Morpho Detection, Inc. v. Transportation Security Administration ( 2013 )

United States Court of Appeals
FOR THE DISTRICT OF COLUMBIA CIRCUIT
Argued April 4, 2013 Decided May 28, 2013
No. 12-1339
MORPHO DETECTION, INC.,
PETITIONER
v.
TRANSPORTATION SECURITY ADMINISTRATION,
RESPONDENT
On Petition for Review of an Order of
the Transportation Security Administration
Matthew S. Hellman argued the cause for the petitioner.
Jonathan R. Prouty, Senior Trial Counsel, United States
Department of Justice, argued the cause for the respondent.
Stuart F. Delery, Principal Deputy Assistant Attorney General,
Jeanne E. Davidson, Director, and Kirk T. Manhardt, Assistant
Director, were on brief.
Before: HENDERSON, BROWN and KAVANAUGH, Circuit
Judges.
Opinion for the Court filed by Circuit Judge HENDERSON.
KAREN LECRAFT HENDERSON, Circuit Judge: Morpho
Detection, Inc. (Morpho), a California-based corporation that
designs and builds explosive and other threat detection
technology, contracted with the Federal Aviation Administration
2
(FAA), on behalf of its then-newly established Transportation
Safety Administration (TSA), to supply its Explosive Detection
System (EDS) to United States airports.1 After Morpho installed
EDSs at two airports in the state of Washington, the Washington
Department of Revenue (Revenue Department) assessed
Morpho $5,278,217 in state use and business taxes based on
their installation. Morpho sought an increase of the contract
price to compensate for the state assessments as “after-imposed
tax[es]” pursuant to Clause 3.4.2-7(c) of the Acquisition
Management System (AMS).2 TSA rejected Morpho’s claim on
the ground Washington’s taxes are not compensable after-
imposed taxes under AMS Clause 3.4.2-7(c). We agree with
TSA that the taxes are not after-imposed taxes within the
meaning of the AMS and, accordingly, we deny Morpho’s
petition for review.
I.
On November 23, 2001, in response to a congressional
mandate to equip U.S. airports with “sufficient explosive
detection systems to screen all checked baggage no later than
1
The contracting entity was InVision Technologies, Inc., of which
Morpho is the successor (after multiple corporate realignments and
name changes). For ease of identification, we refer to the contracting
party throughout as Morpho.
2
“The FAA’s [AMS] was developed in response to Congress’
directive ‘notwithstanding the provisions of Federal acquisition law,’
to provide for more timely and cost-effective acquisitions of
equipment and materials. The Office of Dispute Resolution for
Acquisition is a review body that was created pursuant to this
mandate, and it handles protests and contract disputes that arise under
the [AMS].” Multimax, Inc. v. FAA, 231 F.3d 882, 884 n.1 (D.C. Cir.
2000) (quoting 49 U.S.C. § 40110(d) (2006)).
3
December 31, 2002,”3 the FAA issued a “solicitation” for a
fixed-price contract to provide EDSs to U.S. airports. The
solicitation did not specify particular airports for EDS
installation but “covered all 50 states, as well as Puerto Rico and
Guam.” Decl. of John (“Jack”) Handrahan at 2, ¶ 8 (filed Dec.
16, 2011) (dated Oct. 14, 2011) (JA 569). In February 2002,
Morpho and TSA entered into an “undefinitized letter contract
under the provisions of the [FAA AMS],” which “constitute[d]
an authorization for [Morpho] to commence work on . . .
stand-alone explosives detection systems.” Letter from TSA
Contracting Officer to Morpho at 1 (dated Feb. 15, 2002) (JA
187). The letter contract stated that the FAA had “a mandate to
acquire and install airport security equipment throughout the
country” and that the order would include 450 units. Id. at 2, 3
(JA 188, 189). The parties “definitiz[ed] the letter contract” on
September 6, 2003, as “fully integrated” Contract No. DTFA01-
02-C-00023 (Contract 00023). Amendment of Solicitation/
Modification of Contract No. 2 (Sept. 6, 2003) (JA 201).
Meanwhile, on August 5, 2003, the parties had entered a second
contract—Contract No. DTSA20-03-C-01900 (Contract 01900)
—for a different model EDS.
Each of the EDS contracts provided for on-site installation
by Morpho: “The Contractor shall install and integrate EDS
when directed by the C[ontracting ]O[fficer] by individual
3
The Congress directed: “The Under Secretary of Transportation
for Security shall take all necessary action to ensure that . . . explosive
detection systems are deployed as soon as possible to ensure that all
United States airports [regularly serving a DOT certificated carrier]
have sufficient explosive detection systems to screen all checked
baggage no later than December 31, 2002, and that as soon as such
systems are in place at an airport, all checked baggage at the airport is
screened by those systems . . . .”). Aviation and Transportation
Security Act, Pub. L. No. 107-71 § 110(b), 115 Stat. 597, 615 (Nov.
19, 2001) (codified at 49 U.S.C. § 44901(d)(1)(A)).
4
delivery orders.” Contract No. 00023 § 3.92 (JA 231); Contract
No. 00019 § 3.92 (JA 383); see also Contract 00023
Amendment of Solicitation/Modification of Contract No.4, at 2
(Apr. 27, 2004) (amending contract to require specifically that
Morpho provide “rigging and installation services” as fixed-
price line item) (JA 300). Although the parties seem to have
treated “task orders” (orders requesting specifically described
services) and “delivery orders” (orders requesting delivery of
fixed-price line items) interchangeably, the contracts included
a slightly different procedure for each. In the case of the former,
the TSA Contracting Officer submitted a “Draft” task order to
Morpho, which then prepared a cost estimate and forwarded it
to the Contracting Officer, while the latter was prepared by TSA
based on the contractual line item price. Contract No. 00023 §§
H.2 (JA 265-66), H.3 (JA 266-67); Contract No. 01900 §§ H.2
(JA 417-18), H.3 (JA 418-19). In both cases, the TSA
Contracting Officer reviewed the order for “acceptability,
accuracy and completeness” and transmitted it to Morpho for
review and signature. If Morpho found the contract as written
“unacceptable,” it was directed to “immediately notify the
Contracting Officer and detail the reasons for its position.” Id.
§§ H.2(c), H.3(c). Pursuant to these provisions, for example, in
July 2003, after receiving a draft task order to install EDS units
at the Seattle Airport, Morpho sent TSA a proposal providing
“an estimate for the placement of two each [EDS units] at
Seattle Airport” and requesting “a written notice to proceed
under a task order issued under the current contract.” Letter
from Morpho to TSA Contracting Officer at 1, 2 (dated July 16,
2003) (JA 511) (July 2003 Proposal); see also Letter from
Contracting Officer to Morpho (dated July 6, 2004) (JA 513)
(accepting Morpho’s proposal “to provide rigging for the new
installation of two [EDS units] at Spokane International Airport
[], with no impact to cost, schedule, or performance under
Delivery Order 3”). The July 2003 Proposal specifically noted:
“Washington State gross sales tax of 8.8% has not been included
5
in the above pricing if it is applicable.” July 2003 Proposal at 2
(JA 512). No other tax was mentioned in the proposal—nor are
state taxes referenced elsewhere in documents relating to
individual task/delivery orders so far as the appellate record and
briefing reveal.
On April 22, 2008, the Revenue Department assessed
Morpho combined use and Business and Occupation (B&O)
taxes of $5,423,645 based on a partial tax audit for the period
January 1, 2002 to March 31, 2006, during which period
Morpho had installed EDSs under Contracts 00023 and 01900
at two Washington State airports—Seattle-Tacoma and
Spokane—under fifteen task/delivery orders. After Morpho
appealed the taxes administratively, the Revenue Department
issued a “Final Executive Level Determination” requiring
Morpho to pay use and B&O taxes of $5,278,217—an amount,
Morpho claims, that “substantially exceeded the gross revenue
that Morpho received for its services at the Washington
airports.” Pet’r Br. 22 (emphasis in original). The Revenue
Department determined Morpho was subject to the taxes
because of its status as a statutory “consumer”—a prerequisite
to liability for both the use tax and the B&O tax.4
4
The use tax
(1) . . . is hereby levied and there shall be collected from
every person in th[e] state . . . for the privilege of using
within th[e] state as a consumer: (a) Any article of tangible
personal property purchased at retail . . . or produced or
manufactured by the person so using the same, or otherwise
furnished to a person engaged in any business taxable under
RCW 82.04.280 (2) or (7) . . . .
Wash. Rev. Code § 82.12.020 (2001 through 2006). The B&O tax is
imposed on, inter alios, “every person . . . engaging in activities which
bring a person within the definition of consumer contained in RCW
82.04.190(6).” Wash. Rev. Code § 82.04.280 (2001 through 2006).
6
On December 24, 2008, Morpho filed a “Request for
Interpretation of Contract Terms and Equitable Adjustment”—
in procurement argot, a “contract dispute”—with the Office of
Dispute Resolution for Acquisition (ODRA), which adjudicates
disputes under the FAA’s AMS. See Findings and
Recommendations, Contract Dispute of Morpho Detection, Inc.,
Docket No. 08-TSA-039 (June 8, 2012) (ODRA Decision) (JA
30).5 In its filing, Morpho requested an equitable adjustment
increasing the contract price of both contracts to compensate for
the Washington taxes, which it claimed were “after-imposed
tax[es]” justifying a price increase under AMS Clause
3.4.2-7(c). On June 8, 2012, ODRA issued its decision,
recommending that Morpho’s contract dispute be denied. In an
order issued July 9, 2012, the TSA Administrator “adopt[ed] the
ODRA’s findings and den[ied Morpho’s] contract dispute in its
entirety.” Morpho Detection, Inc., Docket No. 08-TSA-039 at
1 (July 9, 2012). Morpho timely petitioned for review of TSA’s
decision.
5
The ODRA decision was prepared by a dispute resolution officer
and approved by his director. Established in 2001 as an agency within
the Department of Transportation, TSA was instructed to use AMS for
“acquisitions of equipment, supplies, and materials by the
Transportation Security Administration.” Aviation and Transportation
Security Act, § 101(a), 115 Stat. at 601 (codified at 49 U.S.C. § 114(o)
(2001)). Although the Congress transferred the TSA to the
Department of Homeland Security in 2002, TSA continued to use
FAA’s AMS until June 23, 2008. See Homeland Security Act, Pub.
L. No. 107-296, § 424, 116 Stat. 2135, 2185 (2002); Consolidated
Appropriations Act, 2008, Pub. L. No. 110-161, sec. 6, div. E, tit. V,
§ 568, 121 Stat. 1844, 2092 (2007) (repealing 49 U.S.C. § 114(o)); see
also Coal. of Airline Pilots Ass’ns v. FAA, 370 F.3d 1184, 1186 (D.C.
Cir. 2004). The dispute before us relates to contracts entered into
before June 23, 2008.
7
II.
We have jurisdiction over Morpho’s petition for review
under 49 U.S.C. § 46110.6 AMS Clause 3.4.2-7, titled “Federal,
State, and Local Taxes—Fixed-Price, Noncompetitive
Contract,” provides generally: “Unless otherwise provided in
this contract, the contract price includes all applicable Federal,
State, and local taxes and duties.” ODRA Decision at 3 (quoting
AMS cl. 3.4.2-7(b)). It sets out an exception, however, for an
“after-imposed tax,” which may be recovered from the FAA
notwithstanding the absence from the contract of an express
provision therefor: “The contract price shall be increased by the
amount of any after-imposed tax . . . .” Id. (quoting AMS cl.
3.4.2-7(c) (emphasis added)). Morpho claims the Washington
taxes are “after-imposed” taxes requiring a commensurate
increase in the contract price of the two contracts under the
exception. TSA responds that the Washington taxes are not
“after-imposed” within the meaning of AMS Clause 3.4.2-7(c)
because the authorizing statutes went unchanged during the
contract terms and, in any event, the contracts do not incorporate
6
This section provides in relevant part:
[A] person disclosing a substantial interest in an order
issued by the Secretary of Transportation . . . may apply for
review of the order by filing a petition for review in the
United States Court of Appeals for the District of Columbia
Circuit . . . . The petition must be filed not later than 60
days after the order is issued.
49 U.S.C. § 46110 (a); see Roberts v. Napolitano, 463 Fed. App’x 4,
4 (D.C. Cir. 2012) (“Pursuant to 49 U.S.C. § 46110, exclusive
jurisdiction to review ‘an order’ issued by TSA is vested in the courts
of appeals.” (citing 49 U.S.C. § 46110(a), (c))).
8
AMS Clause 3.4.2-7 or its exception.7 We agree with TSA that
if the exception is incorporated in the contracts—an issue we do
not decide—Morpho has no recourse thereunder because the
Washington taxes are not “after-imposed” taxes.8
An “after-imposed tax” is defined as
any new or increased Federal, State, or local tax or
duty, or tax that was excluded on the contract date but
whose exclusion was later revoked or amount of
exemption reduced during the contract period, other
than an excepted tax, on the transactions or property
covered by this contract that the Contractor is required
to pay or bear as the result of legislative, judicial, or
administrative action taking effect after the contract
date.
ODRA Decision at 3 (quoting AMS cl. 3.4.2-7(a)(3) (emphasis
added)). Morpho acknowledged before ODRA that the
7
ODRA similarly declined to decide the incorporation issue but
noted that neither the November 23, 2001 solicitation nor any of the
contract documents expressly incorporates AMS Clause 3.4.2-7. See
ODRA Decision 22, 5 (¶¶ 3, 6), 10 (¶ 22). By contrast, both contracts
expressly incorporate numerous other AMS contract provisions. See
Contract 0023 at I-1 to -2 (JA 277-78); Contract 01900 at I-1 to -2
(JA 430-31).
8
The parties disagree on the applicable standard of review. TSA
asserts that its decision is “subject to the familiar determination of
whether [its] decision is ‘arbitrary or capricious or contrary to law.’ ”
Resp’t Br. 13 (quoting Multimax, Inc. v. FAA, 231 F.3d 882, 886
(D.C. Cir. 2000) (quoting 5 U.S.C. § 706(2)(A); citing J.A. Jones
Mgmt. Servs. v. FAA, 225 F.3d 761, 764 (D.C. Cir. 2000)). Morpho
contends, to the contrary, that our review is de novo. Pet’r Br. 17-20.
We need not resolve the dispute because, even under the more
exacting de novo review, we conclude the subject state taxes are not
“after-imposed” within the meaning of AMS Clause 3.4.2-7(c).
9
Washington use and B&O taxes in question “ ‘have existed for
some time’ ”—indeed “since 1975.” ODRA Decision at 24
(quoting Morpho Final Submission Brief 12 (filed Dec. 16,
2011) (Morpho ODRA Brief)) (quotation marks omitted); see
also Pet’r Br. 25 n.8 (“To be sure, Washington’s tax was enacted
by the Washington legislature long before Morpho ever
submitted its tax proposal.”); see generally Washington v.
United States, 460 U.S. 536, 538-40 & n.3 (1983) (describing
circumstances of 1975 enactment expanding statutory definition
of “consumer” to make certain taxes applicable to federal
contractors).9 Morpho nonetheless argued that Washington had
“never assessed these taxes against contractors in a similar
posture” and that Washington’s “novel interpretation and
application of law constitutes an imposition of a new State tax
that [Morpho] is required to pay or bear as a result of legislative,
judicial, or administrative action taking effect after the contract
date.” ODRA Decision at 24 (quoting Morpho ODRA Brief 12)
(quotation marks omitted) (JA 53); see also Pet’r Br. 33-38. For
taxing purposes, Washington defines “consumer” to include
(6) Any person engaged in the business of constructing,
repairing, decorating, or improving new or existing
buildings or other structures under, upon, or above
real property of or for the United States, any
instrumentality thereof, or a county or city housing
authority created pursuant to chapter 35.82 RCW,
9
The history of Washington’s statutory definition of “consumer”
is tortuous. See Washington v. United States, 460 U.S. at 538-40. The
United States Supreme Court made clear, however, that the definition
was amended in 1975 to remediate the problem caused by the fact that
Washington’s “tax system could not . . . be applied to construction for
the Federal Government because the Supremacy Clause prohibits
States from taxing the United States directly” with the “result . . . that
for federal projects the legal incidence of the tax falls on the contractor
rather than the landowner.” Id.
10
including the installing or attaching of any article of
tangible personal property therein or thereto, whether
or not such personal property becomes a part of the
realty by virtue of installation . . . .
Wash. Rev. Code § 82.04.190 (2001 through 2006) (emphases
added). Morpho maintains that, “at a minimum, the text,
history, and purpose of the Washington tax statute demonstrate
that it is ambiguous and that it does not plainly support the
imposition of the tax here.” Pet’r Br. 34. The statutory
definition does indeed seem ambiguous in that the meaning of
“real property of or for the United States” is unclear. The statute
may mean, as Morpho contends, that the “real property” must
be, conjunctively, both “of” and “for” the United States—which
the two airport properties are not because each is “of” (i.e.,
belongs to) local authorities, not the United States.
Alternatively, the phrase may be read to mean the person must
be “engaged in the business of constructing, repairing,
decorating, or improving new or existing buildings or other
structures,” disjunctively, either “under, upon, or above real
property of . . . the United States” or “for the United States,” see
Revenue Department Determination at 6 n.6 (JA 554)—the
meaning that the Revenue Department used to tax Morpho as a
consumer and that TSA adopts. See Unification Church v. INS,
762 F.2d 1077, 1084 (D.C. Cir. 1985) (“We start with the
proposition that the word ‘or’ is often used as a careless
substitute for the word ‘and’; that is, it is often used in phrases
where ‘and’ would express the thought with greater clarity. That
trouble with the word has been with us for a long time.”
(quoting De Sylva v. Ballentine, 351 U.S. 570, 573 (1956))); see
also United States v. Fisk, 70 U.S. (3 Wall.) 445, 447 (1865)
(“[C]ourts are often compelled to construe ‘or’ as meaning
‘and,’ and again ‘and’ as meaning ‘or.’ ”). The ambiguity,
however, avails Morpho nought.
11
To be “after-imposed,” a tax must be (1) either a “new or
increased” tax or one that was “excluded on the contract date but
whose exclusion was later revoked or amount of exemption
reduced during the contract period” and (2) one “that the
Contractor is required to pay or bear as the result of legislative,
judicial, or administrative action taking effect after the contract
date.” ODRA Decision at 3 (quoting AMS cl. 3.4.2-7(a)(3)).
The Washington use and B&O taxes fail the first prong of the
test because they were neither “new” nor “increased” nor subject
to an “exclusion . . . revo[cation]” or “exemption reduc[tion]”:
they were in existence and fixed at the same rates throughout the
terms of Contract 00023 and Contract 01900—and the key
statutory definition of “consumer” likewise remained the same
throughout. See Wash. Rev. Code §§ 82.12.020, 82.04.280
(2001 through 2006), supra note 4 (taxing provisions); Wash.
Rev. Code § 82.04.190 (2001 through 2006) (“consumer”
definition). The taxes fail the second prong as well as there was
no “legislative, judicial, or administrative action taking effect
after the contract date” “as the result of” which Morpho was
“required to pay or bear” the taxes assessed.
Morpho contends the Revenue Department proceeding that
resulted in the final assessment constitutes a qualifying
“administrative action.” As an initial matter, we decline to read
“administrative action” so broadly as to include every
administrative assessment as a matter of course; so read, AMS
Clause 3.4.2-7(c)’s after-imposed-tax exception would swallow
the tax-inclusive presumption of its rule—that “[u]nless
otherwise provided in th[e] contract, the contract price includes
all applicable Federal, State, and local taxes and duties”—
because virtually every tax involves an administrative
assessment. We will not adopt a reading that would so render
the FAA’s general rule a nullity. Instead we accept the natural
reading of the language, namely, that it is directed to a
governmental action—which may include an administrative
assessment—that effects a substantive change in the statutory
12
taxing provisions or the interpretation thereof. See, e.g.,
Morrison-Knudsen Co. v. United States, 427 F.2d 1181 (Ct. Cl.
1970) (statutory increase in social security taxes constituted
“after-imposed” tax under parallel Federal Acquisition
Regulation). The assessment here effected no such change.
While Morpho asserts the use and B&O taxes “had never
been assessed against a contractor doing work on non-federal
property,” Pet’r Br. 37, it does not claim the Revenue
Department’s assessment here reflects a reversal of the state’s
previous interpretation or application of the statutes at issue. Cf.
Cannon Structures, Inc., IBCA 3968-98, 99-1 BCA ¶ 30,236,
1999 WL 85531 (Interior Bd. of Contract Appeals Feb. 10,
1999) (concluding Arizona state tax assessed on pipeline
construction on Indian reservation was “newly imposed and
collected” based on “Arizona’s decision not to tax construction
projects on Indian reservations at the time Appellant entered into
its contract with the Government” and the subsequent “decision
by Arizona to resume collecting [state tax] in connection with
projects on Indian reservations”) (dictum). To the contrary,
Morpho’s counsel asserted to ODRA that “ ‘[n]o Washington
court ha[d] addressed’ the questions he raised regarding the
definition of ‘consumer,’ making them ‘issues of first
impressions.’ ” ODRA Decision at 27 n.18 (quoting declaration
of lawyer who represented Morpho in administrative
proceeding); see also id. at 26 (“[Morpho] does not cite to prior,
contrary interpretations of the statute, whether in case law,
official tax guides, or even the press.”). Moreover, ODRA
undertook its own investigation which “independently ha[d] not
found any contrary legal interpretation, despite the long history
of applying the use tax to federal contractors within the State of
Washington,” id. at 26—a determination Morpho has not
gainsaid. Nor is this a case where the “administrative action”
adopted an interpretation inconsistent with the express statutory
language, which, as we have explained and Morpho has
acknowledged, is ambiguous. See supra p. 10; Pet’r Br. 12
13
(“ODRA further rejected Morpho’s contention that the
Washington tax statute was ambiguous . . . .”). In sum, Morpho
was not “required to pay or bear [the use and B&O taxes] as the
result of . . . administrative action taking effect after the contract
date.” AMS cl. 3.4.2-7(a)(3) (emphasis added).
Finally, we find unpersuasive Morpho’s claim of unfair
surprise—its complaint that “at the time Morpho submitted the
proposal, Morpho did not know that the Detection Systems
would be installed in Washington” and that “the tax had never
been assessed against a contractor doing work on non-federal
property” there. Pet’r Br. 22, 37 (emphasis in original).
Morpho knew from the start the specification contract “covered
all 50 states,” which could include Washington (and knew for
certain it did so include Washington when Morpho submitted
cost estimates for the individual Washington airport
task/delivery orders). Moreover, given the ambiguous language
of Wash. Rev. Code § 82.04.190(6), Morpho should have known
it might reasonably be determined to be a “consumer” whose
business activities in Washington were subject to the use and
B&O taxes.10 Accordingly, Morpho could have expressly
excluded the use and B&O taxes from the contract price in the
individual Washington task/delivery orders—either in its cost
estimate proposal responding to a draft task order, as it had
excluded the Washington sales tax in its July 2003 Proposal,
supra pp. 4-5—or in response to the Contracting Officer’s
transmission of the final task/delivery order. But it did not. In
any event, Morpho’s uncertainty does not render the use and
B&O taxes “after-imposed” within the meaning of AMS Clause
10
Whether the Revenue Department’s statutory construction is
correct as a matter of public policy or of legislative intent is a question
left to the Washington state courts where Morpho is currently
challenging the tax assessment “on a variety of state-law grounds.”
Pet’r Br. 6 n.4. We conclude only that it is a permissible interpretation
of the ambiguous language.
14
3.4.2-7(c). As we have explained, the Washington taxes
assessed against Morpho do not satisfy the after-imposed tax
exception’s precisely limned terms.
For the foregoing reasons, we deny Morpho’s petition for
review.
So ordered.