
    J. HUNGERFORD SMITH GRAPE JUICE CO. v. THE UNITED STATES
    [No. D-372.
    Decided February 14, 1927]
    
      On the Proofs
    
    
      Beverage tax; assessment on sale price; inclusion, of transportation charges. — The tax of 10 per cent on the sale price of beverages, provided by section 628 of the revenue act of 1918, is not assessable on the cost of transporting said beverages from the manufacturer to his customer, whether prepaid or not.
    
      Same; inelusion of cash discount. — Where in a sale of beverages, taxable under section 628 of the revenue act of 1918, the customer receives a discount for prompt payment, the tax is on the net price paid by the customer and not on the discount in addition thereto.
    
      Same; cost of bottling, etc. — The cost of bottles and containers and the expense of bottling and preparing for shipment are included in the sale price of beverages, and are taxable under section 628 of the revenue act of 1918.
    
      The Reporter's statement of the case:
    
      Mr. John Lord O'Brian for the plaintiff. Mr. Ralph Ulsh and Slee, O'Brian da Hellings were on the briefs.
    
      Mr. Charles T. Handler, with whom was Mr. Assistant Attorney General Herman J. Galloway, for the defendant. 
      Messrs. Fred, K. Dya/r and J oseph H. Sheppard were on the-briefs.
    The court made special findings of fact, as follows:
    I. The plaintiff is a corporation organized under the laws-of Michigan, with its principal place of business at Lawton, Michigan, and during the years 1919, 1920, and 1921 was-engaged in manufacturing and selling unfermented grape-juice.
    II. The plaintiff’s manufactory was during the said years situated at Lawton, Michigan, and it sold its products-throughout the entire territorial area of the United States,, shipments being made from Lawton. A general sales office-was maintained at Rochester, New York.
    III. During the period from February 25, 1919, to and including December 81,1919, the plaintiff paid to the United States, pursuant to section 628 of the revenue act of 1918, approved February 24,1919, and effective February 25,1919, a beverage tax in the amount of ten per cent of certain sums-being gross sales of grape juice as shown by the schedule here immediately following, the divisions of time corresponding to the plaintiff’s accounting periods. The dates of the several payments of tases are set forth in Schedule 2 of Exhibit A of the petition. The said exhibit is made a part hereof by reference.
    From February 25, 1919, to August 81, 1919, the tax paid amounted to $61,277.87 upon gross sales of $612,778.70.
    From September 1, 1919, to August 31, 1920, the tax paid amounted to $104,557.10 upon gross sales of $1,045,571.
    From September 1, 1920, to August 31, 1921, the tax paid amounted to $24,912.21 upon gross sales of $249,122.10.
    From September 1, 1921, to December 31, 1921, the tax: paid amounted to $149.96 upon gross sales of $1,499.60.
    The total tax paid for the entire period was $190,897.14-upon gross sales of $1,908,971.40.
    IY. The foregoing amounts of gross sales included certain transportation charges on the grape juice from Lawton,. Michigan, to points of delivery to customers, certain items; of cash discounts deducted by customers from the list or invoice price and not paid nor received as a part of the purchase price of the grape juice, and also the cost or value of the containers in which the grape juice was sold and the expense of bottling and packing the grape juice into the containers.
    V. On June 14, 1923, and within four years from the dates of payment of all of said taxes, the plaintiff filed with the collector of internal revenue at Grand Eapids, Michigan, a claim for the refund to it of $67,803.45, such claim being for the refund of $4,011.22 of said beverage tax paid on cash discounts deducted by customers, of $9,044.94 of such tax paid on freight charges included in gross invoice amounts, of $42,041.53 of such tax paid on cost of containers, complete with labels, caps, and packages, and of $12,705.76 of such tax paid on the expense of bottling, labeling, and packing the grape juice sold.
    On February 21, 1924, the plaintiff’s said claim for refund was wholly rejected and disallowed by the collector of internal revenue.
    VI. The plaintiff sold its grape juice to jobbers throughout the United States, and sales and shipments were made in one of the following ways:
    
      (a) In carload lots direct to jobbers, in which case the freight was paid by the jobber at destination and the amount paid for freight was deducted from the invoice amount in making payment to the plaintiff.
    
      (b) By shipments in carload lots from Lawton, Michigan, to forty or fifty distributing warehouses throughout the United States at convenient distributing points from which deliveries in small quantities were made to customers within convenient range of the particular warehouse. In this class of shipments the freight was prepaid from the plaintiff’s factory at Lawton to the warehouse and again from the warehouse to the customer. This method of delivery was 'used in order to obtain the benefit of carload freight rates and at the same time to have on hand at points distant from the factory a stock of goods from which local deliveries could be promptly made.
    
      
      (c) In less-than-carload lots directly from the plaintiff’s factory to customers, in which case the freight was usually prepaid.
    VII. The plaintiff was advised by the collector of internal revenue at Grand Rapids at a conference when the beverage tax of 1918 became effective that it was not permissible to deduct transportation charges from gross invoice amounts before computing the beverage tax, and for this reason a different practice prevailed with the plaintiff from February 25, 1919, to June 20, 1919 (at about which time the plaintiff obtained knowledge of article 9 of Treasury Regulations 52), from that which prevailed after that date.
    VIII. When shipments in carload lots were made to jobbers from February 25, 1919, to June 20, 1919, the goods were invoiced at a certain price stated thereon, “Less freight ”; that is, the freight charges were paid at destination by the customer, who deducted from the invoice amount the amount of transportation charges paid by him and remitted to plaintiff the remainder. On all .invoices for such shipments the words “Less freight” were written on the invoice, but the amount of the freight was not actually ascertained and extended, although this could readily have been done.
    IX. Plaintiff’s Exhibit No. 4 is a typical invoice of these shipments, and shows the following practice, unessentials omitted:
    “ GeNeeal Offices,
    “ Rochester, N. F., J¡.-26-19.
    
    “ Sold to Bailey-Hale Co.,
    “ Corpus Christi, Texas.
    “ Shipped to same.
    “As: May 1, 1919.
    “ Terms: 30 days net; 2 per cent 10 days.
    “ Shipped from Lawton, Mich., via IC-Mo. Pac.-Gulf Coast
    R. R.
    435 cs. qts. Boyal Purple Grape Juice @ $6.50_$2, 827. 50
    200 cs. pts. Boyal Purple Grape Juice @ $6.75— 1, 350. 00
    15 cs. 4 oz. Boyal Purple Grape Juice @ $7.25— 1081 75
    4, 286.25
    50 sets advertising. Less 1714%- 750.09
    3, 536.16
    Plus 10% Government tax- 353.62
    -:-$3, 889. 78
    
      “ F. o. b. Lawton, Mich., less freight.
    “ Car St. L. & S. F. 1478.
    “ This invoice is subject to $70.72 cash discount if paid on or before May 10, 1919.”
    X. On all of these shipments thus made and invoiced the-plaintiff paid the 10% beverage tax not only on the amount received by it from the customer but also on the amount of transportation charges paid by the customer and deducted by him from the face of the invoice.
    XI. The total amount of freight paid by the customers, and deducted on these shipments was $48,212.75, and the tax paid on amounts so deducted was $4,821.27.
    XII. After June 20, 1919, on shipments sold and invoiced “ Less freight,” the plaintiff ascertained the amount of' freight from Lawton, Michigan, to destination and entered it on the invoice, deducting it from the gross amount of the invoice and computed the 10% beverage tax on the balance, so that on these shipments no beverage tax was paid on the freight, although sold and invoiced in the same way as the “ Less-freight ” shipments prior to that date except that the amount of the freight was ascertained in advance at Lawton instead of at the time it was paid. This later practice was intended to conform with article 9 of U. S. Treasury Regulations 52.
    XIII. On shipments in carload lots from Lawton to distributing warehouses the freight was prepaid at Lawton to-the warehouse. When the goods thus shipped to a warehouse were reshipped to a local customer in smaller quantities than carloads the freight was also prepaid from the warehouse to the customer. Such sales, therefore, had the transportation charges prepaid from Lawton to the customer.
    XIV. On these sales the beverage tax was paid on the whole invoice amount without any deduction of transportation charges prior to computing the tax.
    XY. A typical invoice from Lawton to a warehouse is-plaintiff’s Exhibit No. 2, such shipments being usually consigned to the plaintiff itself. The invoice is as follows:
    
      “ GENERAL Oeeices,
    “Lawton, Mich., ¡¡.S-W.
    
    “ Sold to J. Hungerford Smith Grape Juice Co., Lawton, Mich.
    “ Shipped to Louisville Public Warehouse Co., Louisville, Ky.
    “ Shipped from Lawton, Mich., via G. R. & I., Richmond, Big 4, Cinn., L. & N.:
    303 cs. qts. Royal Purple grape juice.
    246 cs. pts. Royal Purple grape juice.
    6 cs. % pts. Royal Purple grape juice.
    88 cs. 4 oz. Royal Purple grape juice.
    80 cs. % gals. Royal Purple grape juice.
    41 sets advertising matter.
    “ MEMORANDUM INVOICE
    “ Car I. C. 58192.
    
      “ Freight prepaid.”
    XVI. Plaintiff’s Exhibit No. 3 is a typical invoice of a shipment from a distributing warehouse to a local customer, and reads as follows:
    “ General Oeeices,
    “ Rochester, N. Y., k-8-W
    
    “Sold to Black Diamond Products Co., Fairmont, W. Va., #1726.
    “ Shipped to Consolidation Coal Co., Jenkins Warehouse, Jenkins, Ky.
    
      “ Terms: 30 days net; 2 per cent 10 days.
    “ Shipped from Louisville, Ky.
    125 cs. qts. Royal Purple grape juice @ $6.25- $781.25
    100 cs. pts. Royal Purple grape juice @ $6.50_ 650.00
    25 cs. 4 oz. Royal Purple grape juice @ $7.00- 175.00
    1,606.25
    Less 17%%_._ 281.09
    1, 325.16
    [1 set advertising matter.]
    Plus 10% U. S. Government tax- 132.52
    “ Freight prepaid.
    
      “ This invoice is subject to $26.50 cash discount if paid on or before 4r-18-20.”
    XVII. Other shipments were made freight prepaid directly from the factory in Lawton, Michigan, to the customer, in less-than-carload lots and in those cases also the beverage tax was computed and paid as 10% of the amount of the invoice, without any deduction being first made of transportation costs.
    XVIII. A typical invoice of this last class of shipments is plaintiff’s Exhibit No. 1, which is as follows:
    “ GeNeral Offices,
    
      “Rochester, N. Y., 7-9-19.
    
    
      “ Sold to Fayette Candy Co., Uniontown, Pa.
    “ Shipped to same.
    “ Terms: SO days net; 2 per cent 10 days.
    “ Shipped from Lawton, Mich.
    5 cs. pts. Royal Purple grape juice @ $6.50_$32. 50
    Less 17%_ 5. 69
    [1 set advertising.] 26. 81
    Plus 10% Government tax_ 2. 68
    -$29.49
    “ Freight prepaid.
    “ This invoice is subject to oif, cash discount if paid on or before July 19, 1919.”
    XIX. The plaintiff was required to and did pay the 10% beverage tax on the transportation cost included in the invoiced price on all sales from February 25,1919, to December 31, 1921, except those carload shipments made freight collect and invoiced “less freight” with the amount of freight entered on the invoice made subsequent to June 20, 1919.
    XX. The amount of freight on shipments during the period involved, included in invoice amounts upon which the beverage tax was paid, was $90,449.38 and the tax paid on this transportation was 10% of this amount, or $9,044.94.
    The payments of these sums are divided as follows:
    February 25,1919-August 31,1919, freight- $58,113.45; tax, $5, 811.34 September 1,1919-August 31,1920, freight- 20, 513.86; tax, 2,051.39 September 1,1920-August 31,1921, freight- 11,442. 05; tax, 1,144.21 September 1, 1921-December 31, 1921
    freight_ 380.02; tax, 38. 00
    90,449.38 9, 044.94
    The item of taxes amounting to $4,821.27, which was paid on “ less-freight ” shipments shipped collect from February 25, 1919, to June 20, 1919, set forth above, is included in this total tax on freight, amounting to $9,044.94.
    
      XXI. All of plaintiff’s sales were made at quoted prices to the customers, which included transportation charges,whether shipments were made prepaid or collect. The cost of the transportation was never separately indicated on the invoice.
    XXII. The return to the plaintiff for the grape juice sold was the same whether the goods were shipped freight collect and invoiced “less freight,” and freight paid and deducted from the invoice by the customer (in which case no tax was collected on the transportation cost except for the first few months) or shipped and invoiced with transportation charges prepaid, in which case the beverage tax was paid on the cost of transportation.
    XXIII. The plaintiff sold its goods subject to a discount of 2 per cent from face of invoice when payment was made by customer within 10 days. The tax, however, was computed on the basis of the full amount of the face of the invoice regardless of payments by the customer within the 10-day period.
    The total amount of cash discounts taken by customers in this manner, upon which the Government collected from the plaintiff the 10 per cent beverage tax, was $40,112.20, and the tax collected upon these discounts was $4,011.22, which is the amount of plaintiff’s claim for refund of taxes paid on cash discounts.
    XXIV. The plaintiff’s grape juice was sold entirely in glass containers of different sizes, usually four-ounce, six-ounce, eight-ounce, sixteen-ounce, thirty-two ounce and sixty-four ounce. The container cost included the cost of the glass bottle, the label, the caps for the bottles, and the case in which the bottles were packed. Containers were purchased by the plaintiff by cases complete with these items, and a year’s supply was contracted for annually.
    The cost to the plaintiff of these complete containers for the grape juice sold by it during the tax period was as follows:
    On grape juice sold from February 25, 1919, to August 31, 1919, $125,874.24.
    On grape juice sold from September 1, 1919, to August 31, 1920, $242,033.73.
    
      On grape juice sold from September 1, 1920, to August 81, 1921, $52,OTAS?.
    On grape juice sold from September 1, 1921, to December-31, 1921, $432.94.
    The total cost of the complete containers of the grape juice sold by the plaintiff from February 25, 1919, to December 31, 1921, was $420,415.28.
    XXY. The taxes paid by the plaintiff were computed on the invoice amounts without deduction for the cost of the containers, and the amount of taxes paid on the cost of such containers, a refund of which is claimed, was 10 per cent of said $420,415.28, or $42,041.53.
    XXVI. The grape juice sold was pressed in the autumn, and stored in cellars in large containers until the pressing season was over and the season’s juice all on hand. It was then bottled, and when bottling was going on no other operations were being conducted at the factory.
    The expense of the bottling operations includes the labor cost of drawing and heating the juice, washing bottles, filling, Pasteurizing, labeling, sealing, inspecting, and the proper proportion of general overhead chargeable to bottling operations.
    The bottling and packing cost of the grape juice sold during the time in question, as shown by the plaintiff’s records, was as follows:
    On grape juice sold from February 25, 1919, to August 31, 1919, $49,346.84.
    On grape juice sold from September 1, 1919, to August 31. 1920, $62,980.9?.
    On grape juice sold from September 1, 1920, to August 31, 1921, $14,597.?6.
    On grape juice sold from September 1, 1921, to December 31, 1921, $132.03.
    The total expense of bottling and packing the grape juice-sold by the plaintiff from February 25, 1919, to December 31, 1921, upon which the beverage tax was paid amounted to $127,057.60.
    XXVII. In computing and paying beverage taxes no. deduction was made from invoice amounts of this bottling and packing expense.
    
      The amount of taxes paid on the portion of invoice .amounts of sales which represented this bottling and packing expense was 10 per cent of $127,057.60, or $12,705.76.
    XXVIII. In all of the sales made, during the period involved, an amount equivalent to that of the tax paid by the plaintiff to the defendant was separately indicated on the invoice and paid by the customer to the plaintiff.
    The court decided that plaintiff was entitled to recover the sum of $13,056.16 with interest at the rate of 6 per cent per annum from December 31, 1921, to date of judgment, amounting to $4,010.42; in all, $17,066.58.
   Moss, Judge,

delivered the opinion of the court:

Plaintiff, J. Hungerford Smith Grape Juice Company, is engaged in the business of manufacturing unfermented grape juice for beverage purposes, which it sells at wholesale. The product is placed in glass containers of various sizes, which are packed in boxes, cartons, or other containers for delivery to its customers. Its manufacturing plant is located at Lawton, Michigan, and sales were made to customers throughout all parts of the country. All sales were made by plaintiff under agreement that the price should be two per cent less than the gross invoice if paid within ten days. Deliveries were made in several ways: (1) In carload lots directly from factory to customer, in which case the goods were invoiced “ less freight ” and the freight was paid by the customer at point of destination, and the amount so paid was deducted from the invoice in making remittance to plaintiff; (2) by shipments in carload lots to certain distributing warehouses at convenient distributing points, from which deliveries in smaller quantities were made to customers within convenient range of the warehouse. In this class of shipment the goods were consigned to plaintiff in care of the warehouses, the freight was prepaid from the factory to the warehouse, and again from the warehouse to the customer; (3). in less-than-carload lots directly from factory to the customer, in which case the freight was usually prepaid.

By section 628 of the revenue act of 1918, approved February 24, 1919, and effective February 25, 1919, 40 Stat. 1116, it was provided “ that there shall be levied, assessed, collected, and paid, in lieu of the tax imposed by sections 313, 315 of the revenue act of 1917, (a) * * * upon all unfermented grape juice, ginger ale, root beer, sarsaparilla, pop, artificial mineral waters (carbonated or uncarbonated), other carbonated waters or beverages, and other soft drinks, sold by the manufacturer, producer, or importer, in bottles or other closed containers, a tax equivalent to ten per centum of the price for which so sold.” This act continued in force from February 25, 1919, until December 31, 1921.

Following the enactment of this statute plaintiff was required to include transportation, charges in the total amount of the invoice, and the ten per cent tax was calculated on that total.

On May 3, 1919, the Commissioner of Internal Revenue promulgated regulations relating to the tax on beverages which provided that if goods were sold and delivered at a certain point, less freight to be paid by purchaser, the freight should be deducted before computing the tax. Thereafter no further tax of this character was demanded or paid. However, the Government continued to impose and collect a tax on transportation charges in all cases where the freight was prepaid by plaintiff at the factory.

It is plaintiff’s contention that it was the intent and meaning of the act above set forth to levy a tax upon the sales price of grape juice alone exclusive of transportation cost, and also exclusive of the value, cost, and expense of bottles and containers, and the expense of bottling and preparing the goods for shipping. Proceeding upon this theory, plaintiff filed with the Commissioner of Internal Revenue a claim for refund of tax collected on sums which included such items as the basis for the application of the ten per cent tax, which claim was denied by the commissioner.

With reference to plaintiff’s claim with regard to transportation charges, we are of the opinion that it was improper to compute the tax on amounts including freight charges in either class of shipment. The price or return actually received by the manufacturer was precisely the same, whether the goods were invoiced at a price less freight, the customer paying the freight and deducting it from the amount of invoice, or whether the freight was prepaid by the plaintiff at the factory. In both cases the customer paid the transportation charges, and such charges did not constitute a part of the price for which the goods were sold. Plaintiff should recover on this item the sum of $9,044.94 with interest.

It was also improper to include in the total sum upon which the tax was computed the cash discount. Under the language of the statute “ tax equivalent to ten per centum of the price for which so sold” fairly construed, means the price fixed by agreement of the parties and paid to the manufacturer. In this case the manufacturer offered its goods at two prices, one being the regular selling price payable in thirty days, and the other being the regular selling price less two per cent if paid within ten days. The customer could accept either price, and the acceptance of the latter proposal constituted the agreement between the parties as to the price for which the goods were sold. Plaintiff is entitled to recover on this item $4,011.22 with interest.

It is the opinion of the court that plaintiff’s claim in the matter of cost of bottles and containers, and the expense of bottling and preparing goods for shipment should not be allowed. It is clear from the evidence, as shown by certain exhibits illustrating the type of invoice used by plaintiff, that all expenses, including cost of bottles and containers, expense of bottling and preparing for shipment, were included in the price charged by plaintiff and paid by the customers. It is the judgment of the court that plaintiff herein recover the two items mentioned with interest. And it is so ordered.

Graham, Judge; Hay, Judge; Booth, Judge; and Campbell, Chief Justice, concur.  