Chapter VIII. Decisions of national tribunals

United States of America

UNITED STATES COURT OF APPEALS

FOR THE DISTRICT OF COLUMBIA CIRCUIT

Argued January 7,1999 Decided April 2,1999

No. 98-7055

International Bank for Reconstruction and Development, Appellee, v. District of Columbia, Appellant

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLUMBIA

(97cvO1158)

Donna M. Murasky, Assistant Corporation Counsel, argued the cause for appellant. With her on the briefs were John M. Ferren, Corporation Counsel, Charles

L. Reischel, Deputy Corporation Counsel, and Lutz Alexander Prager, Assistant Deputy Corporation Counsel.

Albert G. Lauber, Jr. argued the cause for appellee. With him on the brief was Lloyd H. Mayer.

Lester Nurick, F. David Lake, Jr., and Erik H. Corwin were on the brief for amici curiae The Inter-American Development Bank, et al.

Before: Silberman, Sentelle, and Randolph, Circuit Judges.

Opinion for the Court filed by Circuit Judge Randolph.

Randolph, Circuit Judge: The property, income, operations and transactions of the International Bank for Reconstruction and Development, commonly known as the World Bank, are immune from federal, state and local taxation. The question in this appeal is whether a private contractor, retained by the Bank to provide food services to individuals on the Bank's premises, has derivative immunity from District of Columbia taxes on the contractor's sales of food and beverages.

I

The World Bank is an international, intergovernmental organization, with headquarters in Washington, D.C. Created by Articles of Agreement drawn up at a conference held in Bretton Woods, New Hampshire, in 1944, the Bank is corporate in form, with all of its capital stock owned by its member Governments. See Herbert Harvey, Inc. v. NLRB, 424 F.2d 770,773 n.20 (D.C. Cir. 1969). The United States

accepted the Articles in the Bretton Woods Agreements Act of 1945, 22 U.S.G. §§ 286-286m. The Bank is empowered to provide financial assistance for the development of member countries, to promote private foreign investment, to stimulate the balanced growth of international trade, and "[t]o conduct its operations with due regard to the effect of international investment on business conditions in the territories of members." Articles of Agreement (as amended Feb. 16, 1989), article I. One of the treaty's provisions (article VII, § 9(a)), which has "full force and effect" throughout the United States, see 22 U.S.C. § 286h, confers tax immunity on the Bank in the following terms:

"The Bank, its assets, property, income and its operations and transactions authorized by this Agreement, shall be immune from all taxation and from all customs duties. The Bank shall also be immune from liability for the collection or payment of any tax or duty."

Nearly 40 years ago the Bank began providing food services for its employees and guests in its D.C. headquarters. Since 1970, it has engaged an outside contractor for this purpose. Initially, the contractor received a fixed percentage of food-service revenues and the Bank provided a substantial subsidy, which by the mid-1980s amounted to $1.3 million per year. In 1989, the Bank phased out the subsidy, renegotiated the agreement with its contractor, then the Marriott Corporation, and replaced the old management-fee contract with a "modified profit and loss" contract. Under the new arrangement, the contractor continued to receive a percentage of revenues and the Bank continued to provide equipment, space and utilities, but the burden of any financial loss now fell on the contractor.

The District of Columbia imposes a tax on the retail sale of food and beverages. The vendor is responsible for paying the tax to the District, but "reimbursement for the tax imposed upon the vendor shall be collected by the vendor" from the purchasers of the food and drink. D.C. Code §§ 47-2002(3)(A), 47-2003(o). (The District's compensating-use tax on retail sales of food and beverages is inapplicable when the sales tax is "properly collected." § 47-2202(3)(A).) Until the 1990s, the District had not sought to collect sales or use taxes on food-service transactions at the Bank. Matters changed when, in 1991, shortly after the Bank's contract renegotiation, Marriott twice requested letter rulings from the District's Department of Finance and Revenue regarding the tax status of its food-service operations at the Bank and at the International Monetary Fund. The District responded that cafeteria and vending sales by outside contractors on the premises of international organizations were subject to local sales taxes when the sales were made to employees of the organizations rather than to the organizations themselves.

Marriott's contract lapsed in 1992 and the Bank entered into a new arrangement with Gardner Merchant Food Services, Inc. This contract slightly modified the profit-and-loss arrangement the Bank had with Marriott: Gardner Merchant was to "be allowed profits not to exceed 2 per cent of revenue"; anything in excess of 2 per cent went to the Bank;1 Gardner Merchant was entitled to general and administrative costs not to exceed 3 per cent of revenue, but it was to be responsible for "pay[ing] out all expenses" and it assumed the risk of "any resultant losses". The contract set forth Gardner Merchant's independent status: "Contractor will, in all its dealings, make it clear that it is an independent contractor to the Bank, and the Contractor and its employees are neither agents, representatives, nor employees of the Bank." Gardner Merchant was to maintain its own records and hold the Bank harmless for any losses arising out of its services.

A provision in the contract purported to extend to Gardner Merchant the Bank's immunity from the collection and payment of taxes:

"The Bank is exempt from payment of sales, use and excise taxes and shall provide Contractor with tax exemption certification as may be required from time to time. The Bank, and the Contractor acting on the Bank's behalf, are also exempt from collecting such taxes from staff and other user's [sic] of the Bank's food services."

Relying on this provision, Gardner Merchant neither collected nor paid any District of Columbia sales or use taxes in performing its food-service contract.

In March 1996, the District's Department of Finance and Revenue conducted a general audit of Gardner Merchant's records and discovered a tax deficiency. For the tax years 1994 and 1995, the District sought to recover from Gardner Merchant back taxes of $351,396.73, penalties of $158,128.55 and interest of $179,212.33, for a total of $688,737.61. On May 22,1997, the Bank paid to the District approximately $680,000.00 to satisfy Gardner Merchant's deficiency...