Hervey v. Southern Wooden Box, Inc. ( 1972 )

George Rose Smith, Justice.

The question in this case is whether one of the appellees, CocaCola Bottling Company of Southeast Arkansas, must pay the Arkansas sales tax or use tax upon its purchases of certain paper cups and wooden cases that it uses in marketing soft drinks. The chancellor held, in two cases consolidated for trial, that neither the purchase of the cups nor the purchase of the cases is a taxable transaction. Since the issues in the two cases are quite different, we discuss them separately-

First, the paper cups. CocaCola, as plaintiff, brought suit to recover use taxes which it had paid under protest upon its purchase of paper cups from out-of-state manufacturers. CocaCola claims an exemption under the “sale for resale” provisions of the statutes, which exempt property that becomes “a recognizable, integral part of the manufactured, compounded, processed, assembled or prepared products.” Ark. Stat. Ann. § 84-1904 (i) and 84-3106 (b) (Repl. 1960). As we pointed out recently in Hervey v. International Paper Co., 252 Ark. 913, 483 S.W. 2d 199 (1972), the clear legislative intent is to exempt purchases that are made for the purpose of resale, to the end that the same property will not be twice subjected to the same tax.

The paper cups in question are bought by CocaCola solely for use in its own coin-operated retail vending machines. When a customer deposits the proper coin or coins in one of those machines, the machine first drops one of the paper cups into an allocated space and then fills the cup with a cold carbonated beverage. The customer takes the paper cup and presumably discards it when he finishes the drink; certainly the cup is not returned to the CocaCola Company for re-use. The company holds a gross receipts tax permit and pays the 3% sales tax, properly called the gross receipts tax, upon the total revenue derived from its vending machines.

The appellant, in arguing that the sale of the paper cups to CocaCola is taxable, relies upon our decision in Wiseman v. Ark. Wholesale Grocers’ Assn., 192 Ark. 313, 90 S.W. 2d 987 (1936). There we denied a tax exemption to grocers upon their purchase of wrapping paper, paper bags, and twine, to be used in the retail sale of groceries. Our reasoning was that grocers buy those wrapping materials for consumption in the course of their own business rather than for resale.

The Wiseman case was clearly and logically distinguished by Chief Justice Griffin Smith in McCarroll v. Scott Paper Box Co., 195 Ark. 1105, 115 S.W. 2d 839 (1938). There it was stipulated that the Wortz Biscuit Company, a manufacturer, purchased paper boxes to be used in the sale of prepackaged cakes, cookies, etc. (which Wortz also sold in bulk at lower prices). The paper boxes became a component part of the product, which was sold in the box to the wholesaler, jobber, retailer, and ultimate consumer. The cost of the box merged into and became an element in the cost of the finished article, representing twelve to fourteen per cent of the net selling price, and was so computed by the biscuit company, rather than being considered by it as part of its general overhead expense.

In the McCarroll case we held that Wortz purchased the paper boxes for resale. In distinguishing the earlier Wiseman case the opinion pointed out that in a grocery store the price of a dozen oranges, a peck of potatoes, a roast, and other groceries is predetermined either by weight or by count, without reference to the paper bag that the checker uses for delivering such articles to the customer. Hence those paper bags are purchased by the grocer for consumption in the course of his business rather than for resale to the customer. Thus the cost of the paper bags merely enters into the selling price of the groceries in the same way as other overhead expenses, such as rent, utility bills, labor, etc.

By contrast, the cost of the boxes used by Wortz Biscuit Company in McCarroll was allocable to the particular product being sold rather than to the overhead cost of doing business. In the case at bar the same showing was made by CocaCola in the trial court with respect to its paper cups. Their cost represents one sixth of the total cost of each drink sold through a vending machine and is considered by the company in fixing the price of such drinks. It follows that the company pays a sales tax upon the paper cups, as a component part of what the statute describes as the “assembled or prepared products,” when the company pays its tax upon the gross revenue derived from its vending machines. The chancellor correctly held that CocaCola’s purchase of the paper cups from the manufacturer is exempt from the use tax, as a purchase for resale.

Secondly, the wooden cases. CocaCola is again an interested party, though the suit to recover taxes paid under protest was brought by the other appellee, Southern Wooden Box, Inc., which manufactures the wooden cases. Here again CocaCola’s argument is that it buys the cases for resale.

CocaCola’s proof upon this branch of the case was largely directed toward showing that bottling companies must deliver their products in compartmented wooden cases, to keep the bottles of carbonated beverage from being broken. That showing, however — that the cases are essential to the company’s method of doing business— does not necessarily show that the cases are purchased for resale. In fact, it is the company’s failure to make that latter showing that compels us to conclude that the purchase of the cases is not a tax-exempt transaction.

The wooden cases are of two types, which CocaCola buys at different prices. It pays $1.07 for a case compartmented to hold 24 bottles and $.96 for a case compartmented to hold four six-packs.

CocaColá contends that it actually “sells” the wooden cases to its retailers, but the proof does not support that contention. CocaCola’s routemen deliver the company’s bottled beverages, in the wooden cases, to grocery stores, filling stations, restaurants, and other retailers. The 24 bottles in a case sell at wholesale for $1.25 (or did in the early 1960’s, the years involved in this case). The route-man also collects a deposit of 12 cents upon each wooden case that he delivers to the retailer. At the same time he picks up other cases of empty bottles, crediting the retailer with 12 cents for each wooden case that is returned. If a retailer or consumer fails to return a case he loses his 12-cent deposit, but no other charge for the missing case is made.

It is obvious from the proof, simply as an economic fact, that CocaCola does not engage extensively in selling, for 12 cents each, cases that it buys for $.96 or $1.07. No such loss could conceivably be taken with regularity in transactions involving only $1.25 as the basic price for the beverage being sold. In fact, the proof is clearly to the effect that the cases are not sold. The only wooden case examined at the trial, which came from an area assigned to another CocaCola bottling company, was marked “Property of the CocaCola Company.” The chief witness for the appellee bottling company testified that his company’s cases were “usually” just marked “Coca-Cola,” but that was done to identify “our cases” so they couldn’t be taken by somebody else. He admitted that the company certainly hoped that the cases would be returned. He also stated that there are statistics showing the average number of times that the cases are returned to a bottling company. Those statistics were not put in the record, even though CocaCola had the burden of proving its claim to an exemption from the tax. Hervey v. International Paper Co., supra.

We hold that CocaCola must prove that it buys the wooden cases for the purpose of reselling them. We do not interpret the broad statutory definition of a sale to include every transaction in which there is a transfer of possession, for a consideration. Ark. Stat. Ann. § 84-1902 (c). The statute must be read as a whole. If the reference to a transfer of possession were applied literally in every instance, absurd results would follow. For instance, a company engaged in renting automobiles would not be required to pay a sales tax upon its purchase of cars, because it would be buying them for resale. Similarly, a company selling butane gas in heavy iron bottles would be reselling the bottles, even though its customers were required to return them. It is our duty to give the statute a reasonable construction, not an absurd one.

The section of the statute now before us clearly provides that if the sale is not for resale, then it is for the processor’s own “consumption or use.” Ark. Stat. Ann. § 84-1904 (i). We think it plain that CocaCola is using the wooden cases, not reselling them.

Although the statute, as we have said, is designed to prevent the same property from being subjected twice to the same tax, there is a correlative legislative intent that all property be subjected to the tax at some point in the course of its manufacture and sale to the ultimate consumer. The “sale for resale” section of the statute pointedly confirms this intent by its requirement that, for the initial sale to be exempt, the resale must be to a person having a sales tax permit. In our judgment the proof falls decidedly short of showing that CocaCola deliberately buys wooden cases for about a dollar each to resell them for 12 cents apiece. If the company’s initial purchase from the manufacturer of the cases is not taxable, then the cases escape taxation altogether, contrary to the intent of the statute. We accordingly hold that the purchases are not tax exempt. That conclusion makes it unnecessary for us to discuss the appellant’s contention that the court should have admitted proof of the custom within the industry with respect to the retailer’s failure to pay any tax upon the wooden cases.

Affirmed as to the paper cups, reversed as to the wooden cases.

Holt, J., not participating. Harris, C.J., and Byrd, J., dissent as to the reversal.