B-220977, JAN 15, 1986

B-220977, JAN 15, 1986

DIGEST: CONSTITUENT INQUIRY CONCERNING ARIZONA STATE TRANSACTION PRIVILEGE TAX AS APPLIED TO SALES OF AIR CONDITIONING EQUIPMENT TO U.S. ARMY. REFERRED BY REPRESENTATIVE ELDON RUDD. GAO DOES NOT KNOW WHETHER QUESTIONED TRANSACTION IS SUBJECT TO TAX OR NOT, BUT CONFUSION MAY STEM FROM LANGUAGE IN INVITATION FOR BIDS REQUIRING ALL APPLICABLE TAXES TO BE STATED IN CONTRACT PRICE. ALSO, STATE LAW MAY HAVE CREATED A SITUATION WHEREIN SOME OF CONSTITUENT'S COMPETITORS ARE EXEMPT FROM TAX WHEN DOING BUSINESS WITH GOVERNMENT. IN NEITHER CASE IS FEDERAL GOVERNMENT IMPOSING ILLEGAL OR UNFAIR BURDENS ON BIDDERS/CONTRACTORS, AS STATE TAX IMMUNITY IS CONSTITUTIONAL IN ORIGIN. TAX EXEMPTION CERTIFICATE PROVIDED TO CONSTITUENT IS VALID AND DOES NOT REQUIRE OMB CONTROL NUMBER, AS IT IS NOT CONTROLLED BY PAPERWORK REDUCTION ACT OF 1980.

THE HONORABLE ELDON RUDD:

HOUSE OF REPRESENTATIVES

THIS LETTER RESPONDS TO YOUR CONSTITUENT'S INQUIRY ON ARIZONA STATE TAXES WHICH YOU FORWARDED TO OUR OFFICE ON OCTOBER 18, 1985. YOUR CONSTITUENT IS VICE PRESIDENT OF ARIZONA REFRIGERATION SUPPLIES (ARS) WHICH HAS A CONTRACT WITH THE U.S. ARMY PROVING GROUNDS IN YUMA. ARS HAS BEEN PROVIDED WITH A U.S. TAX EXEMPTION CERTIFICATE (SF 1094) AND QUESTIONS ITS VALIDITY BECAUSE (1) IT LACKS AN OMB CONTROL NUMBER AND (2) THE ARIZONA DEPARTMENT OF REVENUE INFORMED ARS THAT ITS BUSINESS WITH THE GOVERNMENT IS SUBJECT TO STATE TAX. YOUR CONSTITUENT ALSO QUESTIONS THE FAIRNESS OF THE UNITED STATES' POLICY WITH RESPECT TO STATE TAXES.

IT HAS LONG BEEN HELD THAT THE DOCTRINE OF SOVEREIGN IMMUNITY AND THE SUPREMACY CLAUSE OF THE CONSTITUTION (ART. VI, CL. 2) COMBINED TO PROHIBIT THE STATES FROM TAXING THE FEDERAL GOVERNMENT OR ITS ACTIVITIES. MCCULLOCH V. MARYLAND, 17 U.S. (4 WHEAT.) 316 (1819). HOWEVER, THIS "DOES NOT FORBID A TAX WHOSE LEGAL INCIDENCE IS UPON A CONTRACTOR DOING BUSINESS WITH THE UNITED STATES, EVEN THOUGH THE ECONOMIC BURDEN OF THE TAX, BY CONTRACT OR OTHERWISE, IS ULTIMATELY BORNE BY THE UNITED STATES. (CITATIONS OMITTED.)" UNITED STATES V. BOYD, 378 U.S. 39, 44 (1964).

THE COMPTROLLER GENERAL HAS ALSO HELD THAT IF THE LEGAL INCIDENCE OF THE TAX IS ON THE VENDOR, THE GOVERNMENT MAY REIMBURSE THE VENDOR FOR THE TAX AS A COST OF DOING BUSINESS EVEN IF IT IS SEPARATELY LISTED AND CALLED A TAX ON AN INVOICE. 32 COMP.GEN. 577 (1953); B-144504, JUNE 30, 1970. HOWEVER, IT IS ALSO COMMON FOR INVITATION FOR BIDS ON GOVERNMENT CONTRACTS TO CONTAIN A STANDARD CLAUSE TO THE EFFECT THAT THE PRICE INCLUDES ALL APPLICABLE TAXES.

THE AUTHORITY FOR THE GOVERNMENT TO REIMBURSE A VALID VENDOR TAX AND THE REQUIREMENT THAT A BIDDER COVER APPLICABLE TAXES IN A FIXED PRICE BID ARE IN NO WAY CONTRADICTORY. IN FACT, THE PURPOSE OF THE "PRICE INCLUDES ALL APPLICABLE TAXES" TERM IS NOT TO ESCAPE LIABILITY FOR TAXES, BUT TO SHIFT TO THE LOCAL MERCHANT THE RESPONSIBILITY OF DETERMINING WHAT TAXES APPLY TO THE TRANSACTION. J&W WELDING AND FABRICATION, B-209430, JAN. 25, 1983, 83-1 CPD, PARA. 92. THIS IS ENTIRELY REASONABLE, AS THE SELLER IS IN A MUCH BETTER POSITION THAN THE FEDERAL GOVERNMENT TO KNOW THE LOCAL LAW APPLICABLE TO ITS LINE OF BUSINESS.

WE HAVE NO OPINION ON WHETHER THE CURRENT ARIZONA TRANSACTION PRIVILEGE TAX IS, AS YOUR CONSTITUENT STATES, A VALID VENDOR TAX. BUT SEE, 27 COMP.GEN. 767 (1948). HOWEVER, THE STRUCTURE OF THE ARIZONA LAW ITSELF MAY HAVE CAUSED A PROBLEM FOR YOUR CONSTITUENT. DEFINING A RETAIL SALE AS ANY TRANSFER OF GOODS NOT DESTINED FOR RESALE (ARIZ. REV. STAT. ANN. SEC. 42- 1301(20) (1980)), THE LAW IMPOSES A 2 PERCENT TAX ON RETAILERS' GROSS PROCEEDS FROM SALES (ID. SEC. 42-1312). CERTAIN TRANSACTIONS ARE EXEMPTED, INCLUDING SALES MADE DIRECTLY "TO THE UNITED STATES BY A MANUFACTURER, MODIFIER, ASSEMBLER OR REPAIRER" (ID. SEC. 42-1321(B)). THOSE TERMS ARE ALSO DEFINED IN THE STATUTE AND MAY INCLUDE ARS AND/OR SOME OF ITS COMPETITORS. IF ARS IS A MANUFACTURER, ETC., THEN IT OWES NO TAX. IF ARS IS NOT IN AN EXEMPTED CATEGORY UNDER THE STATUTE AND ITS COMPETITORS ARE, THEN THE RESULTING DISADVANTAGE IS IMPOSED ON ARS BY THE STATE OF ARIZONA, NOT THE FEDERAL GOVERNMENT.

YOUR CONSTITUENT ALSO QUESTIONED THE USE OF A TAX EXEMPTION CERTIFICATE. SUCH CERTIFICATES ARE OFTEN USED TO PROVE THE INAPPLICABILITY OF SALES TAX WHEN MAKING DIRECT PURCHASES ON THE OPEN MARKET. WE DO NOT KNOW WHETHER ARIZONA WOULD ACCEPT THE CERTIFICATE TO EXCUSE ARS FROM TAX ON ITS SALE TO THE ARMY. AS EXPLAINED ABOVE, THE LIABILITY FOR TAX DEPENDS ON OTHER FACTORS. HOWEVER, INSOFAR AS IT EVIDENCES A SALE TO THE FEDERAL GOVERNMENT, THE CERTIFICATE AT LEAST SERVES TO DOCUMENT ARS' ENTITLEMENT TO A REDUCTION IN TAX FROM 2 TO 1 PERCENT OF THE GROSS SALE (ARIZ. REV. STAT. ANN. SEC. 42-1321(C) (1980)).

UNDER THE PAPERWORK REDUCTION ACT OF 1980, FORMS REQUESTING INFORMATION TO BE PROVIDED BY MEMBERS OF THE PUBLIC MUST BE APPROVED BY OMB AND SHOW AN OMB CONTROL NUMBER. 44 U.S.C. SEC. 3504 ET SEQ. THE TAX EXEMPTION CERTIFICATE (SF 1094) DOES NOT REQUEST INFORMATION FROM THE PUBLIC, AND THEREFORE REQUIRES NO OMB CLEARANCE.

WE TRUST THIS ANSWERS YOUR CONSTITUENT'S QUESTIONS. AS YOU REQUESTED, WE ARE RETURNING THE ORIGINAL CORRESPONDENCE WITH THIS REPLY. UNLESS YOU REQUEST DIFFERENT TREATMENT, THIS LETTER WILL BECOME PUBLIC INFORMATION 30 DAYS AFTER ISSUANCE.