U.S. v. State of Cal.

• Decision Date: 16 May 1991
• Docket Number: No. 89-15833,89-15833
• Citation: 932 F.2d 1346
• Parties: 37 Cont.Cas.Fed. (CCH) 76,098 UNITED STATES of America, Plaintiff-Appellant, v. STATE OF CALIFORNIA and California State Board of Equalization, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

Page 1346

932 F.2d 1346

37 Cont.Cas.Fed. (CCH) 76,098

UNITED STATES of America, Plaintiff-Appellant, v. STATE OF CALIFORNIA and California State Board of Equalization, Defendants-Appellees.

No. 89-15833.

United States Court of Appeals Ninth Circuit.

Argued and Submitted July 20, 1990.

Decided May 16, 1991.

Gary R. Allen, David English Carmack, John J. McCarthy, Tax Div., U.S. Dept. of Justice, Washington, D.C., for plaintiff-appellant.

Robert D. Milam, Deputy Atty. Gen., Sacramento, Cal., for defendants-appellees.

Appeal from the United States District Court for the Eastern District of California.

Before ALARCON and POOLE, Circuit Judges, and HATTER, ^* District Judge.

HATTER, District Judge:

FACTS

The United States, through the Departments of the Navy and Energy, contracted with Williams Brothers Engineering Company ["WBEC"] to manage oil drilling operations on federal land in California. California assessed WBEC $14 million in sales and use taxes for the years 1975 through 1981. The assessments were made pursuant to section 6384 of California's Revenue & Taxation Code, which imposes sales and use taxes against federal construction contractors. WBEC was informed of the assessments through notices of tax deficiencies issued in 1978 and 1982.

WBEC paid the assessments, under protest, with funds provided by the U.S., pursuant to their contract. After each payment, WBEC, under the direction of the United States, pursued administrative claims through California's Board of Equalization to obtain a refund of the taxes paid. After each administrative claim was denied, WBEC filed suit in state court. Both state court actions were dismissed, without prejudice, in January, 1988, when WBEC and California stipulated to a $3 million refund, based on erroneous assessments against personal property purchased by WBEC and used or installed by government personnel. The remaining $11 million represents the taxes assessed on personal property installed by subcontractors managed by WBEC.

In May, 1988, the U.S. filed suit in district court seeking declaratory relief establishing that California had erroneously classified and taxed WBEC as a construction contractor, as defined in California Sales and Use Tax Reg. 1521, and that the taxed property was exempt. The United States sought a refund of the $11 million remaining, plus interest. Later, the United States argued that it was entitled to restitution based on a quasi-contract theory under federal common law. Finding that WBEC's failure to comply with California's statutory claim procedure precluded a cause of action for a tax refund, the district court granted California's motion for summary judgment in April, 1989.

The question is whether the district court erred in refusing to consider the quasi-contract claim, and in holding that, in this case, only California law provides a remedy for the over payment of California sales and use taxes.

STANDARD OF REVIEW

The standard of review for a grant of summary judgment is de novo. Tzung v. State Farm Fire and Casualty Co., 873 F.2d 1338 (9th Cir.1989).

SOVEREIGN IMMUNITY

Although an appellate court normally addresses only those issues resolved below, the court may, in its discretion, review an issue "conceded or neglected below if the issue is purely one of law and the pertinent record has been fully developed, ... [or] when there are significant questions of general impact." In re Howell, 731 F.2d 624, 626-27 (9th Cir.), cert. denied, 469 U.S. 933, 105 S.Ct. 330, 83 L.Ed.2d 266 (1984) (citations omitted). Since issues of sovereign immunity pervade this case, we address them here.

The United States claims a right to a refund based on California's erroneous interpretations of its tax laws. Other than asserting in its complaint that the action was brought "to vindicate the sovereign rights and pecuniary interests of the United States," the United States does not rely on any theories of sovereign immunity from the tax in question. Rather, the United States claims that, given the nature and terms of the contract, and WBEC's duties and responsibilities under it, California tax laws simply do not apply to WBEC. The United States does not claim that the tax in question is unconstitutionally discriminatory, or even unconstitutional as applied to WBEC. As the district court stated in its order granting summary judgment, the United States "does not raise a constitutional claim, and, other than its assertion that it brings this suit as a claim under federal common law, it does not tender any federal question."

However, the U.S. alludes to sovereign immunity in its arguments on appeal. Without actually invoking the phrase "sovereign immunity," and relying upon United States v. Independent School District No. 1, 209 F.2d 578 (10th Cir.1954), the United States argues that when the federal government disburses funds, it is exercising a constitutional function, and that the right of the United States to a refund of an erroneous or illegal tax depends on its right to function free from improper state interference.

The Supreme Court has addressed the potential sovereign immunity issue raised by this case, and concluded that "the limits on the immunity doctrine are ... as significant as the rule itself." United States v. New Mexico, 455 U.S. 720, 734, 102 S.Ct. 1373, 1382, 71 L.Ed.2d 580, 591 (1981). In New Mexico, the Court held that state sales and use taxes could be constitutionally applied to federal management contractors. Such a tax is constitutional as long as it is not imposed directly on the United States, or on a constituent part or instrumentality of the United States. New Mexico, 455 U.S. at 735, 102 S.Ct. at 1383, 71 L.Ed.2d at 592. The Court found that the contractors in New Mexico were independent, and not constituent parts or instrumentalities of the United States. New Mexico, 455 U.S. at 738, 102 S.Ct. at 1385, 71 L.Ed.2d at 594.

Noting that it was "constitutionally irrelevant" that the United States reimbursed the contractors' expenditures, including tax liabilities, or that title to goods purchased by the contractors passed immediately to the United States, the New Mexico Court held that:

[I]mmunity cannot be conferred simply because the state tax falls on the earnings of a contractor providing services to the Government. And where a use tax is involved, immunity cannot be conferred simply because the State is levying the tax on the use of federal property in private hands, even if the private entity is using the Government property to provide the United States with goods, or services. In such a situation the contractor's use of the property "in connection with commercial activities carried on for profit," is "a separate and distinct taxable activity." [I]mmunity cannot be conferred simply because the tax is paid with Government funds, [where] the contractor made expenditures under an advanced funding arrangement similar to the one involved here.

New Mexico, 455 U.S. at 734-35, 102 S.Ct. at 1382-83, 71 L.Ed.2d at 592 (citations omitted).

The contractual relationship between WBEC and the United States was, in essential respects, the same as the contractual relationships in New Mexico. WBEC functioned as an independent contractor operating and managing a federal facility under an advanced funding arrangement. Title to all its purchases immediately passed to the United States. The United States' efforts to characterize WBEC's role and responsibilities as limited do not make WBEC any more a constituent part or instrumentality of the United States than were the contractors in New Mexico. See New Mexico, 455 U.S. at 736-37, 102 S.Ct. at 1383-84, 71 L.Ed.2d at 593-94. Moreover, we have previously found Cal.Rev. and T.Code Sec. 6384 and Reg. 1521, as applied to a federal contractor, to be constitutional. In re Howell, 731 F.2d at 629. Therefore, the sovereign immunity of the United States from direct state taxation does not extend to WBEC and cannot be invoked by the United States in this case.

FEDERAL OR STATE LAW?

Lacking a colorable constitutional challenge, the United States must find a cause of action elsewhere, i.e., California law or, as the United States argues, federal common law. The issue of whether state or federal law governs is a question of law and is reviewable de novo. Cortese v. United States, 782 F.2d 845, 849 (9th Cir.1986). Precedent in the Ninth Circuit requires justification for the initial choice of federal law or state law in cases where no clear body of federal common law applies. United States v. State of California, 655 F.2d 914 (9th Cir.1980).

Where there is no clear body of applicable federal common law, state law must be applied unless a "significant conflict between some federal policy or interest and the use of state law in the premises" is demonstrated. State of California, 655 F.2d at 917, quoting Wallis v. Pan Am. Petroleum Corp., 384 U.S. 63, 68, 86 S.Ct. 1301, 1304, 16 L.Ed.2d 369, 373 (1966). As discussed above, the United States enjoys no sovereign immunity in this case. Thus, the preliminary issues to be resolved in this case are constitutional: 1) whether there exists a federal interest in controlling the applicable law; 2) whether that federal interest conflicts with the state interest in preserving its control over local concerns; and 3) whether the state law is hostile to a federal program. See Industrial Indemnity Insurance Co. v. United States, 757 F.2d 982, 985 (9th Cir.1985).

A. No federal interest or program

In this case, no federal interest or program has been identified. However, relying upon United States v. Independent School District No. 1, 209 F.2d 578 (10th Cir.1954), the United States argues that when the federal government disburses funds, it is exercising a constitutional function. However, Independent School District No. 1 is distinguishable. In Independent School District No. 1, the United States brought an action to recover overpayments made to the ...