B-76585, JUNE 18, 1948, 27 COMP. GEN. 767

B-76585, JUNE 18, 1948, 27 COMP. GEN. 767

TAXES - STATE - BUSINESS PRIVILEGE - CONTRACT PRICE ADJUSTMENT THE TAX IMPOSED BY THE STATE OF ARIZONA ON THE GROSS PROCEEDS OR GROSS INCOME FROM THE BUSINESS OF CONTRACTING, HAVING BEEN HELD BY THE SUPREME COURT OF ARIZONA AS NOT BEING A TAX UPON THE SALE OR THE GROSS PROCEEDS THEREOF BUT A BUSINESS PRIVILEGE TAX BASED ON GROSS PROCEEDS OR INCOME, IS A DIRECT AND IMMEDIATE BURDEN UPON EACH CONTRACTUAL TRANSACTION RATHER THAN A REMOTE OR INCIDENTAL CHARGE, AND, THEREFORE, A CONTRACTOR IS ENTITLED TO BE PAID AN AMOUNT REPRESENTING SUCH TAX UNDER THE CONTRACT STANDARD TAX CLAUSE PROVIDING FOR PRICE ADJUSTMENT ON ACCOUNT OF TAXES DIRECTLY APPLICABLE TO THE WORK COVERED BY THE INVOLVED CONTRACT. WHERE A CONTRACTOR, RELYING ON REGULATIONS OF THE ARIZONA TAX COMMISSION WHICH EXEMPTED FEDERAL GOVERNMENT DEFENSE CONTRACTS FROM THE OPERATION OF A STATE STATUTE IMPOSING A BUSINESS PRIVILEGE TAX ON CONTRACTORS, EXCLUDED SUCH COSTS FROM HIS BID PRICE, THE SUBSEQUENT RESCISSION OF SUCH REGULATIONS AFTER AWARD OF THE CONTRACT ON A DETERMINATION THAT THE TAX WAS APPLICABLE TO GOVERNMENT CONTRACTS SHOULD BE REGARDED AS IMPOSING THE TAX AFTER THE DATE OF AWARD WITHIN THE MEANING OF THE CONTRACT STANDARD TAX CLAIMS PROVIDING FOR PRICE ADJUSTMENT ON ACCOUNT OF TAXES SUBSEQUENTLY IMPOSED, SO AS TO ENTITLE THE CONTRACTOR TO PAYMENT OF THE AMOUNT REPRESENTING SUCH TAX APPLICABLE TO THE CONTRACT WORK.

COMPTROLLER GENERAL WARREN TO COL. W. E. AHEARN, U.S. ARMY, JUNE 18, 1948:

BY FIRST INDORSEMENT DATED APRIL 14, 1948, THERE WAS TRANSMITTED TO THIS OFFICE YOUR REQUEST DATED MARCH 29, 1948, FOR DECISION AS TO WHETHER PAYMENT IS AUTHORIZED ON A VOUCHER TRANSMITTED THEREWITH IN THE AMOUNT OF $9,477.52 IN FAVOR OF THE MURPHEY-KEITH BUILDING CO., COVERING THE 20TH AND FINAL PAYMENT UNDER CONTRACT NO. W-911-ENG-1057, DATED JUNE 20, 1942, PROVIDING FOR CERTAIN CONSTRUCTION WORK ON A LUMP SUM BASIS.

THE INSTANT CLAIM IS REPRESENTED AS BEING THE AMOUNT OF THE HEREINAFTER MENTIONED ARIZONA EXCISE TAX PAID BY THE ABOVE-MENTIONED CONTRACTOR IN CONNECTION WITH THE SUBJECT CONTRACT AND REIMBURSEMENT THEREFOR IS SOUGHT ON THE BASIS OF THE TAX CLAUSE CONTAINED IN THE CONTRACT READING AS FOLLOWS:

ADJUSTMENT OF CONTRACT PRICE BY REASON OF CHANGE IN FEDERAL, STATE OR LOCAL TAXES

UNLESS OTHERWISE INDICATED, THE PRICES HEREIN INCLUDE ANY FEDERAL, STATE AND LOCAL TAX OR CHARGE HERETOFORE IMPOSED WHICH IS APPLICABLE TO THE SUPPLIES OR WORK COVERED HEREBY. IF AFTER THE DATE OF THE AWARD, THE FEDERAL GOVERNMENT OR ANY STATE OR LOCAL GOVERNMENT SHALL IMPOSE, REMOVE, OR CHANGE ANY DUTY, SALES, USE OR EXCISE TAX OR ANY OTHER TAX OR CHARGE DIRECTLY APPLICABLE TO THE SUPPLIES OR WORK COVERED HEREBY OR THE MATERIALS USED IN THE MANUFACTURE THEREOF OR DIRECTLY UPON THE IMPORTATION, PRODUCTION, PROCESSING, MANUFACTURE, CONSTRUCTION OR SALE OF SUCH SUPPLIES, WORK, OR MATERIALS, WHICH TAX OR CHARGE MUST BE BORNE BY THE CONTRACTOR BECAUSE OF A SPECIFIC CONTRACTUAL OBLIGATION OR BY OPERATION OF LAW, OR, IN CASE OF A DECREASE OR ELIMINATION OF A TAX, WHERE THE CONTRACTOR IS RELIEVED TO THAT EXTENT, AND IF IN CASE OF AN INCREASE IN AN EXISTING TAX OR THE IMPOSITION OF A NEW TAX THE CONTRACTOR HAS PAID SUCH TAX OR CHARGE TO THE FEDERAL GOVERNMENT OR A STATE OR LOCAL GOVERNMENT, OR ANY PERSON, THEN THE PRICES NAMED HEREIN WILL BE INCREASED OR DECREASED ACCORDINGLY AND ANY AMOUNT DUE TO THE CONTRACTOR AS A RESULT OF SUCH CHANGE WILL BE CHARGED TO THE GOVERNMENT AND ENTERED ON VOUCHERS (OR INVOICES) AS A SEPARATE ITEM: PROVIDED, HOWEVER, THAT THE GOVERNMENT RESERVES THE RIGHT TO ISSUE TO THE CONTRACTOR IN LIEU OF SUCH PAYMENT A TAX EXEMPTION CERTIFICATE OR CERTIFICATES ACCEPTABLE TO THE FEDERAL GOVERNMENT OR STATE OR LOCAL GOVERNMENT, AS THE CASE MAY BE, AND THE CONTRACTOR AGREES, IN THE CASE OF ANY SUCH STATE OR LOCAL TAX OR CHARGE, TO TAKE SUCH STEPS AS MAY BE REQUESTED BY THE GOVERNMENT TO CAUSE SUCH TAX OR CHARGE TO BE PAID UNDER PROTEST, TO PRESERVE AND TO CAUSE TO BE ASSIGNED TO THE GOVERNMENT ANY AND ALL RIGHTS TO THE REFUND OF SUCH TAX OR CHARGE, AND TO FURNISH TO THE GOVERNMENT ALL REASONABLE ASSISTANCE AND COOPERATION REQUESTED BY THE GOVERNMENT IN ANY LITIGATION OR PROCEEDING FOR THE RECOVERY OF SUCH TAX OR CHARGE; AND PROVIDED FURTHER, THAT NOTHING CONTAINED HEREIN SHALL BE CONSTRUED AS REQUIRING THE GOVERNMENT TO REIMBURSE THE CONTRACTOR FOR ANY FEDERAL, STATE OR LOCAL INCOME TAXES, INCOME SURTAXES OR EXCESS PROFITS TAXES.

THE PERTINENT PROVISIONS OF THE ARIZONA EXCISE REVENUE ACT OF 1935, AS AMENDED (SECTION 73-1303 (H), ARIZONA CODE OF 1939), STIPULATE FOR THE LEVY AND COLLECTION ANNUALLY OF A TAX---

AT AN AMOUNT EQUAL TO ONE PERCENT OF THE GROSS PROCEEDS OR GROSS INCOME FROM THE BUSINESS, UPON EVERY PERSON ENGAGED OR CONTINUING IN THE BUSINESS OF CONTRACTING. PAYMENTS MADE BY THE CONTRACTOR FOR LABOR EMPLOYED IN CONSTRUCTION, IMPROVEMENTS OR REPAIRS SHALL NOT BE SUBJECT TO THE TAX HEREIN IMPOSED.

IT APPEARS FROM THE MATTERS SET FORTH IN THE INSTANT SUBMISSION THAT ON AUGUST 25, 1941, THE ARIZONA TAX COMMISSION PROMULGATED A REGULATION PURPORTING TO EXEMPT FEDERAL GOVERNMENT DEFENSE CONTRACTS FROM THE OPERATION OF THE TAX PRESCRIBED BY THE FOREGOING STATUTORY PROVISIONS; THAT SINCE SUCH PROVISIONS WERE NOT BEING APPLIED IN THE CASE OF FEDERAL GOVERNMENT DEFENSE CONTRACTS, AS IN THE CONTRACT HERE INVOLVED, AT THE TIME OF THE NEGOTIATION OF THE CONTRACT NO CHARGE REPRESENTING THE TAX WAS INCLUDED BY THE CLAIMANT IN THE QUOTED PRICES; BUT THAT ON APRIL 15, 1943, THE ARIZONA TAX COMMISSION RESCINDED ITS REGULATION OF AUGUST 15, 1941, BY A NOTICE TO CONTRACTORS READING AS FOLLOWS:

THE TAX COMMISSION HAS RESCINDED THE REGULATION WHICH PURPORTED TO EXEMPT THE CONTRACTORS PERFORMING CONTRACTS FOR THE FEDERAL GOVERNMENT OR ITS AGENCIES FROM REPORTING AND PAYING SALES TAX ON THEIR INCOME RECEIVED FROM THE PERFORMANCE OF SUCH CONTRACTS.

IN THE EVENT YOU HAVE FAILED TO REPORT ON ANY CONTRACTS YOU ARE HEREBY DIRECTED TO REPORT AND PAY YOUR SALES TAX AT THE RATE OF 1 PERCENT UNDER CLASSIFICATION "H" OF THE SALES TAX REPORT, LESS LABOR AND LABOR ISSUANCE, ON YOUR TOTAL GROSS INCOME FROM THE BUSINESS OF CONTRACTING DONE IN THE STATE OF ARIZONA.

ALSO, IT APPEARS THAT THE SUPREME COURT OF ARIZONA SUBSEQUENTLY HELD THAT A CONTRACTOR IS NOT ENTITLED TO OBTAIN EXEMPTION FROM THE SUBJECT TAX ON THE BASIS OF THE STATE LAW GRANTING EXEMPTION FROM THE STATE SALES TAX IN THE CASE OF RETAIL SALES OF TANGIBLE PROPERTY TO THE UNITED STATES ( ARIZONA STATE TAX COMMISSION, ET AL. V. FRANK HARMONSON CO. METAL PRODUCTS, 163 P.2D 667), AND THAT THE ATTEMPT OF THE ARIZONA TAX COMMISSION TO EXEMPT FEDERAL GOVERNMENT DEFENSE CONTRACTS FROM THE SUBJECT TAX WAS UNAUTHORIZED AND COULD NOT FURNISH THE BASIS OF AN ESTOPPEL AGAINST THE STATE TO COLLECT THE TAX ( CRAIN CO. V. ARIZONA STATE TAX COMMISSION, ET AL., 163 P.2D 656); AND THAT IN CONSEQUENCE OF THE DEMAND OF THE STATE TAXING AUTHORITIES THEREFOR THE CLAIMANT WAS REQUIRED TO PAY THE AMOUNT OF THE TAX HERE INVOLVED.

OBVIOUSLY, THE PURPOSE OF THE REIMBURSEMENT PROVISIONS CONTAINED IN THE ABOVE-QUOTED TAX CLAUSE WAS TO AFFORD PROTECTION TO THE CONTRACTOR FROM THE BURDEN OF SUBSEQUENTLY IMPOSED TAXES OF THE TYPES COMPREHENDED THEREBY AND THUS TO OBVIATE THE NECESSITY OF THE CONTRACTOR INCLUDING IN THE PRICE BID ALLOWANCES TO COVER THE POSSIBILITY OF FUTURE NEW TAXES OR INCREASES IN EXISTING TAXES. HENCE, IT APPEARING THAT THE SUBJECT TAX IS NOT AN INCOME, SURTAX OR EXCESS PROFITS TAX, SUCH AS ARE EXCLUDED FROM THE OPERATION OF SAID REIMBURSEMENT PROVISIONS, TWO QUESTIONS ARE PRESENTED IN CONSIDERING THE VALIDITY OF THE INSTANT CLAIM: (1) IS THE TAX A "TAX OR CHARGE DIRECTLY APPLICABLE TO THE SUPPLIES OR WORK * * * OR THE MATERIALS USED * * * OR DIRECTLY UPON THE IMPORTATION, PRODUCTION, PROCESSING, MANUFACTURE, CONSTRUCTION OR SALE OF SUCH SUPPLIES, WORK OR MATERIALS; " AND (2) IF SO, DID THE STATE OF ARIZONA "IMPOSE" THE SUBJECT TAX "AFTER THE DATE OF THE AWARD" OF THE CONTRACT?

IN THE CASE OF ARIZONA STATE TAX COMMISSION, ET AL. V. FRANK HARMONSON CO. METAL PRODUCTS, SUPRA, THE SUPREME COURT OF ARIZONA SAID THAT THE TAX HERE INVOLVED "IS NOT UPON THE SALE OR THE GROSS PROCEEDS THEREOF, BUT IS A PRIVILEGE TAX BASED UPON THE GROSS PROCEEDS OR GROSS INCOME FROM THE BUSINESS OF CONTRACTING.' IN OTHER WORDS, THE TAX IS LAID AGAINST A CONTRACTOR FOR THE PRIVILEGE OF DOING BUSINESS AND IS MEASURED BY HIS GROSS PROCEEDS OR GROSS INCOME DERIVED THEREFROM. HENCE, THE COMPLIANCE WITH THE PROVISIONS OF THE TAXING STATUTE BEING A NECESSARY PREREQUISITE TO THE PERFORMANCE OF EACH AND EVERY PIECE OF WORK DONE BY A CONTRACTOR, THE TAX MUST BE REGARDED, ASO FAR AS THE PRESENT INQUIRY IS CONCERNED, AS A DIRECT AND IMMEDIATE BURDEN UPON EACH TRANSACTION RATHER THAN AS A REMOTE OR INCIDENTAL CHARGE AND, THEREFORE, A TAX "DIRECTLY APPLICABLE TO THE * * * WORK" COVERED BY THE SUBJECT CONTRACT WITHIN THE MEANING AND INTENT OF THAT LANGUAGE AS USED IN THE CONTRACT.

OF COURSE, IT IS TRUE THAT NO ACTION WAS TAKEN BY THE LEGISLATURE OF THE STATE OF ARIZONA IN RESPECT TO THE TAXING STATUTE HERE INVOLVED SUBSEQUENT TO THE AWARD OF THE SUBJECT CONTRACT AND THAT IN A SENSE THE TAX IN QUESTION WAS "IMPOSED" PRIOR TO THE AWARD. BUT A CONSIDERATION OF THE TERMS OF THE ABOVE-QUOTED TAX CLAUSE AS A WHOLE FURNISHES A SUBSTANTIAL BASIS FOR CONCLUDING THAT A TAX OTHERWISE PROPER FOR REIMBURSEMENT SHOULD BE REGARDED AS HAVING BEEN IMPOSED AFTER THE AWARD WITHIN THE MEANING AND INTENT OF THE CLAUSE IN A SITUATION WHERE THE CIRCUMSTANCES ARE SUCH AS APPEAR IN THE INSTANT CASE. CERTAINLY, THE CLAIMANT WAS JUSTIFIED IN NOT INCLUDING AN ITEM REPRESENTING THE SUBJECT TAX IN ITS QUOTED PRICES IN VIEW OF THE EXPRESS DETERMINATION OF THE ARIZONA TAX COMMISSION THAT THE TAX WAS NOT APPLICABLE IN THE CASE OF FEDERAL GOVERNMENT DEFENSE CONTRACTS. AND SINCE THE SUBSEQUENT REVERSAL OF THAT DETERMINATION AND THE ASSESSMENT OF TAXES IN CONNECTION WITH CONTRACTS OF THAT TYPE DID NOT OCCUR UNTIL LONG AFTER THE AWARD OF THE SUBJECT CONTRACT, IT CANNOT WELL BE SAID THAT THE TAX WAS IN FACT "IMPOSED" WITHIN THE SPIRIT AND PURPOSE OF THE TAX CLAUSE HERE INVOLVED AT THE TIME OF THE AWARD.

IN VIEW OF THE FOREGOING YOU ARE ADVISED THAT THE CLAIMANT IS ENTITLED UNDER THE CONTRACTUAL PROVISIONS HERE INVOLVED TO BE PAID AN AMOUNT REPRESENTING THE SUBJECT TAX IN ADDITION TO THE PRICE OTHERWISE FIXED FOR THE WORK COVERED BY THE CONTRACT.

ACCORDINGLY, PAYMENT ON THE INSTANT VOUCHER--- WHICH TOGETHER WITH RELATED PAPERS IS RETURNED HEREWITH--- IS AUTHORIZED IF CORRECT IN OTHER RESPECTS.