Southern Pac Co v. Gallagher

• Decision Date: 30 January 1939
• Docket Number: No. 212,212
• Parties: SOUTHERN PAC. CO. v. GALLAGHER et al
• Court: U.S. Supreme Court

306 U.S. 167

59 S.Ct. 389

83 L.Ed. 586

SOUTHERN PAC. CO.

v GALLAGHER et al.

No. 212.

Argued Dec. 12, 1938.

Decided Jan. 30, 1939.

Mr. Harry H. McElroy, of San Francisco, Cal., for appellant.

[Argument of Counsel from pages 168-169 intentionally omitted] Mr. H. H. Linney, of San Francisco, Cal., for appellees.

Mr. Justice REED delivered the opinion of the Court.

The California Use Tax Act of 1935¹ is assailed as violative of the commerce clause and the Fourteenth Amendment, U.S.C.A.Const. art. 1, § 8, cl. 3; amend. 14, when imposed upon tangible personal property, bought outside of the state by the Southern Pacific Company, an interstate railroad, and installed on importation, or kept available for use, as a part of its transportation facilities.

The attack comes by means of a bill of the Southern Pacific Company seeking, before a three-judge district court,² an interlocutory and final injunction against the State Board of Equalization of California, its members and the Attorney General of the state, to restrain them from enforcing the Use Tax Act. ³ The trial court granted an interlocutory injunction and denied a motion to dismiss⁴ but later refused a permanent injunction and sustained the motion to dismiss.⁵ The case comes here by appeal.⁶

The Use Tax Act is complemental to the California Retail Sales Tax Act of 1933.⁷ The latter levies a tax upon the gross receipts of California retailers from sales of tangible personal property; the former⁸ imposes an excise on the consumer at the same rate for the storage, use or other consumption in the state of such property when purchased from any retailer. As property covered by the sales tax is exempt under the use tax, all tangible personalty sold or utilized in California is taxed once for the support of the state government. Definitions in the Use Tax Act of taxpayer, retailer, storage and use are designed to make the coverage complete. A retailer is 'every person engaged in the business of making sales for storage, use or other consumption'; use is the exercise of any right or power incident to ownership, except sale in the regular course of business; storage is any 'keeping or retention' with a similar exemption; and a taxpayer includes everyone 'storing, using or otherwise consuming' the property subject to the use tax.⁹

The principle of the use tax as applied to property brought into the state after its retail purchase for intrastate use has been upheld in Henneford v. Silas Mason Co.,¹⁰ against the charge that it was a tax upon the operations of interstate commerce or a tax upon a foreign sale, violative of the Fourteenth Amendment. Under the Washington statute, there considered, discrimination against interstate commerce, arising from a second exaction for use after a foreign tax on sale, could not exist as provision was made for a credit against the local tax of any such foreign levy. No such problem arises here by evidence, finding or assignment of error¹¹ even though the California Act does not have this provision. It will be time enough to resolve that argument 'when a taxpayer paying in the state of origin is compelled to pay again in the state of destination.'¹² A discrimination against goods of out-of-state origin on the face of the sales and use acts is suggested because the local retailer may absorb the sales tax while the consumer of an imported article must pay the use tax.¹³ But this is not a discrimination in the law. California's exaction for the distribution of tangible personal property is the same, whether purchased within or without her borders or whether paid by the retailer or consumer. There is an equal charge against what is used, whatever its source. In this case we have a distinctly different application of a use tax. The tax is not sought from personal property used in transactions entirely disassociated from any agency connected with interstate transportation, as builders' supplies for local work in the Silas Mason Case, but from tangible personalty purchased out of the state for immediate or subsequent installation in an interstate railway facility.

The appellant, the Southern Pacific Company, a Kentucky corporation, handles intrastate, interstate and foreign commerce over its railroad system which traverses a number of states and connects with the lines of carriers covering the continent. The findings and stipulation of facts show continual extrastate purchases of tangible personalty for the operation of the road; rails, equipment, machinery, tools and office supplies. Some of the purchases are used in the general offices of the corporation, located in California, for the supervision of the wide-flung activities; others are for material kept in readiness as a stand-by supply to replace or repair equipment damaged, destroyed or worn out in the operation of the road; and still others are to make improvements, replacements or extensions pursuant to previously determined plans and specifications. Few, if any, of the supplies are stored for long term needs. Storage is merely incidental to protection until use, as office supplies in a closet or an extra frog at a section tool house. For construction or reconstruction upon a large scale, special orders are given and arrangements made, so that the material is fabricated for a particular use in the transportation facilities, shipped to its California destination and installed upon arrival. To avoid delay and cost the movement from loading to final placement is as nearly continuous as managerial efficiency can contrive. While some articles are capable of general use, the major purchases of rails, repair parts and supplies for the maintenance and operation of the system are adapted only to railroad use. The purchases are paid for out of railroad operating capital and move on company material waybills, without transportation charge. All purchases may be said to be dedicated to consumption in the interstate transportation business of appellant. No new rolling stock is involved. Subsequent to repairing and reconditioning, rolling stock moves again in interstate transportation, as do cars after being stocked with supplies. The California tax on storage or use, it is said, cannot apply to these articles, as such a tax would be an unconstitutional burden upon the facilities of interstate commerce, of which the articles are a part.

There is agreement upon the principle involved. Appellant states that an excise tax imposed directly upon the privilege of using instrumentalities in carrying on interstate transportation is a direct and unconstitutional burden on commerce. Appellees do not dispute the premise but contend that the tax is on intrastate storage and use. They point to the definition of use as the exercise of a right of ownership, and of storage as any keeping or retention. By the definitive terms themselves, it is urged, the taxable events are retention and installation, not such storage as warehousing connotes, or use in the sense of consumption or operation. If we conclude retention and installation, under the circumstances here developed, are intrastate taxable events, viewed apart from commerce, we must still inquire whether taxes laid upon them are not, in effect, upon commerce, and forbidden.¹⁴

Two lines of authority aid in considering the effect of this tax on commerce. The first makes it quite clear that a state tax upon the privilege of operating in, or upon carrying on, interstate commerce is invalid. States cannot tax interstate telegraph messages,¹⁵ or freight shipments.¹⁶ A license tax on sales by samples burdens one selling only goods from other states.¹⁷ A tax act as applied to the business of interstate communication¹⁸ is unconstitutional. Where a similar levy by other states may be imposed, with consequent multiplicity of exaction on commerce for the same taxable event, local tax of a privilege, measured by total gross receipts from interstate transactions, is considered identical with an action on the commerce itself. ¹⁹ This rule is applicable to a tax on gross receipts from interstate transportation;²⁰ an occupation tax measured by gross receipts from radio broadcasting,²¹ and a general tax at specified rates upon the gross income of every resident, construed as 'a tax upon gross receipts from commerce'²² 'without apportionment.'²³ The measurement of a tax by gross receipts where it cannot result in a multiplication of the levies is upheld.²⁴

Appellant selects from this line the Helson Case²⁵ as determinative of the contention that a tax on use of supplies or equipment is a tax on the commerce. A state tax of three cents per gallon was imposed on all gasoline 'sold at wholesale.' This phrase was defined to include gasoline bought out of the state and used within the state. There was no definition of the word use or used. The taxpayers operated an interstate ferry, purchased gasoline in Ohio and used that portion sought to be taxed in propelling their craft in the territorial waters of Kentucky. That court considered the tax on the consumption of the fas the same as a tax on the operation of the ferry boat and therefore invalid under the rule discussed in the preceding paragraph.

The second line of authority supports the view that use and storage as defined in the California act are taxable intrastate events, separate and apart from interstate commerce. A recent discussion of the topic sets out the precedents in support of a ruling that a tax upon the production of power by the use of which compressors drove natural gas in interstate commerce is valid. Such production is a taxable event distinct from its consumption in commerce.²⁶ Particular attention is called by the state to the Wallace Case.²⁷ There the tax was on 'selling or storing or distributing gasoline.' It became due on withdrawal from storage. The tax was held applicable to gasoline, purchased out of the state and stored in the state, when 'all is withdrawn and used * * * as a source of...