishes clearly the proposition that states may not impose a tax directly on the federal government, and more generally may not impose "taxes the legal incidence of which falls on the Federal government." Id. at 459. McCulloch was at one time more broadly read to forbid taxation on those who contracted with the federal government, its agents or instrumentalities, if such taxation might increase the cost of doing business for the federal government. See, e.g., Dobbins v. Commissioners of Erie County, 16 Pet. 435, 10 L. Ed. 1022 (1842) (state tax on income of federal employee unconstitutional); Panhandle Oil Co. v. Mississippi ex rel. Knox, 277 U.S. 218 (1928) (sales tax imposed on one who sold to federal government unconstitutional). Under such an expansive reading of McCulloch, it might well be the case that an occupation tax of the sort imposed by the 1991 amendment to the Public Accountancy Act would be unconstitutional as applied to a federal employee.

However, the modern trend in intergovernmental tax immunity law, which began with the Stone Court and has continued to the present day, is to find far fewer kinds of transactions immune on constitutional grounds from taxation. In James v. Dravo Contracting Co., 302 U.S. 134 (1937), a Pennsylvania corporation which had a federal contract for locks and dams on the Kanawha and Ohio rivers brought suit to enjoin collection of a West Virginia state gross receipts tax on the contract. The court, by a five-to-four vote, rejected the corporation's argument:

We hold that the West Virginia tax so far as it is laid upon the gross receipts of respondent derived from its activities within the borders of the state does not interfere in any substantial way with the performance of federal functions, and is a valid exaction.

James, 302 U.S. at 161.

Justice Roberts, in dissent, averred that the decision "overrule[d], sub silentio, a century of precedents." 302 U.S. at 161. This claim has proven to be accurate. In 1939, in Graves v. New York ex rel. O'Keefe, 306 U.S. 466, the court explicitly overruled Dobbins and its progeny. It rejected the view "that a tax on income is legally or economically a tax on its source," 306 U.S. at 480, and noted that

the only possible basis for implying a constitutional immunity from state income tax of the salary of an employee of the national government or of a governmental agency is that the economic burden of the tax is in some way passed on so as to impose a burden on the national government tantamount to an interference by one government with the other in the performance of its functions.

Graves, 306 U.S. at 481.

So much of the burden of a non-discriminatory general tax upon the incomes of employees of a government, state or national, as may be passed on economically to that government, through the effect of the tax on the price level of labor or materials, is but the normal incident of the organization within the same territory of two governments, each possessing the taxing power. The burden, so far as it can be said to exist or to affect the government in any indirect or incidental way, is one which the Constitution presupposes, and hence it cannot rightly be deemed to be within an implied restriction upon the taxing power of the national and state governments which the Constitution has expressly granted to one and has confirmed to the other. The immunity is not one to be implied from the Constitution, because if allowed it would impose to an inadmissible extent a restriction on the taxing power which the Constitution has reserved to the state governments.

Id. at 487.

The result of such cases as James and Graves, as well as such later decisions as, e.g., City of Detroit v. Murray Corp., 355 U.S. 489 (1958); United States v. City of Detroit, 355 U.S. 466 (1958); United States v. Township of Muskegon, 355 U.S. 484 (1958); United States v. County of Fresno, 429 U.S. 452 (1977); United States v. New Mexico, 455 U.S. 720 (1982); and South Carolina v. Baker, 485 U.S. 505 (1988) is both to simplify and to narrow the doctrine of intergovernmental tax immunity.

The most succinct statement of modern tax immunity doctrine with respect to federal employees or contractors is provided by the court in Fresno:

The rule to be derived from the Court's more recent decisions, then, is that the economic burden on a federal function of a state tax imposed on those who deal with the Federal Government does not render the tax unconstitutional so long as the tax is imposed equally on the other similarly situated constituents of the State.

429 U.S. at 463-64.

Under Fresno's analysis, two questions must be asked about a state tax that is levied on a federal employee. First, does the legal, as distinct from the economic, impact of the levy fall upon the United States? Second, does the tax discriminate between federal and state employees to the detriment of the federal employees?

The legal impact of the additional fees levied by House Bill 11 falls upon certified public accountants, and not upon their employers. The fee is levied directly on the accountants. Accordingly, the sole remaining question is whether this fee impermissibly discriminates against federal employees.

We should also note that a blanket exemption solely of state employees from the tax would, in all probability, be such an impermissible discrimination. In Davis v. Michigan Department of the Treasury, 489 U.S. 803 (1989), the United States Supreme Court held that the State of Michigan could not exempt from taxation the retirement benefits of state employees, when the benefits of federal employees were subject to the tax. The decision was based on the Public Salary Tax Act of 1939, 4 U.S.C. § 111, which the court viewed as "codify[ing] the result in Graves and foreclos[ing] the possibility that subsequent judicial reconsideration of that case might reestablish the broader interpretation of the immunity doctrine." Davis, 489 U.S. at 812. The court read the act as "coextensive with the prohibition against discriminatory taxes embodied in the modern constitutional doctrine of intergovernmental tax immunity." Id. at 813.

In Davis, the court found that the state's exemption of its retired employees from a general tax imposed, inter alia, on retired federal employees, violated the anti-discrimination principle of the Public Salary Tax Act of 1939 and of intergovernmental tax immunity doctrine. However, the Public Accountancy Act does not discriminate in this fashion.

By its terms, the additional fee assessed by article 10, section 10.06 of House Bill 11 is of general application. The fee is assessed on all certified public accountants licensed to practice in Texas. The legislation is, therefore, plainly constitutional on its face.

You express some concern, however, as to whether the statute is being constitutionally applied. It is your understanding that "CPA's working for state agencies are not required to pay this fee to the Board of Public Accountancy. It is simply 'understood' that their fees have been paid by their respective agencies although no money actually exchanges hands." On the other hand, it has been suggested to us that accountants employed by state agencies first pay the fees, and are then upon application reimbursed by their employers.

While the question of how the statute is being applied may be of constitutional moment in this regard, this office does not ordinarily make factual determinations of the sort that would be necessary here in the opinions process. Accordingly, we cannot speak to this particular question. We therefore conclude only that the $200 fee required of accountants by the Public Accountancy Act of 1991 is not facially unconstitutional.

Accordingly, since the legal incidence of the $200 fee increase in certified public accountants' fees falls on the accountants, and since federal and state accountants are similarly treated with respect to the fee, we find that neither the Public Salary Tax Act nor the doctrine of intergovernmental tax immunity require federally-employed accountants to be exempted from paying the fee.

SUMMARY

The $200 fee increase mandated by the Public Accountancy Act of 1991 is not facially unconstitutional.

DAN MORALES
Attorney General of Texas

WILL PRYOR
First Assistant Attorney General

MARY KELLER
Deputy Attorney General for Litigation

RENEA HICKS
State Solicitor

MADELEINE B. JOHNSON
Chair, Opinion Committee

Prepared by James Tourtelott
Assistant Attorney General