Murray v. State

384 P.2d 337, 62 Wash. 2d 619

• Court: Washington Supreme Court
• Decided: August 1, 1963
• Docket: 36226, 36227, 36228, 36229
• Status: Published

Opinions

Ott, C. J.

This appeal is a consolidation of four actions brought by several contractors to recover a retail sales tax paid under protest, and to enjoin the State Tax Commission from assessing the sales tax in connection with the construction of Capehart Act housing at military installations in Washington.

From adverse judgments, the contractors appeal.

The facts upon which these appeals are predicated are not in dispute. The legal issue involved is whether the transactions, pursuant to which the military housing was constructed, are shielded from state taxation by the sovereign immunity granted to the United States government by the federal and state constitutions.

Each of the appellants was awarded contracts under the provisions of the Capehart Act (69 Stat. 651-654 as amended). Since the contract provisions are identical, we will refer only to the material portions of the documents in cause No. 36226. The procedure for the execution of a contract under the act, in so far as here material, may be stated as follows:

The Secretary of Defense, after determining a need for military housing, issues an invitation for bids. The contractor submitting the lowest acceptable bid receives a “Letter of Acceptability” from the Secretary. The letter requires the successful bidder to establish a private “mortgagor-builder” corporation under the laws of the state of Delaware, and to qualify it to do business in the state involved. The contractor furnishes the corporation with $1,000 for capital stock, purchases all of it, and elects its officers and directors. The United States government executes to the corporation a 55-year lease of the real estate upon which the housing is to be constructed. The corporation is to obtain private financing by giving a mortgage on its leasehold, and obtain a commitment from the Federal Housing Administration to insure its mortgage loan. The mortgage loan is in the amount of the contractor’s bid.

The “Letter of Acceptability” prescribes the “initial closing” procedure, which entails the execution of the following documents:

(1) The 55-year lease between the United States and the corporation for a consideration of $1,000, paid by the corporation to the United States government. The corporation agrees, during the period of construction, to maintain insurance and to save the United States government harmless from any laws, ordinances, and regulations applicable to the leased premises, with regard to construction, sanitation, licenses or permits to do business.

(2) The corporation executes a note, secured by a real and chattel mortgage on its real-estate leasehold, to the private lender.

(3) The corporation, contractor, and the United States execute a housing contract which provides that all construction is to be inspected and supervised by the United States; that progress payments are to be made by the corporation from the mortgage loan, upon request of the contractor and approval of the United States, and that, upon full payment, title to the housing units vests in the United States, subject to contractor liability for latent defects. The contract further provides that the contractor shall act as agent for the corporation, guarantee its performance, and furnish a performance bond to the corporation and the mortgagee.

(4) An irrevocable escrow agreement is executed which provides that the resignations of the officers and directors of the corporation, and the stock certificates of the corporation, endorsed in blank, are to be placed in escrow, with instructions to the escrow holder to deliver these documents to the United States upon completion and acceptance of the project.

(5) The United States executes a written guarantee to pay the mortgage installment payments to the private mortgagee and/or the Federal Housing Administration, the insurer.

The provisions of the Capehart Act were fully complied with by the contractors involved in these appeals.

Appellants’ assignments of error raise two principal issues: First, the appellant contractors contend that, under Washington law, the consumer of the housing project is the party liable for payment of the sales tax, and that, as a result of the statutory method for the construction of Cape-hart housing, the United States is the consumer and, therefore, its constitutional immunity from state taxation applies. Secondly, appellants contend that the mortgagor-builder corporation is an agency of the United States and, as such, is immune from state tax.

The function of interpreting state statutes to determine who is liable for payment of a sales tax is reserved to the state courts involved. Alabama v. King & Boozer, 314 U. S. 1, 86 L. Ed. 3, 62 S. Ct. 43, 140 A.L.R. 615 (1941); Kern-Limerick, Inc. v. Scurlock, 347 U. S. 110, 98 L Ed. 546, 74 S. Ct. 403 (1954).

RCW 82.08.020 provides that “ . . . there shall be collected a tax on each retail sale in this state . . . ” A retail sale is defined in RCW 82.04.050 as including

“ . . . the sale of or charge made for tangible personal property consumed and/or for labor and services rendered in respect to the following: . . . (b) the constructing . . . of new or existing buildings or other structures under, upon, or above real property of or for consumers, . . . ” (Italics ours.)

A consumer is defined in RCW 82.04.190(4) as “Any person who is an owner, lessee or has the right of possession to or an easement in real or personal property . . . ”

(Italics ours.)

RCW 82.08.050 provides in part:

“The tax hereby imposed shall be paid by the buyer to the seller, and each seller shall collect from the buyer the full amount of the tax payable in respect to each taxable sale . . .

“In case any seller fails to collect the tax herein imposed . . . he shall ... be personally liable to the state for the amount of the tax.” (Italics ours.)

Appellants concede that a retail sale, as defined in RCW 82.04.050, did occur, but contend that the consumer defined in RCW 82.04.190, and the buyer denominated in RCW 82.08.050 are synonymous, and that the United States government is the consumer and taxable party because it becomes the owner of the housing units upon their completion and acceptance.

With this contention, we do not agree. One of the purposes of RCW 82.04.050 is to define the event that gives rise to a taxable transaction, which is the rendition of labor and services in the construction of new buildings upon real property of or for consumers. RCW 82.04.190 establishes the means by which the consumer is identified. These sections do not designate the party liable for payment of the tax in any given transaction. RCW 82.08.050 provides that the retail sales tax shall be borne by the buyer, who is primarily liable for payment of the tax. Kaeser v. Everett, 47 Wn. (2d) 666, 289 P. (2d) 343 (1955).

We must therefore determine who is the buyer under the facts of the instant case. In this regard, appellants contend that the United States is the buyer because it bears the economic burden of paying for the military housing, by virtue of its guarantee of the mortgage obligation.

In Alabama v. King & Boozer, supra, the state of Alabama, pursuant to a statute which imposed the sales tax upon the purchaser, levied a sales tax upon the sale of lumber to a contractor who was constructing installations for the Army., It was there contended that the sales tax could not be collected from the contractor for the reason that the United States was the purchaser, within the meaning of the Alabama statute. In answering this contention, the Supreme Court of the United States held:

“. . . The taxing statute, as the Alabama courts have held, makes the ‘purchaser’ liable, for the tax to the seller, who is required ‘to add to the sales price’ the amount of the tax and collect it when the sales price is collected, whether the sale is for cash or on credit. Who, in any particular transaction like the present, is a ‘purchaser’ within the meaning of the statute, is a question of state law on which only the Supreme Court of Alabama can speak with final authority. But it seems plain, as the Government concedes and as we assume for present purposes, that under the provisions of the statute the purchaser of tangible goods who is subjected to the tax measured by the sales price, is the person who orders and pays for them when the sale is for cash or who is legally obligated to pay for them if the sale is on credit. ...” (Italics ours.)

The court concluded:

“We cannot say that the contractors were not, or that the Government was, bound to pay the purchase price, or that the contractors were not the purchasers on whom the statute lays the tax. The added circumstance that they were bound by their contract to furnish the purchased material to the Government and entitled to be reimbursed by it for the cost, including the tax, no more results in an infringement of the Government immunity than did the tax laid upon the contractor’s gross receipts from the Government in James v. Dravo Contracting Co., supra [302 U. S. 134].”

Applying this rule, the buyer is the person who is legally obligated to pay the seller in any transaction. The housing contract executed by the parties provided that “The mortgagor-builder [corporation] shall pay the eligible-builder [contractor] for the performance of this Housing Contract, and all other obligations of the eligible builder herein, . . . ” By the express terms of the contract, the corporation, and not the United States, was^ obligated to pay the appellant contractors; hence, the corporation was the buyer under the statute. Under the provisions of the Capehart Act and the facts in the instant case, the United States government was not obligated to pay the seller. The fact that the ultimate economic burden of the tax may fall upon the United States does not vitiate a state tax on the transactions. Alabama v. King & Boozer, supra; Kern-Limerick, Inc. v. Scurlcok, supra; United States v. Detroit, 355 U. S. 466, 2 L. Ed (2d) 424, 78 S. Ct. 474 (1958); E. I. Du Pont de Nemours & Co. v. State, 44 Wn. (2d) 339, 267 P. (2d) 667 (1954).

Our conclusion in this regard is also supported by the following cases:

United States v. Harrison & Grimshaw Constr. Co., 305 F. (2d) 363 (1962), involved the question of whether the provisions of the Miller Act applied to the performance bond given by the eligible builder under a Capehart Act contract. The court held (p. 368):

“. . . The projects are of a private nature until completion and assumption of control by the government. The mortgagor-builder has a contract with a construction company to build the project. The constructor looks to the mortgagor-builder for payment for his work and owes to the mortgagor-builder the obligation to perform. . . . ” (Italics ours.)

In In re S. S. Silberblatt, Inc. v. Tax Comm. of the State of New York, 5 N. Y. (2d) 635, 159 N. E. (2d) 195, 186 N. Y. S. (2d) 646 (1959), it was said:

“Likewise, we must reject appellant’s contention that the subject mortgages, as direct obligations to the United States, are immune from State or local taxation, as provided in section 3701 of the Revised Statutes of the United States (U. S. Code, tit. 31, § 742) which exempts ‘Except as otherwise provided by law, all stocks, bonds, Treasury notes, and other obligations of the United States’ since they are not ‘of the same type as those specifically enumerated’ in the statute (Smith v. Davis, 323 U. S. 111, 117). Under the arrangement authorized by the Enabling Act, it is clear that the device employed was designed to relieve the Government of its financially burdensome obligation to provide housing for its military personnel and at the same time avoid increasing the national debt. It did not pledge its credit in the usual sense, but merely guaranteed each ‘periodic payment’ based on a monthly average of $90 per family unit.”

Congress, in its discretion, by enacting the Capehart law, chose to leave the hazards of construction, the purchasing of proper materials, and the furnishing of proper labor performance to private contractors and private lenders. It chose to guarantee only the payment to the private lender, after units acceptable to the government were erected upon the leased premises. We conclude, therefore, that the mortgagor-builder corporation was the party legally obligated to pay the contractor, and that it was the buyer denominated in RCW 82.08.050.

Is the mortgagor-builder corporation an agency of the United States?

Appellants contend that title to the units, when built in accordance with the contracts, vested in the United States; that the United States controlled and dictated the terms of the construction contracts, and that it guaranteed the mortgage obligation and ultimately gained ownership of all of the corporation’s capital stock; hence, the corporation is a government agency.

In support of this contention, appellants rely on Clallam Cy. v. United States, 263 U. S. 341, 68 L. Ed. 328, 44 S. Ct. 121 (1923); Green v. Eglin AFB Housing, Inc., 104 So. (2d) 463 (Fla. 1958); and Knapp-Stiles, Inc. v. Michigan Department of Revenue, CCH 2 Mich. Tax Cases ¶¶ 200-202 (1962).

The Clallam County case held that a corporation, organized pursuant to a World War I emergency act which authorized the Director of Aircraft Production to establish one or more state corporations to produce war materials, was an agency of the United States and, as such, its activities were exempt from state taxation. The case is not apropos. The Director of Aircraft Production was, by law, an agent of the government. In the instant case, the successful bidders were not authorized agents of the government. Furthermore, the facts in the cited case did not disclose any evidence of an intent to distinguish the corporate activities from those of the United States. In this regard, the court stated (p. 345): “. . . This is not like the case of a corporation having its own purposes as well as those of the United States . . . ”

In the Green case, the court stated (p. 467):

“ ‘. . . The question here is the extent of an exemption granted by state statute. Had the legislature intended to limit the exemption to that required by the Federal Constitution there would have been no occasion whatever to go further than to say “There shall also be exempted all sales made to the United States.” But the legislature intended to grant a greater exemption and made that intent clear . . . ’ ”

In Knapp-Stiles, Inc. v. Michigan Department of Revenue, supra, the court stated:

“At the outset, it may be noted that the question is not whether the State has the power to impose such tax upon contractors who are performing contracts with the United States.

“Michigan has the power to impose such a tax. Has it done so? Or has it, by the language of the statute, exempted the sales here involved from the tax? ...”

In the Green and Knapp-Stiles cases, the result was determined by interpreting a state exemption statute much broader than our own, for which reason the cases are distinguishable.

The mortgagor-builder corporate entity created for the purpose of constructing and financing Capehart housing serves a separate and distinct function from that of the United States. That such a corporation is not an agency of the United States is sustained by the following decisions:

In In re S. S. Silberblatt, Inc., v. Tax Comm. of the State of New York, supra, the New York Court of Appeals held that the mortgagor-builder corporation was subject to that state’s mortgage recording tax, stating (p. 641):

“The appellant’s contention that this petitioner and the five corporate mortgagors are instrumentalities of the Federal Government or its agencies and, as such, are exempt from State and local taxation, is without substance. . . . At the time of the execution, delivery and recording of these mortgages, each of the mortgagors was a private corporation, all of the capital stock of which was privately owned. They were created for a commercial purpose for private profit, as distinguished from a governmental purpose. In the absence of statute to the contrary, it may. not be assumed that a governmental function was involved. They possess all of the requisites and responsibilities of corporate existence and, as such, are an entity separate and apart from the United States (United States v. Strang, 254 U. S. 491) and this is so, notwithstanding the fact that all of the capital stock of each corporation will ultimately be owned by the Federal Government (Sloan Shipyards v. United States Fleet Corp., 258 U. S. 549). ...” (Italics ours.)

In United States v. Ft. George G. Meade Defense Housing Corp. No. 1, 186 F. Supp. 639 (1960), it was held that the leasehold interest acquired by the mortgagor-builder corporation from the United States was subject to the Maryland mechanics’ lien law because

“. . . the so-called Capehart Act contemplates leaving the entire arrangement for the financing and construction of Capehart housing projects in the hands of private enterprise until the point at which the government has secured the capital stock of the Housing Corporation

The reasoning in the following cases, although not arising from Capehart transactions, supports the view that the mortgagor-builder corporations are not agencies of the government.

In E. I. Du Pont de Nemours & Co. v. State, 44 Wn. (2d) 339, 267 P. (2d) 667 (1954), it was contended that the Du Pont Company was an agent or instrumentality of the United States in its operation of the Hanford Engineer Works. We held (pp. 349, 350):

“ . . . the fact that the government reserved and exercised the right to restrict or control the action of the contractor as to its general activities does not establish the existence of an agency relationship. . . .

“It is also without significance that all of the real and personal property utilized in performing the contract was owned by the government. [Citing cases.] The same is true with regard to the fact that the government exerted unusual supervisory controls over every phase of the contractor’s activity. [Citing case.]”

In United States v. Brown, 41 F. Supp. 838 (1941), the contention was rejected that certain Regional Agricultural Credit Corporations, created pursuant to federal enactment, were immune from state taxation because the United States owned all of the capital stock of the corporations. The court said (p. 840):

“Whether or not these Regional Corporations shall enjoy sovereign immunity from taxation is wholly a question of Congressional intent. They are purely commercial corporations exercising no sovereign function. In the absence of statutory provision, there is no reason why they should be exempted from taxation, especially in view of Congressional policy concerning this type of corporation, evidenced by many statutory provisions expressly subjecting the real property of similar corporations to taxation.

“The mere fact that the United States owns all the capital stock of these corporations is not alone sufficient to endow them with sovereign immunity, nor do they acquire such immunity merely because they are the medium through which the Government carries out certain proprietary activities. Note, 83 L. Ed. 799 et seq. (t

“When a corporation is created for commercial as distinguished from Governmental purposes, it is ordinarily implied in the absence of statutory provisions to the contrary, that such corporation shall have all the requisites and responsibilities of corporate existence, even though the United States owns all the stock. Such a corporation is an entity separate from the United States. United States v. Strang, 254 U. S. 491, 41 S. Ct. 165, 65 L. Ed. 368.”

We conclude that the mortgagor-builder corporation, having served an independent and distinct purpose in the taxable event, is not a federal agency.

Further, Congress has not expressed a legislative intent to immunize a Capehart corporation from state taxation. The invitations to bid expressly provided:

“Nothing in this Invitation for Bids shall be deemed to relieve the eligible builder of any liability for the payment of sales or use taxes properly levied.”

For the reasons stated, the sales tax was “properly levied” upon these transactions. Appellants, under the statute, were obligated to collect the tax from the mortgagor-builder corporations. Having failed to collect it, appellants are liable for the tax. RCW 82.08.050, supra.

The judgments are affirmed.

Finley, Rosellini, Hamilton, and Hale, JJ., concur.