Combustion Engineering, Inc. v. Arizona State Tax Commission, No. 7117

• Court: Supreme Court of Arizona
• Writing for the Court: LOCKWOOD; BERNSTEIN
• Citation: 91 Ariz. 253,371 P.2d 879
• Docket Number: No. 7117
• Decision Date: 23 May 1962
• Parties: COMBUSTION ENGINEERING, INC., a corporation, Appellant and Cross-Appellee, v. ARIZONA STATE TAX COMMISSION, a body corporate and politic; and Thad Moore, Warren Peterson, and William E. Stanford, as members of and constituting said Arizona State Tax Commission, Appellees and Cross-Appellants.

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371 P.2d 879 91 Ariz. 253 COMBUSTION ENGINEERING, INC., a corporation, Appellant and Cross-Appellee,
v.
ARIZONA STATE TAX COMMISSION, a body corporate and politic; and Thad Moore, Warren Peterson, and William E. Stanford, as members of and constituting said Arizona State Tax Commission, Appellees and Cross-Appellants. No. 7117. Supreme Court of Arizona, In Banc. May 23, 1962.

[91 Ariz. 254] Snell & Wilmer, Phoenix, for appellant and cross-appellee.

Wade Church, Former Atty. Gen., Robert W. Pickrell, The Atty. Gen., Stanley Z. Goodfarb, Former Asst. Atty. Gen., Joe R. Purcell, Former Asst. Atty. Gen., Phillip M. Haggerty, Asst. Atty. Gen., Phoenix, for appellees and cross-appellants.

LOCKWOOD, Justice.

This is an appeal by Combustion Engineering Inc., a Delaware Corporation, hereafter referred to as the company, and a cross appeal by the Arizona State Tax Commission, from a summary judgment granting the company a partial recovery of taxes it had paid under protest.

The facts stipulated by the parties were in substance as follows: The company has its principal offices in New York City, sales offices in twenty-six United States cities,

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representatives in the territories and many foreign countries, and seven manufacturing plants in the United States and Canada. During the audit period in question ¹ the company had no office, employee, plant, soliciter, warehouse, dealer or representative of any type in Arizona. ² The company designs, manufactures and sometimes performs the complete field erection of steam generating equipment for power plants, ³ its units (or boilers) having capacities ranging up to 3,000,000 pounds of steam per hour, steam temperatures up to 1200 degrees Fahrenheit, and pressure up to 5,000 pounds per square inch. ⁴ A large boiler requires two or more years from the time manufacture begins to the time it is assembled, tested, and in operation at the customer's power plant of which it becomes a [91 Ariz. 255] major component. The primary raw material is steel and the most important market for the boilers is the electric utility industry. The boilers are not stock items but are engineered by the company to the customer's specifications from the ground up. However the company's vice president stated in an affidavit that they also manufacture a small package boiler which functions like the large one but is regularly shipped completely assembled and is not custom made. For the smaller boiler there is no need, as there is for the larger ones, to have brick or insulation work done at the jobsite for this is done at one of the factories.

The instant case involves the sale of two of the large boilers to Arizona Public Service Company for its Saguaro Power Plant near Tucson, Arizona. Four contracts were entered into in New York City, '* * * being placed there by Ebasco Services Incorporated (as agent) for the Arizona Public Service Company, the purchaser, and the plaintiff Company, as seller.' The contracts and supplements thereto were in the form of purchase orders or offering letters accepted by the company.

The first contract was entered into on March 12, 1951 and called for the company to furnish two boilers toghther with a limited amount of labor with respect thereto. By a supplement dated December 19, 1952 one of the boilers was cancelled, and the labor was excluded; thus the contract as supplemented dealt only with the materials for a single boiler. The second contract provided that the company should:

'Unload from cars, deliver to site and erect the Brickwork and all Heat Insulation including that on piping, gas ducts, air ducts, tubing and all other parts requiring insulation, also furnish Superintendence of Erection and/or services of Supervising Engineers to direct and supervise the complete erection of the Unit and to advise and consult with in connection with all preliminary processes and the full demonstration of all performance guarantees for the [unit covered by the first contract].'

Supplements to the second contract provided that: 1) the purchaser did not choose to have the company perform the complete field erection of the boiler; 2) the company

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was authorized to furnish a radiographer, welding technician and qualified welders; and 3) the company could award the erection of brickwork and insulation to two named contractors. The third contract dated August 12, 1952 covered materials for a second boiler which was to be a duplicate of the first, and the fourth contract as supplemented dealt with the same matters covered by the second contract but was applicable to the boiler ordered under the third contract. The first and third contracts [91 Ariz. 256] will hereafter be referred to as the 'materials contracts', and the second and fourth as the 'labor contracts'.

The equipment manufactured by the company under the materials contracts was shipped f. o. b. point of origin, each point being at a plant outside of Arizona, and in every case freight was paid by the purchaser. Payment for work done and materials purchased under the contracts was transmitted by the purchaser to the company's offices in New York. In each case, however, the contract provided that the last ten per cent of the contract price or the balance due should be paid 'after successful demonstration of all performance guarantees but not later than six months after completion of erection provided seller has fulfilled all other terms and conditions of the contract.' The materials contracts accounted for ninety-one per cent of the cost of the first boiler and ninety-two per cent of the second, and accordingly the labor contracts constituted nine per cent of the cost of the first and eight per cent of the second. ⁵

The purchaser employed Ebasco, the general contractor it used to build its entire power plant, to perform the field erection of the boilers. The company, in compliance with the labor contracts, supplied a superintendent of erection and furnished the radiographer, welding technician and qualified welders to work for the purchaser's contractor. ⁶ Ebasco's work on each unit consisted of erecting a structural steel support from which the 110 X 40 foot, 2500 ton unit was to be hung; hanging a forty foot drum and the headers which had been completely fabricated by the company at [91 Ariz. 257] its Chattanooga, Tenn. plant; and installing the supply drum, also fabricated in Chattanooga. The next operation was to install the water wall tubing which was also prefabricated in Chattanooga, but since much of it was too long to be completely assembled and shipped from there, it was welded together at the jobsite. Although both the welding and the installation was done by Ebasco, the company supplied about ten certified welders to the contractor because of the critical nature of that job. Ebasco next installed superheaters fabricated in Chattanooga and air preheaters

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and fans purchased by the company from firms outside Arizona. Air and gas ducts were then constructed by Ebasco and finally the brick and insulation work around the outside of the unit was done by the subcontractor employed by the company. ⁷

On November 1, 1955 the Arizona State Tax Commission assessed the company $26,553.20 as taxes on the proceeds received from the four contracts. The commission was acting pursuant to A.C.A. § 73-1303 (g) (1939) as amended which reads:

'* * * there is hereby levied and shall be collected by the tax commission * * * annual privilege taxes measured by the amount or volume of business done by the persons on account of their business activities and in the amounts to be determined by the application of rates against values, gross proceeds of sales, or gross income, as the case may be, in accordance with the following schedule:

* * *

* * *

'(g) At an amount equal to one per cent [1%] of the gross proceeds or gross income from the business, upon every person engaging or continuing in the business of contracting. Payments made by the contractor for labor employed in construction, improvements or repairs shall not be subject to the tax herein imposed.' ⁸

The company petitioned for a correction or redetermination and protested the assessment except for that part applicable to the labor contracts ($417.91) for which it submitted a check. The commission, after a hearing, denied the company's petition; therefore the company paid the balance of the assessment under protest, protested the $417.91 and brought suit in superior court for a refund.

The company contended: 1) that it had not engaged in contracting in Arizona within the meaning of the statute, 2) that if it had, all contracts were relevant and [91 Ariz. 258] appropriate to interstate commerce and therefore wholly immune from state taxation and 3) at the very most the tax would have to be limited to the Arizona activities, thereby excluding the income attributable to the materials purchased outside the state. The case was submitted by both parties to the trial court for summary judgment on the basis of the pleadings, fact stipulation and affidavits.

The court made findings of fact that: a) 'By reason of the activities performed by the Company under all of the contracts, the Company engaged in the business of 'contracting' within the state of Arizona * * *.' b) 'The activities of the Company under the labor contracts were 'relevant and appropriate' to the sale of the materials by the Company under the...