Stone v. Stapling Machines Co.
| Decision Date | 22 March 1954 |
| Docket Number | No. 38949,38949 |
| Citation | 220 Miss. 470,71 So.2d 205 |
| Parties | STONE v. STAPLING MACHINES CO. |
| Court | Mississippi Supreme Court |
J. H. Sumrall, John E. Stone, Jackson, for appellant.
Tighe & Barksdale, Jackson, for appellee.
A. H. Stone, Sales Tax Commissioner, made demand, under Section 10111, Code of 1942, upon Stapling Machines Company for the payment of a sales tax of two percent on the gross income of its business for a two year period. It amounted to $4,713.33 for 1949 and $7,017.09 for 1950, or a total of $11,730.42. The company protested the assessment. After a full hearing before the State Tax Commission, it was affirmed. The tax was then paid, and subsequently, the Company filed its suit in the Circuit Court of Hinds County to recover the amount paid. The circuit judge, sitting as both judge and jury, found for the plaintiff, and from the judgment entered, the Tax Commissioner appealed.
The material part of Section 10111, supra, is as follows: '(1) Upon every person engaging or continuing within this state in any of the following businesses, there is likewise hereby levied and shall be collected a tax on account of the business engaged in equal to two per cent of the gross income of the business: * * * Renting or leasing of tangible personal property * * *.'
The appellant contends that the tax here collected was two percent of the gross income of appellee from its business for renting or leasing tangible personal property in the state. On the contrary, the appellee contends that the income in question did not arise from rents, but was royalty, and, as such, was not taxable. The decision of this controversy also involves a consideration of what constitutes doing business the situs of property for taxation, and the commerce clause of the federal constitution.
The appellee is a Delaware corporation, having a place of business in Rockaway, N. J. It leased, under a written contract, to certain persons in the State of Mississippi, delivered f.o.b. the place of manufacture, at the cost of production, certain box making machines on which it held U. S. patents. The lessees thereunder acquired no property rights other than the right to use. The company agreed to furnish repair parts. Its agents were granted access to the machines for inspection and sketching. It had no office or agent in the state. The obligations of the lessees were payable at its principal place of business; and the lessees were required to keep accurate records, separate and apart, and subject to examination by the company's agents who had the right to make copies. The lessees were also required to report in writing to the company the number of boxes delivered during the past month, to whom sold, and the gross amount thereof.
Under Section 1 of the lease contract, the lessee had 'the right and license (a) to make on Lessor's machines in the factory of Lessee at _____ boxes covered by any one or more of the patents listed Exhibit A; (b) to use in said factory, for the manufacture of boxes, machines leased hereunder from Lessor; (c) to use in said factory, for the manufacture of boxes on Lessor's machines, the method inventions covered by any one or more of said patents; and (d) to sell in the United States boxes made under this agreement.'
Thus it will be seen that the lessees had the right to use the patented machines, to make patented boxes thereon, to use the method inventions covered by the patents, and to sell the boxes in the United States.
The applicable part of Section 3 of the lease contract, now under consideration, is as follows: 'Lessee agrees to pay to Lessor, in addition to the amounts hereinbefore provided to be paid by Lessee for the initial right to possess the machines leased hereunder, (a) sums of money equal to four per cent (4%) of the gross sales or fair market value, whichever is higher, of all 'Rock Fastener', 'All-Bound', and 'James' boxes made under this agreement, and (b) sums of money equal to two per cent (2%) of the gross sales or fair market value, whichever is higher, of all other boxes made under this agreement; and Lessee agrees to pay such sums as a royalty for the use of any or all of the patented inventions hereunder licensed to be used and/or as a rental for the use of any or all machines leased hereunder; * * *'. (Emphasis supplied.)
Under the above provision, lessees had to pay the cost of production of the machines, four percent of the gross sales of the patented boxes, and two percent of the gross sales of all other boxes.
It is clear that the company rented its machines to the lessees in New Jersey with the understanding that they would be operated in Mississippi. Pursuant thereto, these machines were carried to Mississippi, but they remained the property of the company. The Lessees were required to pay two percent of the value of any box made on one of the machines. Clearly such two percent was an additional rental for the use of the patented machines. But, since four percent of the value had to be paid, if a patented box was made on the machines, in reason it follows that the difference between four percent on the patented boxes and two percent on any other box, that is, two percent, constituted royalty, that is, compensation for the use of the patent.
Notice the very significant language in Section 3 of the lease contract: '* * * and Lessee agrees to pay such sums as a royalty for the use of any or all of the patented inventions hereunder licensed to be used and/or as a rental for the use of any or all machines leased hereunder; * * *.' Those words provide for the payment of both royalty and rental. The above conclusion, therefore, seems inescapable.
In such view 69 C.J.S., Patents, Sec. 258a, page 792, becomes helpful. It is as follows: 'The word 'royalty', when used in connection with license under a patent, means the compensation paid by the licensee to the licensor for the use of the licensor's patented invention. It has been defined as a tax or duty paid to the owner of a patent for the privilege of manufacturing or using the patented article; rental; payment proportionate to the use of the patented device; something proportionate to the use of a patented device, or, in other words, a kind of excise; specific sums paid annually, or at other stated periods, for the right to use a patented device, whether it is used much or little or not at all. The word has been held an appropriate term as applied to improvements which are nonpatentable.
'The word 'rental' used with reference to patented devices has been said ordinarily to mean specific sums paid annually or at other stated periods for the right to use a patented device; and in this connection it has been distinguished from 'royalties." (Emphasis supplied.) Western Union Tel. Co. v. American Bell Tel. Co., 1 Cir., 125 F. 342, 60 C.C.A. 220, is cited. See Hubenthal v. Kennedy, 76 Iowa 707, 39 N.W. 694; Volk v. Volk Manufacturing Co., 101 Conn. 594, 126 A. 847.
This Court has said that rent is compensation for the use of property. Hines Motor Co., Inc. v. Hederman, 201 Miss. 859, 30 So.2d 70; Stovall v. Gardner, 203 Miss. 527, 36 So.2d 163.
Paragraph (12) Section 10104, Code of 1942, provides that the term 'business', when used in the Act, 'shall include all activities or acts engaged in (personal or corporate) or caused to be engaged in with the object of gain, benefit or advantage either direct or indirect, and not exempting subactivities producing marketable commodities used or consumed in the main business activity each of such subactivities shall be considered business engaged in, taxable in the class in which it falls.'
In Kantor & Son v. Stone, 203 Miss. 260, 34 So.2d 492, 493, the appellants contended that they were engaged in the business of a general contractor, for which they had paid all taxes due, although as an incident thereto and as a business expediency, they made the ten sales of tangible property there in question. The Court held that the tax, which was imposed by Section 10108, Code of 1942, was due by reason of the 'business' which was defined in Section 10104 thereof. The opinion said:
In Stone v. General Contract Purchase Corp., 193 Miss. 301, 7 So.2d 806, 809, 140 A.L.R. 1029, where a Missouri corporation, with an office in Memphis, Tennessee, acquired, from automobile dealers, notes which were secured by liens on automobiles and the corporation's agents came into the state to collect the notes and enforce liens, it was held that the corporation...
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