Boeing Co. v. State, 38785

Decision Date03 July 1968
Docket NumberNo. 38785,38785
PartiesThe BOEING COMPANY, and United States of America, Appellants-Respondents, v. The STATE of Washington, Respondent-Cross-Appellant.
CourtWashington Supreme Court

Holman, Marion, Perkins, Coie & Stone, Seattle, Mitchell Rogovin, Asst. U.S. Atty., Dept. of Justice, Washington, D.C., Eugene G. Cushing, U.S. Atty., Tacoma, for appellants respondents.

John J. O'Connell, Atty. Gen., Olympia, Tim Malone, Asst. Atty. Gen., James A. Furber, Special Asst. Atty. Gen., Tacoma, for respondent-cross-appellant.


This appeal concerns the use tax, imposed under RCW 82.12.020, as amended by Laws of 1959, 1st Ex. Sess., ch. 3, § 10, as applied to bailments.

The Boeing Company and the United States appealed to the superior court from an order of the tax commission assessing additional taxes and penalties. The trial court held that the tax was valid and proper and did not offend the Constitution of the United States or of this state. Boeing has appealed, contending that the trial court erred in failing to sustain its contention that the statute did not apply to its use of the property in question and its further contention that the statute, as applied by the tax commission, denied to Boeing the equal protection of the laws.

The act provides, in pertinent part:

There is hereby levied and there shall be collected from every person in this state a tax or excise for the privilege of using within this state as a consumer any article of tangible personal property purchased at retail, or acquired by lease, gift, or bailment, or extracted or produced or manufactured by the person so using the same. * * *

Boeing concedes that during the period of time involved, it used certain tools and other property belonging to the United States government, for which it was not charged. The reason it was not charged for the use of this property was that it performed contracts for the government on a cost-plus basis, and had the government charged it for the use of government property in the manufacturing process, that charge would have been added to the cost and reimbursed by the government.

The property in question was placed in the possession of Boeing and used for periods of time varying from a few days to many years.

It is Boeing's first contention that it did not use this property under bailment, as that term was defined by the tax commission's rule 211, because it did not have 'exclusive possession' of the property. Its theory is that, because the government had the right to control the use of the property, its possession was not 'exclusive.' The statute makes no mention of the right of exclusive possession; but, assuming that the tax commission correctly construed it in promulgating its rule 211, the fact that Boeing did not have exclusive control of its own use of the property does not mean that it did not have exclusive possession. Although the bailment of this property was terminable at the will of the government, and although it had the right to direct Boeing in its use, the property was within the exclusive possession of Boeing during the time that it held it. It shared that possession with no one nor did it share its use. Neither the statute nor the rules of the commission, insofar as they have been brought to our attention, required that, before the tax could be imposed upon a bailee, it must have been shown that he had exclusive control of his own use of the article in question. The trial court correctly ruled that the property used by Boeing was held under bailment.

The remaining contention of Boeing is that the distinction made by the tax commission between bailees and lessees, in determining the basis upon which the tax should be computed, renders the act arbitrary and denies to Boeing the equal protection of the laws.

During the period of time involved in this action, the tax commission based the tax on leased property on the rentals charged. On bailed property, it based the tax on the value of the article itself. 1 Boeing does not challenge the authority of the tax commission to make its rules whereby a different basis was used for taxation of bailments and leases, but contends that its exercise of authority in this respect resulted in a discriminatory tax.

Boeing concedes the following quoted from Texas Co. v. Cohn, 8 Wash.2d 360, 386, 112 P.2d 522, 534 (1941) to be the applicable law A state legislature has very broad discretion in making classifications in the exercise of its taxing powers. A classification of commodities, businesses, or occupations, for excise tax purposes, under which the classes are taxed at unequal rates, or one class is taxed and another is exempted, will be upheld as constitutional if it is not arbitrary nor capricious and rests upon some reasonable basis of difference or policy. The difference between the classes need not be great. It may consist of physical and chemical dissimilarity of commodities or difference in the character or manner of their uses. Classification may also be permissible if it is reasonably related to some lawful taxing policy of the state, such as greater ease or economy in the administration or collection of a tax, the selection of a fruitful source of revenue with the exemption of sources less promising, or the equalization of the burdens of taxation. If any such reasonable basis for the classification exists, or conceivably may exist, then the circumstance that there is competition between a commodity or business which is taxed and some commodity or business which is not taxed, does not materially affect the validity of the classification.

As Boeing also concedes, our later cases have emphasized that the legislature has a board discretion in making classifications, holding that a classification will not be struck down if any state of facts reasonably can be conceived that would sustain it. An enactment is presumptively valid, and the burden is upon the challenger to prove that the questioned classification does not rest upon a reasonable basis. Hemphill v. Washington State Tax Comm'n, 65 Wash.2d 889, 400 P.2d 297 (1965), appeal dismissed383 U.S. 103, 86 S.Ct. 716, 15 L.Ed.2d 615 (1966).

In Black v. State, 67 Wash.2d 97, 101, 406 P.2d 761, 763 (1965), we said:

In Hemphill, supra, we upheld the exemption of bowling from a sales tax applied to the amusement industry. In Armstrong, supra (Armstrong v. State, 61 Wash.2d 116, 377 P.2d 409 (1962)), we upheld the application of a Business and Occupation Tax to general insurance agents, despite the fact that their counterparts working in insurance company branch offices were not so taxed. In Texas Co., supra, we upheld a tax on distributors of other types of fuel. Here, the legislature has imposed an excise tax on leases of tangible personal property, while leases of similar property, land based, carry no such tax. Nevertheless, the difference in type of property--i.e., tangible personal property versus real property--would be in itself enough of a difference to uphold the classification. Thus, there is no denial of equal protection.

Boeing says that the sole basis for distinguishing between one using property under bailment and one using it under a lease is that the lessee pays rent while the bailee does not. In so saying, it concedes a difference in fact; and it is this difference upon which the variation in the tax is based.

The complaint of Boeing that a bailee must necessarily pay a higher tax than the lessee, even if it be well founded (which we concede only for the purposes of argument), does not invalidate the tax. If the classification is reasonable, the legislature may tax one class and impose no tax at all upon the other. Hemphill v. Washington State Tax Comm'n, supra.

In Black v. State, supra, we held that a difference in type of property (a land-based hotel--real property, a floating hotel--personal property), even though there was little difference in the physical nature of the properties, was a sufficient basis for classification. By the same reasoning, a difference in the manner of holding property is a reasonable basis for distinction.

We need not examine the question whether there are other differences between a lease and a bailment, since the presence of a monetary consideration in one case and the absence of it in...

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