State v. Continental Oil Co., No. 33607.

CourtSupreme Court of Minnesota (US)
Writing for the CourtPeterson
Citation15 N.W.2d 542,218 Minn. 123
PartiesSTATE v. CONTINENTAL OIL CO. et al.
Docket NumberNo. 33607.
Decision Date14 July 1944
15 N.W.2d 542
218 Minn. 123
STATE
v.
CONTINENTAL OIL CO. et al.
No. 33607.
Supreme Court of Minnesota.
July 14, 1944.
Rehearing Denied September 22, 1944.

[218 Minn. 124]

Appeal from District Court, Ramsey County; Albin Pearson, Judge.

[15 N.W.2d 543]

Proceedings by the State of Minnesota against the Continental Oil Company and others to enforce payment of personal property taxes. From a judgment for the defendants, the State appeals.

Reversed with directions.

J. A. A. Burnquist, Atty Gen., George B. Sjoselius, Asst. Atty. Gen., and James F. Lynch, Co. Atty., and Andrew R. Bratter, Asst. Co. Atty., both of St. Paul, for appellant.

Faegre, Benson & Krause, Raymond Scallen, and Hayner N. Larson, all of Minneapolis, for respondents.

PETERSON, Justice.


This appeal by the state from the judgments in separate proceedings against each defendant to enforce payment of personal property taxes for the years 1933 to 1940, inclusive, involves the question whether gasoline belonging to them in the tanks of a pipe-line company is subject to taxation by the state where the gasoline was transported in interstate commerce by pipe line from points outside the state to the tanks located in the state for processing, storage pending receipt of orders for its sale and distribution, and reshipment by rail to defendants' stations and customers within and without the state to fill the orders received pending the storage. In the case of the Phillips Petroleum Company, a separate question is raised as to the taxability of certain high volatile gasoline used at the tank farm in connection with blending the gasoline shipped by pipe line to prepare it for use. It has been assumed that if the first question is answered in the affirmative the decision will be determinative of this second one also.

The defendants are producers, refiners, and marketers of gasoline and other petroleum products, having their refineries in Texas and in the so-called mid-continent field, which includes parts of Oklahoma, Kansas, and Missouri. They produce six or seven basic grades of gasoline, which is transported interstate from the refineries by the Great Lakes Pipe Line Company, a stock-owned-and-controlled

218 Minn. 125

corporation of the defendants and certain others in the same business, through its pipe lines to a so-called tank farm located at the Minnesota Transfer in Ramsey county, this state. The tank farm is a terminal consisting of numerous large tanks with capacities ranging upwards to 82,000 barrels each, with suitable connections and equipment to receive gasoline shipped by pipe line, to process and store it in the manner herein mentioned, and to reship it by rail. At the time of trial, the tank farm had a capacity of 621,000 barrels or about 26,000,000 gallons.

At the time of delivery to the pipe line and receipt at the tank farm the gasoline is not suitable for the market. The octane count for the market must be at least 70. That of all gasoline shipped is much less than 70, most of it being in a low 60, and some of it as low as 58. Consequently, all gasoline shipped must be raised to the required octane count. This is done by adding tetraethyl lead to each shipment after determining by chemical analysis the amount to be added. In addition, such ingredients as coloring, oils, and, in the case of some defendants, solvents and high volatile gasoline are added. This processing requires several hours. Coloring is added simply by dumping a handful of coloring matter into a tank car of gasoline. The addition of the other ingredients requires some mixing and the use of special devices designed for the purpose. The tetraethyl lead is added by running the gasoline through a "spider" which mixes the lead with the gasoline as it passes through. This operation requires about 6½ hours. By means of the processing, the six or seven basic grades shipped by pipe line are changed into 26 different kinds of gasoline ultimately to be sold to the trade. The pipe-line company furnishes the facilities, except for certain tanks of two of the defendants, and the labor in connection with the processing. The defendants furnish the lead, coloring, oils, solvents, and high volatile gasoline.

The shipment is made from the refineries to the tank farm under bills of lading in which the shipper is named as consignor and consignee and the destination is given as the Minnesota Transfer. The pipe-line company is an interstate common carrier. It has

218 Minn. 126

filed regular tariffs and charges the shippers regular tariff rates. While the pipe-line company is regarded by the interstate commerce commission as a common carrier, its processing and storage of gasoline and its property used for such purposes is not, because the commission determined:

"This extra handling of the gasoline is a manufacturing or trade service rather than a transportation service.

15 N.W.2d 544

"Accordingly, all property owned by the carriers and used in blending gasoline has been classified in this report as owned but used for purposes other than those of a common carrier."

The gasoline of a particular shipper may be commingled with the gasoline of the same grade of other shippers. Tenders of shipments are made in such amounts and at such times as to insure an adequate supply of gasoline to meet each shipper's trade needs. When the gasoline arrives at the tank farm it is allocated to the defendants by the pipe-line company. A stock on hand to meet the trade requirements of at least 35 days is carried by each defendant.

The gasoline is reshipped by rail from the tank farm to bulk stations owned either by the defendants, their contract customers, or "spot" customers. The latter are purchasers who have had no previous contracts with the defendants. Their purchases amount to less than 1 per cent of the gasoline handled at the tank farm. Experience has shown that about 75 per cent of the gasoline is delivered to points in Minnesota and 25 per cent to points in Wisconsin, North Dakota, and South Dakota. The four states comprise what defendants call the "northern area." On the average, gasoline is reshipped from the tank farm 35 days after its arrival. This period is necessitated by the processing and awaiting of orders from bulk stations and spot customers. The rail reshipment is made as a separate shipment under a regular rail bill of lading in which the shipper is named as consignor and either itself or its customer to whom shipment is made as consignee. The bill of lading contains a statement of the state of origin of the gasoline shipped under it.

218 Minn. 127

The tariff rates include a charge not only for the transportation of the gasoline, but for the services rendered by the pipe-line company in processing, storing, loading rail cars, and further transportation by rail from the "terminal point [the tank farm] to ultimate destination." The processing, storage, and loading rail cars are characterized in the tariffs as rendered "in transit"—that is, while the gasoline is en route from the refineries to its ultimate destination by rail shipment from the tank farm. The railroads are not parties to the arrangement. The rate established by pipe line from the refineries to the tank farm and by rail from the tank farm to the "ultimate destination" is the same as the all-rail rate from the refineries to the place of ultimate destination. Apparently, the rail rate from the tank farm to the ultimate destination is higher than the proportional rate for the same distance on an all-rail basis. To equalize the pipe-line-rail rate from refinery to ultimate destination with that actually charged under the separate pipe-line and rail tariffs, the pipe-line company rebates to shippers the difference between the rail rate and the proportional rate for the actual rail transportation. Apparently this practice is sanctioned.

Each defendant has what is called a traffic department, which receives orders for the gasoline while it is in storage and allots it to various bulk stations and customers in approximately 200-barrel lots. After the gasoline is allotted, the pipe-line company is directed to make the proper rail shipment for which the shipper has paid the railroad in advance.

When the gasoline is delivered to the pipe line outside the state, it is destined ultimately for the consignor's trade throughout the northern area, but neither the defendants nor the pipe-line company know at that time the particular bulk stations or customers or the particular places to which the gasoline is to be reshipped from the tank farm. In fact, the only destination known at that time is the tank farm. The ultimate destination is to be determined by the traffic department of each shipper as and when orders for gasoline are received by it.

218 Minn. 128

Defendants claim that the storage and processing at the tank farm are necessary to insure safe transportation of the gasoline by the pipe line, because tetraethyl lead is dangerous to human beings. The evidence is that it is a dangerous substance when handled as a separate one, but there was no evidence that it was dangerous to handle when mixed with gasoline. On the contrary, the evidence tends to show that there is no particular danger from handling gasoline containing tetraethyl lead. Defendants offered evidence to the effect that it is uncertain whether it is dangerous to handle gasoline containing tetraethyl lead and that, for that reason, the lead is added at the tank farm rather than at the refineries.

There is no substantial conflict in the evidence. The dispute revolves around the conclusions to be drawn therefrom.

15 N.W.2d 545

Among other things, the trial court found that gasoline was stored in the terminal tanks to await orders from the shippers' own bulk plants and contract customers. As a conclusion of law, it determined that the gasoline while at the tank farm was in interstate transit and not subject to state taxation. Judgments were entered in...

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