A-70315, JANUARY 28, 1936, 15 COMP. GEN. 674

A-70315: Jan 28, 1936

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INVOLVING SUPPLIES AND MATERIALS TO WHICH PROCESSING TAXES UNDER THE AGRICULTURAL ADJUSTMENT ACT WERE APPLICABLE. ARE AUTHORIZED AT CONTRACT PRICES WHERE THE CONTRACTORS ARE NOT . AS FOLLOWS: IT IS REQUESTED THAT A DECISION BE OBTAINED FROM THE COMPTROLLER GENERAL OF THE UNITED STATES AS TO WHAT ACTION. ALL SUPPLY CONTRACTS CONTAIN THE FOLLOWING PROVISION WITH RELATION TO TAXES: "PRICES BID HEREIN INCLUDE ANY FEDERAL TAX HERETOFORE IMPOSED BY THE CONGRESS WHICH IS APPLICABLE TO THE MATERIAL ON THIS BID. EXCISE OR OTHER TAXES WHICH MAY HEREAFTER (THE DATE SET FOR THE OPENING OF THIS BID) BE IMPOSED BY THE CONGRESS AND MADE APPLICABLE TO THE MATERIAL ON THIS BID WILL BE CHARGED TO THE GOVERNMENT AND ENTERED ON INVOICES AS A SEPARATE ITEM.'.

A-70315, JANUARY 28, 1936, 15 COMP. GEN. 674

CONTRACTS - ADJUSTMENT IN PRICES - PROCESSING TAXES INCLUDED IN BID PAYMENTS IN CONNECTION WITH CONTRACTS RESULTING FROM ADVERTISED SPECIFICATIONS CONTAINING A CLAUSE PROVIDING FOR INCLUSION IN BID PRICES OF FEDERAL TAXES IMPOSED BY THE CONGRESS PRIOR THERETO, AND INVOLVING SUPPLIES AND MATERIALS TO WHICH PROCESSING TAXES UNDER THE AGRICULTURAL ADJUSTMENT ACT WERE APPLICABLE, ARE AUTHORIZED AT CONTRACT PRICES WHERE THE CONTRACTORS ARE NOT ,PROCESSORS," BUT IN THE CASE OF CONTRACTOR "PROCESSORS" WHO, BECAUSE OF INJUNCTIONS OBTAINED BY THEM, DID NOT ACTUALLY PAY SUCH TAXES INTO THE TREASURY OF THE UNITED STATES THERE SHOULD BE DEDUCTION FROM THE CONTRACT PRICE OR RECOVERY BY SET OFF OF AN AMOUNT EQUAL TO THE TAX NOT PAID.

COMPTROLLER GENERAL MCCARL TO THE SECRETARY OF THE NAVY, JANUARY 28, 1936:

THERE HAS BEEN RECEIVED YOUR INDORSEMENT OF JANUARY 23, 1936, REQUESTING DECISION OF A QUESTION PRESENTED BY LETTER DATED JANUARY 22, 1936, FROM THE CHIEF, BUREAU OF SUPPLIES AND ACCOUNTS, NAVY DEPARTMENT, AS FOLLOWS:

IT IS REQUESTED THAT A DECISION BE OBTAINED FROM THE COMPTROLLER GENERAL OF THE UNITED STATES AS TO WHAT ACTION, IF ANY, SHOULD BE TAKEN BY THE BUREAU OF SUPPLIES AND ACCOUNTS IN CONNECTION WITH PROCESSING TAXES THAT MAY BE INCLUDED IN PRICES BILLED UNDER CONTRACTS, IN VIEW OF THE RECENT DECISION OF THE SUPREME COURT OF THE UNITED STATES INVALIDATING THE LEVYING OF A PROCESSING TAX UNDER THE AGRICULTURAL ADJUSTMENT ACT.

ALL SUPPLY CONTRACTS CONTAIN THE FOLLOWING PROVISION WITH RELATION TO TAXES:

"PRICES BID HEREIN INCLUDE ANY FEDERAL TAX HERETOFORE IMPOSED BY THE CONGRESS WHICH IS APPLICABLE TO THE MATERIAL ON THIS BID. ANY SALES TAX, DUTIES, IMPOSTS, REVENUES, EXCISE OR OTHER TAXES WHICH MAY HEREAFTER (THE DATE SET FOR THE OPENING OF THIS BID) BE IMPOSED BY THE CONGRESS AND MADE APPLICABLE TO THE MATERIAL ON THIS BID WILL BE CHARGED TO THE GOVERNMENT AND ENTERED ON INVOICES AS A SEPARATE ITEM.'

SOME SUPPLY CONTRACTS ARE MADE WITH A MANUFACTURER, SUCH AS A FLOUR MANUFACTURER, WHO PERFORMS THE FIRST PROCESSING OPERATION ON THE WHEAT ENTERING INTO THE MANUFACTURE OF THE FLOUR, AND THEREFORE IS REQUIRED TO PAY THE PROCESSING TAX TO THE COLLECTOR OF INTERNAL REVENUE.

OTHER CONTRACTS, PARTICULARLY THOSE FOR COTTON PRODUCTS, ARE USUALLY PLACED WITH A COMPANY NOT A MANUFACTURER OR FIRST PROCESSOR OF COTTON. CONTRACT NOS. 42651, WITH THE NEW YORK HANDKERCHIEF MANUFACTURING COMPANY IS ONE OF THIS CLASS. THIS FIRM PROCURED THE HANDKERCHIEFS CONTRACTED FOR FROM WELLINGTON SEARS COMPANY, 65 WORTH STREET, NEW YORK CITY, TO WHOM THE CONTRACTOR STATES HE PAID THE TAX, WELLINGTON SEARS COMPANY IS NOT A MANUFACTURER OF ANY PRODUCT, BUT IS A SALES ORGANIZATION UNDER CONTRACT WITH A NUMBER OF COTTON MILLS TO SELL THE PRODUCT OF THOSE MILLS. IN THIS CASE, WELLINGTON SEARS COMPANY, NOT BEING A MANUFACTURER OR FIRST PROCESSOR OF COTTON, WAS NOT REQUIRED BY LAW TO PAY A PROCESSING TAX, BUT PRESUMABLY PAID THE EQUIVALENT OF THE TAX TO THE FIRST PROCESSOR AND THE LATTER ACTUALLY PAID THE PROCESSING TAX TO THE GOVERNMENT.

INFORMATION IS DESIRED RELATIVE TO THE EXTENT THAT ANY INVESTIGATION SHOULD BE CONDUCTED TO ASCERTAIN WHETHER PROCESSING TAXES, OR ITS EQUIVALENT, ARE INCLUDED IN CONTRACT PRICES. DECISION IS ALSO REQUESTED WHETHER DEDUCTION SHOULD BE MADE FROM PUBLIC VOUCHERS FOUND TO INCLUDE PROCESSING TAX IN THE CONTRACT PRICE, BOTH IN CASES WHERE THE CONTRACT IS WITH A MANUFACTURER OR FIRST PROCESSOR, OR WITH A SELLING ORGANIZATION.

IN VIEW OF THE FACT THAT PAYMENT OF A LARGE NUMBER OF PUBLIC VOUCHERS IS BEING WITHHELD PENDING DETERMINATION OF THIS QUESTION, IT IS REQUESTED THAT THIS MATTER BE CONSIDERED URGENT AND DECISION RENDERED AT THE EARLIEST DATE PRACTICABLE.

THE CONTRACT PROVISION QUOTED IN THE LETTER, ON A SIMILAR PROVISION, HAS BEEN EXTENSIVELY EMPLOYED IN GOVERNMENT CONTRACTS AND WAS APPARENTLY INTENDED, FIRST, TO MAKE THE PRICE DEFINITE AND CERTAIN AND, SECOND, TO PERMIT CONTRACTORS--- THROUGH RESERVING THE RIGHT TO MAKE CLAIM FOR AN ADDITION TO THE CONTRACT PRICE EQUAL TO THE AMOUNT OF TAXES THEREAFTER IMPOSED AND PAID BY THEM, AS STATED--- TO CONTRACT AT LOWER PRICES THAN THEY OTHERWISE MIGHT.

AS TO SUCH CONTRACTS WITH CONTRACTORS WHO ARE NOT "PROCESSORS" AND HENCE WERE NOT SUBJECT TO LIABILITY FOR THE PROCESSING TAX AS SUCH BUT WHOSE PRICES APPARENTLY REFLECTED NO MORE THAN COSTS TO THEM PLUS PROFIT, PAYMENTS IN ACCORDANCE WITH THE TERMS OF SUCH CONTRACTS MAY BE MADE WITHOUT ANY INQUIRY AS TO WHETHER ANY AMOUNT WAS INCLUDED IN THE PRICE TO

WITH RESPECT TO A CONTRACTOR WHO WAS LIABLE AS "PROCESSOR" UNDER THE AGRICULTURAL ADJUSTMENT ACT, AS AMENDED, FOR PAYMENT OF THE PROCESSING TAX ON SUPPLIES DELIVERED UNDER HIS CONTRACT THERE IS A DIFFERENT SITUATION. SOME "PROCESSORS" APPARENTLY CONTINUED TO PAY THE TAX, WHILE OTHERS, BEGINNING IN THE EARLY FALL OF 1935, RESISTED PAYMENT AND OBTAINED AN INJUNCTION AGAINST THE COLLECTION THEREOF. THE SUPREME COURT OF THE UNITED STATES HELD IN ITS DECISION OF JANUARY 6, 1936, IN THE BUTLER CASE THAT THE PLAN OF PROCESSING TAXES AND THEIR USE IN CONNECTION WITH THE REGULATION AND CONTROL OF AGRICULTURAL PRODUCTION WAS UNCONSTITUTIONAL AND IN ITS DECISION OF JANUARY 13, 1936, IN THE RICKERT RICE MILLS CASE AUTHORIZED RETURN OF ALL AMOUNTS IMPOUNDED PENDENTE LITE IN SUCH CASES. AS TO THOSE CONTRACTORS WHO APPLIED FOR SUCH INJUNCTIONS, IT IS APPROPRIATE TO MAKE DEDUCTIONS OR RECOVER BY SET-OFF OF AMOUNTS PAID INTO THE TREASURY OF THE UNITED STATES. IN ALL SUCH CASES THERE SHOULD BE DEDUCTED FROM THE CONTRACT PRICE OF THE ,PROCESSOR" AN AMOUNT EQUAL TO THE PROCESSING TAX WHICH THEY DID NOT, IN FACT, PAY TO THE UNITED STATES--- AND THE BURDEN OF PROOF IS ON THE PROCESSOR TO SHOW THAT IT DID, IN FACT, PAY THE PROCESSING TAX INTO THE TREASURY OF THE UNITED STATES ON THE SUPPLIES OFFERED FOR DELIVERY UNDER THE CONTRACT. IT IS UNDERSTOOD THAT THE BUREAU OF INTERNAL REVENUE HAS A RECORD OF ALL PROCESSORS WHO SOUGHT AND OBTAINED INJUNCTIONS AGAINST THE PAYMENT OF PROCESSING TAXES.