Burlington Northern R. Co. v. Ragland

• Decision Date: 18 July 1983
• Docket Number: No. 83-48,83-48
• Citation: 655 S.W.2d 437,280 Ark. 182
• Court: Arkansas Supreme Court
• Parties: BURLINGTON NORTHERN RAILROAD COMPANY and Kansas City Southern Railway Company, Appellants, v. Charles D. RAGLAND, Commissioner of Revenues of the Department of Finance & Administration of the State of Arkansas, Appellee.

Page 437

655 S.W.2d 437

280 Ark. 182

BURLINGTON NORTHERN RAILROAD COMPANY and Kansas City

Southern Railway Company, Appellants, v. Charles D. RAGLAND, Commissioner of Revenues of the

Department of Finance & Administration of the

State of Arkansas, Appellee.

No. 83-48.

Supreme Court of Arkansas.

July 18, 1983.

Warner & Smith and Hardin, Jesson & Dawson, Fort Smith, and Rowland & Templeton, Little Rock, for appellants.

Timothy J. Leathers, Joseph V. Svoboda, Kelly S. Jennings, Wayne Zakrzewski, John H. Theis, Ann Fuchs and Michael D. Munns, by Joe Morphew, Little Rock, for appellee.

HAYS, Justice.

This case involves the attempted imposition of a use tax by the State of Arkansas on eighty-six railroad freight cars newly acquired by lease or purchase by the Burlington Northern and Kansas City Southern Railway Companies, and loaded for the first time in Arkansas with cargo destined for delivery outside the state. The court below found the tax valid and appellants challenge that holding as a violation of the commerce clause of the United States Constitution. On appeal, we reverse.

The Arkansas Compensating Tax Act of 1949 was enacted to compensate for sales taxes lost on out-of-state purchases of articles to be used or consumed in Arkansas. It imposes an equivalent three percent tax on the purchase price of such articles. The taxing authorization is found in Ark.Stat.Ann. § 84-3105(a):

"There is hereby levied and there shall be collected from every person in this State a tax or excise for the privilege of storing, using or consuming, within the State, any article of tangible personal property, after the passage and approval of this Act [§§ 84-3105-84-3128], purchased for storage, use of consumption in this State at the rate of three per centum (3%) of the sales price of such property. This tax will not apply with respect to the storage, use or consumption of any article of tangible personal property purchased, produced or manufactured outside this State until the transportation of such article has finally come to rest within this State or until such article has become commingled with the general mass of property of this State. This tax shall apply to the use, storage or consumption of every article of tangible personal property, except as hereinafter provided, irrespective of whether the article or similar articles are manufactured within the State of Arkansas or are available for purchase within the State of Arkansas, and irrespective of any other condition...."

Appellants were audited by the Arkansas Commissioner of Revenues and a use tax was imposed on the eighty-six freight cars. Appellants paid the tax under protest and after administrative procedures were concluded, each railroad company filed separate taxpayer suits under Ark.Stat.Ann. § 84-4721 (Repl.1980). Because of the similarity of the disputes, it was agreed that the suits would be consolidated. The facts were stipulated. As to Burlington, the state assessed a tax on fifty-six railroad cars. At the time of assessment, the executive officers were in St. Louis, Missouri and principal operating offices in Springfield. Railroad facilities were operated and maintained in Arkansas as well as in eight other states. Of the fifty-six cars, it was stipulated that two cars were characteristic of the movement of all fifty-six. The first car arrived in Jonesboro, Arkansas on July 7, 1977 to be delivered to the Cotton Belt Railroad for loading. On July 13, the car was moved to Memphis. On August 14, 1977, the car returned to Jonesboro. It was loaded and left Jonesboro on August 23. The movement of the second car was similar except its stops in Arkansas were longer by several days. In all instances the cars were unloaded at destinations outside of Arkansas.

As to Kansas City Southern, the assessed tax was imposed on thirty boxcars. KCS operates in six states including Arkansas, with thirteen percent of its trackage in Arkansas. It was stipulated that three cars were representative of the movement of all thirty cars. KCS, however states simply that the cars were delivered to Ashdown for loading, spent only a short time in Arkansas and the movement of the cars reflects that all the cars spent only brief and isolated periods of time within the state since leaving Ashdown. That is all we know of the length or purpose of their stay in Arkansas.

In urging that the Arkansas use tax is not applicable to these facts, appellants rely largely on cases decided prior to 1977, which turned on whether interstate commerce was involved, if so, the imposition of a state tax was generally held invalid. But if the property had ceased to be in the stream of interstate commerce and had become a part of the common mass of property within a state, then a "taxable moment" had occurred and state taxation would be upheld. See Southern Pacific Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 83 L.Ed. 586 (1939); Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814 (1937).

But in 1977 there was an abrupt change of course. The case of Complete Auto Transit v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977) was decided, and a wholly different approach to state taxing jurisdiction resulted. In Brady, the Supreme Court expressly overruled the much maligned Spector Motor Service v. O'Connor, 340 U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573 (1951), the leading case limiting state taxation on the privilege of doing business in a state, as a violation of the commerce clause. The court abandoned, as formalistic and impractical, prior standards applicable to challenges to state taxation on interstate commerce and laid down new guidelines for making an appropriate evaluation. In cases decided since Brady, it is clear whenever there is a challenge to any state tax on interstate commerce, the tax will be subjected to the Brady test. It has also become clear that the test will be applied to a broader spectrum of commerce, and the older concepts of "purely local activities," "goods not yet in the stream of commerce," "taxable moments" etc., are no longer relevant criteria in determining whether or not an activity is within interstate commerce and, therefore, subject to the Brady test. If the tax may substantially affect interstate commerce, then it is subject to commerce clause scrutiny under Brady. See specifically Commonwealth Edison v. State of Montana, 453 U.S. 609, 101 S.Ct. 2946, 69 L.Ed.2d 884 (1981), (severance tax); see also Mobil Oil Corp. v. Comm'r of Taxes of Vermont, 445 U.S. 425, 100 S.Ct. 1223, 63 L.Ed.2d 510 (1980), (income tax); Japan Line Ltd. v. Co. of Los Angeles, 441 U.S. 434, 99 S.Ct. 1813, 60 L.Ed.2d 336 (1979), (ad valorem property tax); Dept. of Rev. of State of Washington Stevedoring Co., 435 U.S. 734, 98 S.Ct. 1388, 55 L.Ed.2d 682 (1978), (business and occupation tax); National Geographic Society v. California Bd. of Equalization, 430 U.S. 551, 97 S.Ct. 1386, 51 L.Ed.2d 631 (1977), (use tax); Brady, supra (sales tax).

The procedure set out in Brady emphasizes the importance of looking at the practical effects of the taxation and moves away from labels and a form-over-substance approach. The Brady test permits taxation on interstate commerce if it meets four requirements: 1) the activity has a substantial nexus with the state; 2) the tax is fairly apportioned; 3) the tax does not discriminate against interstate commerce; 4) the tax is fairly related to the services provided by the state.

Appellants argue that the substantial nexus requirement is lacking, in this instance, but we need not settle that in this case. For one thing, if the issue were simply whether the first...