RESPONDENT: California and California State Board of Equalization
LOCATION: Williams Brothers Engineering Company
DOCKET NO.: 91-2003
DECIDED BY: Rehnquist Court (1991-1993)
LOWER COURT: United States Court of Appeals for the Ninth Circuit
CITATION: 507 US 746 (1993)
ARGUED: Feb 23, 1993
DECIDED: Apr 26, 1993
Kent L. Jones - on behalf of the Petitioner
Robert D. Milam - on behalf of the Respondents
Facts of the case
From 1975 to 1985, the United States Government contracted with Williams Brothers Engineering Company (WBEC) to conduct the federal oil drilling in Kern County, California. By 1981, WBEC had accrued a state tax deficit of $14 million. After the Board of Equalization rejected WBEC's claim that those taxes were invalid, the company paid its deficit, and, according to WBEC's contract, was subsequently reimbursed by the United States Government. In January of 1988, WBEC continued to challenge the taxes by filing an action in state court. This action concluded with an agreement between the state of California and WBEC that the company receive a $3 million refund. The Federal Government filed a suit in the Eastern District of California in May of 1988, arguing that the remaining state taxes totaling $11 million were also illegitimate. The District Court ruled in favor of the state of California, and the Court of Appeals for the Ninth Circuit affirmed.
May the United States Government receive compensation for the state of California's allegedly unfounded taxation of a private federal contractor?
Media for United States v. CaliforniaAudio Transcription for Oral Argument - February 23, 1993 in United States v. California
Audio Transcription for Opinion Announcement - April 26, 1993 in United States v. California
Sandra Day O'Connor:
The second is United States versus California, which comes here on writ of certiorari to the United States Court of Appeals for the Ninth Circuit.
The State of California assessed approximately $14 million in sales and use taxes against a federal contractor.
Under the federal contract that government paid the contractor an annual fixed fee and also paid its costs including moneys to cover the state taxes.
At the government's direction, the contractor protested the assessment of the state taxes first in administrative proceedings and later in State Court proceedings.
In January 1988, the contractor and state agreed to a $3 million refund and to dismissal of the actions without prejudice.
In May 1988, the Federal Government filed this suit in Federal District Court seeking refund of $11 million in a declaratory judgment that California had classified and taxed the contractor erroneously under state law.
The District Court rejected the government's argument that it was entitled to recover using the federal common law action for money had and received and gave summary judgment for the state.
The Ninth Circuit Court of Appeals affirmed.
In the case of United States versus New Mexico, we held the federal contractors were not immune from state taxation simply because the government shouldered the entire economic burden of the levy.
The contract here is in all relevant respects like the contracts that we discussed in United States versus New Mexico, it is clear that California taxed the contractor not the Federal Government.
The Federal Government's voluntary agreement to pay the taxes does not make those payments a direct disbursement of federal funds to the state.
The Federal Government may not convert an obligation to indemnify its contractor into a right to proceed under the federal common law action for money had and received.
Because that government indemnified the contractor, it did have the right to be subrogated to the contractor's claims against the state.
Under traditional principles of subrogation, however, the subrogate takes no more rights than a subrogor had.
In this case, once the contractor dismissed its state law causes of action, it no longer had the right to sue because the statute of limitations had run in California.
The Federal Government argues it is not subject to the state statutes of limitation.
But in the case of Guaranty Trust Company against the United States, this Court held that even if that were true the principle did not apply when the government acquired by a right of assignment after the statute of limitations had run against the assignor.
Although the government acquired a right to be subrogated to the contractor's claims when it paid the amount of the taxes, it was not subrogated for those claims until it filed a proceeding in Federal Court.
By then, the state statute of limitations had run.
Thus, the government was not subrogated to "a right free of a pre-existing infirmity".
The opinion is unanimous.