Calvert v. Zanes-Ewalt Warehouse, Inc.

• Decision Date: 12 December 1973
• Docket Number: No. B--4010,ZANES-EWALT,B--4010
• Citation: 502 S.W.2d 689
• Parties: Robert S. CALVERT et al., Petitioners, v.WAREHOUSE, INC., Respondent.
• Court: Texas Supreme Court

Page 689

502 S.W.2d 689

Robert S. CALVERT et al., Petitioners, v. ZANES-EWALT WAREHOUSE, INC., Respondent.

No. B--4010.

Supreme Court of Texas.

Dec. 12, 1973.

Rehearing Denied Jan. 9, 1974.

John L. Hill, Atty. Gen., Lewis A. Jones, Asst. Atty. Gen., Austin, for petitioners.

Bowyer, Thomas & Sweet, H. T. Bowyer, and William W. Sweet, Dallas, for respondent.

STEAKLEY, Justice.

This is a suit by Zanes-Ewalt Warehouse, Inc. to recover cigarette taxes in the amount of $27,501.65 paid to the State of Texas under protest. The judgments below were or recovery of the taxes, Calvert v. Zanes-Ewalt Warehouse, Inc., Tex.Civ.App., 492 S.W.2d 638. The Comptroller of Public Accounts of the State of Texas is petitioner here.

In the statutory cigarette tax regulations, Zanes-Ewalt is a 'distributing agent' having sought and obtained an annually renewable permit from the State as such. The permit is required of those 'engaged in the business of storing unstamped cigarettes previously sold in interstate commerce and received in interstate commerce for distribution or delivery only upon order received from without the State . . ..' ¹ The 'distributing agent' is not required to obtain or affix the stamps which evidence payment of the State tax on cigarettes, ² this being the primary responsibility of the statutory 'distributor.' ³

Under review here are these provisions of the Cigarette Tax Law to which Zanes-Ewalt became subject as a licensed distributing agent:

'(1) A tax of Two Dollars ($2) per thousand on cigarettes weighing not more than three (3) pounds per thousand and Four Dollars and Ten Cents ($4.10) per thousand on those weighing more than three (3) pounds per thousand is hereby imposed on all cigarettes used or otherwise disposed of in this State for any purpose whatsoever. The said tax shall be paid only once by the person making the 'first sale' in this State and shall become due and payable as soon as such cigarettes are subject to a first sale in Texas, it being intended to impose the tax as soon as such cigarettes are received by any person in Texas for the purpose of making a 'first sale' of same. ⁴

"First Sale' shall mean and include . . . the loss of cigarettes in this State whether by negligence, theft, or any other unaccountable loss.'

The taxes in question were exacted by the Comptroller when an audit of the accounts of Zanes-Ewalt covering the period from October 1, 1969 through November 30, 1970 revealed a shortage of 3,548,600 cigarettes which Zanes-Ewalt had received from out-of-state distributing companies and upon which the State cigarette tax had not been paid. The cigarettes having been lost in this State, the Comptroller exacted the tax as a 'first sale' as required by the provisions of the Cigarette Tax Law, above noted.

The questions for decision are whether, as to Zanes-Ewalt, the tax thus imposed is an impermissible tax on interstate commerce and whether the statutory manner of its imposition offends constitutional requirements of reasonableness and due process. We answer each question in the negative, and thus sustain the statutory requirements in question.

The facts and circumstances shown by the record are these. Zanes-Ewalt operates a public warehouse in Farmers Branch, Dallas County, Texas. It holds a permit from the State, issued by the Comptroller upon application therefor, to act as a distributing agent under and pursuant to the provisions of the Cigarette Tax Law. Its function is to distribute cigarettes received from the out-of-state tobacco companies.

The tobacco companies ship the cigarettes in cases in carload or truckload lots to Zanes-Ewalt on a regular basis, consigned to the tobacco company in care of Zanes-Ewalt. The cigarettes are unloaded and segregated by Zanes-Ewalt as to brand and are held by Zanes-Ewalt subject to distribution at the direction of the tobacco companies. The cases are not broken by Zanes-Ewalt, except to replace cigarettes damaged in transit. Because of uncertain transit time and the frequency of damage in transit, the cases are not consigned to or marked for a particular distributor when received by Zanes-Ewalt. The cigarettes remain in the Zanes-Ewalt warehouse until ordered for delivery by the particular tobacco company; this is usually for a period of one to seven days. These orders for delivery are in the form of intrastate bills of lading prepared by the tobacco company and later forwarded to Zanes-Ewalt. Ninety-nine per cent of deliveries by Zanes-Ewalt are within the State, either by its trucks or by freight lines on intrastate rates. In effect, the tobacco companies maintain a pool of unconsigned cases of cigarettes in the hands of Zanes-Ewalt, subject to distribution at their direction to the distributors with whom they have contracts. Zanes-Ewalt is compensated by the tobacco companies at an agreed rat per hundred weight of the cigarettes handled.

In resolving the problem of interstate commerce, we first recognize that the taxable incident under the 'first sale' definition invoked by the Comptroller, i.e., the loss of the cigarettes from the hands of Zanes-Ewalt, constitutes the imposition of the cigarette tax directly upon the cigarettes while in the hands of Zanes-Ewalt, prior to their distribution or delivery in fulfillment of the purposes for which they had been received. Under the statutory scheme, however, the cigarettes are 'taxed' while in the hands of the distributing agent only when an unaccountable loss of the cigarettes occurs there.

Zanes-Ewalt argues that it serves merely as one phase of an overall interstate cigarette distribution system; further it asserts that the cigarettes remain in interstate and unbroken transit while in its hands and that during such time the cigarettes are immune from the burden of State taxation or control. Zanes-Ewalt thus contends that an exercise at such time of the power of the State to tax and to enforce regulations against the loss is an imposition upon the use of the cigarettes before their interstate journey has ceased; as such, it is an impermissible tax upon commerce.

The position of the Comptroller, on the other hand, is that the continuity of transit is broken upon delivery of the cigarettes to the warehouse of Zanes-Ewalt for its business purposes and those of the tobacco companies and that at such time the cigarettes become subject to the plenary power of the State to tax and regulate.

It is the established rule that goods in interstate transit are not subject to local taxation. However, where there is an interruption at a point between the point of origin and the final destination, the controlling principle has been stated as follows: any interruption of the movement of commodities at an intermediate point between origin and final destination which is not incidental to the transportation or the use of the means of transportation (or, being so incidental, is used or extended for the purposes of the owner not incidental to the transportation or the means used therefor) breaks the continuity in transit and subjects the shipment to local taxation at the point of interruption. Anno. 78 L.Ed. 138 (1933). Whether the exercise of the taxing power of the State is forbidden in a particular case is to be determined by the practical operation of the State statute, as applied to the facts of that case. Hughes Brothers Timber Co. v. Minnesota, 272 U.S. 469, 47 S.Ct. 170, 71 L.Ed. 359 (1926).

The crucial question in determining whether the taxing power of the State may be exerted is that of 'continuity of transit.' Carson Petroleum Co. v. Vial, 279 U.S. 95, 49 S.Ct. 292, 73 L.Ed. 626 (1929). There are numerous decisions of the United States Supreme Court that speak to this problem; among these are: Champlain Realty Co. v. Town of Brattleboro, 260 U.S. 366, 376--377, 43 S.Ct. 146, 149, 67 L.Ed. 309, 314 (1922):

. . . If the interruptions are only to promote the safe or convenient transit, then the continuity of the interstate trip is not broken. * * * In other words, in such cases interstate continuity of transit is to be determined by a consideration of the various factors of the situation. Chief among these are the intention of the owner, the control he retains to change destination, the agency by which the transit is effected, the actual continuity of the transportation, and the occasion or purpose of the interruption during which the tax is sought to be levied.

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