B-145607, MAY 6, 1964, 43 COMP. GEN. 721

B-145607: May 6, 1964

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MAY NOT BE DENIED REIMBURSEMENT ON THE BASIS OF A SUBSEQUENT JUDICIAL DETERMINATION THAT THE TAXING STATUTE WAS INVALID. WILL BE CONSIDERED IN NEGOTIATIONS WITH THE STATE OF ILLINOIS TO EFFECT SETTLEMENT OF THE TAX CLAIMS THAT HAVE RESULTED FROM THE OLIN MATHIESON HOLDING (202 F.SUPP. 757. IS UNCONSTITUTIONAL. 1964: REFERENCE IS MADE TO LETTER DATED APRIL 20. THE ASSISTANT SECRETARY STATES THAT THE SUM CLAIMED IS $102. WAS PAID WITH RESPECT TO THE FOLLOWING NAVY CONTRACTS IN THE AMOUNTS INDICATED: TABLE CONTRACT NO. 169.16 HE ALSO SAYS THAT THE CONTRACTS WERE PERFORMED DURING THE PERIOD BETWEEN 1955 AND 1959. THAT ADMIRAL HAS ADVISED THAT THE TAXES WERE PAID TO THE STATE OF ILLINOIS ON JUNE 10.

B-145607, MAY 6, 1964, 43 COMP. GEN. 721

TAXES - STATE - SALES - ILLINOIS A CONTRACTOR REQUIRED TO PAY THE ILLINOIS RETAILERS' OCCUPATION TAX ON SALES TO THE UNITED STATES PRIOR TO NAVY INSTRUCTIONS NOT TO PAY THE TAX, OR IF REQUIRED TO DO SO, TO PAY UNDER PROTEST, MAY NOT BE DENIED REIMBURSEMENT ON THE BASIS OF A SUBSEQUENT JUDICIAL DETERMINATION THAT THE TAXING STATUTE WAS INVALID, AND THE AMOUNT OF THE TAX REFUNDED TO THE CONTRACTOR, REPORTED BY THE DEPARTMENT OF THE NAVY TO THE JUSTICE DEPARTMENT, WILL BE CONSIDERED IN NEGOTIATIONS WITH THE STATE OF ILLINOIS TO EFFECT SETTLEMENT OF THE TAX CLAIMS THAT HAVE RESULTED FROM THE OLIN MATHIESON HOLDING (202 F.SUPP. 757, AFFIRMED 371 U.S. 21) THAT THE ILLINOIS RETAILERS' OCCUPATION TAX AS APPLIED TO SALES TO THE UNITED STATES FROM AUGUST 1, 1953 TO AUGUST 1, 1961, IS UNCONSTITUTIONAL.

TO THE SECRETARY OF THE NAVY, MAY 6, 1964:

REFERENCE IS MADE TO LETTER DATED APRIL 20, 1964, FROM THE ASSISTANT SECRETARY OF THE NAVY (INSTALLATIONS AND LOGISTICS) REQUESTING OUR DECISION AS TO THE PROPRIETY OF REIMBURSING THE ADMIRAL CORPORATION OF CHICAGO, ILLINOIS, FOR ILLINOIS RETAILERS' OCCUPATION TAXES PAID IN CONNECTION WITH THE PERFORMANCE OF CERTAIN NAVY CONTRACTS.

THE ASSISTANT SECRETARY STATES THAT THE SUM CLAIMED IS $102,169.16 WHICH, ACCORDING TO ADMIRAL, WAS PAID WITH RESPECT TO THE FOLLOWING NAVY CONTRACTS IN THE AMOUNTS INDICATED:

TABLE

CONTRACT NO. TAX AMOUNT PAID

NOAS 55-629 $ 28,740.50

NOAS 55-865 3,663.77

NOAS 56-821 26,442.71

NOAS 57-756 39,736.19

NOBSR 64678 3,585.99

----------- $102,169.16

HE ALSO SAYS THAT THE CONTRACTS WERE PERFORMED DURING THE PERIOD BETWEEN 1955 AND 1959; THAT ADMIRAL HAS ADVISED THAT THE TAXES WERE PAID TO THE STATE OF ILLINOIS ON JUNE 10, 1960, AND THAT SUBSEQUENT THERETO, PURSUANT TO INSTRUCTIONS OF THE CONTRACTING OFFICER, IT FILED CLAIMS FOR CREDIT; AND THAT COPIES OF THESE CLAIMS HAVE BEEN FILED WITH THE DEPARTMENT OF THE NAVY.

AS A RESULT OF THE OLIN MATHIESON CASE (202 F.SUPP. 757, AFFIRMED 371 U.S. 21), WHICH HELD THAT THE ILLINOIS RETAILERS' OCCUPATION TAX ACT, AS APPLIED TO SALES TO THE UNITED STATES BETWEEN 1953 AND AUGUST 1, 1961, WAS UNCONSTITUTIONAL BECAUSE OF ITS DISCRIMINATORY PROVISIONS, THE DEPARTMENT OF JUSTICE IS ENDEAVORING TO NEGOTIATE AN OVERALL SETTLEMENT WITH THE STATE OF ILLINOIS OF THE RESPECTIVE TAX CLAIMS OF THE PARTIES. IN THE EVENT ADMIRAL IS REIMBURSED FOR THE TAXES CLAIMED, IT IS STATED THAT THE NAVY WILL NOTIFY THE JUSTICE DEPARTMENT SO THAT THE AMOUNT INVOLVED MAY BE CONSIDERED IN ITS NEGOTIATIONS WITH THE STATE.

IT APPEARS THAT THE DEPARTMENT OF THE NAVY HAS ENDEAVORED TO PREVAIL UPON ADMIRAL TO PERFECT ITS CLAIM FOR CREDIT DIRECTLY WITH THE STATE, BUT ADMIRAL HAS REFUSED TO DO THIS (ALTHOUGH IT HAS TAKEN SUCH ACTION AS NECESSARY TO PROTECT ITS RIGHTS), AND IS PRESSING FOR REIMBURSEMENT FROM THE UNITED STATES UNDER ITS CONTRACTS. IT ALSO APPEARS THAT A REPRESENTATIVE OF THE ILLINOIS DEPARTMENT OF REVENUE HAS INDICATED THAT NO CLAIMS FOR CREDIT WILL BE ALLOWED AS A RESULT OF OLIN MATHIESON UNTIL NEGOTIATIONS BETWEEN THE STATE AND THE DEPARTMENT OF JUSTICE HAVE BEEN CONCLUDED.

THE CONTRACTS IN QUESTION CONTAIN A TAX CLAUSE SIMILAR TO ARTICLE 10 OF STANDARD FORM 32 (NOVEMBER 1949 EDITION) WHICH PRESCRIBED GENERAL PROVISIONS FOR SUPPLY CONTRACTS.

PARAGRAPH (C) THEREOF PROVIDES THAT EXCEPT AS MAY BE OTHERWISE PROVIDED, THE CONTRACT PRICE DOES NOT INCLUDE ANY STATE OR LOCAL DIRECT TAX IN EFFECT ON THE CONTRACT DATE. PARAGRAPH (D) PROVIDES THAT THE GOVERNMENT AGREES, UPON REQUEST OF THE CONTRACTOR, UNLESS THERE EXISTS NO LEGAL BASIS TO SUSTAIN AN EXEMPTION, TO FURNISH EVIDENCE OF EXEMPTION WITH RESPECT TO ANY DIRECT TAX NOT INCLUDED IN THE CONTRACT PRICE, AND THAT THE CONTRACTOR AGREES, IN THE EVENT OF THE REFUSAL OF THE APPLICABLE TAXING AUTHORITY TO ACCEPT SUCH EVIDENCE OF EXEMPTION, PROMPTLY TO NOTIFY THE CONTRACTING OFFICER OF SUCH REFUSAL, TO CAUSE THE TAX IN QUESTION TO BE PAID IN SUCH MANNER AS TO PRESERVE ALL RIGHTS TO REFUND THEREOF, AND IF SO DIRECTED BY THE CONTRACTING OFFICER, TO TAKE ALL NECESSARY ACTION, IN COOPERATION WITH AND FOR THE BENEFIT OF THE GOVERNMENT, TO SECURE A REFUND OF SUCH TAX.

PARAGRAPH (E) PROVIDES THAT IF ANY STATE OR LOCAL GOVERNMENT REFUSES TO ACCEPT THE EVIDENCE OF EXEMPTION WITH RESPECT TO ANY DIRECT TAX EXCLUDED FROM THE CONTRACT PRICE, OR IF THE GOVERNMENT DOES NOT FURNISH EVIDENCE OF EXEMPTION WITH RESPECT THERETO AND THE CONTRACTOR IS OBLIGED TO PAY SUCH TAX, THE CONTRACT PRICE SHALL BE CORRESPONDINGLY INCREASED.

IT DOES NOT APPEAR THAT ADMIRAL HAD REQUESTED OR TENDERED EVIDENCE OF EXEMPTION PRIOR TO PAYING THE TAXES AS OF JUNE 10, 1960. HOWEVER, INASMUCH AS THE GENERAL ACCOUNTING OFFICE HAD TAKEN THE POSITION THAT THERE WAS NO LEGAL BASIS TO SUSTAIN AN EXEMPTION WITH RESPECT THERETO (17 COMP. GEN. 863 AND 20 ID. 752), AND SINCE UNDER THE CIRCUMSTANCES A TAX EXEMPTION WOULD NOT HAVE BEEN GRANTED EVEN IF TIMELY APPLICATION THEREFOR HAD BEEN MADE, SUCH ACTION STANDING ALONE WOULD NOT BE SUFFICIENT TO DEFEAT ADMIRAL'S ENTITLEMENT TO REIMBURSEMENT FOR TAXES PAID, IF SUCH ENTITLEMENT WERE OTHERWISE ESTABLISHED. 39 COMP. GEN. 432.

IT APPEARS THAT IN SEPTEMBER OF 1960, THE GOVERNMENT OBTAINED A TEMPORARY INJUNCTION AGAINST THE STATE OF ILLINOIS WITH RESPECT TO THE COLLECTION OF THE SALES TAX FROM GOVERNMENT CONTRACTORS. ON FEBRUARY 24, 1961, THE STATE WAS PERMANENTLY ENJOINED FROM COLLECTING THE TAX ON SUCH SALES (191 F.SUPP. 723 (N.D.ILL., 1963) ); ON NOVEMBER 9, 1961, THE SUPREME COURT VACATED THAT JUDGMENT AND REMANDED THE CASE TO THE DISTRICT COURT FOR FURTHER CONSIDERATION; ON MARCH 7, 1962 (202 F.SUPP. 757 (N.D.ILL., 1962) (, THE DISTRICT COURT HELD THAT THE TAX, AS APPLIED TO SALES TO THE UNITED STATES, WAS UNCONSTITUTIONAL FROM AUGUST 1, 1953, TO AUGUST 1, 1961, DURING WHICH PERIOD THE TAX AS APPLIED TO INSTRUMENTALITIES OF THE STATE OF ILLINOIS WERE EXEMPT FROM THE TAX, WHILE NO SUCH EXEMPTION WAS APPLICABLE TO SALES TO THE FEDERAL GOVERNMENT. ON OCTOBER 15, 1962 (371 U.S. 21), THE SUPREME COURT AFFIRMED WITHOUT OPINION THE JUDGMENT OF THE DISTRICT COURT.

THE FIRST NAVY INSTRUCTIONS REGARDING THE VALIDITY OF THE ILLINOIS RETAILERS' OCCUPATION TAX ON SALES TO THE UNITED STATES WERE ISSUED ON NOVEMBER 7, 1960. THOSE INSTRUCTIONS DIRECTED CONTRACTING OFFICERS TO INSTRUCT ILLINOIS CONTRACTORS NOT TO PAY THE TAX, AND IF REQUIRED TO DO SO, TO PAY UNDER PROTEST. IT WILL BE NOTED THAT SUCH INSTRUCTIONS ARE NOT PERTINENT TO THE TAXES IN QUESTION, SINCE THEY HAD BEEN PAID PRIOR TO NOVEMBER 1960. THE PERTINENT INSTRUCTIONS ARE THE ONES WHICH WERE FIRST ISSUED IN JUNE 1961, REQUIRING CONTRACTORS TO FILE CLAIMS FOR CREDIT ON TAXES PAID SUBSEQUENT TO DECEMBER 31, 1957. IT APPEARS THAT ADMIRAL CORPORATION HAS COMPLIED WITH SUCH INSTRUCTIONS.

THE ISSUE THEREFORE IS WHETHER A CONTRACTOR WHO IS OTHERWISE ENTITLED TO BE REIMBURSED FOR DIRECT STATE SALES TAXES PAID BY HIM MAY BE DENIED REIMBURSEMENT THEREFOR SOLELY BECAUSE, SUBSEQUENT TO SUCH PAYMENT IT HAS BEEN JUDICIALLY DETERMINED THAT THE STATE STATUTE PURPORTEDLY IMPOSING THE TAX IS UNCONSTITUTIONAL. DOUBT IN THE MATTER RESULTS FROM THE FOLLOWING LANGUAGE APPEARING IN 38 COMP. GEN. 624 WHICH CONCERNED A SIMILAR TAX CLAUSE:

* * *. ARTICLE 19 PROVIDES, IN EFFECT, THAT THE CONTRACT PRICE WILL BE INCREASED IN THE AMOUNT OF ANY DIRECT TAX THE CONTRACTOR IS "OBLIGED TO AND DOES PAY.' WE ARE OF THE VIEW THAT UNDER THIS CONTRACT PROVISION THE CONTRACTOR MUST BE LEGALLY OBLIGED TO PAY SUCH TAX AND NOT MERELY REQUESTED TO DO SO. THE CONTRACT MAY NOT BE CONSTRUED TO COMPREHEND REIMBURSEMENT FOR A TAX WHICH IS NOT LAWFULLY APPLICABLE TO THE CONTRACTOR. * * *.

THAT CASE INVOLVED A NEW YORK CORPORATION WHICH PAID THE SOUTH CAROLINA SALES TAX UNDER CIRCUMSTANCES IN WHICH WE HELD THAT THE IMPOSITION OF SUCH TAX WOULD VIOLATE THE COMMERCE CLAUSE OF THE CONSTITUTION. OF PARTICULAR SIGNIFICANCE THERE ARE THE FACTS THAT THE STATE DID NOT MAKE A SPECIFIC REQUEST THAT THE CONTRACTOR PAY THE TAX ON THE INDIVIDUAL TRANSACTION IN QUESTION, AND THAT WHILE THE MATTER WAS NOT FREE OF DOUBT THE CONTRACTOR PAID THE TAX WITHOUT REQUESTING INSTRUCTIONS FROM THE CONTRACTING OFFICER OR SEEKING EXEMPTION THEREFOR FROM THE STATE. UNDER THE CIRCUMSTANCES, THAT CONTRACTOR CLEARLY WAS NOT ENTITLED TO REIMBURSEMENT.

WE HAVE NO DOUBT, HOWEVER, WITH RESPECT TO THAT SOUTH CAROLINA CASE (38 COMP. GEN. 624), THAT IF THE STATE HAD SPECIFICALLY REQUIRED THE CONTRACTOR TO PAY THE TAX ON THE PARTICULAR TRANSACTION IN QUESTION, AND IF HE HAD FOLLOWED THE PROCEDURE PRESCRIBED BY PARAGRAPH (D) OF HIS CONTRACT TAX CLAUSE--- I.E., REQUESTED EXEMPTION FROM THE STATE, PAID UNDER PROTEST, SAVING HIS RIGHTS, AND TAKEN ANY OTHER ACTION PURSUANT TO THE CONTRACTING OFFICER'S INSTRUCTIONS--- THE GOVERNMENT WOULD HAVE BEEN LEGALLY OBLIGATED TO REIMBURSE HIM PURSUANT TO PARAGRAPH (E) OF THE TAX CLAUSE, IRRESPECTIVE OF WHETHER IT WAS LATER DETERMINED THAT THE IMPOSITION OF THE TAX WAS INVALID UNDER THE CIRCUMSTANCES.

CONSEQUENTLY, WE CONCLUDE THAT A CONTRACTOR WHO IS OTHERWISE ENTITLED UNDER HIS CONTRACT TO BE REIMBURSED FOR PAYING STATE SALES TAXES MAY NOT BE DENIED REIMBURSEMENT SOLELY ON THE BASIS OF A SUBSEQUENT DETERMINATION THAT THE TAXING STATUTE WAS INVALID. THE DECISION REPORTED IN 38 COMP. GEN. 624 WAS NOT INTENDED, AND SHOULD NOT BE CONSTRUED, TO HOLD OTHERWISE.

WE THEREFORE CONCLUDE THAT THE ADMIRAL CORPORATION IS ENTITLED TO REIMBURSEMENT FOR THE ILLINOIS RETAILERS' OCCUPATION TAXES PAID IN CONNECTION WITH PERFORMANCE OF THE CONTRACTS IN QUESTION.