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The federal government could owe the state millions of dollars after a court ruling that the West Valley Demonstration Project failed to pay state sales tax on goods and services purchased for the cleanup of the former nuclear fuel reprocessing center.

The Appellate Division of State Supreme Court ruled that West Valley Nuclear Services Co., which is running the project under the auspices of the federal Department of Energy and the state Energy Research and Development Authority, improperly used a sales tax exemption certificate from 1985 to 1990.

The court upheld a ruling by the state Tax Appeals Tribunal and said West Valley Nuclear Services owes $842,167. But because the same certificate was used between 1990 and 1999, the project theoretically also owes sales tax on purchases during that period.

Terry Dunford, spokesman for West Valley Nuclear Services, wouldn't say exactly how much could be owed. But a source familiar with the situation, who asked not to be identified, said the figure could exceed $20 million, unless a settlement is reached with the state.

Dunford said that perhaps half of the roughly $1 billion spent at the project from 1990 and 1999 went for taxable goods and services.

The appeals court ruling also means the West Valley Demonstration Project must pay sales tax on future purchases.

"We're disappointed in this decision," Dunford said. "The potential tax payment for past years, as well as the potential of paying 8 percent sales tax for future years, could have a significant impact on the available funds earmarked for the cleanup at West Valley."

Dunford said the project believed it was using the certificate properly.

"This was not an intentional misleading," he said. "This was something, in conjunction with project officials, we believed was the correct way of going about this business."

Dunford said West Valley would respect the court's decision and would begin paying sales tax on purchases.

Alice C. Williams, the Energy Department's new director at West Valley, said it is too early to tell what impact the decision will have on the project.

"We are assessing how this will affect our operations, and we will be determining soon what this will mean for the project in the long and short terms," she said.

West Valley Nuclear Services argued that because the items and services it purchased were immediately resold to the federal government, the purchases qualified under state law that exempts items bought for resale from sales taxes. The purchases were made by a special letter of credit through a bank account owned by the federal government.

The court ruled that the transactions were solely between the vendors and West Valley Nuclear Services and that while title of the material passed to the federal government, "possession unquestionably passed to (West Valley Nuclear Services)."

"The company didn't pay for it, but the company bought it," said state Assistant Solicitor General Julie Mereson, who handled the case in the appellate division for Attorney General Eliot Spitzer's office.

Mereson said the court's ruling would also apply to purchases made between 1990 and 1999. "As long as the contracts are worded the same way, they can't claim an exemption," she said. "Given the same contract, the rule of law is going to apply to future years."

Dunford said the Energy Department uses such contracts at facilities across the country. "This procedure is not something we created," he said.

Michael Bucci, a spokesman for the state Department of Taxation and Finance, said confidentiality restrictions precluded him from talking about what additional action the department is contemplating.

But Dunford said project management has "already heard an audit team will be coming to the facility in the near future, and we will cooperate with them."

West Valley Nuclear Services had all but completed the most pressing part of the cleanup -- the solidification of 600,000 gallons of highly radioactive liquid that was stored in rotting underground tanks -- but more work needs to be done at the site, which was also used as a storage area and dumping ground for radioactive material.

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