UNITED STATES v. NEW MEXICO
Legal provision: Article 6, Section 2: Supremacy Clause
ORAL ARGUMENT OF GEORGE W. JONES, ESQ. ON BEHALF OF THE PETITIONER
Chief Justice Burger: We will hear arguments first this morning in... 80-702, United States v. New Mexico, et al. Mr. Jones, you may proceed whenever you are ready.
Mr. Jones: Mr. Chief Justice, and may it please the Court:
The issue in this case is whether, under standard Atomic Commission management contracts, three private contractors received and disbursed funds of the United States as agents of the federal government and are, therefore, constitutionally immune from New Mexico's gross receipts and compensating use taxes.
Each of the contractors is a party to a management contract with the Department of Energy, a form of contract developed by its predecessor, the Atomic Energy Commission.
The United States filed this action in the United States District Court for the District of New Mexico, seeking declaratory judgment that sales of tangible personal property to the Department of Energy through the management contractors was a sale to the United States and therefore exempt from the New Mexico gross receipts and compensating taxes.
Unidentified Justice: May I ask, Mr. Jones, you said this is a standard form of contract developed by the predecessor of FERC?
Mr. Jones: Yes.
The management contract concept, I suppose it could be called, was developed by the Atomic Energy Commission shortly after the World War II, and--
Unidentified Justice: And I gather everything that it uses is supplied by the government, isn't it?
All the funds it spends and everything else is supplied by the government.
Mr. Jones: --That's right.
Unidentified Justice: Do they make a profit under these contracts?
Mr. Jones: Well, Sandia, one of the contractors, makes no profit, receives no fee and does no other work, other than the work it does for the government.
Zia and LACI, the two other contractors in this case, receive a management fee.
Unidentified Justice: Is that substantial?
Mr. Jones: --I guess it's relative.
If you compare it to the amount of money they spend, it's not substantial, it's a small percentage.
I'm not sure of the fee that Zia received, but it's not... in the mid-seventies I think it was not more than $50,000.
Unidentified Justice: What is it, the government does this sort of thing just to get the management know-how of these companies?
Is that it?
Mr. Jones: That's the primary reason.
It really started--
Unidentified Justice: Rather than do the job itself.
Mr. Jones: --That's right.
It would be very difficult, I imagine, for the government to do the job because they'd have to hire all of these people who have expertise in particular areas who might well be working for private companies in different areas using that expertise.
And very early on... I think this is primarily historical.
The Manhattan Engineer District, which is responsible for the development of the atomic bomb in World War II, decided that the quickest and most efficient way of getting the manpower and the knowledge and the know-how for the development of the atomic bomb was to draw on the resources of private industry.
And Congress after World War II when it created the Atomic Energy Commission and gave it statutory authority to control the development of atomic energy, it specifically indicated that the Commission should be permitted to, or the Commission could continue this policy of drawing on or relying on private contractors for the carrying out of its functions.
And although the Atomic Energy Commission replaced the Manhattan Engineers District in 1947 and then was in turn replaced by the Energy Research and Development Administration in, I guess, 1975, and then ERDA, the Energy Research and Development Administration, was replaced by the Department of Energy in 1977, they have all continued to use these same kinds of management contracts for the purpose of carrying out their responsibilities.
The United States filed this action seeking a declaratory judgment that sales to the management contractors were sales to its agents, and therefore, to the United States.
And as a result, immune or exempt from New Mexico gross receipts tax.
The United States also sought declaratory judgment that the funds disbursed by these three contractors were not subject to either the New Mexico gross receipts tax or the compensating tax.
On cross motions for summary judgment, the district court held that the management contractors were, in fact, agents, and that the sales of personal property to them were exempt from both the gross receipts and compensating taxes, and that the disbursements by the contractors were also exempt from such taxes.
The Tenth Circuit reversed, holding that the management contractors were not agents and consequently subject to such taxes.
The court of appeals explained its decision by saying our reiterated antipathy to wholesale deprivations of state treasuries without congressional action requires at the least some special arrangement before tax immunity attaches.
The relevance of the court of appeals' hostility to federal immunity or deprivations of state treasuries would be dubious in almost any case.
And I will attempt to show, that the court's stated antipathy is misdirected is misdirected in this case.
Unidentified Justice: Well, Mr. Jones, are you going to elaborate on your footnote on page 27 of your brief of the Carson-Roane and then repeal of 9(b) and then Kern-Limerick?
Because certainly, Congress itself was not entirely happy with the Carson-Roane decision, I take it.
Mr. Jones: But, Justice Rehnquist, there's a substantial difference between saying that the... everyone or all of the contractors with the Atomic Energy Commission are completely immune from state taxation and saying that the contractor shall be immune to the extent that all other contracts with the federal government would be immune.
And Congress clearly recognized the distinction because they made it clear that all they were doing was repealing the decision that this Court had interpreted as creating a statutory immunity.
And I'm not sure what further elaboration on that point you were seeking.
Unidentified Justice: In other words, the government concedes that these contractors are on the same footing as any other sort of government contractors; they don't occupy any special status by virtue of the earlier legislation that was passed in the forties.
Mr. Jones: We concede only that there's no statutory immunity, such as Section 9(b), but it is not our position that these contractors are like any other contractors.
I mean, their immunity from taxation is determined in the same way that any other private contractor's immunity would be determined, but the nature of their relationship with the Atomic Energy Commission we think is very different from that of many other private contractors.
Unidentified Justice: Mr. Jones, is it the position of the government that it is immune from the state tax insofar as it relates to the payments by these contractors for the services of its employees?
Mr. Jones: Yes.
It's the position of the government that the disbursements--
Unidentified Justice: As well as the goods that are purchased.
Mr. Jones: --That's right.
In our view, there is no distinction, no reasonable distinction, to be drawn between the disbursements by these contractors of funds for the payment of services and their disbursement of funds for the payment of goods, because in both cases, the contractors are acting on behalf of the United States.
They have no interest in the money they use to purchase these things.
Unidentified Justice: But you do conceive that the employees work for the contractor and not the government.
Mr. Jones: Well, they work for the contractor in a very peculiar sense.
Sandia is totally a creation or a product of this arrangement with the government.
It had no existence until 1949.
As I mentioned earlier, it receives no fee from the government, it does no other work.
Furthermore, in the contract between the United States and Sandia, and Sandia's parent company, Western Electric Company, it indicates that if the contract is terminated, Western Electric, which owns all of the stock of Sandia, would be required to dispose of that stock as directed by the Department of Energy, and before doing that, required to designate a new board of directors, as indicated by the Department of Energy.
The employees at Sandia were hired solely to perform functions for the government in exactly the same sense as Sandia's purchase of supplies from a third party vendor are made solely for... on behalf of the Government.
Sandia is the largest of the three contractors and it was created in 1949 as a special subsidiary of Western Electric.
From 1949 until the present time, Sandia has carried on its responsibilities for the government, notwithstanding the changes in the various government agencies that had responsibility for the development of atomic energy.
Unidentified Justice: Well, it is... it certainly is true, though, that making the employees technically employees of Sandia rather than the government distinguishes them in very substantial ways from other employees of the government.
They aren't civil service people, they aren't subject to the normal rules about government employees, are they?
Mr. Jones: Sure.
But it seems to me that their distinction from ordinary government employees for those purposes--
Unidentified Justice: Is it in the record or is it agreed what the real motivation was for moving into the Sandia type operations?
Did you say they just thought it was the best way of drawing on the private sector?
Mr. Jones: --Yes.
Unidentified Justice: And most efficient?
Mr. Jones: --The article that is cited most that discusses the sort of general development of these things is an article by... I think the guy who is a former general counsel of the Atomic Energy Commission, and he discusses in some detail the development of these things.
And it appears that the... it's by Highstein and Florshim, called The AEC Management Contract Concept.
But it appears that the Manhattan Engineer District needed to mobilize a great deal of knowledge and resources and energy in a very short time and do it secretly, and they decided that the best way to do it was to hire private contractors to mobilize or draw on the resources of private contractors.
Unidentified Justice: And they would hire... they would have to pay what the market required them to pay for that kind of skill.
Mr. Jones: I'm not sure that that's what occurred because of the circumstances.
Unidentified Justice: I know, but Mr. Jones, these employees, do they not, have the protections, for example, of the Fair Labor Standards Act, the National Labor Relations Act, the Davis-Bacon Acts and all the rest of them, don't they?
Mr. Jones: Sure, they do.
Unidentified Justice: And the same things that are applicable to other private employees.
Mr. Jones: That's right.
Unidentified Justice: But they weren't Grade 18.
Mr. Jones: That's right.
But we are not sure what their salaries are, and those are very carefully controlled in some circumstances by the Atomic Energy Commission, the Department of Energy now.
Unidentified Justice: Are you familiar with the so-called government-owned/contractor operated system that was in effect during the war in all the munitions plants in the country?
Mr. Jones: No, I'm not.
The other contractor, LACI, which is Los Alamos Constructors, Inc, was also... is a subsidiary of Zia and was also formed specifically to do work for the government.
It performs... its only work is construction and repair and alterations at the Los Alamos Scientific Laboratory.
Under these contracts, neither Sandia, Zia nor LACI is required to spend any money in performance of the contracts with the Department of Energy.
Unidentified Justice: Mr. Jones, in that regard, I take it you agree with New Mexico that there are over 10,000 other contracts around the country using advanced funding arrangements like this in which the contractors are not apparently purchasing agents of the government.
Mr. Jones: I don't think that's Mexico's position.
I think they say that there are 10,000 other letter of credit arrangements.
Most of those, as we point out, most of those letter of credit arrangements are grants to private individuals and not contractors.
So in our view, the fact that there are these letters of credit available and used by other agencies in other contexts for other purposes has no bearing at all on whether the use of letters of credit by contractors to purchase property, title to which passes directly to the United States--
Unidentified Justice: Well, does the record show us how many comparable advanced funding arrangements there are in existence that the government has?
Comparable to these?
Mr. Jones: --Well, I am not sure the record indicates anything specific about the nature of the other contracts.
If you look at the attachments to the deposition of Mr. McGrath, you will see that they are... that the letters of credit are to institutions that are not doing work for the government.
There are about 40 or so attached, and they are all to... most of them are to grantees.
There is one from the Department of Health, Education and Welfare... it's not that anymore, it's Health and Human Services now... to a professional review board.
But it's not clear what the nature of the relationship between that organization and HAS is.
So it's not even clear that the one example they point to is comparable to the contracts here.
Our impression, however, is that the type of relationship that exists between the management contractors and the Atomic Energy Commission here is virtually unique.
There may be other contracts in which various aspects of the relationship are duplicated.
But as far as we know, there's no substantial number of government contracts in which you have the unique combination of elements of a contract that exist between the management contractors and Department of Energy.
Unidentified Justice: When you say unique, you don't mean because they're Atomic Energy contractors, but because of the nature of the relationship.
Mr. Jones: That's right, the relationship created by the contract is relatively unique.
None of these contractors spend any money under the contract.
Unidentified Justice: You mean of their own.
Mr. Jones: Of their own.
Unidentified Justice: Of course, these people aren't doing this out of pure altruism, as indicated by the fact of... is it Sandia that gets licenses on any of the developments in the laboratory work?
Mr. Jones: Well, they give as much as they get, however.
We don't suggest that they're doing it because of altruism.
As the state points out in some detail, there are benefits to the private contractors.
I mean, the knowledge and experience that's developed in these areas.
The dissenting opinion in Livingston points out in great detail that these contractors receive a large number of benefits from the government or in the course of their work.
That does not change the nature of their relationship to the government, however.
Employees of the government learn a lot in the course of their work for the government.
A lot of young lawyers work at the Justice Department for some time and then go on to private practice, using what they've learned.
So we don't think that changes the relationship between the two.
The New Mexico gross receipts tax involved in this case is essentially a sales tax.
It's assessed on the total amount of money that is realized from the sale of goods or from performing services, including professional and construction services.
In addition, New Mexico has what's called a compensating tax imposed on the use of property that is imported into the state without the payment of a gross receipts tax.
Although use is one of the aspects of... one of the factors that triggers application of the tax, it is not a use tax of the sort considered by this Court in Boyd, which was a tax on the use per se of the property.
The use tax involved in this case is essentially a complement to the gross receipts tax to protect New Mexico businessmen from the unfair competition that would result from businessmen, their competitors, being able to buy property outside the state and bring it into the state without paying a gross receipts tax.
Since 1819, it has been unquestionably clear that the federal government and its instrumentalities are constitutionally immune from any form of state taxation, absent congressional consent.
In our system, the tax immunity of the federal government is the unavoidable consequence of the supremacy declared by the Constitution.
Kern-Limerick establishes the principle that the federal government's immunity from taxation is preserved even though the federal government chooses to exercise or to perform its work through private contractors or private agents.
Kern-Limerick rests very soundly on the truism that the government can only function through employees or agents.
And if the individuals or entities through whom the government works can be taxed with respect to their activities on behalf of the government, federal immunity would be largely illusory.
Accepting this analysis, the court of appeals nonetheless found that the management contractors in this case are not agents for the purposes of procuring goods and services for the United States.
That conclusion is contrary to every other court that has considered the question; this Court's summary affirmative decision in Livingston, the Ninth Circuit's decision in Nevada Tax Commission, and the Tennessee Supreme Court's decision in United States v. Boyd, which was not--
Unidentified Justice: Are those entirely consistent with County of Fresno?
Mr. Jones: --Yes.
County of Fresno involved the question of the state's power to tax an employee of the government's interest, beneficial interest or beneficial use of government-owned property.
Here, New Mexico hasn't purported to tax the contractor's interest in or use of the government's property.
They have tried to impose a tax or interpreted their gross receipts tax to apply to money that the contractors have no interest in and no use of.
They are simply acting as agents for, disbursing agents, for the government.
The money goes into the special account, or the special account is set up in the name of the contractor and the Atomic Energy Commission.
The contractor acquires no interest in the funds in that account; title always remains in the government, and the contractor writes a draft, executes a draft on the account--
Unidentified Justice: May I interrupt on this advanced spending point.
Would the government's position be the same if there were no advanced funding but there was merely a cost plus arrangement, with the government reimbursing the contractor?
Mr. Jones: --No.
Unidentified Justice: Why would the legal incidence of the tax be any different?
Mr. Jones: Because in the latter case... well, our position might be the same depending on what other aspects of the arrangement--
Unidentified Justice: That's the only change.
Everything else is the same except instead of paying in advance, you purchase on credit and then as soon as the contractor pays the ball, the government reimburses the contractor, but the legal liabilities are all exactly the same as here Would it be a different case?
Mr. Jones: --I think it probably would be a different case, but as this Court's decision in Kern-Limerick makes clear, the fact that the government could have accomplished its goals in different ways by adopting a different contract than the one it did, does not indicate or nullify the effectiveness of the contract that it did adopt.
And it's our position that the relationship here including the advanced funding for the purchase of goods for the United States and services for the United States indicates an agency relationship, at least as clearly as the relationship indicated in Kern-Limerick.
Unidentified Justice: Mr. Jones, did I understand you to say that the use tax in Boyd is different from the use tax in this case?
Mr. Jones: Yes.
Unidentified Justice: In what respect?
Mr. Jones: In Boyd there were three taxes involved.
There was a gross receipts tax and a compensating tax of the sort involved here,--
Unidentified Justice: You have a gross receipts tax here also.
Mr. Jones: --That's right.
A gross receipts tax and a compensating tax that were of the sort, exactly the same sort that are involved here.
Those were not reviewed by this Court.
The only tax that was considered by this Court was what the Tennessee Supreme Court described as a use per se tax.
It was a tax on the use of government property, wholly without regard to who purchased it or where it was purchased.
And this Court--
Unidentified Justice: Isn't the economic effect the same for both types of use taxes as you describe them?
Mr. Jones: --I think not, because the use tax in New Mexico is not a use tax; it's properly called a compensating tax,--
Unidentified Justice: Well, who uses it in New Mexico?
Who uses the property in New Mexico?
Doesn't the contractor use it?
Mr. Jones: --Certainly, but the tax is not on his use.
The tax is simply to collect the gross receipts tax that was avoided by purchasing the property outside the state.
Unidentified Justice: But in the end in both situations, the United States government pays the tax.
Mr. Jones: Oh, that's for sure.
But the holding in Boyd is simply that the contractor's beneficial use of the property of the government was a taxable interest.
Unidentified Justice: Does all of this depend on precisely the way that the state legislature writes the tax?
Mr. Jones: Well, I don't know, precisely the way the state legislature writes a tax.
But it does depend on the nature of the interest that the state purports to tax.
For example, this Court last term affirmed the decision of the Tenth Circuit in a case, United States v. State of Colorado precisely because the state of Colorado purported to tax the use by a management contractor of a facility, a government-owned facility, on its full value to the contractor.
And the Tenth Circuit held in that case that there was no meaningful use that the state could tax to the contractor.
If there are no further questions I'd like to reserve the remainder of my time for rebuttal.
Chief Justice Burger: Mr. Friedman.
ORAL ARGUMENT OF DANIEL H. FRIEDMAN ON BEHALF OF THE RESPONDENT
Mr. Friedman: Mr. Chief Justice, and may it please the Court:
I'd like to begin by responding to Justice Stevens' question because I think that question hit the nail on the head.
The only thing that is different, if anything is different, about these contractors compared to the contractors in the Kern-Limerick case or King & Boozer is that they get their money up front instead of after the fact.
When you read particularly the reply brief of the United States, it is clear that that is all that they are saying.
Now, the benchmark I believe that would assist in analyzing the contractors today is the Boyd case, the case that this Court considered.
It is true that there a use tax was being considered rather than a gross receipts tax.
But principles were enunciated in that case which indicate that this Court has already scrutinized standard management contractors and said that the mere fact that they contract with the United States, the fact that they operate in a government facility, use advance funds, have a complete absence of risk as a result of advanced funding, undertake important federal duties, have the title to their purchases passed to the United States, that all of this is simply symptomatic of government contracting.
It does not create agents, it does not create instrumentalities.
An important concession found at page 201 of the Appendix is the concession by the United States, which I think is proper following the Boyd decision, that these contractors are not instrumentalities.
Now, I'm never sure what an instrumentality is, but in some way I read that to mean that the mere fact of a contractual association is not enough to make you an agent.
Advanced funding was used from the beginning of the Atomic Energy Commission, it was used at the time this Court decided Roane-Anderson, it is continued to be used after Congress legislatively reversed the Roane-Anderson case.
The United States is simply selecting one contractual element of the relationship and after the fact reading in great significance.
There is really no difference, as shown by the history of advance funding within the Atomic Energy Commission.
We have cited in our brief and in the transcript the fact that the Atomic Energy Commission has always viewed these contractors as cost plus contractors.
This Court in Boyd called them cost plus contractors, even though they were getting advanced funding.
Unidentified Justice: Well, there's no plus in the Sandia case.
Mr. Friedman: No, that is correct, Justice White, and in the fourth part of our brief we discuss at some length the benefits that accrue to Sandia.
I believe Justice Brennan pointed out licenses, payments effectively of overhead to Western Electric, totaling some $300,000 in the year in which the interrogatory was responded to.
Unidentified Justice: Those license might produce very valuable results for Sandia, might they not?
Mr. Friedman: They might, indeed, Justice Burger, and basically, it's important to remember, I believe, that Sandia, although it was created to undertake these contracts, was created, if you'll pardon the colloquial expression, by the telephone company.
Sometimes I feel as if the telephone company is the government of the United States, but that is only in jest.
Route 128 around Boston, Silicone Valley in San Francisco, is surrounded by companies that are created to work for the government, that only exist to work for the government.
The real comparison, I believe, is with the corporations that the United States did set up in World War II to build ships, to build munitions.
There were reasons why the United States has chosen to go the private route.
And as Justice Brennan asked about GOGCO plants, government owned, contractor operated, I believe the Michigan property cases are decisions by this Court recognizing that even though you are working in a government facility, using government property, you're still subject to taxes.
I think what the United States confuses in looking at advance funding is the difference between absence of risk, which I say is endemic to government contracting.
If you're on cost plus, whether you get paid in advance or get paid after, unless you're taking vacations in Tahiti with the money, there is no risk.
What the government is confusing is the absence of risk compared to who has the obligation.
Unidentified Justice: What about the risk of loss of the property?
Mr. Friedman: I believe that the risk of loss becomes simply an element of the cost plus contract--
Unidentified Justice: Well, not if it's the contractor's fault.
Mr. Friedman: --Well, in the case of Sandia I believe that absent malfeasance,--
Unidentified Justice: I know that may be true about Sandia, but what about an ordinary cost plus contractor?
If he negligently... if the property is negligently destroyed by him, it's not going to go into his cost.
Mr. Friedman: --That is correct, Justice White.
Unidentified Justice: But here, I don't know.
What about Sandia?
Mr. Friedman: Sandia has a slightly higher threshold of responsibility.
There is still written into the contract that if there is malfeasance at a high enough level, that again there will be responsibility in that sense, Justice White.
Unidentified Justice: But the risk of loss of the property is on the government for almost all purposes here?
Mr. Friedman: Yes, but again, I think it's hard to show negligence in normal government contracting, also.
I don't think that contractors get burned very often.
Unidentified Justice: Mr. Friedman, suppose we were to determine that the lower court was correct, and that the government is not immune from these taxes.
And let's further suppose that the contractor, Sandia or the others, simply refused to pay them.
Do you think New Mexico could seize the property in that event?
Mr. Friedman: No.
I think that it is established in the case law, Justice O'Connor, that although a state is free to tax a government contractor, it may not seize property of the United States, it may not levy against the United States.
Unidentified Justice: Does that mean that the incidence of the tax then is on the government?
Mr. Friedman: Apparently not.
And an example that I would give you is in the Boyd case, after the decision in Boyd by this Court that the Boyd contractor was subject to property taxes, it was paid from advance funding.
And I've cited in my brief from the pleadings in that case indicating that it was the contractor who paid the tax, but he paid it with advance funding.
The important point I believe from that illustration is that it was the contractor's obligation to pay the tax; he was the one that was liable.
And turning to a question that was asked, similarly with the employees.
And remember there are 7000 employees of these contractors, only 160 of whom are involved in procurement, meaning transactions with third parties.
Fifty-eight percent of all these contractors' receipts are not in that classic agent relationship of dealing with third parties; 58 % are simply to meet the payroll.
And we are in a situation in which the United States has conceded they are not instrumentalities; we are not liable for their torts, we don't want to be involved in their labor relations; we conceived that the contractors are independent contractors in hiring and supervising these employees, and yet when the taxman comes calling, suddenly as the reply brief says, they are simply independent contractors working for a fee for the Zia Company or for Sandia.
This to me strains the concept of employee greatly.
The United States has made so many concessions in this case about its relationship vis a vis the contractors' employees that there is no way of finding that the contractors' 7000 employees in some way have a direct contractual relationship with the United States.
True, advanced funding is used to meet the payroll, but the question is, is it the United States' obligation to pay those employees or is it the contractor's?
I think the distinction has to be that under these contracts, as under any cost plus contract, it is the United States that has an obligation to Sandia, Zia and LACI to pay them.
Unidentified Justice: Do you think... you don't think that an employee or a vendor of goods to the contractor could ever sue the United States?
Mr. Friedman: Your Honor, in the deposition of Mr. McGrath, the Treasury Department representative, he says that there is no way that a third party can go against the letter of credit, can go against the Federal Reserve Bank, can go against the--
Unidentified Justice: So if the contractor somehow absconds with the funds that have been advanced, whoever should have been paid with them is out of luck.
Mr. Friedman: --I think that he has to sue the contractor.
Yes, that is correct.
Unidentified Justice: He couldn't get the money, but how about suing the United States in the Court of Claims?
Mr. Friedman: I assume that there are various mechanisms for end-running the process, Mr. Justice Stevens, and frankly,--
Unidentified Justice: What does that mean?
That he could or could not sue in the Court of Claims?
Mr. Friedman: --I don't know the answer to that, sir.
Unidentified Justice: Well, if the United States is an obligor, why couldn't he sue them?
I would think he could.
But I thought your message to us was that the only obligation that's owed to any third parties is the contractor's obligation.
Mr. Friedman: I think that is indicated under the purchase documents--
Unidentified Justice: Well, if that is right, there is no direct obligation or indirect of the United States to third parties, including employees and vendors.
Mr. Friedman: --I am sorry I am not familiar with procedure in the Court of Claims, and so my answer is--
Unidentified Justice: Well, let's just assume the answer... that whether you can sue in the Court of Claims depends on whether or not there is some kind of a contractual obligation with the United States between the third party and the United States.
Is there or not?
Mr. Friedman: --There is not, Mr. Justice White.
And looking at page, for example,--
Unidentified Justice: Perhaps we can find out what the United States' position is on that shortly.
Mr. Friedman: --At page 120 of the Appendix, there is a clear distinction drawn between the Zia Company as the buyer.
It is defined in the purchase documents as the buyer, and indeed, the government in its reply brief concedes; they call it the nominal buyer, I say it's the buyer and that's what the purchase--
Unidentified Justice: You say whatever authority the contractor has in this case, it is your position I take it, that it has no authority to obligate the United States.
Mr. Friedman: --It has no authority any different from that of any other cost plus contractor.
I do not understand them to have that.
As I indicate, by the concessions in this case, there is no direct claim between the contractors' employees and the United States, so that is one segment of these receipts.
In dealing with third parties, the contractors are required to order in their own names.
The purchase documents indicate that the purchase orders could be assigned to the United States, which to me indicates that they are not parties to that purchase, but discovery reveals that they never are assigned.
Unidentified Justice: I suppose if... well, never mind.
Mr. Friedman: In other jurisdictions, as discussed in our brief I believe in the footnote at page 16, the Atomic Energy Commission deliberately structured transactions in a totally different way from these transactions.
It had the purchase orders assigned to it, it made payments directly to the vendors.
It was done deliberately to avoid taxes.
The fact that those procedures have been viewed by the Atomic Energy Commission as a means of avoiding state taxes strongly suggests that the mere contractual interplay that is at issue here does not amount to the same relationship.
Unidentified Justice: Help me again.
I thought the district court in this case found that the relationship insofar as purchasing was concerned made these three companies purchasing agents of the United States, which would seem to me to mean they had the authority to obligate the United States.
Mr. Friedman: Justice Stevens, this was done on cross motions for summary judgment.
The district court did find that the contractor was an agent in all respects, based on the contract documents and exhibits, none of which was controverted.
The Tenth Circuit reversed.
Unidentified Justice: The Tenth Circuit reversed saying even if that's true we would reverse.
Mr. Friedman: But also, the Tenth Circuit said that given all the concessions in regard to the relationship with the contractor's employees, given the fact that the contractors were contractually required to order in their own name, contractually required to use purchase forms that said Zia is the buyer, not the United States, militated the conclusion that the contractors were the only parties that were obligated to the vendors.
I agree that it is easier to find agency in the relationship with third parties.
That is the classic agent use of an agent.
And therefore, also, that the relationship with the employees is far more clearly a non-agent relationship, particularly given the concession that these contractors are not instrumentalities.
Unidentified Justice: If one of these contractors buys from a third party and he is required to order in his own name, that's perfectly true.
But upon delivery, the United States owns the property.
Mr. Friedman: It does, Justice White, but--
Unidentified Justice: And I suppose there have probably been weaker claims of contract with the United States that have prevailed in the court of claims than this one.
Mr. Friedman: --Justice White, the United States has advanced no claims in this case in the record or elsewhere; they have purely argued that advanced funding equal the relationship.
They have not brought in examples of litigation in the Court of Claims.
But the Boyd contractor in the Boyd case also involving these same Atomic Energy Commission contractors, title to the purchase is passed to the United States.
That was true in the Kern-Limerick case, it was true in the Alabama v. King & Boozer case.
I believe that what this Court has consistently said is that the mere fact that title is passed, and the mere fact that contractors in some loose and general sense are operating for the government, or acting as agents for the government... and this is from the Alabama v. King & Boozer case... does not amount to an agency relationship.
Unidentified Justice: Your submission I suppose is if the United States wants a tax immunity, it ought to either have what might be called an instrumentality or they just ought to do it with their own employees.
Mr. Friedman: That is correct, Justice White, and I believe that that is what was said in the opinion in Boyd.
That the government knows how to make agents, it knows how to use its own employees; if it wants to, let it go ahead.
That is the same contractors as we are dealing with here.
Yet, it is only two years into the case, and I'm a trial lawyer.
In a contract case, if somebody starts changing his contracts in the middle of the case, I start thinking maybe he had a weak case.
And even these contract modifications are still reluctant to come out and say flat out, I am designating you as an agent.
Our brief in the first section discusses at great length documentation of the Atomic Energy Commission's reluctance, its fear about designating its contractors as agents, its fear that they will become enmeshed in exactly the sort of red tape that leads the government in the first place to use private companies.
Obviously, the government has, on other occasions, created instrumentalities, on other occasions it has created corporations.
Yet that is not the thrust of federal contracting.
Unidentified Justice: Mr. Friedman, what about the first question in the Boyd case that was not appealed?
Isn't it correct that the Tennessee court held that the contractor was a purchasing agent and therefore was immune from the sales tax?
Mr. Friedman: That is correct, Justice Stevens.
Unidentified Justice: If that is still good law, why doesn't that apply here?
Mr. Friedman: Because of the factual difference between this case and that one.
There, the Atomic Energy Commission, following Roane-Anderson, had gone back and rewritten its purchase documents to say nothing herein shall preclude direct liability of the United States to the third parties.
So there is an excellent example of the Atomic Energy Commission taking the standard contract form which is supposed to have such magic and putting in much stronger language in order to make sure that that happened.
Unidentified Justice: Do you say that the legal issue here is... the bottom line is whether the United States had a direct obligation to the vendor?
That's really what we have to--
Mr. Friedman: Yes, and certainly in regard to the employees, Justice Stevens.
It is unlike the Kern-Limerick case, unlike the Boyd case.
Unidentified Justice: --I don't understand what you mean by with regard to the employees.
They don't have responsibility for labor negotiations and all that.
I understand that.
Mr. Friedman: Yes.
I'm saying that unlike other cases, the Kern-Limerick case purely involved a relationship between a contractor and a third party supplier.
In this case, 42 % of the receipts relate to that sort of transaction; 58 % of the receipts are simply meeting the internal payroll of Sandia, Zia and LACI.
And again, as to those relationships, the government has disclaimed a direct relationship with the contractors' employees.
The United States in its reply brief I think gives a strained interpretation.
If the government says, in regard to the contract... I'm sorry.
Unidentified Justice: Maybe I'm confused on the facts a little bit on this 48 % and 52 %.
The tax that is sought to be imposed here is on the receipts by the vendor in making--
Mr. Friedman: No.
I'm sorry, Justice Stevens.
It is on the receipts of the contractors, and the question is what did they do, what kind of transactions did those receipts relate to.
Unidentified Justice: --Receipts by the contractors paid by whom?
Mr. Friedman: The contractor draws from the United States funds sufficient to meet its payrolls, sufficient to pay its vendor.
Unidentified Justice: And is the state of New Mexico seeking to impose a tax on what the United States pays the contractor for its labor costs?
Mr. Friedman: That is right, because it is a gross receipts tax.
I run a law firm; my law firm pays... I pay 4 % on all my fees even though much of it goes for internal costs.
That is the nature of the gross receipts tax.
Unidentified Justice: Is it true that nearly 60 % of that total is payment to employees for salaries?
Mr. Friedman: Absolutely correct, Justice Burger.
Unidentified Justice: There are 7400 employees?
Mr. Friedman: I forget the number, it's somewhere in the neighborhood of 7000 employees.
Unidentified Justice: Mr. Friedman, the gross receipts tax is on the receipts by the contractor with respect to employees.
But what purchases?
Is it also measured by his advanced funding from the government for purchases?
Mr. Friedman: Yes.
Unidentified Justice: Or is it how much... or is the tax collected by the vendors?
Mr. Friedman: At page 25 of the U.S.'s brief, it is conceded that absent the finding of an agency relationship, the legal incidence of this tax is on the contractor, not on the United States.
Unidentified Justice: I know that.
But just mechanically, is it the vendor who pays the tax and then adds it to the bill?
Mr. Friedman: No.
The contractor pays the tax based on what he has received from the United States.
In transactions in which there is also dealing with a second party in the chain, there is a system of non-taxable transactions.
Unidentified Justice: So that the vendor of goods to the contractor doesn't pay a gross receipts tax.
Mr. Friedman: He will pay a gross receipts tax.
Unidentified Justice: But not on those sales.
Mr. Friedman: No.
If they are not agents he will pay that tax.
Unidentified Justice: So there are two gross receipts on--
Mr. Friedman: No, I'm sorry, I appreciate the correction, and let me explain it.
I'm saying... there are non-taxable transaction certificates made available to insulate one of those levels of transaction.
Unidentified Justice: --And if you tax the contractor, the contractor's vendors are not going to have to pay that.
Mr. Friedman: --Because he will have given a resale certificate.
That is still... in New Mexico we have already litigated against White Sands Missile Range contractors, Air Force contractors, various civilian agency contractors.
We are negotiating with them to work out precisely those transactions so that we can give them the non-taxable certificates.
Unidentified Justice: I take it that Sandia occupies quite a bit of property around Albuquerque, and all of that property is tax exempt.
Mr. Friedman: That is correct, Mr. Justice White.
I think underlying the Court's concern in this area is the need to strike a balance between the needs of the states for revenue and the need to protect the United States from affronts to its supremacy.
I think what distinguishes this type of case from the type of case in which there really is an attempt to tax the United States is that here the affront is, in effect, self-created by the United States.
If the tax burden is too onerous, that is for Congress to adjust, if the amount is too great.
As this Court has said in other recent cases.
But we are dealing here with contract drafting by a federal contracting officer designed to assure that there will be an affront to the supremacy of the United States.
And because of the relationship between the Kern-Limerick case and the underlying James v. Dravo case, which established the general rule that federal contractors are liable for state taxes, the arbiter of this balance between the state's needs and the federal interests lies in the hands of individual contracting officers.
Unidentified Justice: Mr. Friedman, do you think that for you to prevail, Kern-Limerick has to be overruled?
Mr. Friedman: Absolutely not, Justice White.
Unidentified Justice: Anymore than Boyd had to overrule it, is that it?
Mr. Friedman: --Exactly, that is right.
There is no need to... we rely on Boyd, and the difference between this case and the Kern-Limerick case is that Kern-Limerick dealt exclusively with transactions with third parties; whereas here, 58 % relate to employment relationships--
Unidentified Justice: Is this case like Kern-Limerick to the extent it has third party dealings--
Mr. Friedman: --No.
I wanted to continue, Justice White.
Unidentified Justice: --Please do.
Mr. Friedman: Second, in Kern-Limerick the government plastered the contracts and plastered the purchase orders with clear statements: we will be bound, they are merely our agents, we will pay.
It was done deliberately to conserve federal funds.
No such language is found here until July 1, 1977, when very timid contractual modifications are inserted only in the contracts, leaving the purchase orders exactly the way they were, leaving all the relationships exactly the way they were.
Third, Kern-Limerick inserted all this contractual language long in advance of the taxman coming calling.
Here, the contracts are modified two years into a tax case.
I think this is a case in which putting in the... it indicates the government's interpretation of the Kern-Limerick case.
I don't believe that this Court intended that the mere insertion of certain magic words at the time the taxman came knocking was the intent of protecting the government against affronts to its supremacy.
We are long past the days of McCulloch v. Maryland when there was danger that discriminatory taxation by the states would consume the newly-hatched federal government.
If anything, the shoe is on the other foot today.
But having given the power to federal contracting officers to insert agency-creating clauses, whatever the wisdom of that balance may be, it seems to me that great scrutiny should be given when the affront to the supremacy of the United States that is claimed is self-created, and when, in fact, these contractors are indistinguishable from other cost plus contractors.
The only difference here is the advanced funding.
Our brief indicates clearly that advanced funding was viewed by the Atomic Energy Commission only as a reimbursement method for cost plus contractors.
You paid them in advance, but later on you had an audit and you netted out what you would have advanced against what would otherwise be subject to reimbursement.
Unidentified Justice: Didn't the contract in Carson also involve advanced funding?
Mr. Friedman: It did, Justice Powell.
Unidentified Justice: So why do you say that's the only difference here?
Mr. Friedman: Well, it's similar.
Unidentified Justice: The contract is almost identical, isn't it?
The contract involved in Carson is almost identical to the contract here.
Mr. Friedman: That is correct, Justice Powell, and I think it is significant that at the time that Congress reversed... if you will pardon that expression--
Unidentified Justice: Congress repealed Section 9(b), following Carson.
Mr. Friedman: --That's right.
But they left intact Section 4(c) which this Court had referred to in Roane-Anderson.
Obviously, in repealing the Roane-Anderson decision, I don't believe that Congress intended that chance contractual clauses could be grouped together to equal an agency relationship.
That is simply the way the Atomic Energy Commission has always done business.
Thank you very much.
Chief Justice Burger: Do you have anything further, Mr. Jones?
ORAL ARGUMENT BY GEORGE W. JONES, ESQ. ON BEHALF OF PETITIONER -- Rebuttal
Mr. Jones: I have two points.
First, in both Sandia and... Sandia's purchase order, the standard terms and provisions of Sandia's purchase order, and the purchase order or standard terms of Zia's purchase order they indicate that any claims against the contractor arising out of this subcontract, in effect, this purchase order, that are not resolved by the contractor and the supplier must be submitted to a government contracting officer.
The ERDA official or the Department of Energy official who supervises the contract, and if--
Unidentified Justice: Excuse me, that's sort of an arbitration of a dispute.
Mr. Jones: --And if the dispute is not resolved at that point, the supplier must seek redress before the Department of Energy Contract Board of Appeals.
Unidentified Justice: But that doesn't mean he wins; that just tells him where to go to get--
Mr. Jones: But that very clearly indicates that he has a claim against the United States.
And if he's not satisfied with the conclusion of the Contract Board of Appeals, his recourse is to seek judicial review.
Unidentified Justice: --Well, I don't know if that follows.
The contract might say that he has to go to the American Arbitration Association, but it doesn't mean the American Arbitration Association will be liable on the contract.
But let me ask you a different question.
Supposing there was a contract, an order to purchase something for delivery in six months, and there was a... then a cancellation of the order, which would be in normal commercial terms, a breach of the contract.
Would you say that the vendor could then sue the United States directly?
Mr. Jones: Yes.
Sue both the contractor, and the United States.
Unidentified Justice: Say the contractor went insolvent or something like that.
You say there's definitely a direct obligation... and that's the key to your case, is it?
The United States is obligated on the contract.
Mr. Jones: Well, it follows from our position that these guys are agents of the United States.
It necessarily follows.
The consequence of having an agent act for you is that you are bound by their actions--
Unidentified Justice: That's even before they're paid, so you really don't have to rely on advanced funding, if that's right.
Mr. Jones: --Well, that's right, yes.
Unidentified Justice: Let me ask one other question if I may.
With regard to the 50 or 60 % of the receipts by the contractor that are used to reimburse his own employees, not to pay vendors, does the government contend that those receipts are also immune from the tax?
Mr. Jones: Yes.
Unidentified Justice: You do?
Mr. Jones: Yes, absolutely.
Unidentified Justice: And the whole purchasing relationship has nothing to do with that part of... say you had a contractor that didn't ever buy anything; had all the same contractual setup, but all they did was do a lot of research and services of one kind or another.
You'd say they're still immune?
Mr. Jones: That's right, because the contractors have no interest in the money.
They purchase these services of these third parties--
Unidentified Justice: No, the third parties here are employees.
Mr. Jones: --That's right, but they hire these employees for the United States, to provide services to the United States.
Unidentified Justice: But the employees are not United States employees.
Mr. Jones: That's right.
Unidentified Justice: And if the employees were not paid by the contractor, the employees then go to the Court of Claims, against the United States?
Mr. Jones: I suppose they would have a contract claim against the United States in the Court of Claims.
Unidentified Justice: Well, was your answer yes?
Mr. Jones: Yes.
And one final point.
The contract modifications in this case that the state makes so much of in 1977 simply confirmed what nobody denied until 1967.
Even the state of New Mexico recognized that these contractors or contractors of this sort were agents of the United States, even though... on all of their receipts from the United States except their fees.
Unidentified Justice: Well, if you're wrong on the... you think the case does turn on whether the United States is obligated directly to the third parties and to the employees?
Mr. Jones: No, I don't think it turns on that.
It seems, as I said, that--
Unidentified Justice: What if you were wrong on that?
Would you lose the case?
Mr. Jones: --No.
Well, I mean I can't be wrong on that if these guys are agents.
If the contractors are agents for the United States, then the United States is bound by their contractual undertakings on behalf of the United States.
Unidentified Justice: Within the scope of their authority.
Mr. Jones: Within the scope of their authority, as all agents.
Chief Justice Burger: Very well.
Thank you, gentlemen, the case is submitted.