Kern-Limerick, Inc. v. Scurlock

1954-02-08

Headline: Federal purchasing power affirmed: Court blocks Arkansas sales tax on equipment bought by contractors acting as purchasing agents for the United States, making the Government the purchaser and exempt from state gross receipts tax.

Holding: The Court held that, under the Armed Services Procurement Act, contractors could act as purchasing agents so the United States was the disclosed purchaser, and Arkansas’s sales tax could not be applied to those purchases.

Real World Impact:

Treats contractor purchases made for the United States as tax-exempt Government purchases.
Stops states from collecting sales tax on these federally ordered purchases.
Sellers must accept federal purchase orders as evidence the Government is the buyer.

Topics: federal purchasing, state sales tax, government contracts, contractor purchasing agents

Summary

Background

A group of private companies working together to build a naval ammunition depot in Arkansas bought two diesel tractors from a local dealer for $17,146. Arkansas tax officials demanded a 2% gross receipts sales tax from the dealer because the state law treats sales to any person as taxable but exempts sales to the United States. The dealer paid the tax under protest, sued for a refund, and the United States intervened because government contracts reimbursed such taxes.

Reasoning

The Court asked whether the tractors were bought for the United States or for the contractor. It interpreted the Armed Services Procurement Act and the contract language to allow the Navy to use private contractors as purchasing agents and to make the Government the disclosed purchaser with title and obligation to pay. Because the contract and purchase orders showed the Government was the buyer and would be liable, the Court held Arkansas could not tax the sale as if the contractor were the purchaser. The Court therefore reversed the state court’s ruling.

Real world impact

The decision treats purchases made through authorized contractor purchasing agents as Government purchases exempt from state sales taxes. Sellers who deal with federal purchasing orders should treat the United States as the buyer when contract language so provides. States cannot collect gross receipts tax from sellers in these circumstances, though Congress could change that rule by statute.

Dissents or concurrances

Two Justices dissented, arguing that Congress had not clearly authorized delegation of buying power to private contractors and that Arkansas’s tax law properly made contractors the purchasers for state tax purposes, which would allow states to tax such sales.