Southwestern Bell Telephone Co. v. State Commission of Revenue and Taxation

• Decision Date: 10 December 1949
• Docket Number: No. 37653,37653
• Citation: 168 Kan. 227,212 P.2d 363
• Parties: SOUTHWESTERN BELL TEL. CO. v. STATE COMMISSION OF REVENUE AND TAXATION et al.
• Court: Kansas Supreme Court

Page 363

212 P.2d 363

168 Kan. 227

SOUTHWESTERN BELL TEL. CO. v. STATE COMMISSION OF REVENUE AND TAXATION et al.

No. 37653.

Supreme Court of Kansas.

Dec. 10, 1949.

Rehearing Denied Feb. 3, 1950.

Syllabus by the Court.

In an action for a declaratory judgment wherein plaintiff asked a judgment that its use, storage and consumption of certain property purchased outside the state and brought by it into the state and used by it in the operation and maintenance of its telephone system were exempt from payment of the compensating tax, it is held the use, consumption and storage of central office equipment, telephones, instruments, booths, pole lines, wires, cables, conduits, private branch exchange switchboards and related equipment is such that the purchase of it outside the state is subject to the compensating tax under the terms of G.S.1947 Supp. 79-3701 to 3711, inclusive, and is not exempt from the tax under the terms of G.S.1947 Supp. 79-3601 to 3625, inclusive.

Arthur S. Brewster, of Kansas City, Mo., argued the cause and Lloyd S. Miller and Kenneth L. Hodge, both of Kansas City, Mo., and James A. McClure, Robert L. Webb and Ralph W. Oman, all of Topeka, were with him on the briefs for the appellant. Earl H. Painter, of St. Louis, Mo., of counsel.

Mason Mahin, of Smith Center, argued the cause and was on the briefs for the appellees.

The opinion of the court was delivered by

SMITH, Justice.

This was an action for a declaratory judgment wherein the plaintiff asked for an interpretation of certain sections of G.S.1947 Supp. 79-3701 to 3711, inclusive, commonly known as the 'Kansas Compensating Tax', and certain related sections in G.S.1947 Supp. 79-3601 to 3625, commonly known as the 'Kansas Retailers' Sales Tax Act.' The trial court interpreted the sections against the contentions of the plaintiff and it has appealed.

The petition, after the formal allegations as to the official positions of defendants and that plaintiff was engaged in the telephone business, stated that the service offered by plaintiff was subject to the Kansas Retailers' Sales Tax Act of two percent upon its gross receipts and that the plaintiff had been complying with the provisions of that statute. The petition then alleged that G.S.1947 Supp. 79-3703, levied a tax of two percent for the privilege of 'using, storing, or consuming' within the state any articles of tangible personal property purchased subsequent to June 30, 1945, except such articles as were exempt, as provided in G.S.1947 Supp. 79-3704; that the above section exempted the use, storage or consumption of tangible property brought into the state by a public utility for consumption or movement in interstate commerce, tangible personal property purchased other than at retail, tangible personal property upon which a sales tax or use tax of two percent had already been paid and tangible personal property brought into Kansas, which, if purchased in Kansas, would not have been subject to tax under the provisions of G.S.1947 Supp. 79-3601 to 3625, inclusive; that plaintiff's telephone system consisted of central office equipment, telephone instruments, booths, pole lines, wire, cable, conduit and private branch exchanges and other related equipment, all necessary in furnishing intrastate communication service; that in addition plaintiff owned and maintained buildings and purchased stationery, office supplies, typewriters, janitor supplies, furniture and office equipment, vehicles, tools and other work equipment; that plaintiff had in the past and would in the future exercise the privilege of using, storing or consuming within the state all articles of personal property first spoken of above, all of which articles were or would be purchased outside the state and brought into it for the purpose of incorporating them into the integrated telephone system by way of maintenance, construction, reconstruction, replacement or using it in the operation of its integrated telephone system; that defendants had notified plaintiff that it was liable for the compensating tax of two percent in respect to all such articles of personal property brought into Kansas subsequent to January 1, 1948; that the taxable service which plaintiff was furnishing was set out in its general exchange tariff, a copy of which was attached to the petition; that plaintiff was ready and willing to pay all lawful compensating taxes assessed against it, but contended it was not liable for it on all the articles of tangible personal property purchased by it outside the state and brought into the state and actually incorporated into its integrated telephone system and actually used by the telephone users in telephone communications over such integrated telephone system; that the articles, such as central office equipment, telephone instruments, booths, pole lines, wires, cables, conduits and private branch exchange switchboards, wer exempt from taxation because they were articles of tangible personal property purchased by plaintiff, engaged in furnishing a taxable service, and were actually used in the production and entered into the processing of, and became an ingredient or component part of the taxable telephone service furnished by plaintiff consisting of the use of plaintiff's facilities for the purpose of communication. The petition then referred to and quoted from certain provisions of the sales tax act, which will not be set out here, but will be later in this opinion. The prayer was that the court take jurisdiction and determine that the articles of tangible personal property described brought into the state to be used in the manner set forth were not taxable under the Kansas Compensating Tax Act, and defendants had no lawful right to collect a compensating tax from plaintiff by reason of the use, storage or consumption of such property within the state.

The defendants answered admitting the nature of the business of the telephone company; that plaintiff was subject to the Retailers' Sales Tax Act and admitting certain other allegations as to the statutes. The answer denied that the articles mentioned were exempt from the Kansas Compensating Tax and alleged that all of such property was purchased outside the State of Kansas and brought into the state, where it was used, stored and consumed by the plaintiff in such a manner as to subject it to the provisions of the Kansas Compensating Tax Act, as set out in G.S.Supp. 1947, 79-3701 to 3711, inclusive. The answer denied that the articles in question were used by the telephone users, but alleged that the property was owned by plaintiff and used, stored or consumed by it for the purpose of carrying on a telephone business, and denied that such property entered into the processing of, or became an ingredient or component part of the intangible telephone service furnished by defendant. Defendants prayed that the court determine the articles referred to, brought into the state by plaintiff, were taxable under the Kansas Compensating Tax Act.

The trial court heard considerable evidence as to the operation of a telephone system. With such details we are fairly familiar, that is, we all understand that when one makes a cally by dialing his phone, it must go to the central switchboard and thereby be switched to the line of the person called and when that person hears his instrument ring he answers and the communication is complete. We understand that a great deal of property other than the telephone instruments in question must be used in making such communication possible.

The defendants demurred to the evidence of the plaintiff on the ground that it failed to prove a cause of action in favor of the plaintiff and against the defendants. This was overruled. Defendants introduced no evidence. The court found that an actual controversy existed and that the parties were entitled to an interpretation of the two statutes mentioned.

The final judgment was that the central office equipment, telephone instruments, booths, pole lines, wires, cables, conduits, private branch exchange, switchboards, and related equipment purchased outside the state by plaintiff temporarily stored and later incorporated into its integrated telephone system were taxable under the compensating tax act and the assessment of such a tax by defendants constituted the legal exercise of the powers of the defendants.

The plaintiff filed a motion for a new trial on the grounds of erroneous rulings and that the decision was contrary to the evidence. This motion was overruled, hence this appeal.

The sales tax act was passed in 1937. It was chapter 374 of the Session Laws for that year. It is now with some amendments G.S.1947 Supp. 79-3601 to 3625. It levied a tax of two percent upon the privilege of selling tangible personal property at retail in this state or rendering or furnishing certain services therein. The act is framed and has been uniformly construed both by the tax commission and the courts so the transaction taxed is that by which a commodity moves to the ultimate consumer, whoever he may be.

With the enactment of the sales tax act another problem arose. Much property is bought outside the state and brought in for various purposes. Kansas could not tax the privilege of selling property where the sale took place beyond its borders. It could, however, tax the privilege of using property within this state. The result was the enactment of chapter 375 of the Session Laws for 1937, now with some amendments G.S.1947 Supp. 79-3701 to 3711. It is denominated 'compensating tax' in the Session Laws. It is sometimes referred to as the 'use tax.' These two acts are really complementary and supplemental to each other and are construed together generally. It would not do to make a taxpayer pay two percent tax when be bought property and also two percent tax when he used it. On that account the section following the section which imposed the tax provided certain transactions to which the tax...