
    The Hooven & Allison Co., Appellant, v. Evatt, Tax Commr., Appellee.
    (No. 29531 —
    Decided November 24, 1943.)
    
      
      Mr. Thomas G. Lavery and Mr. Marcus E. McGallister, for appellant.
    
      Mr. Thomas J. Herbert, attorney general, and Mr. Aubrey A. Wendt, for appellee.
   Turner, .J.

Did the action of the Tax Commissioner violate Article I, Section 10, Clause 2 of the Constitution of the United States which forbids the levying by a state, without consent of Congress, of an impost or duty on imports? Paraphrasing the language of Mr. Chief Justice Marshall in Brown v. Maryland. 25 U. S. (12 Wheat.), 419, 443, 6 L. Ed., 678, 686: Did the tax here imposed intercept the import in its way to become incorporated with the general mass of property and deny it the privilege of becoming so incorporated until it shall have contributed to the revenue of the state ? ■ ■

The purpose of the foregoing provision of tbe Constitution was to prevent the seaboard states, as well as other states, through which such imports were transported, from levying tribute before the imports reached their final destination and were sold or used by the importer.

Brown v. Maryland, supra, is the leading case on the subject. At page 441 (686 L. Ed.), Mr. Chief Justice Marshall said:

“But, while we admit that sound principles of construction ought to restrain all courts from carrying the words of the prohibition beyond the object the Constitution is intended to secure,' that there must be a point of time when the prohibition ceases, and the power of the state to tax commences; * * * . It is sufficient for the present to say, generally, that when the importer has so acted upon the thing imported, that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import and has become subject to the taxing power of the state; * * # .”

At page 447 (688 L. Ed.), Mr. Chief Justice Marshall said:

“Sale is the object of importation.”

Without reviewing -here all the later pertinent decisions of the Supreme Court of the United States, we think the following quotation from 15 Corpus Juris Secundum, 488, Section 123, correctly states the law, to wit:

“The constitutional provision [Article I, Section 10, Clause 2 of the Constitution of the United States.] does not prohibit a tax on goods after they have entered the channels of trade or have been purchased subsequent to their arrival in this country, or after they have become mixed with other property in the state. ’ ’

The record here discloses that the goods in question were purchased by appellant from New York agents of the sellers under written contracts which specifically provided that the sales were made f. o. b. port of entry in this country (i. a., landed) and that title was to remain in the seller 'until the goods were fully paid for. The final invoices were made out by sellers’ agents after the arrival and weighing of the goods at port of entry. All payments were made to the sellers’ agents. These agents are exclusively representatives of the sellers and- receive no compensation from appellant. After the goods had been cleared through customs, the agents of the sellers made rail shipments to appellant under straight bills of lading. No sales were made to appellant c. i. f.

• One of appellant’s witnesses stated that during the time here in question all contracts of purchase which were made with Stein, Hall & Company, Inc., of New York were made with that concern as a principal and not as agent. The agents through whom appellant made its purchases cleared the goods through customs. ■Appellant’s general manager testified:

“* * * Our deal with the seller is to get that material landed to a port of entry and cleared through and then it is turned over to us.”

This is an accurate description of the transactions and clearly shows that appellant is not the importer, but rather the purchaser of goods subsequent to their arrival in this country under contract to so take them.

Appellant’s general manager testified that none of these goods were purchased or held with a view to sale, but solely for the purpose of conversion in the course of manufacture.

That appellant’s contracts gave rise to imports cannot be questioned. But the fact remains that the purchases and deliveries were made in the United States and that while interstate commerce was involved after the goods were landed, foreign commerce or imports were not. The record discloses the following evidence offered on behalf of appellant through the answers of one of the sellers’ agents: i

“H & A do not buy c. i. f. but landed at port in the United States.
“When the goods arrive at an American port the documents are handed to us by the bank for the purpose of making customhouse entry and delivery. As a matter of service to H & A, the transshipment from port of arrival to Xenia is arranged by ourselves,. H & A instructing us the route by which they wish the goods forwarded and, of course, paying the freight from port of arrival to Xenia.
“The foreign shipper does not reserve any power of disposition over the goods after the documents are handed to the negotiating bank at port of origin.
“The contract calls for payment by H & A on delivery of the goods on dock at port of entry in U. S. A. These terms are in practice modified to the extent that payment is not made until the goods are weighed on the dock and invoice received by H & A.” (Italics ours.)

The record discloses that another agent answered:

“We definitely act as our principal’s selling representative and this is borne out by the fact that we offer and sell at the same price quoted by our principals and receive a fixed commission from them. Up to about a year ago [answer made September 17, 3941] the contract was made between Stein, Hall & Company, Inc. [seller’s agent] and Hooven & Allison Company, both as principals, but since then [about a year prior to September 17, 1941) we have been indicating on our contract ‘sold by Stein, Hall & Company, Inc. for the account of * * *.’ ” (Italics ours.)

The contract forms used by each of the five sellers’ agents from whom appellant purchased are identical in terms, with the exception that in one sisal contract form submitted by Stein, Hall & Company, Inc., tbe provision for f. o. b. or landed on dock at destination is changed to c. i. f. and the provision for title remaining in seller until goods are fully paid for is eliminated.

Under a c. i. f. purchase the buyer takes title at point of origin and pays the cost of insurance and freight from point of origin. Appellant’s general manager testified that all their purchases were f. o. b. port of entry, that is, a landed price, and that if appellant had to buy c. i. f. there would be no excuse for agents to stay in business.

Assuming that appellant was the importer, these goods had so come to rest as to be mingled with the mass of proprety in this country when the state tax was levied thereon. This tax could not have the effect of intercepting the import nor did it deny to the import the privilege of becoming incorporated in-the general mass of local property unless such tax payment was made.

That sale is the object of importation was made clear by Mr. Chief Justice Marshall in Brown v. Maryland, supra. Appellant’s general manager testified positively that none of the goods in question were bought for the purpose of resale but were purchased only for the purpose of conversion by manufacturing processes.

The Supreme Court of the United States has held that when imports are once sold by the importer their character as imports is lost.

As stated by Mr. Justice Clifford in Waring v. Mayor of Mobile, 75 U. S. (8 Wall.), 110, 123, 19 L. Ed., 342, 346:

“Importers selling the imported articles in the original packages are shielded from any such state tax, but the privilege of exemption is not extended to the purchaser, as the merchandise, by the sale and delivery, loses its distinctive character as an import.”

Mr. Justice Clifford distinguished between a sale by the importer of the imported article and the. breaking up of the original package when he said:

“When the importer sells the imported articles, or otherwise mixes them with the genefal property of the state by breaking up the packages, the state of things changes, as was said by this court in the leading case, as the tax then finds the articles already incorporated with the mass of property by the act of the importer. ’ ’

In discussing the case of Brown v. Maryland, supra, Mr. Justice Barbour said in the case of Mayor of City of New York v. Miln, 36 U. S. (11 Pet.), 102, 136, 9 L. Ed., 648, 661:

“The great grounds upon which the court put that case were: that sale is the object-of all importation of goods; * * *

In the License Cases, 46 U. S. (5 How.), 504, 575, 12 L. Ed., 256, 288, Mr. Chief Justice Taney said in respect of importation:

“And while they are in the hands of the importer for sale, in the form and shape in which they were introduced, and in which they are intended to be sold, they may be regarded as merely in transitu, and on their way to the distant cities, villages, and .country for which they are destined, and where they are expected to be used and consumed, and for the supply of which they were in truth imported.”

Appellant’s general manager testified as above noted that none of these goods were purchased for the purpose of resale and that the only purpose of the purchases was use as raw material in appellant’s manufacturing processes. When these goods arrived at Xenia, Ohio, appellant placed them in one of its raw-material warehouses where they were held until needed in the course of manufacture. When asked whether there was any definite time during which such goods were kept in the warehouse, appellant’s general manager answered:

“No; it might be we would need the stuff as soon as it got there and'again we might not; it comes from long distances and we do not carry any more inventory than we need to; it takes three to six months for it to get to us; we attempt to keep a backlog for that; we attempt to run our business with a minimum working inventory, of course.”

The bookkeeping procedure followed by appellant wa's to charge the raw-material account with these goods when received, and credit that account and charge the goods in process account when they were taken from the “warehouse. This procedure was followed for the purpose of cost accounting. Appellant included its raw-material accounts in its assets as disclosed in its balance sheet and other financial statements.

No question is raised as to the amount of the assessments, if the goods are taxable. Under our holding it will be unnecessary to determine whether the goods imported from the Philippine Islands prior to the present war should be treated as coming from a foreign country.

Being of the opinion that the decision of the Board of Tax Appeals' was reasonable and lawful, such decision is hereby affirmed.

Decision affirmed.

Weygandt, C. J., Matthias, Hart and Williams, JJ., concur.

Bell, J., dissents.

Zimmerman, J., not participating.

Bell, J.,

dissenting. The conclusions reached by the majority in this case, in my opinion, are not warranted by the facts or the law.

Clause 2, Section 10, Article I of the Constitution of the United States reads as follows:

“No state shall, without the consent of the Congress, lay any imposts or duties on imports or exports, except what may be absolutely necessary for executing its inspection laws: * *

That provision as it relates to this case is a prohibition against the state laying imposts on imports.

The fact that all of the goods here in question (with the possible exception of those coming from the Philippine Islands) are imports will admit of no dispute and so long as they remained imports the prohibition against their being subject to taxation by the state remained in full force and effect.

The question then is: Were these goods still imports at the time the state declared they were subject to tax?

The decisions are numerous upon the subject of when imported goods ceasa to be immune from state taxation. Generally speaking, it would seem that the immunity ceases, first, where the imports are sold after arrival in this country, and, second, where they are taken from the original package for sale or for use in a manufacturing process.

It must be conceded that the power to construe the Constitution of the United States is reposed in the federal courts, and that the state courts are bound to follow their decisions.

Probably the leading case upon the subject of state taxation upon imports is Brown v. Maryland, 25 U. S. (12 Wheat.), 419, 6 L. Ed., 678, decided in 1827. Chief Justice Marshall wrote the opinion of the court.

In that case the state of Maryland attempted to exact a license fee from persons engaged in the business of selling imports. The question presented was whether the exaction of the fee was within the prohibition contained in Clause 2, Section 10, Article I of the Constitution of the United States.

In a lengthy and elaborate opinion the Chief Justice said in part:

“From the vast inequality between the different states of the confederacy, as to commercial advantage-, few subjects were viewed with deeper interest, or excited more irritation, than the manner in which the several states exercised, or seemed disposed to exercise, the power of laying duties on imports. From motives which were deemed sufficient by the statesmen of that day, the general power of taxation, indispensably necessary as it was, and jealous as the states were of any encroachment on it, was so far abridged as to forbid them to touch imports or' exports, with the single exception which has been noticed. Why are they restrained from imposing these duties f Plainly because, in the general opinion, the interest of all would be best promoted by placing that whole subject under the control of Congress. Whether the prohibition to ‘lay imposts, or duties on imports or exports,’ proceeded from an apprehension that the power might be so exercised as to disturb that equality among the states which was generally advantageous, or that harmony between them which it was desirable to preserve, or to maintain unimpaired our commercial connections with foreign nations, or to confer this source of revenue on the government of the Union, or whatever other motive might have induced the prohibition, it is plain that the object would be as completely defeated by a power to tax the article in the hands of the importer the instant it was landed as by a power to tax it while entering the port. * * * ”

The tax was condemned and held invalid. That case has been cited and followed for more than a hundred years.

The state of Maryland in that case was represented by Mr. Taney who argued that the license fee was lawful. He later became Chief Justice of the United States and in 1847, as Chief Justice, he wrote the opinion in the License Cases, 46 U. S. (5 How.), 504, 12 L. Ed., 256, in which he said in part:

“I argued the case in behalf of the state [referring to Brown v. Maryland], and endeavoured to maintain that the law of Maryland, which required the importer as well as other dealers to' take out a license before he could sell, and for which he was to pay a certain sum to the state, was valid and constitutional; and certainly I at that time persuaded myself that I was right, and thought the decision of the court restricted the powers of the state more than a sound construction of the Constitution of the United States would warrant. But further and more mature reflection has convinced me that the rule laid down by the Supreme Court is a just and safe one, and perhaps the best that could have been adopted for preserving the right of the United States on the one hand, and of the states on the other, and preventing collision between them.”

In the case of Waring v. Mayor, 75 U. S. (8 Wall.), 110, 122, 19 L. Ed., 342, the Supreme Court for the first time decided that where the goods had been sold after entry into this country they were no longer imports and the state could levy a tax upon the goods.

The decision in the Waring case has been followed ever since it was rendered.

The Tax Commissioner bottomed his decision upon the conclusion that a sale occurred after the imports arrived in this country and, upon appeal, the Board of Tax Appeals affirmed that decision.

The majority opinion of this court is bottomed upon a dual conclusion, first, that there was a sale after the goods arrived in this country, and second, that the goods were mixed with the general property in the state thereby destroying the immunity.

If there was a sale of the goods after arrival in this country that would make an end to the contention of appellant. See Waring v. Mayor, supra.

The proposition that courts will look through the form and to the substance of a transaction in order to determine the rights of the parties is so universally understood and accepted as to need no citation of authority.

It should also be kept in mind that, generally speaking, any statute imposing a tax should be strictly construed against the state and in favor of the taxpayer.

With these principles in mind a brief examination of the facts is necessary and important to determine, first, whether a sale took place after the imports reached this country, and, if no such sale took place, then second, whether the goods were so incorporated with the mass of property in this state as to destroy the immunity.

The undisputed evidence, together with the stipulations of counsel, disclose these salient facts: That appellant bought the goods in question through five New York sales agencies representing foreign producers; that on some occasions the offer to sell came from one of the five agents, and on other occasions the appellant would contact the agent and make an offer to purchase at a given price; that often the contracts were made before the goods were in existence; that after appellant and the agent had agreed upon a price, called a landed price, which included all ocean freight charges, insurance, etc., from the point of origin, the agent would submit the offer to the producer and get confirmation thereof; that after the confirmation was received by the agent a written contract generally would be executed between the appellant and the producer and thereafter the goods were shipped; that the contracts were executed upon uniform written forms which had been in use for many years; that the form contract provided that the title to the goods was to remain in the seller until the purchase price was paid; that this provision as to title was never enforced by the producer and was by mutual consent waived by the parties; that before the goods were shipped they were put up in bales and generally were marked so as to identify them with the contract; that the appellant determined the steamship line upon which the goods were to be shipped and determined the port of entry; that as soon as the goods left the point of origin the appellant immediately was notified and received the declaration of the ship; that appellant was responsible for the goods the minute the contract was made and the appellant had the right to re-sell the goods while upon the high seas; that the goods were shipped upon a bill of lading consigned by the producer to a bank, the bill of lading containing directions to notify appellant and the agent; that the agent took up the bills of lading, paid the bank and then shipped the goods by rail to Xenia, Ohio; and that appellant was the importer.

The producer reserved no control over the goods after 'they were loaded on ship at point of origin except, as stated, that the bill of lading was issued to the order of the bank, with directions to notify appellant and the agent.

The title to the goods upon arrival in this country was either in the producer or the appellant. No one could seriously contend that the bank or the agent was at any time the owner of the goods.

The rule seems to be that where goods shipped in interstate commerce are earmarked for a purchaser and shipped under a bill of lading to the order of a bank with directions to notify purchaser, the right of property passes to the' purchaser ivhen the particular property was designated, but the right of possession remained in the seller until the draft is paid.

In Robinson & Martin v. Houston & T. C. Rd. Co., 105 Tex., 185, 146 S. W., 537, paragraph two of the •syllabus states:

“Goods purchased were shipped by rail consigned to shipper’s order, and draft for the price sent through the banks with ball of lading attached. Held that the purchaser had title to support an action against the •carrier for delay in transportation occurring prior to his payment of the draft, though the right of possession up to such payment was^in the shipper.”

That case involved a boiler and on page 187, the •court, speaking through Brown, C. J., said :

“When the Erie City Iron Works sold the boiler to Robinson and Martin and delivered it to the railroad company at Houston, the title rested in the purchasers-, neither payment of the price nor actual delivery to the purchaser was necessary to pass the title.” (Cases cited.) See, also, Dow v. Bank, 91 U. S., 618, 23 L. Ed., 214; F. L. Shaw Co. v. Coleman (Tex. Civ. App.), 236 S. W., 178.

These are cases involving commerce between the states; however, it is difficult to discern any sound reason why the rule applied in interstate commerce cases, as to an order-notify bill of lading should not apply also to such bills of lading when used in foreign commerce.

The contract between the producer and appellant was the sole reason for shipping these goods into this country. This record to me clearly demonstrates that it was the intention of the parties that title was to pass when the goods were placed on ship; that title did pass to appellant at that time; and that there was no sale of the goods after their arrival in this country.

With regard to the second conclusion of the majority, it is admitted that these goods were in the original packages at the time the exemption was claimed.

In Brown v. Maryland, supra, it is said:

“It is sufficient for the present to say, generally, that when the importer has so acted upon the thing imported that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import, and has become subject to the taxing power of the state; but while remaining the property of the importer, in his warehouse, in the original form or package in ivhich it was imported, a tax upon it is too plainly a duty on imports to escape the prohibition in the Constitution.” (Italics ours.)

In the License Cases, supra, Mr. Chief Justice Taney said:

“And while they are in the hands of the importer for sale, in the form and shape in which they were introduced, and in which they are intended to be sold, they may be regarded as merely in transitu, and on their way to the distant cities, villages, and country for which they are destined, and where they are expected to be used and consumed, and for the supply of which they were in truth imported.”

Low v. Austin, 80 U. S. (13 Wall.), 29, 32, 20 L. Ed., 517, decided in 1871, is a leading “original package” case. Mr. Justice Field, in delivering the opinion of the court, said:

“The simple question presented in this case for our consideration is, whether imported merchandise, upon which the duties and charges at the custom-house have been paid, is subject to state taxation, whilst remaining in the original cases, unbroken and unsold, in the hands of the importer.
“The decision of this court in the case of Brown v. The State of Maryland furnishes the answer to the question. # * *
“The Supreme Court of California appears, from its opinion, to have considered the present case as •excepted from the rule laid down in Brown v. The State of Maryland, because the tax levied is not directly upon imports as such, and consequently the goods imported are not subjected to any burden as a class, but only are included as a part of the whole property of its •citizens which is subjected equally to an ad valorem tax. But the obvious answer to this position is found in the fact, which is, in substance, expressed in the citations made from the opinions of Marshall and Taney [License Cases, 46 U. S. (5 How.), 504, 575, 12 L. Ed. 256 (1847)], that the goods imported do not lose their character as imports, and become incorporated into the mass of property of the state, until they have passed from the control of the importer or been broken up by him from their original cases. Whilst retaining their character as imports, a tax upon them, in any shape, is within the constitutional prohibition. The question is not as to the extent of the tax, or its equality with respect to taxes on other property, but as to the power of the state to levy any tax. If, at any point of time between the arrival of the goods in port and their breakage from the original cases, or sale by the importer, they become subject to state taxation, the extent and the character of the tax are mere matters of legislative discretion.” (Emphasis added.)

This decision has never been questioned but has been approved and followed upon many occasions and is still the law of the land.

The second part of the conclusion of the majority, as set forth in paragraph two of the syllabus, is to my mind contrary to the decisions of the United States Supreme Court upon this subject.

The last question is whether the manila hemp from the Philippine Islands is entitled to protection as an import.

The cases of Woodruff v. Parham, 75 U. S. (8 Wall.), 123, 19 L. Ed., 382; Pittsburgh & Southern Coal Co. v. Louisiana, 156 U. S., 590, 600, 39 L. Ed., 544, 15 S. Ct., 459; and Patapsco Guano Co. v. Board of Agriculture, 171 U. S., 345, 350, 43 L. Ed., 191, 18 S. Ct., 862, are authority for the proposition that an article cannot he an import unless it has been brought into this country from a country foreign to the United States.

Was the Philippine Islands during the years 1938, 1939 and 1940 a foreign country?

In Cincinnati Soap Co. v. United States, 301 U .S., 308, 81 L. Ed., 1122, 57 S. Ct., 764, in discussing the Philippine Independence Act, the court said:

“* * * Undoubtedly, these acts have brought about a profound change in the status of the islands and in their relations to the United States; but the sovereignty of the United States has not been, and, for a long time, may not be, finally withdrawn. So far as the United States is concerned, the Philippine Islands are not yet foreign territory. * * *”

See, also, the case of Fourteen Diamond Rings v. United States, 183 U. S., 176, 46 L. Ed., 138, 22 S. Ct., 59.

The decisions in those cases persuade me that the manila hemp from the Philippine Islands was not protected as an import.

In my opinion, therefore, the decision of the Board of Tax Appeals should be reversed and the cause remanded with instructions to allow the exemptions claimed upon the goods here in question except the manila hemp from the Philippine Islands.  