Peoples' Gas & Elec. Co. v. State Tax Commission

Decision Date16 September 1947
Docket Number46987.
Citation28 N.W.2d 799,238 Iowa 1369
CourtIowa Supreme Court

[Copyrighted Material Omitted] [Copyrighted Material Omitted]

W B. Sloan and J. M. Barrett, both of Des Moines, Robert L. Larson, Atty. Gen., and Henry W. Wormley, Asst. Atty. Gen., for appellant.

Smith & Beck, of Mason City, and Lane & Waterman, of Davenport, for appellees.

OLIVER, Chief Justice.

Plaintiff Kansas City Power & Light Company owned and plaintiff Peoples' Gas & Electric Company operated a power house and electric generating plant at Mason City with connected lines furnishing electricity in said city and to several adjacent industrial plants, and to an electric railway, and in or to thirteen neighboring towns; also about six hundred twenty five miles of rural lines serving about 1600 rural customers in five counties in northern Iowa. They also owned and operated a gas system furnishing natural gas in six of said cities and towns and certain suburban districts.

Defendant Commission levied the two per cent. use tax upon numerous items of industrial materials and equipment purchased by plaintiffs outside of Iowa and used in said utilities between April, 1937, and April, 1941. Plaintiffs appealed to the district court which reversed the assessment upon many items and affirmed upon others. The Commission has appealed to this court from the part of the decree which reversed the assessment upon most of the items. Plaintiffs have not appealed from the affirmance upon the other items.

I. The Use Tax law is supplementary to the Sales Tax law. It indirectly taxes sales by taxing use. It serves not only to produce revenue but also to protect Iowa dealers by placing them on a tax equality with out of state vendors whose sales are not subject to a two per cent. sales tax. Dain Mfg. Co. v. Iowa State Tax Commission, Iowa, 22 N.W.2d 786; State Tax Commission v. General Trading Co., 233 Iowa 877, 10 N.W.2d 659, 153 A.L.R. 602. In the language of Nelson v. Sears Roebuck & Co., 312 U.S. 359, 363, 61 S.Ct. 586, 588, 85 L.Ed. 888, 132 A.L.R. 475:

'It is one of the well-known functions of the integrated use and sales tax to remove the buyers' temptation 'to place their orders in other states in the effort to escape payment of the tax on local sales.''

This out of state buying to escape the sales tax was harmful to Iowa sellers and to the sales tax. The principal purpose of the enactment of the Use Tax law was to remedy this evil. Protection of the Iowa seller is in fact protection of the sales tax. If he is forced out of business or deprived of part of his business by the imposition of a tax that does not reach his out of state competitors, the revenue is lost to the state of Iowa.

Of course, the Iowa user or consumer may purchase outside the state, if he so desires. The use tax is not a penalty upon such purchases. It does not even place them at a tax disadvantage. It merely makes them subject to an equal tax.

The two acts are designed to reach all retail sales to Iowa consumers or users (with certain specified exceptions) with a tax measured by two per cent. of the sale price. The tax is paid by the consumer or user but the retailers are made the collectors of the tax under the sales tax act, and, insofar as possible, under the use tax act.

II. The Use Tax law, enacted in 1937, is now Chapter 423, Code of Iowa, 1946. Code section 423.2 provides in part:

'An exise tax is hereby imposed on the use in this state of tangible personal property purchased * * * for use in this state, at the rate of two per cent. of the purchase price * * *.'

This language is broad and unlimited. It comprehends all tangible personal property purchased at any place for use in Iowa. However, the scope of the section is restricted by exemptions and exceptions in various other sections of the Chapter. Section 423.1, entitled 'Definitions,' (1) states that 'use' means and includes the exercise of any right over tangible personal property, incident to its ownership, 'except that it shall not include processing * * *.' 'Property used in 'processing' * * * shall mean and include * * * (c) industrial materials and equipment, which are not readily obtainable in Iowa, and which are directly used in the actual fabricating, compounding, manufacturing, or servicing of tangible personal property intended to be sold ultimately at retail.'

Plaintiffs contend that, by virtue of the foregoing provision, the materials and equipment in question were property not subject to use tax. They assert the expression, 'except that it (use) shall not include processing', is a want of coverage of property so used, rather than an exemption from coverage and that the above quoted parts of 'Definitions' Section 423.1 should be strictly construed against the tax. Our decisions involving the construction of other statutes, comparable in form, do not support this conclusion.

The 1937 sales tax act changed the Definitions section of the 1934 act by adding a processing exception (similar to parts of section 423.1) and by adding also, 'but does not include commercial fertilizer * * *.' Code 1946,§ 422.42. Kennedy v. State Board of Assessment and Review, 224 Iowa 405, 408, 276 N.W. 205, 207, points out that this exempted commercial fertilizer not theretofore exempted, and states: 'Taxation is the rule, not the exception.'

Eddington v. Northwestern Bell Tel. Co., 201 Iowa 67, 72, 202 N.W. 374, 377, states the polestar of construction of any statute is 'that the rule is broader than the exception; that the exception is specific rather than general; and that therefore, doubts and implications should be solved in favor of the rule rather than of the exception.'

Garrison v. Gortler, 234 Iowa 541, 548, 13 N.W.2d 358, and Heiliger v. Sheldon, 236 Iowa 146, 153, 154, 18 N.W.2d 182, involve the construction of parts of a 'definitions' section of the Workmen's Compensation law. That section, Code 1946, § 85.61, defines workman or employee, * * * 'Except as hereinafter specified,' and then specifies, 'The following persons shall not be deemed 'workmen' or 'employees." Both decisions refer to this as a statutory exception which should be strictly construed so as not to encroach unduly upon the general statutory provision to which it is an exception.

In Wood Bros. Thresher Co. v. Eicher, 231 Iowa 550, 562, 1 N.W.2d 655, exceptions to the general statute were likewise strictly construed.

Chapter 437, Code of 1946 deals with the assessment of electric transmission lines. Section 437.1, entitled, 'Company defined,' states it includes any association, corporation, etc. (except co-operative associations, etc.). This exception provision was considered in Greene County Rural Electric Coop., etc., v. Nelson, 234 Iowa 362, 365, 366, 12 N.W.2d 886, which states it is familiar doctrine that the section must be strictly construed in favor of the taxing body and against those claiming exemption from taxation.

The rule of strict construction against exemptions was applied in Hale v. Iowa State Board of Assessment and Review, 223 Iowa 321, 271 N.W. 168; Id., 302 U.S. 95, 58 S.Ct. 102, 82 L.Ed. 72, in which the taxpayer claimed exemption, from income tax, of interest on municipal securities under statutes providing that such securities should not be taxed.

Plaintiffs rely in part upon a statement in Palmer v. State Board of Assessment and Review, 226 Iowa 92, 94, 283 N.W. 415, that, if subject to construction, a certain section (6943 f8, Code of 1935, Gross Income Defined--Exceptions) should be construed strictly against the taxing body. The reference in that statement to the (entire) section was inadvertent and the statement should have been expressly limited to Subsection 1 of said section, theretofore quoted, which defines gross income by listing the items included in the term. Subsection 2, which exempts a list of items, not included in the term gross income, was not set out at length and was not under consideration at that point in the Palmer case and the statement was not intended to refer to it nor to subsequent subsections. As thus clarified the statement in the Palmer case is not contrary to the doctrines of the other cited decisions.

In the case at bar the general provision (section 423.2) imposes the tax upon the use of all tangible personal property purchased for use in Iowa, and the language in section 423.1 here in question excepts or exempts some materials and equipment made subject to the tax by such general statutory provision. Hence, where construction is proper and necessary, such language in section 423.1 should be strictly construed against the taxpayer.

III. The administrative division of the Income, Corporation and Sales Tax law is made a part of the Use Tax law by section 423.23, Code of 1946. Both laws are administered by Iowa State Tax Commission.

In October 1937, shortly after the Act took effect the Tax Commission adopted certain interpretations of the Use Tax Act referred to in Dain Mfg. Co. v. Iowa State Tax Commission, Iowa, 22 N.W.2d 786. In March, 1942, the Commission promulgated Rule 172 which in some respects conflicts with the 1937 interpretations. In the Dain case the record was made by stipulation and merely set out the 1937 interpretation and Rule 172. Under such record it was fair to conclude that the Commission had followed the early interpretations until Rule 172 was adopted. The record in the case at bar is materially different. It shows the Commission had never followed and applied the 1937 interpretations and that at all times and in every case to which it was applicable (with perhaps one exception) the Use Tax law had been administered by the Commission in accordance with Rule 172 which was later...

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