A-88689, JUNE 19, 1942, 21 COMP. GEN. 1119

A-88689: Jun 19, 1942

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IRRESPECTIVE OF WHETHER THE "LEGAL INCIDENCE" OF THE TAX IS ON THE VENDOR OR VENDEE. NO OBJECTION IS REQUIRED TO PAYMENTS BASED UPON SUCH A DETERMINATION. 17 COMP. 1942: I HAVE YOUR LETTER OF MAY 16. IN PART AS FOLLOWS: REFERENCE IS MADE TO YOUR LETTER OF JANUARY 31. IN WHICH YOU ADVISE THAT THE SOCIAL SECURITY BOARD IS AUTHORIZED TO INCLUDE IN GRANTS TO THE STATE OF CALIFORNIA FOR THE PURPOSE SET FORTH IN SECTION 302 (A) OF THE SOCIAL SECURITY ACT THE ENTIRE AMOUNT WHICH THE CALIFORNIA DEPARTMENT OF EMPLOYMENT OR OTHER STATE AGENCY IS REQUIRED TO PAY IN CONNECTION WITH THE PURCHASE OF SUPPLIES AND EQUIPMENT THE SOCIAL SECURITY BOARD FINDS NECESSARY FOR THE PROPER AND EFFICIENT ADMINISTRATION OF THE STATE UNEMPLOYMENT COMPENSATION LAW.

A-88689, JUNE 19, 1942, 21 COMP. GEN. 1119

STATES - SALES TAXES - INCLUSION IN FEDERAL AID UNEMPLOYMENT COMPENSATION ADMINISTRATION GRANTS THE SOCIAL SECURITY BOARD, IN THE SOUND EXERCISE OF THE DISCRETION CONFERRED BY SECTION 302 (A) OF THE SOCIAL SECURITY ACT, AS AMENDED, MAY DETERMINE TO INCLUDE IN GRANTS UNDER SAID SECTION TO A STATE FOR UNEMPLOYMENT COMPENSATION ADMINISTRATION AN AMOUNT TO COVER STATE SALES TAXES PAID BY A STATE AGENCY IN PURCHASING SUPPLIES AND EQUIPMENT NEEDED IN THE ADMINISTRATION OF THE STATE UNEMPLOYMENT COMPENSATION LAWS, IRRESPECTIVE OF WHETHER THE "LEGAL INCIDENCE" OF THE TAX IS ON THE VENDOR OR VENDEE, AND NO OBJECTION IS REQUIRED TO PAYMENTS BASED UPON SUCH A DETERMINATION. 17 COMP. GEN. 223, OVERRULED.

ACTING COMPTROLLER GENERAL ELLIOTT TO THE FEDERAL SECURITY ADMINISTRATOR, JUNE 19, 1942:

I HAVE YOUR LETTER OF MAY 16, 1942, IN PART AS FOLLOWS:

REFERENCE IS MADE TO YOUR LETTER OF JANUARY 31, 1942, IN WHICH YOU ADVISE THAT THE SOCIAL SECURITY BOARD IS AUTHORIZED TO INCLUDE IN GRANTS TO THE STATE OF CALIFORNIA FOR THE PURPOSE SET FORTH IN SECTION 302 (A) OF THE SOCIAL SECURITY ACT THE ENTIRE AMOUNT WHICH THE CALIFORNIA DEPARTMENT OF EMPLOYMENT OR OTHER STATE AGENCY IS REQUIRED TO PAY IN CONNECTION WITH THE PURCHASE OF SUPPLIES AND EQUIPMENT THE SOCIAL SECURITY BOARD FINDS NECESSARY FOR THE PROPER AND EFFICIENT ADMINISTRATION OF THE STATE UNEMPLOYMENT COMPENSATION LAW, WITHOUT DEDUCTION ON ACCOUNT OF ADDITIONAL EXPENSE INCURRED BY REASON OF THE TAX IMPOSED UNDER THE CALIFORNIA RETAIL SALES TAX ACT OF 1933, AS AMENDED.

THE QUESTION OF THE AVAILABILITY OF APPROPRIATIONS MADE PURSUANT TO SECTION 301 OF THE SOCIAL SECURITY ACT FOR THE PAYMENT OF STATE SALES TAXES HAS ON TWO OCCASIONS BEEN THE SUBJECT OF FORMAL SUBMISSIONS TO YOUR OFFICE, AND THE DECISIONS RENDERED, DATED SEPTEMBER 8, 1937, AND AUGUST 2, 1940, HAVE GUIDED THE ACTION OF THE SOCIAL SECURITY BOARD IN THE MAKING OF GRANTS UNDER TITLE III OF THAT ACT AND HAVE FORMED THE BASIS OF ADVICE TO ALL STATE AGENCIES AS TO LIMITATIONS UPON THE EXPENDITURE OF GRANTS MADE BY THE BOARD NOT ONLY UNDER TITLE III BUT ALSO UNDER OTHER TITLES OF THE SOCIAL SECURITY ACT. THE APPARENT SCOPE AND APPLICATION OF YOUR LETTER OF JANUARY 31, 1942, HAS ACCORDINGLY BEEN CAREFULLY STUDIED WITH REFERENCE TO OTHER STATES AND OTHER TYPES OF SALES TAXES, AND APPROPRIATE BOARD ACTION IN RELATION THERETO.

THE BASIS OF THE CONCLUSION INDICATED IN YOUR LETTER WITH RESPECT TO THE CALIFORNIA TAX IS, IT APPEARS, THAT THE LEGAL INCIDENCE OF THAT TAX IS UPON THE VENDOR. FOR THIS REASON, YOUR LETTER INDICATES, THE PRICES PAID BY THE AGENCY FOR SUPPLIES FURNISHED BY IT MAY NOT BE VIEWED AS INCLUDING, AS SUCH, THE TAX IMPOSED UPON THE VENDORS; THE TAX IS RATHER TO BE VIEWED AS MERGED IN THE PURCHASE PRICE. HENCE, IT IS FURTHER INDICATED, OBJECTION THAT GRANTS MADE TO THE STATE TO COVER SUCH EXPENSE WOULD BE DIVERTED, FROM THE PURPOSE FOR WHICH APPROPRIATIONS ARE MADE AVAILABLE PURSUANT TO TITLE III OF THE SOCIAL SECURITY ACT, TO THE PAYMENT OF A STATE TAX WOULD NOT BE TENABLE.

THE DECISION INDICATES NO NEED FOR DISTINGUISHING BETWEEN AMOUNTS PAID IN CONNECTION WITH PURCHASES WHERE THE AMOUNT OF THE SALES TAX HAS BEEN ACTUALLY IDENTIFIED AS SUCH UPON INVOICES AND VOUCHERS AS AN ADDITION TO THE STATED PRICE AND THOSE WHERE THE AMOUNT, IF INCLUDED, IS NOT IDENTIFIED. THE PRINCIPLE OF THE DECISION APPEARS FULLY APPLICABLE TO ALL SALES TAXES, THE LEGAL INCIDENCE OF WHICH IS ESTABLISHED AS UPON THE VENDOR. THE SOCIAL SECURITY BOARD HAS, ACCORDINGLY, DIRECTED THAT EXCEPTIONS TAKEN ON THE BASIS OF PRIOR DECISIONS OF YOUR OFFICE TO THE AMOUNT OF SALES TAXES PAID IN CONNECTION WITH PURCHASES OF THE CALIFORNIA AGENCY BE NO LONGER MAINTAINED. IT HAS LIKEWISE DIRECTED THAT SIMILAR DISPOSITION BE MADE OF EXCEPTIONS OUTSTANDING WITH RESPECT TO THE PURCHASES OF OTHER AGENCIES INVOLVING STATE SALES TAXES THE INCIDENCE OF WHICH IS CLEARLY ON THE VENDOR. IN THE OPINION OF THE GENERAL COUNSEL OF THE FEDERAL SECURITY AGENCY THE GENERAL RETAIL SALES OR OCCUPATION TAXES OF ARIZONA, INDIANA, AND ILLINOIS, AND THE NEBRASKA TAX ON GASOLINE SALES FALL WITHIN THIS CATEGORY.

THE BOARD HAS REQUESTED THAT ADDITIONAL QUESTIONS BE SUBMITTED FOR YOUR FURTHER ADVICE. THE NEED FOR THIS ARISES FOR TWO REASONS; (1) DIFFICULTY IN THE APPLICATION OF THE LEGAL INCIDENCE TEST IN ALL SITUATIONS AND UNCERTAINTY AS TO THE RELATION OF THIS TEST TO THOSE NOTED IN THE PRIOR DECISIONS OF SEPTEMBER 8, 1937, AND AUGUST 2, 1940, AND (2) THE CONCLUSION OF THE BOARD, BASED UPON EXPERIENCE IN THE ADMINISTRATION NOT ONLY OF TITLE III OF THE SOCIAL SECURITY ACT BUT OF THE PUBLIC ASSISTANCE TITLES OF THAT ACT, AND LIKEWISE IN THE ADMINISTRATION OF THE WAGNER-PEYSER ACT, THAT SUCH A TEST IS NEITHER REQUIRED NOR APPROPRIATE IN CONNECTION WITH GRANTS TO THE STATES FOR THE PURPOSES AUTHORIZED BY CONGRESS. THE BOARD BELIEVES THAT THE AMOUNT OF STATE SALES TAXES WHICH STATE AGENCIES ARE LEGALLY REQUIRED, WITHOUT DISCRIMINATION ON ACCOUNT OF THEIR RECEIPT OF FUNDS FROM THE FEDERAL GOVERNMENT, TO PAY TO VENDORS IN CONNECTION WITH THE PURCHASES OF SUPPLIES OR SERVICES NECESSARY FOR THE PROPER ADMINISTRATION OF THE STATE LAW MAY PROPERLY BE INCLUDED IN THE AMOUNT OF SUCH GRANTS AND IN THE PURPOSES FOR WHICH THEY MAY BE EXPENDED.

IN TITLE III OF THE SOCIAL SECURITY ACT, AS IN OTHER TITLES OF THAT ACT, CONGRESS HAS CLEARLY IMPOSED NO EXPRESS RESTRICTION UPON THE SOCIAL SECURITY BOARD WHICH WOULD REQUIRE OBJECTION TO THE USE OF TITLE III GRANTS FOR THE PAYMENT OF STATE SALES TAXES IN CONNECTION WITH STATE PURCHASES. SECTION 302 OF THE ACT DIRECTS THAT GRANTS BE MADE IN AMOUNTS WHICH THE BOARD DETERMINES TO BE NECESSARY FOR THE PROPER AND EFFICIENT ADMINISTRATION OF APPROVED STATE UNEMPLOYMENT COMPENSATION LAWS. THE BOARD IS REQUIRED TO BASE ITS DETERMINATION UPON ITS ESTIMATE OF THE COST OF SUCH ADMINISTRATION AND SUCH OTHER FACTORS AS IT DEEMS RELEVANT. REASON OF THE PROVISIONS OF SECTION 303 (A) (8) AND (9), WHICH MUST BE MET BY STATE LAWS AS A CONDITION TO GRANTS, STATE AGENCIES IN THE EXPENDITURE OF MONEYS GRANTED ARE LIMITED TO EXPENDITURES FOR THE PURPOSES AND IN THE AMOUNTS FOUND NECESSARY BY THE BOARD; IF SUCH MONEYS ARE OTHERWISE EXPENDED THE STATE MUST MAKE REPLACEMENT WITHIN A REASONABLE TIME. THE STATUTE DOES NOT REQUIRE THAT THE BOARD APPROVE IN ADVANCE EACH ITEM OF STATE EXPENDITURE, NOR WOULD IT BE PROPER OR FEASIBLE FOR IT TO ATTEMPT TO DO SO. EXCEPT FOR COMPLIANCE WITH LIMITATIONS PLACED UPON THE GRANT, EXPENDITURES AT THE STATE LEVEL ARE SUBJECT TO THE PROVISIONS OF STATE LAW APPLICABLE TO THE EXPENDITURE OF STATE FUNDS. 16 COMP. GEN. 948.

HOWEVER PROPER AND NECESSARY THE MAINTENANCE OF REFINED DISTINCTIONS IN PROCEDURES RELATED TO THE DIRECT PURCHASING ACTIVITIES OF THE FEDERAL GOVERNMENT, IT WOULD APPEAR THAT SIMILAR EXACTITUDE IS NEITHER REQUIRED NOR POSSIBLE IN DETERMINING THE AMOUNT OF GRANTS TO STATES UNDER STATUTES WHICH, LIKE TITLE III OF THE SOCIAL SECURITY ACT, VEST IN THE FEDERAL ADMINISTRATIVE AGENCY THE RESPONSIBILITY FOR THE EXERCISE OF A BROAD JUDGMENT, IN WHICH THE ESSENTIAL CRITERION IS THE RELATION OF A STATE PAYMENT OR COST TO THE ADMINISTRATION OF A STATE LAW. PARTICULARLY, IT IS IMPOSSIBLE TO AWAIT FINAL ADJUDICATION AS TO THE INCIDENCE OF A STATE TAX BY THE COURTS OF THE STATE. IN THE ABSENCE OF AUTHORITATIVE JUDICIAL DECISION THE QUESTION MIGHT BECOME A MATTER OF CHOICE BETWEEN CONFLICTING OPINIONS OF OFFICIALS WHOSE VIEWS CANNOT BE CONCLUSIVE AS TO WHETHER OR NOT THE TAX IS ONE UPON THE VENDOR.

LOOKING TO THE PURPOSES OF TITLE III, AND ITS DIRECTION TO LIMIT GRANTS TO AMOUNTS NECESSARY FOR THE ADMINISTRATION OF A STATE LAW, IT MIGHT BE ARGUED THAT IF THE LEGAL INCIDENCE OF AN IDENTIFIABLE TAX IS CLEARLY AND EXCLUSIVELY ON THE CONSUMER AND IF THERE IS A NECESSARY CORRESPONDENCE BETWEEN THE LEGAL INCIDENCE AND THE ECONOMIC BURDEN, THE AMOUNT NECESSARY FOR PROPER ADMINISTRATION WOULD NOT INCLUDE SUCH AN ADDITION TO THE PURCHASE PRICE. HOWEVER, IT IS GENERALLY RECOGNIZED THAT THE ECONOMIC INCIDENCE OF A TAX MAY DIFFER FROM ITS LEGAL INCIDENCE. ALTHOUGH, IN LEGAL CONTEMPLATION, THE BUYER MAY PAY THE TAX UPON A PURCHASE, HE MAY ACTUALLY BE PAYING A PRICE LOWERED SUFFICIENTLY TO COMPENSATE HIM FOR HIS SEEMING TAX BURDEN; IN REALITY THE TAX MAY BE PAID BY THE SELLER OR PERHAPS SHIFTED FURTHER BACK TO THE DISTRIBUTOR OR ORIGINAL MANUFACTURER. MOREOVER, NOTWITHSTANDING DEBATE AS TO WHETHER THE ECONOMIC INCIDENCE OF A SALES TAX FALLS ON THE PURCHASER OR THE SELLER, IT IS GENERALLY RECOGNIZED THAT THE SAME ECONOMIC LAWS OF SHIFTING OR INCIDENCE OF TAXATION WILL OPERATE NO MATTER WHAT THE LEGAL OR NOMINAL FORM OF THE TAX. TO APPLY THE LEGAL INCIDENCE TEST TO THE PROPRIETY OF A GRANT TO A STATE OF TITLE III FUNDS FOR USE IN THE PAYMENT OF SALES TAXES INCLUDED IN OR ADDED TO THE NORMAL "PRICE" WOULD RESULT IN A PRACTICAL ANOMALY TO THE EXTENT THAT THE ECONOMIC INCIDENCE OF A VENDOR SALES TAX COINCIDES WITH THAT OF A VENDEE SALES TAX.

FOR THE PURPOSE OF TITLE III OR SIMILAR FEDERAL-AID PROVISIONS, SALES TAXES DO NOT APPEAR TO HAVE A SIGNIFICANCE WHICH DIFFERS FUNDAMENTALLY FROM ANY OTHER TAXES THE COST OF WHICH IS REFLECTED IN THE TOTAL PRICE OR CHARGE FOR A PURCHASED COMMODITY OR SERVICE. THE DISTINGUISHING CHARACTERISTIC OF THE SALES TAX IS THAT IT IS TIED, MORE OR LESS CLOSELY AND MORE OR LESS VISIBLY, TO A PARTICULAR OCCURRENCE, NAMELY, THE SALE, WHICH MARKS THE TRANSFER FROM VENDOR TO VENDEE. THE VARIATIONS FOUND IN TAXES OF THIS CHARACTER, AND WHICH MAY SERVE TO TIP THE BALANCE OF WHAT IS CALLED THE LEGAL INCIDENCE OF THE TAX FROM ONE PARTY TO A TRANSACTION TO THE OTHER, ARE ESSENTIALLY VARIATIONS IN COLLECTION PROCEDURE DICTATED PRIMARILY BY THE LEGISLATURE'S ESTIMATE OF THE MOST EFFECTIVE ADMINISTRATIVE PROCEDURE. WHERE THE INTEREST OF THE TAXING JURISDICTION WOULD BE SERVED BY CONCEALMENT OF THE TAX, THE MEANS ARE READILY PROVIDED. CONCEALED OR UNCONCEALED, THE TAX GENERALLY ENTERS INTO WHAT THE PURCHASER RECOGNIZES, REALISTICALLY, AS THE PRICE OF THE COMMODITY.

WHEN THE STATE AS THE TAXING AUTHORITY FAILS TO PROVIDE AN EXEMPTION FOR SALES MADE TO ITSELF, IT RECOGNIZES A DISTINCTION BETWEEN THE EXERCISE OF ITS SOVEREIGN POWER TO TAX AND ITS ACTIVITIES AS A PURCHASER IN THE COMMERCIAL MARKET. NOTHING IN THE PROVISIONS OF TITLE III OF THE SOCIAL SECURITY ACT APPEARS TO REQUIRE THAT, IN THE EXPENDITURE OF MONEYS GRANTED BY THE SOCIAL SECURITY BOARD, A PROCEDURE AT VARIANCE WITH THOSE APPLICABLE TO THE EXPENDITURE OF MONEYS FROM OTHER SOURCES MUST BE REQUIRED IN THIS RESPECT. ON THE CONTRARY, REGARD FOR THE BASIC PURPOSE OF THE FEDERAL APPROPRIATION, THE DISCRETION AND RESPONSIBILITY VESTED IN THE SOCIAL SECURITY BOARD IN DETERMINING THE AMOUNT OF GRANTS, AND CONSIDERATIONS OF EQUITY AS BETWEEN STATES QUALIFYING FOR GRANTS, INDICATE THAT MINOR TECHNICAL DIFFERENTIATIONS IN THE LEGAL CHARACTERISTICS OF STATE SALES TAXES AND IN STATE TAX COLLECTION PROCEDURES DO NOT CONSTITUTE CONTROLLING LIMITATIONS UPON THE JUDGMENT OF THE RESPONSIBLE FEDERAL ADMINISTRATIVE AGENCY AS TO WHAT MAY REASONABLY BE RECOGNIZED AS A COST OF PROPER AND EFFICIENT ADMINISTRATION. THE LEGAL INCIDENCE OF A TAX IMPOSED IN CONNECTION WITH A PURCHASE, WHILE POSSIBLY CONSTITUTING A RELEVANT FACTOR WHICH THE FEDERAL ADMINISTRATIVE AGENCY MAY PROPERLY TAKE INTO CONSIDERATION IN DETERMINING THE AMOUNT OF THE FEDERAL GRANT, IT IS SUBMITTED DOES NOT LEAD UNALTERABLY TO A CONCLUSION THAT THE AMOUNT DOES NOT REPRESENT A COST OF PROPER AND EFFICIENT ADMINISTRATION, AND AS A TEST IT DOES NOT LEND ITSELF TO CONSISTENT AND EQUITABLE APPLICATION.

YOUR ADVICE IS ACCORDINGLY REQUESTED AS TO WHETHER YOUR OFFICE WILL BE REQUIRED TO OBJECT TO THE INCLUSION IN GRANTS UNDER TITLE III OF THE SOCIAL SECURITY ACT OF AMOUNTS TO FINANCE STATE SALES TAXES WHICH STATE AGENCIES ARE LEGALLY REQUIRED TO PAY IN CONNECTION WITH THE PURCHASE OF SUPPLIES AND SERVICES WHICH HAVE BEEN FOUND BY THE SOCIAL SECURITY BOARD TO BE NECESSARY FOR THE PROPER AND EFFICIENT ADMINISTRATION OF A STATE UNEMPLOYMENT COMPENSATION LAW. IF YOU CONCUR THAT NO SUCH OBJECTION IS REQUIRED I WILL ASSUME THAT A LIKE CONCLUSION WOULD APPLY, WITH RESPECT TO BOTH STATE AND LOCAL SALES TAXES, FOR THE PURPOSES OF GRANTS ON A MATCHING OR OTHER BASIS, UNDER TITLES I, IV, V, AND X OF THE SOCIAL SECURITY ACT AND UNDER THE WAGNER PEYSER ACT; AND THE CONSTITUENT AGENCIES OF THE FEDERAL SECURITY AGENCY WILL BE ADVISED ACCORDINGLY. * * *

SECTION 302 (A) OF THE SOCIAL SECURITY ACT AS AMENDED BY SECTION 301 OF THE ACT OF AUGUST 10, 1939, 53 STAT. 1378, 42 U.S.C. 502, PROVIDES:

THE BOARD SHALL FROM TIME TO TIME CERTIFY TO THE SECRETARY OF THE TREASURY FOR PAYMENT TO EACH STATE WHICH HAS AN UNEMPLOYMENT COMPENSATION LAW APPROVED BY THE BOARD UNDER THE FEDERAL UNEMPLOYMENT TAX ACT, SUCH AMOUNTS AS THE BOARD DETERMINES TO BE NECESSARY FOR THE PROPER AND EFFICIENT ADMINISTRATION OF SUCH LAW DURING THE FISCAL YEAR FOR WHICH SUCH PAYMENT IS TO BE MADE. THE BOARD'S DETERMINATION SHALL BE BASED ON (1) THE POPULATION OF THE STATE; (2) AN ESTIMATE OF THE NUMBER OF PERSONS COVERED BY THE STATE LAW AND OF THE COST OF PROPER AND EFFICIENT ADMINISTRATION OF SUCH LAW; AND (3) SUCH OTHER FACTORS AS THE BOARD FINDS RELEVANT. THE BOARD SHALL NOT CERTIFY FOR PAYMENT UNDER THIS SECTION IN ANY FISCAL YEAR A TOTAL AMOUNT IN EXCESS OF THE AMOUNT APPROPRIATED THEREFOR FOR SUCH FISCAL YEAR. UNDOUBTEDLY THIS PROVISION CONFERS AUTHORITY ON THE SOCIAL SECURITY BOARD TO DETERMINE THE AMOUNT OF THE PAYMENT TO BE MADE TO EACH STATE FROM TIME TO TIME PURSUANT TO THE PRESCRIBED STANDARDS, INCLUDING "SUCH OTHER FACTORS AS THE BOARD FINDS RELEVANT.' ESSENTIALLY THE SAME LANGUAGE WAS USED IN THE ORIGINAL ACT, APPROVED AUGUST 14, 1935, 49 STAT. 626. IT WAS HELD IN DECISION OF SEPTEMBER 8, 1937, 17 COMP. GEN. 223, NEVERTHELESS, ON A SUBMISSION OF THE QUESTION BY THE CHAIRMAN OF THE SOCIAL SECURITY BOARD, THAT THE BOARD WAS NOT AUTHORIZED TO INCLUDE IN SUCH GRANTS THE AMOUNT OF STATE SALES TAXES WHICH THE STATE AGENCIES ARE REQUIRED TO PAY IN CONNECTION WITH THE PURCHASE OF SUPPLIES AND EQUIPMENT NECESSARY FOR THE ADMINISTRATION OF STATE UNEMPLOYMENT COMPENSATION LAWS. IT WAS SAID IN THE DECISION:

THE RULE IS WELL ESTABLISHED THAT THE FEDERAL GOVERNMENT OR ITS ACTIVITIES MAY NOT BE TAXED BY STATES OR THEIR POLITICAL SUBDIVISIONS. COMP. GEN. 295, AND CASES THEREIN CITED. IT FOLLOWS FROM THIS FUNDAMENTAL RULE THAT THERE MAY NOT BE COLLECTED FROM THE FEDERAL GOVERNMENT THE AMOUNT OF A SALES TAX IMPOSED BY A STATE EITHER DIRECTLY AS SUCH OR INDIRECTLY AS A PART OF THE PRICE OF THE COMMODITY. 15 COMP. GEN. 380. SALES TAX IMPOSED BY A STATE ON SALES TO ITSELF OR ONE OF ITS DEPARTMENTS MERELY RESULTS IN TRANSFERRING THE AMOUNT OF THE TAX COLLECTED FROM ONE ACCOUNT OF THE STATE TO ANOTHER AND THE AMOUNT OF THE TAX BECOMES AVAILABLE TO THE STATE FOR EXPENDITURE FOR OTHER PURPOSES. THUS, IN THE INSTANT MATTER, IF THE FEDERAL GOVERNMENT WERE TO PAY THE AMOUNT OF THE TAX IMPOSED BY THE SEVERAL STATES ON THE PURCHASE OF SUPPLIES AND EQUIPMENT NECESSARY FOR THE ADMINISTRATION OF THE RESPECTIVE STATE UNEMPLOYMENT COMPENSATION LAWS, SUCH AMOUNT WOULD BECOME AVAILABLE FOR USE BY THE STATE FOR PURPOSES HAVING NO CONNECTION WITH THE ADMINISTRATION OF SUCH LAWS.

THE SECRETARY OF THE CALIFORNIA STATE BOARD OF EQUALIZATION WAS ADVISED IN LETTER OF APRIL 14, 1938, CONCERNING THIS DECISION THAT "REGARDLESS OF THE METHOD BY WHICH THE STATE SALES TAX IS COLLECTED AND PAID, THE RESULT IS AN INCREASE IN THE GENERAL REVENUES OF THE STATE.'

IT IS APPARENT THAT THE DECISION WAS BASED ON THE PRINCIPLE APPLIED IN PANHANDLE OIL CO. V. MISSISSIPPI, 277 U.S. 218, THAT THE BURDEN OF ANY STATE TAX DIRECTLY ON A TRANSACTION BY WHICH THE UNITED STATES OBTAINS ITS SUPPLIES IS CAST ON THE FEDERAL GOVERNMENT AND IS UNAUTHORIZED.

A PRACTICAL LIMITATION ON THE RULE WAS RECOGNIZED, HOWEVER, IN A LATER DECISION ADDRESSED TO YOU BY THIS OFFICE UNDER DATE OF AUGUST 2, 1940. THAT DECISION IT WAS HELD THERE WAS NO OBJECTION TO INCLUDING IN THE GRANTS TO STATES THE AMOUNT OF STATE TAXES PAID BY A STATE EMPLOYEE IN CONNECTION WITH OFFICIAL TRAVEL. IT WAS SAID:

WHERE AN EMPLOYEE OF THE STATE IS ENGAGED ON OFFICIAL BUSINESS AND INCURS TRAVEL, SUBSISTENCE AND OTHER EXPENSES FOR WHICH, UNDER HIS CONTRACT OF EMPLOYMENT WITH THE STATE AUTHORITIES HE IS ENTITLED TO REIMBURSEMENT, SUCH REIMBURSEMENT TO HIM MUST BE FOR THE EXPENSES HE HAS INCURRED; AND IF, AS A PART OF SUCH EXPENSES, SALES OR OTHER TAXES NECESSARILY ARE INVOLVED, THE PAYMENT BY THE STATE AUTHORITIES TO THE EMPLOYEE OF THE AMOUNT OF HIS NECESSARY EXPENSES, WHICH INCLUDED SOME SUCH TAXES, IS NOT THE PAYMENT OF A TAX AS SUCH, EITHER DIRECTLY OR INDIRECTLY, BUT MERELY AN ITEM OF EXPENSE COVERED BY SECTION 302 OF THE SOCIAL SECURITY ACT. THE REIMBURSEMENT TO THE EMPLOYEE IS FOR AN EXPENSE ACTUALLY INCURRED BY HIM AND FOR WHICH THE STATE AUTHORITIES HAD ASSUMED THE OBLIGATION TO REIMBURSE HIM. IN SUCH CASES THE RELATION BETWEEN THE TAX PAYMENT AND THE PAYMENT BY THE STATE AUTHORITIES IS TOO REMOTE TO BE CONSIDERED AS COVERED BY THE DECISION TO WHICH YOU REFER.

THE PAYMENT OF THE TAXES IN THAT CASE WAS ONE STEP FURTHER REMOVED. INSTEAD OF BEING PAID BY AN AGENCY OF THE STATE THEY WERE PAID BY AN EMPLOYEE FROM HIS OWN FUNDS AND REIMBURSED BY THE AGENCY. SO FAR AS THE AMOUNT INVOLVED GOING INTO THE GENERAL REVENUES OF THE STATE WAS MATERIAL, THE RESULT WAS THE SAME, BUT IN SUCH A TRANSACTION IT BECAME MORE EVIDENT THAT THE AMOUNT WHICH THE STATE AGENCY WAS REQUIRED TO PAY WAS A PROPER EXPENDITURE IN THE ADMINISTRATION OF THE STATE UNEMPLOYMENT COMPENSATION LAW, EVEN THOUGH IT INCLUDED THE AMOUNT OF CERTAIN STATE SALES TAXES.

IN ALABAMA V. KING AND BOOZER, 314 U.S. 1, DECIDED NOVEMBER 10, 1941, THE SUPREME COURT OF THE UNITED STATES GREATLY RESTRICTED IF IT DID NOT WHOLLY OVERRULE THE PRINCIPLE APPLIED IN PANHANDLE OIL CO. V. MISSISSIPPI, SUPRA, ON WHICH THE SAID DECISION OF SEPTEMBER 8, 1937, APPEARS TO HAVE BEEN LARGELY PREDICATED. SEE, ALSO JOHN C. CURRY V. UNITED STATES, 314 U.S. 14, DECIDED THE SAME DAY. FOLLOWING THE PRINCIPLES APPLIED IN THESE LATER DECISIONS OF THE SUPREME COURT, I ADVISED YOU IN DECISION OF JANUARY 31, 1942, 21 COMP. GEN. 733, THAT THE INCLUSION IN GRANTS TO THE STATE OF CALIFORNIA OF AMOUNTS REPRESENTING INCREASED COSTS OF ADMINISTRATION OF THE STATE UNEMPLOYMENT COMPENSATION STATUTE RESULTING FROM THE CALIFORNIA SALES TAX WAS NO LONGER OBJECTIONABLE, IT APPEARING THAT THE LEGAL INCIDENCE OF SUCH TAXES--- IRRESPECTIVE OF THE ECONOMIC BURDEN--- WAS ON THE VENDOR AND NOT ON THE STATE AS VENDEE, AND, THEREFORE, THAT THEY WERE TO BE REGARDED AS MERELY PART OF THE PURCHASE PRICE PAID BY THE STATE, AND NOT AS A PAYMENT OF TAXES, AS SUCH, BY THE STATE TO ITSELF.

YOU NOW URGE THAT THE LEGAL INCIDENCE TEST IS IMPRACTICABLE AND WHOLLY UNREALISTIC IN RELATION TO THE PROBLEM OF MAKING GRANTS TO THE STATES UNDER THE SOCIAL SECURITY ACT. YOU POINT OUT, AND I THINK CORRECTLY, THAT THE ECONOMIC BURDEN AND EFFECT REMAIN GENERALLY THE SAME WHETHER THE "LEGAL INCIDENCE" OF A STATE SALES TAX IS ON THE VENDOR OR ON THE VENDEE. THE PROPOSITION APPEARS TO BE THAT AS THERE IS NOW NO LEGAL BASIS FOR CLAIMING AN EXEMPTION FROM TAXES LAID TECHNICALLY ON THE VENDOR, THERE IS NO REALISTIC BASIS FOR A DISTINCTION AS TO TAXES LAID TECHNICALLY ON THE VENDEE, SO FAR AS THE PRACTICAL MATTER OF MAKING GRANTS TO THE STATES FOR THE COST OF ADMINISTERING CERTAIN STATE LAWS IS INVOLVED. YOU MAINTAIN THAT IN ANY EVENT THE EXTENT TO WHICH AMOUNTS TO COVER THE PAYMENT OF SUCH TAXES SHOULD BE INCLUDED IN THE GRANTS IS FOR DETERMINATION BY THE BOARD IN FIXING THE AMOUNT OF SUCH GRANTS PURSUANT TO THE SOCIAL SECURITY ACT.

HARKING BACK TO THE LANGUAGE OF SECTION 302 (A) OF THE SOCIAL SECURITY ACT, SUPRA, THAT THE BOARD SHALL FROM TIME TO TIME CERTIFY TO THE SECRETARY OF THE TREASURY FOR PAYMENT TO EACH STATE ,SUCH AMOUNTS AS THE BOARD DETERMINES TO BE NECESSARY FOR THE PROPER AND EFFICIENT ADMINISTRATION OF SUCH LAW, SUCH DETERMINATION TO BE BASED INTER ALIA, ON THE "COST OF PROPER AND EFFICIENT ADMINISTRATION" AND "SUCH OTHER FACTORS AS THE BOARD FINDS RELEVANT," I HAVE NO DOUBT THAT THE MATTER HERE INVOLVED IS ONE PRIMARILY FOR DETERMINATION BY THE BOARD IN THE SOUND EXERCISE OF THE DISCRETION CONFERRED BY THE STATUTE. WHILE A BROAD DISCRETION IS GIVEN TO DETERMINE THE AMOUNT OF THE GRANTS PURSUANT TO THE PRESCRIBED STANDARDS, IT REMAINS A LEGAL DISCRETION AND, OF COURSE, MAY NOT BE EXERCISED ARBITRARILY OR CAPRICIOUSLY TO AUTHORIZE PAYMENTS CLEARLY BEYOND THE SCOPE AND PURPOSES OF THE STATUTE. FROM THE MATTERS SET FORTH IN YOUR LETTER I THINK IT IS PLAIN, HOWEVER, THAT A DETERMINATION BY THE BOARD TO INCLUDE IN A GRANT AN AMOUNT TO COVER STATE SALES TAXES PAID TO VENDORS BY THE STATE AGENCY IN PURCHASING SUPPLIES AND EQUIPMENT NEEDED IN THE ADMINISTRATION OF THE STATE UNEMPLOYMENT COMPENSATION LAWS COULD NOT BE SO CHARACTERIZED, IRRESPECTIVE OF WHETHER THE "LEGAL INCIDENCE" OF THE TAX IS ON THE VENDOR OR ON THE VENDEE. ACCORDINGLY, YOU ARE ADVISED THAT THIS OFFICE WILL NOT BE REQUIRED TO OBJECT TO PAYMENTS BASED ON SUCH DETERMINATIONS, AND THE DECISION OF SEPTEMBER 8, 1937, WILL NO LONGER BE FOLLOWED IN SUCH RESPECT. THIS DOES NOT MEAN, OF COURSE, THAT AMOUNTS TO COVER SUCH SALES TAXES NEED BE INCLUDED IN THE GRANTS, WHETHER THE LEGAL INCIDENCE OF THE TAXES BE ON THE VENDOR OR THE VENDEE, BUT ONLY THAT THE MATTER APPEARS TO BE ONE PROPERLY FOR DETERMINATION BY THE BOARD IN THE EXERCISE OF A SOUND DISCRETION IN FIXING THE AMOUNT OF THE GRANT IN RELATION TO THE PARTICULAR CIRCUMSTANCES INVOLVED IN THE CASE OF EACH STATE.

SO FAR AS A SIMILAR QUESTION AS TO SALES TAXES MAY ARISE WITH RESPECT TO THE DETERMINATION OF THE AMOUNT OF GRANTS OR ALLOTMENTS TO STATES UNDER THE OTHER TITLES OF THE SOCIAL SECURITY ACT OR THE WAGNER PEYSER ACT, 48 STAT. 113, 29 U.S.C. 49, ET SEQ., MENTIONED IN YOUR LETTER, OR WITH RESPECT TO A DETERMINATION OF THE PROPRIETY OF STATE EXPENDITURES FOR SUCH ADMINISTRATIVE PURPOSES IN RELATION TO SUCH GRANTS OR ALLOTMENTS, THE SAME PRINCIPLES WOULD APPEAR TO APPLY.

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