Imposing higher tax on defense contractors may spawn legal challenges, Guam Chamber of Commerce warns

By Pacific Island Times News Staff

The Guam Chamber of Commerce today urged senators to reject Sen. Telo Taitague’s proposed binary structure for business privilege tax, saying it was a constitutionally flawed proposal that could jeopardize the entire tax relief legislation

The business group maintained its endorsement of Bill 11-38 in its original form, which would cut the BPT rate from 5 percent to 4 percent, rolling it back to the pre-2018 level.

The chamber said the bill, as originally drafted, has gained ground with a prospect of being passed and, eventually, enacted into law.

“We believe this measure is timely, reasonable and beneficial to our island’s economic recovery and growth,” the chamber said in a statement.

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However, the chamber expressed concern over Taitague’s proposed amendment

that seeks to maintain the BPT at 5 percent for federal prime contractors, while reducing it to 4 percent for all other businesses.

“This approach raises significant constitutional and policy issues, specifically under the Federal Supremacy Clause, as outlined in Article VI of the U.S. Constitution,” the statement reads.

The chamber warned that the proposal may run in conflict with federal procurement policy, thus triggering preemption under the Supremacy Clause.

“Singling out federal prime contractors for higher taxation could be construed as placing a burden on the federal government’s ability to contract freely and efficiently, especially when tax costs are incorporated into bid pricing and ultimately passed on to the federal government,” the chamber said.

“If enacted, this amendment could render the entire bill unconstitutional, jeopardizing the broader goal of tax relief for all Guam businesses. Federal court decisions have consistently ruled that territorial laws - like those of Guam - cannot conflict with, or place undue burdens on, federal operations,” it added.

Besides the legal risks, the business organization cautioned the legislature that imposing higher taxation on military contractors may taint Guam’s reputation as a cooperative partner with the federal government.

“Federal spending has been critical to our island, particularly during the Covid-19 pandemic, when local revenues were sustained by federal aid even as tourism halted and businesses shuttered,” the chamber said. “This amendment could send the wrong message to Washington and prime contractors about Guam’s business climate.”

The chamber acknowledged that Guam must address tax leakages from federal prime contractors, who managed to avoid paying local tax.

“We commend Vice Speaker Tony Ada for raising this issue and requesting stronger federal support in enforcing local compliance, such as requiring registration and allowing payment withholding for noncompliance,” the chamber said. “These are constructive and targeted solutions that do not risk violating federal law or disrupting local business relief efforts.”

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