San Juan Trading Co. v. Sancho

• Decision Date: 16 October 1940
• Docket Number: No. 3567,3568.,3567
• Parties: SAN JUAN TRADING CO., Inc., v. SANCHO, Treasurer. SANCHO, Treasurer of Puerto Rico, v. SAN JUAN TRADING CO., Inc.
• Court: U.S. Court of Appeals — First Circuit

114 F.2d 969 (1940)

SAN JUAN TRADING CO., Inc., v. SANCHO, Treasurer. SANCHO, Treasurer of Puerto Rico, v. SAN JUAN TRADING CO., Inc.

Nos. 3567, 3568.

Circuit Court of Appeals, First Circuit.

October 16, 1940.

L. E. Dubon, of San Juan, P. R., for San Juan Trading Co.

William Cattron Rigby, of Washington, D. C. (George A. Malcolm, of San Juan, P. R., and Nathan R. Margold, of Washington, D. C., on the brief), for Sancho, Treasurer.

E. T. Fiddler, of San Juan, P. R., amicus curiæ.

Before MAGRUDER and MAHONEY, Circuit Judges, and PETERS, District Judge.

MAHONEY, Circuit Judge.

The plaintiff, the San Juan Trading Co., Inc., brought this action to recover from the Treasurer of Puerto Rico the sum of $26,400 paid under protest and collected as excise taxes due and levied upon 88,000 gross of 144 boxes each of uncolored square stick matches packed in wooden outers or shucks containing not less than 25 but not more than 50 sticks per box, brought by the plaintiff into Puerto Rico from the City and State of New York, to be disposed of in Puerto Rico. The said matches had originally been produced in Sweden and had been imported into the United States after August 5, 1935.

The Treasurer levied and collected the tax under the provisions of subdivision 14 of Section 16 of Act No. 85, approved by the Legislature of Puerto Rico, August 20, 1925 (commonly known as the Internal Revenue Law of Puerto Rico) as amended by Act No. 146, § 16, subd. 7, approved May 9, 1938.¹ In substance, insofar as here relevant, the subsection taxes uncolored round stick matches (when packed in a wooden box containing not less than 25 nor more than 50 matches) at 10 cents per gross of 144 boxes while uncolored square stick matches packed in the same way are taxed at 30 cents per gross. Matches packed in other than wooden boxes, regardless of whether round or square, are taxed the same, a difference in taxation only being made dependent on whether the box contained not less than 25 nor more than 50 matches or whether it had less than 25 or more than 50. Paper or cardboard, wooden, and sperm or wax matches were also classified for different rates of taxation. By Act No. 14, approved September 9, 1938, the statute was amended to tax wooden matches, whether round or square, packed in wooden boxes containing less than 25 or more than 50 matches. These had been left untaxed in the previous act.

Plaintiff and defendant stipulated that the only wooden matches produced in Puerto Rico are round stick matches made by the Pan American Match Company, a Puerto Rican corporation; that the only other round stick matches sold in Puerto Rico are made in the continental United States and recently in Sweden; that the round matches are die-cut from prepared blocks of soft "White Pine", whereas square matches are severed directly from sheets of hardwood known as "Aspen"; that the cost to Swedish manufacturers of producing round stick matches is at present greater than that of producing square stick matches, though it cannot be determined whether it will remain so; and that the retail price for both Swedish and Puerto Rican matches is one cent per box.

The plaintiff challenged the validity of subdivision 7 of Section 16, supra, on the grounds that by unwarrantedly discriminating between round and square matches, the subdivision violates the rights secured to the plaintiff by the V and XIV Amendments to the Constitution of the United States, and Section 2, par.1, of the Organic Act of Puerto Rico, 39 Stat. 951 (1917), 48 U.S.C.A. § 737, in that it deprives the plaintiff of its property without due process of law and denies it the equal protection of the laws; contravenes Article VI of the Reciprocal Commercial Trade Agreement entered into between the United States and the Kingdom of Sweden and signed May 25, 1935, 49 Stat. 3759, exempting imports from Sweden from internal revenue taxes other or higher than those payable on like articles of national or other foreign origin, and also violates the provisions of Section 2, par. 22, of the Organic Act of Puerto Rico, supra, at page 952, 48 U.S.C.A. § 737, to the effect that taxation in the Island shall be uniform, and the provisions of Section 3 thereof as amended, 44 Stat. 1418 (1927), 48 U.S.C.A. § 741a, that there must be no discrimination between articles imported from the United States or foreign countries and similar articles of domestic origin.

The defendant admitted levying and collecting the tax under the statute set out above but denied that the statute violated the Constitution of the United States, the Organic Act of Puerto Rico, or the Reciprocal Commercial Trade Agreement. He further alleged that round and square stick matches have different characteristics of a substantial nature sufficient to justify the Legislature of Puerto Rico in classifying them differently for purposes of taxation.

The case having been submitted on the pleadings and the stipulation, the District Court held that the classification which made a distinction between round and square matches was unreasonable in that it bore no substantial or fair relation to the object or purpose of a revenue act and that it violated the XIV Amendment to the Constitution of the United States, the Organic Act of Puerto Rico, and the Reciprocal Commercial Trade Agreement. It further held, however, that the invalidation of the discriminatory features of subdivision 7 of Section 16 did not void the entire section but only the amount of the invalid discrimination of 20 cents per gross. It, therefore, allowed the plaintiff a refund in that amount, and entered judgment in the sum of $17,600 with interest thereon from the date of filing of the suit to the date of payment.

From this judgment, both plaintiff and defendant appeal. The plaintiff alleges that the District Court was in error in holding that it was subject to a tax of 10 cents per gross and in refusing to order a refund of the entire 30 cent tax collected from it. The defendant claims that the court erred in invalidating the said subdivision, asserting that the classification is reasonable; that the said subdivision does not violate the Constitution of the United States, the Organic Act of Puerto Rico, or the Reciprocal Commercial Trade Agreement, and that the District Court should not have allowed the plaintiff any refund whatever.

I think that the judgment of the District Court should be affirmed. In the exercise of its legislative power the Legislature of Puerto Rico is limited by the provisions of its Organic Act and any other applicable laws of Congress, since it can only exercise such powers as have been delegated to it by Congress pursuant to Article IV, § 3, cl. 2 of the Constitution of the United States, which deals with the government of the territories. Domenech v. National City Bank, 1935, 294 U.S. 199, 55 S.Ct. 366, 79 L.Ed. 857; Haavik v. Alaska Packers' Association, 1924, 263 U.S. 510, 44 S.Ct. 177, 68 L.Ed. 414; Sancho v. Corona Brewing Corporation, 1 Cir., 1937, 89 F.2d 479, certiorari denied, Corona Brewing Co. v. Bonet, 1937, 302 U.S. 699, 58 S.Ct. 18, 82 L.Ed. 540. Since the due process and equal protection clauses of the V and XIV Amendments to the Constitution of the United States are identical with Section 2, par. 1, of the Organic Act of Puerto Rico, supra, discussion of whether they extend to Puerto Rico is unnecessary, and the conformity of said subdivision 7 of Section 16 of the Internal Revenue Law with the Organic Act is all that need here be considered. Sancho v. Bacardi Corporation of America, 1 Cir., 1940, 109 F. 2d 57.

Section 2, par. 1, of the Organic Act of Puerto Rico provides that "no law shall be enacted in Porto Rico which shall deprive any person of * * * property without due process of law, or deny to any person therein the equal protection of the laws". 39 Stat. 951 (1917) 48 U.S.C.A. § 737. This clause, like the XIV Amendment to the Constitution of the United States, in no way limits the power of the Legislature of Puerto Rico to classify the objects of legislation or the persons affected by it so as to subject different classes to differing rates of taxation. New York Rapid Transit Corp. v. New York, 1938, 303 U.S. 573, 58 S.Ct. 721, 82 L.Ed. 1024; Stebbins v. Riley, 1925, 268 U.S. 137, 45 S.Ct. 424, 69 L.Ed. 884, 44 A.L.R. 1454; Magoun v. Illinois Trust & Savings Bank, 1898, 170 U.S. 283, 18 S.Ct. 594, 42 L.Ed. 1037. However, such classification must be reasonably related to the object of the legislation and must be based upon some distinction which can rationally and fairly be made the reason for different taxation. New York Rapid Transit Corp. v. New York, supra; Magoun v. Illinois Trust & Savings Bank, supra; Gulf, C. & S. F. Ry. Co. v. Ellis, 1897, 165 U.S. 150, 17 S.Ct. 255, 41 L.Ed. 666. The first question here is whether the classification of matches between round and square and the differing taxation based thereon is such a reasonable classification based on such a distinction. If not, the classification is void. Smith v. Cahoon, 1931, 283 U.S. 553, 51 S.Ct. 582, 75 L.Ed. 1264; Southern Ry. Co. v. Greene, 1910, 216 U.S. 400, 30 S.Ct. 287, 54 L.Ed. 536, 17 Ann.Cas. 1247.

There is no necessity for considering separately the plaintiff's contention that the tax in question violates the uniformity clause of Section 2 of the Organic Act² since there is no question but that the act applies equally in all parts of Puerto Rico, and all matches in each class are treated the same. Therefore, if the classification between round and square matches is valid, the tax is not obnoxious to the uniformity clause. Stebbins v. Riley, supra; Sanchez Morales & Co. v. Gallardo, 1 Cir., 1927, 18 F.2d 550.

The distinction between round and square matches is not a reasonable classification which can be used as a basis for different rates of taxation. The only distinctions between round and square stick matches apparent on the record are the facts that the...