B-162338, SEPTEMBER 18, 1967, 47 COMP. GEN. 163

B-162338: Sep 18, 1967

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DESIGNATED AN "EXCISE TAX" ON WAGES IS NOT THE "FEDERAL EXCISE TAX OR DUTY ON THE TRANSACTIONS OR PROPERTY COVERED BY THIS CONTRACT" CONTEMPLATED BY THE CONTRACT CLAUSE IN SECTION 1-11.401-1 OF THE FEDERAL PROCUREMENT REGULATIONS ENTITLED "FEDERAL. THE INCREASE IN SOCIAL SECURITY TAXES SUBSEQUENT TO THE EXECUTION OF A CONSTRUCTION CONTRACT IS NOT PAYABLE AS A CONTRACT CHANGE. FROM THE DEPUTY ADMINISTRATOR REQUESTING A DECISION ON A LEGAL QUESTION INVOLVED IN A CONTRACT APPEAL WHICH IS PENDING BEFORE THE VETERANS ADMINISTRATION CONTRACT APPEALS BOARD. THE DEPUTY ADMINISTRATOR ADVISES THAT THE CONTRACT IN QUESTION WAS AWARDED ON JUNE 30. THE QUESTION PRESENTED FOR DECISION IS WHETHER THIS INCREASE IN TAXES CONSTITUTED A "FEDERAL EXCISE TAX OR DUTY ON THE TRANSACTIONS OR PROPERTY COVERED BY THIS CONTRACT" WITHIN THE MEANING OF THE CONTRACT CLAUSE PRESCRIBED BY THE FEDERAL PROCUREMENT REGULATIONS (1-11.401-1) ENTITLED .

B-162338, SEPTEMBER 18, 1967, 47 COMP. GEN. 163

CONTRACTS - TAX MATTERS - SOCIAL SECURITY TAXES - INCREASE AS REQUIRING CONTRACT ADJUSTMENT THE INCREASE IN SOCIAL SECURITY TAXES RESULTING FROM THE MEDICARE PROGRAM PROVIDED BY THE SOCIAL SECURITY ACT AMENDMENTS OF 1965, AND DESIGNATED AN "EXCISE TAX" ON WAGES IS NOT THE "FEDERAL EXCISE TAX OR DUTY ON THE TRANSACTIONS OR PROPERTY COVERED BY THIS CONTRACT" CONTEMPLATED BY THE CONTRACT CLAUSE IN SECTION 1-11.401-1 OF THE FEDERAL PROCUREMENT REGULATIONS ENTITLED "FEDERAL, STATE AND LOCAL TAXES," WHICH AUTHORIZES A PRICE ADJUSTMENT FOR TAX INCREASES THAT OCCUR AFTER THE DATE OF A CONTRACT. THEREFORE, THE INCREASE IN SOCIAL SECURITY TAXES SUBSEQUENT TO THE EXECUTION OF A CONSTRUCTION CONTRACT IS NOT PAYABLE AS A CONTRACT CHANGE, THE TAX CLAUSE EMPLOYING THE PHRASE ,TRANSACTIONS OR PROPERTY" IN CONNECTION WITH THE SUBJECT MATTER OF A CONTRACT AND ITS PURPOSES DOES NOT APPLY TO SOCIAL SECURITY TAX INCREASES, NEITHER CONSIDERED PROPERTY NOR A TRANSACTION IN THE SENSE OF DOING OR PERFORMING BUSINESS, BUT A TAX LEVIED "UPON THE RELATION OF EMPLOYMENT.'

TO THE ADMINISTRATOR, VETERANS ADMINISTRATION, SEPTEMBER 18, 1967:

WE REFER TO A LETTER OF AUGUST 21, 1967, FROM THE DEPUTY ADMINISTRATOR REQUESTING A DECISION ON A LEGAL QUESTION INVOLVED IN A CONTRACT APPEAL WHICH IS PENDING BEFORE THE VETERANS ADMINISTRATION CONTRACT APPEALS BOARD.

THE DEPUTY ADMINISTRATOR ADVISES THAT THE CONTRACT IN QUESTION WAS AWARDED ON JUNE 30, 1965, TO PRESTON HAGLIN COMPANY, IN THE AMOUNT OF $1,356,000, AND CALLED FOR THE CONSTRUCTION OF A NEW RESEARCH BUILDING FOR THE VETERANS ADMINISTRATION HOSPITAL IN MINNEAPOLIS, MINNESOTA. ON JULY 30, 1965, THE SOCIAL SECURITY AMENDMENTS OF 1965, 79 STAT. 286, WHICH ESTABLISHED THE SO-CALLED MEDICARE PROGRAM BECAME LAW. THIS RESULTED IN INCREASING THE CONTRACTOR'S SOCIAL SECURITY TAXES. THE QUESTION PRESENTED FOR DECISION IS WHETHER THIS INCREASE IN TAXES CONSTITUTED A "FEDERAL EXCISE TAX OR DUTY ON THE TRANSACTIONS OR PROPERTY COVERED BY THIS CONTRACT" WITHIN THE MEANING OF THE CONTRACT CLAUSE PRESCRIBED BY THE FEDERAL PROCUREMENT REGULATIONS (1-11.401-1) ENTITLED ,FEDERAL, STATE, AND LOCAL TAXES.' THIS CLAUSE, WHICH WAS INCLUDED IN THE CONTRACT AS PARAGRAPH 14 OF THE GENERAL CONDITIONS, PROVIDES, IN PART, AS FOLLOWS:

"1-11.401-1

(C) CONTRACT CLAUSE.

FEDERAL, STATE, AND LOCAL TAXES

(A) EXCEPT AS MAY BE OTHERWISE PROVIDED IN THIS CONTRACT, THE CONTRACT PRICE INCLUDES ALL APPLICABLE FEDERAL, STATE, AND LOCAL TAXES AND DUTIES.

(B) NEVERTHELESS, WITH RESPECT TO ANY FEDERAL EXCISE TAX OR DUTY ON THE TRANSACTIONS OR PROPERTY COVERED BY THIS CONTRACT, IF A STATUTE, COURT DECISION, WRITTEN RULING, OR REGULATION TAKES EFFECT AFTER THE CONTRACT DATE, AND--

(1) RESULTS IN THE CONTRACTOR BEING REQUIRED TO PAY OR BEAR THE BURDEN OF ANY SUCH FEDERAL EXCISE TAX OR DUTY OR INCREASE IN THE RATE THEREOF WHICH WOULD NOT OTHERWISE HAVE BEEN PAYABLE ON SUCH TRANSACTIONS OR PROPERTY, THE CONTRACT PRICE SHALL BE INCREASED BY THE AMOUNT OF SUCH TAX OR DUTY OR RATE INCREASE: PROVIDED, THAT THE CONTRACTOR IF REQUESTED BY THE CONTRACTING OFFICER, WARRANTS IN WRITING THAT NO AMOUNT FOR SUCH NEWLY IMPOSED FEDERAL EXCISE TAX OR DUTY OR RATE INCREASE WAS INCLUDED IN THE CONTRACT PRICE AS A CONTINGENCY RESERVE OR OTHERWISE; * * *.'

ON NOVEMBER 25, 1966, IN RESPONSE TO THE CONTRACTOR'S CLAIM FOR A PRICE ADJUSTMENT UNDER THE ABOVE-QUOTED TAX CLAUSE, THE CONTRACTING OFFICER RENDERED A FINAL DECISION IN WHICH HE STATED: ,AS A RESULT OF THE REVIEW I HAVE DECIDED THAT ALTHOUGH SOCIAL SECURITY TAX IS A FEDERAL EXCISE TAX IT IS A TAX ON THE PRIVILEGE OF EMPLOYING INDIVIDUALS AND NOT A TAX ON OR IN RESPECT TO THE EMPLOYERS' BUSINESS OR A TAX ON THE PROPERTY TO BE PROVIDED UNDER THE CONTRACT. THEREFORE PARAGRAPH 14 OF THE GENERAL CONDITIONS OF THE CONTRACT SPECIFICATIONS DO (SIC) NOT APPLY TO THE SOCIAL SECURITY TAX INCREASE AND IS NOT PAYABLE AS A CONTRACT CHANGE.'

THE CONTRACTOR FILED A TIMELY APPEAL FROM THIS DECISION IN ACCORDANCE WITH THE DISPUTES CLAUSE OF ITS CONTRACT.

IN SUBMITTING THE MATTER HERE FOR OUR DECISION THE DEPUTY ADMINISTRATOR STATES THAT THE LEGAL ISSUE INVOLVED AFFECTS NOT ONLY CONTRACTS ENTERED INTO BY THE VA, BUT ALSO CONTRACTS ENTERED INTO BY OTHER AGENCIES GOVERNED BY FPR 1-11.401-1, AS WELL AS CONTRACTS OF THE DEPARTMENT OF DEFENSE SIMILARLY GOVERNED BY ASPR 11-401.1. IN THAT CONNECTION HE NOTES THAT WHILE NO AUTHORITATIVE PRECEDENT BINDING ON ALL AGENCIES HAS BEEN FOUND, THE GENERAL SERVICES BOARD OF CONTRACT APPEALS HAS ENTERED A DECISION ON THE ISSUE IN JACOBSEN CONSTRUCTION CO., GSBCA-2022, 66-2 BCA 5874, OCTOBER 4, 1966, HOLDING THAT THE TAX CLAUSE PRESCRIBED BY FPR 1-11.401-1 DID NOT PERMIT A PRICE ADJUSTMENT FOR THE PAYMENT OF THE INCREASED SOCIAL SECURITY TAXES REQUIRED BY THE 1965 ACT. THE DEPUTY ADMINISTRATOR ALSO NOTES THAT THE CORPS OF ENGINEERS BOARD OF CONTRACT APPEALS HAS DECLINED JURISDICTION OF AN APPEAL ON THE SAME QUESTION INVOLVED HERE IN MORRISON-KNUDSON COMPANY, INC. AND BATES AND ROGERS CONSTRUCTION CORP., ENG. BCA 2808, JULY 12, 1967.

THE INCREASED SOCIAL SECURITY TAX REQUIRED TO BE PAID BY AN EMPLOYER UNDER THE SOCIAL SECURITY ACT AMENDMENTS OF 1965 IS DESIGNATED BY THE ACT AS AN "EXCISE TAX" COMPUTED ON WAGES "PAID BY HIM WITH RESPECT TO EMPLOYMENT.' SEE SECTION 321 (C), PUBLIC LAW 89 97, 79 STAT. 396, AND 26 U.S.C. 3111. THIS TAX CLEARLY IS NOT ONE ON THE "PROPERTY" COVERED BY THE CONTRACT. ACCORDINGLY, THE QUESTION TO BE RESOLVED IS WHETHER THE TAX IS ON A "TRANSACTION" COVERED BY THE CONTRACT WITHIN THE MEANING OF PARAGRAPH 14 OF THE GENERAL CONDITIONS.

INITIALLY, IT SHOULD BE NOTED THAT THE TAX CLAUSE IN QUESTION IS A STANDARD ONE AND WAS INCORPORATED IN THE FEDERAL PROCUREMENT REGULATIONS LONG BEFORE ENACTMENT OF THE SOCIAL SECURITY AMENDMENTS OF 1965. ACCORDINGLY, IT IS PLAIN THAT THE TAX CLAUSE WAS NOT INCLUDED IN THE SUBJECT CONTRACT FOR THE PURPOSE OF ANTICIPATED SPECIAL LEGISLATION SUCH AS THE "MEDICARE" AMENDMENTS OF THE 1965 ACT. SEE JACOBSEN CONSTRUCTION COMPANY, SUPRA. MOREOVER, THE SOCIAL SECURITY EXCISE TAX HAS BEEN CHARACTERIZED AS ONE LEVIED "UPON THE RELATION OF EMPLOYMENT" AND UPON "THE RIGHT TO EMPLOY" AND AS A PAYROLL TAX. SEE UNITED STATES V. GLENN L. MARTIN CO., 308 U.S. 62 AT 65 (1939), AND CASES CITED THEREIN.

"TRANSACTION" HAS BEEN DEFINED AS THE "DOING OR PERFORMING OF ANY BUSINESS; THE MANAGEMENT OF AN AFFAIR.' BOUVIER'S LAW DICTIONARY (RAWLE'S THIRD REVISION). THE WORD HAS NEVER BEEN THE SUBJECT OF ANY EXACT JUDICIAL DEFINITION AND IT IS GENERALLY CONSTRUED ACCORDING TO THE CONTEXT IN WHICH IT APPEARS. 87 C.J.S., TRANSACTION. IN OUR OPINION, THE INCREASED SOCIAL SECURITY TAXES PAID BY THE CONTRACTOR ARE NOT FEDERAL EXCISE TAXES ON "TRANSACTIONS * * * COVERED BY" THE CONTRACT. WHILE IN A BROAD SENSE THE EMPLOYMENT OF A PERSON, LIKE INNUMERABLE OTHER ACTIVITIES, MAY BE CALLED A "TRANSACTION" WE DO NOT THINK THIS IS THE KIND OF TRANSACTION CONTEMPLATED BY THE TAX CLAUSE. THE EMPLOYMENT OF THE PHRASE "ON THE TRANSACTIONS OR PROPERTY COVERED BY THIS CONTRACT" FAIRLY INDICATES THAT THE TRANSACTIONS OR PROPERTY REFERRED TO ARE THOSE WHICH ARE A DIRECT PART OF THE SUBJECT MATTER OF THE CONTRACT OR ITS PURPOSE. THIS RATIONALE, WE THINK, IS IMPLICIT IN UNITED STATES V. GLENN L. MARTIN CO., SUPRA; AND IN LEGGETT V. MISSOURI STATE LIFE INSURANCE CO., 342 S.W. 2D 833 (1960), BOTH OF WHICH AUTHORITIES WERE CITED BY THE GENERAL SERVICES BOARD OF CONTRACT APPEAL AS CONTROLLING ITS DECISION IN JACOBSEN CONSTRUCTION CO., SUPRA. IN JACOBSEN THE BOARD STATED: "THE BOARD'S ATTENTION HAS BEEN DIRECTED TO TWO COURT DECISIONS WHICH THE BOARD FINDS CONTROL THE BOARD'S DECISION IN THIS DISPUTE. THE CASE OF LEGGETT V. MISSOURI STATE LIFE INSURANCE CO., * * * DEALT WITH THE APPLICATION OF SOCIAL SECURITY TAXES ON THE BUSINESS AFFAIRS OF AN INSURANCE COMPANY. THE COURT, IN DECLARING SOCIAL SECURITY TAXES AS EXCISES IMPOSED ON THE PRIVILEGE OF EMPLOYING PERSONS SAID: -A PRIVILEGE TAX ON THE RELATIONSHIP OF THE EMPLOYER AND EMPLOYEE IS NOT A TAX ON OR IN RESPECT TO THE BUSINESS IN WHICH THE EMPLOYER IS ENGAGED.- THE COURT WENT ON TO SAY THAT THE - SOCIAL SECURITY TAXES IN QUESTION WERE NEITHER TAXES ON NOR IN RESPECT TO THE BUSINESS OF THE OLD COMPANY ACCOUNT. THE FACT THAT THE PERSONS UPON WHOSE WAGES THE TAXES WERE CALCULATED ASSISTED IN AND WERE ESSENTIAL TO THE OPERATION OF THE INSURANCE COMPANY OR OF ITS BUSINESS DOES NOT CHANGE THE NATURE OF THE TAX.- IN SUPPORT OF ITS DECISION THE COURT CITED UNITED STATES V. GLENN L. MARTIN CO., * * * WHICH DEALT WITH A CONTRACT FOR THE SALE OF AIRCRAFT AND AIRCRAFT PARTS, ENTERED INTO BETWEEN THE UNITED STATES AND A MANUFACTURER CONTAINING A PROVISION THAT ANY FEDERAL TAX WHICH MIGHT THEREAFTER BE IMPOSED AND MADE APPLICABLE DIRECTLY UPON THE PRODUCTION, MANUFACTURE, OR SALE OF SUPPLIES CALLED FOR SHOULD BE ADDED TO THE SALE PRICE STIPULATED IN THE CONTRACT. THEREAFTER, THE SOCIAL SECURITY ACT WAS PASSED GIVING RISE TO THE QUESTION WHETHER THE CONTRACT PRICES SHOULD BE INCREASED BY THE AMOUNT OF THE SOCIAL SECURITY TAXES PAID BY THE MANUFACTURER. THE SUPREME COURT OF THE UNITED STATES HELD THAT THE -CONTRACT WAS CONCERNED WITH FEDERAL TAXES "ON" THE GOODS TO BE PROVIDED UNDER IT, WHATEVER THE OCCASION FOR THE TAXES. AND A TAX "ON" THE RELATIONSHIP OF EMPLOYER AND EMPLOYEE, IS NOT OF THE TYPE TREATED BY THE CONTRACT AS A TAX "ON" THE GOODS OR ARTICLES SOLD; ... RESPONDENT IS NOT ENTITLED TO THE ADDITIONAL COMPENSATION WHICH IT SEEKS.- "THE BOARD FINDS THAT THE PAYMENT OF SOCIAL SECURITY TAXES CREATED BY THE SOCIAL SECURITY AMENDMENTS OF 1965 ARE NOT FEDERAL EXCISE TAXES ON TRANSACTIONS COVERED BY THE SUBJECT CONTRACT.'

WE SEE NO BASIS UPON WHICH A CONCLUSION CONTRARY TO THE JACOBSEN CASE CAN BE REACHED. ACCORDINGLY, YOU ARE ADVISED THAT THE SOCIAL SECURITY TAX INCREASE RESULTING FROM THE SOCIAL SECURITY AMENDMENTS OF 1965 DOES NOT CONSTITUTE FEDERAL EXCISE TAX OR DUTY ON THE TRANSACTIONS OR PROPERTY COVERED BY THE SUBJECT CONTRACT.