B-151383, NOV. 3, 1966

B-151383, NOV. 3, 1966

TO THE LANE CONSTRUCTION CORPORATION:

FURTHER REFERENCE IS MADE TO YOUR LETTER DATED AUGUST 15, 1966, CONCERNING A CLAIM OF YOUR COMPANY FOR PAYMENT OF THE SUM OF $28,000 WHICH WAS CONSIDERED BY THE CORPS OF ENGINEERS, UNITED STATES ARMY, AS AN APPROPRIATE ADJUSTMENT DUE THE GOVERNMENT ON ACCOUNT OF A REFUND OBTAINED BY YOUR COMPANY ON SALES AND USE TAXES PAID TO THE STATE OF MARYLAND IN CONNECTION WITH THE PERFORMANCE OF ARMY CONTRACT NO. DA-49 080-ENG-4182, DATED JANUARY 28, 1959, AS AMENDED.

THE CONTRACT COVERED THE CONSTRUCTION OF A RUNWAY, TAXIWAY AND APRONS AT THE ANDREWS AIR FORCE BASE, MARYLAND. IT INCORPORATED A TAX CLAUSE PROVIDING FOR THE MAKING OF CERTAIN ADJUSTMENTS UNDER CIRCUMSTANCES INVOLVING SUCH MATTERS AS INCREASES IN THE RATES OF ANY TAXES OR DUTIES, OR TAX EXEMPTIONS. ONE OF THE PROVISIONS OF THE TAX CLAUSE IS TO THE EFFECT THAT, IF THE CONTRACTOR IS NOT REQUIRED TO PAY OR BEAR THE BURDEN OF A TAX WHICH IS INCLUDED IN THE CONTRACT PRICE, THE GOVERNMENT WOULD BE ENTITLED TO THE BENEFIT OF SUCH TAX RELIEF. HOWEVER, PARAGRAPH (C) (4) OF THE TAX CLAUSE EXCLUDES CERTAIN TYPES OF TAXES FROM THE CONTRACT PRICE INCREASE AND PRICE DECREASE PROVISIONS.

IT WAS DETERMINED IN A DECISION RENDERED BY OUR OFFICE ON JUNE 22, 1965, B-156701, THAT NEITHER PARTY TO A CONSTRUCTION CONTRACT INCORPORATING THE PARTICULAR TAX CLAUSE WOULD BE ENTITLED TO AN ADJUSTMENT BASED ON STATE OR LOCAL TAXES LEVIED ON THE MATERIALS USED ON THE CONSTRUCTION PROJECT, OR EXEMPTIONS FROM STATE OR LOCAL TAXES ON THOSE MATERIALS. OUR DECISION REFERRED TO THE CASE OF COMPTROLLER OF TREAS. V. PITTSBURGH-DES MOINES ST.CO., 189 A.2D 107, WHEREIN THE COURT OF APPEALS OF MARYLAND HELD THAT THE EXEMPTION PROVISIONS OF THE STATE SALES AND USE TAX LAW DISCRIMINATED AGAINST THE FEDERAL GOVERNMENT AND ITS CONTRACTORS AND THE TAXES THEREFORE ARE NOT APPLICABLE TO THE PROCUREMENT OF SUPPLIES FOR A FEDERAL CONSTRUCTION PROJECT.

DURING THE TIME OF PERFORMANCE OF CONTRACT NO. DA-49-080-ENG-4182, THE UNITED STATES DECIDED TO CONTEST THE CONSTITUTIONALITY OF THE MARYLAND SALES AND USE TAXES AS APPLIED TO GOVERNMENT CONTRACTORS. IN ANTICIPATION OF A POSSIBLE FAVORABLE DECISION, THE CORPS OF ENGINEERS NEGOTIATED A SUPPLEMENTAL AGREEMENT WITH YOUR COMPANY, INSERTING INTO THE CONTRACT A STANDARD CLAUSE PRESCRIBED BY THE JUDGE ADVOCATE GENERAL OF THE ARMY FOR USE ON ALL NEW CONTRACTS, AND FOR ADDITION TO ALL CONTRACTS BEING PERFORMED IN THE STATE OF MARYLAND, WHERE POSSIBLE. UNDER THAT CLAUSE, THE GOVERNMENT WOULD BE ENTITLED TO A CREDIT FOR TAX REFUNDS IF THE MARYLAND SALES AND USE TAX LAW SHOULD BE DECLARED UNCONSTITUTIONAL. THE SUPPLEMENTAL AGREEMENT WAS DULY EXECUTED BY BOTH PARTIES TO CONTRACT NO. DA-49-080-ENG-4182 AND THE SURETIES' CONSENT TO THE CONTRACT MODIFICATION WAS OBTAINED BEFORE EXECUTION OF THE AGREEMENT IN OCTOBER 1961.

IT IS ALLEGED THAT ON OR ABOUT JULY 17, 1963, YOU APPLIED FOR AND RECEIVED FROM THE STATE OF MARYLAND A REFUND IN THE SUM OF $70,571, WHICH REFUND WAS PAID ON FEBRUARY 19, 1965. ON SEPTEMBER 27, 1965, THE CORPS OF ENGINEERS SUBMITTED A CONTRACT PAYMENT ESTIMATE TO YOU AND DEDUCTED THEREFROM $50,000 AS AN ESTIMATED REFUND DUE THE GOVERNMENT ON ACCOUNT OF THE MARYLAND SALES AND USE TAXES. SUBSEQUENTLY, ON NOVEMBER 3, 1965, THE GOVERNMENT RELEASED $22,000 OF THAT AMOUNT, RETAINING $28,000 AS A TAX CREDIT.

YOU REFER TO THE SUPPLEMENTAL AGREEMENT AS STATING IN PART THAT "IN COMPLIANCE WITH REQUIREMENTS OF THE JUDGE ADVOCATE GENERAL, DEPARTMENT OF THE ARMY, IT IS NECESSARY TO INCLUDE IN THE CONTRACT CERTAIN NEW PROVISIONS IN ORDER TO OBTAIN A REFUND TO THE UNITED STATES OF ALL MARYLAND SALES AND USE TAXES ON MATERIALS AND SUPPLIES USED IN THE PERFORMANCE OF THE CONTRACT.' THAT STATEMENT IS CONSIDERED BY YOU AS IMPLYING THAT IT WAS MANDATORY FOR THE SUPPLEMENTAL AGREEMENT TO BE EXECUTED BY YOUR COMPANY AS A PART OF ITS CONTRACT.

YOU ALSO REFER TO OUR DECISION OF JUNE 22, 1965, AS INDICATING THAT, IF YOU HAD NOT EXECUTED THE SUPPLEMENTAL AGREEMENT, THE GOVERNMENT WOULD NOT HAVE BEEN IN A POSITION TO REQUIRE AN ADJUSTMENT FOR ANY SALES AND USE TAX REFUNDS OBTAINED BY YOU FROM THE STATE OF MARYLAND. YOU STATE THAT THE CORPS OF ENGINEERS ADMITS THAT IN SIMILAR CASES IT HAS NO RIGHT TO SALES TAX REFUNDS AND HAS NOT DEMANDED SUCH REFUNDS FROM OTHER CONTRACTORS. FURTHERMORE, YOU CONTEND THAT IT IS INEQUITABLE FOR THE GOVERNMENT TO DEMAND A REFUND FROM LANE WHERE LANE HAS NO LEGAL RIGHT TO OBTAIN THE APPLICABLE PORTION OF THE REFUND FROM ITS SUBCONTRACTORS.

THE CORPS OF ENGINEERS HAS SUBMITTED A REPORT STATING THAT, DURING NEGOTIATIONS CONCERNING THE TAX REFUND, IT WAS AGREED THAT THE GOVERNMENT WOULD RELEASE TO LANE MONEY WHICH IT HELD OVER AND ABOVE THE GOVERNMENT'S ESTIMATE OF THE AMOUNT OF THE REBATE DUE THE GOVERNMENT AND THAT LANE, THOUGH DISPUTING THE ACCURACY OF THE GOVERNMENT ESTIMATE, WOULD BRING A CLAIM AT THIS TIME STRICTLY UPON THE QUESTION OF ENTITLEMENT.

IT IS THE POSITION OF THE CORPS OF ENGINEERS THAT YOUR ALLEGATIONS AND ARGUMENTS WOULD NOT JUSTIFY ALLOWANCE OF ANY PART OF THE SUM OF $28,000 WITHHELD FROM PAYMENT UNDER YOUR CONTRACT EXCEPT TO THE EXTENT THAT AN ADJUSTMENT WOULD BE PROPER IF DETERMINED THAT THE AMOUNT WITHHELD WAS EXCESSIVE. IT IS POINTED OUT THAT THERE IS ONE BASIC FACTUAL DIFFERENCE BETWEEN THE SITUATION INVOLVED IN THE CASE OF B 156701, JUNE 22, 1965, AND THE ONE HERE INVOLVED. IN THE CITED CASE THE CONTRACT DID NOT INCLUDE, BY SUPPLEMENTAL AGREEMENT OR OTHERWISE, A CLAUSE SPECIFICALLY CONCERNING MARYLAND SALES AND USE TAXES, SUCH AS WAS MADE A PART OF YOUR CONTRACT BY THE SUPPLEMENTAL AGREEMENT EXECUTED IN OCTOBER 1961. OUR DECISION WAS BASED ENTIRELY UPON THE TAX CLAUSE INCLUDED IN VARIOUS CONSTRUCTION CONTRACTS WHICH WERE ENTERED INTO BY THE UNITED STATES BEFORE THE GOVERNMENT DECIDED TO CONTEST THE CONSTITUTIONALITY OF THE MARYLAND SALES AND USE TAX LAW ON THE GROUND THAT, BY GRANTING AN EXEMPTION WITH RESPECT TO SALES MADE TO THE STATE OR ANY OF ITS POLITICAL SUBDIVISIONS WITHOUT GRANTING A SIMILAR EXEMPTION WITH RESPECT TO SALES MADE TO THE UNITED STATES, THE LAW DISCRIMINATED AGAINST THE UNITED STATES AND ITS CONTRACTORS.

THE CORPS OF ENGINEERS DID NOT ATTEMPT TO RECOVER FROM CERTAIN OTHER CONTRACTORS BECAUSE THEIR CONTRACTS DO NOT CONTAIN THE "MARYLAND SALES AND USE TAXES" CLAUSE. IT IS REPORTED THAT SEVERAL GOVERNMENT CONTRACTORS REFUSED TO SIGN PROPOSED SUPPLEMENTAL AGREEMENTS INCORPORATING THAT CLAUSE AND NO REPRISALS, DIRECT OR INDIRECT, WERE IMPOSED BY THE GOVERNMENT BECAUSE OF SUCH REFUSALS. WITH RESPECT TO YOUR SUGGESTION THAT THE LANGUAGE OF THE SUPPLEMENTAL AGREEMENT IMPLIED THAT ITS EXECUTION WAS MANDATORY, THE CORPS OF ENGINEERS STATES THAT THERE WAS NOTHING HIDDEN ABOUT THE MEANING OF THE SUPPLEMENTAL AGREEMENT, NOR WAS ANY PRESSURE PUT TO BEAR UPON YOU TO SIGN THE AGREEMENT; ALSO, THAT THE OFFICIAL OF YOUR COMPANY WHO SIGNED THE AGREEMENT MUST BE PRESUMED TO HAVE KNOWN WHAT THE COMPANY WAS EXECUTING, BUT AT SUCH TIME THE COMPANY OFFERED NO OBJECTION WHATSOEVER. IN REGARD TO THE ARGUMENT THAT LANE WOULD HAVE TO BEAR THE BURDEN OF THE ENTIRE TAX CREDIT TO THE GOVERNMENT, BECAUSE LANE'S SUBCONTRACTORS ARE NOT REQUIRED TO EXTEND A SIMILAR CREDIT TO LANE, IT IS STATED BY THE CORPS OF ENGINEERS THAT THIS BURDEN COULD HAVE BEEN DISTRIBUTED AMONG THE SUBCONTRACTORS CONCERNED BY AMENDING THE SUBCONTRACTS TO INCLUDE A SIMILAR TAX CLAUSE.

IT APPEARS THAT YOUR COMPANY WAS NOT OBLIGATED UNDER THE TERMS OF ITS CONTRACT BEFORE EXECUTION OF THE SUPPLEMENTAL AGREEMENT IN OCTOBER 1961 TO MAKE ANY PAYMENT TO THE GOVERNMENT ON THE BASIS OF SALES AND USE TAX REFUNDS OBTAINED FROM THE STATE OF MARYLAND. HOWEVER, IT IS OUR OPINION THAT THE STATEMENT IN THE SUPPLEMENTAL AGREEMENT THAT IT IS NECESSARY TO INCLUDE THE NEW TAX CLAUSE IN ORDER TO OBTAIN A REFUND TO THE UNITED STATES DOES NOT REASONABLY IMPLY THAT EXECUTION OF THE SUPPLEMENTAL AGREEMENT WAS MANDATORY FROM THE STANDPOINT OF SUGGESTING THAT, IF YOU FAILED TO EXECUTE THE AGREEMENT, YOU WOULD BE HELD LIABLE FOR BREACH OF THE CONTRACT. IT DOES NOT APPEAR THAT YOU WERE MISLED IN THE MATTER BUT, RATHER, THAT YOU CONSIDERED AT THE TIME THAT THE GOVERNMENT WOULD BE EQUITABLY ENTITLED TO ANY AMOUNTS RECEIVED AS TAX REFUNDS IF THE GOVERNMENT WAS SUCCESSFUL IN ITS EFFORTS TO OBTAIN AN EXEMPTION FROM THE TAXES INVOLVED ON BEHALF OF ITS CONTRACTORS.

THERE WAS NO CONSIDERATION FOR THE EXECUTION OF THE SUPPLEMENTAL AGREEMENT AND IT APPEARS THAT MOST COURTS SUPPORT THE GENERAL PRINCIPLE THAT A CONTRACT MODIFICATION CAN BE NOTHING BUT A NEW CONTRACT WHICH MUST BE SUPPORTED BY A CONSIDERATION. SEE 17 AM.JUR.2D, CONTRACTS, SECTION 469. HOWEVER, IN SUITS INVOLVING SUPPLEMENTAL AGREEMENTS WHICH FAVOR THE UNITED STATES OR ITS AGENCIES, THE FEDERAL COURTS HAVE ADOPTED THE APPARENTLY MINORITY VIEW THAT A CONTRACT MAY BE CHANGED OR MODIFIED IN ONE OR MORE OF ITS DETAILS WITHOUT REQUIRING ANY ADDITIONAL CONSIDERATION. SEE MID-STATE PRODUCTS CO. V. COMMODITY CREDIT CORPORATION, 196 F.2D 416, 420; AND EQUIPMENT CORPORATION OF AMERICA V. UNITED STATES, 98 CT.CL. 159. THUS, IT APPEARS THAT YOUR COMPANY IS BOUND BY THE SUPPLEMENTAL AGREEMENT TO CONTRACT NO. DA-49-080-ENG 4182, ALTHOUGH IT CONSTITUTES ESSENTIALLY A WAIVER OF CERTAIN RIGHTS UNDER THE ORIGINAL CONTRACT.

IN VIEW OF CERTAIN STATEMENTS MADE BY BOTH PARTIES IN THIS CASE AND THE FACT THAT NEITHER PARTY HAS FURNISHED OUR OFFICE AN ANALYSIS OF THE TAX REFUNDS OR OTHER TAX CREDITS CONSIDERED IN THE GOVERNMENT'S REVISED ESTIMATE OF THE AMOUNT DUE FROM YOUR COMPANY, WE ARE UNABLE TO DETERMINE AT THIS TIME WHETHER THE CORPS OF ENGINEERS HAS CLAIMED FROM LANE AMOUNTS EQUIVALENT TO THE TAX REFUNDS OBTAINED BY ITS SUBCONTRACTORS, PLUS ANY AMOUNTS INVOLVING MARYLAND SALES AND USE TAXES WHICH THEY HAVE NOT PAID AS THE RESULT OF THE DECISION OF THE MARYLAND COURT OF APPEALS. IN THAT CONNECTION, ALTHOUGH IT IS OUR OPINION THAT LANE IS OBLIGATED TO PAY TO THE UNITED STATES THE AMOUNT OF THE TAX REFUNDS WHICH LANE RECEIVED WHETHER DIRECTLY OR FROM ITS SUBCONTRACTOR, AND ALLOW OTHER APPROPRIATE TAX CREDITS IN REGARD TO THE TAXES WHICH IT HAS NOT PAID, IT APPEARS DOUBTFUL THAT THERE EXISTS ANY REASONABLE BASIS FOR A CONCLUSION THAT LANE IS REQUIRED TO ACCOUNT FOR TAX REFUNDS OBTAINED BY ITS SUBCONTRACTORS OR OTHER TAX RELIEF OBTAINED BY THEM IN CONNECTION WITH THE PERFORMANCE OF THE SUBCONTRACTS WHICH WERE NOT PASSED ON TO LANE.

THE TAX CLAUSE OF THE SUPPLEMENTAL AGREEMENT TO CONTRACT NO. DA-49 080- ENG-4182 DOES NOT APPEAR IN ANY MANNER TO CONCERN AN OBLIGATION ON THE PART OF LANE TO ACCOUNT FOR TAX REFUNDS OR OTHER RELIEF OBTAINED BY ITS SUBCONTRACTORS UNLESS THEY VOLUNTARILY CONSIDERED THE TAXES AS SEPARATE ITEMS OF THEIR PRICING AGREEMENTS AND ALLOWED LANE APPROPRIATE CREDITS FOR THE TAXES WHICH THEY WERE NOT REQUIRED TO PAY AND FOR ANY TAX REFUNDS RECEIVED BY THEM. THE TAX CLAUSE SPECIFICALLY COVERS TAXES WHICH "THE CONTRACTOR" IS NOT REQUIRED TO PAY, OR TAXES AS TO WHICH "THE CONTRACTOR" HAS NOT BORNE THE BURDEN OR HAS OBTAINED A REFUND; AND IT IS REASONABLE TO CONCLUDE THAT THE CONTRACTOR COULD NOT BE SAID TO HAVE BEEN RELIEVED FROM A TAX BURDEN SIMPLY BECAUSE ITS SUBCONTRACTORS WERE NOT REQUIRED TO PAY THE PARTICULAR TAXES OR OBTAINED TAX REFUNDS. APPARENTLY THE TAXES WERE INCLUDED IN THE SUBCONTRACT PRICES AND THERE WERE NO AGREEMENTS FOR THE SHIFTING OF THE SUBCONTRACTORS' TAX BURDEN TO LANE. COMPARE UNITED STATES V. COWDEN MFG. CO., 312 U.S. 34, REHEARING, DENIED, 312 U.S. 713, WHEREIN THE RESPONDENT REIMBURSED ITS SUBCONTRACTORS FOR CERTAIN TAXES IMPOSED AFTER THE DATE SET FOR OPENING OF THE BID UPON WHICH THE CONTRACT INVOLVED WAS BASED, BUT WAS HELD NOT TO BE ENTITLED TO A PRICE INCREASE UNDER THE "FEDERAL TAXES" CLAUSE OF THE CONTRACT.

ACCORDINGLY, IF THE GOVERNMENT'S TAX CREDIT CLAIM AGAINST LANE INCLUDES CHARGES BASED UPON TAX REFUNDS OR OTHER TAX RELIEF OBTAINED BY YOUR SUBCONTRACTORS AND NOT PASSED ON TO YOU, IT APPEARS THAT SUCH CHARGES SHOULD BE ELIMINATED DURING FURTHER NEGOTIATIONS IN THE MATTER BETWEEN YOUR COMPANY AND THE CORPS OF ENGINEERS. OTHERWISE, IT DOES NOT APPEAR THAT WE WOULD BE WARRANTED AT THIS TIME IN AUTHORIZING PAYMENT OF ANY PART OF YOUR CLAIM FOR $28,000.