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Matter of: Reimbursing Contractor for State Sales Tax Paid by Contractor in Providing Service to U.S. Army File: B-249429 Date: February 4, 1993 72 Comp.Gen. 107

B-249429 Feb 04, 1993
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Highlights

The government is not constitutionally immune from Utah state sales taxes paid by the contractor for such materials. Asked whether the federal government is immune from paying Utah state sales tax under a contract for janitorial services. The federal government is not immune from paying Utah's sales tax and the Army Proving Ground should continue to reimburse the contractor for state sales tax incurred under the conitract. It is an inquestioned principle of constitutional law that the United States and its instrumentalities are immune from direct taxation by state and local governments. The legal incidence of the tax falls directly on a business enterprise which is supplying the federal government as a customer with goods or services.

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Matter of: Reimbursing Contractor for State Sales Tax Paid by Contractor in Providing Service to U.S. Army File: B-249429 Date: February 4, 1993 72 Comp.Gen. 107

Appropriations/Financial Management Appropriation Availability Purpose availability Specific purpose restrictions Taxes State/local governments Appropriations/Financial Management Claims Against Government Contract terms Taxes Reimbursement Under a contraat which provides that the government pay "the actual direct costs" for the materilals used under the contract, the government is not constitutionally immune from Utah state sales taxes paid by the contractor for such materials. The legal incidence of the state sales tax falls on the contractor as the purchaser of supplies in the state and the government may therefore reimburse the contractor for the taxes.

By letter dated July 1, 1992, the Finance and Accounting Officer, U.S. Army DugWay Proving Ground, asked whether the federal government is immune from paying Utah state sales tax under a contract for janitorial services. The contract provides that the contractor shall be paid the "actual direct costs" for the materials used and the shipping costs incurred under the contract. The contractor paid sales tax on the supplies and materials used to perform the services specified in the contract, including, for example, ammonia, dust pans, rags, and sponges. Under the circumstances presented here, the federal government is not immune from paying Utah's sales tax and the Army Proving Ground should continue to reimburse the contractor for state sales tax incurred under the conitract.

It is an inquestioned principle of constitutional law that the United States and its instrumentalities are immune from direct taxation by state and local governments. McCulloch v. Maryland, 17 U.S. (4 Wheat.) 316 (1819). Direct taxation occurs where the legal incidence of the tax falls directly on the United States as the buyer of goods, Kern-Limerick, Inc. v. Surlack, 347 U.S. 110 (1954), or as the of services, 53 Gomp. Gen. 410 (1973), or as the owner of property, United States v. County of Aliegheny, 322 U.S. 174 (1944). If, on the other hand, the legal incidence of the tax falls directly on a business enterprise which is supplying the federal government as a customer with goods or services, it is she contract or other agreement which determines what the government must pay for the items supplied. [1] For example, contract language stating that the "price includes all applicable taxes" will authorize full payment of the contract price, even though some of the cost of the item is attributable to taxes paid by the contractor. 64 Gomp. Gen. 655, 657 (1985).

In this case, the legal incidence of Utah's sales tax falls on the contractor as the purchaser of supplies in the state. Under Utah Code Ann. Sec. 59-12-103(1)(l) (1992), Utah imposes a sales tax "on the purchaser" of "tangible personal property." Dugway Proving Ground agreed, under its janitorial services contract, to pay "the actual direct costs" for the materials and supplies used to perform the services specified in the contract. We think that the term "actual costs" as used in the contract includes state taxes paid by a contractor. See B-147316, Jan. 9, 1962; Federal Acquisition Regulation Sec. 31.205-41.

1. In Alabama v. King and Boozer, 314 U.S. 1(1941), the Court held that a tax paid by a government contractor was not prohibited simply because its burden was passed on to the United States economically by the termsa of a contract. Although the economic burden of a tax is taaditionally shifted to the government in the form of increased costs, such a shift is not indicative of a shift in legal incidence. Gurley v. Rhoden, 421 U.S. 200, 204 (1975); States v. Boyd, 378 U.S. 29, 44(1964).

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