Government Had to Reimburse Contractor for Taxes But Not Penalties. How Do You Tell the Difference Between a Tax and a Penalty?

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The contract required the government to reimburse the contractor for after-imposed taxes. The Afghan government assessed a fee against the contractor for exceeding a cap on security personnel. The contractor claimed this was an after-imposed tax, which the government had to pay. The government said it didn’t have to pay because the fee was a penalty, not a tax. The board found the fee was a tax. The fee was more akin to a cost of doing business in Afghanistan, not a penalty imposed for breaking Afghan law.

Appeals of Triple Canopy, Inc., ASBCA Nos. 61415 et al.


Triple Canopy had contracts with DoD to provide security in Afghanistan. Each contract incorporated FAR 52.229-6. That provision states contract price shall be increased by the amount of any after-imposed tax the contractor has to pay.

The government of Afghanistan issued a directive limiting the number of security personnel provided by a single company to 500. If a company exceeded this limitation, they had to pay a fee for each person over the 500-employee cap.

Triple Canopy had more than 500 personnel in Afghanistan. The Afghan government assessed a fee against Triple Canopy.Triple Canopy paid the fee and submitted a claim too DoD for reimbursement.

DoD didn’t issue a decision. Triple Canopy appealed the deemed denial to the ASBCA. The board found the claims were barred by Contract Dispute Act’s statute of limitations. Triple Canopy appealed to the Federal Circuit. The court reversed, holding the claims were timely. The Federal Circuit remanded to the ASBCA for a decision on the merits.


Triple Canopy alleged the fees imposed by Afghanistan were “after-imposed” taxes. Thus, the government had to reimburse the company under FAR 52.229-6. The government argued it didn’t have to reimburse because the assessment was not a tax imposed for doing business as a security company. Instead, the government argued, the assessment was a penalty imposed for exceeding an employee cap.

To determine whether the assessment was a tax or penalty, the board looked to National Federation of Independent Businesses v. Sebelius, 567 U.S. 519 (2012). In that case, Supreme Court decided whether the health insurance mandate under the Affordable Care Act was a tax or a penalty. The court held the mandate was a tax. While the mandate sought to induce the purchase of health insurance, it didn’t prescribe any negative legal consequences for not doing so. You could either purchase health insurance, or pay a fee. Either decision complied with the law.

The board reasoned the Afghan fee was similar to the health insurance mandate. The purpose of the fee was to limit the number security personnel employed by one company. But there was no negative legal consequences for having over 500 employees. Companies could either choose to have fewer than 500 employees or pay the fee. In this sense, the assessment was really just a cost of doing business in Afghanistan, not a penalty for having over 500 employees.

The government argued the fee was a penalty because under the directive, the Afghan government could dissolve a company that failed to comply. But the board noted this dissolution threat was never carried out. In fact, when Triple Canopy violated the directive, the Afghan government allowed it to appeal. Indeed, the Afghan government ended up cutting the initial assessment against Triple Canopy in half. This lax enforcement further indicated the fee was a tax, not a penalty.

Triple Canopy is represented by Armani Vadiee and Todd M. Garland of Smith Pachter McWhorter PLC. The government is represented by Caryl A. Potter, III and Michael J. Farr of the Air Force.

–Case summary by Craig LaChance, Senior Editor