United States v. Cowden Manufacturing Co.

Background

In 1933 a private company agreed to supply a stated number of mechanic’s suits to the United States under a contract that included a "federal taxes" clause about tax adjustments. To make the suits the company bought cotton cloth, thread, and labels from subcontractors who, as processors, would pay any processing taxes. At the time no processing tax was in effect, but the parties agreed that if such taxes were later imposed the contractor would reimburse subcontractors for those taxes as a separate billed item. After the subcontractors paid processing taxes, the contractor reimbursed them, then asked the Government to repay those amounts. The Comptroller General denied the claim; a trial court sided with the contractor, and the Supreme Court agreed to review the matter.

Reasoning

The Court framed the question as whether the contract’s federal-taxes clause required the United States to reimburse the contractor for taxes paid to processors and then passed on to the contractor. The Court read the clause to cover only taxes "made applicable directly upon the production, manufacture, or sale of the supplies covered by this contract" — meaning the finished suits delivered to the Government — and taxes actually paid by the contractor because a statute required them. Because the processing tax was on materials and paid by subcontractors who shifted the cost, the Court held the United States was not obligated to reimburse those amounts.

Real world impact

The decision means government contractors generally cannot recover subcontractors’ pass-through processing taxes under this common federal-taxes clause unless the contractor itself was statutorily required to pay the tax directly. Many government contracts use similar language, so similar claims should fail.