B-153496, MAR. 13, 1964

B-153496, MAR. 13, 1964

TO MR. KARL F. GEISER:

YOUR LETTER OF FEBRUARY 13, 1964, CONCERNS CLAIMS FOR REFUND OF CALIFORNIA SALES AND USE TAXES OVERPAID IN ERROR BY CONTRACTORS ON UNITED STATES GOVERNMENT CONTRACTS AND SUBCONTRACTS.

YOU REFER TO A CONFERENCE HELD IN THIS OFFICE ON FEBRUARY 7, 1964, ATTENDED BY YOU AND ANOTHER REPRESENTATIVE OF THE CONTRACTORS AND SUBCONTRACTORS, REPRESENTATIVES OF THE ARMY, NAVY, AND AIR FORCE, TOGETHER WITH REPRESENTATIVES OF THIS OFFICE. THE SITUATION, IN BRIEF, AS DISCLOSED AT THE CONFERENCE, IS SET FORTH BELOW.

CERTAIN GOVERNMENT PRIME CONTRACTORS AND SOME OF THEIR SUBCONTRACTORS FILED CLAIMS FOR REFUND OF CALIFORNIA SALES AND USE TAXES WITH THE CALIFORNIA STATE BOARD OF EQUALIZATION ON THE BASIS THAT THE TAXES IN QUESTION WERE NOT APPLICABLE TO THE TRANSACTIONS INVOLVED. THE CONTRACTS ARE FIXED PRICE LUMP-SUM CONTRACTS, SOME WITH THE STANDARD TAX CLAUSE THAT WAS IN EFFECT AT THE TIME THE CONTRACT WAS ENTERED INTO. THE CONTRACTS IN QUESTION ARE CHIEFLY WITH OR INVOLVE THE DEPARTMENT OF DEFENSE ALTHOUGH SOME ARE WITH OTHER FEDERAL AGENCIES. THE STATE BOARD AGREED THAT THE TAXES WERE NOT APPLICABLE TO THE TRANSACTIONS BUT ESTABLISHED THREE CRITERIA WHICH WOULD HAVE TO BE MET BEFORE THE BOARD WOULD ACTUALLY REFUND THE TAXES TO THE CONTRACTORS OR SUBCONTRACTORS (AS THE TAXPAYERS). THESE CRITERIA ARE AS FOLLOWS:

"/A) WE (STATE BOARD) MUST VERIFY THAT SALES OR USE TAX PAID BY THE CLAIMANT, EITHER BY RETURNS TO THE BOARD OR AS REIMBURSEMENT TO VENDORS, ON TANGIBLE PERSONAL PROPERTY WHICH WAS RESOLD TO THE U.S. GOVERNMENT PRIOR TO ANY USE BY THE CONTRACTOR OR SUBCONTRACTOR.

"/B) THE CLAIMANT MAY ESTABLISH TO THE SATISFACTION OF OUR STAFF THAT HE DID NOT SECURE REIMBURSEMENT FROM THE UNITED STATES BY INCLUDING THE AMOUNT OF THE TAX IN THE CONTRACT PRICE, OR

"/C) THE CLAIMANT MAY PRESENT EVIDENCE THAT HE HAS, OR IS, COMMITTED TO REFUND THE TAX TO THE UNITED STATES.'

THE FIRST OF THE CRITERIA HAS BEEN MET. SUBSEQUENTLY YOU, AS THE ATTORNEY FOR THE CONTRACTORS AND SUBCONTRACTORS FILED A POSITION IN THE CALIFORNIA COURTS FOR A WRIT OF MANDATE TO COMPEL THE STATE BOARD TO REFUND THE TAXES WITHOUT MEETING EITHER OF THE REMAINING TWO CRITERIA. HOWEVER, THE PETITION WAS DENIED WITHOUT OPINION, ALTHOUGH THE DENIAL WAS NOT ON THE MERITS BUT ON THE BASIS THAT A WRIT OF MANDATE WAS NOT THE PROPER REMEDY IN THIS CASE. THUS, THE STATE STILL HAS THE FUNDS.

YOU POINTED OUT THAT THE MONEYS IN QUESTION BELONG TO EITHER THE CONTRACTORS OR THE UNITED STATES DEPENDING ON THE VARIOUS CONTRACT PROVISIONS; BUT, IN ANY EVENT, NOT TO THE STATE. THEREFORE, RATHER THAN GET INVOLVED IN FURTHER LITIGATION YOU WERE DESIROUS OF BEING ABLE TO INFORM THE BOARD THAT THE UNITED STATES WOULD NOT OBJECT TO THE REFUNDS BEING MADE UNDER SOME PLAN OR PROPOSAL WHICH WOULD PROTECT ANY INTEREST THE UNITED STATES MIGHT HAVE IN SUCH REFUNDS. YOU FELT THAT THE BOARD MIGHT BE WILLING TO MAKE THE REFUNDS IF SUCH AN AGREEMENT COULD BE REACHED. YOU STATED THAT UNDER CALIFORNIA LAW A REFUND COULD NOT BE MADE DIRECTLY TO THE UNITED STATES SINCE IT WAS NOT THE TAXPAYER.

THE MATTER WAS DISCUSSED AT LENGTH AND A NUMBER OF ALTERNATIVES CONSIDERED. IT WAS FINALLY AGREED THAT YOU, AS THE ATTORNEY FOR THE CONTRACTORS AND SUBCONTRACTORS, WOULD WRITE A LETTER TO THE COMPTROLLER GENERAL REQUESTING COMMENTS ON A PLAN FOR PAYING THE TAX REFUNDS INTO AN ESCROW ACCOUNT WHERE THE FUNDS WOULD REMAIN UNTIL IT WAS DECIDED WHETHER THEY BELONGED TO THE UNTIED STATES OR THE CONTRACTOR OR SUBCONTRACTOR INVOLVED. THIS DETERMINATION WOULD BE MADE UNDER OR PURSUANT TO THE TERMS OF THE INDIVIDUAL CONTRACTS INVOLVED. THE REPRESENTATIVES OF THE ARMY, NAVY AND AIR FORCE WERE AGREEABLE TO SUCH A PLAN.

ACCORDINGLY, IN YOUR LETTER YOU SUGGEST THAT THE UNION BANK, MAIN OFFICE, LOS ANGELES, CALIFORNIA, OR OTHER QUALIFIED FINANCIAL INSTITUTION AS MAY BE MUTUALLY AGREEABLE, BE USED AS ESCROW AGENT OR SUBSTANTIALLY THE FOLLOWING PROCEDURE AND INSTRUCTIONS:

"PROCEDURE

"1. THAT ALL OF THE INTERESTED FEDERAL AGENCIES BE REPRESENTED BY ONE AGENCY OR AGENT IN THAT AGENCY, AND THAT ALL PROCEDURAL MATTERS CONCERNING THE UNITED STATES GOVERNMENT BE HANDLED BY THE SELECTED AGENT OR AGENCY HEREINAFTER REFERRED TO AS AGENT.

"2. THAT ALL OF THE PARTICIPATING CONTRACTORS APPOINT A RESPONSIBLE INDIVIDUAL WITH POWER TO ACT FOR ALL OF SAID CONTRACTORS IN ANY OF THE MATTERS CONCERNING THE FUNDS TO BE COLLECTED FROM THE STATE OF CALIFORNIA, SAID PERSON BEING HEREINAFTER REFERRED TO AS TRUSTEE.

"3. THAT UPON THE APPOINTMENT OF THE AGENT AND TRUSTEE AND UPON THEIR CONCURRENCE IN THE TERMS OF THE ESCROW INSTRUCTIONS, THE COMPTROLLER GENERAL OF THE UNITED STATES, THROUGH HIS SAID AGENT ORDER THE STATE OF CALIFORNIA TO PAY FUNDS DESIGNATED AS REFUND OF OVERPAYMENT OF SALES OR USE TAX INCIDENT TO THE EXECUTION OF CONTRACTS FOR THE UNITED STATES GOVERNMENT, TO THE CONTRACTOR.

"4. THAT THE TAXPAYING CONTRACTOR WILL, ACCORDING TO HIS PREVIOUS WRITTEN AGREEMENT (TO BE FILED WITH THE STATE BOARD OF EQUALIZATION) DELIVER THE DRAFT FOR THE SAID FUNDS UNCASHED AND DULY ENDORSED, TO THE TRUSTEE FOR DEPOSIT IN THE ESCROW ACCOUNT.

"5. THAT THE TRUSTEE WILL THEN SUPPLY TO THE AGENT FULL INFORMATION AS TO THE CONTRACTS INVOLVED IN THE REFUND, THE AMOUNTS REFUNDED IN CONNECTION WITH THE SAME, AND ANY OTHER NECESSARY OR DESIRABLE INFORMATION REQUESTED BY THE AGENT.

"6. THAT THE AGENT WILL PROMPTLY INITIATE SUCH PROCEDURE AS MAY BE NECESSARY OR DESIRABLE TO DETERMINE THE RESPECTIVE INTEREST AND EQUITY IN ANY OF THE FUNDS AS BETWEEN THE GOVERNMENT AND THE RESPECTIVE CONTRACTORS.

"7. THAT IN CASE OF DISAGREEMENT OR DISPUTE BETWEEN THE AGENT AND TRUSTEE THE TERMS AND CONDITIONS OF THE "DISPUTE CLAUSE" IN THE CONTRACT WILL BE PREVAILING AND THE PROCEDURE OUTLINED THEREIN WILL BE FOLLOWED BY THE PARTIES.

"ESCROW INSTRUCTIONS

"1. THAT EACH CONTRACTOR PARTICIPATING WILL EXECUTE SUCH AUTHORIZATION AS WILL BE NECESSARY TO INSURE THAT HE WILL UPON RECEIPT OF ANY OF THE SUBJECT REFUNDS TRANSMIT THE REMITTANCE FROM THE STATE OF CALIFORNIA DIRECTLY TO THE TRUSTEE DULY ENDORSED TO THE LATTER'S ORDER, WITHOUT CASHING THE SAME.

"2. THAT THE AGENT AND THE TRUSTEE WILL INSTRUCT THE ESCROW AGENT AS TO THE DISPOSITION OF THE FUNDS AND THAT THE ESCROW AGENT WILL DISBURSE FUNDS ONLY UPON THE JOINT DIRECTION OF THE AGENT AND TRUSTEE, HOLDING FOR FURTHER ACTION ALL FUNDS UPON WHICH AN AGREEMENT HAS NOT BEEN REACHED.

"3. THAT SHOULD THE AGENT AND THE TRUSTEE AGREE THAT THE FUNDS AS REFUNDED BY THE STATE OF CALIFORNIA ARE PROPERTY OF THE UNITED STATES GOVERNMENT, THE SAME WILL BE DISBURSED TO THE UNITED STATES GOVERNMENT AND THE LATTER AGREES TO REIMBURSE THE CONTRACTOR FOR HIS EXPENSES AND COST IN THE MATTER TOGETHER WITH THAT PORTION OF THE EXPENSES OF THE ESCROW RELATING TO SAID TRANSACTION.

"4. THE ESCROW AGENT WILL BE EMPOWERED AND REQUESTED TO PLACE ESCROWED FUNDS AT INTEREST IN A MANNER SUITABLE FOR PUBLIC FUNDS WHILE THE FUNDS ARE IN ITS POSSESSION.

"5. ANY INTEREST DERIVED FROM THE REFUNDS OR FROM FUNDS HELD IN ESCROW WILL ACCRUE TO THE BENEFIT OF THE PARTIES EVENTUALLY ESTABLISHED AS OWNER OF THE SAME.

"6. BOARD OF CONTRACT APPEALS PROCEDURE AS OUTLINED IN THE CONTRACT WILL BE CONSIDERED AS THE FINAL PROCEDURE IN CASE OF ANY DISAGREEMENT.'

YOU REQUEST OUR COMMENTS ON THE SUGGESTED PROCEDURE AND INSTRUCTIONS

CONCERNING PARAGRAPH NUMBER 1 UNDER "PROCEDURE," THE APPOINTMENT OF ONE AGENCY OR AGENT TO REPRESENT THE INTERESTED FEDERAL AGENCIES WOULD BE A MATTER FOR SUCH AGENCIES TO AGREE UPON. WE WOULD HAVE NO OBJECTION TO THE FEDERAL AGENCIES THAT ENTERED INTO THE CONTRACTS INVOLVED AGREEING THAT ONE OF SUCH AGENCIES SHALL REPRESENT THE UNITED STATES IN CONNECTION WITH THE ESCROW ARRANGEMENTS.

AS TO PARAGRAPH NUMBER 3 UNDER "PROCEDURE," IT WAS OUR UNDERSTANDING AT THE CONFERENCE THAT YOU WERE DESIROUS OF BEING ABLE TO INFORM THE CALIFORNIA STATE BOARD OF EQUALIZATION THAT THE UNITED STATES WOULD NOT OBJECT TO THE STATE REFUNDING THE TAX MONIES PURSUANT TO SOME PLAN OR PROPOSAL WHICH WOULD PROTECT ANY INTEREST THE UNITED STATES MIGHT HAVE IN SUCH TAX REFUNDS. YOU SEEMED TO FEEL THAT THE BOARD MIGHT BE WILLING TO MAKE THE REFUNDS IF SUCH AN AGREEMENT COULD BE REACHED AND WE INDICATED OUR CONSENT THERETO IN A LETTER TO YOU. ACCORDINGLY, WE AGREED TO ADVISE YOU BY LETTER THAT WE HAD NO OBJECTION TO AN ESCROW ARRANGEMENT, IF AFTER CONSIDERING YOUR PROPOSED PROCEDURE, WE REACHED SUCH A CONCLUSION. WE DID NOT CONTEMPLATE REQUESTING THE STATE TO PAY THE TAX REFUNDS TO YOUR CLIENTS. FURTHER, WE WOULD NOT AGREE TO PAYMENT OF THE REFUNDS BY THE STATE TO THE CONTRACTOR, UNLESS THE ESCROW AGENT IS MADE A COPAYEE OF THE CHECK, SO AS TO INSURE COMPLIANCE WITH PARAGRAPH NUMBER 4 UNDER "PROCEDURE.'

CONCERNING PARAGRAPH NUMBER 7 UNDER "PROCEDURE" AND PARAGRAPH NUMBER 6 UNDER "ESCROW INSTRUCTIONS," WHETHER, UNDER THE TERMS OF A CONTRACT, THE UNITED STATES OR A CONTRACTOR PRIMARILY IS ENTITLED TO FUNDS REPRESENTING SALES TAXES TO BE REFUNDED BY A STATE, IS A QUESTION OF LAW. SECTION 322, TITLE 41, U.S.C. PROHIBITS THE INCLUSION (IN A GOVERNMENT CONTRACT) OF A PROVISION MAKING FINAL ON A QUESTION OF LAW THE DECISION OF ANY ADMINISTRATIVE OFFICIAL, REPRESENTATIVE, OR BOARD. TO THE EXTENT THAT A QUESTION OF LAW IS INVOLVED, ANY ADMINISTRATIVE DETERMINATIONS OR DECISIONS CONCERNING ENTITLEMENT TO THE TAX REFUND MONIES IN THE INSTANT CASE WOULD BE SUBJECT TO REVIEW BY, OR APPEAL TO, THIS OFFICE, AS WELL AS TO JUDICIAL REVIEW. THUS, WE CANNOT AGREE WITH PROVIDING IN THE ESCROW ARRANGEMENT THAT THE "DISPUTES CLAUSE" WILL GOVERN IN THE CASE OF A DISPUTE OR DISAGREEMENT BETWEEN THE REPRESENTATIVE OF THE GOVERNMENT AND THE CONTRACTOR, OR THAT THE BOARD OF CONTRACT APPEALS PROCEDURE WILL BE THE FINAL PROCEDURE.

ALSO, IF THE PARAGRAPHS MENTIONED ABOVE UNDER "PROCEDURE" ARE MODIFIED IN ACCORDANCE WITH THE FOREGOING, THE APPROPRIATE PARAGRAPHS UNDER "ESCROW INSTRUCTIONS" SHOULD BE MODIFIED ACCORDINGLY. FURTHER, UNDER PARAGRAPH 3 OF THE "ESCROW INSTRUCTIONS" IT IS NOT CLEAR JUST WHAT EXPENSES AND COSTS IT IS CONTEMPLATED THAT THE GOVERNMENT WILL REIMBURSE THE CONTRACTOR. SUGGEST THAT THE PARAGRAPH BE MODIFIED TO INCLUDE THE SPECIFIC TYPES OF EXPENSES AND COSTS AND THE PRORATA SHARE THEREOF WHICH THE GOVERNMENT WOULD REIMBURSE THE CONTRACTOR.

IF THE ESCROW "PROCEDURE" AND "ESCROW INSTRUCTIONS" ARE MODIFIED IN ACCORDANCE WITH THE FOREGOING AND THE AGENCIES CONCERNED AGREE THERETO, WE WOULD NOT OBJECT TO THE PROPOSED ESCROW ARRANGEMENT IN CONNECTION WITH THE REFUND OF THE CALIFORNIA SALES AND USE TAXES. COPIES OF THIS LETTER WILL BE SENT TO THE REPRESENTATIVES OF THE ARMY, NAVY AND AIR FORCE WHO ATTENDED THE CONFERENCE.