Hon. Robert S. Calvert Comptroller of Public Accounts Austin, Texas Opinion No. V-1492 Re: Applicability of motor fuel sales tax to purchases of graoline under Lease and Operating Agreement between Reconstruction Fin-

,ante Corporation and United Dear Sir: States Rubber Company.

We quote the following exc,erpt from your letter requesting our opfnion on the above captioned matter.

“We desire the opinion ofyour office as towhether or not motor fuel sold in Texas to the United States Rubber Company.under the conditions set outhereinbelow is subjectsto the motor fuel tax imposed by Article 7065b, Vernon’s Annotated Civil Statutes of Texas.

,’ “The United States Rubber Company has entered into an agreement with the Reconstruction Finance Corporation acting by and through its Office of Rubber Reserve, to.Iea.&, operdte.,andmainfairrh systhetk rgbber plant located near Port Ned&s ;Texas,, said plant being owned by R;F.C.‘s agent, Rubber Reserve, and leased and oparated by the United States Rubber Company underwhich appears to us to be a cost-plus-a-fixed-fee contract. “This department has construed the opinions rendered byyour office holding thatprivate persons or corporations engaged to perform c~ost-plus contracts for theFederal Government are not subject to immunity from the State tax imposed uponmotor fuel purchased and used by skid contractors, to be applicable here, and has notified the selling distributors that the taxes should be collected. These opinions are No. O-4389, dated May 28, 1942; No. O-4689, dated July 21, 1942: No; O-4731, dated September 4, 1942; NO. O-5214, dated April 28, 1943; andOpinion No. 0-5309A, dated March 13, 1944.”Hon. Robert S. C,alvert. page 2 (V-1492)

From your letter and thefile attached thereto we have gathered the following facts.

sunder the submitted contract, Reconstruction Finance Corporation (acting by and through its Office of Rubber Reserve), a corporation created by and existing under the laws of the United States (hereafter referred to as “Reserve”), entered into a lease and operating agreement with United States Rubber Cornpany (hereafter referred to as ‘Operator*).

Reserve owns a synthetic rubber plant near Port Neches, Texas. Reserve agreed to lease the plant to Operator, who agreed to **use** and properly maintain it for the manufacture of synthetic rubber. We will summarize only pertinent portions of the lengthy contract. Operator is required to obtain satisfactory insurance, payable to or naming Reserve as assured, protecting agafnst loss or damage to the,Plant andagainst liabflity to third parties by reasqn of Operator’s activities under tha contract. Operator, after approval by Reserve, **is** to pay all taxes,, a&iassr&ants,. and similar charges which may be imposed uponOparator or Reserve with respec,t to or uponthePlant or any part thereof.

Innumerous sections of the contract (see, for example, Sections 8. 10, 13, li’

. and 21 for Reserve” andas acting 1.Operator is refer~red to as “Agent for the account and at the expense and risk of Reserve” in reactivating and managing the Plant; but ue6

. it is expressly understood that all **persons** engaged in,the performance of this contract by Operator shall be employed 

### or retained by Operator andshall not be tbo employees of Reserve for any purpose whatsoever.“, Section 

### 9 (a).

,Reserve is to reimburse Operatar for costs incurred fn the reactivation andmana’gement of the Plant and, in addition, is to pay Operator tinoperating fee as provided in Section 14. TRe quote the following excerpts from Se&ion 10, which gives exampEes of such “costs.*

“(b) The cost of all facilities, machinery, tools, dies, jigs, office equipment, BuppLias,manufacturing aids, aLterationa. improvem$ntx, repLacemerits. and,, additions to the mar&acQxring bxildiags or equipment ‘~ facilities connected therewith, re@iked 

### for tba effib+ 

### ~, performance of this contract andfor which Operator fa ., not otherwise reimbursed; and the eoBtof all maintenance and repairs incLudingthe cost of replacing, repairing or recondi.tioning any of the machinery or 0quLpmentcomprising the Plant,, damaged or destroyed, but onIyto the.

Hon. Robert S. Calvert, page 3 (V-1492)

extent that the damage to or destruction of said machinery or equipment is not covered by insurance and only to the extent that the replacing, repairing or reconditioning is necessary to the efficient operation or maintenance of the Plant.

“It is hereby understood that title to any and all property ofwhatever character, the cost ofwhich is paid by Reserve pursuant to this subsection (b) of this Section 10, shall vest directly in Reserve, and that title to such property shall in no event vest in Operator,

“It is hereby further understood that in theacquisition, purchase and installation of any machinery, equipment,.maferials., or supplies in connection with

‘any alterations, improvements: or betterments ,of, **.?~** or additions to, thePlant, or in coniiection **WIW** a$ replacements made in the Plant, and in the negotiation, execution and supervision of all contracts with third parties in connection therewith, Operator shall act as Agent for andonbehalf of Rese.rve; provided, however, thatas a condition percedent to reimbursement under the terms of this subsection (b) any such expenditure for the acquisition, ,purchase or inaSallation of machinery, equipment, material~s or supplies in connection with any alterations, improvements or betterments of, or additions to, t&ePlant involving more thanOne Thousand Dblla,rs: ($1,000) shall be first approved inwriting by Reserve; and provided, further, that as a condition precedent to reimbursement under the terms of this said subsection (b), any such expenditure for the acquisition, pur,chase or installation of machinery, equipment, materials or supplies in connection with any replacement in the Plant involving more thanFive Thousand Dollars ($5,000) shall be first approved inwriting by Reserve,

“(c) The amount of all taxes, licenses, fees or other charges levied by any competent governmental:. authority, including those levied onthe Plant, or for the privilege of operating the Plant, or on the product manufactured therein, or on any materials or supplies, including the amount of any payments made by Operator under the Social Security Act (empLoyer‘s contribution), andany applicable Federal, state or local taxes, assessments or charges (excluding any taxes on net income, .any.excess profits taxes, capital stock tax or any other taxes based uponthe capital or in-.

Hon. Robert S. Calvert, page 4 (V-1492)

come of Operator) Which Operator may be required to pay to such governmental authority, andwhich are

‘incum-ed in connection with the performance of this contract, and including the amount of any additional taxes or,contributions required tobe paid by Ope~rator at any time during the performanc e of this cDntract or within five (5) years thereafter pursuant to the Unemployment Compensation Act of any state and arising out of the layoff or discharge of persons on account of the aforesaid reactivation or intermittent operation of the Plant or termination of **this** contract.

“(d) The amount of all premiums or other costs of any bonds or insurance, including public Liability, employers’~ liability, property damage, workmen’s compensation, fidelity, **fire,** theft, burglary or other insurance, which Reserve may specifically require Operator to carry under this contract. In the event Reserve and Operator shaI1cove‘lcworkmen’s compensation risks on a self-insurance basis. such arrangements shall be%ffectuated in a manner mutually satisfactory to the parties hereto. *(e) The amount, if any, paid by Operator as damages for any&jury to or death of a person or persons, or for any injury to property,’ the liability f~orwhich is incurred by Operator during the term of this contract arising through the occupancy of the Plant, or through the performance of this contract, but such amount, if any, shall be included her.ein only to the extent that operator is ac.tually ont-ofpocket therefdr without indemnity of any kind through insurance coverage or otherwise and only to the extent that Operator is le’gally liable for such damages as determined by due process of law OPpursuant to a settlement made with the express approval of Rc-~ serve, and provided that the liability of Reserve under this subsection (e) of this Section 10shall be limited as provided by Section 11.n Section 14, which relates to the operating fee. contains the following statement:

‘@Ris,understood that said operating fee is intended to compensate Operator for making avuilable exe,cutive management and theknowledge, skill andexperience of its organization in connection with the operations tobe conducted hereunder. andHon. Robert S1Calvert, page 5 (V-1492)

al,so to cover certain expenses incident to the operation and maintenance of the Plant which are not capable ofbeing identified and charged directly hereunder. II

. 0

.

. Section 12provides for supplying Operator with electric power, gas, water, and compressed ,air previously contracted for by Reserve. In the event of insufficiency, Operator will receive these utilities as allocated by Reserve., Detailed provisions .relate to sewage disposal, track maintenance, cafeteria facilities, pipeline~s,@ndother facilities.

Section 13reads, in part, as follows:

“It i&understood that in the performance of this contract, Operator is acting as Agent for Reserve, for the accountand at the expense and risk of the latter, and,that, accordingly, Operator shall in no event be libale for, but shall be held harmless by Reserve against any damage to or loss or destruction of property (whether owned by Reserve or others) or any injur’y to or,,death of persons, in any manner, arising out of.or in connection with thework hereunder,

~‘

.‘unless it be shown tohave been caus~dddirectly by bad faith or ,wilful misconduct **on** the part of any officer ‘ofOperator or anylrepresentative of,,Operator having supervision and direction of the,,Plant.as awhole, acting within the scope of his authority and employment, ,or unles~sit results from the failure of Operator toicarr,y Such ,insurance e;o.verage as Operator may be required to carry ~utider this contract.

. e
-” Section 15provides thatRes,erve will furnish Operator with wcrrkingcapital to meet,Operator’s costs, and sets out in detail the procedure tobe fo’llowed in so doing.

Reserve is to pay Operator monthly the amount of “costs” not otherwise reimbursed, and the amount of the operating fee for ,thepreceding calendar monthReserve also contracts to supply Operator with certain materials to manufacture’ synthetic rubber.

Section 17contains the following provisiOn:

‘“Operator, as agent for Reserve, shall use its best efforts to procure all [other ] materials so0 necessary for the manufacture of Synthetic RubberHon. Robert S. Calvert, page 6 (V-1492)

0

. a but,to~theextent Operator :is:tinable to obtain ‘~ such materiaIs. Reserve shall endeavor to ob,tain such materials and to make arrangements for delivery thereof to Operator at the Plant. Title to all materials purchased by Operator hereunder shall ve~stdirectly in Reserve.” Reserve is to indemnify Operator for any costs in any way connected with alIeged infringement of patent **or** patent applications or patent royalty claims “as the result of any action of Operator hereunder as agent for Reserve, or as the result of aplyaction taken after the date of commencem,ent of operations

‘inthe Plant by Operator, or by any third party cooperating with Operator in anticipation of the manufacture of Synthetic Rubber under this contractfi and Reserve shall take all necessary action (including defense of any suit or suits) and shall b,ea~r aI costs and expenses whatsoever (including attorneys’ fees) incurred in conne~ctionwith the defense, adjustment and payment of any such claitns, .demands, cau$es of actiiin or suits, butReserve shall assume no responsibility whatsoever under **this** Section 18for any action not pertinent to the manufacture of Synthetic Rubber under or in conne~etionwith this’agreement. ee*Se

Technical information acquired in connection with or resulting from the operation of the Plant is tobe made freely available to Reserve, and Reserve has no obligation to pay for costs~of patents, etc., owned or controlled by Operator.

The Plant is to be operated on a monthly basis with Reserve notifying Operator in advance how much rubber Reserve de~sires Operator to produce during the coming month.

Section 21reads as follows: “All contracts which Operator may execute in connection with the operation or maintenance of the Plant ,which run for a period of str (6) months or more. or which represent an obli Five Thousand Dollars fation in an aggregate sum of $5.000) or more, shall be submitted to Reserve for approval prior to execution; provided, however, that contracts for materials and supplies necessary for the manufacture of,Synthetic Rubber hereunder. unless running for a period of six (6) months or more or unless containing a provi~sionfor liquidated damages, need not be so submitted to Reserve for approval, but three conformed copies of all contracts for such materials and supplies representing an obligation

‘onthe part of Operator, as Agent for Reserve, in an aggregate sum of Ten Thousand Dollars ($10,000) orHon. Rober,t S. Calve‘rt, page 7 (V-1492)

more, shall be forwarded toReserve immediately after the execution thereof.. All arrangements or agreements, pursuant towhich Operator may itself. furnish supplies or services to the operationdf the Plant, shall be first submitted to Reserve for approval prior to execution- ” Section 3,2reads as foIlotis: “This contract shall be cotistrued according to : the law of the State of Texas.” The opinions of this office which you cite as controlling in the instant case may be summarized as follows:

Opinion O-4389. The Austin Company was constructing the Forb%‘oith,Airo’raft .ilss~emtilyPlant fpr the’Uni&d States. ~The’government purchased from the distributor t.he&otor fuel ’ used by the company. Under the terms of the contract, title to all materials delivered to the site of thework vested in the United States upondelivery. The company was held tobe an independent contractor. The sale from the distributor to the gove~rnmentwas not taxable but the tax was held to accure .whenthe company acquired andused the motor fuel unless the contractor occupied, some status of immunity or exemption. However, the foll&ihg statements appear on pages 9 and 10of the opinion:

.’

Yee.If said Austin Company were a mere agent

‘or instrumentality, under its contract, of the United States Government, for the construction of the plant in question, use of motor fuel by said company upon thehighways of this State would be, in contemplatfon

. of law, use of such motor fuel by the Federal Government; andno tax would probably accrue, unless such tax should be considered a toll or charge for use of property or facilities of the State andtherefore coilectible even from the Federal Gove-em, a question notnecessary to determine here. If, on-the other hand, The Austfn Company is an independent contractor rather thanan agent of the government, its use of the motor fuel uponthehighways would be taxable to the extent of 4$ for each andevery gallon so used, the same as such use of motor fuel by any other person, firm ,or corporation engaged in business in this State, whether construction or otherwise. DD** Opini& O-4689 held thatanArchiteot-Engtieer-Managercost-plus-a-fixed-fee cuptractor was not’an agency or instrumentality of the Federal Government andwas not exempt from paymentr

.

How Robert S. Calvert, page 8 (V-1492)

of the motor fuel tax. We quote the following excerpt from page 3 of the opinion:

“As stated by the authorities gener.ally (See 3%C.J. l318-1319) and contrary to the contentions urged by contractor’s counsel, there is nothing peculiarly inherent in a contract calling for engineeying, architectural,or managerial services, as distinguished from ‘conBtructfon’ contracts, which preclude’s the former type ofcontract from creating the relationship of independent contr~actorif the parties so desire to contract. A c,ontract

‘tofurnish the architectural, engineering OPmanagerial setvices for the construction of a given project for the Government isjust as ne~cessary andoccupies no different classification or status, as relates to the law governing tKerelationship of master and servant or independent c~ontractor, as the usual contra&, to actually construct **OP** build the plant or project. Under the instant contract the contractor undertakes andobligates himself OPitself to furnish the plans and specifications and to pe‘rfommall other services expressly contemplated ther,ein, in coxmectionwith a specifically described project, and to furnish the labor. materials, tools and supplies therefor, with right of reimbursement by the Government for the cost of thework0 Dqsm Opinion O-4731 dealt with the cement tax levted by Article 7047, V.C.S., andheld that since the tax is levied uponthe manufacturer andimparter of cement it makes no difference to its impusition that such manmbacturers andimpo%&.rs .thereafter ,make sales directly ta the United States Government OP one of its instrume’ntalitfes. Alabama v. King andBoo+er, 314 U.S. 1 (1941); Cw~y v. Untted States, 314U.S. 14 (1941)a

Op&aiiop

062L4 held .#I+$since tie Defense Supplies Cor- #mtior#f a &bddi&y~f $2e+@.ru@;tion !$ina~e.:+ZbX%tion, was a F&de$al agency 0~ i&&un&faIity a&dbpzesdy dxesnpt +om ~sales, use. storage, andpurchabe taxes by Section 610;15 U.S.CA., T,exas distributors cbald sell aviat%ongasoline taxfreesto the Corporation. However, the opinEonexpressly stated:

*Nothing herein should be construed as holdfng

. . . thatmotor fuel purchased from the,.

. . Corporation and subsequently sold or used by a
‘distributba’ is tax exempt.” Opinion O-5309A peconaidered and afbbmd 04389. Tke opinion held (I) that‘notax may be imposed on sales to OP uses by the Federal government or Federal agencies and instra-.

Hon. Robert S. Calvert, page 9 (V-1492)

mentalities which Congre,ss has exempt from such tax, (2) that use of motor fuels by a cost-plus contractor with a tax exempt agency is subject to tax, and (3) that the motor fuel tax accrues where motor fuels are both sold to and used by such cost-plus contractors.

.Ths photostat.which you have furnished ofapur~chase order fsr,g&oline directed to the Texas Qompany shows that it is a purchase order’from Reconstrttctibn Finance Corporation acting by andthrough United States RubberCompany, agent. Shipment is to be made to Reconstruction Finance Corporation, United States Rubber Company, Agent, Port Neches, Texas. Section 8 of the Reconstruction Finance Corporation Act, as amended, 12 U.S.C.A., Sec. 607, expressly provides that the Corporation is exempt ffrom all taxation ,). , imposed!.

. .by any State

. . . except that real property of the Corporation shall be subject to

. . . State

. . ; taxation

. . .‘according to its value as other real property is taxed. The exemptions provided

. . .with respect to taxation (which shall, for all purposes, be deemed to fnclude sales, use, storage, and purchase taxes) shall be construed to be applicable not only to the Corporation but also with respect to any other public corporation

. . .wholly financ~edand‘wholly managed by the Corporation.”

Inview of the opinions previously summarized, the holdings ofwhich are hereby r~eaffirmed, sales to the Reconstruction Finance Corporation, acting by and through its agent, United States Rubber Company,are tax exempt. Consistently with other conclusions reached in these opinions, however, we think that the use by U. S. Rubber of the motor fuel on the highways of this State is subject to tax and that U. S. R.ubberis liable for the tax.

We have reached this latter co&lusion for the following reasons. The contract expressly states thatit is tobe construed in accordance with the laws of the ‘Stateof Texas. The fact that the contrac~t,designated Operator as “Agent” of Reserve is not conpolling., Th’er&&onship between the parties to the contract must be defermin@d b$ all t&eprovisions~of the cbntract itself. 2 Tex. **Jur.,** Agency, SlZ,.p. 394; Falls Rubber Co. tr.LaFon, 256 S.W. 577 (Tex. Comm. App. 1923).

Carruth v. Valley Ready-Mix Concrete Co., 2,21S.W. 2d 584, 592 [Tex. Civ. App. 1949, error ref. n.r.e.), recognizes as controlling in Texas the following fundamental principles of ~theLaw ofAgency:

,:’” ‘fin tnde,$etient contract~orandan,agentare “not always easy tk~ distinguish, and there is no oniform criterion by which they map be differentiated. Generally, however, the relations are distinguished.

Hon. Robert S. Calvert, page 10(V-1492)

by the extent of the control which the employer exercises over the employee in the manner inwhich he performs his work.

* ‘Where a contra& contains provisions which, if they stood alone, would indicate that the true relation was that of independent contractor andothers which indicate that the relationship was that of principal andagent, the spirit andessence of the contract, considered as awhole, must be looked to.

* ‘One may be an independent contra,ctor and at the same time for certain purposes be an agent of

‘the employer. Anyindependent contractor becomes an agent by his employer ag.reeing to be responsible for obligations incurred by him in the completion ofhis undertaking, but payment ofworkmen by an owner or empIoyer does not necessarily transform an independent contractor into an *gent.’ 2 C.J.S., Agency, SZ, pages 1027, 1029.” The first of the last quoted principles has long been recognized as the law inTexas. In 2 Tex. Jur., Agency, E 10, p. 390, the rule is stated thus:

“An independent c,ontractor is unlike an agent in thathe is responsible tohis employer for the resu1.tonly of thework tobe,done; the employer has no control over the mann@ of doing thework nor any right to select the contractor”6 employees

**or** to supervise their work.” InBertrand v. Mutual Motor Company, 38 S.W. 2d, ,4i7 (Tex. Civ. App. m terror re
. I) the court said: *An independent contractor may act for and inbehalf of another, but, since he is not under the other’s control; it is held thatthe relation of agency does not exist.” Inholding that one of the parties to the contract under mnaideratinn ocrunind thestatus of an indewndent contractor. --..-.--- - ----- ---- =___ ---------- ~~~--~ ~---.-~~~--~ the court inHighgrade Lignite Company v. Courson. 219S-W. 230 (Tex. Civ. App. I920, error dism.). stated ti fac.ts necessitated that conclusion. i?The following The party in question had theHon. Robert S. Calvert, page 11(V-1492)

exclusive management and control of the leased m&e. He had authority over the employee~s, power tohire and dkxharge them, and to direct their work. No one told the contractur when towork or how towork. He merely received shipping orderu from the other party to the contra&, who took all the coal thatwas mined, paid all operating expenses of.every kind or character incident to or connected ~ith,~he,mining~‘ol)eraSiops, and paid tb,eoperator df the ,mine hfs cgmpenaati~ ,I?!f+&dJmonthly &urns. ;” 1’

, Ithas also been said thatit is the right to interfere in the mode of doing thework contracted for rather thanthe fact of actual interference with c~onfrolthatmakes the difference between a servant or agent and an independent contractor. 56 C.J.S., Master and Servant, g 3(3), pp. 49,54; West Lumber Company v. Powell, 221 S.W. 339, 341 (Tex. Civ. App. 1920. err~ordism.); Corrigan v. Huebler, 167 S.W. 159, 160 (Ten. CLv.App. 1914).

In the instant case Operator hires and dischar’ges the employees who operate the plant. Operator ,directs their work. Section 9 of the costtract expressly states that persons engaged,, in the performante ,ofthe contract shall not be employees of R% serve for any pur,pose’whatsoever. Reserve has retained no right to.interfere in the manner inwhich the employees ‘perf,orm’their work. Sections 8 and 9 require Operator to make all preparations necessary to reactivate the plant and to operate and maintain it; but the choice of such perparations and the method of said operations are nowhere prescribed in the contract but are left to Operator’s discretion. Indeed, Reserve’s motive for entering into the contract, evidenced throughout the entire instrument and expressly stated in Section 14, was to obtain thebenefit of Operator’s executive ability and “the knowledge, skill andexperience ofits organization in connection with the operations to be conducted hweunder.” Reserve‘s interest is clearly limited to results--to obtaining specified amounts of rubber (Sets. 17, 19)andthe,latest technical.developments (Sec. 18).

Thus, under the authorities previously discnss,ed. Opera- .: tor‘s relationship to Reserve in the production of synthetic rubber, the operation of pilot plants for experimental purposes, and in its research and developmental work is clearly that of independent contractor. This status is impliedly recognized fn Section 10 (c) which lists as an example of the “cDsts* for which Operator will be reimbursed by Re~serve %axes, licenses, fees OTother charges levied

. . . for the privilege of operating the Plant, or on theproduct manufactured therein, or on any materials or supplies,

. . . and any applicable Federal, state or local taxes, assessments or rharges’(excluding any taxes on net income, capiLa1Stock tax or any other taxes based uponthe capital OCR income ofOperator) which Operator may be required to pay to such governmental, .

Hon. Robert S. Calvert, page 12 (V-1492)
authority, andwhich are incurred in connection with the performanc~eof this contract,

. DOn Since this section enumerates many taxes from which Reconstruction Finance Corporation is exempt under Section 8 of the Reconstruction Finance Corporation Act,

. quoted, in part, on page 9 of this Opinion, it negates the proposiLionthat.Operator .is Reserve’s agent in the performance of’the contract in its entirety. For if such weie~operator’s true status, his entire operations would be acc’orded all of the tax immunity which has been confeired upon.Reconstructi~on .Finance Corporation.

. In so far as the provisions of the contract under consideration deal with the actual production of synthetic rubber andwith Operator’s research activities, they are analogous from both the practical andlegal standpoint to the provisions of the contract considered inAtt’y Gen. Op. O-5309A. The existenc~eof an agency relationship under the submitted contract for certain purposes and the contractual designation of Operator as agent for Reser,ve are not sufficient tojustify a departur~efrom the holding ofthat opinion. You are therefore advised thatwhen Operator acquires the motor fuel and uses it uponthe highways of this State the motor fuel tax accrues and Operator is liable therefvr. SUMMARY Under the terms of the contract between Reconstruction Finance Corporation ,andUnited States Rubber Company for the operation of a synthetic rubber plant located near Port Neches, Texas, United States Rubber Company i.s.made the agent of Reconstruction Finance Corporation for certain. purposes. Sales of motor fuel to Reconstruction Finance Corporation; acting by and through its agent, United States Rubber Company, are not subject to the motor fuel tax levied by Article 7065b-1. et seq., V,C.S. In the operation of the synthetic rubber plant and in its research and developmental work under the contract, United States Rubber Company is an independent contractor. Therefore, when United States Rubber Company acquires motor fuel ,anduses it upon the,high- .ways of this State in the d,ischarge of its contractual obligations, the motor fuel tax accrues and United States Rubber Company is liable therefor. .APPROVED: Yours very tiuly, ~W.V. Geppert PRICE DANIEL Taxation Division Attorney General

‘~Mary K. Wall Reviewing Assistant Marietta McGreg Charles D. Mathews First Assistant Assistant v~