Indiana Department of State Revenue v. Hoosier Metal Fabricators, Inc.

379 N.E.2d 551 (1978)

INDIANA DEPARTMENT OF STATE REVENUE, Gross Income Tax Division of the State of Indiana, Appellant (Defendant below),
v.
HOOSIER METAL FABRICATORS, Inc., an Indiana Corporation, Appellee (Plaintiff below).

No. 2-477A130.

Court of Appeals of Indiana, Second District.

August 24, 1978.

Theodore Sendak, Atty. Gen., Daniel Lee Pflum, Deputy Atty. Gen., Indianapolis, for appellant.

Michael J. Kiley, Kiley, Osborn, Kiley, Harper & Rogers, Thomas R. Hunt, Marion, for appellee.

BUCHANAN, Chief Judge.

CASE SUMMARY

Defendant-appellant, Indiana Department of State Revenue (the State), appeals from a judgment ordering the refund of gross income tax to Hoosier Metal Fabricators, Inc. (Hoosier), claiming the trial court erred in ruling that Hoosier's sales were made in interstate commerce and therefore were exempt from Indiana gross income tax.

We affirm.

FACTS

The facts and evidence most favorable to the judgment reveal:

Hoosier is an Indiana corporation located in Gas City, Indiana, and involved in the production of grommets and fabrications made from exotic metals of an experimental nature for use in jet aircraft engines.

Approximately ninety-nine (99%) percent of Hoosier's work is done for the Pratt-Whitney Aircraft Corporation (Pratt-Whitney) located in East Hartford, Connecticut, and West Palm Beach, Florida. As a prerequisite to the placement of orders, Pratt-Whitney required Hoosier to establish a quality control system and quality control manual. After approval of the system and manual, Pratt-Whitney assigned a quality control representative (QCR) to Hoosier's plant in Gas City, Indiana.

The QCR was present at Hoosier's plant approximately three days a week and was paid exclusively by Pratt-Whitney. His primary function was to inspect the manufacturing process to assure compliance with the quality control system.

Several witnesses testified that the QCR's authorization to ship a part to Pratt-Whitney did not constitute acceptance and that the QCR had no authority to accept or reject any part. Furthermore, there was evidence that Pratt-Whitney had subsequently accepted parts identified as defective by the QCR. Repeated testimony was given to the effect that final acceptance or rejection occurred only after shipment and re-inspection by Pratt-Whitney. The contract between the parties provided that shipment was to be made F.O.B. Gas City, Indiana, and that Pratt-Whitney had up to six months following delivery in which to reject any non-conforming part or shipment.

The State audited Hoosier for the calendar years of 1969 through 1974 and discovered that Hoosier had filed gross income tax returns for those years taking exemptions for income derived from sales to Pratt-Whitney as being income derived from interstate commerce.

The State disallowed the exemption and assessed additional taxes and interest against Hoosier, which Hoosier paid under protest. Hossier subsequently filed a claim with the State for refund but the claim was denied. In 1975, Hoosier filed a complaint in the Grant County Circuit Court for refund of the additional taxes paid for the years 1969 through 1971, and in 1976, Hoosier filed a second complaint for recovery of additional taxes paid during 1972 through 1974. The causes were consolidated and the parties stipulated to the following issue:

Whether or not the function and duties of the Quality Control Representative of Pratt-Whitney Aircraft at the Indiana Plant of Plaintiff constitutes final acceptability of the parts produced by Plaintiff in Indiana for Pratt-Whitney Aircraft at its Connecticut and Florida operations so as to make income derived from sales of these component parts subject to Indiana Gross Income Tax.

The parties also stipulated that the total refund, if recovered, would be Forty-four Thousand, One Hundred and 99/100 ($44,100.99) Dollars for the years 1969 through 1971, and Twenty-three Thousand, Two Hundred Sixty-one and 11/100 ($23,261.11) Dollars for 1972 through 1974.

The trial court found that the QCR did not accept or reject the parts at Hoosier's plant in Gas City, Indiana, and therefore the sales to Pratt-Whitney resulted in income derived from interstate commerce. Accordingly, the trial court ordered the State to refund the stipulated amounts to Hoosier.

ISSUES

The true issue before us is:

Has the State presented reversible error on appeal or are the parties bound by their stipulated issue?

DECISION

CONCLUSION — The State has preserved no reversible error on appeal.

Our statutes recognize that cardinal principle of the American federal system of government, which prohibits a state from taxing interstate commerce. Ind. Code 6-2-1-7 provides in pertinent part:

There shall be excepted from the gross income taxable under this chapter:

So much of such gross income as is derived from business conducted in commerce between this state and other states ..., but only to the extent to which the state of Indiana is prohibited from taxing such gross income by the Constitution of the United States of America.

Whether gross income is derived from interstate commerce must be determined by the particular facts and circumstances involved. Mueller Brass Co. v. Gross Income Tax Division, Indiana State Dept. of Revenue (1971), 255 Ind. 514, 265 N.E.2d 704; Gross Income Tax Division v. Surface Combustion Corp. (1953), 232 Ind. 100, 111 N.E.2d 50.

It is well established that a gross income tax on income derived from the sales of goods manufactured within the state (Indiana) to a non-resident buyer will be sustained when the transfer of title and possession occur within the state (Indiana). International Harvester Co. v. Department of Treasury of State of Indiana (1944), 322 U.S. 340, 64 S. Ct. 1019, 88 L. Ed. 1313, rehearing denied, 322 U.S. 772, 64 S. Ct. 1281, 88 L. Ed. 1597; Gross Income Tax Division v. Shane Manufacturing Co. (1963), 244 Ind. 279, 191 N.E.2d 310; Indiana Department of State Revenue v. Bendix Aviation Corp. (1957), 237 Ind. 98, 143 N.E.2d 91, appeal dismissed, 355 U.S. 607, 78 S. Ct. 539, 2 L. Ed. 2d 524, rehearing denied, 356 U.S. 928, 78 S. Ct. 714, 2 L. Ed. 2d 760 (1958).

On the other hand, gross income derived from the sale of goods shipped out of the State of Indiana has been held exempt from taxation when the passage of title occurred in another state. Gross Income Tax Division v. L.S. Ayres & Co. (1954), 233 Ind. 194, 118 N.E.2d 480; Gross Income Tax Division, State of Indiana v. Strauss (1948), 226 Ind. 329, 79 N.E.2d 103, cert. denied, 335 U.S. 860, 69 S. Ct. 135, 93 L. Ed. 406.

If there is no explicit agreement regarding the passage of title Ind. Code 26-1-2-401(2) is controlling and provides in pertinent part:

Unless otherwise explicitly agreed title passes to the buyer at the time and place at which the seller completes his performance

.....

(a) if the contract requires or authorizes the seller to send the goods to the buyer but does not require him to deliver them at destination, title passes to the buyer at the time and place of shipment; (emphasis added)

Evidence in the record discloses that the contract between Hoosier and Pratt-Whitney included the delivery term F.O.B. place of shipment (Gas City, Indiana) which indicated that Hoosier was to send the goods to Pratt-Whitney but was not required to deliver them at their destination. See Ind. Code 26-1-2-319(1)(a).

Because there is no evidence in the record indicating an explicit agreement to the contrary, we must conclude that Hoosier completed its performance and title passed to Pratt-Whitney when Hoosier delivered the parts to the carrier for shipment (in Indiana). However, the parties stipulated that the issue of taxability was determined by acceptance or rejection by the buyer. This is not the criterion. As stated in R. Summers, J. White, Uniform Commercial Code, § 8-2 (1972):

"Acceptance" is a term of art which must be sharply distinguished from a variety of other acts which the buyer might commit. Note first that whether the buyer has "accepted" the goods is unrelated to the question whether title has passed from seller to buyer. Secondly, acceptance is only tangentially related to buyer's possession of the goods, and in the usual case the buyer will have had possession of the goods for some time before he has "accepted" them. (Emphasis added)

See also R. Nordstrom, Law of Sales ch. 6, § 126 (1970).

Even though the State has argued that the F.O.B. Gas City delivery term completed the sale within the state (Indiana) and therefore the income was not derived from interstate commerce, the State and Hoosier stipulated to the single issue of place of acceptance ... a stipulation which is binding upon the parties and operates as a waiver of all other questions. Continental Casualty Co. v. Lloyd (1905), 165 Ind. 52, 73 N.E. 824; Miles v. Eltzroth (1976), Ind. App., 351 N.E.2d 77.

Consequently, no reversible error has been presented and the trial court's judgment must be affirmed.

Affirmed.

SULLIVAN, J., and HOFFMAN, J. (by designation), concur.