In re General Merchandise Corporation of America

• Citation: 32 F. Supp. 805
• Decision Date: 24 April 1940
• Docket Number: No. 20802.,20802.
• Parties: In re GENERAL MERCHANDISE CORPORATION OF AMERICA.
• Court: U.S. District Court — Western District of Pennsylvania

32 F. Supp. 805

In re GENERAL MERCHANDISE CORPORATION OF AMERICA.

No. 20802.

District Court, E. D. Pennsylvania.

April 24, 1940.

Abraham L. Shapiro, Asst. City Sol., and Francis F. Burch, City Sol., both of Philadelphia, Pa., for petitioner City of Philadelphia.

MacCoy, Brittain, Evans & Lewis and Walter C. Janney, Jr., all of Philadelphia, Pa., for respondent Provident Title Co., landlord.

BARD, District Judge.

This matter comes before the court on a certificate for review of an order of a referee in bankruptcy. The referee denied priority to a claim for sales tax filed by the City of Philadelphia against the bankrupt's estate.

The question for decision is whether the city is entitled to priority of payment out of a bankrupt's estate for taxes laid by a city ordinance upon sales of goods for consumption where the bankrupt is the vendor whose duty it was to collect the tax from the purchaser, but which tax the vendor had not paid over to the city prior to being adjudicated a bankrupt on February 27, 1939.

Beginning February 8, 1938, and ending December 31, 1938, there was in effect an ordinance adopted by the City of Philadelphia imposing a tax, with certain exceptions, upon purchasers for consumption of tangible personal property. Section 2 fixed the tax at "two per centum upon the amount of every sale in the City of Philadelphia." Another clause of Section 2¹ directs that the tax "shall be paid by the purchaser to the vendor for and on account of the City of Philadelphia." The vendor was liable for the collection of the tax and was required to charge it to the purchaser separately from the sales price. Other pertinent sections of the ordinance are Sections 3,² 6³ and 7.⁴

During the effective period of the ordinance the bankrupt, a vendor of merchandise in the City of Philadelphia, made sales, the tax on which amounted to $446.25. This sum was never remitted to the city.

The city filed a claim in the bankrupt estate for this amount and asserted priority of payment. Bankrupt's landlord objected to giving a preference to the city's claim. The trustee had insufficient funds to pay both the landlord's claim and the city's claim.

The city's claim, to be entitled to priority, must be a claim for taxes within the meaning of Section 64, sub. a(4) of the Chandler Act.⁵

Under the language of the sections of this ordinance cited in the margin, it was not entirely clear whether the burden of the tax was laid upon the purchaser or upon the vendor.

This uncertainty was dispelled by the Supreme Court of Pennsylvania in Blauner's, Inc. v. Philadelphia, 330 Pa. 340, 198 A. 889, decided March 23, 1938. In sustaining the constitutionality of the ordinance, that court declared in clear and definite language that the purchaser was the taxpayer and the vendor was the tax collector. Said Mr. Justice Drew, speaking for the court, at page 345 of 330 Pa., at page 891 of 198 A.: "The subject of tax in the instant ordinance is the transaction of sale. The purchaser is made the taxpayer, and the seller the collector of the tax, for which he is compensated. Counsel for appellants argue ably that the tax is in fact on the vendor. The ordinance makes it clear that this is not so. However, as we view the case, it would make no difference which party was required to pay; the tax being on the sale itself, if the city council had the power to make the levy, and it had that power if there was no duplication, it could require either party to the sale, to pay the tax. In this instance, the council saw fit to place it on the vendee."

Blauner's Inc. v. Philadelphia, supra, involved no federal question. The construction of the Philadelphia ordinance by the Pennsylvania Supreme Court is binding upon this court. J. Bacon & Sons v. Martin, 305 U.S. 380, 59 S.Ct. 257, 83 L.Ed. 233.

The Pennsylvania Supreme Court having determined that the vendor is a tax collector and not a taxpayer, is the city's claim one for "taxes legally due and owing by the bankrupt" within the meaning of Section 64, sub. a(4) of the Chandler Act? The quoted phrase from the Chandler Act was also contained in Section 64, sub. a of the old Bankruptcy Act.⁶

In United States v. Kaufman, 267 U.S. 408, 45 S.Ct. 322, 69 L.Ed. 685, the Supreme Court of the United States held that the Bankruptcy Act gave the United States no priority of payment out of partnership assets for a tax due from an individual partner, except to the extent of the share of each partner, if any, in the surplus remaining after the payment of the partnership debts.

Since the Pennsylvania Supreme Court has decided that the tax is not on the vendor and the Supreme Court of the United States has decided that a claim for taxes shall have priority only when the taxes are owed by the bankrupt himself, the claim of the City of Philadelphia for priority of payment out of the vendor's bankrupt estate must be denied.

Counsel for the City of Philadelphia has presented a very able brief and called the court's attention to the New York City ordinance and the decisions of the New York Court of Appeals interpreting the New York City ordinance. It is conceded by the parties that the Philadelphia ordinance providing for the sales tax, and the Sales Tax Law enacted by the City of New York are, for all present purposes, identical.

Counsel for the city argues that the New York Sales Tax Law had been enacted and the cases thereunder decided prior to the enactment by the City of Philadelphia and that when the ordinance was adopted by the City of Philadelphia, there was adopted with it the construction placed thereon by the highest courts of the state of New York. 25 R.C.L.Statutes, Section 294. I agree with this statement as a presumption of law in the absence of an expression of legislative intention to the contrary, but such presumptive construction must yield as a binding influence on this court to any subsequent contrary decision by the Supreme Court of Pennsylvania.

I have examined the New York cases interpreting the New York City Sales Tax Law.⁷ The New York Court of Appeals in the Atlas Television case held that the tax is assessed against the vendor and the city was entitled to priority. In rejecting the argument that the tax is on the purchaser and the vendor's obligation only a debt, the court said: "We might agree with that conclusion if the local law did not contain other provisions which indicate that the obligation imposed upon the vendor is in the nature of a tax." Subsequently, in the Merchants Refrigerating Company case, the New York Court of Appeals attempted to qualify its language in the Atlas Television case, but without, it seems to me, qualifying its decision. Both of these decisions were rendered prior to the enactment of the Philadelphia ordinance.

In Kesbec, Inc. v. McGoldrick, decided since the enactment of the Philadelphia ordinance, the New York Court of Appeals, in a four to three opinion, said: "The sales tax was not imposed on the vendor. It fell upon the purchaser (Merchants Refrigerating Company v. Taylor) * * *." The dissenting opinion in the Kesbec case states that in the Atlas Television case the court rejected the argument that the vendor became a debtor and decided that the vendor "is a taxpayer and not an agent of the city." Judge Lehman, who wrote the opinion in the Atlas Television case, concurred in the dissent in the Kesbec case.

In the recent case, McGoldrick v. Berwind-White Coal Mining Company, 309 U.S. 33, 60 S.Ct. 388, 391, 84 L.Ed. ___, the Supreme Court of the United...