Broken Arrow City Council
Meeting of: 11-17-2015
To: Mayor and Council Members
From: Office of the City Attorney
Title:
title
Consideration, discussion, possible ratification of a Settlement Agreement and Mutual Release between the Broken Arrow Municipal Authority, Crossland Heavy Contractors, Inc., Crossland Construction Company, Inc., and Oil Capital Electric, LLC regarding the Verdigris Water Treatment Plant
End
Background:
Earlier this year, representatives of Oil Capital Electric (OCE), one of the subcontractors of Crossland Heavy Contractors on the Verdigris Water Treatment Plant construction project, advised City of Broken Arrow representatives that it was being audited by the Oklahoma Tax Commission (OTC). The OTC was disallowing the subcontractor’s sales tax exemption on the basis that the City had not issued a “Tax Exempt Letter.” This Tax Exempt Letter is one which the City of Broken Arrow routinely issues to its contractors to facilitate the purchase of tangible personal property on City contracts without having to pay sales tax. According to various sources, OCE was being audited not just for its work on the Verdigris Water Treatment Plant, but also on projects for other municipal public trusts and several colleges and universities. In response to this audit, a packet of information, including the Tax Exempt Letter, was provided to the OTC.
Unlike most projects managed by the Department of Engineering and Construction, the Broken Arrow Municipal Authority (BAMA), rather than the City of Broken Arrow, was the contracting body. The City of Broken Arrow and all of its Title 60 public trusts are exempt, themselves, from the payment of sales taxes. However, only the City and those public trusts specifically identified in the statute may pass on its exempt status to their contractors. BAMA is not specifically identified in this statute and, therefore, may not pass on its exempt status.
When the Department of Engineering and Construction was contemplating the construction of the Water Treatment Plant, BAMA hired HDR Engineering, Inc. (HDR) to create a set of bid specifications. These voluminous bid specifications, which took three large three-ring binders to contain, were created and disseminated during the bidding process. The documents were obviously much larger than those generally used by the City in its bidding and for purposes of contract administration. At the end of 2011, Staff began finalizing the bid specifications. A number of addenda were prepared and issued to potential bidders in advance of the bids being submitted. Unfortunately, one of the Addenda contained information that materials and supplies incorporated into the work were sales tax exempt. Had the City been the entity bidding and administering the project, this would have been the case.
Because the bid specifications indicated the project would be sales tax exempt, the project was likely underbid. Total construction costs to date are in excess of $59,413,852.00. BAMA received the funding to build the Water Treatment Plant through a loan from the Oklahoma Water Resources Board (OWRB). The loan proceeds for the project did not include payment for sales tax on the purchase of materials.
Several months ago, Crossland Heavy Contractors, Inc. (Crossland Heavy), the general contractor on the Verdigris Water Treatment Plant, along with OCE, approached the City with claims for reimbursement of any sales tax liability. Their argument was that it was BAMA’s responsibility to reimburse them for any OTC exposure because either the cost of sales tax should have been incorporated into the project bid or BAMA should have made arrangements for direct payment of the materials. Importantly, due to the size of the project and the amount of funds expended on materials, Staff would likely have opted to include these costs into the project’s bid. The claims were investigated by Staff and outside counsel was retained to assist the Legal Department with assessment and evaluation. Of concern to Crossland Heavy, OTC, and BAMA, was the potential for large penalties and interest on the sales tax. Implementation of the 2015 Voluntary Compliance Initiative Tax Amnesty Program (Amnesty Program) established by the Tax Commission pursuant to 68 O.S. Section 216.3, alleviated these concerns and led the parties to a proposed resolution of these issues.
The attached Settlement Agreement and Mutual Release (Agreement) provides for BAMA’s payment of $144,800.00 to OCE, which represents 80% of the sales taxes allegedly due and owing by OCE on this project. The remaining $36,200.00 will be paid by Crossland Heavy. These funds, pursuant to the Agreement, will be paid by OCE to the Tax Commission as a full settlement pursuant to the Amnesty Program. The attached Agreement also provides for Crossland Heavy’s payment of $1,792,000.00 to the OTC. This figure includes sales tax allegedly due and owing and as calculated by Crossland Heavy, as well as Crossland Construction Company, Inc., one of Crossland Heavy’s major subcontractors on this project. Under the terms of the Agreement, BAMA will pay $1,742,000.00 to Crossland Heavy over a three-year period of time with 7% interest. Advancement of payment to the OTC in order to meet the terms of the Amnesty Program, which expired on Friday, November 13, 2015, was considered to be a major inducement even with the calculated interest because of the significant impact such a lump sum payment would have on BAMA’s limited emergency reserves. Importantly, there is no penalty for early payment.
Although it is the position of Staff that the tax liability rests with Crossland Heavy and its subcontractors, the bid documents, specifically including the addenda, could result in significant exposure for BAMA. Further, the Amnesty Program, which provides for the waiver of interest and penalties, coupled with the willingness of Crossland Heavy to resolve this issue on behalf of it and two of its major subcontractors, serve as an inducement to resolution. Importantly, attorneys for Crossland Heavy, Crossland, and OCE have expressed its intent to sue BAMA for not just the tax on the materials, but also any interest and penalties, if BAMA were not willing to resolve this issue within the parameters of the Amnesty Program. The chance of success in such a circumstance is not calculated to be high by the Legal Department and would result in additional, unknown, and possibly incredibly high expenses, including attorney’s fees and other litigation costs.
The attached Agreement, most importantly of all, provides for the mutual release of all parties with regard to the claims filed by Crossland Heavy, Crossland and OCE. Ratification by the City Council is required due to the potential encumbrance of debt by BAMA.
Cost: $1,886,800.00, exclusive of interest
Prepared By: Beth Anne Wilkening, City Attorney
Reviewed By: Finance Department
Approved By: Michael L. Spurgeon, City Manager
Attachments: Settlement Agreement and Mutual Release
Recommendation:
Ratify the Settlement Agreement and Mutual Release.