Westinghouse Elec. Corp. v. State Tax Commission of Md.

• Decision Date: 23 February 1955
• Docket Number: No. 90,90
• Citation: 111 A.2d 661,206 Md. 392
• Parties: WESTINGHOUSE ELECTRIC CORPORATION v. STATE TAX COMMISSION OF MARYLAND.
• Court: Maryland Court of Appeals

Page 392

206 Md. 392

111 A.2d 661

WESTINGHOUSE ELECTRIC CORPORATION v. STATE TAX COMMISSION OF MARYLAND.

No. 90.

Court of Appeals of Maryland.

Feb. 23, 1955.

Theodore C. Waters and William B. Rafferty, Baltimore (Harrison L. Winter, Theodore C. Waters, Jr., and Miles & Stockbridge, Baltimore, on the brief), for appellant.

Ambrose T. Hartman, Asst. Atty. Gen. (C. Ferdinand Sybert, Atty. Gen., on the brief), for appellee.

Before BRUNE, C. J., and DELAPLAINE, COLLINS, HENDERSON and HAMMOND, JJ.

COLLINS, Judge.

This is an appeal from an order affirming an assessment against Westinghouse Electric Corporation (Westinghouse), appellant, for personal property taxes for the calendar year 1953, made by the State Tax Commission of Maryland (Commission).

Westinghouse in its tax return of personal property as of January 1, 1953, reported as the average monthly value of merchandise and products manufactured by it in Maryland for the calendar year 1952, the amount of $9,132,961, of which amount $6,191,162 had a taxable situs in Baltimore County. In its return it was asserted that of this amount, $4,027,910 was exempt from assessment and taxation in Baltimore County for the reason that the sovereign immunity of the United States of America (the Government), to State and local taxation had attached to merchandise and products of that value. On November 13, 1953, the Commission made a tentative assessment against appellant of personal property subject to taxation in Baltimore County of $6,053,570. This assessment thereby granted to Westinghouse an average monthly exemption of $137,592 of the total average monthly exemption of $4,027,910 claimed. After a protest was filed, a hearing was held before the Commission on December 10, 1953. As a result of that hearing, on December 16, 1953, the Commission made a final assessment in which it fixed the average monthly assessment for manufactured products of raw materials subject to State and local taxation in Baltimore County at $5,820,480. The Commission thereby granted to the appellant a portion of the claimed exemption, but denied the balance of the exemption in the amount of $3,627.350. From that assessment the appellant, under the provisions of Code 1951, Article 81, Section 255(b), filed an appeal in Circuit Court No. 2 of Baltimore City. After hearing, that court entered an order affirming the assessment by the Commission. From that order appellant appeals here.

Westinghouse, incorporated in Pennsylvania, has its principal office in Pittsburg. Its business consists of the manufacture, sale and installation of electrical and steam apparatus. It carries on such business in Baltimore City; Friendship Airport, Anne Arundel County, Maryland; and Lansdowne, Baltimore County, Maryland. The operation in Baltimore City is principally the manufacture of X-ray equipment for hospitals and radiologists. The manufacturing for Government sales there is comparatively small. The same kind of articles are manufactured in Baltimore City for Government sale as are manufactured for industrial, private and hospital use. At Friendship Airport, Anne Arundel County, appellant manufactures solely military products. At Lansdowne, Baltimore County, both commercial equipment and equipment for the military services of the United States are manufactured. No substantial amount of merchandise of commercial design manufactured there is sold to the Government. The large proportion of the manufacturing at Lansdowne is for the military services. In most cases the equipment there is peculiarly designed for military needs and has no use in industry or in civilian life. The appellant admits that it buys and pays for the parts and materials in the process of manufacture, pursuant to contracts with the Government.

On account of national security many provisions of appellant's contracts with the Government remain secret. However, the appellant introduced in evidence examples of parts of contracts relating to payment and acceptance by the Government. Such contracts provide: 'Seventy-five percent (75%) of the total contract price for such items shall be paid as partial payments in accordance with the provisions of this paragraph * * *.' There is a further provision that the contractor may request partial payments on account. The amount of the partial payments are figured upon a percentage of value, by comparison with the total contract price, of the work finished during the interval for which the particular partial payment is made. In the examples offered the percentages are seventy-five and eighty-five. The balance or final payment is to be paid upon delivery and final acceptance. The sample contracts also contain the following clause: 'In the event that the Contractor shall procure or maintain insurance upon any materials or other property upon which a lien exists in favor of the Government pursuant to the terms of this clause, the policy or policies shall contain a loss payable clause making losses payable to the Secretary of the Navy or order. Any payments thereunder shall inure to the benefit of the Government to the extent of any loss suffered by the Government and to the Contractor as to any remaining balance. The foregoing provisions shall not be deemed to require that the Contractor procure or maintain any such insurance.'

Under the provision of Code 1951, Article 81, Section 7(2), a tax is imposed on tangible personal property according to the rates fixed from time to time by the State and its political sub-divisions. A corporation's tangible personal property is valued and assessed by the Commission pursuant to the authority vested in it by Code 1951, Article 81, Section 12(b)(5). Before the Commission, and at the hearing in the Circuit Court, Westinghouse took the position that the personal property for which it claimed exemptions was held by it under one of the following four types of contracts:

'1. Contracts which had been terminated and which by their terms vested legal title to the property manufactured thereunder in the United States;

'2. Contracts which provided for the making of progress payments as the work progressed and which also provided that upon the making of a progress payment, title to the property in its then state and thereafter should vest in the United States;

'3. Contracts which provided for the making of progress payments as the work progressed and which specifically created a lien on the property in the course of manufacture in favor of the United States upon the making of a progress payment; and

'4. Contracts which provided for the making of progress payments as the work progressed but which contained no specific provision either vesting title or creating a lien upon the property in the course of manufacture in favor of the United States upon the making of a progress payment.'

The Commission and the Court held that property manufactured under paragraphs 1 and 2, supra, was exempt from assessment and taxation because the sovereign immunity of the Government to State and local taxation had attached thereto, but that property manufactured under paragraphs 3 and 4, supra, was not so exempt.

The Commission, appellee, points out that there is a fifth class of personal property manufactured by appellant for which no exemption is claimed and that is the type of contract which does not provide for progress payments from the Government. Appellant says that this class developed the day the case was presented to the Commission. Mr. Frank W. Godsey, Jr., general manager of the Baltimore division of appellant corporation, testified that until about a year ago there was an advantage to appellant in not receiving progress payments for the reason that the type of contract, which required the progress payments, afforded a lower profit to the corporation than those which did not require progress payments. This profit advantage no longer exists and, therefore, appellant now presses for the type of contract which requires progress payments.

The question, therefore, before us is whether personal property manufactured under the contracts in paragraphs 3 and 4, supra, should be exempt from assessment and taxation because of the sovereign immunity of the Government.

The appellant claims immunity for several reasons. It claims that the material ordered by the Government can be sold to and used by the Government alone. It admits that its own funds were used to finance the manufacture of this equipment as least until such times as it becomes entitled to progress payments. If the Government rejects the materials, they must be reworked or scrapped and the salvage value of their component parts credited to the Government. It contends that it is subject to the most rigid system of supervision and control and the Government has removed from appellant its customary dominion and control over these products.

Of course, the Government is immune to State and local taxation. McCulloch v. State of Maryland, 1819, 4 Wheat. 316, 4 L.Ed. 579; United States v. County of Allegheny, 1944, 322 U.S. 174, 64 S.Ct. 908, 88 L.Ed. 1209 (the Mesta case). In early cases the Supreme Court of the United States gave a rather broad scope of immunity. This immunity has recently been narrowed. Helvering v. Mountain Producers Corp., 303 U.S. 376, 58 S.Ct. 623, 82 L.Ed. 907; Graves v. People of State of New York, 306 U.S. 466, 477, 59 S.Ct. 595, 83 L.Ed. 927, 931; Oklahoma Tax Commission v. Texas Co., 336 U.S. 342, 69 S.Ct. 561, 93 L.Ed. 721. In the early cases it had been held that because of its economic incidence on the Government the tax was an unconstitutional interference by a state with the functions of the Federal Government. The Supreme Court of the United States has receded from that position. James v. Dravo Contracting Co., 302 U.S. 134, 58 S.Ct. 208, 82 L.Ed. 155. It was held by this Court in Meade Heights, Inc., v. State Tax Commission of Maryland, 202 Md. 20, 95 A.2d 280, that a property interest, less than...