B-131558, APR. 25, 1957

B-131558: Apr 25, 1957

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TO THE SECRETARY OF THE ARMY: REFERENCE IS MADE TO A LETTER DATED APRIL 18. OR ANY OTHER TAX OR DUTY FROM WHICH THE CONTRACTOR OR THIS TRANSACTION IS EXEMPT . . . . "/C) STATE OR LOCAL TAXES. THE CONTRACTOR IS OBLIGATED TO AND DOES PAY OR BEAR THE BURDEN OF ANY SUCH TAX (AND DOES NOT SECURE A REFUND THEREOF). THE PARTIES APPEAR TO HAVE SO INTERPRETED IT. ON THE BASIS OF WHICH THE CONTRACT WAS CONSUMMATED. ARTICLE 28 MUST BE HELD TO HAVE BEEN EFFECTIVELY MODIFIED BY THE PROVISIONS OF ARTICLE VII. THE CONTRACT WAS NEGOTIATED PURSUANT TO THE PROVISIONS OF SECTION 2 (C) (1) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947 (PUBLIC LAW 413. THE CONTRACTOR WAS REQUIRED TO EXCLUDE FROM THE CONTRACT PRICE ALL TAXES OF THE TYPE IN QUESTION.

B-131558, APR. 25, 1957

TO THE SECRETARY OF THE ARMY:

REFERENCE IS MADE TO A LETTER DATED APRIL 18, 1957, FROM THE ASSISTANT JUDGE ADVOCATE GENERAL, REQUESTING ADVICE AS TO THE PROPRIETY OF REIMBURSING THE RUST ENGINEERING COMPANY, FIXED-PRICE CONTRACTOR UNDER CONTRACT NO. AF 40/600/-651, DATED JULY 26, 1955, IN AN AMOUNT NOT TO EXCEED $22,974 TO COVER THE AMOUNT OF TENNESSEE SALES AND USE TAXES (TENN. CODE ANN., SEC. 67-3001 ET SEQ.) WHICH THE CONTRACTOR HAS BEEN, OR SHALL BE, REQUIRED TO PAY TO STATE TAXING AUTHORITIES UPON MATERIALS, EQUIPMENT, AND COMPONENTS TO BE INCORPORATED INTO AND MADE A PART OF THE PERMANENT INSTALLATION (DYNAMOMETER) REQUIRED TO BE FURNISHED UNDER THE CONTRACT.

ARTICLE 28 OF THE ADDITIONAL GENERAL PROVISIONS OF THE CONTRACT PROVIDES, IN PERTINENT PART, AS FOLLOWS:

"/A) DEFINITIONS . . . . (I) THE TERM "DIRECT TAX" MEANS ANY TAX OR DUTY DIRECTLY APPLICABLE TO THE COMPLETED SUPPLIES OR SERVICES (AS DISTINGUISHED FROM TAXES DIRECTLY APPLICABLE TO MATERIALS AND COMPONENTS USED IN THE MANUFACTURE OR FURNISHING OF THE COMPLETED SUPPLIES OR SERVICES) COVERED BY THIS CONTRACT, OR ANY OTHER TAX OR DUTY FROM WHICH THE CONTRACTOR OR THIS TRANSACTION IS EXEMPT . . . .

"/C) STATE OR LOCAL TAXES. EXCEPT AS MAY BE OTHERWISE PROVIDED IN THIS CONTRACT, THE CONTRACT PRICE DOES NOT INCLUDE ANY STATE OR LOCAL DIRECT TAX IN EFFECT ON THE CONTRACT DATE.

"/D) EVIDENCE OF EXEMPTION. THE GOVERNMENT AGREES, UPON REQUEST OF THE CONTRACTOR, UNLESS THERE EXISTS NO LEGAL BASIS TO SUSTAIN AN EXEMPTION, TO FURNISH A TAX EXEMPTION CERTIFICATE OR OTHER SIMILAR EVIDENCE OR EXEMPTION WITH RESPECT TO ANY DIRECT TAX NOT INCLUDED IN THE CONTRACT PRICE PURSUANT TO THIS CLAUSE . . . .

"/E) PRICE ADJUSTMENT. IF, AFTER THE CONTRACT DATE, (I) . . . ANY STATE OR LOCAL GOVERNMENT EITHER IMPOSES OR INCREASES (OR REMOVES AN EXEMPTION WITH RESPECT TO) ANY DIRECT TAX OR ANY TAX DIRECTLY APPLICABLE TO THE MATERIALS OR COMPONENTS USED IN THE MANUFACTURE OR FURNISHING OF THE COMPLETED SUPPLIES OR SERVICES COVERED BY THIS CONTRACT, OR (II) . . . ANY STATE OR LOCAL GOVERNMENT REFUSES TO ACCEPT THE EVIDENCE OF EXEMPTION, FURNISHED UNDER PARAGRAPH (D)HEREOF, WITH RESPECT TO ANY DIRECT TAX EXCLUDED FROM THE CONTRACT PRICE, . . . . AND IF UNDER EITHER (I), (II) . . . THE CONTRACTOR IS OBLIGATED TO AND DOES PAY OR BEAR THE BURDEN OF ANY SUCH TAX (AND DOES NOT SECURE A REFUND THEREOF), THE CONTRACT PRICE SHALL BE CORRESPONDINGLY INCREASED . . . .'

AS INDICATED IN THE ASSISTANT JUDGE ADVOCATE GENERAL'S LETTER, THE TERMS OF THE ABOVE-QUOTED ARTICLE PROPERLY MAY NOT BE SAID TO CONTEMPLATE THAT TAXES DIRECTLY APPLICABLE TO MATERIALS AND COMPONENTS USED IN THE MANUFACTURE OR FURNISHING OF THE COMPLETED SUPPLIES, AS DISTINGUISHED FROM DIRECT TAXES AS DEFINED THEREIN, WOULD BE EXCLUDED FROM THE CONTRACT PRICE. HOWEVER, THE PARTIES APPEAR TO HAVE SO INTERPRETED IT, AND THE PROVISIONS OF ARTICLE VII OF THE CONTRACTOR'S PROPOSAL, ON THE BASIS OF WHICH THE CONTRACT WAS CONSUMMATED, PROVIDED AS FOLLOWS:

"ARTICLE VII - SALES TAX

"IN ACCORDANCE WITH ARTICLE XXVIII OF THE ADDITIONAL GENERAL PROVISIONS OF THE PROPOSED CONSTRUCTION CONTRACT (AFPI FORM 10), THE PRICE QUOTED IN THIS PROPOSAL DOES NOT INCLUDE ANY ALLOWANCE FOR SALES OR USE TAXES WHICH CONTRACTOR MAY BE REQUIRED TO PAY ON MATERIALS AND EQUIPMENT WHICH WOULD BECOME A PERMANENT PART OF THE INSTALLATION.'

THUS, ARTICLE 28 MUST BE HELD TO HAVE BEEN EFFECTIVELY MODIFIED BY THE PROVISIONS OF ARTICLE VII, WHICH LEAVE NO ROOM FOR DOUBT THAT THE PARTIES INTENDED TO EXCLUDE TAXES OF THE TYPE INVOLVED FROM THE CONTRACT PRICE. MOREOVER, THE CONTRACT WAS NEGOTIATED PURSUANT TO THE PROVISIONS OF SECTION 2 (C) (1) OF THE ARMED SERVICES PROCUREMENT ACT OF 1947 (PUBLIC LAW 413, 80TH CONGRESS), NOW 10 U.S.C. SEC. 2304 (A) (1), AND, IN THE PROCESS OF NEGOTIATION, IT APPEARS THAT THE CONTRACTING OFFICER EXPRESSLY INFORMED AND ADVISED THE CONTRACTOR THAT UNDER THE TERMS OF ARTICLE 28 OF THE PROSPECTIVE CONTRACT, THE CONTRACTOR WAS REQUIRED TO EXCLUDE FROM THE CONTRACT PRICE ALL TAXES OF THE TYPE IN QUESTION. IT FURTHER APPEARS THAT BOTH THE CONTRACTOR AND CONTRACTING OFFICER WERE OF THE OPINION THAT THE EQUIPMENT AND COMPONENTS TO BE INCORPORATED OF THE OPINION THAT THE EQUIPMENT AND INTO THE DYNAMOMETER REQUIRED TO BE FURNISHED UNDER THE CONTRACT WOULD BE EXEMPT FROM SUCH TAXES; BUT THAT IT WAS THEIR UNDERSTANDING THAT, IF THE STATE OR LOCAL GOVERNMENT NEVERTHELESS SHOULD IMPOSE SUCH TAXES UPON THE CONTRACTOR, THE CONTRACT PRICE WOULD BE CORRESPONDINGLY INCREASED. IN VIEW THEREOF, AND OF THE EXPRESS TERMS OF THE CONTRACTOR'S PROPOSAL RELATIVE TO THE EXCLUSION OF THE TAXES IN QUESTION FROM THE CONTRACT PRICE, WE AGREE WITH THE VIEW EXPRESSED IN THE ASSISTANT JUDGE ADVOCATE GENERAL'S LETTER THAT NO LEGAL BASIS EXISTS FOR DENYING REIMBURSEMENT TO THE CONTRACTOR FOR ANY OF THE TAXES INVOLVED WHICH IT HAS BEEN, OR WILL BE, REQUIRED TO PAY AS A RESULT OF THE PERFORMANCE OF THE CONTRACT.

RELATIVE TO THE PROCEDURE TO BE FOLLOWED IN REIMBURSING THE CONTRACTOR FOR THE TAXES, THE ASSISTANT JUDGE ADVOCATE GENERAL STATES:

"THE RECORD DOES NOT INDICATE WHICH PORTION OF THE AMOUNT CLAIMED BY CONTRACTOR REPRESENTS TENNESSEE SALES AND USE TAXES ACTUALLY PAID TO DATE BY THE CONTRACTOR AS CONTRASTED WITH THE AMOUNT OF SUCH TAXES DUE BUT NOT YET PAID. THE LEGALITY OF THE INSTANT TAXES IS CURRENTLY BEING CONTESTED IN TEST LITIGATION INSTITUTED BY VARIOUS GOVERNMENT CONTRACTORS (SECTION B - INCLOSURE 3). IT IS PROPOSED TO INSTRUCT THE CONTRACTOR TO FOLLOW THE PROCEDURES WITH RESPECT TO PAYMENT OF THE INSTANT TAXES (INCLOSURE 3) CURRENTLY BEING FOLLOWED BY OTHER CONTRACTORS OF THE MILITARY DEPARTMENT. ACCORDINGLY, IT IS PROPOSED:

"/1) TO REIMBURSE CONTRACTOR TO THE EXTEND THAT THE CONTRACTOR HAS PAID THE INSTANT TAXES TO THE STATE AUTHORITIES. WITH RESPECT TO THESE TAXES, CONTRACTOR WOULD BE REQUESTED TO FILE A CLAIM FOR REFUND WITHE THE STATE AUTHORITIES (SECTION A, PARAGRAPH 1D, INCLOSURE 3);

"/2) TO REQUEST RESALE CERTIFICATES FROM THE STATE AUTHORITIES, TO THE EXTENT CONTRACTOR HAS NOT PAID THE INSTANT TAXES TO THE STATE PURSUANT TO SECTION A--- PARTICULARLY PARAGRAPHS 1A, 1B AND 1C--- OF INCLOSURE 3.'

THE PROCEDURE THUS RECOMMENDED BY THE ASSISTANT JUDGE ADVOCATE GENERAL TO BE FOLLOWED IN REGARD TO INSTRUCTIONS TO BE ISSUED TO THE CONTRACTOR IN REGARD TO PAYMENT OF THE TAXES, AND IN REGARD TO REIMBURSEMENT TO THE CONTRACTOR ON ACCOUNT THEREOF, IS HEREBY APPROVED.