Reducing State And Local Tax Costs To Compete More Effectively For Government Contracts

• Author: BY Lieutenant Colonel Karl E. Wolf
• Pages: 01

1. INTRODUCTION

While there is considerable authority' far the philosophical proposition that literally nothing is certain except death and taxes, most government contractors face neither death nor certain taxation in the performance of their government contracts. An understanding of the law of taxation of government contractors and a knowledge of government procurement procedures can effect a material tax savings for a company selling to or perfarming contracts for the Government. In view af the highly competitive nature of most government procurement a three or four per cent tax savings which ia reflected in the bid price may well result in the award of the contract. A company, which utilizes the combined tax and procurement information discussed herein, may be able to compete more effectively for government contracts and at the same time provide economy far the taxpayers from a11 the states. This article will discuss the following: first, the law with respect to what the states can legally tax on Bales to the Government and its contractors; second, a survey of what the states are currently taxing on such sales; and third, haw the government contractor can reduce his tax casts by proper utilization of authorized procurement procedures in the state and local tax arena.

'

This article is based in part npon an sddrera delivered by the author at the Annual Conference. Tax Executives Institute. in White Sulphur Springs. Weat Virginia, on Augviit 27, 1962, and which ia being published in 15 Tar Executive 42 (1962). The opinions and e~nelusions preaented herein are thaae of the author and do not neessaarily represent the views of The Judge Advocate General's School, the Department of Defense, or m y other governmental agency.

** JAGC, U.S. Army; Command Judge Advocate, U.S. Army Supply and Maintensnee Command; LL.B., 1953, University of Penniylvsnia Law School; Member of the Connecticut and Distriot of Columbia Bars.

Boeing Airplane Co., 37 T.C. No. 84 (Jan. 10. 1862).

100 13am 35

KARL

E. WOLF **

11. WHAT THE STATES MAY TAX ON SALES TO THE GOVERBMENT1

The Supreme Court cases decided since 1940 indicate that not all government purchases and transactions come under the umbrella of intergovernmental tax immunity.' The Colorado Nat'l Bank v. Bedford

B debt from the purchaser to the seller until paid and was recov-erable at law in the same manner as other debts: (3) The seller was required to remit 811 taxes collected to the State treasurer less an amount covering the expense of collection; (4) The seller was

9 For a diicumion of recent dewlopmenta m the law of taxation of govern- ment contraetain, see Waif, Recent Devalapmrnta in State Tniof%on o f Gavrrnmanl Controefws, 14 Tax Execvfive 25 (19611

3 The doctrine of implied conatitutionel immunity, which was originslly enunciated ~n MeCulioch Y. Maryland, 17 U.S. I4 Wheat.) 316 (1819). has Its baaia in the s u ~ r e m a e ~ elsu~e of the Constitution. For over a century the

,mmumty.

* 310 U.S.

41 (1940)

Tho fact that a national bank, although B federal inrtrumentility for certain PYTPOS~S, is not an agency of the United States Government in the amae that a government department 1s B branch of the Government of the United States dam not appear to be a slgmfieant baais to diatinguiah the rase. The Court stated that It aanumed that the tax would be invslid if laid upon the bank as 8" inntiumentality of Government and that ita bankinz operation8 were free from atste taxntm except as Congress may have permitted. It should ais0 be noted that the ease of MeCulloch V. Maryland, 17 U.S. I4 Wheat.) 316 (1818), which ertnbiiahed the doctrine of implied eanstitutianal immunity aim involved a federal bank

0Kern.iimerrek. Ine. V. Seurioek. 347 U.S.

110 (1b54) ; Federal Land Bank

Y. Bismarck Lumber Co., 314 U.S. 95 (1841) : Alabama V. King & Boozer, 314 U.S. 1 11941).

36 A00 b8mB

STATE AND LOCAL TAX COSTS

forbidden to hold out directly or indirectly that he would assume or absorb the tax; and (6) The purchaser was allowed to recover illegally collected taxes and all 8ums paid by him as taxes were public money and trust funds of the state.

The Alabama u. King & Boanevi decision, involving a sales tax of the vendee type imposed upon a transaction between B

lumber supplier and B cost-plus-fixed-fee contractor of the Government, rejected economic burden upon tHe Government as a basis for invalidating such a tax. The Court further found that the cost-plus-fixed-fee contractor involved was not an agent af the federal government. Therefore, the legal incidence of the vendee type tax was not upon the Government and no immunity from taxation resulted. Accordingly, the fact that materials are destined to be furnished ta the Government by B cast type contractor does not prevent a vendee type sales tax being imposed on sales by a supplier to that contractor. Subsequent Supreme Court& and State courte cases indicate that a federal cost-plus-fixed-fee con-tractor may under appropriate circumstances be considered an agent of the federal government and thus immune from vendee type sales taxes because of the federal government's immunity. Other casesL" clearly indicate that a state in it taxing statutes may not discriminate unlawfully against the federal government by imposing a vendor type sales tax on sales to the federal government and at the same time exempt sales to the state and political subdivisions.

This capsule summary indicates that to determine the validity of a sales tax upon direct sales to the federal government or its agent one must first determine whether the legal incidence isupon the seller or purchaser. This is accomplished by checking

'314 U.S. 1 (1941). In diaevssing the relatiomhip af two independent taxing Sovereignties in the same temitory the Supreme Court stated: "The asserted right of the m e to be free of taxatm by the other doer not spell immunity from p~ying the added costs, attrlbutsble to the taxatron of those who furnish supplies to the Government and who have been granted no tax immunity. So far as B different view ha% prevailed, see Panhandle Oil Co. V. Knaz. mpra; Grovss V. TOZGB

Co., sup?a, we think it no longer tenable." 314 U.S. at 9.

Livingston V. United States, 364 U.S.

281 (1960) : Kern-Limerick, Inc. Y.

Seurlaek, supm note 6.sAVCO MfE. Carp. Y. Cannelly, 145 Conn. 161, 140 A.2d 479 (1958):General Matara Corp. Y. State Camm'n of Revenue 6 Taxation, 182 Kan. 237. 320 P.2d 807 (1968!, Chiysler C o w Y. City of New Orleana. 238 La. 123. 114 Sa.2d 579 (1969) i Tswes V. Aerial Products, h e . , 210 Yd. 627, 124 A.2d SO5

/ I O F C /

,.""",.

United State8 Y. Department of Revenue, 202 F.Supp. 757 (N.D.

Ill.

19621, affd. 31 D.S L Week 3126 (U S. Oet 15, 1962) : People ez vel Holland Coal Ca. Y. Isaaen, 22 I11.2d 477, 176 K.E.2d 889 (IBSl), ooooid, Pores Lake Homes, Ine. Y. Grant County, 365 U.S. 744 (1961) ; Phillips Chemical Co. Y.

Dumas Independent School Dist, 361 U.S. 376 l19601.

for those elements of the statute which have, as previously in-dicated, been found to result in the tax being of the vendee type. If the purchaser is the Government or its authorized agent and the legal incidence is upon the purchaaer (a vendee type tax), the tax is invalid. If the legal incidence is upon the seller (a vendor type tax), since the tax is not on the Government, it is valid unless the statute exempts sales to the Government as most states do, or the tax discriminates against the federal govern. ment. Moving one step away from the sales transaction between the supplier and the Government to the sales transaction between

B supplier and a government contractor, who i9 not an authorized government agent, leads to the outskirts of federal immunity. Except far construction contractors, an exemption is provided in mast states for such sales under a resale exemption or materials used in processing or manufacturing exemption. Federal gov-ernment immunity does not enter into this situation except far the proposition that a tax upon sales by a supplier to a KOVW"- ment contractor may be invalid if the tax statute is discriminatory by exempting only sales to contractors of the State and political subdivisions.

Federal immunity is also involved in the use tax area. By use tax is meant the type ai tax which is designed to complement the sales tax by taxing a person for the use within the state of tangible personal property upon which B sales tax was not paid be-cause the purchase was made out of the state. The implied immunity concept immunizes the federal government, including an authorized government agent, from taxation In its use of property it purchases." This immunity does not extend to contractors in their use of their own or government property. Hence, contractors, who are not considered to be agents of the Government, are subject to a use tax on personal property which they purchase out of state, become the owner of, and then use in the state in the performance of a government contract - As early as 1941 the Supreme Court in Curry v. Cnited States'" sustained an Alabama complementary use tax imposed upon a contractor for materials purchased outside of and used within the state in the performance of his cast-plus-fixed-fee contract with the Government where the contract provided that title to mch materials shall vest in the Government upon their delivery at the work site and in--~

I Stales V. Liwngnton, 179 FSupp B (E

D.S.C 1969). ufl'd, 364

,j"sll

S 14 (1841).

STATE AND LOCAL TAX COSTS

spection and acceptance in writing by the contracting officer. The tax status of a contractor's use of property which he purchases out of state with title passing to the Government rests upon the terms of the statute involved unless he is an authorized government agent. If the statute imposes B tax upon use incident to awner-ship an2 the ownership af the property passes from the vendor to the Government with only use or posession in the purchasing contractor, no such tax may be...