The only question in my mind with the contract is whether the contract is "enforceable".  If litigation were to result from this situation, I think the State would argue they enjoy soverign immunity from litigation (i.e. they are the government and can't be sued).

However, based on my research, the State cannot argue this because the State effectively waived their soverign immunity when they agreed to adhere with the Internal Revenue Code in establishing the PACT.  So, they "must" adhere to federal regulations.

So, I agree with you, a contract does exist.  I would like to add - it is also enforceable. 

We will get our money one way or the other.  I do think we should try the diplomatic way first.  By going the diplomatic route, maybe we will benefit from the PACT within the next year.  Otherwise the litigation route may take years and years.