James v. Dravo Contracting Co.

1937-12-06

Headline: West Virginia may tax a private contractor’s gross receipts from U.S. construction contracts for locks and dams; Court reverses injunction and allows the State to collect the two-percent tax for in-state work.

Holding: The Court held that West Virginia’s two-percent tax on a contractor’s gross receipts from work performed within the State is valid and does not unconstitutionally burden federal operations, and it reversed the injunction.

Real World Impact:

Allows states to tax private contractors’ in‑state work on federal projects.
Requires contractors to apportion receipts for out‑of‑state fabrication.
May increase federal project costs unless Congress intervenes

Topics: state taxation, government contracts, construction of locks and dams, federal‑state powers

Summary

Background

A Pennsylvania construction company entered four contracts with the United States in 1932–1933 to build locks and dams on the Kanawha and Ohio Rivers. West Virginia assessed a gross‑receipts tax on the amounts the company received under those contracts and the contractor sued in federal court, which enjoined the tax. The State appealed and the case reached the Supreme Court.

Reasoning

The Court addressed two main questions: whether West Virginia had territorial power to tax these activities, and whether the tax unlawfully burdened federal operations. The Court held that work fabricated and done in Pennsylvania was not taxable by West Virginia and required apportionment. Work performed at sites inside West Virginia could be taxed because the State retained jurisdiction over river beds and had ceded only concurrent jurisdiction over some purchased bank lands. The Court also found the tax was not on the United States, its property, or its officers; the contractor was an independent private firm; and the two-percent, nondiscriminatory gross‑receipts tax did not substantially interfere with federal functions. Relying on prior decisions about taxing contractors and property used in federal work, the Court reversed the injunction and allowed the State tax as applied to in‑state activities.

Real world impact

States can collect nondiscriminatory gross‑receipts taxes from private contractors for work actually performed inside state borders on federal projects. Contractors must apportion receipts for out‑of‑state fabrication and installation. The ruling accepts that such taxes may raise government procurement costs but leaves relief to Congress.

Dissents or concurrances

A strong dissent argued the decision undermines long‑standing precedent protecting federal operations from state taxation, saying a tax measured by payments from the United States directly burdens federal functions and should be invalid.