# Petition — ARA Services, Inc. v. South Carolina Tax Commission > Briefs, arguments, decisions, and more. URL: https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1974%3A1 ## Record - **Collection:** Supreme Court brief - **Document type:** Petition - **Published:** January 1, 1978 - **Citation:** 439 U.S. 1048 ## Text 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 477 11-A 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. 478 12-A 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. 479 13-A 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. 480 14-A 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 15-A 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 482 16-A 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. 483 17-A 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- 484 18-A 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 7 --- Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/brief%3Amicro_IA40385005_1974%3A1. Public record. Not legal advice.