Atchison, Topeka & Santa Fe Ry. Co. v. State Board of Equalization

• Decision Date: 24 February 1956
• Citation: 294 P.2d 181,139 Cal.App.2d 411
• Court: California Court of Appeals Court of Appeals
• Parties: The ATCHISON, TOPEKA and SANTA FE RAILWAY COMPANY, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, a State Agency of the State of California, and George R. Reilly, James H. Quinn, Paul R. Leake, Robert E. McDavid, and Robert C. Kirkwood, as the members of and constituting said State Board of Equalization, Defendants and Respondents. Civ. 16524.

Page 181

294 P.2d 181

139 Cal.App.2d 411

The ATCHISON, TOPEKA and SANTA FE RAILWAY COMPANY, a corporation, Plaintiff and Appellant, v. STATE BOARD OF EQUALIZATION, a State Agency of the State of California, and George R. Reilly, James H. Quinn, Paul R. Leake, Robert E. McDavid, and Robert C. Kirkwood, as the members of and constituting said State Board of Equalization, Defendants and Respondents.

Civ. 16524.

District Court of Appeal, First District, Division 1, California.

Feb. 24, 1956.

Rehearing Denied March 23, 1956.

Hearing Denied April 18, 1956.

Robert W. Walker, Robert B. Curtiss, Los Angeles, L. W. Butterfield, Chicago, Ill., Peart, Baraty & Hassard, San Francisco, for appellant.

Edmund G. Brown, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Ernest P. Goodman, Eugene B. Jacobs, Deputies Atty. Gen., San Francisco, for respondents.

PETERS, Presiding Justice.

The plaintiff brought this action to secure a refund of $32,348.90 in use taxes and $9,129.86 interest paid by it under protest on 17 switch engines claimed by plaintiff to be exempt from the tax. The case was submitted to the trial court upon a written stipulation of facts. Judgment was entered in favor of defendants. Plaintiff appeals.

The question presented is whether or not the transactions about to be described were subject to the Use Tax. §§ 6201-6246, Rev. & Tax. Code.

The plaintiff is a Kansas corporation qualified to do business in California. It operates a railroad which transports passengers and freight in and between 12 different states, including California. In 1942 the plaintiff began to purchase 93 switch engines for use in its terminals throughout its system. Pursuant to this program, between January 1, 1943, and December 1, 1945, the engines were purchased by plaintiff and delivered to it in Iowa. The use tax here involved was levied on the purchase price of 17 of these engines that were permanently assigned to and used in California. When these 93 engines were ordered, and at the time they were delivered to plaintiff in Iowa, 'plaintiff had not determined at what point or points on its system any particular engines would be used, but plaintiff had purchased said engines for use in its yards upon its railroad at any point or points, in the State of California or elsewhere, whenever and whereever any or all of said engines should be needed to carry on the business of plaintiff.' When the engines were purchased and delivered 'plaintiff knew that some of said engines were needed for its operations in the State of California.'

The 93 engines, when delivered at Shopton, Iowa, where the plaintiff maintains shops, were adjusted and made ready for use, and thereafter placed in 'revenue service' ¹ at Shopton to determine if they were ready for operation. After testing at Shopton, the engines were assigned to revenue service at a point where a shortage of power for yard work existed. At some points such shortages were temporary, and, when the temporary shortage ended, the engines were moved to another temporary assignment until they reached their point of permanent assignment. This point for the 17 engines here involved was California. All but one of the 17 engines, after servicing and testing at Shopton, were moved to various places on plaintiff's railroad outside of California, and placed in service in yard work. The one exception was moved directly to California from Shopton, without being used in revenue service at intervening out-of-state points. The times spent by the 17 engines in revenue service outside of California, including the time spent at Shopton, before the engines were sent to California, ranged from 1 to 79 days, averaging about 43 days. The life expectancy of such engines is 25 years.

Each of these 17 engines was moved from the point where it was last engaged in temporary revenue service to its assigned point in California 'dead in train,' that is, by being coupled into a freight train and hauled on an interstate journey into California. This method of transportation was used because switch engines are not intended to haul trains, and because it was cheaper to haul them 'dead in train' than to transport them under their own power.

The 17 engines have remained in California since they first entered the state. Since their arrival in California the engines have been engaged in interstate and intrastate commerce. The parties describe the relative interstate and intrastate work of such engines at some length. It can fairly be said that the greater portion of the work of such engines was in interstate commerce, although a small proportion of the work was exclusively in intrastate commerce. These engines also engaged in some non-revenue service, that is, in the making up of work trains, etc.

It is an admitted fact that no sale, use or excise tax has been paid to any other state with respect to the 17 engines.

In January of 1949 the defendant notified plaintiff that it claimed that there was owing to it $32,348.90 plus $9,129.86 interest 'with respect to the storage, use or other consumption, during the quarterly periods beginning January 1, 1943, and ending December 31, 1945, in the State of California, of 17 diesel electric switch engines which were purchased by plaintiffs outside this State and brought into this State by plaintiff.' Plaintiff paid the taxes and then filed a claim for refund, claiming that the engines were exempt from the tax because used in interestate commerce. The precise allegations of the claim are:

'(1) That each and all of said seventeen Diesel switch engines were purchased for use in interstate commerce, were actually placed in use in interstate commerce prior to their entry into this state, and were thereafter used continuously in interstate commerce.

'(2) That the movement of said engines to California from the points outside of California where they had previously been engaged in interstate commerce, itself constitutes interstate commerce, because they were moving interstate from said points to California and transporting themselves as a shipment in interstate commerce, so that there never was a taxable moment in which said engines, or any of them were used, stored or otherwise consumed in the State of California except as instrumentalities of interstate commerce.'

The trial court adopted the stipulated facts as part of its findings, and also found 'as inferences drawn by the Court from the stipulated facts and as additional findings' that 'the diesel electric switch engines with respect to which the use tax was assessed and collected by the State of California were purchased by plaintiff from a retailer for storage and use in the State of California and were stored and used by plaintiff in the State of California.' The court also found that 'there was a period of time after the switch engines arrived in the State of California when they were stored and used by plaintiff exclusively in intrastate commerce.' The court concluded that the assessment of the tax had been duly and regularly made and that 'there was an intrastate storage and use of the switch engines in the State of California to which the use tax validly applied.' Plaintiff appeals from the judgment based on such findings and conclusions.

The basic contention of appellant is that the challenged tax has been imposed on the use of engines in interstate commerce and therefore violative of the commerce clause of the United States Constitution. The California Use Tax expressly exempts from its operation any tax prohibited by the Constitution of the United States. ² Respondent board has adopted Rule 55, Administrative Code, § 2015, Title 18, to give effect to this exemption. That rule provides: 'The use tax applies with respect to any tangible personal property purchased for storage, use or other consumption in this State, the sale of which is exempt from sales tax under this rule * * * except property purchased for use in interstate of foreign commerce, placed in use in interstate or foreign commerce prior to its entry into this State, and thereafter used continuously in interstate or foreign commerce.' ³

The use tax provides that 'Every person storing, using, or otherwise consuming in this State tangible personal property purchased from a retailer is liable for the tax.' § 6202, Rev. Tax.Code. Section 6241 creates a statutory presumption that 'tangible personal property sold by any person for delivery in this State is sold for storage, use, or other consumption in this State until the contrary is established.' Section 6246 creates a statutory presumption that 'tangible personal property shipped or brought to this State by the purchaser was purchased from a retailer on or after July 1, 1935, for storage, use, or other consumption in this State.'

The general purpose, nature and constitutionality of this tax have long been determined and need not be discussed. Douglas Aircraft Co., Inc., v. Johnson, 13 Cal.2d 545, 90 P.2d 572; Anders v. State Board of Equalization, 82 Cal.App.2d 88, 185 P.2d 883; Brandtjen & Kluge v. Fincher, 44 Cal.App.2d Supp. 939, 111 P.2d 979.

Appellants contend that the tax is imposed on the purchase price of property in interstate commerce because these engines were engaged in interstate use before they entered the state, and such use was not interrupted or terminated when the engines were transferred or used in California. Respondents, on the other hand, contend that there was a 'taxable moment' after the journey of the switch engines had ended and before they were placed in interstate commerce in this state that justifies the tax. The answer to these contentions depends upon whether the rules announced in Southern Pac. Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 83 L.Ed. 586 and Pacific Telephone & Telegraph Co. v. Gallagher, 306 U.S. 182, 59 S.Ct. 396, 83 L.Ed. 595, or the rules announced in Union Pac. R. Co. v. Utah State Tax Commission, 110 Utah 99, 169 P.2d 804, should control this case...