Pratt-Gilbert Hardware Co. v. O'Neil

The question to be decided here is: Are sales of merchandise made by a licensee under the Excise Revenue Act of 1935, c. 77, taxable where such sales have been consummated by delivery to the purchaser in another state?

Plaintiff-appellant is an Arizona corporation, with its principal place of business at Phoenix, engaged in the hardware and implement business, and is licensed under the 1935 Excise Revenue Act. During the years 1942 and 1943 plaintiff, pursuant to contract made in Arizona, agreed to sell and deliver to purchasers certain merchandise f.o.b. without the state of Arizona. In compliance with these agreements, there were delivered to the purchasers f.o.b. at St. Louis, Missouri, Trenton, New Jersey, and Cincinnati, Ohio, certain articles. All the purchasers were Arizona residents, and the equipment so sold and delivered was carried in interstate commerce to the buyers-purchasers in Arizona.

No facts or circumstances appear which would indicate an intention on the part of the seller and buyers that title and possession would not pass on the delivery to the carrier. The rule is, in the absence of evidence to the contrary, that "Under a contract of sale f.o.b. the point of shipment, the title passes at the moment of delivery to the carrier, that is, when the goods are placed on board cars or a vessel for transportation to the buyer." 55 C.J. 559, sec. 566, Sales; 46 Am.Jur. 608, sec. 442, Sales. Such is the rule of this jurisdiction. State v. Hendrix,59 Ariz. 184, 124 P.2d 768; sections 52-517, 52-518, 52-543, A.C.A. 1939.

A delivery is essential to the consummation of a sale, and the sale is considered made at the place of delivery, not where the agreement is entered into or where the purchase price is paid, but where the goods are delivered to the purchaser. 46 Am.Jur. 605, sec. 440, Sales:

"* * * In such case, the time and place of delivery are regarded as the time and place of sale, the carrier is deemed the bailee of the buyer for the purpose of transportation, and the seller is deemed the agent of the buyer in employing the carrier. Although the executory contract of sale is entered into in the jurisdiction in which the buyer resides and to which the subject matter of the sale is to be shipped to him, either personally by the seller or through his authorized agent, the place of the executed sale is generally held to be the place where the property is set apart and delivered to the carrier; and it has been held that where an order is taken and payment of the price received, the order to be filled by delivery of the property to be thereafter separated from a mass, to a carrier at another place for transportation to the buyer, the place of sale is the place where the property is set apart and delivered to the carrier."

The text is supported by decisions from the United States courts and the courts of thirty states, among them Arizona. State v. Hendrix, supra. As to this rule, particular attention is called to Louisville N.R. Co. v. United States, 267 U.S. 395,45 S. Ct. 233, 69 L. Ed. 678; Illinois C.R. Co. v. United States,265 U.S. 209, 44 S. Ct. 485, 68 L. Ed. 983; Pullman Palace Car Co. v. Metropolitan Street R. Co., 157 U.S. 94, 15 S. Ct. 503,39 L. Ed. 632; The Mary and Susan, 1 Wheat. 25, 4 L. Ed. 27; The Merrimack, 8 Cranch 317, 3 L. Ed. 575; Golo Slipper Co. v. Hamilton Shoe Stores Co., 10 Cir., 43 F.2d 33.

It is the general rule under sales or business excise tax statutes similar to ours that where a licensee sells goods to a purchaser in the taxing state, but actually delivers the goods to the purchaser in another state, the taxation of the proceeds of such sales constitutes an unlawful burden on interstate commerce. Crew Levich Co. v. Commonwealth of Pennsylvania, 245 U.S. 292,38 S. Ct. 126, 62 L. Ed. 295; Gwin, White Prince v. Henneford,305 U.S. 434, 59 S. Ct. 325, 83 L. Ed. 272; Anno. 117 A.L.R. 854. The same rule applies where a gross income tax is sought to be collected on intra as well as interstate business without apportionment. J.D. Adams Mfg. Co. v. Storen, 304 U.S. 307,58 S. Ct. 913, 82 L. Ed. 1365, 117 A.L.R. 429; Anno. 89 A.L.R. 1440; 47 Am.Jur. 209, sec. 10, Sales and Use Taxes.

In recognition of this general principle, the excise revenue act which we have under consideration does not attempt to levy an excise tax upon the gross proceeds of sales or gross income derived from transactions in interstate commerce. Sec. 73-1308, A.C.A. 1939. Wherever a transaction which involves both intra and interstate business is concerned, there is an apportionment provided for in the statute. Thus, only that portion of the income or proceeds of sales from all persons engaged in the business of transmitting long distance messages by telephone or telegraph, or transporting for hire freight or passengers by motor vehicles or railroads, or products such as oil or gas in pipes or conduits, arising from intrastate business, is taxable. Sec. 73-1303, (c) (9), A.C.A. 1939. It will also be noted that those taxed as manufacturing, baling, etc., under the provisions of sec. 73-1303, (a) (1), and (c) (1), mining, quarrying, etc., by the provisions of (c) (9), supra, the value of the entire product, regardless of the place of sale rather than the sale price, is the basis for the tax. The tax in these cases is fixed for the manufacturing, etc., process rather than upon the sale of the articles. It is evident, however, that the legislature inserted the provision last mentioned because it had in contemplation that the proceeds of the sale of an article made beyond the territorial jurisdiction of the state would not be based upon a taxable event.

It is my view that the statutes in so far as sales are concerned contemplate the imposition of taxes on the gross income or the gross sales made in Arizona. The legislature doubtless recognized that the state had no jurisdiction beyond its boundaries and that an extraterritorial sale would not be taxable. It seems to be a fundamental rule that a state may not tax persons, property or interest not within its territorial jurisdiction. 47 Am.Jur. 202, sec. 5, Sales and Use Taxes; 26 R.C.L. 267, sec. 234, Taxation, also page 268, sec. 235; James v. Dravo Contr. Co., 302 U.S. 134, 58 S. Ct. 208, 82 L. Ed. 155, 114 A.L.R. 318.

We have held that while the tax in question is an excise revenue tax, in so far as retail sales are concerned it is fundamentally based upon the proceeds of sale, and if a sale is exempt, as where made to the United States government, the proceeds of such a sale cannot be the basis for a tax. Luke v. East Vulture Min. Co., 47 Ariz. 220, 54 P.2d 1002; Arizona State Tax Comm. v. Frank Harmonson Co., 63 Ariz. 452, 163 P.2d 667.

It would seem to be obvious that the state has no power to impose or collect a tax on a sale which has been consummated beyond its territorial boundaries. McLeod v. J.E. Dilworth Co.,322 U.S. 327, 64 S. Ct. 1023, 1025, 88 L. Ed. 1304. In this case an order was taken in Arkansas by traveling salesman, delivery was made to a carrier in Tennessee. The court said: "For Arkansas to impose a tax on such transaction would be to project its powers beyond its boundaries and to tax an interstate transaction." I find no cases under an excise or sales tax similar to ours where taxes have been collected on the proceeds of sales on property where the sales were consummated by delivery to the purchaser without the boundaries of the taxing state. We discussed this matter in the late case of Crane Co. v. Arizona State Tax Comm.,63 Ariz. 426, 163 P.2d 656, 661, and pointed out that sales taxes do not unconstitutionally burden interstate commerce where imposed upon sales of property shipped from without the state "provided, however, that the delivery of the merchandise is made to the purchaser in the taxing jurisdiction either directly from such extrastate source or through the offices of the seller within the taxing state; * * *" While we did not have occasion in that case to determine whether a sale, such as we have under consideration, that is, where the delivery has actually been made in another state, is subject to the tax, the converse to what we said in the Crane Co. case would seem to be true. That is to say, if the sale was made without the jurisdiction of the taxing state as here, by delivery without the state, the tax cannot be imposed upon the proceeds of such sale. As I have stated, no case has held that such a sale is taxable.

It is apparent that an attempt to tax in Arizona the proceeds of a sale made in another state would unquestionably constitute a burden upon interstate commerce. So in this case the places of these sales being respectively Missouri, New Jersey and Ohio, each of these states could impose similar taxes, and the result would be multiple taxes and an undue burden on interstate commerce. J.D. Adams Mfg. Co. v. Storen, supra; J.B. Simpson, Inc., v. O'Hara, 277 Mich. 55, 268 N.W. 809; Montgomery Ward Co. v. Fry, 277 Mich. 260, 269 N.W. 166; Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 58 S. Ct. 546, 82 L. Ed. 823, 115 A.L.R. 944.

An examination of the annotations in 89 A.L.R. 1440, 110 A.L.R. 1491, 117 A.L.R. 852, and 128 A.L.R. 900, clearly discloses that no court has yet held the proceeds of a sale taxable except where delivery has been made to the purchaser in the taxing jurisdiction. The taxable event, to-wit, the sale, must occur in the taxing jurisdiction. We think the case of Western Live Stock v. Bureau of Revenue, supra, clearly illustrates that point. There the question before the court was whether under the sales or license tax law of New Mexico, advertising received through interstate commerce and published in a paper circulated in New Mexico and other states, was taxable. The court held that although the advertising was received in and circulated in interstate commerce, since the taxable event, to-wit, the actual printing and publication occurred in New Mexico, the transaction was taxable. It is pointed out in this case that there would be no possibility of other jurisdictions taxing the same transaction, and therefore the tax in New Mexico would not constitute an undue burden on interstate commerce.

I cannot agree with Justice LA PRADE'S analysis of either of the McGoldrick cases. In McGoldrick v. Berwind-White Coal Min. Co., 309 U.S. 33, 60 S. Ct. 388, 84 L. Ed. 565, 128 A.L.R. 876, the ruling of the court pertained wholly to shipments which originated outside the City of New York, but where actual deliveries were made within the city. In two instances the coal company made shipments f.o.b., one from its mines in Pennsylvania, and the other at the pier in Jersey City, N.J. The court left the question as to these two items to the New York court, on the theory that it was a local question, since the Act provided that "any transaction originating and/or consummated outside the territorial limits of the city", Laws N.Y. 1943, Ex.Sess., c. 815, as amended by Laws 1934, Ex.Sess., c. 873, would not be taxable. Chief Justice Hughes dissented, with joinder by Justices McReynolds and Roberts.

Judge LA PRADE leans heavily upon the opinion of the supreme court in the case of McGoldrick v. Felt Tarrant Mfg. Co.,309 U.S. 70, 60 S. Ct. 404, 405, 84 L. Ed. 584. The Judge's statement that the machines were shipped f.o.b. factory or main office in Massachusetts is not borne out by the record. The court in that case states:

"The sales in the city, when not of machines located at the New York office, are effected through solicitations of orders by the agent, which takes from the prospective purchaser a signed order or a contract for a conditional sale on partial payment, which is forwarded by the agent to the Massachusetts office. If accepted there the order is filled by shipping the purchased machine by rail or truck direct to the purchaser in New York City, who pays the freight."

It is evident from this that the actual delivery was made in New York City, and not at the point of shipment. The fact that the purchaser must pay the freight is not equivalent to a transaction where the shipment is made f.o.b. shipping point. So far as may be determined from the opinion, the shipments may have been c.o.d. New York.

I am satisfied that although the facts here are dissimilar the rules laid down by the Missouri supreme court in American Bridge Co. v. Smith, 352 Mo. 616, 179 S.W.2d 12, 157 A.L.R. 798, and by the United States Supreme Court in McLeod v. Dilworth Co., supra, construing the Arkansas retail sales act are applicable here. The imposition of a tax on the sales in controversy is wholly beyond the scope of our excise tax law, and for the reason stated void under the interstate commerce clause. In order that a transaction be taxable within the state, the taxable event, here the sale, must have occurred within the territorial boundary of the state. Any other holding would lead to confusion. If we say that a sale made in Ohio or Missouri is taxable here simply because the contract was entered into in this jurisdiction and the purchase price paid in Arizona, we would also have to hold that where a merchant in Arizona receives an order either personally or by mail for the delivery of goods in another state, the proceeds of such a sale would be taxable. The fact that the merchant happens to have a place of business in Arizona should not compel him to pay taxes on an extrastate sale. It seems to be unquestioned that if a foreign merchant sends a solicitor to Arizona, who takes an order for merchandise to be shipped to the purchaser in Arizona, such a sale is not taxable. McLeod v. Dilworth Co., supra. A foreign merchant would have to be transacting business in Arizona before the tax would operate against him. If, on the other hand, we hold that a local merchant, who has a place of business and pays taxes in Arizona on his property, has the right to accept an order for merchandise and make the delivery in another state for shipment to Arizona, without being subject to tax on the proceeds of such a sale, he is placed on an equality with the nonresident merchant. Such a ruling, it seems to me, makes sense and is fully supported by the law.

For the reasons stated, I dissent from the majority opinion. The judgment should be reversed.