Hamm v. Boeing Co.

• Decision Date: 03 October 1968
• Docket Number: 3 Div. 309
• Citation: 283 Ala. 310,216 So.2d 288
• Parties: Phillip HAMM, as Commissioner of Revenue of the State of Alabama v. The BOEING COMPANY. -326.
• Court: Alabama Supreme Court

Page 288

216 So.2d 288

283 Ala. 310

Phillip HAMM, as Commissioner of Revenue of the State of Alabama v. The BOEING COMPANY.

3 Div. 309-326.

Supreme Court of Alabama.

Oct. 3, 1968.

As Modified on Denial of Rehearing Nov. 7, 1968.

MacDonald Gallion, Atty. Gen., Willard W. Livingston and Wm. H. Burton, Asst. Attys. Gen., for appellant.

Martin, Balch, Bingham, Hawthorne & Williams and Wm. J. Ward, Birmingham, for appellee.

SIMPSON, Justice.

This is an appeal by the Commissioner of Revenue from a judgment in favor of the appellee (hereinafter Boeing) rendered by the Circuit Court of Montgomery County. Eighteen cases were consolidated for trial and are presented herein. The essential facts are as follows:

Boeing is a government contractor working with the National Aeronautics and Space Administration (NASA) in assisting to develop the proposed Appollo Saturn Moon Rocket.

Boeing paid sales tax assessed by the State under protest and filed these actions for refund under the provisions of Title 51, § 891, Code of Alabama, 1940 (Recomp. 1958). It is the State's position that the sales tax is due from Boeing on the purchase of tangible personal property made within the State of Alabama. It is the contention of Boeing, on the other hand, that NASA was in fact the real purchaser of such items of personal property and that therefore no sales tax is due on the purchase and to so impose it would constitute a direct tax on the United States Government, in contravention of the principles of sovereign immunity.

The parties stipulated as follows:

Boeing is a corporation qualified to do business in Alabama, its principal place of business being Huntsville. Boeing is engaged in research and development work at the George C. Marshall Space Flight Center at Huntsville, Alabama. Its work is performed as a prime contractor with the United States government under three interrelated contracts.

These contracts provide for the following: Contract No. 2577 represented the initial contractual effort leading to development of the program for design and manufacture of the first stage booster rocket--Saturn S-1C-for the Apollo Saturn Space Vehicle. The initial program was essentially complete on December 31, 1962, and any work remaining under Contract 2577 was incorporated into Contract 5608 which, as a continuation and enlargement of 2577, became effective on January 1, 1963. It is this latter contract along with Contract No. 5606(F) with which we are concerned.

Contract No. 5608 carries the initial planning through manufacture and systems test of the S-1C. Under 5608 Boeing has provided engineering design for the S-1C Booster and for test equipment such as that used in the dynamic test vehicle, which is a structure, the instrumentation for which was furnished by Boeing, in which the entire Saturn V System can be tested, in verticle position, for structural, aerodynamic and certain other characteristics. Contract 5608 is a cost-plus-fixed-fee contract, the fixed fee being based upon estimated costs which were agreed upon by Boeing and NASA for fee determination purposes during negotiation of the contract. Contract No. 5606(F) is a cost contract only, and Boeing receives no fee in connection therewith. This contract is a facilities contract rather than a research and development contract. It is merely an agreement which establishes the terms under which Boeing was authorized and directed to acquire certain types of general use facilities with which to carry out the work required under 2577 and 5608.

With the exception of S-1C end product components and materials that Boeing ordered for direct delivery to NASA at Marshall Space Flight Center (on which no tax was paid and on which none is claimed) Boeing has paid tax under protest on its acquisitions from all sources other than GSA depots, upon which no tax is claimed.

The types of items which were acquired by Boeing under Contract 5606(F) and 5608, and upon which the sales tax was paid may be divided into these general categories:

1. Facilities Equipment acquired under 5606(F):

a. Lathes, oscilloscopes, radial saws, table saws, arc welders, generators, drill presses, heat pumps, high vacuum pumps, voltage regulators, microfilm readers, typewriters.

Generally facilities equipment may be said to be the general use equipment used in the performance of the work done under 5608. These items all have a unit cost of $200.00 or more and all items of facilities equipment 5606(F) are 'direct charge' acquisitions, which means that Boeing bills NASA directly for each item that it procures.

2. Special Tooling and Research and Development (5608): Special Tooling and Research and Development is an accounting title for direct charge acquisitions under 5608. Such acquisitions consist of:

a. Special tooling and materials for the manufacture of such tooling.

b. Other items of hardware needed in connection with testing and with the fabrication of test equipment under 5608.

Special tooling consists of tooling tools which may be designed and created for special uses under 5608; or wiring and cable out of which to create such tools. Boeing orders some special tools from others and also fabricates some special tools in its own machine shop at the Huntsville Industrial Center or in shops at Marshall Space Flight Center. Special tooling includes jigs and forms which are used for creating end products that never have been formed before. The newly formed end product may itself be a special tool (such as a custom built frame or dolly for handling test equipment or components of the S-1C Rocket itself) or it may constitute a part of an item of test equipment such as instrumentation for the dynamic test vehicle.

Special tooling and other research and development acquisitions may be primarily for use in the hands of Boeing in the performance of its work under 5608 or may be assembled and used by Boeing briefly and then delivered to NASA personnel, or it may be procured and shipped directly to NASA or fabricated into same assembled end-item by Boeing and delivered to NASA without use by Boeing in its research and development work under the contract. The State admits that procurements for shipments directly to NASA and used solely by NASA personnel and procurements for fabrication or assembly by Boeing into end-items which after such fabrication or assembly are delivered to NASA for use solely by NASA personnel are not subject to tax. The State does maintain that all procurements of items which are used by Boeing, however briefly, in performance of its research and development work under 5608 are taxable.

This is another case which raises the question of a State's ability to tax a government contractor in the face of a claim of sovereign immunity raised by the contractor grounded upon the assertion that the incidence of the tax is directly upon the United States in that the contractor is merely an agent of the United States Government in making the purchase, within the meaning of the Sales Tax Statute, or stated differently, the actual purchaser of the tangible personal property is the United States.

The question is not without difficulty. In State of Alabama v. King & Boozer, 314 U.S. 1, 62 S.Ct. 43, 86 L.Ed. 3, 140 A.L.R. 615 (involving sales tax) and the companion case of Curry v. United States, 314 U.S. 14, 62 S.Ct. 48, 86 L.Ed. 9 (involving use tax) the Supreme Court of the United States, in upholding the imposition of the Alabama Sales Tax in a case involving a government contractor operating under a Cost-plus-fixed-fee Contract, stated:

'So far as such a nondiscriminatory state tax upon the contractor enters into the cost of the materials to the Government, that is but a normal incident of the organization within the same territory of two independent taxing sovereignties. The asserted right of one to be free of taxation by the other does not spell immunity from paying the added costs, attributable to the taxation of those who furnish supplies to the Government and who have been granted no tax immunity. * * *

'They (the contractors) were not relieved of the liability to pay the tax either because the contractors in a loose and general sense were acting for the Government in purchasing the lumber or, as the Alabama Supreme Court seems to have thought, because the economic burden of the tax imposed upon the purchaser would be shifted to the Government by reason of its contract to reimburse the contractor.'

Thus the Supreme Court of the United States in King & Boozer, supra, departed from what had been believed to be the test in such cases--the economic burden test--for immunity and replaced it with what has been frequently called the legal incidence test. Thus it is said if the incidence of a tax is directly upon the United States or its agent, it is invalid by implied immunity, while any indirect tax is valid.

It seems then that under the King & Boozer rationale the critical question becomes one of determining what the relationship is between the United States Government and government contractor with respect to the purchase of tangible personal property. Or more succinctly the question is whether or not the federal government itself is in effect the actual purchaser of the property so that the imposition of the sales tax would constitute a direct tax on the federal government since unquestionably under the Alabama Sales Tax Statute the incidence of the tax is the purchase at retail, the tax being borne by the consumer who is 'the last person to whom property passes in the course of ownership'. National Linen Service Corp. v. State Tax Comm., 237 Ala. 360, 186 So. 478.

In resolving this issue the trial court found in part as follows:

'The Federal Government operates the National Aeronautics and Space Administration (NASA). * * *

'The National Aeronautics and Space Administration (NASA) has been given the task of sending and hopefully returning American Astronauts to and from the moon during...