Grudle v. Iowa Dept. of Revenue and Finance

• Citation: 450 N.W.2d 845
• Decision Date: 24 January 1990
• Docket Number: No. 88-1785,88-1785
• Parties: Carroll C. GRUDLE, Appellee, v. IOWA DEPARTMENT OF REVENUE AND FINANCE, Appellant.
• Court: Iowa Supreme Court

Page 845

450 N.W.2d 845

Carroll C. GRUDLE, Appellee, v. IOWA DEPARTMENT OF REVENUE AND FINANCE, Appellant.

No. 88-1785.

Supreme Court of Iowa.

Jan. 24, 1990.

Rehearing Denied Feb. 16, 1990.

Thomas J. Miller, Atty. Gen., Harry M. Griger, Sp. Asst. Atty. Gen., and Gerald A. Kuehn, Asst. Atty. Gen., for appellant.

Scott H. Peters and Scott J. Rogers of the Peters Law Firm, P.C., Council Bluffs, for appellee.

Considered by HARRIS, P.J., and LARSON, SCHULTZ, LAVORATO and SNELL, JJ.

SCHULTZ, Justice.

This appeal arises from the assessment of a consumer use tax by the Iowa Department of Revenue and Finance (department) upon Carroll Grudle (owner). This assessment was predicated on his ownership of trucks and trailers used exclusively in his interstate trucking business. The owner protested the assessment, claiming that the trucks and tractors were not purchased for use in Iowa. However, the department, in final agency action, upheld the assessment. The department found that the owner had stored and maintained the trucks in Iowa between interstate trips and concluded that this period of time was a "taxable moment," allowing the imposition of the state use tax. The district court on judicial review reversed the agency, and the department appeals. We affirm.

I. The facts are undisputed. The subjects of the use tax were four truck trailers and three truck tractors. The owner purchased three trailers and one tractor in Iowa and the rest out of state. The owner is exclusively an interstate trucker. The trucks haul products to and from Iowa. Occasionally, between trips, the vehicles are serviced or stand idle on the owner's farm in Iowa where he conducts his business. These intervals are for short periods of time; the longest period reported in the two and one-half year audit was for two months.

This appeal presents legal rather than fact issues. Central to all of the legal issues is the interpretation of the use tax statute, Iowa Code section 423.2 (1985). This section provides in part "[a]n excise tax ... on the use in this state of tangible personal property purchased for use in this state, at the rate of four percent of the purchase price of the property." Id.

The district court, acting in an appellate capacity, concluded that neither section 423.2 nor any agency regulation provided that a "period of idleness" of an interstate vehicle is a "taxable moment." Consequently, the court concluded that no authority existed for such taxation on an interstate hauler who lays over in Iowa for several days or more. The court also adopted the alternative holding that a 1985 legislative change ¹ reinstating an exemption from use tax for interstate commerce was remedial, and thus could be applied retroactively to exempt the owner from the assessment of a use tax.

On appeal, the department challenges both conclusions drawn by the district court. Our function, like that of the district court, is to correct any errors of law on the part of the department. Richards v. Iowa Dep't of Revenue, 360 N.W.2d 830, 831 (Iowa 1985). As we agree with the district court's first conclusion, we do not address the retroactivity of the legislative change.

II. The use tax imposed by the State on the owner's vehicles used exclusively in interstate commerce raises a constitutional problem. The commerce clause, article I, section 8, clause 3 of the United States Constitution, gives Congress the power to regulate commerce between the various states. The Supreme Court in Spector Motor Service, Inc. v. O'Connor, 340 U.S. 602, 609-10, 71 S.Ct. 508, 512-13, 95 L.Ed. 573, 578-79 (1951), held that a state tax on an activity exclusively in interstate commerce violated the commerce clause. See also Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 458, 79 S.Ct. 357, 362, 3 L.Ed.2d 421, 427 (1959); Freeman v. Hewit, 329 U.S. 249, 252-54, 67 S.Ct. 274, 276-77, 91 L.Ed. 265, 271-73 (1946).

Despite these rulings, the various states sought to collect a fair share of revenue from such property by taxing its use during a break in the flow of its interstate activity. The courts were prone to allow such taxation, coining the term "taxable moment" to describe this period of time when the property was not used in interstate commerce. Atchison, T. & S.F. R.R. v. State Bd. of Equalization, 139 Cal.App.2d 411, 421, 294 P.2d 181, 187-88 (1956); Inter-state Nurseries, Inc. v. Iowa Dep't of Revenue, 164 N.W.2d 858, 864-65 (Iowa 1969); Michigan-Wisconsin Pipe Line Co. v. Johnson, 247 Iowa 583, 589, 73 N.W.2d 820, 824 (1955).

The Supreme Court later overruled Spector and relaxed its rule by holding that interstate commerce might be taxed by a state if a four-prong test was met. Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 97 S.Ct. 1076, 51 L.Ed.2d 326 (1977). Applying this test a state tax withstands scrutiny under the commerce clause if "the tax is applied to an activity with a substantial nexus with the taxing State, is fairly apportioned, does not discriminate against interstate commerce, and is fairly related to the services provided by the State." Id. at 279, 97 S.Ct. at 1079, 51 L.Ed.2d at 331.

These two doctrines have a major difference in approach. The "taxable moment" doctrine only allows the taxation of property during a time period when it is not used in interstate commerce. On the other hand, Complete Auto tells us that property used in interstate commerce may be taxed by the state if the four-prong test is met. In this appeal the department embraces both doctrines.

III. The department's initial claim on appeal is that the owner is subject to the imposition of the tax if the Complete Auto test is met. The department points out that we adopted this test in Atchison, Topeka, & Santa Fe Railroad v. Bair, 338 N.W.2d 338, 347-48 (Iowa 1983), cert. denied, 465 U.S. 1071, 104 S.Ct. 1427, 79 L.Ed.2d 751 (1984), and Kartridg Pak Co. v. Department of Revenue, 362 N.W.2d 557, 561 (Iowa 1985).

We conclude that the department's request to apply the Complete Auto test to the assessed use tax is improper in view of the proceedings before the agency prior to this appeal. In reviewing agency action, the district court and the appellate court may only review issues considered and decided by the agency. Meads v. Iowa Dep't of Social Servs., 366 N.W.2d 555, 559 (Iowa 1985).

Prior to appeal, the department did not seek to impose a tax on the interstate use of the vehicles. Apparently the use tax was not imposed pursuant to Iowa Code section 423.7 (1985) ² when the vehicles were registered and the owner obtained a certificate of title. In preparing his work sheet during the tax audit that led to this assessment, the auditor referred to "taxable moments" and set out the "off duty times" of each vehicle as shown by the owner's vehicle logs. Prior to the hearing, the department's attorney specified in a letter that "[t]he department's position has consistently been that vehicles involved in layovers in Iowa between interstate trips and those which make Iowa their home base, experience taxable moments in Iowa per rule 730 I.A.C., section 33.6. ³ " At all times during the agency hearing, the department's sole legal theory for the assessment of the use tax was based on the principle that its authority to assess the tax was derived from a break in the interstate use of the vehicle constituting a "taxable moment." The department did not claim that it had the right to tax the vehicle's activities in interstate commerce. The owners had no reason to present evidence relevant to the four-prong test of Complete Auto. The "taxable moment" theory was the only issue reviewed by the department in its final decision.

The department's auditor at the protest hearing also spoke of an additional taxable moment occurring between the time of the purchase of four vehicles in Iowa and their use in interstate commerce. However, this was not the issue before the hearing officer. The department's final decision properly addressed only the "off duty" or "layover" issue.

Consequently, we do not address issues concerning the general imposition of a use tax on interstate commerce and the application of the "taxable moment" doctrine to the time between a vehicle's purchase and its placement in interstate service. These issues were not litigated before the department. We add that the failure to address the right to tax interstate commerce is not likely to occur again, because the legislature at the time of imposition of this tax had already provided an exception for property used in interstate commerce. This exemption went into effect on July 1, 1985, a few weeks after this assessment. We now turn to the "taxable moment" issue.

IV. The department claims that the owner's vehicles were not used exclusively in interstate commerce because they came to rest in...