B-128446, AUGUST 3, 1956, 36 COMP. GEN. 81

B-128446: Aug 3, 1956

Additional Materials:

Contact:

Edda Emmanuelli Perez
(202) 512-2853
EmmanuelliPerezE@gao.gov

 

Office of Public Affairs
(202) 512-4800
youngc1@gao.gov

1956: REFERENCE IS MADE TO YOUR LETTER OF JUNE 26. IT APPEARS THAT THE PARTIES ARE IN DISAGREEMENT AS TO WHETHER FREIGHT CHARGES ON SALES OF PRODUCTS PRODUCED AT THE FACILITY BY THE LESSEE SHOULD BE DEDUCTED BEFORE APPLYING THE PERCENTAGE FORMULA IN SUBSECTIONS (A) (1) AND (A) OF ARTICLE 4 OF THE LEASE FOR THE PURPOSE OF COMPUTING THE RENT. THE FACILITY WAS LEASED FOR THE PROCESSING OF ORES. IT APPEARS THAT CERTAIN OF THESE PRODUCTS ARE GENERALLY SOLD F.O.B. THAT THE PRINCIPAL PRODUCT NOW BEING MARKETED IS SOLD ON A "DELIVERED-CUSTOMER" BASIS BY SIMILAR PRODUCERS WHOSE PRODUCTION FACILITIES ARE LOCATED ADJACENT TO THEIR CUSTOMERS AND IN AREAS WITH COMPARABLE FREIGHT RATES. UNDERSTAND FROM THIS THAT THIS PRODUCT IS QUOTED AND SOLD AT A FLAT UNIT PRICE.

B-128446, AUGUST 3, 1956, 36 COMP. GEN. 81

LEASE - MODIFICATION - RENT BASED ON SALES - PREPAID FREIGHT THE DEFINITION OF THE TERM "GROSS SALES" IN A LEASE, WHICH REQUIRES THE LESSEE TO PAY TO THE GOVERNMENT AS RENT THE GROSS AMOUNT REALIZED FROM SALES OF FERRO ALLOYS PRODUCED AT THE LEASED FACILITY, PRECLUDES DEDUCTION OF ANY KIND AFTER TITLE HAS PASSED TO THE SELLER, AND THEREFORE, THE LEASE MAY NOT BE MODIFIED TO EXCEPT FROM GROSS SALES PREPAID FREIGHT ON GOODS SOLD AT PRICES INCLUDING DELIVERY.

TO THE ADMINISTRATOR, GENERAL SERVICES ADMINISTRATION, AUGUST 3, 1956:

REFERENCE IS MADE TO YOUR LETTER OF JUNE 26, 1956, WITH ENCLOSURES, REQUESTING A DECISION CONCERNING THE PROPRIETY OF AMENDING ARTICLE 4 (D) OF LEASE NO. GS-00-D/S/-1692, DATED MARCH 15, 1954. THE LEASE INVOLVES THE INDUSTRIAL FACILITY AT SPOKANE, WASHINGTON, OCCUPIED BY PACIFIC NORTHWEST ALLOYS, INC., AND THE PROPOSED AMENDMENT WOULD EXCLUDE FROM THE RENTAL BASE, NAMELY," GROSS AMOUNT REALIZED FROM SALES" OF ALL ITEMS PRODUCED AT THE PLANT, THE COST OF FREIGHT ON SUCH ITEMS PAID BY THE LESSEE FOR DELIVERY TO PURCHASERS.

IT APPEARS THAT THE PARTIES ARE IN DISAGREEMENT AS TO WHETHER FREIGHT CHARGES ON SALES OF PRODUCTS PRODUCED AT THE FACILITY BY THE LESSEE SHOULD BE DEDUCTED BEFORE APPLYING THE PERCENTAGE FORMULA IN SUBSECTIONS (A) (1) AND (A) OF ARTICLE 4 OF THE LEASE FOR THE PURPOSE OF COMPUTING THE RENT. YOU STATE THAT THE ADMINISTRATION HAS DENIED THE LESSEE'S REQUEST FOR SUCH DEDUCTIONS BUT AGREED TO SUBMIT THE MATTER FOR OUR DECISION AS TO THE PROPRIETY OF THE PROPOSED AMENDMENT.

THE FACILITY WAS LEASED FOR THE PROCESSING OF ORES, CONCENTRATES, METALS, AND RELATED PRODUCTS AND THE PRODUCTION OF FERRO-ALLOYS, CONCENTRATES, METALS, AND PRODUCTS RELATED THERETO. IT APPEARS THAT CERTAIN OF THESE PRODUCTS ARE GENERALLY SOLD F.O.B. PRODUCER'S PLANT, BUT THAT THE PRINCIPAL PRODUCT NOW BEING MARKETED IS SOLD ON A "DELIVERED-CUSTOMER" BASIS BY SIMILAR PRODUCERS WHOSE PRODUCTION FACILITIES ARE LOCATED ADJACENT TO THEIR CUSTOMERS AND IN AREAS WITH COMPARABLE FREIGHT RATES. THE LESSEE STATES THAT, WHEN IT ENTERED INTO THE SALE OF LOW CARBON FERROCHROME (THE PRINCIPAL PRODUCT PRODUCED AT THE FACILITY), IT ADHERED TO THE ESTABLISHED PURCHASING PRACTICES AND, FOR THE CONVENIENCE OF ITS CUSTOMERS IN BILLING, OFFERED ITS PRODUCT ON A FREIGHT-ALLOWED BASIS. UNDERSTAND FROM THIS THAT THIS PRODUCT IS QUOTED AND SOLD AT A FLAT UNIT PRICE, DELIVERED, AND THAT FREIGHT IS PAID BY THE LESSEE-SELLER. URGING MODIFICATION OF THE LEASE TO PERMIT THE EXCLUSION OF FREIGHT FROM GROSS SALES, THE LESSEE ASSERTS THAT PAYMENTS OF SUCH NATURE CANNOT BY ANY STRETCH OF THE IMAGINATION BE CONSTRUED AS PART OF THE TOTAL INCOME FROM ITEMS PRODUCED AT THE FACILITY. THE LESSEE ASSERTS THAT IT NEVER ANTICIPATED AND DOES NOT BELIEVE THE GOVERNMENT'S NEGOTIATORS INTENDED ON ACCOUNT OF THE LOCATION OF THE PLANT THAT THE COST OF FREIGHT ON SALES WAS INTENDED TO BE INCLUDED IN THE " GROSS SALES" PRICE ON WHICH THE RENTAL IS REQUIRED TO BE COMPUTED. YOU STATE THAT THE CONTRACTING OFFICER IS NOW DEAD AND, IN THE CIRCUMSTANCES, YOU TRANSMITTED A STATEMENT DATED JUNE 6, 1956, BY THE GOVERNMENT NEGOTIATORS WHEREIN IT IS STATED THAT THE PERCENTAGE FIGURES REACHED IN THE NEGOTIATIONS WERE ARRIVED AT ON THE BASIS OF ESTIMATED SELLING PRICES AT THE TIME OF SUCH NEGOTIATIONS AND DID NOT ANTICIPATE A PERCENTAGE OF ANY COSTS OTHER THAN THE ACTUAL SELLING PRICE. THE NEGOTIATORS STATE THAT, TO THE BEST OF THEIR KNOWLEDGE, THE PAYMENT OF FREIGHT BY THE PRODUCER IS A PROCESS PECULIAR TO THIS PARTICULAR INDUSTRY AND IS NOT GENERAL IN ALL MANUFACTURING OR PROCESSING OPERATIONS. IN CONCLUSION THEY STATE THAT, WHILE TO THE BEST OF THEIR RECOLLECTION FREIGHT RATES WERE NOT DISCUSSED, IF THE QUESTIONS HAD ARISEN THEY ARE CONVINCED THAT SPECIFIC PROVISION WOULD HAVE BEEN MADE FOR ELIMINATING PREPAID FREIGHT PAYMENTS FROM THE BASE USED FOR COMPUTATION OF THE RENTAL.

THE RENTAL FORMULA AS PROVIDED IN SUBSECTIONS (A) (1) AND (2) OF ARTICLE 4 OF THE LEASE PROVIDES FOR THE PAYMENT OF SPECIFIED PERCENTAGES OF THE GROSS AMOUNT REALIZED FROM SALES OF ALL PRODUCTS PRODUCED AT THE LEASED FACILITY. ARTICLE 4 (D) PROVIDES AS FOLLOWS:

GROSS SALES DEFINED

" GROSS SALES" SHALL BE CONSTRUED TO MEAN THE TOTAL PRICE AT WHICH ALL ITEMS PRODUCED AT THE LEASED FACILITIES ARE SOLD WITH NO DEDUCTIONS FROM SAID TOTAL OF ANY KIND OR NATURE EXCEPT IN SUCH AMOUNTS AS MAY HAVE BEEN ALLOWED OR CREDITED BY LESSEE TO ITS PURCHASERS FOR PRODUCTS RETURNED AND TRADE DISCOUNTS. " GROSS SALES" SHALL ALSO INCLUDE INTRA-COMPANY TRANSFERS OF ITEMS PRODUCED AT THE LEASED PREMISES. " GROSS SALES" OF THIS TYPE SHALL BE CONSTRUED TO BE THE TOTAL OF THE CURRENT MARKET PRICES, LESS RETURNS, OF THE ITEMS SO TRANSFERRED.

WHILE THE EXACT LANGUAGE OF THE RENTAL PROVISION IS "GROSS AMOUNT REALIZED FROM SALES," RATHER THAN "GROSS SALES," IT MUST BE PRESUMED THAT THE QUOTED PROVISION WAS INTENDED TO DEFINE THE RENTAL BASE. THE CLEAR AND UNAMBIGUOUS LANGUAGE OF THE DEFINITION NECESSARILY PRECLUDES THE DEDUCTION OF FREIGHT PAID BY THE LESSEE. THE ESTABLISHED RULE OF CONTRACT CONSTRUCTION IS THAT A WRITTEN CONTRACT EMBODYING THE FINAL INTENTIONS OF THE PARTIES MUST BE INTERPRETED ACCORDING TO THE LEGAL IMPORT OF ITS TERMS AND THAT, IN THE ABSENCE OF MISTAKE OR FRAUD, ALL PRIOR VERBAL AND WRITTEN STATEMENTS MADE IN REFERENCE TO THE SAME SUBJECT AT OR BEFORE THE TIME OF ITS EXECUTION ARE TO BE CONSIDERED AS MERGED IN THE CONTRACT. 12 AM. JUR., CONTRACTS, SECTION 282. THESE SAME PRINCIPLES ARE APPLICABLE TO LEASES. 51 C.J.S., LANDLORD AND TENANT SECTION 232B; LEVY V. FORMA, 65 N.Y.S.2D 505; SCHOEN-1MCALLISTER V. OAK PARK NATIONAL BANK, 349 ILL. APP. 500, 111 N.E.2D 378. THE LATTER CASE INVOLVED A LEASE CONTAINING A PROVISION IN WHICH RENT WAS BASED ON GROSS SALES OF THE LESSEE, DEFINED AS MEANING TOTAL PRICE OR CHARGE PAID OR AGREED TO BE PAID ON EACH SALE MADE OR SERVICE UNDERTAKEN. THE COURT IN HOLDING THAT THE TERM "GROSS SALES" INCLUDED AMOUNTS COLLECTED BY LESSEE, SUCH AS RETAILERS OCCUPATION TAX, STATED THAT THE INTENTION OF THE PARTIES IS TO BE DETERMINED FROM THE LANGUAGE USED IN THE INSTRUMENT AND NOT FROM ANY SURMISES THAT THE PARTIES INTENDED CERTAIN CONDITIONS WHICH THEY FAILED TO EXPRESS. THE LEVY CASE IS SOMEWHAT SIMILAR TO THE PRESENT CASE. THE LEASE IN THAT CASE PROVIDED FOR PAYMENT OF A FIXED ANNUAL AND ADDITIONAL PERCENTAGE RENTAL, THE LATTER TO BE COMPUTED ON GROSS SALES BUT WITH THE EXPRESS RESERVATION THAT THE PHRASE "GROSS SALES" WAS NOT TO INCLUDE LOCAL SALES TAXES. DEFENDANTS THERE CONTENDED FOR THE RIGHT TO EXCLUDE, IN THE COMPUTATION OF GROSS SALES, THE AMOUNT OF THE FEDERAL EXCISE TAX ON DISTILLED SPIRITS. THE COURT, HOWEVER, HELD THAT IF THEY WERE PERMITTED TO DO SO THEY WOULD, IN EFFECT, BE DEDUCTING AN ITEM OF EXPENSE FROM THE ACTUAL SALES AND THAT THIS WOULD DISTORT THE MEANING OF THE WORD "GROSS" TO SOMETHING LESS THAN THE TOTALITY WHICH ITS USE IMPORTED.

THE LEGAL QUESTION PRESENTED IS SUBSTANTIALLY THE SAME AS HAS BEEN DEALT WITH BY THE COURTS IN A NUMBER OF CASES INVOLVING THE APPLICATION OF SALES OR USE TAXES TO SALES ON A DELIVERED PRICE BASIS. THE RULE DEDUCIBLE FROM THOSE CASES SEEMS TO BE THAT, ABSENT SPECIFIC STATUTORY PROVISION TO THE CONTRARY, THE PRICE PAID BY A PURCHASER TO THE SELLER FOR GOODS AT THE POINT WHERE TITLE PASSES IS THE SALE PRICE INCLUDIBLE IN "GROSS SALES," WITHOUT REGARD TO TRANSPORTATION COSTS TO THAT POINT WHICH MAY HAVE BEEN PAID OR INCURRED BY THE SELLER. SEE WHITCHILL SAND AND GRAVEL COMPANY V. STATE TAX COMM., ( SUP. CT. UTAH, 1944) 150 P.2D 370; GEE COAL CO. V. DEPT. OF FINANCE, 361 ILL. 293, 197 N.E. 871; STATE V. MENEFEE MOTOR CO., 18 LA. APP. 694, 139 SO. 61.

IN VIEW OF THE FOREGOING IT MUST BE CONCLUDED THAT THERE IS NO LEGAL BASIS FOR REFORMING THE LEASE BY EXCEPTING FROM "GROSS SALES," AS DEFINED IN PARAGRAPH 4 (D), PREPAID FREIGHT ON ITEMS PRODUCED AT THE PLANT AND SOLD AT PRICES INCLUDING DELIVERY. AS INDICATED IN YOUR LETTER, THE LESSEE CITES OUR DECISION OF MARCH 30, 1956, B-123906, 35 COMP. GEN. 533, AS JUSTIFICATION FOR THE PROPOSED MODIFICATION OF THE PRESENT LEASE. HOWEVER, WE AGREE WITH YOUR CONCLUSION THAT SINCE THE TWO CASES ARE DISTINGUISHABLE FACTUALLY THE CITED CASE IS NOT CONTROLLING HERE.