Washington Court of Appeals, Division II held Alstom Power, Inc. (Alstom) and GE Steam Power, Inc. (GE), Appellants and Cross-Respondents, liable for Washington use tax related to its contract with the federal government through the US Army Corps of Engineers (Army Corps) to rehabilitate aging turbines in the Chief Joseph Dam located in Washington.
“... the Supremacy Clause prohibits states from taxing the United States directly.””
THE contract
The contract required that Alstom complete “complex, multi-year turbine rehabilitation work” and that initial design work be completed subject to the Army Corps approval. Once the designs were approved, the Army Corps was to authorize commencement of the physical work on the rehabilitation and installation of the turbine components.
Following the manufacturing and rehabilitation of the turbine components which occurred outside of Washington, Alstom reassembled and installed the turbine units at the Washington location.
THE AUdit
In 2009, the Washington Department of Revenue (Department) audited Alstom finding that Alstom owed use tax on the design and engineering costs related to the creation and rehabilitation of the turbine components “because those costs were part of the value of the turbine components”. Additionally, the audit determined that the preauthorization design and engineering costs should have been included in the taxable value.
THE APPEALS
Alstom appealed to the Department’s Administrative Review and Hearings Division (ARHD) arguing that the Department erred in its use tax assessment. However, the ARHD found in favor of the Department and that Alstom owed use tax on the full value of the components for the rehabilitation, not just the cost of the raw materials used for the turbine components.
Alstom was again audited, appealed a second time to the ARHD which subsequently reached the same determination as the prior appeal. The two ARHD audit decisions were consolidated and an appeal filed with the Board of Tax Appeals.
The Board’s decision provided some relief to Alstom in determining that although Alstom was liable for use tax on the design and engineering costs associated with the creation and rehabilitation of turbine components, costs incurred prior to the Army Corps’ authorization were not subject to the state’s use tax.
Nonetheless, neither party to the appeal was satisfied with the decision and appealed to the state Court of Appeals. The appellate court held the design and engineering costs were properly included in the taxable value for Washington’s use tax but found that the pre-authorization design, engineering, and testing costs should also be included in the taxable value.
THE TAKEAWAY
Being a party to a government contract does not automatically guarantee that no sales or use tax is due on the individual transactions required of the contractor. A clear review and understanding of any contract and related transactional costs, as well as an analysis of the involved states’ statutes and regulations, is strongly recommended.