City of Ames v. State Tax Commission

• Decision Date: 07 June 1955
• Docket Number: No. 48687,48687
• Citation: City of Ames v. State Tax Commission, 246 Iowa 1016, 71 N.W.2d 15 (Iowa 1955)
• Parties: The CITY OF AMES, Iowa, Appellee, v. The STATE TAX COMMISSION of the State of Iowa, Appellant.
• Court: Iowa Supreme Court

Page 15

71 N.W.2d 15

246 Iowa 1016

The CITY OF AMES, Iowa, Appellee, v.The STATE TAX COMMISSION of the State of Iowa, Appellant.

No. 48687.

Supreme Court of Iowa.

June 7, 1955.

Dayton Countryman, Atty. Gen., Edward R. Hayes, Sp. Asst. Atty. Gen., and James M. Barrett, De Moines, for appellant.

R. G. Pasley, Ames, C. J. Rosenberger, Muscatine, Whitley Hemingway, Webster City, and Harold O. Hegland, Ames, for appellee.

THOMPSON, Justice.

The litigation under consideration here arises under chapter 423,Code of Iowa 1950, I.C.A. embodying the Use Tax law.It concerns the power of the Iowa State Tax Commission, hereinafter known as the commission, to levy a use tax upon materials and equipment purchased outside the State of Iowa and used by the plaintiffCity of Ames, hereinafter termed the city, in the construction of a municipal light and power plant.Two appeals are involved.The city's action prayed that certain use tax assessments levied by the commission be cancelled.The trial court granted the relief prayed as to what, following the order set out in appellee's brief, we shall designate as ExhibitsNos. 2, 3, 4, 5, 6, 7, 8, 9, 10 and 11.From this part of the decree and judgment the commission has appealed.It will be designated as the appellant.The court denied the city's prayer for relief from the assessment against the property described in Exhibit 1, and also held certain freight charges paid by the city were part of the price of goods purchased and so subject to use tax.From this part of the judgment the city, which we shall term the appellee, has appealed.

1.The case as presented to us is replete with difficult questions of law and fact, and the briefs and arguments take a wide range.The essential problem we must resolve is whether the large and expensive items of material used in building and equipping the municipal power plant are properly subject to use tax under the provisions of chapter 423.Two major questions are involved: 1, were the items involved 'industrial materials and equipment, which are not readily obtainable in Iowa'; and 2, were they'directly used in the actual fabricating, compounding, manufacturing, or servicing of tangible personal property intended to be sold ultimately at retail'?See Code section 423.1, paragraph 1,I.C.A. Paragraph 4 of the same section provides that "tangible personal property" includes electricity 'when furnished or delivered to consumers * * * within this state.'

II.Giving attention first to the commission's appeal, and in accord with the two important questions set out above, it is contended by the appellant first that the items of equipment, Nos. 2 to 11 inclusive, found by the trial court not subject to the tax were in fact readily obtainable in Iowa under the law then applicable.(It should perhaps be noted that the use tax is payable by the user of personal property if it has not otherwise been paid, under the terms of section 423.14 of the Code, I.C.A.; and since the tax was not paid by the suppliers who sold the property to the city, with one exception to be noted later, the attempt is to establish the city's liability under the section last cited.)The commission offered no witnesses at the trial, but cross-examined those called by the city at some length.It is now its contention that such cross-examination shows the equipment purchased could have been ordered through factory branches, resident agents or salesmen or jobbers or dealers in Iowa regularly engaged in selling such equipment, either the same or comparable, in the regular course of their business.

This brings into focus one of the vital points in the case.Shortly after the enactment of the use tax law, in 1937 the commission by rule interpreted 'readily obtainable in Iowa' as meaning 'kept in Iowa for sale or manufactured in Iowa as distinguished from being obtainable by giving an order to an agent in Iowa for delivery of the same from some point outside the State of Iowa.'In Dain Manufacturing Company of Iowa v. Iowa State Tax Commission, 237 Iowa 531, 536, 22 N.W.2d 786, 789, 790, we compared this rule with the later interpretation made by the commission in 1942.The later rule, now a part of Rule 172 of the commission, says:

'The commission holds that, where industrial materials and equipment of the same general classification are offered for sale in Iowa, such material and equipment cannot be considered 'not readily obtainable in Iowa' and therefore would not be entitled to use tax exemption when purchased in interstate commerce from points outside the state.'

We then said that in so far as these orders were in conflict, we thought the earlier one more nearly expressed the legislative intent.But the prevailing opinion in Peoples Gas & Electric Company v. State Tax Commission, 238 Iowa 1369, 28 N.W.2d 799, is thought by the appellant to approve the 1942 version of the rule, and is interpreted as meaning that even though the property is not kept for sale or manufactured in Iowa, if it may be ordered from outside the state through an agency regularly engaged in the state in selling such products, it is 'readily obtainable' in Iowa.For the purposes of this discussion we may accept this as the correct interpretation of the opinion in the Peoples Gas case.

Shortly after the decision of the Peoples Gascase, supra, the Fifty-Third General Assembly amended the use tax statutes by enacting chapter 193 of its laws.The material parts of this chapter are paragraph 10 of section 2, andsection 3, which we set out:

'Sec. 2.Amend section four hundred twenty-three point one (423.1), Code 1946, by adding at the end thereof the following:

"10.'Readily obtainable in Iowa' shall mean kept in Iowa for sale or manufactured in Iowa for sale as distinguished from being obtainable by giving an order to an agent in Iowa for delivery from some point outside the state of Iowa. * * *'

'Sec. 3.The provisions of this act shall be applicable hereafter beginning with the quarter ending June 30, 1949, and every return and payment for said quarter shall be under the provisions of this act.'

The quoted part of section 2 now appears as paragraph 10, section 423.1 of the Code, I.C.A.

Chapter 193, supra, contained a publication clause, by virtue of which it became effective on May 26, 1949.It will be observed that paragraph 10 of section 2 of chapter 193, supra, is in substance, and very closely in language, identical with the rule first adopted by the commission in 1937.It returned the status of the law on this point to the commission's first interpretation, and if the holding in the Peoples Gas case is to be understood as the appellant contends, the rule there approved was changed by the legislative enactment.Chapter 193 was made effective for the quarter ending June 30, 1949; which means beginning on April 1 of that year.

The commission, faced with legislative action interpreting the meaning of 'readily obtainable', on February 15, 1950, adopted its Rule 172A.After reciting the action of the legislature in enacting chapter 193, the rule states:

'It is the commission's interpretation of the foregoing amendment, that an item is readily obtainable in Iowa, only:

'(a) When normally carried as a stock item in Iowa for sale, irrespective of quantities, or

'(b) When the item is manufactured in Iowa for sale, irrespective of quantities, or,

'(c) When an item acquired outside of Iowa, but not stocked or manufactured in Iowa, is fairly and reasonably competitive to an item which is stocked in Iowa for sale or manufactured in Iowa for sale.'

The rule further says:

'When determining whether an item of tangible personal property is or is not 'readily obtainable in Iowa' the facts and the law existing at the time the contract to purchase was made shall govern and not the facts and the law existing at the time the item was delivered into the state of Iowa.'

It is the last quoted portion of the rule which the commission relies upon to prove that the equipment used by the city is subject to the use tax because it says it shows the property was readily obtainable in Iowa.Contending the evidence adduced by it on cross-examination of the appellee's witnesses shows the equipment could have been ordered through agents or jobbers or branch agencies in Iowa, it points out that all of the purchase contracts entered into by the city with the suppliers outside the state were made before the effective date of chapter 193, and while the rule of the Peoples Gas case was in effect.Applying its Rule 172A to this situation, it urges that the liability to use tax must be determined as of the time of the purchase contracts rather than the time of delivery.The situation is peculiar in that all of the material and equipment had been contracted for before chapter 193 took effect on April 1, 1949, but with the exception of Exhibit 1, all deliveries were made after that date.(It is of interest to note that nearly all of the equipment described in ExhibitsNos. 2 to 11, inclusive, was delivered in Iowa, and so became taxable here, at various dates from six to more than eighteen months after chapter 193, supra, became effective on April 1, 1949.)If, therefore, that part of Rule 172A making the time of the contract instead of the time of delivery the determining point on the question is given force, and if the evidence shows there were agencies in the state which could have ordered or did order the same or comparable property, even though from outside the state, the use tax was properly assessed.

The city contends, however, that it is the time of delivery that must govern the assessment of the tax, and that the commission exceeded its powers in enacting that part of Rule 172A which attempts to apply the 'time of purchase contract' test.With this position we agree.

Section 422.61, made applicable to Code chapter 423 by section 423.23, I.C.A., is here quoted so far as material:

'The commission shall have the...