W. Elec. Co. v. State

• Decision Date: 03 December 1945
• Docket Number: April term.,No. 57,57
• Citation: 312 Mich. 582,20 N.W.2d 734
• Parties: WESTERN ELECTRIC CO., Inc. (MICHIGAN BELL TELEPHONE CO., Intervener) v. STATE et al.
• Court: Michigan Supreme Court

312 Mich. 582

20 N.W.2d 734

WESTERN ELECTRIC CO., Inc. (MICHIGAN BELL TELEPHONE CO., Intervener)

v.STATE et al.

No. 57, April term.

Supreme Court of Michigan.

Dec. 3, 1945.

OPINION TEXT STARTS HERE Appeal from Court of Claims; Charles H. Hayden, Judge.

Proceeding by the Western Electric Company, Inc. against the State, Department of Revenue of the State of Michigan and Louis M. Nims, State Commissioner of Revenue to recover tax and penalty paid under protest wherein the Michigan Bell Telephone Company, intervened as a plaintiff. From the part of the judgment denying recovery of the principal tax, the plaintiffs appeal, and from the part of the judgment allowing recovery of the amount paid as penalty, the defendants cross-appeal.

Judgment affirmed on plaintiffs' appeal and judgment in so far as it allows plaintiffs a recovery of penalties reversed and case remanded with directions.

REID, J., dissenting.

Before the Entire Bench.

Thomas G. Long, Karl F. Oehler, and Butzel, Eaman, Long, Gust & Bills, all of Detroit, for plaintiff and intervening plaintiff and appellants.

John R. Dethmers, Atty. Gen., Edmund E. Shepherd, Sol. Gen., of Lansing, and Meredith H. Doyle and T. Carl Holbrook, Asst. Attys. Gen., for defendants-appellees.

BOYLES, Justice.

The principal question here involved is whether plaintiffs are liable for a use tax under Act No. 94, Pub.Acts 1937, Stat.Ann. 1944 Cum.Supp. §§ 7.555 [1]-7.555 [22]. A second issue questions the right of the State to claim a penalty for nonpayment. The facts are not in dispute.

Plaintiff Western Electric Company, Inc., is a New York corporation organized and existing under the laws of that State, continuously authorized to do business in Michigan beginning in June, 1916. It is licensed under the Michigan Sales Tax Act and registered under the Use Tax Act. Its manufacturing operations are conducted in Illinois, New Jersey, Maryland, and it has warehouses located in several States including Michigan. Its principal place of business in Michigan is in Detroit. Plaintiff Michigan Bell Telephone Company is a Michigan Corporation organized and existing under Act No. 129, Pub.Acts 1883, of this State. It was so organized in 1904 by original articles of association under the name Michigan State Telephone Company, and has ever since continued as such corporation, its name having been changed by amendment to Michigan Bell Telephone Company.

Defendant Louis M. Nims, State commissioner of revenue, on March 18, 1942, under authority of the Use Tax Act, supra, levied a use tax against plaintiff Western Electric Company in respect of tangible personal property coming into this State from time to time from August 1, 1938, to June 30, 1941, in interstate commerce, for plaintiff Michigan Bell Telephone Company as the user or consumer. Western Electric Company appealed from said levy to the State board of tax appeals constituted under Act No. 122, Pub.Acts 1941, Stat.Ann. 1942 Cum.Supp. §§ 7.657 [1]-7.657 [19], which board heard the appeal and upheld the levy. Within the time for payment provided by law plaintiff Western Electric Company paid to the State under protest $557,975.58 as determined by said board, of which $446,402.55 was tax and $111,573.03 was penalty, and then filed the instant claim in the court of claims to recover the sums so paid. The attorney general, appearing for the defendants, moved to dismiss the case and the Michigan Bell Telephone Company petitioned the court of claims for leave to intervene as a party plaintiff, on the ground that the liability, if any, imposed by the Use Tax Act was against it as the consumer and that the Western Electric Company was made liable under the act only as the collecting agent with ultimate liability, if any, against the consumer Michigan Bell Telephone Company. The court denied the attorney general's motion to dismiss and granted the telephone company leave to intervene. It is conceded that if the telephone company is not liable for the tax, then the Western Electric Company would not be liable and would be entitled to recover the tax paid under protest. In the case before us no issue is presented as between the two plaintiffs, as to which one may be held liable if the tax is upheld. Likewise there is no issue as to the amount of the levy or of the penalty.

Judge Charles H. Hayden of the Ingham circuit court, presiding in the court of claims, held that plaintiffs were liable for the tax but not for the penalty and entered judgment accordingly. Plaintiffs appeal from that part of the judgment denying recovery of the principal tax paid under protest, and defendants cross-appeal from that part of the judgment allowing recovery by plaintiffs of the amount of the penalty paid.

While stated by counsel in more extended language, the first question for decision is whether the Michigan Bell Telephone Company is liable for a use tax. This involves the construction of section 1 of article 10 of the Michigan Constitution (1908), and its application to the Michigan Bell Telephone Company. Said section states: ‘All subjects of taxation now contributing to the primary school interest fund under present laws shall continue to contribute to that fund, and all taxes from such subjects shall be first applied in paying the interest upon the primary school, university and other educational funds in the order herein named, after which the surplus of such moneys shall be added to and become a part of the primary school interest fund.’

Major emphasis is placed by plaintiffs on the following italicized words: ‘ All subjects of taxation now contributing to the primary school interest fund under present laws shall continue to contribute to that fund, and all taxes from such subjects shall be first applied in paying the interest upon the primary school * * * funds * * *.’

Plaintiffs claim that the telephone company was a ‘subject of taxation’ contributing to the primary school interest fund when the 1908 Constitution was adopted, that the use tax is in the same category as the taxes it was then paying, and that the telephone company cannot be compelled to pay the use tax inasmuch as the Use Tax Act puts this tax money into the State general fund instead of into the primary school interest fund. The attorney general meets the issue squarely by insisting that ‘subject of taxation’ means the underlying principle on which the tax is levied, not merely the corporation or taxpayer who is subjected to the tax; and that the use tax is not the same ‘subject of taxation’ as the one on which the telephone company was paying a tax when the 1908 Constitution was adopted. The attorney general particularly emphasizes that section 1 of article 10 definitely refers to subjects of taxation now contributing to the primary school interest fund ‘under present laws'-i. e., at the time the Constitution was adopted, or at least at the time when it became effective January 1, 1909; and on that point claims that the Michigan Bell Telephone Company was not contributing to the primary school interest fund ‘under present laws' as they stood when the Constitution of 1908 was adopted or came into effect. As will be pointed out later, counsel for plaintiffs seem to agree with the attorney general that taxes from any new or different ‘subject of taxation’ legislated into effect since 1908 could be put to other uses than the primary school interest fund-e. g., the State general fund, without clashing instanter with section 1 of article 10.

At the outset, we are of the opinion that ‘subjects of taxation’ as used in section 1 of article 10 of the 1908 Constitution means something more than the corporation, public utility or individual taxpayer who may be made liable by legislative enactment for a tax. It connotes a deeper significance, the underlying principle on which the tax is designed and imposed.

This brings us to a consideration of the first essential question which must be settled, namely, what were the taxes which were then being contributed to the primary school interest fund by the telephone company.

When the Constitution of 1908 came into effect the Bell Telephone Company was paying a specific tax on its property and business under the provisions of Act No. 179, Pub.Acts 1899, computed upon the gross receipts derived from its business within this State. While this act did not expressly provide for payment of such taxes into the primary school interest fund, this act was in effect in 1900 when the amendment to section 10 of article 14 of the Constitution of 1850 was adopted (see p. 404, Pub.Acts 1901). This amendment provided that all taxes thereafter levied on the property of such classes of corporations as were then paying specific taxes under laws then in force should be applied to the primary school interest fund and the State debt until extinguished. This amendment to the Constitution being selfexecuting, thereafter the taxes paid by the telephone company were necessarily put into the primary school interest fund. This amendment further states that the legislature might provide for the assessment of the property of corporations at its true cash value by a State board of assessors, as well as to provide for the collection of specific taxes from corporations; and that all such taxes were to go into the primary school interest fund. However, no such legislation was enacted imposing an ad valorem tax on telephone companies (i. e., the Michigan Bell Telephone Company) until after the Constitution of 1908 was adopted, and Act No. 179, Pub. Acts 1899, supra, continued to govern the imposition of specific taxes on telephone companies at the time the Constitution of 1908 became effective. It is significant that section 5 of article 10 of the Michigan Constitution (1908) expressly authorizes the legislature to provide for the assessment of the property of telephone companies (among other corporations) at its true cash value; and section 4 of article 10 expressly authorizes the legislature to...