persons and firms in addition to Olin Mathieson are engaged in
making sales at retail of tangible personal property in Illinois
to the United States which property is and will be required to
further the national defense and perform other governmental
functions; that the United States has instructed these vendors to
refuse to pay taxes on receipts from sales to it.
It is further alleged that under the provisions of existing
contracts, the United States is obligated to reimburse Olin
Mathieson and other vendors if they should be required to pay any
taxes under the Act. The parties have stipulated that in addition
to Olin Mathieson there are more than 1440 persons or firms in
the State of Illinois engaged in sales to agencies of the
Department of Defense, including the United States Air Force,
United States Army, United States Navy, and the Military
Petroleum Supply Agency; that the total amount of these contracts
is in excess of $623,655,000.
The United States contends that the inclusion of such a tax on
proceeds from sales to the Federal Government is in violation of
the Constitution of the United States because (1) it results in
discrimination against the United States and those with whom it
deals in that the Illinois Retailers' Occupation tax is not
imposed on proceeds from sales made "to the State of Illinois,
any county, political subdivision or municipality thereof, or to
any instrumentality or institution of any of the governmental
units aforesaid, * * *" (§ 441, Ch. 120, Smith-Hurd Ann. Stats.),
and (2) violates the immunity from state and local taxation to
which the United States is entitled. It is also stated that there
exists no plain, speedy and efficient remedy which plaintiffs may
pursue in the courts of Illinois.
Defendants, by motion to dismiss, assail the jurisdiction of
this court to entertain this controversy. The reasons therefor
are (1) the United States is not a proper party plaintiff for it
is not a taxpayer under the Illinois law; (2) § 1341, 28
U.S.C.A., proscribes the jurisdiction of this court to enjoin or
otherwise prevent the collection of taxes claimed to be due under
state law and said section applies to suits brought by the United
States as well as suits brought by others; (3) plaintiffs have a
plain, speedy and efficient remedy for contesting the liability
for such taxes in the state courts; and (4) the plaintiff, Olin
Mathieson, is within the inhibition of the Eleventh Amendment to
the Constitution of the United States and cannot bring suit
against the State of Illinois.
In the alternative, defendants urge dismissal of the claim on
its merits for the reason (1) the Illinois occupation tax applies
to all retailers of the class described in the complaint who are
engaged in the transactions alleged therein, and therefore these
taxes do not discriminate against the sovereignty of the United
States; and (2) it fails to state a claim upon which relief can
In United States v. Livingston, D.C.S.C. 1959, 179 F. Supp. 9,
affirmed per curiam, 364 U.S. 281, 80 S.Ct. 1611, 4 L.Ed.2d 1719,
rehearing denied 364 U.S. 855, 81 S.Ct. 35, 5 L.Ed.2d 79, the
court held that § 1341, 28 U.S.C.A., proscribing federal court
jurisdiction in suits to enjoin collection of taxes where a
plain, speedy and efficient remedy exists in the state courts is
not applicable to the United States. It is implicit in § 1341, as
it is in any action brought by the sovereign, that the interest
of the United States must be of the kind to support its presence
as a party litigant. United States v. San Jacinto Tin Co., 1887,
125 U.S. 273, 285, 8 S.Ct. 850, 31 L.Ed. 747; United States v.
Beebe, 1887, 127 U.S. 338, 8 S.Ct. 1083, 32 L.Ed. 121.
Where a taxpayer is singled out and treated differently from
all those similarly situated because he transacts business with
the United States, as is alleged here, such action discriminates
not only against him but also against the United States. Pacific
Co. v. Johnson, 1932, 285 U.S. 480, 493, 52 S.Ct. 424, 76 L.Ed.
893; United States v. Allegheny County, 1943, 322 U.S. 174, 64
S.Ct. 908, 88 L.Ed. 1209; United States v. City of Detroit, 1957,
355 U.S. 466, 473, 78 S.Ct.
474, 2 L.Ed.2d 424; Phillips Chemical Co. v. Dumas Independent
School Dist., 1960, 361 U.S. 376, 80 S.Ct. 474, 4 L.Ed.2d 384.
Furthermore, the United States is a proper party plaintiff
because it has a substantial pecuniary interest in the outcome of
this suit for it is obligated by contract to reimburse the
We conclude that the interest of the United States in this suit
is direct and substantial and that it is a proper party litigant.
We are further persuaded by the reasoning in the Livingston
case,*fn* supra, that § 1341 does not deprive this court of
jurisdiction. United States v. United Mine Workers of America,
1947, 330 U.S. 258, 67 S.Ct. 677, 91 L.Ed. 884; United States v.
Woodworth, 2 Cir., 1948, 170 F.2d 1019.
In order to resolve the contentions of the defendants in their
entirety, however, we proceed to determine the efficacy of the
argument that a plain, speedy and efficient remedy exists in the
courts of Illinois. Such determination bears also on the exercise
of judicial discretion which must guide us, as a federal court of
equity, in determining whether or not we should grant or withhold
a remedy which is within our equity power to give. Toomer et al.
v. Witsell et al., 1948, 334 U.S. 385, 68 S.Ct. 1156, 92 L.Ed.
1460; Great Lakes Dredge & Dock Co. v. Huffman, 1942,
319 U.S. 293, 301, 63 S.Ct. 1070, 87 L.Ed. 1407. The defendants rely on
Owens-Illinois Glass Co. v. McKibbin, 1943, 385 Ill. 245,
52 N.E.2d 177, to establish that Olin Mathieson has recourse to the
courts of Illinois to enjoin the tax collection without the
necessity of depositing the tax moneys due. In Goodyear Tire &
Rubber Co. v. Tierney, 1952, 411 Ill. 421, 427, 104 N.E.2d 222,
the Illinois Supreme Court ruled that application for injunction
is available only to a taxpayer when the tax is unauthorized by
law, i.e., imposed when not provided for, or is levied on
property which is exempt. Owens-Illinois Glass Co. v. McKibbin,
supra, 385 Ill. at page 256, 52 N.E.2d at page 182; Acme Printing
Ink Co. v. Nudelman, 1939, 371 Ill. 217, 20 N.E.2d 277. In the
instant case it is conceded by plaintiffs that Olin Mathieson is
a retailer subject to the occupation tax of Illinois. Therefore,
it may not invoke the remedy of injunctive relief in the courts
A remedy by way of protest, hearing and court review are
provided for by the Illinois Retailers' Occupation Tax Act and
may be pursued without prior payment of any part of the
assessment. If a taxpayer fails to pay such tax at the time he
files his return, he incurs a penalty of 10 per cent on the
amount of the tax due. §§ 442, 444, Ch. 120. In addition, § 444a
provides that the Department shall have a lien on all present and
subsequently acquired real and personal property of the taxpayer
for any unpaid tax and penalty, which lien becomes effective upon
the termination of any review proceedings. A taxpayer may file
suit under the Administrative Review Act, S.H.A. ch. 110, § 264
et seq., without payment or deposit of the moneys due, but is
required to file a bond in the amount of the unpaid tax and
penalty or, in lieu of such bond, an order will be entered
imposing a lien upon the taxpayer's present and subsequently
acquired real and personal property. § 451,
Ch. 120. The Act does not provide that the taxpayer may recover
the cost of such bond. A failure to provide interest on a tax
refund has been considered by the courts as evidence that a
taxpayer does not have a plain, speedy and efficient remedy.
United States v. Livingston, supra; cf. Southern Ry. Co. v.
Query, D.C.S.C., 1927, 21 F.2d 333, 342. It is the court's view
that failure to provide for cost of the required bond is
analogous to a failure to provide for recovery of interest on a
It is urged that plaintiffs have available the remedy of
declaratory judgment. The availability of that remedy in tax
cases is uncertain. In Goodyear Tire & Rubber Co. v. Tierney,
supra, 411 Ill. at page 430, 104 N.E.2d at page 226, the Supreme
Court of Illinois observed that courts should proceed cautiously
in tax cases in order to avoid interference with collection of
revenues and "the cases are often such that the courts ought to
deny declaratory relief". It also stated:
"While there is a sharp division of authority on
the question of whether the existence of another
adequate remedy precludes proceedings under the
Declaratory Judgments Act in tax matters, we believe
that those decisions which hold that the existence of
another adequate remedy is a bar to declaratory
action are supported by better reason and sounder
We are of the opinion that the remedies available in the courts
of Illinois to the plaintiff, Olin Mathieson, are not plain,
speedy and efficient. The circumstances of this case, as above
stated, completely negate a possibility that there exists an
adequate remedy at law such as would, under the decision in
Toomer et al. v. Witsell et al., supra, preclude relief upon the
instant application to this Court.
We are also of the opinion that the Eleventh Amendment to the
Constitution of the United States is not applicable in this case.
A suit to restrain unconstitutional action threatened by an
individual who is a state officer, as is the defendant Director
of Revenue, is not an action against the State. Georgia R. &
Banking Co. v. Redwine, 1951, 342 U.S. 299, 304, 72 S.Ct. 321, 96
L.Ed. 335. It is immaterial that the Department of Revenue is
also a defendant. Its joinder must be considered in the light of
the issues involved and the relief sought. Moline Tool Co. v.
Department of Revenue, 1951, 410 Ill. 35, 37, 101 N.E.2d 71; Ex
parte Young, 1907, 209 U.S. 123, 155, 28 S.Ct. 441, 52 L.Ed. 714.
The action sought to be restrained as being in violation of the
Federal Constitution is the collection of the occupation tax; a
duty dischargeable only by the officer empowered to execute and
discharge the functions of the Department of Revenue. No other
activity of the state is involved. Therefore, we hold that the
Department of Revenue is a nominal party and that this suit is
within the rule applied to a state officer seeking to enforce an
alleged unconstitutional act.
For the above and foregoing reasons, the motion of defendants
to dismiss the aforesaid complaint for lack of jurisdiction is
We next proceed to a consideration of defendants' motion to
dismiss the cause on its merits.
The Attorney General of the State of Illinois leans heavily on
State of Alabama v. King & Boozer, 1941, 314 U.S. 1, 62 S.Ct. 43,
86 L.Ed. 3, as being directly in point. Plaintiffs dispute its
applicability on the authority of Kern-Limerick, Inc. v.
Scurlock, 1953, 347 U.S. 110, 119, 74 S.Ct. 403, 98 L.Ed. 546,
which expressly stated that the King & Boozer case left open the
issue of the immunity of the United States as a purchaser.
Neither of these cases is controlling or decisive of the
question presented in this case. The Alabama statute in King &
Boozer and the Arkansas statute in Kern-Limerick required that
the seller of the property collect the tax from the purchaser. In
each of these cases, the court was called upon to decide whether,
under the facts of the case, the United States was the purchaser
upon whom fell the legal incidence of the tax. In King
& Boozer it was held that the United States was not the purchaser
and therefore the Alabama tax was not invalid as impinging upon
the immunity of the sovereign to be free from taxation. In
Kern-Limerick it was held that the United States was the
purchaser and the legal impact of the Arkansas statute therefore
fell upon a sovereign who is immune from taxation by the state.
Under the Illinois statute, with which we are concerned, it
must be conceded that by virtue of the statutory language the
legal incidence of the tax falls upon Olin Mathieson, a retailer
engaged in the occupation of selling tangible personal property.
No statutory provision compels him to collect the tax from the
purchaser who, in this instance, is the United States. In the
light of the decisions of the Supreme Court of the United States
since Panhandle Oil Co. v. State of Mississippi ex rel. Knox,
1927, 277 U.S. 218, 48 S.Ct. 451, 72 L.Ed. 857, we do not hold
that Olin Mathieson is an agent or instrumentality of the Federal
Government so as to result in an imposition of this tax upon the
sovereign. The mere fact that a private corporation conducts its
business under a contract with the United States does not make it
an instrumentality of the latter. United States v. City of
Detroit, supra, 355 U.S. at pages 471-473, 78 S.Ct. at pages 477,
478; Curry v. United States, 1941, 314 U.S. 14, 62 S.Ct. 48, 86
L.Ed. 9. Therefore, we are not concerned here with the principle
of sovereign immunity from local taxation and such doctrine does
not per se prohibit the assessment of the instant tax.
In considering the validity of a state tax "we are concerned
only with its practical operation, not its definition or the
precise form of descriptive words which may be applied to it".
Lawrence v. State Tax Comm., 1932, 286 U.S. 276, 280, 52 S.Ct.
556, 557, 76 L.Ed. 1102. The particular name which a state
legislature may give to a money payment commanded by statute is
not controlling when its constitutionality is in question.
Carpenter v. Shaw, 1929, 280 U.S. 363, 367-368, 50 S.Ct. 121, 74
L.Ed. 478; United States v. City of Detroit, supra. The Illinois
Act, by its terms, imposes the tax "upon persons engaged in the
business of selling tangible personal property at retail" which
falls on all who come within that classification — that is, those
who sell at retail to the State of Illinois and its subdivisions
and those who sell to the Federal Government as well as those who
sell to private citizens and corporations.
Certain basic principles must be recognized in our approach to
the problem before us. There is a strong presumption in favor of
the validity of a legislative classification if any state of
facts can reasonably be conceived to sustain it and it is
presumed that such state of facts exist. Statutes which tax one
class while exempting another class necessarily impose a greater
burden upon the person taxed than would be the case if the
exempted class would be included. Such statutes do not create an
inequality in the constitutional sense if all in the same class
are included and treated alike. Hart Refineries v. Harmon, 1928,
278 U.S. 499, 502, 49 S.Ct. 188, 73 L.Ed. 475. The legislature
has the power to grant an exemption according to its views of
public policy subject only to the limitation that the exemption
and the classification upon which it is based be reasonable and
not arbitrary. Consequently, we do not question the power of the
Illinois legislature to grant an exemption to a retailer who
deals with it and its political subdivisions. Indeed, such action
has the beneficent objective of reducing costs of governmental
administration to the benefit of its citizens.
In our view, however, a retailer who deals with the Federal
Government falls within the same class as a retailer who deals
with the State of Illinois. If an exemption is made from the
general classification of retailers who sell tangible personal
property on the legally justifiable basis of dealing with the
State of Illinois, it is because such retailer deals with a
governmental entity. By exempting a retailer who deals with the
of Illinois and its political subdivisions, the legislature has
subdivided retailers who transact business with governmental
entities into two divisions — those who deal with the State of
Illinois and its subdivisions and those who deal with the United
States. To be valid, such an exemption must fall alike on all
similarly situated and must include retailers who deal with the
A reasonable consideration of difference or policy between
these retailers must exist otherwise the classification is either
capricious or arbitrary. Phillips Chemical Co. v. Dumas
Independent School Dist., supra, 361 U.S. at page 383, 80 S.Ct.
at page 479. No enlightenment has been offered as a basis for the
differentiation. It is difficult for us to perceive a reasonable
distinction which grants one freedom from contributing to the
cost of government and imposes the burden upon the other.
Further, the imposition of the tax upon one and not the other
permits the State to deal with retailers at a lower cost and
imposes an increased cost upon the Federal Government dealing
with the same class of persons. Assuming that the statutory
exemption may have the laudable public purpose of reducing
governmental costs, it is equally applicable to the Federal
Government thus benefiting all citizens of the United States,
including the citizens of the State of Illinois.
Not only is the Federal Government discriminated against as a
governmental unit in contrast to the exemption granted
"the State of Illinois, any county, political
subdivision or municipality thereof, or to any
instrumentality or institution of any of the
governmental units aforesaid"
but it is further discriminated against in contrast with many
non-governmental entities, specifically
"any corporation, society, association, foundation,
or institution organized and operated exclusively for
charitable, religious or educational purposes."
The United States Supreme Court in Phillips Chemical Co. v.
Dumas Independent School District, supra, condemns such
discrimination. It stated:
"a State may not single out those who deal with the
Government, in one capacity or another, for a tax
burden not imposed on others similarly situated. (p.
383 [80 S.Ct. at page 479]). * * * it does not seem
too much to require that the State treat those who
deal with the Government as well as it treats those
with whom it deals itself. (p. 385 [80 S.Ct. at page
480]). The differences between the two classes, at
least when the Government's interests are weighed in
the balance, seem too impalpable to warrant such a
gross differentiation * * * a state tax may not
discriminate against the Government or those with
whom it deals." 361 U.S. at page 387, 80 S.Ct. at
For the above and foregoing reasons, we conclude that § 441,
Chapter 120, Smith-Hurd Ann.Stats., as applied here, results in
the imposition of a tax which discriminates against the Federal
Government and those with whom it deals and is, therefore,