United States v. State of Mont.

• Decision Date: 19 August 1977
• Docket Number: Civ. A. No. 1989.
• Citation: 437 F. Supp. 354
• Parties: UNITED STATES of America, Plaintiff, v. STATE OF MONTANA, Department of Revenue of the State of Montana, and W. A. Groff, as Director of Revenue of and for the State of Montana, and his successors in office, Defendants.
• Court: U.S. District Court — District of Montana

437 F. Supp. 354

UNITED STATES of America, Plaintiff, v. STATE OF MONTANA, Department of Revenue of the State of Montana, and W. A. Groff, as Director of Revenue of and for the State of Montana, and his successors in office, Defendants.

Civ. A. No. 1989.

United States District Court, D. Montana, Helena Division.

August 19, 1977.

John J. McCarthy, Chief Gen. Litigation Section, Tax Division, U. S. Dept. of Justice, Washington, D. C., Charles E. Stratton, Trial Atty. — Tax Division, U. S. Dept. of Justice, Washington, D. C., Thomas A. Olson, U. S. Atty., Billings, Mont., for plaintiff.

Terry B. Cosgrove, Sp. Asst. Atty. Gen., Helena, Mont., Robert A. Poore, Sp. Asst. Atty. Gen., Butte, Mont., for defendants.

Before KILKENNY, Circuit Judge, and EAST and SMITH, District Judges.^*

DECISION

EAST, Senior District Judge:

The Action:

The United States of America, by and through an appropriate delegate of the Department of the Army, (Government) filed this action in April, 1971 against the State of Montana and the above named officials of that state (State). During the proceedings, the three-judge District composed of Judges Browning, East and Smith postponed the proceedings during the pendency of a state court action culminating in the decision of the Supreme Court of the State in Peter Kiewit Sons' Co. v. State Board of Equalization, 161 Mont. 140, 505 P.2d 102 (1973), (Kiewit).

A final pretrial order was filed by the parties wherein the Government challenges the validity of the State's public contractors' licensing and Gross Receipts Tax (G. R. Tax) Act, Chapter 35, Title 84, Revised Code of Montana 1947, as amended, (the Act)¹ and regulations promulgated thereunder under Article VI, Clause 2, (Supremacy Clause) and the Fourteenth Amendment (Equal Protection Clause) to the United States Constitution, and seeks:

(a) Declaratory and injunctive relief against the enforcement of the Act against it, its contractors, subcontractors, and others with whom it deals (Contractors); and

(b) A refund of unlawful taxes paid by the Government through its Contractors.

Following oral argument before this three-judge District Court, the matter was submitted upon the merits based upon the evidentiary record made before the Honorable Russell E. Smith and the records and files herein.

Jurisdiction:

We note jurisdiction under 28 U.S.C. §§ 1345 and 2201.

The Act:

The Act provides:

(a) The definition of a public contractor is anyone who proposes and does perform work for the government, state, its county or municipal governments, and school districts, and is required to meet standards or grounds to determine fitness and responsibility in order to: (1) submit bids or proposals, (2) enter into contracts with the government, and (3) perform or continue his contractual obligations with the government, and is subject to suspension of the contractor's license upon stated conditions. (R.C.M.1947 § 84-3501(b)).²

(b) It is unlawful for a public contractor to act in his capacity within the state without having a public contractor's license³ and paying the G. R. Tax of one percentum of the value of the contractor's prime contract. (R.C.M. 1947 §§ 84-3505(5) and 84-3516.

(c) Methods for a public contractor to obtain a refund from and to the extent of the G. R. Tax, the amount of ad valorem personal property taxes ultimately assessed and paid to the appropriate local taxing authorities of the state, and income and corporate income taxes ultimately determined to be due and paid to the state. (R.C.M.1947 § 84-3514).

(d) For a preferred classification of a private contractors who perform construction contracts for private persons, partnerships, joint ventures, private corporations (including those listed on the New York and American Stock Exchanges) or other non-governmental groups (private contracts) through an exemption to obtain a public contractor's license or pay the G. R. Tax.

Contentions of the Parties:

The Government contends that:

1. The licensing and G. R. Tax provisions of the Act and regulations thereunder are erroneous, invalid, and without legal force or effect because both the language and the operation of the Act violate the Constitution and laws of the United States in that they:

(a) Illegally discriminate against the Government, and its agencies and instrumentalities, and those with whom the Government does business.

(b) Illegally force the Government to pay more for its construction than does a private person, business, or corporation.

(c) Illegally discriminate against those with whom the Government does business.

(d) Illegally provide a system of refunds and credits that discriminate against an out-of-state contractor in favor of a Montana contractor and place a heavier tax burden on such out-of-state contractor.

(e) (The system of refunds and credits) illegally interferes with the Government's free choice to choose its contractors and frustrates the policy of choosing the lowest bidder (in violation of federal procurement law).

2. The G. R. Tax was intended by the State's legislature as a "wash-out" revenue-enforcing measure and, accordingly, each year after all refunds and credits are taken by a Contractor or at the termination of each contract, the State must refund any excess G. R. Tax collected under the Act. Hence, the Government is entitled to a refund of taxes and license fees, with interest, equal to all such amounts or sums as have been paid to the State by the Government or its Contractors under the Act in excess of all refunds and credits taken.

The State contends that:

1. The G. R. Tax, which has worked out by virtue of credits and refunds to be actually a tax of one-half of one percent, is not a direct tax upon the Government so any economic impact upon the Government therefrom is indirect and not substantial.

2. The G. R. Tax is imposed equally and identically upon all public contractors, such that the State, and its subdivisions, are treated exactly the same as the Government.

3. The Act in no sense (either through refunds and credits or otherwise) discriminates against in-state and out-of-state Contractors.

4. The Government, as acknowledged in the pretrial order (item 12-(g), page 7), was the real party in interest in Kiewit. Therefore, under the doctrine of England v. Medical Examiners, 375 U.S. 411, 84 S.Ct. 461, 11 L.Ed.2d 440 (1964), (England) and Drummond v. United States, 324 U.S. 316, 65 S.Ct. 659, 89 L.Ed. 969 (1945), (Drummond), the Government elected to litigate its challenges to the constitutionality of the Act fully in the State Courts of Montana in Kiewit and is barred from relitigating the same again.

5. Further, the Government is collaterally estopped from relitigating the following issues which it caused to be raised and decided:

(a) The reasonableness and validity of the classification for the tax purposes between public contracts and private contracts;

(b) The inapplicability of the Act as to the Government's selection or control of its Contractors; and

(c) That the tax is not directly on the Government and that any indirect economic impact is not substantial within the concepts of James v. Dravo Contracting Co., 302 U.S. 134 58 S.Ct. 208, 82 L.Ed. 155 (1937).

Facts:

We find from the pretrial order agreed facts and evidence of record the following:

1. The Government, prior to and since enactment of the Act, has and will continue to contract with Contractors to perform construction work within the State to erect, build, excavate, alter or repair buildings, structures, installations or facilities for itself, its agencies and instrumentalities, including its Department of the Army.

2. Contractors performing construction contracts in the State are subject to the following three taxes:

(a) Personal property taxes payable to appropriate counties.

(b) Corporation license taxes, or income taxes based on net income, payable to the State.

(c) One percent G. R. Tax applicable to contract proceeds under construction contracts awarded by the Government.

3. Private contractors performing construction contracts in the State for private parties; i. e., for parties other than the Government, the State or political subdivisions thereof; are subject to the following two State taxes:

(a) Personal property taxes payable to counties in the State.

(b) Corporation license taxes, or income taxes, based on net income, payable to the State.

4. Prior to 1971, the Government contractually required its Contractors within the State not to take advantage of the refund provisions and credits provided for in the Act. Such a requirement was contained in the contracts involved in Kiewit. However, since 1971 the Government's contracts, as those involved here, required the Contractors to take advantage of all refunds and credits provided for in the Act and to reimburse the Government in the amount of them. The inescapable effect of the G. R. Tax is to increase the cost to the Contractors for doing business with the Government within the State. Some Contractors add the tax as a line item in their bids. It is inevitable that the increased cost will be passed on to the Government. The State's tax records show that after deducting all credits allowable on account of the payment by Contractors for ultimately assessed personal property and income taxes and corporate license fees, the State retains in its general fund approximately one-half of the G. R. Tax. This overplus or non-washout is an average figure because the tax credits which may be taken vary between Contractors. One Contractor may use more valuable personal property than another and one Contractor may be liable for either state corporate license fees or income taxes while another is not. As the credits which may be taken vary, the amounts of the Contractors' G. R. Tax actually retained by the State also vary. For example, an average Contractor performing a $5,000,000 contract for the Government would, after credits, pay an overplus of G. R. Tax...