United States v. Montana

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 proceed*356ings, 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 nongovernmental groups (private contracts) through an exemption to obtain a public contractor’s license or pay the G. R. Tax.

*357 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
(e) 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, *358structures, 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 of slightly less than one-half of one percent, or $25,000. That amount constitutes general revenue to the State,4 a substantial part of which amount has been paid by the Government.

5. Subordinate public entities of the State experience the same adverse tax effect under their public contracts; however, the State does not because of its retention as general revenue of approximately one-half of the G. R. Tax paid.

6. The net amount of the G. R. Tax, after allowing all tax credits, paid by instate based public contractors and retained in the general fund of the State is .44 of the G. R. Tax, and the net amount of the G. R. Tax paid by out-of-state public contractors and retained in the general fund of the State is .46 thereof.

Discussion and Conclusions:

State’s Contention 5:

We meet a threshold disposition of the State’s contention 5 raising the issue of a foreclosure of the Government’s contentions under the doctrine of res judicata and judicial estoppel in view of the decision in Kiewit.

This issue was first raised herein immediately following the decision in Kiewit through the State’s motion for a summary *359judgment under the rationale of England and Drummond. The motion was denied under the reasoning of this Court’s decision entered on the 20th day of November, 1974. That decision reserved for later decision as to whether the holdings in Kiewit were dispositive of any of the ultimate pretrial order Government issues of unequal treatment. We will later herein meet that challenge. The decision also concluded that Government’s asserted issue that the Act’s provisions as applied to it violated the Supremacy Clause “remain[s] viable and unfettered by any holding in Kiewit.” We now reach that same conclusion.

Government’s Contention 1(a) and (c) :

We deem these two contentions to be one and the same.

It is manifest from the above findings of fact that as between the State and the Government, the imposition of the G. R. Tax upon Contractors discriminates against the Government and in favor of the State. Although a public contractor for the State might add the G. R. Tax as a line item in his bid and thus increase the cost of construction, the State would receive as general revenue that portion of the G. R. Tax remaining after allowing credits and refunds. As indicated, that averages slightly less than 50 percent of the G. R. Tax. Contra, the Government is required to pay through increased bids by the imposition of the G. R. Tax and gets no return of the overplus of approximately 50 percent.5

Homestake-Sapin Partners v. United States, 375 F.2d 507, at 512 (10th Cir. 1967), teaches:

“Whether a tax discriminatory against the United States is unconstitutional under the Fourteenth Amendment, the supremacy clause, or both, is a question the Supreme Court has not had occasion to answer. See discussion in Comptroller of Treasury, Retail Sales Tax Div. v. Pittsburgh-Des Moines Steel Co., 231 Md. 132, 189 A.2d 107. Chief Justice Warren in Phillips Chemical Co. v. Dumas School District, 361 U.S. 376, 385, 80 S.Ct. 474, 480, 4 L.Ed.2d 384, involving discriminatory taxes levied against lessees of government property, intimates that unconstitutionality in discrimination cases stems from the supremacy clause when he says, ‘ . . .we have made it clear, in the equal protection cases, that our decisions in that field are not necessarily controlling where problems of intergovernmental tax immunity are involved. . Accordingly, it does not seem too much to require that the State treat those who deal with the Government as well as it treats those with whom it deals itself.’ ”

Compare Esso Standard Oil Co. v. Evans, 345 U.S. 495, 500, 73 S.Ct. 800, 97 L.Ed. 1174 (1953). See also United States v. City of Detroit, 355 U.S. 466, 473, 78 S.Ct. 474, 2 L.Ed.2d 424 (1958); and Alabama v. King and Boozer, 314 U.S. 1, 8, 62 S.Ct. 43, 86 L.Ed. 3 (1941).

We conclude and declare that the imposition of the G. R. Tax under the Act upon the Contractors subjects the Government to discrimination in favor of the State, all in violation of the Supremacy Clause. We further conclude that the Government is entitled to permanent injunctive restraint of future imposition of the G. R. Tax upon its Contractors in order to alleviate the discriminatory effect of the Act as applied to it.

Government’s Contention 1(b):

In view of our holding that the Act violates the Supremacy Clause, we find it unnecessary to pass upon the Equal Protection Clause issues or upon the questions of collateral estoppel arising as to them.

However, nothing in the issues raised presented, nor did the contractor Kiewit *360have standing to raise on behalf of the Government in Kiewit, the Government’s current issue of the discriminatory effect upon it as an owner-builder by the imposition of the G. R. Tax upon its 'Contractors in violation of the Supremacy Clause. Commissioner of Internal Revenue v. Sunnen, 333 U.S. 591, 68 S.Ct. 715, 92 L.Ed. 898 (1948).

The decision in Kiewit finds a reasonable classification of public contractors, vis-a-vis, private contractors, for different tax purpose 6 treatment under the Act in a recital of some four factors, namely:

(1) A public work is intended for the use of the public, and if the work is inadequate in some particular way, this could expose and would expose some part of the public at large to danger, inconvenience, or injustice. That of course would not always be true in the case of a private contractor.
(2) Public contractors must be experienced, they must establish their qualifications to the state or federal government. However, private property owners could engage a licensed or unlicensed contractor or an experienced or inexperienced one.
(3) Public contractors invariably must provide a bond. Private works require bonds only at the election of the owner.
(4) Public works normally would involve elaborate, professionally drawn plans and specifications. They would also ' include mandatory supervision or inspection. Private works would have such inspection and/or supervision at the option of the owner.

It must be assumed for validity of such rationalization that those factors or reasons are subjects of and enforceable under state law; otherwise they are mere suppositions. Yet by reason of State’s judicial decree and administrative action, none of the Act’s requirements for the fitness, financial responsibility or supervision applies to Contractors.

It is manifest to us that as between Contractors and large structure private contractors,7 there is no reasonable or rational factual basis for the demonstrated unequal treatment under the Act.

“The rule to be derived from the Court’s more recent decisions, then, is that the economic burden on a federal function of a state tax imposed on those who deal with the Federal Government does not render the tax unconstitutional so long as the tax is imposed equally on the other similarly situated constituents of the State.” United States v. County of Fresno, 429 U.S. 452, at 462, 97 S.Ct. 699, at 704, 50 L.Ed.2d 683 (1977).
“If anything is settled in the law, it is that a State may not discriminate against the Federal Government or its [Contractors]. See, e. g., Phillips Co. v. Dumas School District, [supra]; United States v. City of Detroit, [supra]; City of Detroit v. Murray Corp., 355 U.S. 489, [78 S.Ct. 458, 2 L.Ed.2d 441.]” Moses Lake Homes, Inc. v. Grant County, 365 U.S. 744, at 751, 81 S.Ct. 870, at 874, 6 L.Ed.2d 66 (1961).

*361We conclude and declare that the imposition of the G. R. Tax upon Contractors discriminates against the Government in favor of private contractors, all in violation of the Supremacy Clause. We further conclude that the Government is entitled to permanent injunctive restraint against the State’s future imposition of the G. R. Tax upon Contractors.

Government’s Contention 1(d):

The facts disclose that the system of refunds and credits applicable to the G. R. Tax under the Act discriminates against out-of-state public contractors in favor of in-state public contractors to the extent of .02 of one percent, or two cents on each $100 of a bid amount.

We conclude that that amount in a dollar and cents discriminatory effect is de minim-is and the contention is without merit.

Government’s Contention 1(e) :

While the facts reveal that the existence of the Act with its imposition of the G. R. Tax upon Government Contractors tends to chill the field of federally qualified contract bidders, yet there is no substantial evidence in the record that the Government has been materially frustrated in its procurement law policy or mandate of choosing the lowest bidder on any specific project.

We conclude the issue is without merit.

Government’s Contention 2:

We deem it expedient and in conservation of judicial time and effort that this issue of the Government’s recovery of the overplus of the G. R. Tax paid to the State in excess of all allowable refunds and credits be remanded to the single judge District Court for disposition under further order by the Honorable Russell E. Smith, Chief Judge for the District.

The injunctive restraint of general fund disposition by the State of such overplus of G. R. Tax held by the State is to remain in force and effect until further order of the single judge District Court.

Neither party shall recover costs in these three-judge District Court proceedings.

This decision shall constitute the findings of fact and conclusions of law of this three-judge District Court as provided by Fed.R. Civ.P. 52(a).

Counsel for the Government is requested to serve and submit within 25 days from the date hereof a proposed declaratory judgment and decree of permanent restraint in accordance with the foregoing decision.

DATED this 19th day of August, 1977.

. For a concise history and statement of the purposes of the Act, see Kiewit, 505 P.2d at 104 — 06. In short, the Supreme Court of Montana labels the Act as a legislative “revenue enforcing measure designed to operate hand in hand with [the State’s] long-standing personal property tax and income tax, to ensure more effective tax collection and reduce tax avoidance.”

. It was held by the Supreme Court of Montana in Kiewit that the regulatory provisions of the Act do not apply to the United States, and the parties have stipulated that the regulatory provisions are not in issue here.

. The Act provides for fixed fees for A, B, and C licenses ranging in cost from $200 for an A license to $10 for a C license. The holders of B and C licenses are limited as to the value of the public contract which they may undertake. R.C.M.1947 § 84-3505(1) to (4). No issue arises as to those fees.

. Since the Act has been in effect, it has produced up to July, 1975, general revenue to the State from Government contracts in the amount of $5,658,437.29, all in the face of legislative and judicial disavowal of intent to do so.

. The Supreme Court of Montana in Peter Kiewit Sons’ Co. v. Department of Revenue, 166 Mont. 260, 531 P.2d 1327, at 1328 (1975), suggests that a Contractor “would be entitled to a refund or some other administrative remedy” for the overplus of the G. R. Tax retained by the State. However, no statutory or administrative procedure for such relief has been presently called to our attention.

. As heretofore pointed out, the Act is not revenue raising or taxing legislation, but on the contrary it is a measure to enforce other revenue and taxing laws. The evidence is conclusive that when the mission of the Act has been accomplished, as in this case, the State has received and kept in its general fund approximately one-half of the G. R. Tax paid by Contractors.

. It is common knowledge that throughout the United States, the Government contracts with private owner-builder parties for the construction and leasing of huge structures for governmental use.

There is relevant and substantial evidence in the record that there are no significant differences between a contractor’s bid on an identical private project, vis-a-vis, a project to be performed for the Government; i. e., the private construction of large bank buildings and the Big Sky Ranch project or the Government’s construction of a post office or courthouse building. The same type of construction problems can be encountered in a private contract as in a public one, and the only essential difference between a federal construction project and an identical construction project' performed for a private person, business or corporation is that the ultimate cost is approximately one percent greater to the Government.