United States v. Glenn L. Martin Co.

Background

A Maryland aircraft maker contracted with the War Department on June 28, 1934 to sell aircraft and aircraft material. The contract said the stated prices included any federal taxes already in force and promised to increase or decrease the price if Congress later imposed taxes “applicable directly upon production, manufacture, or sale” and paid by the contractor. In 1936–1937 the manufacturer paid $794.03 in federal Social Security taxes and $6,943.29 in Maryland unemployment taxes, both enacted after the contract. The manufacturer asked the Government to raise the contract price to cover those taxes; the District Court denied relief, the Circuit Court of Appeals reversed, and the Supreme Court agreed to decide the issue.

Reasoning

The central question was whether the contract required the United States to reimburse the manufacturer for the federal Social Security payroll tax. The Court explained that the contract dealt with federal taxes “on” the material, articles, or supplies — for example, sales or processing taxes tied to the value, quantity, or sale of goods. By contrast, the Social Security Act imposed an excise measured by having individuals in employment — a tax on the employer–employee relationship or payrolls, not on the goods themselves. Because payroll taxes are distinct from taxes “on” articles or supplies, they were not the kind of tax the contract promised to offset. The Court therefore ruled the manufacturer was not entitled to extra payment for the Social Security tax and did not reach the Maryland tax argument.

Real world impact

The decision leaves contractors responsible for employer payroll taxes unless a contract clearly covers payroll taxes. The Court reversed the appeals court and affirmed the District Court’s judgment, narrowing claims under similar contract language.