A-82181, JANUARY 23, 1937, 16 COMP. GEN. 672

A-82181: Jan 23, 1937

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WITH CORRESPONDING DECREASES FOR TAXES SAVED WHERE REDUCTIONS ARE EFFECTED BY CHANGE ORDERS IN THOSE CONTRACTS ENTERED INTO SUBSEQUENT TO THE ENACTMENT OF SAID TAX LAWS. THE AMOUNT ADDED AS TAXES MAY NOT BE TREATED AS AN ITEM OF "COST" ON WHICH ARE COMPUTED BY PERCENTAGE THE AMOUNTS TO BE ALLOWED AS "OVERHEAD" AND . AMOUNTS REPRESENTING SOCIAL SECURITY TAX DIRECTLY CHARGEABLE TO CHANGE ORDERS ISSUED UNDER A CONTRACT NEED NOT BE WITHHELD UNTIL THE TAX IS ACTUALLY PAID BY THE CONTRACTOR BUT MAY BE PAID ALONG WITH OTHER CONTRACT PAYMENTS UPON SATISFACTORY SHOWING AS TO THE CORRECTNESS OF THE AMOUNT. MAY INCLUDE THE WHOLE PURCHASE PRICE AS AN ITEM OF COST OF THE MATERIAL UPON A PROPER SHOWING THAT SAID MATERIALS WERE ACTUALLY PURCHASED SINCE THE IMPOSITION OF THE TAX WITH THE TAX ACTUALLY INCLUDED.

A-82181, JANUARY 23, 1937, 16 COMP. GEN. 672

CONTRACTS - PRICE ADJUSTMENTS - CHANGE ORDERS - SOCIAL SECURITY AND SALES TAXES A CONTRACTOR MAY NOT BE REIMBURSED UNDER ORIGINAL CONTRACTS FOR SOCIAL SECURITY TAXES MADE APPLICABLE AFTER THE EXECUTION OF THE CONTRACT, BUT UNDER A CONTRACT PROVIDING FOR AN "EQUITABLE ADJUSTMENT" IN CONNECTION WITH CHANGE ORDERS INVOLVING INCREASES OR DECREASES IN LABOR, TIME, MATERIAL, ETC., THERE MAY BE ADDED TO AMOUNTS PAYABLE, DUE TO SUCH CHANGES, A SUM EQUAL TO THE EXACT AMOUNT OF TAXES DIRECTLY CHARGEABLE TO THE CHANGE ORDERS, WITH CORRESPONDING DECREASES FOR TAXES SAVED WHERE REDUCTIONS ARE EFFECTED BY CHANGE ORDERS IN THOSE CONTRACTS ENTERED INTO SUBSEQUENT TO THE ENACTMENT OF SAID TAX LAWS, BUT THE AMOUNT ADDED AS TAXES MAY NOT BE TREATED AS AN ITEM OF "COST" ON WHICH ARE COMPUTED BY PERCENTAGE THE AMOUNTS TO BE ALLOWED AS "OVERHEAD" AND ,PROFIT.' AMOUNTS REPRESENTING SOCIAL SECURITY TAX DIRECTLY CHARGEABLE TO CHANGE ORDERS ISSUED UNDER A CONTRACT NEED NOT BE WITHHELD UNTIL THE TAX IS ACTUALLY PAID BY THE CONTRACTOR BUT MAY BE PAID ALONG WITH OTHER CONTRACT PAYMENTS UPON SATISFACTORY SHOWING AS TO THE CORRECTNESS OF THE AMOUNT. A CONTRACTOR, REQUIRED TO PURCHASE MATERIALS AND ARTICLES FOR USE ON WORK COVERED BY CHANGE ORDERS, WHO, BECAUSE OF A SALES TAX, PAYS A HIGHER PRICE BY REASON OF THE INCLUSION OF SAID TAX IN THE PURCHASE PRICE, MAY INCLUDE THE WHOLE PURCHASE PRICE AS AN ITEM OF COST OF THE MATERIAL UPON A PROPER SHOWING THAT SAID MATERIALS WERE ACTUALLY PURCHASED SINCE THE IMPOSITION OF THE TAX WITH THE TAX ACTUALLY INCLUDED, AND THE HIGHER PRICE MAY NOT BE INCLUDED MERELY BECAUSE REPLENISHMENT OF TAX FREE STOCK USED IN CONNECTION WITH THE CHANGE ORDER REQUIRES THE PAYMENT OF A HIGHER PURCHASE PRICE.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE FEDERAL EMERGENCY ADMINISTRATOR OF PUBLIC WORKS, JANUARY 23, 1937:

THERE HAS BEEN CONSIDERED YOUR LETTER OF DECEMBER 4, 1936, AS FOLLOWS:

IN CONNECTION WITH THE ADJUSTMENTS OF EXTRAS AND CREDITS FOR CHANGES IN WORK BEING PERFORMED BY SEVERAL OF THE CONTRACTORS ON HOUSING PROJECTS UNDER THE SUPERVISION OF THE FEDERAL EMERGENCY ADMINISTRATION OF PUBLIC WORKS, THE QUESTION HAS ARISEN AS TO WHETHER OR NOT TAXES ON PAY ROLLS LEVIED PURSUANT TO THE SOCIAL SECURITY ACT OF THE UNITED STATES AND THE ACTS OF THE SEVERAL STATES SHOULD BE CONSIDERED.

IN ARTICLE 3 OF THE STANDARD FORM OF CONTRACT IT IS PROVIDED:

"IF SUCH CHANGES CAUSE AN INCREASE OR DECREASE IN THE AMOUNT DUE UNDER THIS CONTRACT OR IN THE TIME REQUIRED FOR ITS PERFORMANCE, AN EQUITABLE ADJUSTMENT SHALL BE MADE AND THE CONTRACT SHALL BE MODIFIED IN WRITING ACCORDINGLY.'

IN MAKING SUCH ADJUSTMENTS IT HAS BEEN CUSTOMARY TO ALLOW THE CONTRACTOR FOR EXTRA WORK THE ACTUAL COST OF THE WORK INVOLVED PLUS A REASONABLE AMOUNT FOR OVERHEAD AND PROFIT. IN THE PAST THIS HAS IN MANY INSTANCES BEEN FIXED AT 10 PERCENT FOR OVERHEAD AND 10 PERCENT FOR PROFIT. WHERE THE CHANGE HAS RESULTED IN A DECREASE IN THE AMOUNT OF THE WORK, THE GOVERNMENT HAS BEEN CREDITED WITH THE ESTIMATED COST OF THE WORK ELIMINATED, BUT NO CREDIT HAS BEEN TAKEN FOR ANY OVERHEAD OR PROFIT. THIS POLICY, I UNDERSTAND, IS IN LINE WITH THE PRACTICE OF OTHER GOVERNMENT DEPARTMENTS AND THE BUILDING INDUSTRY IN GENERAL.

IN SEVERAL OF THE LATER CONTRACTS, AFTER THE AMOUNT OF OVERHEAD AND PROFIT TO BE ALLOWED HAD BEEN THE SUBJECT OF SOME DISPUTE BETWEEN CONTRACTORS AND THE GOVERNMENT, THIS POLICY WAS EMBODIED IN THE CONTRACT DOCUMENTS PRIOR TO THE INVITATION FOR BIDS, AND A PARAGRAPH WAS INSERTED IN THE GENERAL CONDITIONS TO THE EFFECT THAT, EXCEPT IN UNUSUAL CIRCUMSTANCES WHERE SUCH A PRACTICE WOULD BE INEQUITABLE, ADJUSTMENTS IN CONTRACT PRICE WOULD BE MADE ON THE BASIS OF COST PLUS 10 PERCENT FOR OVERHEAD AND 10 PERCENT FOR PROFIT WHERE THERE WAS ADDITIONAL WORK TO BE PERFORMED AND ON THE BASIS OF ACTUAL COST WITHOUT OVERHEAD AND PROFIT WHERE THE CHANGE RESULTED IN A DECREASE IN THE COST OF THE WORK. IT NOW BECOMES NECESSARY IN ADJUSTING SEVERAL CHANGES TO DETERMINE WHETHER OR NOT SOCIAL SECURITY TAXES ON PAY ROLLS ARE PROPERLY ITEMS OF COST OR OF OVERHEAD.

YOUR OPINION OF MAY 5, 1936 (15 COMP. GEN. 958), ON THIS QUESTION HAS BEEN REVIEWED. I UNDERSTAND THIS DECISION TO BE THAT ON EXTRAS THE SOCIAL SECURITY TAX IS NOT TO BE CONSIDERED AS A PART OF THE ACTUAL COST OF DOING THE WORK, THIS TAX BEING MORE IN THE NATURE OF AN OVERHEAD COST EITHER TO BE ABSORBED BY THE CONTRACTOR OR FOR WHICH HE IS TO BE REIMBURSED AS AN OVERHEAD ITEM. IN THIS CONNECTION IT IS TO BE POINTED OUT THAT IF THE SOCIAL SECURITY TAX IS TO BE TREATED AS AN ITEM OF OVERHEAD, THE GOVERNMENT, ON CHANGES WHICH INVOLVE A DECREASE IN THE AMOUNT OF WORK, WILL NOT RECEIVE ANY CREDIT FOR THE TAX ON THAT PART OF THE PAY ROLL WHICH IS ELIMINATED BY THE CHANGE.

IT IS ALSO TO BE POINTED OUT THAT, WHILE UNDER THIS DECISION IT MIGHT BE POSSIBLE TO ALLOW THE AMOUNT OF THE SOCIAL SECURITY TAX AS AN OVERHEAD ITEM, NEVERTHELESS, IN THOSE CONTRACTS WHICH DEFINITELY FIX THE CONTRACTOR'S RECOVERY AT ITEMS OF ACTUAL COST PLUS 10 PERCENT FOR OVERHEAD, THE NON-ALLOWANCE OF THIS TAX AS AN ITEM OF COST WOULD DEFINITELY WORK AN INJUSTICE ON THE CONTRACTOR. IN YOUR OPINION YOU STATE:

"TAXES ARE INCLUDED WITH OTHER EXPENSES DESIGNATED AS OVERHEAD, WHICH ARE EXPENSES NECESSARY TO THE MAINTENANCE OF THE ADMINISTRATIVE AND SUPERVISORY ORGANIZATION AND PLANT OF THE CONTRACTOR IRRESPECTIVE OF A PARTICULAR CONTRACT.'

IT WOULD APPEAR THAT THE SOCIAL SECURITY TAX DOES NOT FALL WITHIN THIS DEFINITION AS, EXCEPT FOR THE CONTRACTOR'S ADMINISTRATIVE AND SUPERVISORY ORGANIZATION, SUCH TAX IS PAID ONLY BECAUSE OF THE EXISTENCE OF A CONTRACT. WERE IT NOT FOR THE CONTRACT THE CONTRACTOR WOULD BE UNDER NO OBLIGATION TO CARRY ON HIS PAY ROLL THE EMPLOYEES ACTUALLY AND SOLELY ENGAGED IN PERFORMING IT.

IN ORDER THAT WE MAY ADJUST THE MATTERS NOW PENDING, YOUR DECISION IS REQUESTED ON THE FOLLOWING POINTS:

1. UNDER THOSE CONTRACTS WHERE NO LIMITATION IS PLACED AS TO THE AMOUNT OF OVERHEAD WHICH IS TO BE PAID TO THE CONTRACTOR, SHOULD THE TAXES LEVIED PURSUANT TO THE SOCIAL SECURITY ACTS OF THE FEDERAL GOVERNMENT OR ANY OF THE STATES BE CONSIDERED AS AN ITEM OF COST OR AS AN ITEM OF OVERHEAD FOR THE PURPOSE OF CHANGE ADJUSTMENTS, AND, IF THEY ARE TO BE CONSIDERED AS AN ITEM OF OVERHEAD, IN THOSE CHANGES WHICH RESULT IN A CREDIT TO THE GOVERNMENT SHOULD THE GOVERNMENT INSIST ON A CREDIT FROM THE CONTRACTOR IN THE ESTIMATED AMOUNT OF THE TAXES WHICH THE CONTRACTOR WILL NOT BE REQUIRED TO PAY BECAUSE OF THE CHANGE?

2. UNDER THOSE CONTRACTS WHERE THE CONTRACT ITSELF PROVIDES FOR THE AMOUNT OF OVERHEAD TO BE CHARGED AND PRECLUDES THE GOVERNMENT FROM REQUIRING A CREDIT ON OVERHEAD ITEMS, MAY SOCIAL SECURITY TAXES BE CONSIDERED AS AN ITEM OF COST OR DOES THE 10 PERCENT ALLOWED FOR OVERHEAD PRECLUDE ANY FURTHER CONSIDERATION OF THIS ITEM?

I NOTE IN YOUR DECISION OF MAY 5, REFERRED TO ABOVE, THAT YOU STATE:

"* * * THERE WOULD BE NO LEGAL AUTHORITY FOR THE ALLOWANCE OF ANY AMOUNT IN EXCESS OF THAT ACTUALLY PAID BY THE CONTRACTOR TO THE GOVERNMENT AND TO THE DISTRICT OF COLUMBIA IN DISCHARGE OF THE SAID TAXES.'

SECTION 905 (B) OF PUBLIC NO. 271 OF THE 74TH CONGRESS PROVIDES THAT THE RETURNS SHALL BE FILED NOT LATER THAN JANUARY 31 NEXT FOLLOWING THE CLOSE OF THE TAXABLE YEAR, AND UNDER SUBSECTION (D) THIS SECTION PROVIDES FOR THE PAYMENT OF THE TAX IN QUARTERLY INSTALMENTS. THIS MEANS THAT AT THE EARLIEST ANY TAXES ACCRUING DURING THE YEAR 1936 WILL NOT BE SETTLED UNTIL JANUARY 31, 1937. I ASSUME, THEREFORE, THAT IT IS NOT YOUR INTENT TO WITHHOLD ADJUSTMENTS OF THESE CHANGE ORDERS UNTIL THE TAX IS ACTUALLY PAID, BUT THAT THE ALLOWANCE SHOULD BE MADE ON THE AMOUNT ACTUALLY PAYABLE BY THE CONTRACTOR TO THE FEDERAL OR STATE GOVERNMENT.

YOUR OPINION OF MAY 5, WHILE DEALING SOLELY WITH THE SOCIAL SECURITY TAXES, HAS ALSO RAISED THE FURTHER QUESTION AS TO WHETHER OR NOT THE SALES TAXES ON MATERIALS AND SUPPLIES LEVIED BY THE FEDERAL GOVERNMENT AND BY VARIOUS STATES AND CITIES SHOULD ALSO BE CONSIDERED AS AN ITEM OF OVERHEAD RATHER THAN AS ACTUAL COSTS TO THE CONTRACTOR. IN VIEW OF THE FACT THAT THE CONTRACTOR CANNOT OBTAIN THE MATERIALS UPON WHICH THE TAXES ARE LEVIED WITHOUT PAYING THE TAXES THEREON TO THE MANUFACTURER OR DEALER, IT WOULD SEEM THAT SUCH TAXES ARE PROPERLY COSTS OF THE MATERIALS PURCHASED. PLEASE ADVISE ME IF MY INTERPRETATION IN THIS REGARD IS CORRECT.

THE CASE CONSIDERED IN THE DECISION CITED BY YOU, 15 COMP. GEN. 958, INVOLVED THE PROPOSAL OF A CONTRACTOR TO "BILL YOUR OFFICE (THE GOVERNMENT AGENCY CONCERNED) FOR THE YEAR 1936 AT THE RATE OF 2 PERCENT ON OUR TOTAL PAY ROLLS AND THE PAY ROLLS OF OUR SUBCONTRACTORS ASSOCIATED WITH US ON THE ANNEX, LIBRARY OF CONGRESS OPERATION, PLUS THE ADDITIONAL COST OF PREPARING THE NECESSARY REPORTS," THE RATE TO BE INCREASED FOR YEARS FOLLOWING 1936 CONFORMABLY WITH THE INCREASES PRESCRIBED IN THE STATUTES UNDER CONSIDERATION. THIS SUGGESTION OF THE CONTRACTOR WAS UPON THE THEORY THAT THE EXTRA EXPENSE ENTAILED UNDER THE STATUTES HAD BEEN "LEGISLATED BY THE OWNERS, THAT IS, THE FEDERAL GOVERNMENT, SINCE THE AWARD OF THE CONTRACT TO US.' THE DISTINCTION BETWEEN THE UNITED STATES WHEN ACTING IN THE CAPACITY OF A CONTRACTOR AND THE GOVERNMENT WHEN ACTING IN ITS SOVEREIGN CAPACITY HAS BEEN TOO LONG RECOGNIZED TO BE OPEN TO QUESTION. SEE HOROWITZ V. UNITED STATES, 267 U.S. 458; 8 COMP. GEN. 25. MANIFESTLY, THE FACT THAT THE CONGRESS--- ACTING FOR THE GOVERNMENT IN ITS SOVEREIGN CAPACITY--- SUBSEQUENT TO THE UNDERTAKING OF THE CONTRACT, IMPOSED A TAX WHICH PLACED AN ADDITIONAL BURDEN UPON THE CONTRACTOR, AFFORDED NO LEGAL BASIS FOR THE ALLOWANCE OF ANY AMOUNT IN ADDITION TO THE CONTRACT PRICE TO COVER THE AMOUNT OF SUCH TAX, AND THIS IS TRUE, OF COURSE, AS TO ALL SIMILAR CONTRACTS. IT HARDLY NEED BE SAID, THEREFORE, THAT NO PROCEDURE MAY BE ADOPTED WHEREBY A CONTRACTOR IS REIMBURSED IN ANY WAY FOR THE SOCIAL SECURITY TAXES UNDER ORIGINAL CONTRACTS TO WHICH SOCIAL SECURITY TAXES HAVE BECOME APPLICABLE AFTER THE EXECUTION OF THE CONTRACT.

YOUR PRESENT SUBMISSION PRESENTS FOR CONSIDERATION THE QUESTION AS TO WHAT CONSTITUTES AN ,EQUITABLE ADJUSTMENT" BETWEEN THE GOVERNMENT AND CONTRACTORS, WITHIN THE MEANING OF ARTICLE 3 OF THE STANDARD GOVERNMENT FORM NO. 23 AND P.W.A. FORM NO. 51, CONSTRUCTION CONTRACT, UNDER CHANGE ORDERS INVOLVING INCREASES OR DECREASES IN LABOR, TIME, AND MATERIAL, IN VIEW OF THE IMPOSITION OF FEDERAL AND STATE SOCIAL SECURITY TAXES ON PAY ROLLS.

CHANGE ORDERS INVOLVING ADDITIONS TO AN ORIGINAL FIXED-PRICE CONTRACT ON A COST PLUS OVERHEAD AND PROFIT BASIS, ARE, IN EFFECT, COST-PLUS UNDERTAKINGS ON THE PART OF THE CONTRACTOR AND MAY BE SO CONSIDERED.

IT WAS POINTED OUT IN THE DECISION, SUPRA, THAT THE TERM "COST" HAS A RECOGNIZED MEANING AS APPLYING TO THE ACTUAL COST OF LABOR AND MATERIAL AND POSSIBLY, IN SOME INSTANCES, MACHINERY AND EQUIPMENT FOR THE PERFORMANCE OF A PARTICULAR CONTRACT, WHILE THE WORD "OVERHEAD" COVERS EXPENSES NECESSARY TO THE MAINTENANCE OF THE ADMINISTRATIVE AND SUPERVISORY ORGANIZATION AND PLANT OF A CONTRACTOR IRRESPECTIVE OF A PARTICULAR CONTRACT, AND THAT TAXES ARE INCLUDED IN THE LATTER CATEGORY. IT MAY BE OBSERVED THAT BOTH THE TERMS "COST" AND "OVERHEAD" HAVE BEEN JUDICIALLY RECOGNIZED AS DIFFICULT OF EXACT CATALOG AND APPLICATION. HAZLETON TRIPOD-BOILER CO. V. CITIZENS ST.RY. CO., 72 FED. 317-21, THERE WAS POINTED OUT THE DIFFICULTY OF DETERMINING THE ELEMENTS OF "COST" OF AN ARTICLE, AND THERE WAS QUOTED A PRIOR DECISION THAT "THE TERM IS CERTAINLY OF AN EQUIVOCAL MEANING.' CORPUS JURIS, VOLUME 46, PAGE 1161, DEFINES THE WORD ,OVERHEAD" THUS---

A WORD OF VAGUE CONTENT, WHICH HAS RECENTLY BEEN INTRODUCED IN ACCOUNTING. IT IS NOT A TECHNICAL WORD OF THE LAW. IT MAY BE SAID TO INCLUDE BROADLY THE CONTINUOUS EXPENSES OF A BUSINESS, IRRESPECTIVE OF THE OUTLAY ON PARTICULAR CONTRACTS.

CITING DAIRYMEN'S LEAGUE COOPERATIVE ASSOCIATION V. HOLMES, 207 APP.DIV. 429, 202 N.Y.S. 663-72. IN LYTLE, CAMPBELL AND CO., INC., V. SOMERS, FITLER AND TODD CO., 276 PA. 409, 27 A.L.R. 41, THE COURT SAID:

OVERHEAD, OR GENERAL EXPENSE, AS APPLIED TO A BUSINESS CONCERN, PRODUCING A UTILITY POSSESSING THE QUALITY OF VALUE OR WEALTH AS GENERALLY UNDERSTOOD, INCLUDES ALL ADMINISTRATIVE OR EXECUTIVE COSTS INCIDENT TO THE MANAGEMENT, SUPERVISION, OR CONDUCT OF THE CAPITAL OUTLAY OF ITS BUSINESS. * * *

THE TERM "OVERHEAD"--- INCLUDING THE SALARIES OF EXECUTIVES OR ADMINISTRATIVE OFFICIALS, INTEREST CHARGES FOR FLOATING BONDS, CARRYING CHARGES, DEPRECIATION, TAXES, AND THE GENERAL OFFICE EXPENSES AS HERE CLAIMED--- CANNOT BE ALLOWED AS AN OPERATING CHARGE IN "COST PLUS" CONTRACTS.

WHILE THE COURTS HAVE SUGGESTED THE UNCERTAIN AND SOMEWHAT ELASTIC QUALITY OF THE TERMS "COSTS" AND "OVERHEAD," THE AUTHORITIES EXAMINED APPEAR AGREED THAT TAXES ORDINARILY ARE NOT PROPERLY FOR INCLUSION AS AN ITEM OF COST UNDER A PARTICULAR CONTRACT, AND THAT SUCH COST ONLY INCLUDES "THE NECESSARY COST OF OPERATION AFFECTING THE PARTICULAR UNDERTAKING--- THE COST OF LABOR AND MATERIALS THAT WENT INTO AND BECAME PART OF THE FINISHED PRODUCT.' LYTLE, CAMPBELL AND CO., INC., ETC., SUPRA. THE SOMEWHAT SUI GENERIS NATURE OF THE SOCIAL SECURITY TAX ON EMPLOYERS MAY BE RECOGNIZED IN THE LIGHT OF THE FOREGOING DEFINITIONS. AS YOU SUGGEST, SUCH PORTION OF A CONTRACTOR'S SOCIAL SECURITY TAX AS IS APPLICABLE TO A GOVERNMENT CONTRACT IS PAID ONLY BECAUSE OF THE EXISTENCE OF SUCH CONTRACT, AND IS DIRECTLY CHARGEABLE THERETO AND SINCE IT IS DEPENDENT UPON A PARTICULAR PAY ROLL OR CONTRACT IT IS NOT IN EXACTLY THE SAME CLASS AS OTHER TAXES WHICH ORDINARILY ARE INCLUDED AS OVERHEAD. ON THE OTHER HAND, THE AMOUNT OF SUCH TAX IS NOT PAID TO THE LABOR EMPLOYED ON THE WORK, IT DOES NOT GO INTO AND BECOME A PART OF THE FINISHED PRODUCT, AND REPRESENTS NO ADDITIONAL VALUE RECEIVED BY THE GOVERNMENT UNDER THE CONTRACT. THEREFORE, IT DOES NOT COME WITHIN THE RECOGNIZED DEFINITION OF "COST.'

IT IS POSSIBLE THAT IN SOME INSTANCES THE CLERICAL WORK NECESSARY FOR THE COMPUTATION, ACCOUNTING, REPORTING, AND PAYING THE TAX MAY INCREASE THE OVERHEAD OF A CONTRACTOR TO SOME EXTENT. IT IS PROBABLE, HOWEVER, THAT IN THE GREAT MAJORITY OF CASES SUCH INCREASE WOULD BE COMPARATIVELY SLIGHT, AND NOT SUFFICIENT TO "DEFINITELY WORK AN INJUSTICE ON THE CONTRACTOR" AS SUGGESTED BY YOU. ON THE OTHER HAND, TREATING THE TAX AS AN ITEM OF COST SUBJECT TO AN ALLOWANCE OF 10 PERCENT OVERHEAD AND 10 PERCENT PROFIT WOULD RESULT IN PAYMENT BY THE GOVERNMENT TO THE CONTRACTOR OF THE ENTIRE AMOUNT OF THE TAX PLUS 21 PERCENT THEREOF, REPRESENTING NOT ONLY INDEMNIFICATION OF A CONTRACTOR AGAINST THE AMOUNT OF THE TAX, BUT A SUBSTANTIAL GAIN TO SAID CONTRACTOR, WITH NO CORRESPONDING BENEFIT TO THE GOVERNMENT, WHICH COULD HARDLY BE CONSIDERED "AN EQUITABLE ADJUSTMENT" ON BEHALF OF THE UNITED STATES. IT WOULD APPEAR THAT UNDER THE CONDITIONS PRESENTED, ALLOWANCE TO A CONTRACTOR IN CHANGE ORDERS INVOLVING AN INCREASE, OF AN AMOUNT EQUAL TO THE EXACT AMOUNT OF THE SOCIAL-SECURITY TAXES, DIRECTLY CHARGEABLE TO THE LABOR EMPLOYED IN PERFORMING THE WORK UNDER THE CHANGE ORDER, PAID OR TO BE PAID BY THE CONTRACTOR, WOULD OPERATE AS AN EQUITABLE ADJUSTMENT BETWEEN THE GOVERNMENT AND THE CONTRACTOR IN PRACTICALLY EVERY CASE, THE GOVERNMENT THUS INDEMNIFYING THE CONTRACTOR AGAINST LOSS BY REASON OF THE PAYMENT OF THE TAX OCCASIONED BY THE CHANGE ORDER, LEAVING THE CONTRACTOR TO ABSORB SUCH INCIDENTAL INCREASE IN OVERHEAD AS MAY BE NECESSARY. THE ALLOWANCE TO THE CONTRACTOR OF 10 PERCENT OVERHEAD AND 10 PERCENT PROFIT IN THE ACTUAL COST OF LABOR AND MATERIAL EMPLOYED AND USED IN PERFORMANCE OF THE WORK WOULD APPEAR TO BE SUFFICIENT NOT ONLY TO SAVE THE AVERAGE CONTRACTOR HARMLESS FROM LOSS OR DAMAGE (OTHER THAN THE TAX ITSELF) ON ACCOUNT OF THE TAX, BUT TO ASSURE A REASONABLE RETURN OF PROFIT ON THE WORK PERFORMED.

UPON THE SAME PRINCIPLE, WHEN A CHANGE ORDER RESULTS IN A DECREASE IN THE AMOUNT DUE UNDER THE CONTRACT, IT WOULD APPEAR EQUITABLE THAT THE GOVERNMENT SHOULD RECEIVE THE BENEFIT OF REDUCTION OF THE EXACT AMOUNT OF THE TAX FROM WHICH THE CONTRACTOR IS RELIEVED, EXCEPT, OF COURSE, THAT WHEN THE ORIGINAL CONTRACT WAS ENTERED INTO PRIOR TO THE IMPOSITION OF THE TAX AND PRESUMABLY WITHOUT REFERENCE THERETO THE GOVERNMENT WOULD NOT BE ENTITLED TO CLAIM ANY REDUCTION IN ADDITION TO THE ESTIMATED COST OF THE WORK ELIMINATED, AS OUTLINED IN THE SECOND PARAGRAPH OF YOUR LETTER. WHERE CONTRACTS HAVE BEEN ENTERED INTO SUBSEQUENT TO THE ENACTMENT OF THE APPLICABLE SOCIAL SECURITY TAX LAWS, IT IS TO BE PRESUMED THEY HAVE BEEN MADE IN CONTEMPLATION OF SUCH STATUTES AND THAT THE CONTRACT PRICES HAVE BEEN ESTIMATED TO INCLUDE THE AMOUNT OF SUCH TAX. IN SUCH INSTANCES THE GOVERNMENT WOULD BE ENTITLED TO CLAIM AN AMOUNT EQUAL TO THE TAX AS A REDUCTION ON CHANGE ORDERS.

REFERRING TO THE QUESTION RAISED IN THE PENULTIMATE PARAGRAPH OF YOUR SUBMISSION, SINCE THE AMOUNT OF THE TAX FOR WHICH A CONTRACTOR IS OBLIGATED IS BASED UPON THE AMOUNT OF HIS LABOR PAY ROLL, AND IS APPARENTLY A MATTER OF SIMPLE COMPUTATION, THERE WOULD APPEAR TO BE NO NECESSITY TO WITHHOLD PAYMENTS OTHERWISE PROPERLY DUE THE CONTRACTOR ON ACCOUNT OF THE TAX UNTIL THE TAX IS ACTUALLY PAID. AND PAYMENTS COVERING THE AMOUNT OF THE SOCIAL SECURITY TAX MAY BE MADE ALONG WITH OTHER PROPER PAYMENTS UNDER THE CONTRACT, UPON SATISFACTORY SHOWING BY THE CONTRACTOR AS TO THE CORRECTNESS OF THE AMOUNT.

REPLYING TO THE FINAL PARAGRAPH OF YOUR LETTER, YOU ARE INFORMED THAT THIS OFFICE CONCURS IN THE INTERPRETATION THEREIN STATED. SALES TAXES LEVIED BY THE FEDERAL GOVERNMENT AND THE VARIOUS STATES ARE CHARGED UPON AND PAYABLE BY THE VENDOR WHO, IT IS TO BE PRESUMED, ADDS TO HIS SALE PRICE AN AMOUNT SUFFICIENT TO COVER SAID TAX WHICH THEN BECOMES A PART OF THE PRICE OF THE ARTICLE. AS WAS SAID BY THE COURT IN LASH'S PRODUCTS CO. V. UNITED STATES, 278 U.S. 175,"THE PURCHASER DOES NOT PAY THE TAX. PAYS OR MAY PAY THE SELLER MORE FOR THE GOODS BECAUSE OF THE SELLER'S OBLIGATION BUT THAT IS ALL. * * * THE PRICE IS THE TOTAL SUM PAID FOR THE GOODS. THE AMOUNT ADDED BECAUSE OF THE TAX IS PAID TO GET THE GOODS AND FOR NOTHING ELSE.'

WHERE A CONTRACTOR IS REQUIRED TO PURCHASE MATERIALS AND ARTICLES FOR USE ON WORK COVERED BY INCREASE CHANGE ORDERS AND NECESSARILY PAYS A HIGHER PRICE THEREFOR BY REASON OF THE INCLUSION OF A SALES TAX AS A PART OF THE PURCHASE PRICE, HE WOULD BE ENTITLED TO INCLUDE THE WHOLE PURCHASE PRICE AS AN ITEM OF COST OF THE MATERIAL, UPON A PROPER SHOWING. HOWEVER, IT WOULD APPEAR TO BE INCUMBENT UPON THE ADMINISTRATIVE OFFICERS TO DETERMINE THAT SUCH MATERIALS AND ARTICLES HAVE BEEN PURCHASED BY THE CONTRACTOR AT THE HIGHER PRICE FOR USE ON THE CONTRACT UNDER THE CHANGE ORDER AND THAT NO ARTICLES OR MATERIALS PREVIOUSLY PURCHASED OR CONTRACTED FOR FOR USE ON THE ORIGINAL CONTRACT AT A LOWER PRICE IS CHARGED TO THE GOVERNMENT AT A HIGHER PRICE THAN ACTUALLY PAID, MERELY BECAUSE THE IMPOSITION OF A SALES TAX HAS ADVANCED THE PRICE OF SIMILAR ARTICLES OR MATERIALS SINCE THE PURCHASE OR CONTRACT AT A LOWER PRICE WAS MADE. LIKEWISE, MATERIALS AND ARTICLES PREVIOUSLY PURCHASED BY A CONTRACTOR AND KEPT IN STOCK MAY NOT BE BILLED TO THE GOVERNMENT AT A HIGHER PRICE MERELY BY REASON OF THE FACT THAT REPLENISHMENT OF THE CONTRACTOR'S STOCK WOULD NECESSITATE THE PAYMENT OF A HIGHER PURCHASE PRICE. THAT IS TO SAY, THE AMOUNT ALLOWABLE TO A CONTRACTOR AS THE COST OF ARTICLES AND MATERIALS NECESSARY FOR USE UNDER A CHANGE ORDER IS THE ACTUAL PRICE PAID BY THE CONTRACTOR THEREFOR WHEN THE SAID ARTICLES AND MATERIALS WERE PURCHASED, EITHER EXCLUSIVE OR INCLUSIVE OF A SALES TAX AS THE CASE MAY BE. ..END :