Orr Felt & Blanket Co. v. Schneider

• Decision Date: 30 June 1965
• Docket Number: No. 39022,39022
• Citation: 3 Ohio St.2d 14,209 N.E.2d 150
• Parties: , 32 O.O.2d 7 The ORR FELT & BLANKET CO., Appellee, v. SCHNEIDER, Tax Commr., Appellant.
• Court: Ohio Supreme Court

Page 14

3 Ohio St.2d 14

209 N.E.2d 150, 32 O.O.2d 7

The ORR FELT & BLANKET CO., Appellee, v. SCHNEIDER, Tax Commr., Appellant.

No. 39022.

Supreme Court of Ohio.

June 30, 1965.

Syllabus by the Court

1. When grease wool, imported for use in manufacturing upon which no duty has been paid, is stored in its original packages by a manufacturer-importer in a bonded warehouse, which warehouse is under the exclusive control of the United States customs officer, such wool has not definitely ended its importation journey and has not been irrevocably committed to supply the manufacturer-importer's 'current operational needs,' and, therefore, such wool retains its constitutional immunity as an import and is not taxable under the Ohio personal property tax laws.

2. When imported grease wool upon which duty has been paid is stored in a warehouse in inventory under the manufacturer's control for use in manufacturing, only that amount which is required to provide for the manufacturer-importer's 'current operational needs' for the length of time it takes to secure an additional supply of wool from the foreign market which the manufacturer has selected as its source of supply loses its constitutional immunity as an import and is, therefore, taxable under the Ohio personal property tax laws.

During 1959, the period in question here, The Orr Felt & Blanket Company, appellee herein, was engaged in the business of manufacturing products in which wool, both domestic and foreign, was the principal raw material.

Appellee imported grease wool either by direct purchase by its own employees in the Canadian markets, or by direct purchase through its agents (foreign wool buyers) in the foreign wool markets of New Zealand, Ireland, Australia, South America and South Africa.

After purchase in the foreign wool market, the grease wool was shipped to Orr Felt in Piqua, Ohio, removed from the railroad car or truck in which it arrived in Piqua under the supervision of a customs officer, and placed in a section of Orr Felt's warehouse, which warehouse section was under bond to and control of the Collector of Customs of the United States. This warehouse section was under the supervision of a customs officer and the only access to it was through a locked door, the only key to which was held by the Customs Officer in Dayton. There was no physical connection between the warehouse and the manufacturing plant. No manufacturing operation of Orr Felt was carried on in the bonded warehouse and Orr Felt trucked the imported grease wool from the warehouse to the manufacturing plant located one mile away.

While in the bonded warehouse the grease wool remained in the same bale, bag or package in which it was imported and while it was in this warehouse no action was taken to change the form, either of the grease wool or its package, and the aging of such wool added no value to it. In a few instances imported bales, bags or packages of grease wool were not placed in the bonded customs warehouse upon arrival in Piqua, but were removed immediately from bond by payment of the customs duty and placed in Orr Felt's warehouse immediately adjacent to its manufacturing plant.

When Orr Felt desired to remove grease wool from the bonded customs warehouse, the import duty upon the grease wool which it desired to remove would be paid and the Customs Officer would come from Dayton, Ohio and unlock the warehouse and supervise the removal of that grease wool upon which the duty had been paid.

After the grease wool was withdrawn from the bonded customs warehouse and transported by truck the one mile to Orr Felt's manufacturing plant, it was placed either in a warehouse section of the manufacturing plant itself, or in a warehouse immediately adjacent to the manufacturing plant. It remained in its original bale, bag or package.

When manufacturing requirements demanded, the bale, bag or package containing the grease wool was broken and the grease wool was sorted and placed into sorted grease wool inventory. After sorting, the grease wool was either scoured or stored for future use. After scouring, the grease wool was either placed into the manufacturing process or stored for future use.

The type and quantity of grease wool imported by Orr Felt could have been purchased by it from wool importers who imported such grease wool for resale, but Orr Felt chose to import its own grease wool in order to reduce its grease wool inventory cost by six to twelve per cent and to insure the obtaining of a better quality and a more uniform grease wool. By importing its own grease wool, Orr Felt was required, in the purchase of certain types of grease wool, to direct its agents in October of one year to purchase grease wool that would not be delivered to appellant until February or March of the following year, which would then constitute a supply that could be expected to satisfy manufacturing needs for one year. There was a 16- or 17-month interval between purchase and anticipated final use of such grease wool. Because of the infrequency of availability of the grease wool in foreign markets and Orr Felt's desire to purchase and import the grease wool directly, Orr Felt claims that it retained in its inventory a greater supply than was necessary to meet its day-to-day manufacturing requirements.

Orr Felt asserts that if it had purchased directly from wool importers located on the East coast of the United States who warehoused and had available grease wool of the type and in the quantity needed by it, the amount of such grease wool which Orr Felt would have kept in its inventory to meet its manufacturing requirements on January 1, 1960, would have been a one-month's supply, or approximately 50,000 pounds of grease wool. Orr Felt also claims that an estimate of one-month's supply gave consideration to the time necessary to place the order, to obtain delivery by means of transportation available in 1959 and 1960, and to provide for a safety margin in the event of a slip-up in the procedure.

Orr Felt claims that it has an average of 5.2-month's inventory of grease wool on hand during 1959, while its manufacturing requirements could have been met with approximately a one-month's supply if it had chosen to purchase its grease wool from East coast importers.

The Orr Felt & Blanket Company filed a return of taxable property for 1960. It included therewith a schedule on which one of the columns is headed 'Imported Wool in Original Containers.' The month-end values were not included as part of taxable inventory.

On audit of Orr Felt's 1960 return, the Tax Commissioner included as part of taxable inventory the above mentioned imported wool. An appeal was taken to the Board of Tax Appeals by Orr Felt.

The Board of Tax Appeals affirmed the action of the Tax Commissioner to the extent that he had subjected to taxation all of the 'duty paid' imported wool removed from the taxpayer's bonded warehouse as part of inventory. The 'bonded' wool was determined to be excludable from inventory and hence tax exempt under Section 10, Clause 2, Article I of the United States Constitution.

The cause is before this court upon appeal from the decision of the Board of Tax Appeals.

The Tax Commissioner has appealed the modification of his final order to the extent that 'bonded' wool was held exempt from taxation.

Orr Felt filed a cross-appeal presenting the additional question whether the board's affirmance of the Tax Commissioner's action as to 'duty paid' imported wool is correct under the facts and applicable law.

Miller & Bazler and Frank E. Bazler, Troy, for appellee.

William B. Saxbe, Atty. Gen., Edgar L. Lindley and Thomas Moyer, Columbus, for appellant.

O'NEILL, Judge.

Section 10, Clause 2, Article I of the United States Constitution provides:

'No state shall, without the consent of Congress, lay any imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws * * *.'

This is a constitutional prohibition against state taxation of imports.

The landmark case in this field is Brown v. Maryland (1827), 12 Wheat. 419, 441, 6 L.Ed. 678. This was an import-for-sale case. Chief Justice Marshall said:

'* * * when the importer has so acted upon the thing imported, that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import, and has become subject to the taxing power of the state; but while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported, a tax upon it is too plainly a duty on imports to escape the prohibition in the Constitution.'

Although this was an import-for-sale case, the court, in dicta, stated that '* * * The same observations apply to * * * [goods] used by the importer.', thus laying the foundation for the import-for-use doctrine which asserts that goods are protected until the importer 'has used the privilege he had purchased.' Brown v. Maryland, supra, pages 442, 443.

Maryland had attempted to license importers. However, Low v. Austin (1871), 13 Wall. 29, 20 L.Ed. 517, extended the principle of Brown v. Maryland, supra, to cases where the state was attempting to levy its general property taxes upon imports, as in the case before us. Low v. Austin, supra, established that if the goods remain imports the states are prohibited from levying a general property tax.

Hooven & Allison Co. v. Evatt, Tax Com'r (1945), 324 U.S. 652, 65 S.Ct. 870, 89 L.Ed. 1252, was the first important case involving imports for use in manufacturing.

The taxpayer kept a large supply of imported hemp on hand from which he manufactured various products. The Tax Commissioner attempted to impose the Ohio property tax upon these hemp fibers.

The court laid down the guiding principle in these cases at page 657, 65 S.Ct. at page 873:

'* * * that immunity survives their arrival in this country and...