B-150792, MARCH 22, 1963, 42 COMP. GEN. 517

B-150792: Mar 22, 1963

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WHEN THE TAX WAS HELD APPLICABLE TO THE STATE OF ILLINOIS. - IS APPLICABLE TO GOVERNMENT ORDERS AFTER AUGUST 1. WHERE THE TAX WAS PROVIDED FOR IN THE CONTRACT AS A SEPARATE ITEM. PAYMENT IS NOT AUTHORIZED WHERE TAXES ARE CONCEALED IN THE BID PRICE. OR THERE IS NO EXPECTATION OF REIMBURSEMENT. THE INCLUSION OF THE STANDARD TAX CLAUSE IN THE BID INVITATION AND THE TAX IN THE BID PRICE WILL SUFFICE. HAS RECEIVED NOTICE FROM THE DEPARTMENT OF REVENUE THAT ALL RETAILERS WITH OCCUPATION TAX LIABILITY ARE REQUIRED TO FILE AMENDED RETURNS BACK TO AUGUST 1. YOU STATE THAT YOUR OFFICE HAS ALWAYS INCORPORATED INTO YOUR CONTRACT TERMS AND CONDITIONS THE STANDARD TAX CLAUSE AS USED BY GENERAL SERVICES ADMINISTRATION BUT THAT FROM THE INFORMATION AVAILABLE YOU HAVE BEEN UNABLE TO DETERMINE THE CONSTITUTIONALITY OF THE TAX.

B-150792, MARCH 22, 1963, 42 COMP. GEN. 517

TAXES - STATE - BUSINESS PRIVILEGE - GOVERNMENT LIABILITY THE CONSTITUTIONALITY OF THE ILLINOIS RETAILERS' OCCUPATION TAX BECOMING EFFECTIVE AS TO THE FEDERAL GOVERNMENT ON AUGUST 1, 1961, WHEN THE TAX WAS HELD APPLICABLE TO THE STATE OF ILLINOIS, THE TAX--- NOT A SALES TAX BUT A PERSONAL TAX ON BOTH DOMESTIC AND FOREIGN CONTRACTORS FOR THE PRIVILEGE OF DOING BUSINESS IN ILLINOIS--- IS APPLICABLE TO GOVERNMENT ORDERS AFTER AUGUST 1, 1961, WHETHER FILLED FROM SOURCES WITHIN ILLINOIS OR SHIPPED INTO ILLINOIS FROM ANOTHER STATE AND, THEREFORE, AGENCIES MAY REIMBURSE CONTRACTORS, EXCEPT FOR THE SUBMISSION OF DOUBTFUL CLAIMS TO THE CLAIMS DIVISION OF THE GENERAL ACCOUNTING OFFICE, UNDER CONTRACTS THAT INCLUDED THE TAX CLAUSE, WHERE THE TAX WAS PROVIDED FOR IN THE CONTRACT AS A SEPARATE ITEM, OR IT CAN BE ESTABLISHED THAT THE BID PRICE DID NOT INCLUDE THE TAX BECAUSE OF DOUBT AS TO ITS VALIDITY, BUT PAYMENT IS NOT AUTHORIZED WHERE TAXES ARE CONCEALED IN THE BID PRICE, OR THERE IS NO EXPECTATION OF REIMBURSEMENT, AND FOR THE PURPOSE OF EVALUATING FUTURE PROCUREMENTS, THE INCLUSION OF THE STANDARD TAX CLAUSE IN THE BID INVITATION AND THE TAX IN THE BID PRICE WILL SUFFICE.

TO THE PUBLIC PRINTER, UNITED STATES GOVERNMENT PRINTING OFFICE, MARCH 22, 1963:

BY LETTER DATED FEBRUARY 7, 1963, WITH ENCLOSURES, YOU REQUESTED OUR DECISION ON CERTAIN QUESTIONS PERTAINING TO THE APPLICABILITY OF THE ILLINOIS RETAILERS' OCCUPATION TAX ACT OF JUNE 28, 1933, AS AMENDED, CH. 120 SEC. 440 FF., SMITH-HURD ANN.STATS., ON CURRENT ORDERS FROM CONTRACTORS AND ON OTHER ORDERS TO WHICH THE TAX WOULD APPLY DATING BACK TO AUGUST 1, 1961.

THE ENCLOSURES SHOW THAT ONE OF YOUR CONTRACTORS (BUSINESS SUPPLIES CORPORATION OF AMERICA) WHICH DID NOT INCLUDE THE TAX IN ITS PRESENT CONTRACT NOR IN ITS PRIOR CONTRACTS BACK TO AUGUST 1, 1961, HAS RECEIVED NOTICE FROM THE DEPARTMENT OF REVENUE THAT ALL RETAILERS WITH OCCUPATION TAX LIABILITY ARE REQUIRED TO FILE AMENDED RETURNS BACK TO AUGUST 1, 1961, AND TO REMIT THE TAX DUE AS SHOWN BY SUCH AMENDED RETURN. YOU STATE THAT YOUR OFFICE HAS ALWAYS INCORPORATED INTO YOUR CONTRACT TERMS AND CONDITIONS THE STANDARD TAX CLAUSE AS USED BY GENERAL SERVICES ADMINISTRATION BUT THAT FROM THE INFORMATION AVAILABLE YOU HAVE BEEN UNABLE TO DETERMINE THE CONSTITUTIONALITY OF THE TAX.

THE ACT, BY ITS TERMS, IMPOSES THE TAX "UPON PERSONS ENGAGED IN THE BUSINESS OF SELLING TANGIBLE PERSONAL PROPERTY AT RETAIL IN THE STATE OF ILLINOIS.' WITH CERTAIN EXCEPTIONS, THE TAX FALLS ON ALL WHO COME WITHIN THE CLASSIFICATION, THAT IS, THOSE WHO SELL AT RETAIL TO THE STATE OF ILLINOIS AND ITS SUBDIVISIONS AND THOSE WHO SELL TO THE FEDERAL GOVERNMENT OR PRIVATE CITIZENS OR CORPORATIONS. THE STATUTE AS AMENDED BY SECTION 1 OF THE ACT OF JULY 13, LAWS 1953, P. 1310, EXEMPTED FROM ITS APPLICATION RETAILERS SELLING TO "THE STATE OF ILLINOIS, ANY COUNTY, POLITICAL SUBDIVISION OR MUNICIPALITY THEREOF, OR TO ANY INSTRUMENTALITY OR INSTITUTION OF ANY OF THE GOVERNMENTAL UNITS AFORESAID," AS WELL AS RETAILERS WHO SOLD TO CERTAIN NONGOVERNMENTAL UNITS SUCH AS CHARITIES, SCHOOLS AND CHURCHES. NO SUCH EXEMPTION WAS GRANTED TO RETAILERS SELLING TO THE FEDERAL GOVERNMENT.

THE PRELIMINARY HISTORY CONCERNING COURT ACTION RELATING TO THE CONSTITUTIONALITY OF THE STATUTE IS SET OUT IN 41 COMP. GEN. 395. AS A RESULT OF FURTHER DEVELOPMENTS IN THE MATTER A THREE-JUDGE FEDERAL DISTRICT COURT IN UNITED STATES AND OLIN MATHIESON CHEMICAL CORP. V. DEPARTMENT OF REVENUE OF THE STATE OF ILLINOIS, 202 F.SUPP. 757, HELD THAT THE TAX, AS APPLIED TO SALES TO THE UNITED STATES, WAS UNCONSTITUTIONAL FROM AUGUST 1953 TO AUGUST 1, 1961, DURING WHICH PERIOD THE TAX AS APPLIED TO SALES TO THE STATE OF ILLINOIS WERE EXEMPT FROM THE TAX, WHILE NO SUCH EXEMPTION WAS APPLICABLE TO SALES TO THE FEDERAL GOVERNMENT. THE COURT HELD, HOWEVER, THAT THE TAX BECAME APPLICABLE TO SALES TO THE FEDERAL GOVERNMENT BEGINNING WITH THE REPEAL OF THE STATE EXEMPTION EFFECTIVE AS OF AUGUST 1, 1961. SINCE SEPTEMBER 1960, THE STATE HAS BEEN JUDICIALLY RESTRAINED FROM COLLECTING THE TAX FROM GOVERNMENT CONTRACTORS. THESE RESTRAINTS, HOWEVER, WERE TERMINATED AS TO THE PERIOD COMMENCING AUGUST 1, 1961, WHEN THE UNITED STATES SUPREME COURT ON OCTOBER 15, 1962, AFFIRMED WITHOUT OPINION THE JUDGMENT OF THE DISTRICT COURT.

IN ORDER TO ADVISE YOUR CONTRACTORS AS TO THE VALIDITY OF THE TAX AND AS TO WHETHER THEY MAY EXPECT REIMBURSEMENT OF THE TAXES NOW DEMANDED BY THE DEPARTMENT OF REVENUE YOU REQUEST ANSWERS TO THE FOLLOWING QUESTIONS:

1. IS THE STATE OF ILLINOIS RETAILERS' OCCUPATION SALES TAX APPLICABLE TO ORDERS ISSUED BY THE FEDERAL GOVERNMENT)

2. IF THE ANSWER TO QUESTION 1 IS IN THE AFFIRMATIVE, WOULD THE TAX BE APPLICABLE TO ONLY THOSE ORDERS MANUFACTURED AND SHIPPED TO AN AGENCY WITHIN THE STATE OF ILLINOIS)

3. IF THE TAX IS PAYABLE BY THE FEDERAL GOVERNMENT, DOES THE TAX CLAUSE IN OUR CONTRACTS AUTHORIZE PAYMENT BY THE GOVERNMENT WHEN:

A. THE TAX IS CONCEALED IN THE CONTRACTOR'S BID PRICE?

B. THE TAX IS SEPARATELY STATED IN THE CONTRACTOR'S BID AS PAYABLE

BY THE U.S. GOVERNMENT? C. THE CONTRACTOR HAS NOT INDICATED

IN HIS BID WHETHER OR NOT THE

TAX IS INCLUDED IN HIS BID PRICE OR WHETHER HE EXPECTS TO BE

REIMBURSED FOR THE TAX BY THE U.S. GOVERNMENT?

4. IF THIS TAX IS TO BE CONSIDERED IN DETERMINING THE LOWEST BIDDERS ON FUTURE ADVERTISEMENTS, WILL THE BIDDERS BE REQUIRED TO INCLUDE A PROVISION IN THEIR BIDS THAT SUCH TAX WILL BE BILLED TO THE GOVERNMENT IN ORDER THAT THEY MAY RECEIVE REIMBURSEMENT FOR THE TAX?

5. IF THE TAX IS VALID AND THE AMOUNT OF SUCH TAX IS REQUIRED TO BE PAID BY THE VARIOUS GOVERNMENT AGENCIES, WILL THE AGENCIES HAVE THE AUTHORITY TO REIMBURSE THE CONTRACTORS FOR PAST TAXES WITHOUT SENDING THE BILLS TO THE CLAIMS DIVISION OF YOUR OFFICE FOR CONSIDERATION AND SETTLEMENT AS CLAIMS?

UNDER THE DECISION ABOVE REFERRED TO THE ANSWER TO YOUR FIRST QUESTION IS CLEARLY IN THE AFFIRMATIVE, AS TO SALES CONSUMMATED AFTER AUGUST 1, 1961.

AS TO QUESTION 2, THE INCIDENCE OF THE TAX IS NOT ON MANUFACTURING BUT "UPON PERSONS ENGAGED IN THE BUSINESS OF SELLING PERSONAL PROPERTY AT RETAIL" IN ILLINOIS. IT IS NOT A TAX ON SALES BUT A PERSONAL TAX ON THE PRIVILEGE OF DOING BUSINESS WITHIN THE STATE MEASURED BY THE GROSS RECEIPTS FROM SALES OF TANGIBLE PERSONAL PROPERTY FOR DELIVERY WITHIN THE STATE. 17 COMP. GEN. 863; PEOPLES DRUG SHOP, INC. V. MOYSEY, 384 ILL. 283, 51 N.E.2D 144; DEPARTMENT OF REVENUE V. JENNISON WRIGHT CORP., 393 ILL. 401, 66 N.E.2D 395, 401. THE TAX DOES NOT ACCRUE BY REASON OF THE CONSUMMATION OF A RETAIL SALE, BUT IS BASED ON THE RECEIPTS THEREFROM IN THE HANDS OF THE VENDOR. REIF V. BARRETT, 335 ILL. 104, 188 N.E. 889. TO THE APPLICABILITY OF THE TAX ON FOREIGN CORPORATIONS DOING BUSINESS WITHIN THE STATE THE SUPREME COURT OF THE UNITED STATES IN CONSIDERING THE CONSTITUTIONALITY OF THE STATUTE AS APPLIED TO FOREIGN CORPORATIONS SUSTAINED THE VALIDITY OF THE TAX ON ALL SALES TO ILLINOIS CUSTOMERS FROM THE HEAD OFFICE IN ANOTHER STATE EXCEPT ON ORDERS SENT DIRECTLY BY THE CUSTOMERS TO THE HEAD OFFICE AND SHIPPED DIRECTLY TO THE CUSTOMERS FROM THE HEAD OFFICE. NORTON COMPANY V. DEPARTMENT OF REVENUE OF ILLINOIS, 340 U.S. 534. IN REACHING THAT CONCLUSION THE COURT STATED---

BUT WHEN, AS HERE, THE CORPORATION HAS GONE INTO THE STATE TO DO LOCAL BUSINESS BY STATE PERMISSION AND HAS SUBMITTED ITSELF TO THE TAXING POWER OF THE STATE, IT CAN AVOID TAXATION ON SOME ILLINOIS SALES ONLY BY SHOWING THAT PARTICULAR TRANSACTIONS ARE DISASSOCIATED FROM THE LOCAL BUSINESS AND INTERSTATE IN NATURE. THE GENERAL RULE, APPLICABLE HERE, IS THAT A TAXPAYER CLAIMING IMMUNITY FROM A TAX HAS THE BURDEN OF ESTABLISHING HIS EXEMPTION.

THE ONLY ITEMS THAT ARE SO CLEARLY INTERSTATE IN CHARACTER THAT THE STATE COULD NOT REASONABLY ATTRIBUTE THEIR PROCEEDS TO LOCAL BUSINESS ARE ORDERS SENT DIRECTLY TO WORCESTER (MASSACHUSETTS) BY THE CUSTOMER AND SHIPPED DIRECTLY TO THE CUSTOMER FROM WORCESTER. INCOME FROM THOSE WE THINK WAS NOT SUBJECT TO THIS TAX.

YOUR THIRD QUESTION IS UNDERSTOOD TO BE DIRECTED TO THE RIGHTS OF CONTRACTORS TO REIMBURSEMENT FOR THE AMOUNT OF TAXES TO WHICH THEY ARE PROPERLY SUBJECT ON ACCOUNT OF SALES TO THE GOVERNMENT, IN THE THREE SITUATIONS STATED. OBVIOUSLY, IF THE TAX WAS IN FACT INCLUDED IN THE CONTRACT PRICE (AS IT WOULD NORMALLY BE REQUIRED TO BE UNDER THE PROVISIONS OF THE STANDARD TAX CLAUSE) NO ADDITIONAL PAYMENT COULD BE REQUIRED OR JUSTIFIED, AND THE ANSWERS TO SECTIONS A AND C OF YOUR QUESTION WOULD APPEAR TO BE IN THE NEGATIVE. HOWEVER, IF AT THE TIME OF BIDDING IT WAS CONSIDERED, BY REASON OF JUDICIAL DECISIONS THEN IN EFFECT, THAT THE TAX WAS NOT APPLICABLE, THE CONTRACTORS MIGHT BE ENTITLED TO REIMBURSEMENT FOR TAXES SUBSEQUENTLY DETERMINED TO BE APPLICABLE IF THEY COULD SATISFACTORILY ESTABLISH THAT THE PRICE BID WAS IN FACT EXCLUSIVE OF THE TAX BY REASON OF RELIANCE UPON SUCH DECISIONS. IF PAYMENT OR REIMBURSEMENT OF THE TAX WAS EXPRESSLY PROVIDED FOR IN THE CONTRACT AS A SEPARATE ITEM, NOT OTHERWISE INCLUDED IN THE CONTRACT PRICE, AS IN SECTION B OF YOUR QUESTION, THAT PROVISION WOULD CONTROL, AND THE AMOUNT LAWFULLY PAYABLE BY THE CONTRACTOR WOULD BE PROPERLY REIMBURSABLE.

IN ANSWER TO QUESTION 4, IF THERE IS INCORPORATED IN THE BID INVITATION THE STANDARD TAX CLAUSE THE RIGHTS OF THE PARTIES WILL BE GOVERNED THEREBY, THE BID PRICE WILL INCLUDE THE TAX, AND NO OTHER REFERENCE THERETO WILL BE REQUIRED.

IN ANSWER TO QUESTION 5 IT MAY BE STATED THAT WHERE CONTRACTS ENTERED INTO PRIOR TO NOVEMBER 9, 1962, CONTAINED THE STANDARD TAX CLAUSE AND IT CAN BE SATISFACTORILY ESTABLISHED THAT THE TAX WAS NOT INCLUDED IN THE CONTRACT PRICE BECAUSE OF A JUSTIFIABLE ASSUMPTION OR UNDERSTANDING OF THE INVALIDITY OF THE TAX THERE WILL BE NO OBJECTION TO AGENCIES REIMBURSING THE CONTRACTORS FOR SUCH TAXES WHICH BECAME DUE AND PAYABLE AFTER AUGUST 1, 1961. DOUBTFUL CLAIMS MAY BE SUBMITTED TO THE CLAIMS DIVISION OF OUR OFFICE FOR SETTLEMENT. 4 GAO 1030.10.

FOR YOUR INFORMATION IT MAY BE STATED THAT THE DEPARTMENT OF JUSTICE, WITH A VIEW TO SETTING OFF TAXES IMPROPERLY COLLECTED AGAINST DEMANDS OF THE STATE FOR TAXES ACCRUING SINCE AUGUST 1, 1961, HAS RECOMMENDED TO THE DEPARTMENT OF DEFENSE AND OTHER GOVERNMENT AGENCIES THAT VENDORS (CONTRACTORS) MAKING INTRASTATE SALES IN ILLINOIS TO ANY OF THEIR BRANCHES BE ADVISED TO RESUME INCLUSION OF PROCEEDS OF SUCH SALES IN THEIR RETURNS UNDER THE RETAILERS OCCUPATION TAX ACT BEGINNING WITH THE RETURNS DUE NOVEMBER 30, 1962, FOR THE MONTH OF OCTOBER 1962. THE DEPARTMENT OF JUSTICE ALSO SUGGESTED THAT THE VENDORS (CONTRACTORS) BE INSTRUCTED, PENDING FURTHER ADVICE TO WITHHOLD PAYMENT OF SUCH TAXES FOR THE PERIOD AUGUST 1, 1961, TO SEPTEMBER 30, 1962, DESPITE THE DISSOLUTION OF THE TEMPORARY RESTRAINING ORDER, BUT THAT SUCH VENDORS SHOULD IMMEDIATELY ADVISE THE DEPARTMENTS AND AGENCIES OF THE AGGREGATE AMOUNT OF UNPAID TAXES WHICH HAVE ACCRUED FOR THAT PERIOD, SO THAT THE DEPARTMENTS AND AGENCIES MAY PASS SUCH FIGURES ON TO THE DEPARTMENT OF JUSTICE AS SOON AS RECEIVED BY THE PURCHASING DEPARTMENTS AND AGENCIES. THERE IS ENCLOSED FOR YOUR INFORMATION A COPY OF A CIRCULAR NOTICE SENT BY GENERAL SERVICES ADMINISTRATION TO CONTRACTORS WITH IT, AND IT IS SUGGESTED THAT YOU MAY WISH TO GIVE SIMILAR ADVICE TO SUCH OF YOUR CONTRACTORS AS MAY BE INVOLVED.

IN THE LIGHT OF THE FOREGOING, BEFORE ACTING ON ANY CLAIMS BY VENDORS FOR THE PERIOD AUGUST 1, 1961, TO SEPTEMBER 30, 1962, IT WOULD APPEAR DESIRABLE THAT YOU CONTACT THE DEPARTMENT OF JUSTICE.