Michigan-Wisconsin Pipe Line Co. v. Johnson

• Decision Date: 13 December 1955
• Docket Number: MICHIGAN-WISCONSIN,No. 48817,48817
• Citation: 73 N.W.2d 820,247 Iowa 583
• Parties: PIPE LINE COMPANY, Appellee, v. Ray E. JOHNSON, Martin Lauterbach and J. F. Hamilton, as Members of the Iowa State Tax Commission, and Iowa State Tax Commission, Appellants.
• Court: Iowa Supreme Court

Page 820

73 N.W.2d 820

247 Iowa 583

MICHIGAN-WISCONSIN PIPE LINE COMPANY, Appellee, v. Ray E. JOHNSON, Martin Lauterbach and J. F. Hamilton, as Members of the Iowa State Tax Commission, and Iowa State Tax Commission, Appellants.

No. 48817.

Supreme Court of Iowa.

Dec. 13, 1955.

Rehearing Denied Feb. 10, 1956.

Dayton Countryman, Atty. Gen., Edward R. Hayes, Sp. Asst. Atty. Gen., and James Barrett, of the Iowa State Tax Commission staff, Des Moines, for appellants.

H. R. Duncan and Jens Grothe, Des Moines, for appellee.

WENNERSTRUM, Justice.

This appeal involves the interpretation which should be given to section 423.4(2), 1950, 1954 Codes, I.C.A. This section exempts from use tax assessment tangible personal property used in interstate transportation or interstate commerce. The Iowa State Tax Commission, after audit of the plaintiff's records, and hearing thereon, entered a use tax assessment against the plaintiff company for the materials used in the erection of certain structures and installations. Sec. 423.16, 1950, 1954 Codes, I.C.A. The Michigan-Wisconsin Pipe Line Company appealed to the Polk County District Court. Secs. 422.55, 422.29, 1950, 1954 Codes, I.C.A. Upon trial the court held the assessments were improper and void and set them aside. The Tax Commission has appealed.

The plaintiff company operates a pipeline system transporting natural gas from points in Texas through several states, including Iowa, to Michigan, Wisconsin and other points. The transportation of gas is effected by means of the forcing of it through pipelines buried in the ground. Compressor stations are located at various points on the line and aid in forcing the gas in its movement. The line of the plaintiff company enters the State of Iowa near Lineville on the south and continues through the south and eastern part of the state. Through measuring stations, and separate utility companies, it serves the communities of Mt. Pleasant, Burlington, Ft. Madison, Keokuk, Centerville and Fairfield. It is shown by the record only 2 6/10% of the gas brought into Iowa by the plaintiff company is delivered to all the various communities heretofore noted.

The construction of the pipeline was completed in 1949 and went into operation on a partial capacity basis in October of that year. Thereafter during 1950 and 1951, after the line was already in operation, two compressor stations were erected in this state. One was built near Lineville and the other near Fairfield. The cost of the material used in the installation of the two compressor stations and auxilliary buildings at the points mentioned is the basis of the assessment here involved.

The installations and buildings at the two compressor stations consisted of: Water Storage Tank; Cooling Tower; Water Well; Scrubbers; Compressor Building; Pipeline Warehouse; Pipeline Garage; Pipeline Storage Racks; Microwave Tower; Microwave Building; Meter Building, Auxiliary Building, Air Receivers; Lubrication Oil Storage Tanks; Shop and Warehouse and Garage; and Scrap Bin.

In addition to the buildings mentioned at each station a house for a superintendent was constructed. At the Lineville location, in addition to the superintendent's home, eight other homes were built, which are rented to employees. These employees work on two 12 hour shifts. By reason of the distance from Lineville, the nature of the roads required to be used, and the limited housing conditions in or near that community, the houses were erected for use by the employees. The Fairfield station is not too far distant from that city, is on a good road and employee housing there was not deemed necessary.

The plaintiff company, or a contractor engaged by it to develop the compressor stations, as well as the auxiliary buildings previously mentioned, purchased various articles of tangible personal property outside of Iowa for use in the building and development of the project. This material became a part of the buildings, grounds and equipment at the stations. The company or its contractor did not pay use or sales tax to the Iowa State Tax Commission on the items necessary for the construction (with a few exceptions). Thereafter the commission, following the audit previously referred to, assessed a use tax against the company, it having acquired said property subject to the claimed lien for use tax owed by its contractors. Sec. 423.14, 1950, 1954 Codes, I.C.A.

The company appealed to the Polk County District Court from the commission's order of assessment on the ground the property purchased was exempt from the use tax because: (1) the provisions of Section 423.4(2), exempted purchases of property used in interstate commerce or interstate transportation, (2) it was exempt from tax under prior construction of Section 423.4(2) and the rules and regulations of the State Tax Commission, (3) the assessment and tax was an interference with interstate commerce and in violation of the Federal constitution, and (4) the assessment and tax violated the due process clause in the 14th Amendment to the Federal constitution.

The statutory exemption, to which reference has been made, is as follows: 'The use in this state of the following tangible personal property is hereby specifically exempted from the tax imposed by this chapter: * * * (2) Tangible personal property used (a) in interstate transportation or interstate commerce, * * *.' Sec. 423.4, 1950, 1954 Codes, I.C.A.

I. There are several issues discussed in the respective briefs. However, it would appear the tax commission's primary claim for reversal in this court and its claimed authority to make the assessment it did is based on the following contention. It maintains the State of Iowa has power to impose a use tax on the use of tangible personal propery brought into and delivered in Iowa, and which has come to rest in Iowa, even though that property may at some future time be used in interstate commerce.

The commission asserts as authority for its position heretofore set forth the case of Southern Pacific Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 391, 83 L.Ed. 586, wherein the Supreme Court of the United States passed upon a provision of the California use tax act of 1935. It would appear from the cited case the California statute imposed a use tax on a consumer of tangible personalty held for 'use' or 'storage'. It is therein stated: '* * * The tax is not sought from personal property used in transactions entirely disassociated from any agency connected with interstate transportation, * * *, but from tangible personalty purchased out of the state for immediate or subsequent installation in an interstate railroad facility.' It is further stated: '* * * In the present case some of the articles were ordered out of the state under specification suitable only for utilization in the transportation facilities and installed immediately on arrival at the California destination. If articles so handled are deemed to have reached the end of their interstate transit upon 'use or storage,' no further inquiry is necessary as to the rest of the articles which are subjected to a retention, by comparison, farther removed from interstate commerce. We think there was a taxable moment when the former had reached the end of their interstate transportation and had not begun to be consumed in interstate operation. At that moment, the tax on storage and use--retention and exercise of a right of ownership, respectively--was effective. The interstate movement was complete. The interstate consumption had not begun. * * *' (Emphasis supplied.)

And as indicative of the reasoning of the Supreme Court of the United States in the cited case it was therein stated: '* * * A tax on property or upon a taxable event in the state, apart from operation, does not interfere. This is a practical adjustment of the right of the state to revenue from the instrumentalities of commerce and the obligation of the state to leave the regulation of interstate and foreign commerce to the Congress.'

A case which is cited in the Southern Pacific Co. v. Gallagher, supra, opinion and which is a further claimed authority by the tax commission as a basis for the assessment it has made in the instant case is that of Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 526, 81 L.Ed. 814. In this last cited case an assessment of a use tax was made upon contractors who were engaged in the construction of the Grand Coulee Dam on the Columbia River. The taxing authority of the State of Washington imposed a use tax on machinery, materials and supplies, including locomotives, cars, conveyors, pumps and trestle steel which were bought at retail in other states. In commenting upon the claimed interstate commerce character of the transaction the Supreme Court of the United States stated: '* * * On the other hand, a use tax is always payable where the user has acquired property by retail purchase in or from another state, unless he has paid a sales or use tax elsewhere before bringing it to Washington. The tax presupposes everywhere a retail purchase by the user before the time of use. If he has manufactured the chattel for himself, or has received it from the manufacturer as a legacy or gift, he is exempt from the use tax, whether title was acquired in Washington or elsewhere. The practical effect of a system thus conditioned is readily perceived. * * *

'The tax is not upon the operations of interstate commerce, but upon the privilege of use after commerce is at an end.

'Things acquired or transported in interstate commerce may be subjected to a property tax, nondiscriminatory in its operation, when they have become part of the common mass of property within the state of destination. (Citing cases.) This is so, indeed, though they are still in the original packages. (Citing cases.) For like reasons they may be subjected, when once they are at rest, to a nondiscriminatory tax upon use or enjoyment. (Citing cases.) The privilege...