U.S. v. State of N. M., s. 76-1888

CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)
Citation581 F.2d 803
Docket Number76-1889,Nos. 76-1888,s. 76-1888
Parties25 Cont.Cas.Fed. (CCH) 82,544 UNITED STATES of America, Plaintiff-Appellant and Cross-Appellee, v. STATE OF NEW MEXICO, Bureau of Revenue of the State of New Mexico, and Fred L. O'Cheskey, as Commissioner of Revenue of and for the State of New Mexico and his successors in office, Defendants-Appellees and Cross-Appellants.
Decision Date07 August 1978

Ann B. Durney, Appellate Section, Tax Division, Dept. of Justice, Washington, D. C. (Myron C. Baum, Acting Asst. Atty. Gen., Gilbert E. Andrews and Donald R. Anderson, Tax Division, Dept. of Justice, Washington, D. C., and Victor R. Ortega, U. S. Atty., Albuquerque, N. M., with her on brief), for plaintiff-appellant and cross-appellee.

Daniel H. Friedman, Bureau of Revenue, Santa Fe, N. M. (Jan E. Unna, Sp. Asst. Atty. Gen. and Toney Anaya, Atty. Gen. of New Mexico, Santa Fe, N. M., with him on briefs), for defendants-appellees and cross-appellants.

Before McWILLIAMS, BARRETT and McKAY, Circuit Judges.

McKAY, Circuit Judge.

Lockheed Electronics Company (Lockheed) and RCA Service Company (RCA) (collectively referred to as "contractors") had cost-plus contracts with the United States for the performance of research and development services at the White Sands Missile Range in New Mexico. Because state and local taxes were included in the definition of reimbursable costs in the contracts, the cost to the United States was increased by the amount of New Mexico's gross receipts and compensating taxes which were imposed on the contractors. The contractors disputed the imposition of the gross receipts tax so far as it applied to general and administrative (G&A) expenses and to materials and equipment purchased by the contractors in New Mexico. They also contested the imposition of the compensating tax for reimbursable out-of-state purchases of property.

New Mexico refused to permit the United States to intervene in the state administrative contest. The United States then instituted this action seeking a declaratory judgment that the Constitution and laws of the United States and the laws of New Mexico prohibit the application of the provisions of the New Mexico Gross Receipts and Compensating Tax Act (N.M.Stat.Ann. §§ 72-16A-1 to -19 (Supp.1975)) (the Act) to the receipts of Lockheed and RCA under their respective contracts with the United States.

The three judge panel to which the case was assigned concluded that a judgment by the panel was not required, leaving the decision to the district judge. The district judge declared that New Mexico has the right to assess and collect gross receipts and compensating taxes against amounts reimbursed by the United States for tangible personal property purchased by Lockheed and RCA to enable them to perform the services specified in their contracts, but that New Mexico is not entitled to assess its gross receipts tax against reimbursements for G&A "services" performed by the contractors outside New Mexico. Both the United States and New Mexico appealed.

According to the stipulated facts, each written agreement between the United States and a contractor required that the contractor act "as an independent contractor and not as an agent of the government" and that no employer-employee or master-servant relationship would exist between the United States and the contractor. Each contract further contained a government property clause which provided that "(t)itle to all property purchased by the Contractor, for the cost of which the Contractor is entitled to be reimbursed as a direct item of cost under this contract, shall pass to and vest in the Government upon delivery of such property by the vendor." Record, vol. 1, at 48.

Pursuant to provisions of the Armed Service Procurement Regulations, which were included by reference in the contracts, the contractors were required, where possible, to utilize government owned property. See 32 CFR § 7-203.21 (1976). Before purchasing any materials, supplies or equipment from a commercial vendor, the contractors were required to resort to all government sources including the "country store" (a local outlet containing miscellaneous supplies and materials) and MILSTRIP (a nation-wide computerized purchasing program). Available government owned property was provided to the contractors free of charge. If a contractor was unable to obtain government owned property and the Contracting Officer (a Civil Service employee of the Department of the Army who acts as the representative of the United States and is authorized to execute contracts on behalf of the United States) and other appropriate government officials approved, the contractor could purchase supplies from private vendors under General Services Administration (GSA) federal supply schedule contracts at preferred rates. The purchase requisitions for purchases under GSA contracts declared that the order was being placed on behalf of the Department of the Army, listed the government contract number and declared that property delivered under the requisition would vest in the United States. However, the purchase order that was provided to the vendor merely referred to the government contract number and did not recite the other information contained in the requisition. Finally, if needed materials could not be obtained from government sources or under GSA contracts, a contractor could receive appropriate authorizations and make purchases from private vendors.

Unless the requirement was waived in writing, the contractor had to obtain the written approval of the Contracting Officer before purchasing any materials, supplies or equipment for a purchase price exceeding $500. Orders for supplies purchased from a private vendor, whether or not pursuant to a GSA contract, were placed by the contractor and vendors delivered the property directly to the contractor. The contractor paid the vendor from his own funds and the purchase price was reimbursed by the United States.

New Mexico assessed no gross receipts or compensating taxes against the contractors on the value of government owned property provided to the contractors but did assess such taxes on reimbursements for tangible personal property acquired by the contractors from private vendors, whether or not pursuant to GSA contracts.

G&A expenses were incurred by Lockheed at its headquarters in New Jersey and in Arizona and by RCA at its headquarters in New Jersey. G&A costs were reimbursable under a contract "pool" ratio formula, the G&A reimbursement being a percentage of the direct reimbursement for work performed in New Mexico. The stipulated facts list "the cost of services or items such as management, personnel, financial, marketing, contracting, industrial relations, legal, accounting, payroll, computer and administration" as allowable G&A expenses. Any G&A costs incurred in New Mexico were billed as direct costs under the contract rather than as indirect G&A expenses. It is further stipulated that none of the items which make up G&A costs involved the performance of direct services for the United States or its personnel.

I

The government contends the New Mexico gross receipts statute unconstitutionally places the incidence of the tax on the United States. The Act provides that:

A. For the privilege of engaging in business, an excise tax equal to four per cent (4%) of gross receipts is imposed on any person engaging in business in New Mexico.

B. The tax imposed by this section shall be referred to as the "gross receipts tax."

N.M.Stat.Ann. § 72-16A-4 (Supp.1975). "Gross receipts" means Inter alia "the total amount of money or the value of other consideration, received from selling property in New Mexico . . . or from performing services in New Mexico." Id. § 72-16A-3(F). The New Mexico Supreme Court has construed that statutory language as placing the legal incidence of the gross receipts tax on the seller. First Nat'l Bank v. Commissioner of Revenue, 80 N.M. 699, 705, 460 P.2d 64, 70 (Ct.App.), Cert. denied, 80 N.M. 707, 460 P.2d 72 (1969), Appeal dismissed, 397 U.S. 661, 90 S.Ct. 1407, 25 L.Ed.2d 643 (1970). Noting that "(t)he act in plain language levies the tax upon the privilege of engaging in business within the state and is measured by a percentage of a business's gross receipts" the court below concluded that the language of the Act placed the legal incidence of the gross receipts tax on the contractors. His view is supported by the express language of First Nat'l Bank even though the result in that case casts some shadow over the principle it declares. See Bradbury & Stamm Constr. Co. v. Bureau of Revenue, 70 N.M. 226, 236, 372 P.2d 808, 815 (1962).

"States may not impose taxes directly on the Federal Government, nor may they impose taxes the legal incidence of which falls on the Federal Government." United States v. County of Fresno, 429 U.S. 452, 459, 97 S.Ct. 699, 703, 50 L.Ed.2d 683 (1977). Thus, the decisive issue in this case is whether the legal incidence of the challenged New Mexico taxes falls on the United States, regardless of where the economic burden ultimately rests. See id. at 462, 97 S.Ct. 699. Where, as here, federal rights and immunities are involved, we are not bound by the state court's characterization of that issue. E. g., Diamond Nat'l Corp. v. State Bd. of Equalization, 425 U.S. 268, 96 S.Ct. 1530, 47 L.Ed.2d 780 (1976); First Agricultural Nat'l Bank v. State Tax Comm'n, 392 U.S. 339, 347, 88 S.Ct. 2173, 20 L.Ed.2d 1138 (1968); Society for Savings v. Bowers, 349 U.S. 143, 151, 75 S.Ct. 607, 99 L.Ed. 950 (1955); United States v. Allegheny County, 322 U.S. 174, 184, 64 S.Ct. 908, 88 L.Ed. 1209 (1944). We must, however, "give (the state court's) finding great weight in determining the natural effect of a statute, and if it is consistent with the statute's reasonable interpretation it will be deemed conclusive." Gurley v. Rhoden, 421 U.S. 200,...

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