In re Los Angeles Lumber Products Co.

• Decision Date: 20 April 1942
• Docket Number: No. 31352.,31352.
• Citation: 45 F. Supp. 77
• Court: U.S. District Court — Southern District of California
• Parties: In re LOS ANGELES LUMBER PRODUCTS CO., Ltd.

45 F. Supp. 77

In re LOS ANGELES LUMBER PRODUCTS CO., Ltd.

No. 31352.

District Court, S. D. California, Central Division.

April 20, 1942.

COPYRIGHT MATERIAL OMITTED

Gibson, Dunn & Crutcher, of Los Angeles, Cal., for debtor corporation.

Earl Warren, Atty. Gen., H. H. Linney, Asst. Atty. Gen., and John L. Nourse, James E. Sabine, and R. S. McLaughlin, Deputy Attys. Gen., for the State of California.

JENNEY, District Judge.

On July 25, 1939, the State of California filed a tax claim against the estate of Los Angeles Lumber Products Company, Ltd (hereinafter called the "debtor") for $11,113.66 plus interest. On July 19, 1940, demand for payment was made. The demand is in three parts, which total $10,757.89: (1) $6,822.93 for retail sales taxes accruing prior to the commencement of bankruptcy; (2) $389.39 for sales taxes accruing subsequent to the commencement of bankruptcy; and (3) $3,545.57 for use taxes. Additional charges total $1,056.62, $137.82 being for interest and $918.80 for penalties, thus making a grand total of $11,814.51. On December 16, 1941, the debtor filed objections to the allowance of these items.

The matter was referred to a special master, who held hearings upon the claim and objections thereto.

During the hearings the parties agreed upon the basic formulae applicable to the sales tax part of the claim, and a stipulation filed December 15, 1941, concurred in by the special master, fixed that portion of the claim at $3,806.21. A report to this effect was filed December 15, 1941, and on the same day the court made an order allowing the sales tax portion of the claim as fixed at $3,806.21, plus interest on the agreed sum to December 15, 1941. Pursuant to such order, that sum has been paid and the item discharged.

The present report deals principally with the use tax item and the penalties. The state has filed written objections to the report within the time required by Rule 53(e) (2) of the Federal Rules of Civil Procedure, 28 U.S.C.A. following section 723c. They are directed only to the recommendation that the use tax of $3,545.57, plus interest at 6% on the sum of $3,165.69 from April 15, 1940, to date of payment, be disallowed.

The first matter which will be determined is the liability of the debtor for the use tax. The facts upon which this claim is based are stated in the master's report as follows:

"It is conceded by the parties that the use tax item is based upon the building of a barge of more than 1000 tons burden by the debtor corporation within the state and sold by it within the state to the General Petroleum Corporation for use within the state." (Report, p. 3, lines 1-4, inclusive.)

The California Retail Sales Tax Act, Cal.Stats.1933, p. 2599, was enacted in 1933 and amendatory provisions have since been added. It is a tax of 3% imposed upon the gross receipts of California retailers for the privilege of selling tangible personal property at retail in this state. The Use Tax Act, Cal.Stats.1935, p. 1297, was added to the state's taxing system in 1935 and it, too, has been amended from time to time. It is an excise tax upon the storage, use, or other consumption of tangible personal property purchased from retailers for storage, use, or consumption within this state. The rate has always been 3% of the sales price.

In 1937, amendments to the Sales and Use Tax Acts, which are very similar in their subject matter, were adopted. Both became effective August 27, 1937. Section 5.7 of the Sales Tax Act, Cal.Stats. 1937, p. 1326, reads as follows:

"There are hereby specifically exempted from the provisions of this act and from the computation of the amount of tax levied, assessed or payable under this act the gross receipts from sales by builders thereof of vessels of more than one thousand tons burden."

Section 4.7 of the Use Tax Act, Cal. Stats.1937, p. 1327, reads as follows: "The storage, use or other consumption in this State of the following tangible personal property is hereby specifically exempted from the tax imposed by this act, namely, any ship of more than one thousand tons burden purchased in this State from the builders thereof, with respect to which this tax would, if such ship had been purchased outside this State or purchased in interstate commerce, be inoperative because prohibited under the Constitution or the laws of the United States of America or the Constitution of this State."

One of the first cases before the United States Supreme Court involving the constitutionality of a general use tax was decided March 29, 1937. Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814. That court upheld the use tax act of the State of Washington as applied to materials purchased outside that state, brought in and there used solely and exclusively in intrastate business. On January 30, 1939, the Supreme Court upheld the application of a use tax act (California's) to property purchased outside and brought within its borders for subsequent use in the course of mixed intrastate and interstate commerce. Southern Pac. Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 83 L.Ed. 586, and Pacific Tel. & T. Co. v. Gallagher, 306 U.S. 182, 59 S.Ct. 396, 83 L.Ed. 595. See discussion Traynor, State Taxation and the Commerce Clause in the Supreme Court, 1938 Term, (1940) 28 Calif.L.Rev. 168, 180, 181.

A consideration of these two exemptions reveals the following scheme of exemption. The California legislature appears to have been doubtful whether or not the Supreme Court of the United States would uphold the constitutionality of the use taxes in their application to property purchased outside the state or in interstate commerce. It seemed apparent, however, that the commerce clause would not preclude the application of this tax to intrastate transactions. In order not to place local shipbuilders at a disadvantage, the legislature inserted the conditional exemption in Section 4.7 of the Use Tax Act. To complete the scheme, it was then necessary that the same type of craft be exempted from the sales tax. The result of the amendments was that if a ship of over 1,000 tons burden, purchased outside this state or in interstate commerce could not be subjected to a use tax, a ship of equal displacement manufactured in this state was free from these taxes; i. e., both the conditional exemption of Section 4.7 of the Use Tax Act and the absolute exemption of Section 5.7 of the Sales Tax Act applied.

Even before these exemptions became law, the Silas Mason Co. case, supra, held that the use tax was not violative of the commerce clause as applied to the facts of that case. Subsequently, in the decisions in the Southern Pac. Co. and Pac. Tel. & T. Co. cases, supra, most, if not all, doubt as to the constitutionality of these tax statutes under the commerce clause was dispelled.

Counsel for debtor argue that the conditional exemption of Section 4.7 of the Use Tax Act is not confined merely to the commerce clause and that, if the use tax applied to a similar ship purchased outside the state or in interstate commerce would violate any provision of the federal Constitution or any federal statute, the ship constructed in California is exempted from the use tax by Section 4.7 of the Use Tax Act. Debtor's answering brief, pp. 11, 12. There seems to be no way to determine whether provisions other than the commerce clause were intended to be included, but the words of the amendment, "under the Constitution or the laws of the United States of America," make that interpretation seem reasonable. At any rate, for the purposes of argument its correctness will be assumed.

The conditional exemption of Section 4.7 of the Use Tax Act is based upon the premise that the state has the authority to tax the ship in question. However, if the state is forbidden by the federal Constitution or any federal statute to exact the use tax of a similar ship purchased outside California, the ship which is manufactured in California will not be subjected to the use tax. Thus, in fairness to local shipbuilders, the state will forego the exercise of a power which it may legally exercise.

The specific contentions made by the debtor are that the imposition of the use tax upon a similar ship purchased outside the state or in interstate commerce would be invalid (1) as a "duty of tonnage" under Art. I, § 10, Clause 3, of the federal Constitution; and (2) as a violation of Section 3 of the Act admitting California into the Union, Act Sept. 9, 1850, 9 Stat. 452, Ch. 50; and that, therefore, under either or both, the present case falls squarely within the exemption provisions of Section 4.7 of the Use Tax Act.

Article I, § 10, Clause 3, of the Constitution, reads in part as follows: "No State shall, without the Consent of Congress, lay any Duty of Tonnage * * *."

The policy underlying this provision is stated by Mr. Justice (now Chief Justice) Stone in Clyde Mallory Lines v. State of Alabama, 1935, 296 U.S. 261, 264, 265, 56 S.Ct. 194, 195, 80 L.Ed. 215:

"It seems clear that the prohibition against the imposition of any duty of tonnage was due to the desire of the framers to supplement article 1, § 10, Cl. 2, denying to the states power to lay duties on imports or exports, citing cases by forbidding a corresponding tax on the privilege of access by vessels to the ports of a state, and to their doubts whether the commerce clause would accomplish that purpose.¹ If the states had been left free to tax the privilege of access by vessels to their harbors the prohibition against duties on imports and exports could have been nullified by taxing the vessels transporting the merchandise."

A duty of tonnage within the meaning of the Constitution is a charge upon a vessel, as an instrument of commerce, for entering, lying in, or leaving a port. Huse v. Glover, 1886, 119 U.S. 543, 549, 550, 7 S.Ct. 313, 30 L.Ed. 487. All taxes and duties, regardless of name or form, which operate to impose a charge of this type are...