Herman M. Brown Co. v. Johnson, 49067

• Decision Date: 03 April 1957
• Docket Number: No. 49067,49067
• Citation: 248 Iowa 1143,82 N.W.2d 134
• Parties: HERMAN M. BROWN COMPANY, Appellee, v. Ray E. JOHNSON, Martin Lauterbach and Frank Hamilton, constituting the Iowa State Tax Commission, Appellants.
• Court: Iowa Supreme Court

Page 134

82 N.W.2d 134

248 Iowa 1143

HERMAN M. BROWN COMPANY, Appellee, v. Ray E. JOHNSON, Martin Lauterbach and Frank Hamilton, constituting the Iowa State Tax Commission, Appellants.

No. 49067.

Supreme Court of Iowa.

April 3, 1957.

Rehearing Denied July 22, 1957.

See 84 N.W.2d 44.

Dayton Countryman, Atty.Gen., M. A. Inverson, Sp. Asst. Atty. Gen., J. M. Barrett, Sp. Counsel for State Tax Commission, Des Moines, for appellants.

Abramson & Myers, by A. J. Myers, Des. Moines, for appellee.

BLISS, Chief Justice.

This action involves the Iowa Use Tax statute, Chapter 423 of the 1954 Code of Iowa, I.C.A. There is no substantial dispute over the facts. The parties have stipulated many of them. The testimonial evidence is not extensive but the exhibits which have been certified to this Court are voluminous.

Section 423.1(1), supra, provides: "Use' means and includes the exercise by any person of any right or power over tangible personal property incident to the ownership of that property, except that it shall not include processing, or the sale of that property in the regular course of business. * * *' (Italics ours.)

Section 423.2. 'Imposition of tax. An excise tax is hereby imposed on the use in this state of tangible personal property purchased on or after the effective date* [* 47 G.A. ch. 198, effective date, April 16, 1937] of this chapter for use in this state, at the rate of two percent of the purchase price of such property. Said tax is hereby imposed upon every person using such property within this state until such tax has been paid directly to the county treasurer, to a ratailer, or to the commission as hereinafter provided.' (Italics ours.)

Section 423.4. 'Exemptions. The use in this state of the following tangible personal property is hereby specifically exempted from the tax imposed by this chapter:

'1. Tangible personal property, the gross receipts from the sale of which are required to be included in the measure of the tax imposed by division IV of chapter 422, and any amendments made or which may hereafter be made thereto. * * *'

Division IV of chapter 422 mentioned just above is the statutory provision requiring the payment of the sales tax of two percent.

Appellee is an Iowa corporation with its home office at Des Moines, Iowa. For ten or more years prior to July 1, 1953 it was engaged in Iowa in selling heavy roadbuilding machinery and equipment. Its business was in buying new merchandise at wholesale prices and selling it at retail prices to its customers in Iowa. In effecting these sales to its customers, the appellee, in by far the greater number of transactions, used a printed lease agreement, which was preferable to its purchasers, wherein the rental specified was payable by the day, week, month, or longer periods. In the agreement was the provision: 'Lessee to pay state sales tax as required by law,' and also another provision, that, 'in case the lessee desires to purchase the above-mentioned equipment _____ percent of all rentals paid in may be applied against the purchase price which is $_____ F.O.B. _____ ship or deliver to _____. Rental starts _____.' The lessee agreed to maintain the machinery and equipment in the same condition as when delivered, usual wear and tear excepted, and to pay all claims for damages to the equipment, and to persons injured in its use. Some of the leases were oral, but subject to the foregoing conditions and provisions. Two thirds or more of the transactions resulted in sales of equipments, upon which sales taxes were paid on the total sales prices, and were remitted to the State by appellee.

If the option to purchase was not exercised the property was returned to the appellee, and it made lease transactions like unto the original one until an eventual final sale was made. Such sales were made in all but four transactions, in one of which the item of property could not be located. In some instances several lease agreements were made before a final sale was consummated.

The appellee did not pay use taxes on the property returned by lessees who did not become ultimate purchasers. The Commission insisted upon these payments being made, and had two accountants make an audit of appellee's records for the five-year period commencing July 1, 1948 and terminating July 1, 1953. As a result of this audit, the Commission demanded $11,622.45 as use taxes and penalty thereon of $986.22, or a total claim of $12,608.67. Later the Commission reduced the claim by $264.46 to $12,344.21, the amount in controversy, which it exacted as use taxes. Appellee paid it under protest and brought this action for an order or decree of mandamus commanding its refund to it.

The contention of the Commission is stated in its printed argument in this Court as follows: 'During the period (the 5 years herein noted) appellee leased various items of machinery and equipment to various customers, some of which was ultimately purchased by the lessees thereof through the exercise of an option to purchase. Some of such leased equipment was returned to the lessor-appellee without the lessee thereof having exercised any option to purchase the same. The leased equipment which was returned by the first lessee to the appellee without exercising any option to purchase the same was viewed by the Tax Commission as having been subjected to a use by rental on the part of the Herman M. Brown Company. Such use of the said equipment was noted in an audit of the books and records of said company covering the period from July 1, 1948 to July 1, 1953, and as a result of such audit, an Iowa use tax and penalty assessment was made thereon. * * * the portion thereof relating to the equipment rented without the exercise of an option to purchase by the first lessee is the only part thereof which is contested.' (Italics ours.)

The appellee used but two witnesses. One was Ben Brown, its general sales manager, during the period of the audit, and William Sampson, its treasurer during the same period. Mr. Brown testified: 'The Herman M. Brown Company acquires and purchases its equipment for the purpose of reselling such equipment. It has a retail sales tax permit. In recent years there has been a policy established by the plaintiff Company of renting equipment at times to promote the sale of equipment. As Sales Manager and Director of Sales of the plaintiff Company, I know the policy of the plaintiff Company has been to permit all equipment on rental to be purchased by the lessee whether that lease was by written or oral agreement. * * * The Herman M. Brown Company purchases or acquires none of the property or equipment that it deals in at retail. The rental of equipment consummated by our company is for the purpose of promoting sales of our merchandise. The rentals promote sales of the company because some of the purchasers do not want to show liability in their accounts which would be occasioned if the equipment were bought on conditional sales contract, because there are times when they want to see what the equipment will do and whether they have the proper size or the correct equipment to do the job, and because of income tax considerations for the purchaser. The income advantage is obtained by the contractor renting the equipment, and charging the rental off to the job, and then later purchasing such equipment. * * * (Cross-examination) Some of the items that are the subject of these lease contracts are rented several times to different people before they are eventually sold. * * * I don't know what the customer has in mind when he rents equipment other than the fact when they come in and rent it, it is usually for a period where we think it is going to be a sale. * * * We have no way of knowing whether it is going to turn into a sale or not. * * * My conclusion that the customers rent this equipment rather than purchase for income tax purposes or income tax savings is based upon their telling us that is why they want to purchase it on a rental purchase plan, which means they want to purchase it but they want to do it on a rental basis. I have testified that our purchases are never at retail prices, but are at the wholesale price.'

The testimony of Mr. Sampson was confirmatory of that of Mr. Brown that the business of the appellee and the purpose of it was not in leasing merchandise, but in selling it at retail, and that all leases by it were only for the purpose of promoting and effecting outright sales. He testified: 'Our company is in the business of selling goods, wares, and merchandise for profit. * * * All of the equipment and machinery that the plaintiff purchased was purchased at wholesale. * * * To the best of my knowledge, we have never had a rental on which the purchaser did not have the option of applying the rentals he had paid against the purchase of that equipment.'

The parties stipulated: '* * * In most, although not all cases, where plaintiff leased equipment a written lease agreement was signed by the parties, which agreement contained an option to purchase clause which may or may not have been exercised by the lessee. * * * Under most of these written lease agreements, the lessee does, in fact, exercise the option to purchase the property so leased and when such option is exercised, the rentals previously paid are applied upon the purchase price and these rental payments, together with an additional amount specified in the written lease agreement, are paid by the lessee or purchaser to the plaintiff and the total amount so paid is the measure for computing the sales tax.'

The defendant-appellant offered but one witness, Mr. Koons, a field operator of the Commission, who with an assistant, Mr. Hild, audited the books and records of the appellee, for the five-year period, hereinbefore referred to. He testified that it was part of his duties to examine the records of taxpayers when assigned to do so for the purpose of determining whether they have discharged their sales-tax...