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

E. SUGARMAN, Plaintiff and Respondent, v. STATE BOARD OF EQUALIZATION, Defendant and Appellant.*

Civ. 17816.

Decided: July 21, 1958

Edmund G. Brown, Atty. Gen., James E. Sabine, Asst. Atty. Gen., Ernest P. Goodman, Eugene B. Jacobs, Deputies Atty. Gen., for appellant. Walter E. Drobisch, San Francisco, for respondent.

The plaintiff brought this action to secure a refund of $3,206.83 in use tax, penalties and interest, paid by him on a yacht imported from Holland. The case was tried without a jury. The court held that the tax was prohibited under Article I, section 8, clause 3, and Article I, section 10, clause 2 of the Constitution of the United States, and entered judgment in favor of the plaintiff. Defendant appeals. The sole issue on appeal is whether the yacht lost its constitutional exemption as an import after its arrival and use in this state.

The facts are not in dispute. The plaintiff E. Sugarman is a resident of the City and County of San Francisco, State of California. On January 25, 1953, the plaintiff entered into a written agreement with a shipbuilding firm in Amsterdam, Holland, for the construction of a yacht for $65,000. The plaintiff purchased from retailers in California, certain additional machinery which was to be installed in the yacht by the shipbuilder. This additional machinery which was manufactured in Michigan, was exported by manufacturer from Detroit directly to the shipbuilding firm in Amsterdam, without first being delivered to the plaintiff in California. The cost of the additional machinery was $16,340.23. The total cost of the yacht to the plaintiff was $81,340.22. The plaintiff purchased the yacht and all equipment with the intent of using them in California.

Between January 10, 1953 and October 25, 1953, the yacht was constructed and the additional machinery installed. On October 25, 1953, the shipbuilding firm delivered the yacht to the plaintiff in Amsterdam, Holland, where the plaintiff had gone for that purpose. The plaintiff was accompanied by a resident of California who was employed by the plaintiff to become skipper of the yacht immediately on delivery. On that day, the Dutch flag was replaced by the flag of the United States. For several days, the plaintiff, accompanied by his skipper and representatives of the shipbuilding firm, who were aboard to check the operations of the yacht, made daily cruises for pleasure and as shakedown runs, in the vicinity of Amsterdam. On November 5, 1953, the yacht was personally delivered by the plaintiff to a freighter at Rotterdam, Holland and consigned to the plaintiff in San Francisco. The plaintiff and representatives of the shipbuilding firm assisted and supervised the loading of the yacht on the upper deck of the freighter. To protect the yacht from damage, it was enclosed in protective coverings and cratings. The plaintiff's skipper accompanied the yacht on the freighter in order to see that these protective coverings remained secure and to take care of the yacht during the voyage.

On December 7, 1953, the plaintiff paid all duties to the United States Collector of Customs in San Francisco, a sum of $9,413.40. On December 9, 1953, the freighter carrying the yacht arrived in San Francisco. Twenty-four hours later, the yacht was removed from its protective coverings and crates and lifted into San Francisco Bay. The plaintiff immediately piloted the yacht under its own power to a berth in Sausalito, California. Because of the illness of the plaintiff's wife and certain changes in the yacht necessitated by law and subsequently made by a Sausalito shipbuilding firm, the yacht was not used for about six months after its arrival in Sausalito. During this period the skipper lived aboard the yacht. It is an admitted fact that since that time the yacht has been used by the plaintiff solely for pleasure cruises in California. No sale, use or excise tax has been assessed by or paid to any state or nation with respect to the yacht and its equipment except the tax which is the subject of this action. Within the proper time and in accordance with the procedure prescribed by law, the defendant made two determinations of use tax against the plaintiff; one for the use of the yacht in California and one for the use of the additional machinery in California. After notice of these determinations, the plaintiff petitioned for redetermination. His petition was denied. Thereafter, the plaintiff filed a timely claim for a refund, and on refusal of the claim, the plaintiff filed this action.

The basic contention of the defendant is that the challenged tax does not violate the export-import clause of the United States Constitution, or the commerce clause of the United States Constitution, as found by the court below. Plaintiff relies on Rev. and Taxation Code, section 6352, which expressly exempts from the operation of the use tax any taxes prohibited by the Constitution of the United States. The use tax provides that ‘Every person storing, using, or otherwise consuming in this State tangible personal property purchased from a retailer is liable for the tax.’ (Rev. & Tax.Code, section 6202.) The general purpose, nature and constitutionality of the California use tax have long been determined and need not be discussed in detail. Douglas Aircraft Co., Inc. v. Johnson, 13 Cal.2d 545, 90 P.2d 572; Southern Pac. Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 82 L.Ed. 586; Chicago Bridge & Iron Co. v. Johnson, 19 Cal.2d 162, 119 P.2d 945; Johnson v. Los Angeles County, 31 Cal.App.2d 579, 88 P.2d 725; Brandtjen & Kluge, Inc. v. Fincher, 44 Cal.App.2d Supp. 939, 111 P.2d 979. These authorities, however, deal chiefly with the application of the use tax in situations where it was erroneously contended that the tax violated the commerce clause of the United States Constitution. It is not necessary, therefore, to discuss the commerce clause aspect of the judgment appealed from. The question of the applicability of the California use tax in a situation such as this one, where it is contended that the tax violates Article I, section 10, clause 2, has never been presented.

Article I, section 10 of the Constitution of the United States contains an enumeration of those powers that are prohibited to the states. Clause 2 of that section reads as follows: ‘No State shall, without the Consent of the Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws: and the net Produce of all Duties and Imposts, laid by any State on Imports or Exports, shall be for the Use of the Treasury of the United States; and all such Laws shall be subject to the Revision and Controul of the Congress.’ In interpreting this provision in Brown v. Maryland, 1827, 12 Wheat. 419, at pages 439 and 440, 6 L.Ed. 678, Chief Justice Marshall said:

‘It may be conceded, that the words of the prohibition ought not to be pressed to their utmost extent; that in our complex system, the object of the powers conferred on the government of the Union, and the nature of the often conflicting powers which remain in the states, must always be taken into view, and may aid in expounding the words of any particular clause. But while we admit that sound principles of construction ought to restrain all courts from carrying the words of the prohibition beyond the object the constitution is intended to secure; that there must be a point of time when the prohibition ceases, and the power of the state to tax commences; we cannot admit, that this point of time is the instant that the articles enter the country. It is, we think, obvious, that this construction would defeat the prohibition.

‘The constitutional prohibition on the states to lay a duty on imports, a prohibition which a vast majority of them must feel an interest in preserving, may certainly come in conflict with their acknowledged power to tax persons and property within their territory. The power, and the restriction on it, though quite distinguishable, when they do not approach each other, may yet, when the intervening colors between white and black, approach so nearly, as to perplex the understanding, as colors perplex the vision, in marking the distinction between them. Yet the distinction exists, and must be marked as the cases arise. Until 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.]

In the most recent interpretation of Article I, section 10, clause 2, Hooven & Allison Co. v. Evatt, 324 U.S. 652, at page 657, 65 S.Ct. 870, at page 873, 89 L.Ed. 1252, Chief Justice Stone pointed out:

‘Although one Justice dissented in Brown v. Maryland, supra, from that day to this, this Court has held, without a dissenting voice, that things imported are imports entitled to the immunity conferred by the Constitution; that that immunity survives their arrival in this country and continues until they are sold, removed from the original package, or put to the use for which they are imported. Waring v. The Mayor, supra, 8 Wall. [110] 122, 123, 19 L.Ed. 342; Low v. Austin, 13 Wall. 29, 32, 33, 20 L.Ed. 517; Cook v. Pennsylvania, 97 U.S. 566, 573, 24 L.Ed. 1015; F. May & Co. v. New Orleans, 178 U.S. 496, 501, 507, 508, 20 S.Ct. 976, 977, 979, 980, 44 L.Ed. 1165; People of State of N. Y., ex rel. Edward & John Burke v. Wells, 208 U.S. 14, 21, 22, 24, 28 S.Ct. 193, 195, 196, 52 L.Ed. 370; Gulf Fisheries Co. v. MacInerney, 276 U.S. 124, 126, 127, 48 S.Ct. 227, 228, 72 L.Ed. 495; McGoldrick v. Gulf Oil Corp., 309 U.S. 414, 423, 60 S.Ct. 664, 667, 84 L.Ed. 840.’ [Emphasis added.]

The court went on to say in 324 U.S. at page 665, 65 S.Ct. 877,

‘We have often indicated the difference in this respect between the local taxation of imports in the original package and the like taxation of goods, either before or after their shipment in interstate commerce. In the one case the immunity derives from the prohibition upon taxation of the imported merchandise itself. In the other the immunity is only from such local regulation by taxation, as interferes with the constitutional power of Congress to regulate the commerce, whether the taxed merchandise is in the original package or not. The regulatory effect of a tax, otherwise permissible, is not in general affected by retention of the merchandise in the original package in which it has been transported. Woodruff v. Parham, 8 Wall. 123, 19 L.Ed. 382; Brown v. Houston, 114 U.S. 622, 5 S.Ct. 1091, 29 L.Ed. 257; American Steel & Wire Co. v. Speed, 192 U.S. 500, 521, 24 S.Ct. 365, 371, 38 L.Ed. 538; Sonneborn Bros. v. Cureton, 262 U.S. 506, 508–513, 43 S.Ct. 643–645, 67 L.Ed. 1095; Baldwin v. G. A. F. Seelig, Inc., 294 U.S. 511, 526, 527, 55 S.Ct. 497, 501, 502, 79 L.Ed. 1032.’

The question here is simply when, if at all, the yacht and machinery lost their tax exempt character as imports and became subject to the taxing power of the state. Plaintiff, on appeal, earnestly contends that by the payment of the customs duty to the United States he also purchased the right to thereafter use the yacht in California free from the taxing power of the state. The same argument was rejected in Brown v. Maryland, supra, and F. May & Co. v. New Orleans, 178 U.S. 496, 20 S.Ct. 976, 44 L.Ed. 1165. Plaintiff's argument appears to be that an imported article never loses its exemption as an import. A use tax is not on the operation of interstate commerce but on the privilege of use after the commerce is at an end. Henneford v. Silas Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814.

Plaintiff further contends that we should follow Richfield Oil Corp. v. State Board, 329 U.S. 69, 67 S.Ct. 156, 91 L.Ed. 80, and Matson Nav. Co. v. State Bd. of Equal., 136 Cal.App.2d 577, 289 P.2d 73. In the former case, the Supreme Court held that the California sales tax could not be levied on oil which the Richfield Company, pursuant to a contract with a foreign government, piped from its storage tanks in California into a vessel of the foreign government. In the latter case, a large steamer sold by the Matson Company to a foreign government in California was held exempt from the California sales tax. His argument is that as the California use tax and sales tax are complementary, the validity of the use tax is governed by the same principles as the validity of the sales tax. Therefore, he argues if a transaction where oil is sold to New Zealand in California and title passes in California, is not subject to the sales tax, a transaction in which a yacht is manufactured and sold in Holland for importation and use in California and title passed in Holland, is not subject to the use tax. We cannot agree with this argument. In McLeod v. J. E. Dilworth Co., 322 U.S. 327, 330, 64 S.Ct. 1023, 1025, 88 L.Ed. 1304, Justice Frankfurter said: ‘A sale tax and a use tax in many instances may bring about the same result. But they are different in conception, are assessments upon different transactions, and in the interlacings of the two legislative authorities within our federation may have to justify themselves on different constitutional grounds.’

Furthermore, the Richfield and the Matson case, supra, were concerned with export transactions. The issue in the Richfield case was whether the process of exportation had begun so as to make the oil exempt; the issue in the Matson case was whether a ship was properly an object of export and whether the ship in question was sufficiently committed to the stream of export trade at the time of sale. Even if we were to follow plaintiff's analogy of export cases, in Cornell v. Coyne, 192 U.S. 418, at page 427, 24 S.Ct. 383, at page 384, 48 L.Ed. 504, the court said, ‘The true construction of the constitutional provision is that no burden by way of tax or duty can be cast upon the exportation of articles, and does not mean that articles exported are relieved from the prior ordinary burdens of taxation which rest upon all property similarly situated. The exemption attaches to the export, and not to the article before its exportation.’

The instant case is concerned with an import transaction. The issue is whether the import process has been completed so that the yacht and machinery are subject to the taxing power of the State of California. It is clear that the purpose of the Constitutional prohibition against state duties on imports is to prevent a clog in the process of importation, not to prevent a tax on the use of the article after it has reached its destination. Brown v. Maryland, supra; Henneford v. Silas, Mason Co., 300 U.S. 577, 57 S.Ct. 524, 81 L.Ed. 814. There is no question here that the plaintiff bought the yacht and machinery for use in California, and that they have been so used since their arrival from Holland.

We find a compelling analogy in Banner Laundering Co. v. Gundry, 1940, 297 Mich. 419, 298 N.W. 73 and Tres Ritos Ranch Co. v. Abbott, 1940, 44 N.M. 556, 105 P.2d 1070. In the Gundry case, the taxpayer, a resident of Detroit, Michigan, went to Canada and bought a pair of shoes from a retailer. He returned to Detroit with the shoes and paid the U. S. Customs duties on them. The State of Michigan imposed a use tax on the use of the shoes in Michigan. The Supreme Court of Michigan upheld the imposition of the use tax and rejected the taxpayer's contention that the tax transgressed the power of Congress to regulate foreign commerce. In the New Mexico case, the taxpayer bought cattle in Mexico and brought them to his ranch in New Mexico to feed and hold for sale in the United States. The court rejected the taxpayer's contention that the cattle as imports, were exempt from a state tax. The Tres Ritos case was recently followed in State v. Harper, Tex.Civ.App.1945, 188 S.W.2d 400 certiorari denied 327 U.S. 805, 66 S.Ct. 964, 90 L.Ed. 1030.

We conclude that when the plaintiff's yacht and machinery completed their journey and were ‘put to the use for which they were imported,’ they lost their tax exempt status as an import.

We come then to the more difficult question of precisely when the taxable incident occurred. The question is difficult because the plaintiff is a private person who has imported an article for his own use and pleasure. Except for the Gundry case, supra, in all of the cases beginning with Brown v. Maryland, the taxpayer has been a person importing the article in question for commercial, industrial or manufacturing purposes. In this context the ‘original package’ doctrine is easier to apply as a practical adjustment of the right of the state to revenue and the obligation of the state to leave the regulation of foreign commerce to the federal government. The original package doctrine is applied by analogy to both foreign commerce and interstate commerce. Brown v. Maryland, 12 Wheat. 419, 6 L.Ed. 678; Hooven v. Allison Co. v. Evatt, 324 U.S. 652, 65 S.Ct. 870, 89 L.Ed. 1252; Southern Pac. Co. v. Gallagher, 306 U.S. 167, 59 S.Ct. 389, 83 L.Ed. 586. Some of the foreign commerce cases seem to indicate that the import loses its tax exempt status when the ‘original package’ is broken. Brown v. Maryland, supra; Mexican Petroleum Corp. v. City of South Portland, 1922, 121 Me. 128, 115 A. 900, 26 A.L.R. 965; E. J. Stanton & Sons v. County of L. A., 78 Cal.App.2d 181. In Southern Pacific Co. v. Gallagher, supra, which upheld the imposition of the California Use Tax on personal property purchased outside of the state by an interstate railroad and kept available for use as part of its transportation facilities in California, the court said in 306 U.S. at page 177, 59 S.Ct. at page 393 ‘We think there was a taxable moment when the former had reached the end of their interstate transportation and had not begun to be consumed in interstate operation. At that moment, the tax on storage and use—retention and exercise of a right of ownership, respectively—was effective. The interstate movement was complete. The interstate consumption had not begun.’ The court further indicated in 306 U.S. at page 181, 59 S.Ct. at page 395 that, ‘the taxable event is the exercise of the property right in California’. We think the problem in the instant case can be solved by the following from Hooven & Allison v. Evatt, 324 U.S. 652, at pages 664 and 665, 65 S.Ct. 870, at page 877:

‘For the purpose of the immunity it has not been thought, nor is there reason for supposing, that it matters whether the imported merchandise is stored in the original package in the importer's warehouse at the port of entry or in an interior state. The reason for the original package doctrine, as fully expounded in Brown v. Maryland, supra, is that unless the immunity survives to some extent the arrival of the merchandise in the United States, the immunity itself would be destroyed. For there is no purpose of taxing importation, itself, even its ultimate suppression, which could not be equally accomplished by laying a like tax on things imported after their arrival and while they are in the hands of the importer.

‘On the other hand the immunity is adequately protected and the state power to tax is adequately safeguarded if, as has been the case ever since Brown v. Maryland, supra, an import is deemed to retain its character as such ‘while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported,’ see Brown v. Maryland, supra, 12 Wheat. 442, 6 L.Ed. 678, or until put to the use for which it was imported. Chief Justice Marshall, in Brown v. Maryland, supra, 12 Wheat. at pages 442, 443, 6 L.Ed. 678, rejected the suggestion that ‘an importer may bring in goods, as plate, for his own use, and thus retain much valuable property exempt from taxation.’ Plainly if and when removed from the package in which they are imported or when used for the purpose for which they are imported, they cease to be imports and their tax exemption is at an end. It is quite another matter to say, and Chief Justice Marshall did not say, that because they may be taxed when used, the importer may not hold them tax free until the original packages are broken or until they are put to the use for which they are imported. He said, 12 Wheat. at page 443, 6 L.Ed. 678: ‘The same observations [i. e., the importer has mixed the goods with the common mass of property, rendering them taxable] apply to plate, or other furniture used by the importer.’'

It is our view therefor that the defendant properly determined that a use tax was properly due and that the judgment of the lower court is in error.

Judgment reversed, with directions to the trial court to enter judgment in favor of defendant.

KAUFMAN, Presiding Justice.

DOOLING and DRAPER, JJ., concur.

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