Virtue Bros. v. Los Angeles County

• Decision Date: 06 January 1966
• Citation: 239 Cal.App.2d 220,48 Cal.Rptr. 505
• Court: California Court of Appeals Court of Appeals
• Parties: VIRTUE BROS., a California corporation, Plaintiff and Respondent, v. The COUNTY OF LOS ANGELES and the City of Los Angeles, Defendants and Appellants. BEMIS BROS. BAG COMPANY, a corporation, Plaintiff and Appellant, v. The COUNTY OF LOS ANGELES and City of Los Angeles, Defendants and Respondents. CLAYTON MANUFACTURING COMPANY, a corporation, Plaintiff, Respondent and Cross-Appellant, v. COUNTY OF LOS ANGELES, Defendant, Appellant and Respondent. ANCHOR POST PRODUCTS, INC., OF CALIFORNIA, a corporation, Plaintiff, Respondent and Cross-Appellant, v. The COUNTY OF LOS ANGELES and the City of Whittier, Defendants, Appellants and Respondents. Civ. 28858-28861.

Page 505

48 Cal.Rptr. 505

239 Cal.App.2d 220

VIRTUE BROS., a California corporation, Plaintiff and Respondent, v. The COUNTY OF LOS ANGELES and the City of Los Angeles, Defendants and Appellants.

BEMIS BROS. BAG COMPANY, a corporation, Plaintiff and Appellant, v. The COUNTY OF LOS ANGELES and City of Los Angeles, Defendants and Respondents.

CLAYTON MANUFACTURING COMPANY, a corporation, Plaintiff, Respondent and Cross-Appellant, v. COUNTY OF LOS ANGELES, Defendant, Appellant and Respondent.

ANCHOR POST PRODUCTS, INC., OF CALIFORNIA, a corporation, Plaintiff, Respondent and Cross-Appellant, v. The COUNTY OF LOS ANGELES and the City of Whittier, Defendants, Appellants and Respondents.

Civ. 28858-28861.

District Court of Appeal, Second District, Division 2, California.

Jan. 6, 1966.

Hearing Denied March 2, 1966.

Greenbaum, Baker & Ancel, by Louis R. Baker, Gerald T. Manpearl, Los Angeles, for plaintiffs.

Harold W. Kennedy, County Counsel, A. R. Early, Deputy County Counsel, for defendants.

ROTH, Presiding Justice.

All plaintiffs are manufacturers. Virtue Bros. (Virtue), imported plywood from Finland; Clayton Manufacturing Company (Clayton), imported steel tubing from the British Isles; and Anchor Post Products, Inc. of California (Anchor), imported wire from Australia. Taxes were levied by the County of Los Angeles and the City of Los Angeles (defendants) upon the assessed valuation of full inventories of import materials in the possession of plaintiffs on the first Monday in March 1960, the taxing date. ¹ Plaintiffs paid under protest and sued for a refund.

These cases present the constitutional question of when and the extent to which a local nondiscriminatory property tax may be levied upon materials imported for use by local manufacturers.

Article I, § 10, cl. 2, of the United States Constitution provides: 'No State shall * * * lay any Imports or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws: * * *.'

Plaintiffs contend that only so much of the imported materials which are removed from their respective warehouses and specifically set aside for manufacture pursuant to a production schedule are taxable.

The trial court agreed, and judgment for a refund was entered respectively for each plaintiff in the appropriate amount.

Defendants predicate this appeal ² on the construction given to the import clause (supra) in the recent case of Youngstown Sheet & Tube Co. v. Bowers, 358 U.S. 534, 79 S.Ct. 383, 3 L.Ed.2d 490 (1959), which they argue, asserts that the state may tax imported materials when the manufacturer has so acted upon the materials imported with full awareness of the realities of his business as to put them to use in a practical way.

The question posed, has like a sleeping dog, been allowed to lie although there have been some abortive kicks in the past. Youngstown however succeeded in arousing more than a growl or bark. The resolution of the long dormant question has a deep bite.

Judicial construction of the constitutional clause originates with Brown et al. v. State of Maryland, 12 Wheat. 419, 6 L.Ed. 678 (1827).

We start at the source. Chief Justice Marshall, speaking for the Court, stated that case as follows: 'The cause depends entirely on the question, whether the legislature of a state can constitutionally require the importer of foreign articles to take out a license from the state, before he shall be permitted to sell a bale or package so imported.' (Id. p. 436.)

The Chief Justice held the tax unconstitutional and set forth reasons which, as might be expected, have been quoted and relied on ever since: 'There is no difference, in effect, between a power to prohibit the sale of an article and a power to prohibit its introduction into the country. * * * No goods would be imported if none could be sold. No object * * * can be accomplished by laying a duty on importation, which may not be accomplished * * * by laying a duty on the thing imported in the hands of the importer. It is obvious that the same power which imposes a light duty can impose a very heavy one, one which amounts to a prohibition. Questions of power do not depend on the degree to which it may be exercised.' (Id. p. 439.)

Foreseeing the conflict between the inherent right of a state to tax and the constitutional inhibition to tax imports, he indicated that there must be a line of demarcation, and said: '* * * Yet the distinction exists, and must be marked as the cases arise. Till they do arise, it might be premature to state any rule as being universal in its application. It is sufficient for the present to say, generally, that when the importer has so acted upon the thing imported that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import, and has become subject to the taxing power of the state; but while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported, a tax upon it is too plainly a duty on imports to escape the prohibition in the constitution.' (Emphasis added.) (Id. pp. 441-442.)

California had an early brush with the doctrine of Brown, when in 1870, it levied a tax similar to the one in the case at bench, on champagne imported from France by commission merchants for purpose of sale. They paid duties and charges and thereafter stored the wine in their original case in their warehouse in San Francisco, where they remained for sale.

Citing Brown Mr. Justice Field held at 13 Wall. p. 34: '* * * goods imported do not lose their character as imports, and become incorporated into the mass of property of the state, until they have passed from the control of the importer or been broken up by him from their original cases. * * * The question is not as to the extent of the tax, or its equality with respect to taxes on other property, but as to the power of the state to levy any tax. * * *' (Low v. Austin, 13 Wall. 29, 20 L.Ed. 517.)

Youngstown does not permit the type of state tax here levied on materials imported for sale. Youngstown affirms that materials imported for sale are still immune. It makes clear that materials imported for manufacture lose their tax immunity when required for current operational needs and irrevocably committed to the use for which they have been imported. Mr. Justice Frankfurter in a vigorous dissent, argues there is no distinction. He asserts that Youngstown overrules 132 years of unbroken law and that the reasoning of the majority opinion is applicable to imports for sale as it is to imports for manufacture. ³

In Youngstown the facts were stipulated and showed the following operation: Ore was shipped from a foreign country. It was unloaded at the port of entry, thereupon reloaded and transported to Youngstown's place of business, unloaded, separated and placed in separate piles in separate areas of the ore yard. Daily manufacturing needs were taken from these piles, deposited into 'stock bins' or 'stock houses' holding one or two days' supply. As ore from a particular pile was consumed, other ore was brought in and unloaded on top of the remainder in the particular pile. This replenishment process was continuously repeated. All of the ore was taxed. ⁴

In the cases at bench, the operation was substantially the same. In Virtue, tax was assessed against 67,895 pieces of plywood imported from Finland and warehoused in its original strapping on Virtue premises adjacent to their manufacturing plant. Thereafter, it was removed to the processing area of the plant where it was manufactured into table tops. Annually, Virtue consumes about 145,200 pieces. A 90-day supply is 38,400 pieces, and a five-day supply is 2,750.

Plywood orders must be placed with the mills in Finland approximately five months in advance of required arrival, and shipping time is approximately seven weeks. Shipments arrive monthly. However, a two months' minimum inventory of 24,200 pieces is maintained to provide for delay due to force majeure.

In processing plywood, a production schedule, based on current sales activity, is sent to the production department weekly. This schedule controls the volume of plywood and other materials required for production at any given time. The production supervisor of the plant testified that the minimum inventory required for production purposes was a five-day supply based on the weekly schedule.

All the plywood assessed was eventually used.

Except for the type and origin of material, amount imported and consumed annually, amount if any, in reserve for force majeure reasons, the facts in Clayton and Anchor are substantially the same.

Ten years before Youngstown, in Hooven & Allison Company v. Evatt, 324 U.S. 652, 65 S.Ct. 870, 89 L.Ed. 1252, the Supreme Court, in a case similar on the facts to Youngstown, rejected the argument that imports for use in manufacture stored in a warehouse on the premises of the manufacturer, were subject to state taxation, appearing to hold that actual use of the material was required to destroy the immunity. In Hooven, the Court said: '* * * [W]hen [the imported materials are] used for the purpose for which they are imported, they cease to be imports and their tax exemption is at an end.' (Id. at p. 665, 65 S.Ct. at p. 877.)

Comparing Brown and Hooven, the Court in Youngstown said at 358 U.S. pp. 541-542, 79 S.Ct. pp. 387, 388:

'While Chief Justice Marshall did not undertake definitively to state just what acts or conduct of the importer would be deemed to have 'so acted upon the thing imported' as to cause it to be 'mixed up with the mass of property in the country [and to lose] its distinctive character as an import,' he did specify some of the acts that would so result. He held * * * [among other things] (3) that goods brought into this country by an importer 'for his own use' and here 'used' by him are to be regarded as a part of ...