price, then he was also entitled to price adjustment. Downward adjustment of price was provided for in certain cases, for example, where the contractor was relieved of direct taxes which had been included in the contract price.

With respect to federal taxes, the clause provided that the contract price was to include 103 any applicable taxes in effect on the contract date and that the price was subject to adjustment upward if direct taxes or "directly applicable" taxes were imposed, increased or exemptions were removed after the contract date or if an exemption certificate (covering direct taxes excluded from the contract price by some provision other than the tax clause) were dishonored or denied. Downard adjustment was also, of course, provided for.

On 28 January 1958, Revision No. 28 to the 1955 edition of the Armed Services Procurement Regulation promulgated a new tax clause for advertised and certain negotiated fixed-price contracts 104 expressing a new policy with respect to the tax aspecting of contract pricing. Subparagraph (b) of both clauses provides:

Except as may be otherwise provided in this contract, the contract price includes all Federal, State, and local duties in effect and applicable to this contract on the tax inclusive date, except taxes (other than Federal transportation taxes) from which the Government, the Contractor, or the transactions or property covered by this contract are then exempt. Unless specifically excluded, duties are included in the contract price, and, if freight is included in the contract price, Federal transportation taxes are likewise included.

It is not clear what standard is to be used for determining when the Government, the contractor, et cetera, are "exempt" as that word is used in the clause.

The phrase "tax inclusive date" as used in the provision quoted above means the date of a negotiated contract, the date set for opening of bids in case of a formally advertised contract, or the date of any modification or supplemental agreement which calls for additional supplies or services.105 "Tax inclusive date" not only has the function of defining when taxes are included, as stated in subparagraph (a) of the clause quoted above, but it also is relevant in determining the contractor's entitlement to price adjustment for taxes not included in the contract price. Under subparagraph (c) of the

100 See subpar. (b), ASPR 11-401 (removed 28 Jan 1958). Failure to include the amount of applicable taxes would result in denial of later claims for reimbursement. See footnote 101, supra.

104 ASPR 11-401.1 (Jan 1958). This clause is required for insertion in all formally advertised contracts and negotiated fixed-price contracts where the contracting officer is satisfied that the contract price, by virtue of competition or otherwise, excludes contingencies for state and local taxes. ASPR 11-401.2 (Jul 1960) is required for insertion in all negotiated fixed-price contracts where the ASPR 11-401.1 clause is not used.

105 As defined in subpar. (a) of ASPR 11-401.1 (Jan 1958). ASPR 11-401.2 (Jul 1960) eliminates the reference to the "date set for opening of bids."

clauses,106 both upward and downward price adjustment is provided for, except that no adjustment of less than $100 is to be made. With respect to adjustment upward, the principal test is whether the contractor has had to bear the burden of a tax or pay a tax which was not to be included in the contract price (pursuant to subparagraph (b) of the clause quoted supra), or which was specifically excluded by some other provision of the contract, or whether there has been any increase in rate of taxes or duties. 107 No adjustment is apparently available in cases where the contractor omitted from his price the amount of a tax which was applicable to the contract and which should have been included pursuant to subparagraph (b), quoted supra. Adjustment of the price is not available in the case of certain taxes, for example, social security taxes, net income taxes, excess profit taxes, any state and local taxes other than those levied on or measured by the contract or sales price of services or completed supplies under the contract.108 Apparently, local property taxes imposed after the "tax inclusive" date would not be the basis for upward price adjustment.109 Interestingly, the downward price adjustment provisions of the clauses 110 provide that the contract price will be reduced or the contractor will repay where any tax included or required to be included in the price is refunded or the contractor is not required to pay or bear the burden of the tax. Just how this might be applied in a case where the contractor negligently or mistakenly omits from his price a tax which he should have included and then the tax is not imposed (because of repeal, for example) is a subject not expressly dealt with in the clause.

The situation of a contractor with a cost-reimbursement contract is considerably different from that of a fixed-price contractor. No special tax clauses are provided for cost-reimbursement contracts by the Armed Services Procurement Regulation. Instead, cost-reimbursement contractors will be reimbursed for taxes they are required to pay to the extent such taxes are allowable costs under the terms of the contract.111 Cost-reimbursement supply contracts are required

100 I.e., subpar. (c) of ASPR 11-401.1 (Jan. 1958) and (d) of ASPR 11-401.2 (Jul 1960).

107 However, the contractor must warrant in writing that he did not include any contingency charge in his contract price for such taxes. Also, it must appear that the contractor's liability for the tax, duty, rate increase, interest or penalty was not incurred through his "fault or negligence" or his failure to follow the contracting officer's instructions. ASPR 11-401.1 (c) (1) following (11) (Jan 1958). For other restrictions on the contractor's right to recover, see the remaining provisions of subpar. (c), ASPR 11-401.1 (Jan 1958).

108 ASPR 11-401.1 (c) (4) (Jan 1958).

109 Such adjustment might be allowed under the provisions of ASPR 11-401.2(d) (4) (Jul 1960) which permit adjustment for "such property taxes as are assessed either on special tooling, raw materials, components, work-in-process, or completed supplies covered by this contract, or on the Contractor's interest in or use of Government-owned property supplied or acquired under this contract."

110 ASPR 11-401.1 (c) (2) (Jan 1958) and 11–401.2(d) (2) (iii) (Jul 1960). 111 ASPR 11-402.

to include the "Allowable Cost, Fixed-Fee, and Payment" clause set forth in ASPR 7-203.4 (Apr 1959). This clause incorporates the cost principles set out in ASPR Section XV, Part 2. While taxes are generally regarded as allowable costs,112 federal taxes on income and excess profits 113 and taxes and expenses in connection with financing, refinancing, or refunding operations, including listing of securities on exchanges,114 are specifically treated as unallowable costs. Somewhat different tests of allowability apply under costreimbursement research contracts with nonprofit institutions 115 and cost-reimbursement construction contracts and subcontracts and for cost-reimbursement contracts for architect-engineer services related to construction.116

II. Creating Immunity From State and Local Taxation: Congressional Enactment

119

5. Power of Congress to create immunity by statute. It has been pointed out above that governmental agencies, instrumentalities and property are generally regarded as being immune under the Constitution from any state or local taxes having a direct legal incidence on them. It has also been pointed out that contractors are not entitled to such immunity unless they are appointed agents of the United States.117 The power of the military departments, acting pursuant to the Armed Services Procurement Act,118 to make such appointment as one of the terms of a contract, has been recognized.11 The question may be raised whether or not Congress has the power by statute to confer immunity on contractors who, without such statute, would not normally be entitled to such immunity. It would be anomalous, indeed, if the executive departments could appoint contractors as purchasing agents and thus insure immunity from taxation and, at the same time, Congress could not confer such immunity. The full extent of congressional power to confer immunity has not been explored by the courts, although decisions like Carson v. Roane-Anderson Company 120 and Dameron v. Brodhead,121 and others,122 indicate the congressional power in this respect is broad.

112 ASPR 15-205.41(a).

113 Ibid.

114 Ibid.

115 See ASPR 15-307.3 (11).

116 See ASPR 15-403 (1).

117 See the discussion of Kern-Limerick, Inc., v. Scurlock, 347 U.S. 110 (1954), supra, pp. 1212-1214.

118 10 U.S.C. 2301-2314 (Rev., 1956).

110 Kern-Limerick, Inc., v. Scurlock, footnote 117, supra.

120 342 U.S. 232 (1952).

121 345 U.S. 322 (1953).

12 See Pittman v. Home Owner's Loan Corp., 308 U.S. 21 (1939); Federal Land Bank v. Bismarck Lumber Co., 314 U.S. 95 (1941); Anno., 96 L. Ed. 263, 273-274 (1952); "Jurisdiction Over Federal Areas Within the States," a Report of the Interdepartmental Committee for the Study of Jurisdiction of Federal Areas Within the States, Part II, pp. 319-321 (1957).

Perhaps the best gloss on the subject may be found in the words of the Supreme Court:128

The constitutional power of Congress to protect any of its agencies from state taxation * * has long been recognized as applying to those with whom it has made authorized contracts. *** Certainly the policy behind the power of Congress to create tax immunities does not turn on the nature of the agency doing the work of the government. The power stems from the power to preserve and protect functions validly authorized * ** the power to make all laws necessary and proper for carrying into execution the powers vested in the Congress. US Const Art I, § 8, cl 18.

Despite the apparent amplitude of its power, Congress has not exercised it with great frequency. Although it made determined efforts, the War Department was unable to secure legislation during World War II 124 to reduce the tax burden resulting from the decision in Alabama v. King and Boozer.125 Recent efforts to secure immunity from state and local taxation have met with little encouragement.

6. The Atomic Energy Act and Carson v. Roane-Anderson Company. In enacting the Atomic Energy Act of 1946, Congress provided in section 9(b):128

*** The [Atomic Energy] Commission, and the property, activities, and income of the Commission are expressly exempted from taxation in any manner or form by any State, county, municipality, or any subdivision thereof.

In addition, the Commission was authorized to make management contracts whereby business firms would operate Atomic Energy Commission production facilities for the Commission.127 It is not quite clear whether or not Congress contemplated that the language of section 9(b), quoted above, would extend to management contractors 128 such as the Roane-Anderson Company (which operated the

123 See Carson v. Roane-Anderson Co., 342 U.S. 232, 233 (1952). See also Detroit v. Murray Corp. of Amer., 355 U.S. 489 (1958); Alabama v. King and Boozer, 314 U.S. 1 (1941).

124 The determination to seek such legislation is reflected in Memorandum, "State and Local Taxes," to The Judge Advocate General from the Director of Purchases and Contracts, Office of the Under Secretary, War Department, 18 Nov 1941. Bills introduced included: H.R. 6049, 77th Cong., 1st Sess. (1941); H.R. 6617, 6750, 6955, 77th Cong.. 2d Sess. (1942). The bills met vigorous opposition from representatives of state and local taxing jurisdictions and officials of other federal agencies. In October 1943, the enactment of similar legislation was briefly considered but no positive steps were taken to secure introduction into Congress of appropriate bills. By that time, administrative activity of the War and Navy Departments had resulted in concession of favorable tax treatment by a substantial number of states. See footnote 26, supra. It was, of course, appreciated that introduction of legislation seeking immunity might have the result in loss of such concessions.

125 314 U.S. 1 (1941).

120 Act of 1 Aug 1946, 60 Stat. 766, formerly 42 U.S.C. 1809 (b).

127 Section 4 (c) (2) of the Atomic Energy Act of 1946, 60 Stat. 759, formerly 42 U.S.C. 1804 (c) (2).

123 Legislative history may be found in H.R. Rep. No. 1186, 79th Cong., 1st Sess. (1946); Sen. Rep. No. 1211, 79th Cong., 2d Sess. (1946); H.R. Rep. No. 2478, 79th Cong.. 2d Sess. (1946); H.R. Rep. (Conf. Rep.) No. 2670, 79th Cong., 2d Sess. (1946). See Note, 4 So. Car. L. Q. 590 (1952).

town of Oak Ridge, Tennessee, for the AEC) or the Carbon and Carbide Chemicals Corporation (which operated the AEC plant at Oak Ridge for production of fissionable materials). Tax authorities of the State of Tennessee, in any event, imposed the state's sales tax on merchants who sold to the two companies and the state's use tax on certain other purchases by the companies. The Supreme Court of Tennessee ruled that the tax might not be imposed.129 The state took the matter to the United States Supreme Court. Perhaps a comment made by Mr. Justice Frankfurter in the course of his dissent in United States v. Allegheny foreshadowed the course followed by the court in Roane-Anderson:130

But in carrying on effectively the task committed to it, the United States can, I believe, go beyond the doctrine of implied immunity from taxation. I have no doubt that Congress, by appropriate legislation, could immunize those who deal with the Government from sales and property taxes which States otherwise are free to impose. Consistently, with this remark, the court held that imposition of the tax was unlawful, Roane-Anderson and Carbon and Carbide were regarded as "activities" of the AEC and on the ground that this term, as used in section 9(b) and elsewhere in the Atomic Energy Act, was broad enough to include not only Government agents but also independent contractors through whom the AEC performed the functions assigned to it by Congress.

The decision in the Roane-Anderson case added to the concern in the minds of state tax administrators who already felt that the portion of section 9(b) of the Atomic Energy Act, quoted above, portended a grave loss of revenue.131 On 24 April 1952, the Joint Congressional Committee on Atomic Energy conducted hearings on "State Taxation of Atomic Energy Commission Contractors."132 Representatives of the National Association of Tax Administrators and of several of the states appeared to request repeal of the exemption. By formal resolution at their annual meeting in July 1952, the state governors protested the exemption and urged Congress to amend the Atomic Energy Act.138 Similar action was taken by the

129 192 Tenn. 150, 239 S.W.2d 27 (1951).

180 United States v. Allegheny, 322 U.S. 174, 196 (1944).

181 Section 9(b) would clearly extend to types of taxes other than sales and use taxes of the type involved in Carson v. Roane-Anderson Co. The portion of sec. 9(b) omitted from the quotation in the text at page 1242, supra, did permit the Atomic Energy Commission to make payments in lieu of taxation, but only in lieu of property taxation. Fears kindled by the Carson case might have been somewhat allayed by the decision of the Supreme Court of Washington in General Elec. Co. v. State, 42 Wash. 2d 411, 256 P.2d 265 (1953), which did not follow the Carson decision in a case involving AEC operations in Handford, Washington. That decision was later reversed (after the Atomic Energy Act was amended, see footnote 135, infra) by the United States Supreme Court, 347 U.S. 909 (1954), Iowa had also distinguished the Carson case by denying refund to an Ordnance Corps contractor. The Ordnance Corps made the contract as operating agent of the AEC. See JAGT 1953/2393, 27 Mar 1953.

189 Hearings before the Joint Committee on Atomic Energy, 82d Cong., 24 Sess. (1952). 133 Sen. Rep. No. 694, 83d Cong., 1st Sess., p. 3 (1953).