Petition — ARA Services, Inc. v. South Carolina Tax Commission

en Court, U,

| FILED

8-714 OCT 28 1978

In THE

Supreme Court of the United States

OcToBER TERM, 1978

ARA SeERvICES, INC..

' NACL Rg 1K

OSes :

Petiticner,

SourH CAROLINA TAX COMMISSION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF THE

STATE OF SOUTH CAROLINA

W. Francis MARION

Post Office Box 2048

409 East North Street

Greenville, S. C. 29602

HAYNsWorTH, PERRY, BRYANT,

Marion & JOHNSTONE

Greenville, S. C.

Of Counsel

R., CLERK

——

INDEX

Page

Cases, Statutes, Materials Cited _. ee Rta glee fe iii

Opinion Below 1

Jusiediotion ............. Es SO Ee OR RN 2

Questions Presented ..2

Constitutional Provision Involved .................. ae

Statute Involved _. ge a 2

i 3

Reasons For Granting Writ 5

a 5

ee es sek es de nscaescees: 8

yak avecssesascce 9

EE 1A

A — Opinion of the Court Below ._............ 2-A

B — Order of the Court Below

Denying Petition for Rehearing 6-A

C — Pertinent Text of Statute Involved

9-A

CASES CITED

Boddie v. Connecticut, 401 U.S. 377 (1971)

Federal Land Bank of St. Paul v. Bismarck,

314 US. 94 (1941) 6... cece cece eee.

First National Bank v. State Tax Comm..,

392 U.S. 339 (1968)

Kern - Limerick v. Surlock, 374 U.S. 403 (1954)

McCullough v. Maryland, 4 Wheat. 316, 4 L.Ed. 579

Townes Associates, Ltd. v. City of Greenville,

266 S.C. 81, 221 S.E. 2d 773 (1976)

United States v. Boyd, 318 U.S. 39 (1964) ..

FEDERAL STATUTES AND REGULATIONS

U.S. Const. XIV Amend.

42 U.S.C. §1751

STATE STATUTES

S.C. Code § 12-35-1340 (1976) pes ne

In THE

Supreme Court of the United States

OcroBeR TERM, 1978

No.

ARA Services, INc.,

Petitioner,

v.

SoutH CAROLINA TAx CoMMISSION,

Respondent.

PETITION FOR A WRIT OF CERTIORARI TO

THE SUPREME COURT OF THE

STATE OF SOUTH CAROLINA

Petitioner prays that a writ of certiorari issue to review

the judgement herein of the South Carolina Supreme Court

in the above entitled case handed down on June 5, 1978, peti-

tion for rehearing denied on July 31, 1978.

OPINION BELOW

The order of the court below was handed down June 5,

1978, petition for rehearing denied on July 31, 1978 and

remittitur entered as of thet date. These Orders are appended

hereto, infra at p. 2-A. The case is officially reported in...

S.C. ...., 246 S.E. 2d 171 (1978).

2

JURISDICTION

The final order of the South Carolina Supreme Court

was entered on July 31, 1978, and is appended hereto, infra

at p. 6-A. The jurisdiction of this court is invoked under 28

U.S.C. 1257 (3).

QUESTIONS PRESENTED

I. DID THE IMPOSITION OF THE SALES AND USE

TAXES BY THE SOUTH CAROLINA TAXING AU-

THORITY ON THE FEDERALLY SUPPORTED SUM-

MER LUNCH PROGRAM FOR CHILDREN VIOLATE

THE CONSTITUTIONAL PRINCIPLE OF THE FED-

ERAL GOVERNMENT'S IMMUNITY FROM TAX-

ATION BY THE STATES?

Ul. DID THE SOUTH CAROLINA SUPREME COURT'S

FAILURE TO KEMAND TO THE TRIER OF THE

FACT THE QUESTION OF WHETHER THE TAX-

PAYER WAS NEGLIGENT IN FAILING TO REMIT

THE TAX VIOLATE THE TAXPAYER'S RIGHT TO

DUE PROCESS OF LAW UNDER THE FOURTEENTH

AMENDMENT TO THE CONSTITUTION?

CONSTITUTIONAL PROVISION INVOLVED

The Constitutional Provision involved is the Fourteenth

Amendment to the United States Constitution, the pertinent

portion of which is as follows:

. nor shall any state deprive any person of life, liberty

or property, without due process of law.

STATUTE AND REGULATIONS INVOLVED

The statute involved is Section 13 of the National School

Lunch Act (42 U.S.C.A. 1751, et seq., as amended, and the

Department of —— Regulations promulgated pursuant

thereto, 7 C.F.R. 225 et seq.). Because the statute and regula-

tion provisions are lengthy, their pertinent text is set forth

as Appendix C, p. 9-A.

3

STATEMENT OF THE CASE

ARA, during the years in question, sold meals in South

Carolina in connection with federally supported summer lunch

programs for children. These summer lunch programs were

one of a number of programs established by the Department

of Agriculture pursuant to Section 13 of the National School

Lunch Act, 42 U.S.C.A. §1751, et. seq., as amended, for the

purpose of assisting states and local body politics through

grants-in-aid and other means, to initiate, maintain, or expand

food service programs for children.

The Department of Agriculture, through its Child Nu-

tritional Regional Office in Atlanta, Georgia, upon application,

entered into contracts with various “service institutions” or

“sponsors” in South Carolina. 7 C.F.R. 225.7b(e).

In establishing their programs, the local sponsors were

given the option of either preparing the meals themselves

or hiring a “food management service company” or “caterer”

to prepare these meals.

ARA was hired as the caterer in each of the instances

in question. The sponsors would pay ARA directly for the

meals and file a claim for reimbursement with the federal

government.

From the time assessment, it was ARA’s position that

there were actually two sales of the meals — one from ARA

to the sponsor, and one from the sponsor to the consuming

children and the federal government. Alternatively, ARA

argued that if there was but one sale of the meal, it was from

ARA to the federally support program and imposition of such

a tax would result in the unconstitutional levy of tax by the

taxing authority on a federally supported program. This

argument was raised in the protest by ARA to the South

Carolina Tax Commission and formed the basis of the Second

Cause of Action of the Complaint. The Trial Court did not

reach this latter issue because it found that as a wholesaler,

4

ARA was not liable for the tax, but the Appellant in the

South Carolina Supreme Court raised this position as Addi-

tional Sustaining Ground II. The only mention of the South

Carolina Supreme Court in its opinion to this assertion was

that:

....ARA has submitted to the court these additional

sustaining grounds. The case was tried by the lower

court on stipulations which are included in the record

before us. A careful examination of the stipulations

convinces us that the lower court would not have

been justified in granting relief to ARA on the basis

of any of the sustaining grounds enumerated.

The Appellant again raised the constitutional argument

in light of the finding of the Supreme Court as Ground II in

the petition for Rehearing. This petition was denied without

comment.

In addition to the tax, excess interest and penalties were

assessed pursuant to section 12-35-1340 of the Code of Laws

of South Carolina 1970.

In its Fourth Cause of Action in its refund action, ARA

asserted:

That if an additional tax is found to be due, that the

plaintiff's (ARA) failure to pay such tax was not

result of any negligence on its part, and pursuant to

Section 65-1458 of the 1962 South Carolina Code of

Laws, as amended, the $5480.50 in penalties paid

should be refunded and the interest reduced accord-

ingly.

Because it found that no tax was due and owing, the

trial court did not, of course, specifically reach the issue of

whether the ARA was negligent in failing to remit the tax.

After the South Carolina Supreme Court reversed, the tax-

payer filed a petition for rehearing, the fourth ground of

which provided in pertinent part, as follows:

5

That to charge ARA with the excess interest rate and

penalties, a finding of fact is required that the tax-

payer filed its:returns negligently and in bad faith,

and the record is totally void of any evidence to sup-

port such a finding and the trial court did not so

hold;

That section 12-35-1340 is penal in nature and its

nature and its provisions should not be enforced

without a full hearing and review by the Court; that

section 12-35-1440 expressly provides for a review by

the Court as to the merits of any tax or penalty (em-

phasis ours) assessed which, at least, we submit,

should require this Court to remand the matter to the

lower Court for express findings relative to such pen-

alties and excess interest charges.

This petition was denied without comment.

REASONS FOR GRANTING THE WRIT

I

The sales and use tax levied on sales to the summer

lunch program imposes an unconstitutional burden on those

federally supported programs and is therefore, not in accord

with the constitutional principles of immunity from taxation

and the decisions of this Court.

ARA contended, and the trial court found the ARA was

a wholesaler, and, therefore, not liable for sales or use taxes

under the laws of South Carolina. This was based on a finding

by the trial court that there were two sales of the meals —

one from ARA to the sponsor, the second from the sponsor to

the federal government and the consuming children.

The South Carolina Supreme Court, however, ignored

the form of the transaction and held that because the summer

lunch programs were nothing more than “give away” pro-

grams, there was only one sale of the meal. Under this char-

acterization, ARA was found to be a retailer who supplied

the meals to ultimate consumer. The record clearly estab-

lished that the purchase price for the meals came from the

Department of Agriculture. Moreover, the record also con-

tained evidence that the purchasing sponsors received food

donated by the United States Department of Agriculture,

were obligated to make available their records for inspection

by the federal government, and warranted to follow all man-

date of the federal authorities regarding the handling of these

programs. In addition, the contracts between ARA and the

Sponsor did not become effective until the U. S. Department

of Agriculture approved the sponsor and in turn, the sponsor

forwarded this certification to ARA.

Based on these facts, it is clear that the South Carolina

Supreme Court determined that for purposes of this program

the sponsors and the federal government were one — i..,

that the sponsors were the purchasing agents of the federal

government. This relationship was implicitly recognized by

the South Carolina Supreme Court when it found that “the

last transaction for a consideration involved ARA as vendor

and the sponsor as vendees.”

Although ARA disagrees with this characterization of

the transaction, it nevertheless is the ruling of that Court. The

basis of this petition for certiorari is not this finding, however,

but the Court’s failure to apply the constitutional doctrine of

intergovernmental immunity from taxation to its opinion of

the nature of the transaction. ARA consistently argued from

the time of the first hearing before the Sales and Use Tax

Division of South Carolina Tax Commission that if there:

was bnt one transfer of the meals, the imposition of a sales

or use tax on such sales would result in unconstitutional levy

of state tax on a federally supported program.

It has been well established since the early days of our

history that the federal government is constitutionally immune

7

from taxation by the states in proper cases. McCullough v.

Maryland, 4 Wheat. 316, 4 L.Ed. 579. This doctrine has de-

veloped to the point if the legal incidence of the tax is on

the federal government, the state is barred from attempting

to collect it. See Kern-Limerick, Inc. v. Surlock, 374 U. S.

403 (1954).

Although the burden of the South Carolina Sales tax is

technically on the vendor, the Court has recognized that if

the tax is one which by its terms must be passed on to the

purchaser, the legal incidence of tax is on the purchaser.

See First National Bank v. State Tax Comm., 392 U. S. 339

(1968); Federal Land Bank of St. Paul v. Bismarck, 314

U. S. 94 (1941). In the present situation, the contract with

the sponsor specifically provided that “in the event that the

sale of any food items contracted for herein are held subject

to any local or state sales tax, the amount of such sales tax

shall be added to the invoice and billed to the purchaser.”

This clearly shifted the legal responsibility for the tax to the

sponsors, because the South Carolina Supreme Court found

that the sponsors and the U. S. Department of Agriculture

were one in the same for the purposes of applying the S. C.

Sales and Use Tax law and because they are legally responsible

for tax under their contract, the imposition of a sales and

use tax on these sales by South Carolina resulted in an un-

constitutional imposition of tax on the federally supported

program. Although tnere is language in United States v. Boyd,

318 U. S. 39 (1964) to the effect that a contract for payment

of the product by the federal government is not sufficient

to immunize the sale from tax, in that case and in those cited

therein, the federal government was liable for the tax under

the general reimbursement provisions of the contract. In the

present case, however, there was a separate and distinct as-

sumption of the tax liability conditioned on a tax being

assessed. The sponsor (and federal government under the

South Carolina Supreme Court ruling) expressly assumed

8

legal responsibility for the tax. Therefore, because both the

economic burden and legal responsibility fell on the federally

supported program, these meal sales were covered by the

intergovernmental immunity doctrine from taxation.

Il

By failing to remand to the trier of fact the question

of whether ARA was negligent in failing to pay the tax, the

South Carolina Supreme Court denied ARA of its right to

be heard on this issue and deprived ARA of due process of

law as guaranteed by the Fourteenth Amendment of the Con-

stitution

It is elementary that the Fourteenth Amendment of the

Constitution requires the states to give a defendant in a civil

suit “an opportunity for a hearing before he is deprived of any

significant property interest.” Boddie v. Connecticut, 401

U. S. 377, 379 (1971). As this Court has stated, “a State must

afford to all individuals a meaningful opportunity to be heard

if it is to fulfill the promise of the Due Process Clause.”

Under South Carolina law, a taxpayer is liable for excess

interest at a rate of one percent per month and a five percent

penalty if “the understatement is due to negligence on the

part of the taxpayer.” (S. C. Code § 12-35-1340).

If however, return “was made in good faith and the under-

statement of the tax was not due to any fault of the taxpayer,”

no penalty is added and interest is imposed at the rate of

one half of one percent. (S. C. Code § 12-35-1340). The Tax

Commission assessed excess interest and penalties against

the taxpayer in this suit. Because the trial court found that

the entiré tax was erroneously assessed and collected, it did

not, of course, reach the issue of whether or not ARA acted

in good faith or was negligent in failing to remit the tax.

Parenthetically, it could well be assumed that since the Trial

Judge held that the Tax Commission was in error in the as-

sessment, that the Court would have found the taxpayer was

not negligent and had obviously exercised good faith. The

9

South Carolina Supreme Court, however, in reversing the

decision of the trial court, imposed the excess interest and

penalties in addition to ihe tax.

Under Article V, section 5 of the Constitution of South

Carolina, the state Supreme Court in a jaw case is only given

jurisdiction to correct errors of law. Findings of fact wil! not

be disturbed unless the review of the record discloses that

there is no evidence which reasonably supports the judge's

findings. Townes Associates, Ltd. v. City of Greenville, 266

S. C. 81, 221 S.E. 2d 773 (1976).

Because the trier of fact did not address the fact issue

of whether ARA was negligent in failing to remit a tax if

one was owed and because jurisdiction of the South Carolina

Supreme Court is limited to review errors of laws, the Court

should have remanded the question of the ARA’s negligence

to the trial court. ARA was not given an opportunity to be

heard on this issue and, therefore, ARA’s property, to the

extent of the excess interest and penalties, was taken without

due process of law.

CONCLUSION

For the reasons cited above, the petition for certiorari

should be granted.

Respectfully submitted

W. Francis Marion

P. O. Box 2048

Greenville, S$. C. 29602

Counsel for Petitioner

Of Counsel,

Haynsworth, Perry, Bryant, Marion & Johnstone

P. O. Box 2048

Greenville, South Carolina 29602

1-A

APPENDICES

2-A

APPENDIX A

THE STATE OF SOUTH CAROLINA

In The Supreme Court

ARA Services, Inc., __. Respondent,

V.

South Carolina Tax Commission, Appellant.

Appeal From Greenville County

James H. Price, Jr., Judge

Opinion No. 20704

Filed June 5, 1978

REVERSED

Attorney General Daniel R. McLeod, Deputy Attorney

General Joe L. Allen, Jr., and Assistant Attorneys General

G. Lewis Argoe, Jr., and John C. von Lehe, all of Co-

lumbia, for appellant.

W. Francis Marion, of Haynsworth, Perry, Bryant, Marion

& Johnstone, of Greenville, for respondent.

LITTLEJOHN, A. J.: The appellant, South Carolina Tax

Commission, assesses ARA Services, Inc. (ARA) $167,396.45 for

sales taxes alleged to be due under § 65- Code of Laws of

South Carolina (1962)'. This amount, representing taxes,

—

1Now codified as § 12-35-510 (1976).

3-A

interest, penalty and license fees, was paid under protest by

ARA, which then brought this action pursuant to §§ 65-1466,

65-1467, and 65-2661 and 65-2662? of the 1962 Codes as

Amended (Supp. 1975). These Code sections permit a tax-

payer to pay contested items under protest and then sue for

recovery of the amount paid.

The South Carolina Sales Tax Law requires sellers at

retail to collect and pay to the State a 4% sales tax. It does

not require that sales tax be paid by wholesalers. The ques-

tion for determination by the court is whether the sales in-

volved were made at retail or at wholesale. The lower court

held that ARA’s transactions were wholesale sales and ordered

the Tax Commission to refund the money paid under protest.

The Commission has appealed, asserting that the lower court

should have denominated ARA’s transactions retail sales

rather than wholesale sales.

The facts upon which our determination must hinge

are not in dispute. During the years in question (February

i, 1972, to August 31, 1975), ARA sold meals ir -his State

to fourteen eleemosynary-type organizations, called sponsors,

which conducted federally supported summer lunch programs

for indigent children. The programs were among those es-

tablished by the Department of Agriculture pursuant to § 13

of the National School Lunch Act, 42 U.S.C.A., §1751, et seq.,

as amended, for the purpose of assisting states and local body

politics through grants-in-aid and other means, to initiate,

maintain, or expand food service programs for children.

ARA entered into a written contract with each of the local

sponsors which were referred to in the contracts as “pur-

chasers.” The preamble of the contract stipulated that “.. . pur-

chaser is desirous of purchasing meals for consumption by

children under the Special Summer Service Program for Chil-

dren of the United States Department of Agriculture. . . .”

2Now codified as § 12-35-1430 and 12-35-1440.

4-A

(Emphasis added.) No federal agency was a party to the con-

tract. The Department of Agriculture entered into a separate

reimbursement contract with the local sponsors. The reim-

bursement agreement was for an amount more than that paid

by the sponsor to ARA.

The contracts between ARA and the sponsors provided

as follows: “Billing shall be made monthly and purchaser will

pay such billings within ten (10) days of the invoice date.”

(Emphasis added. )

South Caroina Code § 12-35-510 (1976) impuses a sales

tax:

“.. . upon every person engaged or continuing within

this State in the business of selling at retail any tan-

gible personal property whatsoever, including mer-

chandise and commodities of every kind and char-

acter... .”

We think that the lower court erred in holding that

“_ . ARA’s sales were sales at wholesale and that . . . the

sales tax was erroneously assessed.” It was the reasoning of

the lower court that: “The sponsor, in turn, sold the meals

to the consuming children or to the federal agency through

a program of reimbursement.”

The meals were never sold by the sponsors to the chil-

dren. The entire record indicates that everyone involved knew

that this was a give-away program. Even though the sponsors

could have charged the children, Mr. Dennis of the Depart-

ment of Agriculture testified that he did not remember any

child ever having paid anything for meals provided by the

summer Junch programs in South Carolina between 1972

and 1975. ARA’s Mr. Koester testified as follows:

“Q. At the time of the signing that receipt who be-

comes liable for the payment of that lunch?

“A. In our opinion the sponsor that we've contracted

to provide the lunches for.

5-A

“Q. Do you receive any check whatsoever from the

federal government?

“A. No, we don’t.”

It is apparent that no sale was ever contemplated or was ever

made by the sponsors to either the children or the De-

partment of Agriculture. Accordingly, the last transaction for

a consideration involved ARA as vendor and the sponsors

as vendees. Code § 12-35-170 defines “wholesale sale” and

“sale at wholesale” as follows:

“The terms wholesale sale and sale at wholesale

mean a sale of tangible personal property by whole-

sales to licensed retail merchants, jobbers, dealers

or other wholesalers for resale, and do not include

a sale by wholesalers to users or consumers, not for

resale.” (Emphasis added. )

ARA argues that there were two distinct sales of the

meals. It is maintained that ARA sold the meals to the spon-

sors, who in turn sold the meals to the children, and that the

consideration for the sale from the sponsors to the children

was provided by the Deparment of Agriculture. We are of

the opinion that the fact that the Department of Agriculture

reimbursed the sponsors for their costs does not convert the

giving of meals from the sponsors to the children into a sale.

The Department of Agriculture never owned the meals, and

the sponsors were obligated to pay for them regardless of

whether they were ever reimbursed by the Department.

The facts in this case are unlike those in Slater v. South

Carolina Tax Commission, .... §. C. ...., 242 §.E.2d 439

(1978). There, meals were purchased from Slater, a subsidiary

of ARA, for resale to students at colleges. The meals were

then actually resold to the students who paid the colleges

for them. Accordingly, Slater’s sale to the colleges was not

the last transfer of the meals for consideration, and thus were

wholesale transactions.

6-A

ARA has submitted to the court three additional sustain-

ing grounds. The case was tried by the lower court on stipula-

tions which are inciuded in the record before us. A careful

examination of the stipulations convinces us that the lower

court would not have been justified in granting relief to ARA

on the basis of any of the sustaining grounds enumerated.

APPENDIX B

The lower court should have dismissed the complaint,

and the order that court is

REVERSED.

LEWIS, C. J.. RHODES and GREGORY, J. J., concur.

NESS, A. J., dissents.

NESS, A. J. (Dissenting):

Believing the trial court correctly characterized ARA as

a wholesaler, I dissent.

Initially, the sponsors were given the option of either

preparing the meals or hiring a caterer. They elected to con-

tract with ARA and paid respondent for the lunches. The

sponsors transferred the boxed lunches to the children and

then received consideration from the U. S. Department of

Agriculture. Accordingly, two distinct sales or transfers of

the meals transpired.

In each instance, the payment from the USDA to the

sponsor was greater than the amount charged the sponsor

by ARA, reflecting costs attributable to the sponsor's serving

of the meals to the children. This payment flowing from the

federal government to the sponsor was the consideration for

the second transfer sale of the meals to the children. There-

fore, ARA’s transfer of the lunches to sponsor was a sale for

resale.

The majority rests its conclusion on the fact the meals

es

7-A

were never “sold” by the sponsors to the children. In this

way, the majority seeks to distinguish the case from our

recent decision in Slater Corporation v. S. C. Tax Commission,

S.C. , 242 S. E. 2d 439 (1978).

I believe the two cases are strikingly similar. In Slater,

the colleges purchased the meals from Slater, a subsidiary of

ARA, and the students, in turn purchased the meals from the

colleges. In each instance, as here, the student paid the col-

leges more for the meals than the colleges paid Slater, re-

flecting costs incurred by the school in serving the food.

In this case, it is irrelevant that the consideration for the

second transfer did not flow directly from the children. In

Slater, the fact that a college may have received payment

for the student’s meals from a source other than the student

himself (i.e., parents, a scholarship fund, etc.) would not

have altered Slater’s status as a wholesaler.

The critical consideration is that two sales were involved

in each. According to Code Section 12-35-100, a “sale” is:

“Any transfer, exchange or barter, conditional

or otherwise, in any manner or by any means what-

soever, of tangible personal property . . .” (Emphasis

supplied ).

Therefore, it is not necessary for the consumer to give

consideration in order for a sale to transpire; it is sufficient

if consideration is provided a third party in the consumer's

behalf.

This is not a situation where ARA sold the meals to

the sponsor and sponsor then gave the meals away without

receiving consideration from any source. In this case there

were two distinct sales pursuant to Code Section 12-35-100

and two distinct considerations passing.

I conclude ARA sold the lunches to the sponsors for

|e mmm

8-A

resale as the sponsors received payment from the USDA

when they transferred the meals to the children. I would

affirm the order of the trial judge refunding the taxes paid

under protest, with interest.

The Court has this day refused your Petition for Re

hearing in the above case in the following order:

“Petition denied.

s/ J. Woodrow Lewis C.J.

s/ Bruce Littlejohn A.J.

s/ Wm. L. Rhodes, Jr. A.J.

s/ George T. Gregory, Jr. A.J.

Petition granted.

s/ J. B. Ness A.J.”

The remittitur is being sent down today.

9-A

APPENDIX C

§ 1761. Summer food service programs for children in

service institutions

Assistance to States; definitions; facilities to be used; eligible service Insti-

tutions; order of priority in participation; assistance to rural area elig-

ible service institutions to participate in programs; reimbursement of

camps, limitation

(a)(1) The Secretary is authorized to carry out a program to assist

States, through grants-in-aid and other means, to initiate, maintain,

and expand nonprofit food service programs for children in service in-

stitutions. For purposes of this section, (A) “program” means the

summer food service program for children authorized by this section;

(B) “service institutions” means nonresidential public or private non-

profit institutions, and residential public or private nonprofit summer

camps, that develop special summer or school vacation programs pro-

viding food service similar to that made available to children during

the school year under the school lunch program under this chapter or

the school breakfast program under the Child Nutrition Act of 1966;

(C) “areas in which poor economic conditions exist’? means areas in

which at least 3313 percent of the children are eligible for free or re-

duced price school meals under this chapter and the Child Nutrition

Act of 1966, as determined by information provided from departments

of welfare, zoning commissions, census tracts, by the number of free

and reduced price lunches or breakfasts served to children attending

public and nonprofit private schools located in the area of program

food service sites, or from other appropriate sources, including state-

ments of eligibility based upon income for children enrolled in the pro-

gram; (D) “children” means individuals who are eighteen years of

476

10-A

Ch. 13 SCHOOL LUNCH PROGRAMS 42 § 1761

age and under, and individuals who are older than eighteen who are

(i) determined by a State educational agency or a local public educa-

tional agency of a State, in accordance with regulations prescribed by

the Secretary, to be mentally or physically handicapped, and (ii) par-

ticipating in a public school program established for the mentally or

physically handicapped; and (E) ‘State’ means any of the fifty

States, the District of Columbia, the Commonwealth of Puerto Rico,

the Virgin islands of the United States, Guam, American Samoa, the

Trust Territory of the Pacific Islands, and the Northern Mariana Is-

lands.

(2) To the maximum extent feasible, consistent with the purposes

of this section, any food service under the program shali use meals

prepared at the facilities of the service institution or at the food serv-

ice facilities of public and nonprofit private schools. The Secretary

shall assis States in the development of information and technical as-

sistance to encourage increased service of meals prepared at the facili-

ties of service institutions and at public and nonprofit private schools.

(3) Eligible service institutions entitled to participate in the pro-

gram shall be limited to those that—

(A) demonstrate adequate administrative and financial respon-

sibility to manage an effective food service;

(B) have not been seriously deficient in operating under the

program;

(C) either conduct a regularly scheduled food service for chil-

dren from areas in which pocr economic conditions exist or quali-

fy as camps; and

(D) provide an ongoing year-round service to the community to

be served under the program (except that an otherwise eligible

service institution shall not be disqualified for failure to meet

this requirement for ongoing year-round service if the State de-

termines that its disqualification would result in an area in which

poor economic conditions exist not being served or in a significant

number of needy children not having reasonable access to a sum-

mer food service program).

(4) The following order of priority shall be used by the State in

determining participation where more than one eligible service insti-

tution proposes to serve the same area:

(A) local schools or service institutions that have demonstrated

successful program performance in a prior year;

(B) service institutions that prepare meals at their own facili-

ties or operate only one site;

(C) service institutions that use local school food facilities for

the preparation of meals;

(D) other service institutions that have demonstrated ability

for successful program operation; and

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42 § 1761 PUBLIC HEALTH AND WELFARE Ch. 18

(E) service institutions that plan to integrate the program

with Federal, State, or local employment programs.

The Secretary and the States, in carrying out their respective fune-

tions under this section, shall actively seek eligible service institutions

located in rural areas, for the purpose ot assisting such service insti-

tutions in applying to participate in the program.

(5) Camps that satisfy all other eligibility requirements of this sec-

tion shall receive reimbursement only for meals served to children who

meet the eligibility requirements for free or reduced price meals, as

determined under this chapter and the Child Nutrition Act of 1966,

Payments to service institutions; food service operations costs; adjustments

in maximum reimbursement levels; meals per day limitation; budget for

administrative costs; submittal and approval by State; administrative

cost payments; maximum allowabie levels; study of food service opera-

tions and administrative costs; report to Congress

(b)(1) Payments to service institutions shall equal the full cost of

food service operations (which cost shall include the cost of obtaining,

preparing, and serving food, but shall not include administrative

costs), except that such payments to any institution shall not exceed

(1) 85.75 cents for each lunch and supper served; (2) 47.75 cents for

each breakfast served; or (3) 22.50 cents for each meal supplement

served: Provided, That such amounts shall be adjusted each January

1, to the nearest one-fourth cent in accordance with the changes for

the twelve-month period ending the preceding November 30 in the se-

ries for food away from home of the Consumer Price Index published

by the Bureau of Labor Statistics of the Department of Labor: Pro-

vided further, That the Secretary may make such adjustments in the

maximum reimbursement levels as the Secretary determines appropri-

ate after making the study prescribed in paragraph (4) of this

subsection.

(2) Any service institution shall be permitted to serve up to three

meals per day of operation if at least one of the three meals is a meal

supplement, and any service institution that is a camp shall bey _ anit-

ted to serve up to four meals per day of operation, if the service insti-

tution has the administrative capability, and the food preparation and

food holding capabilities (where applicable), to manage more than one

meal service per day, and if the service period of different meals does

not coincide or overlap. Such meals may include a breakfast, a lunch,

a supper, and meal supplements.

(3) Every service institution, when applying for participation in

the program, shall submit a complete budget for administrative costs

related to the program, which shall be subject to approval by the

State. Payment to service institutions for administrative costs shall

equal the full amount of State approved administrative costs incurred,

except that such payment to service institutions may not exceed the

maximum allowable levels determined by the Secretary pursuant to the

study prescribed in paragraph (4) of this subsection.

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Ch. 13 SCHOOL LUNCH PROGRAMS 42 § 1761

(4)(A) The Secretary shall conduct a study of the food service op-

erations carried out under the program. Such study shall include, but

shati not be limited to—

(1) an evaluation of meal quality as related to costs; and

(ii) a determination whether adjustments in the maximum

reimbursement levels for food service operation costs prescribed

in paragraph (1) of this subsection should be made, including

whether different reimbursement levels should be established for

self-prepared meals and vendored meals and which site-related

costs, if any, should be considered as part of administrative costs.

(B) The Secretary shall also study the administrative costs of sery-

ice institutions participating in the program and shall thereafter pre-

scribe maximum allowable levels for administrative payments that re-

flect the costs of such service institutions, taking into account the

number of sites and children served, and such other factors as the Sec-

retary determines appropriate to further the goals of efficient and ef-

fective administration of the program.

(C) The Secretary shall report the results of such studies to Con-

gress not later than December 1, 1977.

Vayments for meats served during May through September;

exceptions for continuous school calendars

(c) Payments shall be made to service institutions only for meals

served during the months of May through September, except in the

case of service institutions that operate food service programs for

ee on school vacation at any time under a continuous school cal-

endar.

Advance program payments to States for monthly meal service;

letters of credit, forwarding to States; determination

of amount; valid claims, receipt

(d) Not later than April 15, May 15, and July 1, of each year, the

Secretary shall forward to each State a letter of credit (advance pro-

gram payment) that shall be available to each State for the payment

of meals to be served in the month for which the letter of credit is is-

sued. The amount of the advance program payment shall be an

imount whith the State demonstrates, to the satisfaction of the Secre-

tary, to be necessary for advance program payments to service institu-

tions in accordance with subsection (e) of this section. The Secretary

Shall also forward such advance program payments, by the first day of

the month prior to the month in Which the program will be conducted,

to States that operate the program in months other than May through

September. The Secretary shall forward any remaining payments due

Pursuant to subsection (b) of this section not later than sixty days

following receipt of valid claims therefor.

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42 § 1761 PUBLIC HEALTH AND WELFARE Ch. 12

Advance program payments to service institutions for monthly meal service;

certification of personnel training sessions; minimum days per month

operations requirement; payments; computation, limitation; valid claims,

receipt; withholding; demand for repayment; subtraction of disputed

payments

(e)(1) Not later than June 1, July 15, and August 15 of each year,

or, in the case of service institutions that operate under a continuous

school calendar, the first day of each month of operation, the State

shall forward advance program payments to each service institution:

Provided, That (A) the State shall not release the second month’s ad-

vance program payment to any service institution that has not certi-

fied that it has held training sessions for its own personnel and the

site personnel with regard to program duties and responsibilities, and

(B) no advance program payment may be made for any month in

which the service institution will operate under the program for less

than ten days.

(2) The amount of the advance program payment for any month in

the case of any service institution shall be an amount equal to (A) the

total program payment for meals served by such service institution in

the same calendar month of the preceding calendar year, (B) 50 per-

cent of the amount established by the State to be needed by such serv-

ice institution for meals if such service institution contracts with a

food service management company, or (C) 65 percent of the amount

established by the State to be needed by such service institution for

meals if such service institution prepares its own meals, whichever

amount is greatest: Provided, That the advance program payment

may not exceed the total amount estimated by the State to be needed

by such service institution for meals to be served in the month for

which such advance program payment is made or $40,000, whichever is

less, except that a State may make a larger advance program payment

to such service institution where the State determines that such larger

payment is necessary for the operation of the program by such service

institution and sufficient administrative and management capability

to justify a larger payment is demonstrated. The State shall forward

any remaining payment due a service institution not later than seven-

ty-five days following receipt of valid claims. If the State has reason

to believe that a service institution will not be able to submit a valid

claim for reimbursement covering the period for which an advance

program payment has been made, the subsequent month’s advance pro-

gram payment shall be withheld until such time as the State has re-

ceived a valid claim. Program payments advanced to service institu-

tions that are not subsequently deducted from a valid claim for reim-

bursement shall be repaid upon demand by the State. Any prior pay-

ment that is under dispute may be subtracted from an advance pro-

gram payment.

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Ch. 13 SCHOOL LUNCH PROGRAMS 42 § 1761

Nutritional standards; free cost meals to children in approved institutions;

camp services, charges for meals to Ineligible children; quality assur-

ance, model specifications and standards; meal preparation contracts,

requirements; Inspection and testing

(f) Service institutions receiving funds under this section shall

serve meals consisting of a combination of foods and meeting mini-

mum nutritional standards prescribed by the Secretary on the basis of

tested nutritional research. Such meals shall be served without cost to

children attending service institutions approved for operation under

this section, except that, in the case of camps, charges may be made

for meals served to children other than those who meet the eligibility

requirements for free or reduced price meals in accordance with

subsection (a)(5) of this section. To assure meal quality, States

shall, with the assistance of the Secretary, prescribed! model meal

specifications and model food quality standards, and ensure that all

service institutions contracting for the preparation of meals with food

service management companies include in their contracts menu cycles,

local food safety standards, and food quality standards approved by

the State. Such contracts shall require (A) periodic inspections, by

an independent agency or the !ocal health department for the locality

in which the meals are served, of meals prepared in accordance with

the contract in order to determine bacteria levels present in such

meals, and (B) that bacteria levels conform to the standards which are

applied by the local health authority for that locality with respect to

the levels of bacteria that may be present in meals served by other es-

tablishments in that locality. Such inspections and any testing result-

ing therefrom shall be in accordance with the practices employed by

such local health authority.

Regulations, guidelines, applications, and handbooks;

publication; startup costs

(g) The Secretary shall publish proposed regulations relating to the

implementation of the program by November 1 of each fiscal year, fi-

nal regulations by January 1 of each fiscal year, and guidelines, appli-

cations, and handbooks by February 1 of each fiscal year: Provided,

That for fiscal year 1978, those portions of the regulations relating to

Payment rates for both food service operations and administrative

costs need nut he published until December 1 and February 1, respec-

tively. In order to improve program planning, the Secretary may pro-

vide that service institutions be paid as startup costs not to exceed 20

percent of the administrative funds provided for in the administrative

budget approved by the State under subsection (b)(3) of this section.

Any payments made for startup costs shall be subtracted from

amounts otherwise payable for administrative costs subsequently made

to service institutions under subsection (b) (3) of this section.

Direct disbursement to service institutions by Secretary

(h) Each service institution shall, insofar as practicable, use in its

food service under the program foods designated from time to time by

T. 42U SCA §§ 1400-1890—17 481

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42 § 1761 PUBLIC HEALTH AND WELFARE Ch. 13

the Secretary as being in abundance. The Secretary is authorized to

donate to States, for distribution to service institutions, food available

under section 1431 of Title 7, or purchased under section 612c of Title

7 or section 1446a-1 of Title 7. Donated foods may be distributed

only to service institutions that can use commodities efficiently and

effectively, as determined by the Secretary.

Administration of program by Secretary, in event of nonadministration

by State, and direct disbursement to service institutions; notification

(i) If any State (1) is unable for any reason to disburse the funds

otherwise payable to it under this section, or (2) does not operate the

program in accordance with the requirements of this section, the See-

retary shall assume authority for administration of the program in

such State, and shall disburse the funds directly to service institutions

in the State for the same purposes and subject to the same conditions

as are required of a State disbursing funds made available under this

section. In cases described in clause (1) of the preceding sentence,

the State shall notify the Secretary, not later than January 1 of each

fiscal year in which the program is operated, of its intention not to

administer the program.

Administrative expenses of Secretary; authorization of appropriations

(j) Expenditures of funds from State and local sources for the

maintenance of food programs for children shall not be diminished as

a result of funds received under this section.

Administrative costs of State; payment; adjustment; standards and

effective dates, establishment; funds; withholding, inspection

(k)(1) The Secretary shall pay to each State for its administrative

costs incurred under this section in any fiscal year an amount equal to

(A) 20 percent of the first $50,000 in funds distributed to that State

for the program in the preceding fiscal year; (B) 10 percent of the

next $50,000 in funds distributed to that State for the program in the

preceding fiscal year; (C) 5 percent of the next $100,000 in funds

distributed to that State for the program in the preceding fiscal year;

and (D) 2 percent of any remaining funds distributed to that State

for the program in the preceding fiscal year: Provided, That such

amounts may be adjusted by the Secretary to reflect changes in the

size of that State’s program since the preceding fiscal year.

(2) The Secretary shall establish standards and effective dates for

the proper, efficient, and effective administration of the program by

the State. If the Secretary finds that the State has failed without

good cause to meet any of the Secretary’s standards or has failed

without good cause to carry out the approved State management and

administration plan under subsection (n) of this section, the Secretary

may withhold from the State such funds authorized under this subsec-

tion as the Secretary determines to be appropriate.

(3) To provide for adequate nutritional and food quality monitor-

ing, and to further the implementation of the program, an additional

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Ch. 13 SCHOOL LUNCH PROGRAMS 42 § 1761

amount, not to exceed the lesser of actual costs or 1 percent of pro-

gram funds, shall be made available by the Secretary to States to pay

for State or local health department inspections, and to reinspect facil-

ities and deliveries to test meal quality.

Food service management companies; subcontracts; assignments, conditions

and limitations; meal capacity information In bids subject to review;

registration; record, availability to States; small and minority-owned

businesses for supplies@und services; contracts; standard form, bid and

contract) procedures, bonding requirements and exemption, review by

States, collusive bidding safeguards

(1)(1) Service institutions may contract on a competitive basis only

with food service management companies registered with the State in

which they operate for the furnishing of meals or management of the

entire food service under the program, except that a food service man-

agement company entering into a contract with a service institution

under this section may not subcontract with a single company for the

total meal, with or without milk, or for the assembly of the meal. The

Secretary shall prescribe additional conditions and limitations govern-

ing assignment of all or any part of a contract entered into by a food

service management company under this section. Any food service

management company shall, in its bid, provide the service institution

information as to its meal capacity. The State shall, upon award of

any bid, review the company’s registration to calculate how many re-

maining meals the food service management company is equipped to

prepare.

(2) Each State shall provide for the registration of food service

management companies. For the purposes of this section, registration

Shall include, at a minimum—

(A) certification that the company meets applicable State and

local health, safety, and sanitation standards;

(B) disclosure of past and present company owners, officers,

and directors, and their relationship, if any, to any service insti-

tution or food service management company that received pro-

gram funds in any prior fiscal year; f

(C) records of contract terminations or disallowances, and

health, safety, and sanitary code violations, in regard to program

operations in prior fiscal years; and

(D) the addresses of the company’s food preparation and dis-

tribution sites.

No food service management company may be registered if the State

determines that such company (i) lacks the administrative and finan-

cial capability to perform under the program, or (ii) has been serious-

ly deficient in its participation in the program in prior fiscal years.

(3) In order to ensure that only qualified food service management

companies contract for services in all States, the Secretary shall main-

tain a record of all registered food service management companies and

their program record for the purpose of making such information

available to the States.

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42 § 1761 PUBLIC HEALTH AND WELFARE Ch. 13

(4) In accordance with regulations issued by the Secretary, positive

efforts shall be made by service institutions to use small businesses

and minority-owned businesses as sources of supplies and services,

Such efforts shall afford those sources the maximum feasible opportu-

nity to compete for contracts using program funds.

(5) Each State, with the assistance of the Secretary, shall establish

a standard form of contract for use by service institutions and food

service management companies. The Secretary shall prescribe re-

quirements governing bid and contract procedures for acquisition of

the services of food service management companies, including, but not

limited to, bonding requirements (which may provide exemptions ap-

plicable to contracts of $100,000 or less), procedures for review ot con-

tracts by States, and safeguards to prevent collusive bidding activities

between service institutions and food service management companies,

Accounts and records

(m) States and service institutions participating in programs under

this section shall keep such accounts and records as may be necessary

to enable the Secretary to determine whether there has been compli-

ance with this section and the regulations issued hereunder. Such aec-

counts and records shall at all times be available for inspection and

audit by representatives of the Secretary and shall be preserved for

such period of time, not in excess of five years, as the Secretary deter-

mines necessary.

Munugement and administration plan; notification nnd submittal to

Secretary; specific provisions

(n) Each State desiring to participate in the program shall notify

the Secretary by January 1 of each year of its intent to administer

the program and shall submit for approval by February 15 a manage-

ment and administration plan for the program for the fiscal year,

which shall include, but not be limited to, (1) the State’s administra-

tive budget for the fiscal year, and the State’s plans to comply with

any standards prescribed by the Secretary under subsection (k) of

this section; (2) the State’s plans for use of program funds and

funds from within the State to the maximum extent practicable to

reach needy children, including the State’s methods for assessing need,

and its plans and schedule for informing service institutions of the

availability of the program; (3) the State’s best estimate of the num-

ber and character of service institutions and sites to be approved, and

of meals to be served and children to participate for the fiscal year,

and a description of the estimating methods used; (4) the State's

plans and schedule for providing technical assistance and training eli-

gible service institutions; (5) the State’s schedule for application by

service institutions; (6) the actions to be taken to maximize the use

of meals prepared by service institutions and the use of school food

service facilities; (7) the State’s plans for monitoring and inspecting

service institutions, feeding sites, and food service management com-

panies and for ensuring that such companies do not enter into con-

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Ch. 13 SCHOOL LUNCH PROGRAMS 42 § 1761

tracts for more meals than they can provide effectively and efficient-

ly; (8) the State’s plan and schedule for registering food service

management companies; (9) the State’s plan for timely and effective

action against program violators; (10) the State’s plan for determin-

ing the amounts of program payments to service institutions and for

disbursing such payments; (11) the State’s plan for ensuring fiscal

integrity by auditing service institutions not subject to auditing re-

quirements prescribed by the Secretary; and (12) the State’s proce-

dure for granting a hearing and prompt determination to any service

institution wishing to appeal a State ruling denying the service insti-

tution’s application for program participation or for program reim-

bursement.

Violations and penalties

(o)(1) Whoever, in connection with any application, procurement,

recordkeeping entry, claim for reimbursement, or other document or

statement made in connection with the program, knowingly and will-

fully falsifies, conceals, or covers up by any trick, scheme, or device a

material fact, or makes any false, fictitious, or fraudulent statements

or representations, or makes or uses any false writing or document

knowing the same to contain any false, fictitious, or fraudulent state-

ment or entry, or whoever, in connection with the program, knowingly

makes an opportunity for any person to defraud the United States, or

does or omits to do any act with intent to enable any person to de-

fraud the United States, shall be fined not more than $10,000 or im-

prisoned not more than five years, or both.

(2) Whoever being a partner, officer, director, or managing agent

connected in any capacity with any partnership, association, corpora-

tion, business, or organization, either public or private, that receives

benefits under the program, knowingly or willfully embezzles, misap-

plies, steals, or obtains by fraud, false statement, or forgery, any bene-

fits provided by this section or any money, funds, assets, or property

derived from bencfits provided by this section, shall be fined not

more than $10,000 or imprisoned for not more than five years, or

both (but, if the benefits, money, funds, assets, or property involved is

not over $200, then the penalty shall be a fine of not more than $1,000

or imprisonment for not more than one year, or both).

(3) If two or more persons conspire or collude to accomplish any

act made unlawful under this subsection, and one or more of such per-

sons do any act to effect the object of the conspiracy or collusion, each

shall be fined not mere than $10,000 or imprisoned for not more than

five years, or both.

Authorization of appropriations

(p) For the fiscal years beginning October 1, 1977, and ending Sep-

tember 30, 1980, there are hereby authorized to be appropriated such

SuMs as are necessary to carry out the purposes of this section.

June 4, 1946, c. 281, § 13, as added May 8, 1968, Pub.L. 90-302, § 3, 82

Stat. 117, and amended May 14, 1970, Pub.L. 91-248, § 6(c), (d), 84

485

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