Sanchez Morales & Co. v. Gallardo, 2003

• Decision Date: 11 April 1927
• Docket Number: No. 2003,2004.,2003
• Citation: 18 F.2d 550
• Parties: SANCHEZ MORALES & CO., Inc., v. GALLARDO. PORTO RICO AUTOMOBILE CO., Inc., v. SAME.
• Court: U.S. Court of Appeals — First Circuit

18 F.2d 550 (1927)

SANCHEZ MORALES & CO., Inc., v. GALLARDO.

PORTO RICO AUTOMOBILE CO., Inc., v. SAME.

Nos. 2003, 2004.

Circuit Court of Appeals, First Circuit.

April 11, 1927.

Carroll G. Walter, of New York City (J. Henri Brown, of San Juan, Porto Rico, on the brief) for appellants.

William C. Rigby, of Washington, D. C. (George C. Butte, of San Juan, Porto Rico, and Russell H. Brennan, of Washington, D. C., on the brief), for appellee.

Before BINGHAM, JOHNSON, and ANDERSON, Circuit Judges.

ANDERSON, Circuit Judge.

These two tax cases are conceded by learned counsel for the appellants to be indistinguishable from 29 of the 43 cases disposed of in a single opinion of this court on January 7, 1927. 16 F.(2d) 545.

The court below sustained demurrers and dismissed the bills, which allege that the plaintiffs are dealers in motor vehicles and accessories, pneumatic tires, phonographs, radio sets, pianos, pianolas, typewriters, safes, glass show counters, cash registers, and adding machines, all transported into Porto Rico from the United States, and that of these articles only glass showcases are manufactured in Porto Rico.

Counsel now urge that this court was wrong in its expressed view (16 F.(2d) 545) that the West India Oil Case, 6 F.(2d) 523, disposed of the minor contentions raised in the 29 cases and now raised in these two cases.

The first contention is stated as follows:

"The act of 1923 discriminates against articles manufactured or produced outside of Porto Rico, in that upon such articles the taxes are computed upon a higher basis of value than upon domestic articles; and such discrimination is an unlawful regulation of and burden upon interstate and foreign commerce."

This is plainly unsound. Goods imported from (say) New York are, when landed in Porto Rico, treated by the Tax Act precisely as though manufactured in Porto Rico. Transportation to Porto Rico of New York goods is a part of the basic cost in Porto Rico of the imported goods. The importer and the local manufacturer are both taxed on the basis of cost in Porto Rico, plus a profit of 10 per cent., unless adjusted to a lower rate under section 6 of the Act of 1923, No. 68, as amended by Laws Sp. Sess. 1920, No. 1. The proper comparison is not between manufacturing costs in New York — followed perhaps by a sale in New York to the importer at a price increased by the manufacturer's profit — and the manufacturing cost of goods produced in Porto Rico. When in Porto Rico, whether manufactured in Porto Rico or in the States and transported to Porto Rico, the first sale is taxed. There is no discrimination against goods produced in the States. The New York manufacturer can compete with the Porto Rican manufacturer only by putting his goods into the Porto Rican market. The local manufacturer is entitled to such advantage as accrues from his remoteness from the large manufacturing centers. Whether the amount of local competitive manufacturing is sufficient to make appellants' claim, even if found legal, of any significance, is, on this record, doubtful. But it is not sound.

Appellants' second contention is thus stated:

"The definition of the term `ad valorem,' contained in section 6 of the Act of 1923 (substantially identical with section 4 of the Act of 1925), causes an inequality of valuation for the purpose of fixing the tax, and thus makes the statute operate unequally as between members of the same class, and thereby causes, not only a lack of uniformity, but also a denial of the equal protection of the laws, in violation of the Organic Act of Porto Rico and the Fourteenth Amendment of the Constitution."

Section 6 (as amended by Acts Sp. Sess. 1923, No. 1, § 1) reads:

"Sec. 6. Definition of the Phrase `Ad Valorem.' — For the purposes of this act the phrase `ad valorem' shall be construed to mean the cost of an article after it is in the possession of a person, plus a reasonable benefit to be estimated at ten per cent. over the amount of said cost, unless such person proves, to the satisfaction of the treasurer of Porto Rico, that the profit obtained on such article is less than ten per cent.; provided, that the word `person' as used in this section shall be given the meaning given thereto in section 7 hereof."

The argument is that, as some sales may possibly be made at less than cost and others at a profit in excess of 10 per cent., the necessary result is lack of the uniformity required by the Organic Act.

This contention is based on a misapprehension of the fundamental nature of the tax. It is not a tax on property or on profits. It is an excise tax levied on the "sale, use, consumption or exhibition in Porto Rico" of the named articles. There is no "classification" as the term is used in most of the cases cited and relied upon. In title II, entitled "Excise and License Taxes," part I deals with excise taxes, in section 20, with 51 subdivisions; part II deals with "license taxes," in section 21, with 42 subdivisions. In section 20, about 20 of the excise taxes are specific, e. g., $1 a liter on brandy; about 30 are ad valorem: a few are mixed. The ad valorem taxes are: At 5 per cent. on sales, etc., of 7 articles; at 10 per cent. on 16 articles; others at 15, 30, and 40 per cent. Perhaps even more varied are the license taxes imposed, each three months, on numerous kinds of manufacturers and dealers; some of them divided into as many as five classes, the gradation to be made by the treasurer (section 23) "according to the relative importance of the establishment as measured by the volume of business transacted, irrespective of the net profit or gain derived therefrom, but with due regard to the business or industry to which it bears most intimate similarity."

Thus profits are expressly excluded as a basis for the license tax. All licenses of the same class pay the same license fees, even though doing unequal amounts of business or deriving unequal profits from the same volume of business.

Turning to the ad valorem excises, there is...