Laws, Regulations & Annotations

Business Taxes Law Guide – Revision 2018

Sales And Use Tax Court Decisions

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United States v. California . . . (1993)

The United States Was Not Entitled to Recovery of Funds It Had Paid to a Construction Contractor as Reimbursement for the Contractor's Tax Liability Arising on a United States Construction Contract

The Departments of the Navy and Energy contracted with WBEC to manage oil drilling operations on federal land in California. In notices issued to WBEC in July 1978 and December 1982, the Board determined that WBEC owed approximately $14 million in sales and use taxes under Revenue and Taxation Code section 6384, which imposes tax on sales to contractors of tangible personal property for use in certain construction contracts with the United States.

WBEC paid the taxes using funds the Federal Government provided. After exhausting its administrative remedies with the Board, WBEC filed a timely suit for refund. In January 1988, the Board and WBEC stipulated to a $3 million refund for erroneous assessments and to a dismissal of the case.

In May 1988 the United States filed suit in the Eastern District of California seeking a declaratory judgment that California had classified and taxed WBEC erroneously under California law, and that the taxed property was exempt. In the course of the suit the United States also contended that it was entitled to recovery based on the federal common-law cause of action for money had and received. The District Court rejected all of its arguments.

The Supreme Court reaffirmed its prior holding that the Government is not immune from taxes merely because they have an "effect" on the Government or "even because the Federal Government shoulders the entire economic burden of the levy." In this case, California did not tax the Federal Government; it taxed WBEC.

The court also held that the Government was in no better position than as a subrogee of WBEC. Since WBEC's rights had lapsed and its claims were barred, under traditional subrogation principles, the claims of the United States were also barred. Finally, the court rejected the Government's argument that state statutes of limitation do not bind it. United States v. California (1993) 507 U.S. 746; 123 L.Ed.2d 528.