Comptroller of Treasury v. Aerial Products, Inc.

Collins, J., delivered the opinion of the Court. This is an appeal by the Comptroller of Maryland, (the Comptroller), appellant, from an order of the Circuit Court for Cecil County, allowing a refund of $8,811.12, being part of a payment of $27,852.51, paid under protest on February 5, 1954, to the Comptroller by Aerial Products, Inc., (Aerial), appellee. The appellee was a corporation owning and operating a factory in Elkton, Maryland, where it produced flares, signals, fuses and loaded ammunition. Approximately ninety-nine and one-half percentum of the work of the appellee was for the production of products required for use by the United States Government.

The controversy here arose out of a series of contracts entered into at or about the time of the Korean crisis, whereby certain machinery and equipment was acquired to be used for the production of goods needed by the Government. The controversy was whether or not the purchases made under the various contracts between the appellee and the Government were taxable under the Maryland law relating to sales and use taxes. No sales or use tax was paid by Aerial at the time of these purchases. Sometime prior to February 5, 1954, the Comptroller’s office sent auditors to inspect the appellee’s books.

On or about that date Aerial learned from its attorneys that the report of the auditors showed sales and use taxes due by them. Under instruction from its attorneys the appellee forwarded to the Comptroller the aforesaid payment of $27,852.51, under protest. Claims for refund were filed with the Comp- ⁶³¹ trailer. The Comptroller ruled against Aerial on claimed refunds in the amount of $8,811.12.

The appellee then appealed to the Circuit Court for Cecil County. From an order of that court overruling the Comptroller, he appeals here. The claim amounting to $8,811.12 for refund was made up in the following manner. Caption (2) was for the purchase of property under a Navy contract for use in the manufacture of supplies for the Government.

The amount of tax, interest and penalty involved was $5,948.49. Caption (3) was for money spent for the purchase of property and services under the Navy contract for modification and repair of equipment owned by the Government and lent to Aerial to use in performing the Government contracts. The amount of tax, interest and penalty there involved was $410.94. The total refund therefor claimed under the Navy contract was $6,359.43.

Caption (4) was for the purchase of property under an Army contract for use in the manufacture of supplies for the Government. The amount of tax, interest and penalty involved was $218.86. Caption (5) was for the purchase of property under special tooling provisions of the Navy contract and was generally referred to as the “Tooling Contracts”. The amount of tax, interest and penalty involved was $2,232.83.

It was stipulated and agreed between the parties at the Comptroller’s hearing that “If claimant is entitled to refund of taxes paid on such purchases under Section 322 (k) of the Maryland Retail Sales Tax Act, and Section 370(b) of the Maryland Use Tax, the amount of refund under Caption (2) is $4,378.85, the amount of refund under Caption (4) is $213.70, and the amount of refund under Caption (5) is $1,590.83.” At the beginning of the hearing below, the appellee abandoned its appeal from the Comptroller’s determination on Caption (5). These contracts were not mentioned in the trial judge’s opinion in reversing the Comptroller and Caption (5) is not before us on this appeal. The appellee agrees that the order of the trial judge must be interpreted so as not to apply to the Tooling Contracts. At the argument in this Court the appellant admitted that there was no evidence under which the Maryland Use Tax ⁶³² could be collected.

The question here, therefore, involves only the Maryland Retail Sales Act. The appellant contends that, since in appeals from the decisions of the Comptroller, such decisions on appeal are restricted to questions of law only, the trial judge erred in substituting his judgment as to facts for the judgment of the Comptroller. Code, 1951, Article 81, Section 3.48, provides for an appeal from the decision of the Comptroller to the Circuit Court of the county or to the Baltimore City Court, depending upon where the taxpayer regularly conducts his business. Said Section provides in part: “Such appeal shall be limited to questions of law only, but the Comptroller shall file in the Court to which the appeal has been taken a certified copy of the record of proceedings held before him.” In Comptroller of the Treasury v. Smith, 205 Md. 408, 414 , 109 A. 2d 47 , the contention was made that the trial court exceeded its authority under Article 81, Section 348, supra, in reviewing the facts.

Judge Henderson said in that case for this Court: “It is clear that the Comptroller’s findings of fact are final, and the court cannot properly substitute its own judgment. However, questions of fact, in this type of case, shade into mixed questions of law and fact, and courts may consider the facts at least for the purpose of ascertaining whether there is evidence to support a legal conclusion that necessarily involves the drawing of a line.” For the same reason the questions here shade into mixed questions of law and fact. In order for those contracts to be performed it was necessary that certain machinery and equipment be purchased. The appellee lacked the working capital to do this.

The Navy contract, under which Captions (2) and (3) arose, originated with a telegram dated June 20, 1951, to the appellee from the Chief of the Bureau of Ordnance of the Navy Department. This advised the appellee that it was awarded the contract providing for the procurement and installation of machinery, tools and production equipment at its plant for the production of 20MM ammunition. Appellee was to procure and install the equipment. All purchases of equipment were to be made in the name of and for the account of the Government.

A contract would provide for reimbursement to appellee of ⁶³³ direct cost only for purchase and acquisition of facilities without fee or profit. It was understood that the Government could remove or abandon the facilities at any time. Priority of use of facilities would vest in the Bureau of Ordnance with no rental charge. Facilities would be subject to stand-by provisions for five years with maintenance and stand-by storage, with no cost to the Government.

All purchase orders and sub-contracts were subject to Bureau approval. A definite contract later supplanted the telegram. That contract provided on its cover page that Aerial should furnish and deliver all supplies and perform all services set forth in an attached schedule for the consideration stated therein. The contract related in detail what was intended to be accomplished, and provided in part that Aerial, after obtaining Government approval, by contract with others should acquire, construct and install as necessary for the operation, machinery, tools, equipment and facilities identified in the schedule approved by the Government.

It was the intention of the parties that the items of equipment and facilities to be acquired should constitute a production unit capable of loading 1,500,000 — 20MM Projectiles per month on a one-shift basis. The total estimated cost in the initial contract was $284,521.00, The contract defined “allowable cost” as constituting “the direct costs incurred by the Contractor in the performance of the acquisition, construction and installation of the facilities under that contract and accepted by the Bureau of Supplies and Accounts (Cost Inspection Service), Department of the Navy, as chargeable to such performance * * The contract then provided for use of the facilities at Aerial’s plant and that Aerial was under certain obligations to maintain and protect the facilities in stand-by condition. It was the intention of the parties that the equipment and facilities be acquired and installed so as to enable Aerial to establish the production unit aforesaid. Aerial was also required to obtain approval by the Government of the plans and specifications and to seek competitive bids.

Also contained were provisions with respect to reimbursement and notice of suit against Aerial. Materials could be inspected at the option of the Navy. The Government retained the right to furnish Aerial with Gov ⁶³⁴ ernment owned equipment provided that, if Aerial should be required to cancel any purchase order, the cost of such cancellation, as well as Aerial’s own cost, should be allowable elements of cost. As allowable costs the Government should pay to Aerial full compensation for the equipment, construction and installation of the facilities called for by the contract.

Once each month, if approved by a Bureau specified therein, Aerial should submit to an authorized representative of that Bureau an invoice or public voucher showing the cost 'incurred by Aerial in connection with the acquisition, construction and installation of facilities. After receipt of such invoice the Government should as promptly as possible make payment thereof, except that a reserve was to be set up to take care of any disallowance which might result from a subsequent payment of certain items not properly allowable. Under Article 8, “Title,” it was provided: “Any and all facilities which the Contractor may purchase for the performance of its obligations under this contract to acquire, construct and install the facilities shall be purchased in the name and for the account of the Government. Title to all of the facilities shall be and remain in the Government, it being understood and agreed that the title to all materials, parts, assemblies, subassemblies, supplies, equipment and other property for the cost of which the Contractor is entitled to be reimbursed under this contract shall automatically pass to and vest in the Government upon delivery to the Contractor for the account of the Government or upon the happening of any other event by which title passes from the vendor or supplier thereof, in the case of any such property which is purchased for the performance of this contract, or, in the case of property not so purchased, upon the allocation thereof to this contract by the commencement of processing or use thereof or otherwise.

The provisions of this Article, however, shall not be construed as relieving the Contrae ⁶³⁵ tor from responsibility for the care and preservation of 'such facilities or as a waiver of the right of the Government to require the fulfillment of any of the terms of this contract.” (Italics supplied). There were insurance provisions freeing Aerial from liability for loss of or damage to the facilities. Aerial was to maintain adequate property control records of the facilities and a system for identification of them. The Government retained the right to terminate Aerial’s authority to use the facilities or any part thereof, upon receipt of written notice by Aerial.

The Government could remove, or direct Aerial to remove, the facilities when Aerial’s authority to use had been terminated. There was also a provision for the Government’s right of access. By Article 28 it was also provided: “All items of Government-owned property furnished by the Government to the Contractor for the construction and installation of the facilities and all items of property acquired by the Contractor, title to which vests in the Government under Article 8 are subject to the provisions of this Article and are hereinafter collectively referred to as ‘Government Property’. Upon the completion of the acquisition, construction and installation of the facilities, or at such earlier date as may be fixed by the Contracting Officer, the Contractor shall submit to the Contracting Officer in a form acceptable to him, inventory schedules covering all items of Government property not required for or consumed in the performance of the acquisition, construction and installation of the facilities (including any resulting scrap), or not theretofore delivered to the Government, and shall deliver or make such other disposal of the Government property as may be directed by the Contracting Officer.

Recoverable scrap shall be reported in accordance with a procedure and in such form as the Contracting Officer may direct. The net proceeds of any such disposal approved by the Contracting Offi ⁶³⁶ cer shall be credited to the cost of the work covered by the contract or shall be paid in such manner as the Contracting Officer may direct.” (Italics supplied). The testimony showed that the first stage was the preparation of a schedule of needed facilities by Aerial. The approval of the Bureau of Ordnance was then obtained.

Aerial then forwarded purchase orders on its own bill heads to the sellers. On such orders was typed “This material is purchased for the account of the U. S. Government”. The orders were signed by the purchasing officer of Aerial. Upon receipt of the shipments Aerial was billed.

Aerial paid the bills with its own checks. Aerial then applied to the Government for reimbursement. Reimbursement was then made by the Government. The appellant in his brief states: “It is interesting to note the construction which has been given the phrase ‘for the account of the Government’ by the Congress in the Renegotiation Act of 1951.

Parenthetically, it should be noted that this contract, and all others here involved, were expressly made subject to the Renegotiation Act of 1951. In defining the phrase ‘acquired * * * for the account of the Government’, the Committee Report of the Committee on Finance, Senate Report No. 92, which may be conveniently found in the U. S. Code, Congressional and Administrative Service, 82d Congress, 1st Sess., 1951, Volume 2, at pp. 1339 et seq. at p. 1345 thereof, makes the following comment: ‘As used in the bill, the phrase “acquired * * * for the account of the Government” means acquired pursuant to an arrangement by the Government and the purchaser of such equipment, whereby title to such equipment will, or may, at the option of the Government, vest in the Government.’ ” Upon delivery of the equipment to Aerial property record cards were filled out on a Government form and copies sent to the proper Government officer. Tags, showing that the equipment was the property of the Government, were placed on the equipment which was inspected by the proper Government official to make sure that the tags were attached. Such procedure was prescribed in the “Manual For Control of Government Property In Possession of Contractors”. ⁶³⁷ The appellee claims that the United States was the real purchaser of the property and services acquired under the Navy contract, and that these transactions were therefore exempt by virtue of Code, 1951, Article 81, Section 322 (f), Maryland Retail Sales Act, and by virtue of the Federal Constitution.

Section 322 (f), supra, exempts from the Retail Sales Tax: “Sales which are not within the taxing power of this State under the Constitution of the United States.” It was said by this Court in Westinghouse v. State Tax Commission, 206 Md. 392, 398, 399 , 111 A. 2d 661 : “Of course, the Government is immune to State and local taxation. M’Culloch v. Maryland, (1819), 4 Wheat. (U. S.) 316, 4 L. Ed. 579 ; United States v. County of Allegheny, (1944), 322 U. S. 174 , 88 L. Ed. 1209 , (the Mesta case). In early cases the Supreme Court of the United States gave a rather broad scope of immunity.

This immunity has recently been narrowed. Helvering v. Mountain Producers Corp., 303 U. S. 376 , 82 L. Ed. 907 ; Graves v. New York, 306 U. S. 466, 477 , 83 L. Ed. 927, 931 ; Oklahoma Tax Commission v. Texas Co., 336 U. S. 342 , 93 L. Ed. 721 . In the early cases it had been held that because of its economic incidence on the Government the tax was an unconstitutional interference by a state with the functions of the Federal Government. The Supreme Court of the United States has receded from that position.

James v. Dravo Contracting Co., 302 U. S. 134 , 82 L. Ed. 155 .” In State of Alabama v. King & Boozer, 314 U. S. 1 , 62 S. Ct. 43 , 86 L. Ed. 3 , decided November 10, 1941, King and Boozer sold lumber to “cost-plus-a-fixed-fee” contractors to be used by them in building an Army camp for the Government. The question for decision was whether the Alabama sales tax, with which the seller was chargeable, and which he was required to collect from the buyer, infringed the constitutional immunity of the United States from state taxation. There, the contracts provided that the contractors were to supply labor and materials