B-126096, DECEMBER 30, 1955, 35 COMP. GEN. 378

B-126096, DECEMBER 30, 1955, 35 COMP. GEN. 378

CONTRACTS - COST-PLUS-FIXED-FEE TAX LIABILITY - STATE AND LOCAL LEVIES - INTEREST AND PENALTIES ON DELINQUENT TAX PAYMENTS INTEREST AND PENALTY ASSESSMENTS LEVIED BY A STATE ON DELINQUENT PAYMENTS OF SALES AND USE TAXES WHICH WERE WITHHELD BY A COST-PLUS-A FIXED-FEE CONTRACTOR PURSUANT TO INSTRUCTIONS OF THE CONTRACTING OFFICER ARE ALLOWABLE ITEMS OF COST UNDER THE CONTRACT AND ANY DISCOUNTS LOST AS A RESULT OF THE DELINQUENT TAX PAYMENTS MAY ALSO BE REIMBURSED TO THE CONTRACTOR.

TO THE SECRETARY OF THE ARMY, DECEMBER 30, 1955:

REFERENCE IS MADE TO YOUR LETTER OF NOVEMBER 15, 1955, WITH ENCLOSURES, WHEREIN YOU REQUEST A DECISION AS TO THE PROPRIETY OF REIMBURSING THE RALPH M. PARSONS COMPANY, LOS ANGELES, CALIFORNIA, COST PLUS-A-FIXED-FEE CONTRACTOR UNDER CONTRACTS NOS. DA-18-064-CML-2283 AND 2613, DATED JUNE 28, 1951, AND SEPTEMBER 1, 1954, RESPECTIVELY, THE PENALTY AND INTEREST ASSESSMENTS AND THE DISCOUNT LOST AS A RESULT OF THE DELINQUENT PAYMENT OF MARYLAND STATE SALES AND USE TAXES IMPOSED IN CONNECTION WITH PURCHASES OF MATERIALS UTILIZED IN THE PERFORMANCE OF THOSE CONTRACTS.

IN VIEW OF THE RULINGS OF THE COURTS IN THE CASES OF ALABAMA V. KING AND BOOZER, 314 U.S. 1; CURRY V. UNITED STATES, 314 ID. 14, AND PARTICULARLY WESTINGHOUSE ELECTRIC CORPORATION V. STATE TAX COMMISSION OF MARYLAND (1955), 111 A.2D. 661, THERE CAN BE NO SERIOUS DOUBT CONCERNING THE APPLICABILITY OF THESE TAXES TO THOSE PURCHASES OF SUPPLIES AND MATERIALS WHICH WERE UTILIZED BY THE CONTRACTOR IN THE PERFORMANCE OF THE COST-PLUS- A-FIXED-FEE CONTRACTS REFERRED TO. CONSEQUENTLY, THE ONLY ISSUE HERE IS WHETHER THE PENALTIES, INTEREST AND DISCOUNT ADMINISTRATIVELY CHARGED TO THE CONTRACTOR ARE PROPER FOR REIMBURSEMENT AS A PART OF THE COST OF PERFORMING THE WORK OF THE SAID CONTRACTS.

THE CIRCUMSTANCES RESPONSIBLE FOR THE DELAY IN MAKING PAYMENT OF THESE MARYLAND SALES AND USE TAXES MAY BE SUMMARIZED AS FOLLOWS: ON AUGUST 18, 1952, THE CONTRACTOR MADE FORMAL APPLICATION TO THE STATE OF MARYLAND FOR A SALES TAX LICENSE FOR USE IN THE PROCUREMENT OF SUPPLIES REQUIRED IN THE PERFORMANCE OF CONTRACT NO. DA-18-064-CML-2283, EXECUTED JUNE 28, 1951. WITH HIS COMMUNICATION OF AUGUST 27, 1952, THE COMPTROLLER FOR THE STATE OF MARYLAND RETURNED THE CONTRACTOR'S REJECTED APPLICATION WITH THE EXPLANATION THAT "* * * AS YOU ARE OBTAINING THIS LICENSE FOR THE PURPOSE OF OPERATIONS IN CONNECTION WITH A GOVERNMENT CONTRACT IN THE STATE OF MARYLAND, YOU ARE CONSIDERED THE ULTIMATE CONSUMER AND AS SUCH YOU ARE REQUIRED TO PAY THE SALES TAXES TO THE SUPPLIERS AT THE TIME YOU PURCHASE THE MATERIALS NECESSARY FOR THE JOB.' AFTER THE RETURN OF ITS APPLICATION THE CONTRACTOR INFORMED THE GOVERNMENT CONTRACTING OFFICER (THEN MR. WILLIAM D. MCCUIN) OF ITS INABILITY TO OBTAIN THE REQUESTED TAX EXEMPTION AND, AT THE TIME, SOUGHT SPECIFIC ADVICE AS TO WHETHER THEY SHOULD PAY THOSE TAXES, AND IN CASE THEY DID, WHETHER SUCH PAYMENTS CONSTITUTED REIMBURSABLE ITEMS OF COST UNDER THE CONTRACT. DURING THE COURSE OF SEVERAL ENSUING CONVERSATIONS WITH THE CONTRACTING OFFICER RELATIVE TO THIS MATTER THE CONTRACTOR WAS SPECIFICALLY INSTRUCTED TO PAY THE TAXES ONLY WHEN THEY APPEARED ON THE VENDORS' INVOICES, BUT THAT IT SHOULD TAKE NO AFFIRMATIVE ACTION TOWARDS CALCULATING ANY OF THE TAXES WHICH MIGHT BE DUE ON PRIOR PURCHASES, NOR TO DO ANYTHING WHICH MIGHT "INVITE" PAYMENT OF THE TAX. THIS COURSE OF PROCEDURE WAS MUTUALLY AGREED UPON AND ADOPTED BY THE PARTIES, AS EVIDENCED BY THE STATEMENTS CONTAINED IN SEVERAL AFFIDAVITS SUBSEQUENTLY EXECUTED BY THE CONTRACTOR'S REPRESENTATIVES AND BY THE CONTRACTING OFFICER, AS WELL.

ON OR ABOUT OCTOBER 26, 1954, A REPRESENTATIVE OF THE MARYLAND RETAIL SALES TAX DIVISION COMMENCED AN AUDIT OF THE CONTRACTOR'S ACCOUNTS FOR THE PURPOSE OF DETERMINING ITS TAX LIABILITY TO THE STATE, COMPLETING THE SAME ON NOVEMBER 16, 1954. SHORTLY THEREAFTER, IN A LETTER DATED DECEMBER 2, 1954, THE STATE COMPTROLLER NOTIFIED THE CONTRACTOR OF A DEFICIENCY ASSESSMENT OF $16,435.73 AGAINST ITS ACCOUNTS FOR THE PERIOD AUGUST 1, 1952 THROUGH SEPTEMBER 30, 1954. OF THIS AMOUNT, $14,077.72 REPRESENTED DIRECT SALES AND USE TAXES ON ITS PURCHASES MADE UNDER THE SAID CONTRACTS, $950.24 INTEREST, AND $1,407.77 PENALTIES ON THOSE TAXES. DEMAND WAS MADE THEREIN FOR PAYMENT OF THE DEFICIENCY ASSESSMENTS ON OR BEFORE JANUARY 4, 1955. MOST OF THESE TAXES APPLIED, OF COURSE, TO PURCHASES MADE UNDER THE EARLIER 1951 CONTRACT NO. 2283, THE LATER CONTRACT NO) 2613 NOT HAVING BEEN EXECUTED UNTIL SEPTEMBER 1, 1954.

WITH ITS COMMUNICATION DATED DECEMBER 6, 1954, THE CONTRACTOR FORWARDED TO THE SUCCESSOR CONTRACTING OFFICER (MR. DEGREY R. BISHOP) THE SAID DEFICIENCY ASSESSMENT NOTICE, REQUESTING INSTRUCTIONS AS TO THE ACTION IT SHOULD TAKE IN THE MATTER. BY LETTER DATED DECEMBER 14, 1954, THE SUCCESSOR CONTRACTING OFFICER INSTRUCTED THE CONTRACTOR TO MAKE PAYMENT OF THE STATE'S BILL UNDER PROTEST AND, PRIOR TO PAYMENT, MAKE SOME EFFORT TO REDUCE THE AMOUNT OF THE ASSESSMENT BY THE ELIMINATION OF THE INTEREST AND PENALTY CHARGES. IN ITS LETTER OF DECEMBER 22, 1954, THE CONTRACTOR REQUESTED THE STATE COMPTROLLER TO ELIMINATE FROM THE ASSESSMENT NOTICE THE INTEREST AND PENALTY CHARGES. THERE IS NO RECORD OF A REPLY TO THIS REQUEST. ON DECEMBER 28, 1954, THE CONTRACTOR, ACTING PURSUANT TO THE CONTRACTING OFFICER'S INSTRUCTIONS, PAID THE TOTAL ASSESSMENT OF $16,435.73 AND, AT THAT TIME, FILED WITH THE STATE COMPTROLLER A FORMAL CLAIM FOR REFUND OF THE FULL AMOUNT PAID. THIS AMOUNT, ALONG WITH CERTAIN ADDITIONAL ITEMS OF DISCOUNT, TOTALING $422.32, WHICH WERE LOST BY REASON OF DELINQUENT PAYMENT OF THE TAXES, WERE DISAPPROVED IN THE ADMINISTRATIVE AUDIT OF THE CONTRACTOR'S ACCOUNTS.

THEREAFTER, ON JANUARY 6, 1955, THE CONTRACTOR FILED WITH YOUR DEPARTMENT CLAIMS FOR REIMBURSEMENT OF THE TAXES AND RELATED ASSESSMENTS PAID BY IT, TOGETHER WITH THE LOST DISCOUNTS OF $419.16 AND $3.16, APPLICABLE TO THE TAXES PAYABLE UNDER CONTRACTS NOS. 2283 AND 2613, RESPECTIVELY. IN THIS CONNECTION, ARTICLE 81, PARAGRAPH 384, OF THE ANNOTATED CODE OF MARYLAND ( FLACK) 1951, AUTHORIZES A PERSON SUBJECT TO THE TAX TO CREDIT AGAINST THE AMOUNT OF THE TAX PAYABLE BY HIM A SUM EQUIVALENT TO 3 PERCENT OF HIS GROSS TAX, PROVIDED, OF COURSE, HIS TAX IS PAID PROMPTLY. ALTHOUGH YOUR DEPARTMENT AUTHORIZED REIMBURSEMENT TO THE CONTRACTOR OF THE DIRECT TAXES PAID BY HIM, AMOUNTING TO $14,077.72, THE AUTHORIZED REPRESENTATIVE OF THE CONTRACTING OFFICER, BY NOTICES ISSUED UNDER DATE OF JANUARY 19, 1955, DISAPPROVED THE CONTRACTOR'S CLAIMS FOR REIMBURSEMENT OF THE PENALTIES, INTEREST, AND DISCOUNTS INVOLVED, AMOUNTING IN THE AGGREGATE TO $2,779.80, AND BY SUPPLEMENTAL LETTERS DATED MARCH 8 AND 11, 1955, DENIED THE CONTRACTOR'S REQUEST OF MARCH 2, 1955, TO RESUBMIT THE SAID ITEMS FOR PAYMENT.

IN TWO COMMUNICATIONS EACH DATED MARCH 22, 1955, THE CONTRACTOR, ACTING PURSUANT TO THE PROCEDURE OUTLINED IN THE " DISPUTES" ARTICLE OF THE CONTRACTS, FORMALLY APPEALED THE SUCCESSOR CONTRACTING OFFICER'S DECISION IN THE MATTER, AND IT IS UNDERSTOOD SUCH APPEALS ARE NOW PENDING BEFORE THE ARMED SERVICES BOARD OF CONTRACT APPEALS. IT IS THE DEPARTMENT'S POSITION THAT SINCE THE MATTERS HERE IN DISPUTE INVOLVED QUESTIONS OF LAW ONLY, THEY ARE NOT PROPERLY WITHIN THE JURISDICTION OF THE BOARD.

INCLUDED AMONG THE OFFICIAL PAPERS IN THE CASE ARE PHOTOSTAT COPIES OF FOUR AFFIDAVITS EXECUTED DURING THE MONTH OF MARCH 1955, BY VARIOUS REPRESENTATIVES OF THE CONTRACTOR, INCLUDING ITS ASSISTANT ADMINISTRATIVE MANAGER, MANAGER OF ACCOUNTING, SENIOR ACCOUNTANT AND ITS PURCHASING AGENT, MR. HAILFLEIGH, WHEREIN THERE ARE RELATED THE EXACT CIRCUMSTANCES UNDER WHICH THESE SALES AND USE TAXES, ALONG WITH THE DEFICIENCY ASSESSMENTS, WERE PAID BY THE CONTRACTOR. FROM AN ANALYSIS OF THESE SWORN STATEMENTS, IT IS EVIDENT THAT THE CONTRACTOR'S ACTION IN HAVING WITHHELD PAYMENT OF THE STATE SALES AND USE TAXES WHEN NOT SPECIFICALLY SHOWN ON THE VENDORS' INVOICES WAS DUE SOLELY TO THE DIRECTIVES OR INSTRUCTIONS ISSUED TO HIM BY THE GOVERNMENT CONTRACTING OFFICER. THIS FACT IS CONFIRMED BY STATEMENTS CONTAINED IN THE ORIGINAL CONTRACTING OFFICER'S AFFIDAVIT OF MAY 6, 1955, A COPY OF WHICH IS AMONG THE PAPERS COMPRISING " ENCLOSURE NO. 3.' MOREOVER, THE RECORD ESTABLISHES THAT THE DEFICIENCY ASSESSMENTS, INCLUDING PENALTIES AND INTEREST, WERE PAID BY THE CONTRACTOR UNDER PROTEST PURSUANT TO SPECIFIC DIRECTIVES ISSUED BY THE SUCCESSOR CONTRACTING OFFICER, MR. BISHOP, IN HIS COMMUNICATION DATED DECEMBER 14, 1954, AFTER WHICH THE CONTRACTOR IMMEDIATELY FILED CLAIMS WITH THE STATE COMPTROLLER FOR THEIR REFUND, AS DIRECTED.

WHILE THE CONTRACTOR WAS REQUIRED UNDER ARTICLE XXVII OF ITS CONTRACTS TO PROCURE THE REQUISITE SERVICES AND MATERIALS AT THE MOST ADVANTAGEOUS PRICES AVAILABLE, AND TO TAKE ADVANTAGE OF ALL CASH DISCOUNTS, REBATES OR OTHER ALLOWANCES OFFERED IN CONNECTION WITH THEIR PURCHASE, IN VIEW OF THE CONTRACTING OFFICER'S INSTRUCTION TO PAY ONLY THOSE TAXES WHICH WERE BILLED ON THE INVOICES OF THE VENDORS, AND TO WITHHOLD PAYMENT OF THE TAX NOT SHOWN ON SUCH INVOICES, IT COULD HARDLY BE SAID THAT THE CONTRACTOR'S ACTION IN WITHHOLDING PAYMENT OF THE TAXES UNTIL INVOICED THEREFOR BY THE STATE TAXING AUTHORITIES CONSTITUTED A BREACH OF ITS CONTRACTUAL OBLIGATION TO PROCURE THE MATERIALS ON THE BEST TERMS AVAILABLE. CF. 22 COMP. GEN. 109. TO THE CONTRARY, IT SEEMS CLEAR FROM THE FACTS AS REPORTED IN THIS MATTER THAT THE DEFICIENCY ASSESSMENTS IMPOSED IN CONNECTION WITH THE SAID PURCHASES OF MATERIALS RESULTED PRIMARILY FROM THE ACTIONS AND INSTRUCTIONS OF THE CONTRACTING OFFICERS WHO HAD DIRECT CHARGE OVER THE ADMINISTRATION OF THESE CONTRACTS.

CONCERNING THE PROPRIETY OF REIMBURSING THE CONTRACTOR FOR THE INTEREST AND PENALTY ASSESSMENTS LEVIED BY THE STATE ON THE DELINQUENT PAYMENTS, YOUR ATTENTION IS DIRECTED TO ARTICLE 81, PARAGRAPH 402 (A) OF THE MARYLAND CODE, WHICH READS: " UNLESS WAIVED BY THE COMPTROLLER, THE AMOUNT OF THE PENALTY AND INTEREST SHALL BE COLLECTED AS A PART OF THE TAXES THEMSELVES.' ( ITALICS SUPPLIED.) UNDER THE LEGISLATIVE INTENT, AS EXPRESSED IN THE STATUTE, UPON THE PAYMENT BY THE CONTRACTOR OF THOSE PENALTY ITEMS, ALONG WITH THE DELINQUENT TAXES, THEY AUTOMATICALLY BECAME MERGED WITH AND A PART OF THE DIRECT TAXES PAID. CF. ESSO STANDARD OIL COMPANY V. EVANS, 345 U.S. 495.

IN CONNECTION WITH THIS PHASE OF THE MATTER, THE COURTS LONG HAVE RECOGNIZED THAT THE IMPOSITION OF PENALTIES AND INTEREST ON DELINQUENT TAXES IS WITHIN THE CONSTITUTIONAL POWER OF THE STATE OR FEDERAL LEGISLATURES, AND THAT THE AMOUNT OF THE PENALTY TO BE ASSESSED IS EXCLUSIVELY A MATTER OF LEGISLATIVE DISCRETION. SEE, STATE V. BRADLEY, 93 SO. ( ALABAMA) 595; ALSO TEXAS CO. V. DYER, 174 SO. 80, APP. DEN., 301 U.S. 670; BANKERS TRUST COMPANY V. BLODGETT, 260 ID. 647. ALSO, IT IS WITHIN THE DISCRETION OF THE LEGISLATURE TO PROVIDE AS IN THE INSTANT CASE, THAT TAXES WHICH REMAIN UNPAID SHALL BEAR INTEREST FROM THE TIME THEY ARE DUE. LEAGUE V. TEXAS, 184 U.S. 156; STATE V. GREAT ATLANTIC AND PACIFIC TEA CO., 183 SO. 219, CERTIORARI DENIED, 305 U.S. 637; STATE V. BALTIMORE, 65 A. 369. UPON THE BASIS OF THE FACTS OF RECORD, THE CONTRACTOR APPEARS PROPERLY ENTITLED TO REIMBURSEMENT IN THE AMOUNT OF THE INTEREST AND PENALTIES ASSESSED ON THE DELINQUENT SALES AND USE TAXES HERE INVOLVED.

RELATIVE TO THE ITEMS OF DISCOUNT WHICH HAVE BEEN ADMINISTRATIVELY CHARGED TO THE CONTRACTOR'S ACCOUNT, SINCE THEY OBVIOUSLY WERE LOST THROUGH NO FAULT OR NEGLIGENCE UPON ITS PART, THEY LIKEWISE ARE PROPER FOR REIMBURSEMENT AS ALLOWABLE ITEMS OF COST.