B-132417, AUGUST 5, 1957, 37 COMP. GEN. 85

B-132417, AUGUST 5, 1957, 37 COMP. GEN. 85

STATES - FEDERAL AID, GRANTS, ETC. - STATE SALES TAXES FEDERAL FUNDS WHICH ARE GRANTED TO THE STATES FOR COOPERATIVE AGRICULTURAL EXPERIMENT WORK BECOME STATE FUNDS SUBJECT ONLY TO STATE RESTRICTIONS AND THE STATES IN DISBURSING THE GRANTS MAY NOT BE CONSIDERED AGENTS OF THE UNITED STATES; THEREFORE, NO OBJECTION IS MADE TO THE PAYMENT FROM SUCH FEDERAL GRANT FUNDS OF NONDISCRIMINATORY STATE SALES TAXES ON SERVICES AND SUPPLIES PROCURED BY THE STATES, AS PURCHASERS, TO CARRY OUT THE PURPOSES OF THE GRANT. 14 COMP. GEN. 747, OVERRULED. PAYMENT OF STATE SALES TAXES ON PURCHASES MADE BY THE STATES FOR AGRICULTURAL EXTENSION AND EXPERIMENT WORK FOR WHICH THE STATE RECEIVES FEDERAL GRANTS IS NOT TO BE REGARDED AS A DIVERSION OF FUNDS FOR A PURPOSE NOT AUTHORIZED IN THE GRANT BUT RATHER IS TO BE REGARDED AS INCIDENT TO THE PURPOSE OF THE GRANT. 14 COMP. GEN. 747, OVERRULED.

TO THE SECRETARY OF AGRICULTURE, AUGUST 5, 1957:

ON JULY 1, 1957, THE ASSISTANT SECRETARY REQUESTED OUR DECISION WHETHER FEDERAL FUNDS, GRANTED TO THE VARIOUS STATES AND TERRITORIES FOR COOPERATIVE AGRICULTURAL EXTENSION WORK AND FOR THE WORK CARRIED ON BY STATE AGRICULTURAL EXPERIMENT STATIONS, MAY BE USED TO PAY STATE SALES TAXES ON COMMODITIES OR SERVICES PROCURED BY THE STATES FROM SUCH FUNDS, WHERE THE LEGAL INCIDENCE OF THE TAX IS ON THE PURCHASER.

OUR DECISION IN 14 COMP. GEN. 747 (A-46031, APRIL 9, 1935) WAS CITED AS PROHIBITING THE PAYMENT OF SUCH TAX ON THE GROUNDS THAT IT WOULD CONSTITUTE AN UNLAWFUL DIVERSION OF THE FUNDS TO A PURPOSE NOT AUTHORIZED IN THE GRANTS.

IT IS WELL ESTABLISHED THAT THE UNITED STATES' CONSTITUTIONAL IMMUNITY FROM STATE OR LOCAL TAXATION EVEN ON PURCHASES DIRECTLY BY A FEDERAL AGENCY DOES NOT EXTEND TO SALES TAXES WHERE THE LEGAL INCIDENCE OF THE TAX IS ON THE VENDOR. ( ALABAMA V. KING AND BOOZER, 314 U.S. 1; 24 COMP. GEN. 150; 33 ID. 453.) ON THE OTHER HAND, THE RULE IS WELL ESTABLISHED ALSO THAT A STATE SALES TAX, THE LEGAL INCIDENCE OF WHICH IS ON THE PURCHASER, WOULD CONTRAVENE THE IMMUNITY ACCORDED TO THE UNITED STATES BY THE CONSTITUTION IF APPLIED TO PURCHASES MADE BY AGENTS OR INSTRUMENTALITIES OF THE UNITED STATES FROM FEDERAL FUNDS. MCCULLOCH V. MARYLAND, 4 WHEAT. 316.

THE FIRST QUESTION HERE IS WHETHER THE STATES, IN OBLIGATING AND DISBURSING THE FUNDS GRANTED TO THEM BY CONGRESS FOR COOPERATIVE AGRICULTURAL EXTENSION WORK AND EXPERIMENT STATION RESEARCH, STAND IN SUCH RELATIONSHIP TO THE GOVERNMENT THAT PURCHASES BY A STATE BECOME, IN LEGAL EFFECT, PURCHASES BY THE UNITED STATES. IF SUCH A RELATIONSHIP EXISTS OR, IN OTHER WORDS, IF THE FUNDS SO GRANTED MUST CONTINUE TO BE REGARDED AS FEDERAL FUNDS UNTIL DISBURSED BY THE STATE OFFICIALS, WHO IN THAT CASE WOULD BE ACTING AS AGENTS OF THE UNITED STATES, THEN IT FOLLOWS THAT PAYMENT OF STATES SALES TAXES, THE LEGAL INCIDENCE OF WHICH IS ON THE PURCHASER, WOULD VIOLATE THE CONSTITUTIONAL IMMUNITY OF THE UNITED STATES AGAINST STATE AND LOCAL TAXATION.

THE GENERAL RULE REGARDING THE CHARACTER AND STATUS OF SUCH FUNDS IS STATED IN 28 COMP. GEN. 54 AS FOLLOWS:

* * * IT CONSISTENTLY HAS BEEN HELD WITH RESPECT TO FEDERAL FUNDS GRANTED TO A STATE THAT, WHEN SUCH FUNDS ARE RECEIPTED FOR BY THE STATE, THEY BECOME STATE FUNDS AND, IN THE ABSENCE OF A CONDITION OF THE GRANT SPECIFICALLY PRESCRIBING TO THE CONTRARY, ARE TOTALLY DIVESTED OF THEIR IDENTITY AS FEDERAL FUNDS AND BECOME FUNDS OF THE STATE AND THE EXPENDITURE THEREOF IS SUBJECT TO THE LAWS AND REGULATIONS APPLICABLE TO THE EXPENDITURE OF STATE FUNDS RATHER THAN BY FEDERAL LAWS APPLICABLE TO THE EXPENDITURE OF APPROPRIATED MONEYS BY THE DEPARTMENTS AND ESTABLISHMENTS OF THE GOVERNMENT.

THAT THIS RULE IS APPLICABLE TO GRANTS FOR AGRICULTURAL EXTENSION WORK AND FOR THE WORK CARRIED ON BY STATE AGRICULTURAL EXPERIMENT STATIONS SEEMS APPARENT FROM THE LANGUAGE OF THE CONTROLLING STATUTES. 7 U.S.C. 341-348; 361-389, SUPP. IV. CF. 25 25 COMP. GEN. 868 AND 36 COMP. GEN. 84.

THE STATES, THEREFORE, IN DISBURSING GRANT FUNDS FOR PURPOSES WITHIN THE SCOPE OF THE GRANT, MAY NOT BE CONSIDERED AS "AGENTS" OF THE UNITED STATES; AND, EXCEPT FOR CONDITIONS SPECIFIED BY CONGRESS IN THE GRANTS, THEY ARE SUBJECT ONLY TO THE RESTRICTIONS IMPOSED BY STATE LAWS AND REGULATIONS ON THE DISBURSEMENT OF OTHER STATE FUNDS. IF A STATE, UNDER ITS LAWS, IS REQUIRED TO PAY SALES TAXES ON PURCHASES MADE WITH FUNDS DERIVED FROM STATE REVENUES, WE CAN SEE NO REASONABLE BASIS FOR HOLDING THAT SUCH SALES TAXES MAY NOT LIKEWISE APPLY TO PURCHASES WITH FUNDS OBTAINED BY THE STATE THROUGH A FEDERAL GRANT, PROVIDED THE TERMS OF THE GRANT DO NOT EXPRESSLY PROHIBIT THE PAYMENT OF SUCH TAXES.

THE DECISION IN 14 COMP. GEN. 747, MENTIONED ABOVE AND IN THE ASSISTANT SECRETARY'S LETTER, WAS NOT BASED ON THE CONSTITUTIONAL IMMUNITY OF THE UNITED STATES AGAINST LOCAL TAXATION; AND, IN VIEW OF THE STATUS OF THE FUNDS HERE INVOLVED AND THE ROLE OF THE STATES RELATING THERETO AS DISCUSSED ABOVE, THE QUESTIONS OF IMMUNITY AND WHETHER THE LEGAL INCIDENCE OF THE TAX FALLS ON THE VENDOR OR VENDEE NEED NOT BE CONSIDERED HERE. THE DECISION IN 14 COMP. GEN. 747 WAS BASED ON AN INTERPRETATION WHICH WE DO NOT NOW CONSIDER TO BE JUSTIFIED, NAMELY, THAT THE PAYMENT OF STATE SALES TAXES ON AUTHORIZED PURCHASES CONSTITUTED A DIVERSION OF THE FUNDS TO A PURPOSE NOT AUTHORIZED IN THE GRANT. WE NOW ARE OF THE OPINION THAT THE PAYMENT OF SUCH TAXES ON OTHERWISE VALID PURCHASES MADE TO ACCOMPLISH THE PURPOSES OF THE GRANT IS ONLY INCIDENTAL TO THE AUTHORIZED PURPOSE AND NOT, IN ITSELF, A SEPARATE "PURPOSE" OUTSIDE THE SCOPE OF THE GRANT.

YOU ARE ADVISED, THEREFORE, THAT UNLESS A STATE'S OTHER FUNDS ARE EXEMPT NO OBJECTION NEED BE MADE TO THE PAYMENT FROM THESE FUNDS OF SUCH NONDISCRIMINATORY SALES TAXES AS MAY BE IMPOSED BY THE STATES, MUNICIPALITIES, AND LOCAL AUTHORITY ON SERVICES OR COMMODITIES PROPERLY PROCURED BY THE STATES, AS PURCHASERS, TO ACCOMPLISH THE PURPOSES OF THE GRANTS AS SET OUT IN 7 U.S.C. 341-348; 361-389, SUPP. IV.

CONSEQUENTLY, THE DECISION IN 14 COMP. GEN. 747, SO FAR AS IT HELD THAT SUCH PAYMENT WOULD CONSTITUTE AN UNLAWFUL DIVERSION OF THE FUNDS, IS OVERRULED.