STANDARD OIL CO OF v. JOHNSON STATE TREASURER

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District Court of Appeal, Third District, California.

STANDARD OIL CO. OF California v. JOHNSON, STATE TREASURER.

Civ. 6826.

Decided: March 30, 1943

Earl Warren, Atty. Gen., H. H. Linney, Asst. Atty. Gen., and Adrian A. Kragen, Deputy Atty. Gen., for appellant. Pillsbury, Madison & Sutro and H. H. McElroy, all of San Francisco, for respondent.

This is an appeal from a judgment against appellant as Treasurer of the State of California, for the recovery of retail sales tax in the sum of $120,196.76, together with interest in the sum of $22,662.84.

The case was tried on a stipulation of facts and no additional evidence was introduced. Certain paragraphs of said stipulation of facts set forth that California is a great oil producing state and that a large proportion of its production is shipped to points outside of the state for use in other states and in foreign countries; and that a portion of the oil so produced in California and shipped outside its borders is the fuel oil in question which was delivered to respondent pursuant to the provisions of the contract hereinafter referred to. Appellant objected to the materiality of these facts but the trial court overruled the objection and admitted the entire stipulation. Briefly the facts are as follows:

Respondent oil company contracted with the Southern Pacific Company to supply said railroad company (hereinafter called the Railroad) with fuel oil for its operations in California, Oregon, Nevada, Arizona, Utah and elsewhere. Except for California, none of the states mentioned has appreciable fuel oil production and it was necessary that the Railroad's needs be supplied outside those states for use therein. The contract, first entered into in 1928, which contract was under consideration by this court in Standard Oil Co. v. Johnson, 56 Cal.App.2d 411, 132 P.2d 910, was amended on January 1, 1936, subsequent to the enactment of the California Retail Sales Tax Act, Gen.Laws 1937, Act 8493, and all sales here involved were under the amended contract.

All deliveries under the contract were made from respondent's sources of production within California. The method under which orders were given and billed under the contract was substantially as follows: The Railroad from its San Francisco office would communicate to respondent at its San Francisco office, or elsewhere in California, orders for shipments of fuel oil. Fuel oil was loaded in tank cars of the Railroad at Tracy, Richmond, El Segundo or Seguro, California, and forthwith, under standard bills of lading on which respondent was designated as consignor and the Railroad as consignee, transported to destination outside of California. Respondent was not liable for demurrage if the cars were promptly loaded or if delay was due to causes beyond the reasonable control of respondent. Payment for the fuel oil was made by the Railroad from its San Francisco office to respondent's San Francisco office.

The prices which the Railroad paid for the fuel oil were determined under the contract. The price to be paid for fuel oil to be delivered at the four major consumption points outside of California was the price payable at the point of shipment “plus the current rail freight between such point of shipment and such point of delivery.” Thus the Railroad paid the same price for fuel oil delivered outside of California as it would have paid for the fuel oil delivered in California. Respondent added to its price the freight costs for the transportation from California to the point of delivery, collected those from the Railroad, and then the Railroad received the same amount back again by reason of its charge for freight.

The Board of Equalization of the State of California determined that such transactions were subject to the measure of the retail sales tax and assessed an additional tax against respondent. After petition for reassessment had been denied, respondent paid a part of said tax under protest and thereafter filed its action for refund.

The trial court determined that the sale and delivery of oil to the Railroad was a transaction in interstate commerce and on the basis of that determination gave judgment in favor of respondent.

In Standard Oil Co. v. Johnson, supra, which was essentially a companion case of the instant case and argued on the same day, we had before us a case involving the contract as it existed prior to its amendment in 1936. The only material difference between the contract involved in the instant case and the one involved in the former case is that under the former provision the delivery of the fuel oil was f.o.b. Southern Pacific Company tank cars at Tracy or El Segundo, California, whence it was transported by Southern Pacific Company to its various destinations outside of the state. Respondent Oil Company in that case contended, as it contends here, that the transactions were in interstate commerce and that the imposition of a tax would result in a discrimination against interstate commerce in violation of the Constitution of the United States; and appellant State of California contended that the transactions were solely intrastate, and that the imposition of the tax upon the seller did not discriminate against nor impose a burden upon interstate commerce nor constitute a regulation thereof. In reversing the judgment of the court below we upheld the imposition of the sales tax upon the sales there involved upon the ground that the transaction was intrastate and upon the further ground that the imposition of the tax neither discriminated against nor imposed any burden upon interstate commerce. In our opinion in that case we reviewed a number of decisions of the United States Supreme Court and of other courts which have a bearing on the issue involved in the instant case, and reference is hereby made to our opinion in that case for a review of said decisions. As already pointed out, the chief difference between the facts in the former case and in the instant case is that the 1928 contract between respondent Standard Oil Company and the Railroad was amended so that after the fuel oil had been delivered into the tank cars of the Railroad at the shipping point, it was transported to destinations outside of California under standard bills of lading in which respondent was consignor and the Railroad was the consignee; the freight charge was paid by respondent to the Railroad and the amount thereof was added to the price of the oil, so that, in effect, the cost of the transportation from the point of shipment to the destination outside the State was borne by the Railroad as under the former contract.

In arguing for a reversal of the judgment appellant makes two main contentions which are: 1. The sale and delivery of the fuel oil here involved was an intrastate transaction; 2. Even if the sale and delivery of the fuel oil here involved were part of an interstate activity the tax would apply. Respondent counters by contending that (1) The sales were sales in interstate commerce; and (2) The tax cannot apply to this interstate commerce.

In support of his first contention appellant argues that under the facts of the instant case the sale and delivery of fuel oil by respondent was an intrastate transaction and the gross receipts therefrom subject to the California Retail Sales Tax Act. Appellant asserts that in the instant case there was “a sale and delivery in California, a local, intrastate transaction and that the form used to direct shipment to the final destination of the oil is not of moment in view of the fact that the purchaser had actual possession of the oil in California”; and it argues that the mere use of a standard bill of lading and a designation of respondent as consignor should not allow the parties to change what is essentially an intrastate transaction into an interstate transaction; and that the whole purpose of the amendment of the contract in 1936 was to make the delivery ostensibly f.o.b. outside of California instead of, as under the former provision of the 1928 contract, f.o.b. point of delivery to the tank cars, and thus to avoid the payment of sales taxes to the State of California.

Respondent, in reply, points out that the Railroad had an overwhelming need for oil in Oregon, Nevada, Arizona and Utah and that, because no sufficient quantity of oil was available in those states, it was necessary to look to other states for the necessary oil, which could only be obtained through interstate transportation; that both the purchase and the transportation were necessary elements, and that together they were interstate commerce, as the need for oil could not be fulfilled without interstate transportation. Respondent argues that no matter where possession of the oil was taken or by whom or how the oil was shipped, interstate commerce was the very soul and substance of the transaction and that there would not have been a transaction without interstate commerce. “It is in this essential respect,” states respondent, “that this case differs from those to which appellant refers” [and which we will refer to hereinafter]. “In none of those cases,” continues respondent, “does it appear, as it does here, that interstate movement of the goods was so much of the essence of the particular transaction or that the particular transaction was so much a part of a great interstate movement of an essential commodity.”

With reference to this phase of the argument advanced by respondent we believe that it must be held that our decision in Standard Oil Co. v. Johnson, supra, determines it adversely to respondent's contention. Under a state of facts which, with the exception hereinbefore noted, was in all respects similar to those of the instant case, we there held that the sales were intrastate transactions subject to the provisions of the Retail Sales Tax Act.

Appellant contends that the facts of the instant case bring it directly within the decision of the Supreme Court of the United States in Department of Treasury of Indiana v. Wood Preserving Corp., 313 U.S. 62, 61 S.Ct. 885, 888, 85 L.Ed. 1188. In that case Wood Preserving Corporation, a Delaware corporation, qualified to do business in Indiana, was engaged in the business of purchasing, selling and treating railroad ties. Indiana laid a tax on the corporation's gross receipts from the sale of untreated ties to the Baltimore and Ohio Railroad. The corporation received orders for ties from the railroad in Ohio and then by mail or telephonic communication with the producers in Indiana purchased ties to meet such orders. The Indiana producers delivered the ties to a loading point in Indiana where they were examined by a railroad inspector and an agent of the Wood Preserving Corporation, and those accepted by the railroad inspector were loaded on freight cars furnished by the railroad, and sent on bills of lading, with the corporation as consignor and the railroad's chief engineer in Ohio as consignee. The corporation did not pay freight to the railroad for transportation. In reversing the Circuit Court of Appeals, 7 Cir., 114 F.2d 922, and affirming the judgment of the District Court, the Supreme Court said:

“As to these dealings, it appears that respondent received in Indiana the ties it purchased from the local producers and that respondent sold and delivered these ties in Indiana to the Railroad Company. The fact that the delivery by the producers to respondent and respondent's delivery to the Railroad Company took place at the same time is not important. Respondent was in Indiana acting through its agent at the designated points on the railroad line. The Railroad Company was at the same points represented by its inspector. The ties brought there by the producers were then examined and those found by the inspector to be in accordance with specifications were accepted. In these transactions, respondent through its agent at once accepted from its vendors the ties which the Railroad Company found satisfactory and then and there sold and delivered these ties to the Railroad Company. These were local transactions––sales and deliveries of particular ties by respondent to the Railroad Company in Indiana. The transactions were none the less intrastate activities because the ties thus sold and delivered were forthwith loaded on the railroad cars to go to Ohio for treatment. The contract providing for that treatment called for the treatment of ties to be delivered by the Railroad Company at the Ohio plant, and the ties bought by the Railroad Company in Indiana, as above stated, were transported and delivered by the Railroad Company to that treatment plant. Respondent did not pay the freight for that transportation and the circumstance that the billing was in its name as consignor is not of consequence in the light of the facts showing the completed delivery to the Railroad Company in Indiana. See Superior Oil Co. v. Mississippi, 280 U.S. 390, 50 S.Ct. 169, 74 L.Ed. 504.”

Appellant relies also upon O'Kane v. State, 283 N.Y. 439, 28 N.E.2d 905, 908. In that case appellants were in the investment business in New York City and received written confirmation of sales of stock from banks in foreign states and mailed stock with draft attached to buyers in the foreign state after offer to purchase and memorandum of sale and agreement to sell were made in New York where the stock was located. Title to the stock did not pass until payment was received by appellants. The State of New York attempted to levy a tax upon all sales or agreements of sale, at so much a share. Appellants argued that the tax was in violation of the power of Congress over interstate commerce. The New York Court of Appeals upheld the tax and in connection with the interstate commerce argument said:

“It is a matter of historical record that the Founding Fathers were concerned lest State rivalries should lead to the stifling of trade carried on beyond the confines of any single State. But it was not thereby intended that commerce among the several States, when once protected from the dangers of local prejudice, should altogether escape its proportionate share of the cost of government. McGoldrick v. Berwind–White Coal Mining Co., 309 U.S. 33, 60 S.Ct. 388, 84 L.Ed. [565, 128 A.L.R. 876]; Felt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62, 59 S.Ct. 376, 83 L.Ed. 488; Southern Pacific Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 83 L.Ed. 586; Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814; Western Live Stock Co. v. Bureau of Revenue, supra [303 U.S. 250, 58 S.Ct. 546, 82 L.Ed. 823, 115 A.L.R. 944]. In the Berwind–White case the courts sustained the sales tax imposed on the buyer although the goods previously had been transported interstate. The contract between the seller and the buyer was made in New York and the goods were delivered in New York. In answering the claim of immunity from taxation because interstate commerce had preceded the taxable event the court said in part: ‘As we have often pointed out, there is no distinction in this relationship between a tax on property, the sum of all the rights and powers incident to ownership, and the taxation of the exercise of some of its constituent elements. * * * Taxation of property or the exercise of a power over it immediately preceding its previously contemplated shipment interstate has been similarly sustained. (Cit.) For reasons already indicated all such taxes upon property or the exercise of the powers of ownership stand in no different relation to interstate commerce and have no different effect upon it than has the present sales tax upon goods whose shipment interstate into the taxing state was contemplated when the contract was entered into.’ * * * In the case at bar certain goods, to wit, shares of stock, were located in this State and were part of the common mass of property which undoubtedly was subject to taxation. The taxable event, to wit, the making of the agreement for the sale of the property, occurred in this State prior to the transportation of the goods in interstate commerce and was an exercise of one of the incidents of ownership. In imposing a tax on the exercise of one of the incidents of ownership, no discrimination was practiced on interstate commerce. Appellants object to the taxation of a local event because it is followed by interstate commerce. But unless local events occurring after interstate commerce has ended are clothed with a greater sanctity than are possessed by local events preceding interstate commerce, such objection must fail. McGoldrick v. Berwind–White Coal Mining Co., supra. Indeed, it would appear that no such distinction has been drawn. Coe v. Town of Errol, supra [116 U.S. 517, 6 S.Ct. 475, 29 L.Ed. 715]; Bacon v. People of State of Illinois, supra [227 U.S. 504, 33 S.Ct. 299, 57 L.Ed. 615]; Federal Compress & Warehouse Co. v. McLean, supra [291 U.S. 17, 54 S.Ct. 267, 78 L.Ed. 622]. The simple grant of power to the Congress to regulate interstate commerce would not seem of itself to lead to any distinction such as is contended for by appellants.”

In State Board of Equalization v. Blind Bull Coal Co., 55 Wyo. 438, 101 P.2d 70, 72, cited by appellant the retail sales tax of Wyoming was involved. Defendant sold coal at its mine in Wyoming, said coal being taken from the mine in trucks by the purchasers and transported into Idaho whence they had come for the sole purpose of buying the coal, and with the intention of transporting it into Idaho. The imposition of the retail sales tax upon these transactions was held not to constitute a burden on interstate commerce, and the court in a well–reasoned opinion said:

“The manufacture, production and sale in one state of a commodity for transportation or use in interstate commerce, and its keeping, use and sale in the state to which it is transported have been treated as local transactions that may be the subjects of non–discriminatory taxes. We refer to only a few of the illustrative cases. * * * [Citing cases] * * *

“Recent cases, from Wiloil Corp. v. Pennsylvania, 294 U.S. 169, 55 S.Ct. 358, 79 L.Ed. 838, to McGoldrick v. Berwind–White Coal Mining Co., supra, do not presage any extension of tax immunity under the commerce clause.”

While contending that the transactions were in interstate commerce no matter where possession of the oil was taken or by whom or how the oil was shipped, respondent argues that any possession that the Southern Pacific Company may have taken of the oil in California was of a distinctly qualified kind, as it was taken in its capacity as a common carrier for transportation under standard commercial bills of lading and title to the property and unfettered ownership did not pass until the property reached its destination, and after the Railroad's function as common carrier was finished. Appellant in reply states that the fact cannot be ignored that the Southern Pacific Company through its California office purchased the fuel oil from respondent and received possession of it in California when the oil was delivered into the Railroad's tank cars in California, and that the fact that the Southern Pacific Company as a common carrier transported the oil to a destination outside of the State does not relieve respondent from the retail sales tax.

We have reached the conclusion that the sales here involved were intrastate transactions and subject to the California Retail Sales Tax Act. The mere use of a standard bill of lading and a designation of respondent as consignor should not be allowed to change what is essentially an intrastate transaction into an interstate transaction. As was said in Department of Treasury of Indiana v. Wood Preserving Corp., supra:

“The ties bought by the Railroad Company in Indiana, as above stated, were transported and delivered by the Railroad Company to that treatment plant. Respondent did not pay the freight for that transportation and the circumstance that the billing was in its name as consignor is not of consequence in the light of the facts showing the completed delivery to the Railroad Company in Indiana.”

Furthermore, under the contract all oil was to be accepted or rejected by the Railroad at the time of tender of delivery, which must be taken to mean as of the time of delivery into the tank cars of the Railroad; and the amount of the transportation charge was to be added to the price of the oil.

Even if our conclusion that the sales herein involved are intrastate transactions should not be correct, we are still of the opinion that the sales tax was properly assessed. The retail sales tax is purely an excise tax for the privilege of doing certain acts under the protection of the State of California, and all who do such acts should pay equally. The fact that the privilege exercised may also involve interstate commerce does not deprive the state of its powers to levy a tax upon the privileges and benefits conferred by it.

In the case of State of Wisconsin v. J. C. Penney Co., 311 U.S. 435, 61 S.Ct. 246, 249, 85 L.Ed. 267, 130 A.L.R. 1229, the court said: “A state is free to pursue its own fiscal policies, unembarrassed by the Constitution, if by the practical operation of a tax the state has exerted its power in relation to opportunities which it has given, to protection which it has afforded, to benefits which it has conferred by the fact of being an orderly, civilized society.”

In McGoldrick v. Berwind–White Coal Mining Co., 309 U.S. 33, 60 S.Ct. 388, 391, 84 L.Ed. 565, 128 A.L.R. 876, the court said:

“It is only when the tax operates to regulate commerce between the states or with foreign nations to an extent which infringes the authority conferred upon Congress, that the tax can be said to exceed constitutional limitations. * * *

“But it was not the purpose of the commerce clause to relieve those engaged in interstate commerce of their just share of state tax burdens, merely because an incidental or consequential effect of the tax is an increase in the cost of doing the business, Western Live Stock v. Bureau of Revenue, 303 U.S. 250, 254, 58 S.Ct. 546, 548, 82 L.Ed. 823 [826], 115 A.L.R. 944. Not all state taxation is to be condemned because, in some manner, it has an effect upon commerce between the states, and there are many forms of tax whose burdens, when distributed through the play of economic forces, affect interstate commerce, which nevertheless falls short of the regulation of the commerce which the Constitution leaves to Congress. * * *

“If, as guides to decision we look to the purpose of the commerce clause to protect interstate commerce from discriminatory or destructive state action, and at the same time to the purpose of the state taxing power under which interstate commerce admittedly must bear its fair share of state tax burdens, and to the necessity of judicial reconciliation of these competing demands, we can find no adequate ground for saying that the present tax is a regulation which, in the absence of Congressional action the commerce clause forbids.”

And as was said by Mr. Justice Reed, speaking for the court in Best & Co., Inc., v. Maxwell, 311 U.S. 454, 61 S.Ct. 334, 335, 85 L.Ed. 275: “The commerce clause forbids discrimination, whether forthright or ingenious. In each case it is our duty to determine whether the statute under attack, whatever its name may be, will in its practical operation work discrimination against interstate commerce.”

No question of multiple taxation is involved, as it is not contended that this fuel oil was taxed in any other state.

We do not believe that there is any rational basis upon which we could conclude that the imposition of the retail sales tax upon the sales herein involved would impose an unequal or discriminatory burden upon interstate commerce, and we are satisfied that under the later decisions of the Supreme Court of the United States the power of the State to impose a sales tax upon such transactions should be sustained.

As we view the matter, this was in essence and effect an intrastate transaction even though the oil purchased was to be used by the Southern Pacific Company in operations outside of the State of California. The Southern Pacific Company through its California office purchased the oil and received possession of it in its tank cars in California, even though it was by its orders consigned to the railroad company at points outside of the state. The Southern Pacific Company was the carrier and the amount of the freight charges was merely added to the purchase price of the oil. As quite frankly admitted by counsel for respondent upon the oral argument, the freight was paid instead of the tax. We do not believe that the taxing power of the state can be taken away by so transparent a subterfuge, nor do we believe that the founding fathers in placing the commerce clause in the Constitution of the United States ever contemplated or intended that a state should be deprived of its power to tax such a transaction.

The judgment is reversed.

SCHOTTKY, Justice pro tem.

ADAMS, P. J., concurred. THOMPSON, J., deeming himself disqualified, did not participate in the decision. Hearing granted; TRAYNOR, J., not participating.