SEARS, ROEBUCK AND CO., Plaintiff and Appellant, v. COUNTY OF KINGS et al., Defendants and Respondents.
This appeal involves the propriety of respondent's assessment of $37,031.97 in ad valorem personal property taxes on imported tires owned by appellant and stored in two Armstrong Rubber Company warehouses in Kings County on March 1, 1971. Appellant claims immunity from the tax under the import-export clause of the United States Constitution (art. I, § 10, cl. 2). The trial court ruled that the tires had lost their immunity when they were delivered to the warehouses either in bulk lots or in sea vans and commingled with other tires. For the reasons stated we conclude that the tires retained their immunity from tax and that the assessment was illegal.
The facts are not in dispute. Appellant was an importer of steel-belted radial-ply tires manufactured in Europe by Michelin. The tires were imported for sale through appellant's retail stores in 11 western states.
Appellant had a contractual arrangement with Armstrong Rubber Company by which armstrong would store the tires at its warehouses in Hanford and ship the tires to appellant's retail stores pursuant to orders placed by the stores.
The tires were shipped from Europe either in cargo containers known as ‘sea vans'1 or loose in the hold of a ship. They were wrapped before shipping with a heavy-gauge tar paper-like material to insure protection during transportation. The wrappings had labels indicating the country of origin and port of entry.
When the tires arrived in the United States they were shipped to one of two warehouses owned by Armstrong. Those tires shipped in sea vans usually remained in them until they reached the warehouse; however, at times the tires would be removed from the sea vans at the port of entry and placed in a railroad car for transportation to Hanford. The tires which were shipped loose usually were taken to the warehouses by truck. On the lien date, 74,656 Michelin tires were stored at the warehouses.
Armstrong only had authority to ship the imported tires to the retail stores although occasionally appellant would place an ‘accommodation order’ directing Armstrong to ship a set of tires to an individual; however, no sales of Michelin tires were made at the warehouses.
Armstrong also stored at its warehouses tires manufactured by it and sold to appellant, but those domestic tires were owned by Armstrong on the lien date. Armstrong did not store any foreign tires other than the Michelin tires owned by appellant.
The tires were stored by stacking them on wooden pallets after they were sorted by catalog number, size and description. There was no intermingling of Michelin and Armstrong tires on the pallets although the pallets holding Michelin and Armstrong tires at times were stacked adjacent to each other. The tires were stored in the warehouses in such spaces as were available at the time each shipment of tires arrived. The location of the imported tires at all times could be ascertained by data-processing equipment.
All of the imported tires retained their original wrapping while stored at the warehouses, and the tires were shipped from the warehouses to the retail outlets in the same wrapping.
The average turnover of a particular shipment of imported tires at the warehouses would be approximately three to four months' time. While at the warehouses the tires were not offered for sale or hypothecated in any manner.
Article I, section 10, clause 2 of the United States Constitution provides in part:
‘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 Inspections Laws; . . .’
In Brown v. Maryland (1827), 25 U.S. (12 Wheat.) 419, 6 L.Ed. 678, Chief Justice Marshall explained that the constitutional provision was intended to confer exclusive power on the national government to tax imports. It was held:
(1) That one who had imported goods for the purpose of selling them had, by the payment of duty to the United States, acquired the right too dispose of his merchandise as well as to bring it into the country (25 U.S. at 439, 440, 6 L.Ed. at 686, 687);
(2) that the state could not tax the import while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported (25 U.S. at 439, 6 L.Ed. at 686); and
(3) that there must be a point of time where the prohibition ceases and the power of the state to tax commences. (25 U.S. at 439, 6 L.Ed. at 686.)
While recognizing the difficulty of formulating a general rule as to when an imported article becomes subject to local taxation, Marshall nevertheless stated:
‘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.’ (25 U.S. at 12 Wheat. 441–442, 6 L.Ed. at 686.)
(See also F. May & Co. v. New Orleans (1900), 178 U.S. 496, 20 S.Ct. 976, 980, 44 L.Ed. 1165.)
Brown v. Maryland, supra, involved an indictment against an importer for selling a package of dry goods in the form in which it was imported, without a license. Marshall explained that, ‘This state of things is changed if he sells [the goods], or otherwise mixes them with the general property of the state, by breaking up his packages, and traveling with them as an itinerant peddler.’ (25 U.S. at 12 Wheat. 443, 6 L.Ed. at 687.) It was noted that any attempt to tax the goods begore these changes took place would be to deny the importer the privilege which he had purchased from the United States ‘until he shall have also purchased it from the state.’ (25 U.S. at (12 Wheat.) 443, 6 L.Ed. at 687.) The rationale is that the importer should not be forced to pay twice for the privilege of disposing of the imported goods.
For 150 years the Brown v. Maryland test has been re-examined and applied in a variety of situations involving goods imported fro sale and for manufacture. In Low v. Austin (1871), 80 U.S. 29 (13 Wall.) 20 L.Ed. 517, import and commission merchants in San Francisco had received a consignment of wine from France upon which they paid the custom charges at the port of entry. They removed the wine from the customs house to their warehouse in the original cases in which it had been imported where it was held for sale. In reversing the California Supreme Court's decision that the wine was subject to ad valorem property taxes levied by the City and County of San Francisco, the United States Supreme Court held that the wine was immune from tax while remaining in the original cases, unbroken and unsold, in the importer's warehouse. ‘Indeed, goods imported, while they remain in the hands of the importer, in the form and shape in which they were brought into the country, can, in no just sense, be regarded as a part of that mass of property in the state usually taxed for the support of the state government.’ (80 U.S. at 29, (13 Wall.) 20 L.Ed. at 519.) As recently as 1964 in Dept. of Revenue v. James Beam Co. (1964), 377 U.S. 341, 84 S.Ct. 1247, 12 L.Ed.2d 362, the Supreme Court reaffirmed the rule announced in Low v. Austin, supra.
In F. May & Co. v. New Orleans, supra, 178 U.S. 496, 20 S.C. 976, the petitioners were engaged in importing and selling towels and linens from foreign countries. About 65 per cent of their business was done by import orders placed in advance of delivery and 35 per cent from the sale of goods in their individual packages at the store. When an import order was given the towels would be put up in packages of two, three, or five dozen each and the manufacturer would ship the packages in a wooden case. The case might not come to the store in New Orleans but would go, unopened, directly to the buyer; however, if two or more orders were in a case it would be shipped to the importer's store, opened, and the different orders removed from the case for delivery to the buyers. The packages were never opened at the store except for the purpose of showing a sample to a customer. Packages not subject to import orders were sold directly from the store.
In rejecting the importer's contention that because the separate packages shipped in the wooden cases were never opened before sale or delivery to a customer the goods were exempt from local tax, Justice Harlan held that the ‘original package’ was the wooden case in which the imported goods were shipped and when the case was opened for the sale or delivery of the separate packages therein, each package lost its distinctive character as an import. He stated:
‘But what is the difference in principle between the case of sales by an importer through traveling agents [the itinerant peddler mentioned by Justice Marshall], and the case of an importer who opens the box or case in which his goods, wrapped in separate parcels, were imported, and by [his] employees sells or offers to sell the separate parcels, either from the opened box or case in his store, or from shelves or counters upon which such parcels have been placed for examination and sale?’
The goods were taxed ‘. . . because at time of the assessment they were in the market for sale . . . subject to be taxed as like property, in the same condition, that had its origin in this country.’ (20 S.Ct. at 980; emphasis added.)
In Hooven & Allison Co. v. Evatt (1944), 324 U.S. 652, 65 S.Ct. 870, 89 L.Ed. 1252, the state of Ohio had assessed ad valorem taxes on imported bales of hemp and other fibers. When assessed the bales were stored at petitioner's warehouse at its factory in Ohio preliminary to their use by petitioner in the manufacture of cordage and similar products. The court, through Chief Justice Stone, observed:
‘. . ., from [the day of Maryland v. Brown], this Court has held, without a dissenting voice, that things imported are imports entitled to the immunity conferred by the Constitution; that the 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. [Citations.]’ (65 S.Ct at p. 873.)
Because the fibers had not been sold by the importer and had remained in their original package, the court narrowed its inquiry to whether there had occurred ‘the happening of some event sufficient to alter their character as imports.’ (65 S.Ct. at p. 873.) The delivery of the fibers to the warehouse at the factory was not such an event because there was no showing that the presence of the fibers was so essential to the ‘current manufacturing requirements' that they could be said to have entered the process of manufacture. (65 S.Ct. at p. 878.)
However, in the consolidated cases of Youngstown Sheet and Tube Co. v. Bowers (1959), and United States Plywood Corporation v. City of Algama (1959), 358 U.S. 534, 79 S.Ct. 383, 3 L.Ed.2d 490, the court expanded the ‘process of manufacture’ concept of Hooven, supra, in holding that iron ores and plywood veneer imported for manufacture had been irrevocably committed to the manufacturing process when delivered to the manufacturer's premises and stored in piles which supplied ‘the daily ore needs of the plant.’ (79 S.Ct. at pp. 390–391.) ‘Unlike Hooven, these are not cases of the mere storage in a warehouse of imported materials intended for eventual use in manufacturing but not found to have been essential to current [daily] operational needs. Here . . . the imported materials . . . were so essential to current manufacturing requirements that they must be said to have entered the process of manufacture, . . .’ (79 S.Ct. at p. 389.) In answering the contention that the wooden veneers were immune form tax because they had been received in ‘bundles' at the plant and were not opened until put into the manufacturing operations of the plant, the court said:
‘Whatever may be the significance of retaining in the ‘original package’ goods that have been so imported for sale [citations], goods that have been so imported for use in manufacturing are not exempt . . ., though not removed from the ‘original package,’ if, as found here, they had been ‘put to the use for which they (were) imported.’ [Citation] Breaking the original package is only one of the ways by which packaged goods . . . imported for . . . manufacturing may lose their distinctive character as imports. Another way is by putting them ‘to the use for which they (were) imported.’' (79 S.Ct. at p. 391.)
In Price Paper Corporation v. City of Detroit (1972), 42 Mich.App. 488, 202 N.W.2d 523, plaintiff was in the business of importing newsprint from Canada for resale to various newspapers in the United States. The principal customer was the Detroit Shopping News. Plaintiff rented storage space at the facilities of Safran Printing Company in Detroit for the purpose of storing the newsprint. Safran was the printer for the Detroit Shopping News. The newsprint remained stored in its original wrapping until such time as Safran readied it for the presses, at which time the paper ‘would be identified to the contract’ and title would pass from plaintiff to the Detroit Shopping News. Recognizing that once the paper was delivered to Safran it became part of the current operating requirements of the publishing process under the rationale of Hooven, supra, and Youngstown, supra, the court nevertheless held that the ‘use’ doctrine relied on in the manufacturing cases was inapplicable to goods imported for sale. Until the sale was consummated and the paper identified to the contract the newsprint retained its immunity. ‘[T]he right to resell imported goods free of prior local taxes goes along with the right to bring them into the country.’ (202 N.W.2d at p. 525.)
The California courts have wrestled with the application of the ‘original package’ doctrine to goods imported for sale. In E.J. Stanton & Sons v. County of L.A. (1947) 78 Cal.App.2d 181, 177 P.2d 804, the taxpayer imported hardwood by ship. Each shipment was broken into separate stacks at the taxpayer's storage yard, and sales were made from the stacks. In rejecting the contention that each piece of lumber was an original package so that it retained its character as an import until sold, the court fictionalized a ‘unitary’ concept of packaging: ‘Although a cargo in bulk may arrive at the port of entry in irons, or wrapped and tied with hemp ropes, or encircled with a silken thread or, as a herd of steers, have no binder at all, yet the entire shipment without regard to its exterior wrapper is the original package.’ (78 Cal.App.2d at p. 187, 177 P.2d at p. 807.) In holding that the ‘package’ was broken by the local sales, the court said: ‘[W]hen such cargo sheds its invisible cover, even though in the warehouse of the importer, and is so sorted and classified as to facilitate its sale, and portions thereof are sold until the pile is depleted and the remnants thereof are commingled with new shipments of the same type of timbers, also to be offered for sale,’ the immunity of the entire shipment ends. (78 Cal.App.2d at p. 188, 177 P.2d at p. 808.)
In Simon v. County of Los Angeles (1956), 141 Cal.App.2d 74, 296 P.2d 381, plaintiffs were in the business of importing nails packaged in kegs and sacks and selling them locally at wholesale or retail. At the port of entry the shipment containing the kegs and sacks was transported by common carrier to plaintiffs's warehouse. The kegs and sacks were placed on wooden pallets and stacked from floor to ceiling. Plaintiffs received 1 to 3 shipments per month containing 500 to 2,000 sacks and kegs. No effort was made to segregate the shipments; however, each sack or keg would be identified by order number, size of nail and country of origin. The court declined to apply the ‘unitary’ rule of Stanton, supra, because unlike the lumber in that case the nails were packaged. Relying on Marshall's description in Brown v. Maryland, supra, the court adopted a definition of the ‘original package’ as ‘the form or physical condition of the article of commerce in which it is transported.’ (411 Cal.App.2d at p. 77, 296 P.2d at p. 383.) It is the unit of transportation ‘made in the usual manner prevalent among honest dealers.’ If the unit is in a bona fide form according to normal trade practices, there is a presumption that it constitutes the original package.. (141 Cal.App.2d at p. 81, 296 P.2d 381.)
In Volkswaqen Pacific, Inc. v. City of Los Angeles (1972), 7 Cal.3d 48, 101 Cal.Rptr. 869, 496 P.2d 1237, the City of Los Angeles assessed a business license tax on plaintiff, an importer of automobiles and parts, on the basis of its gross receipts from sales to dealers within the city. It was held that the removal of individual packages containing Volkswagen and Porsche parts from sea vans constituted an opening of the ‘original package’ for the sale or delivery of the separate parcels contained therein because VW and Porsche distributed the packages to local dealers as they were taken from the sea vans. Under the facts the importers had removed the parts from the van ‘with the intent of functioning as a wholesaler.’
‘[T]he opening of the sea van did signify a breaking of bulk ‘for the sale or delivery of the separate parcels contained in it’ . . .. Uncontraverted evidence shows that once the individual packages were removed from the sea van [the wholesaler-importer] distributed those packages to local dealers. . . . [O]nce [the importer] entered the vans to remove the individual packages they did so with the intent and effect to act as wholesalers in ‘the mass of property in the country . . ..’ (Brown v. Maryland, supra.)'2
As to the automobiles shipped loose in the hold of the ship, the court applied the unitary concept of E. J. Stanton & Sons, supra, in holding that each automobile was part of an aggregate of similar automobiles and lost its immunity when unloaded at the dock. Individual packaging of each automobile was recognized as inherently impossible or impracticable. (7 Cal.3d at p. 56, 101 Cal.Rptr.  at p. 875, 496 P.2d  at p. 1243.)
A stretching of the ‘original package’ concept to its outermost limit appears to have been reached in Sterling Liquor Distributors, Inc. v. County of Orange (1970), 3 Cal.App.3d 510, 83 Cal.Rptr. 571. There, imported liquors were kept in their original cartons in the importer's warehouse separate form the domestic liquor. The imported liquors were sold from the warehouse in the unopened cases except where individual orders were received for less than case lots; these orders were filled from a separate section of the warehouse known as the ‘repack area.’ Even though the unbroken cases were sold directly from the warehouse the court rejected the argument that the importation process had ended at the warehouse the same as goods imported for manufacture. Declining to ‘abrogate the ‘original package’ doctrine' it held the liquor in the unbroken cases immune from tax. (3 Cal.App.3d at p. 512, 83 Cal.Rptr. at p. 572.)
Finally, in Singer Co. v. County of Kings (1975), 46 Cal.App.3d 852, 121 Cal.Rptr. 398, this court held that sewing machines manufactured in foreign countries and shipped to the importer's warehouse at Hanford in sealed cartons and placed in separate piles according to model number and country of origin and stored at the warehouse until reloaded onto truck trailers for delivery to the importer's retail outlets were immune from tax. The opening of the sea vans in which the cartons were shipped did not constitute a breaking of the ‘original package’ in the constitutional sense because it was not done for the purpose of immediate sale or delivery of the cartons. We also rejected the contention that since the importer filled the orders from its retail stores upon demand the warehousing of the cartons was ‘putting the goods to the use for which they were imported.’ (46 Cal.App.3d at p. 863, 121 Cal.Rptr. at p. 405.)
The long judicial history just recited demonstrates that the ‘original package’ doctrine of Brown v. Maryland, supra, is still viable insofar as goods imported for sale. If the goods remain in the importer's warehouse in their original form or package and are not sold, offered for sale or hypothecated,3 they retain their character as imports. In such a case, the significant event which transposes the goods form imports to the general mass of taxable property in the state is the delivery of the goods from the warehouse to the inventory stock of the importer at the retail outlet. It is only at this point that the goods are ‘in the market for sale.’ (F. May & Co. v. New Orleans, supra, 20 S.Ct. at p. 980; see also Cominco Products, Inc. v. State Tax Commission (1966), 243 Or. 165, 411 P.2d 85.) By analogy to the manufacturing cases it is at this point that the goods become a part of the ‘current operating needs' of the retailer and are committed to the purpose for which they were imported. (Cf. Youngstown Sheet and Tube Co. v. Bowers, supra; Hooven & Allison Co. v. Evatt, supra.)
Applying the foregoing principles to the facts of the instant case, we hold, first, that the unloading of the tires from the sea vans did not constitute a breaking of the original package so as to cause the tires to lose their import status. The tires were not removed from the vans for the purpose of immediate delivery or sale but for the purpose of storage and safekeeping. Appellant at this point in time did not act as a ‘wholesaler‘ in the mass of property in the state. (See Singer Co. v. County of Kings, supra, 46 Cal.App.3d 852, 862, 121 Cal.Rptr. 398; Michigan State Tax Commission v. Garment Corp. of Amer. (1971) 32 Mich.App. 715, 189 N.W. 2d 72; cf. Volkswagen Pacific, Inc. v. City of Los Angeles, supra, 7 Cal.3d 48, 53–56, 101 Cal.Rptr. 869, 496 P.2d 1237; F. May & Co. v. New Orleans, supra 178 U.S. at p. 496, 20 S.Ct. at p. 980.)
Second, the aggregate of the tires in each shipment did not constitute an original package so that the unloading and stacking of the tires at the warehouses ended their immunity. The ‘unitary’ theory of packaging is applicable only where individual packaging of the imported items is inherently impossible or impracticable. (Volkswagen Pacific, Inc. v. City of Los Angeles, supra, 7 Cal.3d at p. 56, 101 Cal.Rptr. 869, 496 P.2d 1237; Singer Co. v. County of Kings, supra 46 Cal.App.3d at p. 862, fn. 2, 121 Cal.Rptr. 398; Simon v. County of Los Angeles, 141 Cal.App.2d at pp. 77–79, 296 P.2d 381.) Not only were the tires physically capable of individual packaging, each tire was wrapped in heavy tar paper and marked and identified as to country of origin and port of entry. The wrapping was in accordance with normal shipping practices in the tire industry. Each tire reasonably may be classified as an original package in the constitutional sense. (Brown v. Maryland, supra, 25 U.S. at p. 439, 6 L.Ed at p. 686; Simon v. County of Los Angeles, supra, 141 Cal.App.2d at p. 77.)
Third, the tires did not lose their immunity because they were stored on pallets adjacent to pallets containing Armstrong's domestically manufactured tires. In Imperial Development Co. v. Calexico (1920) 47 Cal.App. 666, 191 P. 50, bales of imported cotton were held immune from California property tax even though the imported bales were ‘not all stored in one portion of the warehouse, and . . . [were] stored in a warehouse in which home-grown cotton was also stored.’ (47 Cal.App. at p. 670, 191 P. at p. 51.) Because the goods were marked for identification and were in the original bales, it was held that the imported cotton ‘could not become so mingled with the other goods stored in the warehouse as to lose its character as an import while it continued to be the property of the importer.’ (47 Cal.App. at pp. 670–671, 191 P. at p. 51; see also Singer Co. v. County of Kings, supra, 46 Cal.App.3d 852, 864, 121 Cal.Rptr. 398.)
Respondent's final argument is that although the tires were not held for immediate sale or delivery at the warehouses, they nonetheless lost their immunity because at this point in time they were irrevocably committed to appellant's sales system; they had become a part of appellant's total inventory of tires held for sale in this country. While this argument has a factual basis in that, in a sense, all goods imported for wholesale or retail purposes are committed to a marketing system as soon as they arrive at the importer's warehouse, it is legally unsound because it would abolish all immunity of goods imported for sale.
The fundamental purpose of the immunity provision is to allow an importer to hold his goods without tax until such time as he sells or otherwise uses them for the purpose for which they were imported. Storage of the goods for safekeeping until they are needed at the retail outlets is not such a use of the goods as to cause them to lose their character as imports. To preserve the immunity provision we must hold that while at the warehouse the goods are still ‘in transit’ to their ultimate sales destination; at this point the importation process has not ended.
The judgment is reversed.
1. A sea van is a large metallic-type container about the size of a semi-trailer.The vans are owned or leased by the shiping company and are returned to it when the tires are unloaded. Appellant did not pay a federal duty on the vans because they are considered an instrument of international traffic.
2. By the term ‘wholesaler’ the court undoubtedly had reference to one who sells goods for the purpose of resale in the ordinary course of business, i. e., one who sells to a ‘jobber’ or to a ‘retailer’ but no to the ultimate consumer. (City of Los Angeles v. Clinton Merchandising Corp., 58 Cal.2d 675, 679, 25 Cal.Rptr. 859, 375 P.2d 851; see Black's Law Dictionary (4th ed. 1957) at p. 1770.) However, irrespective of whether the importer is a wholesaler or a retailer, the pivotal question is whether he holds the goods in his warehouse for immediate sale or delivery to his buyers or whether the goods are placed in the warehouse for storage and safekeeping pending a future sale or delivery. Although at times the distinction is hazy, it is nevertheless critical in determining import immunity.
3. In Halo Sales Corp. v. City & County of San Francisco (1971), 6 Cal.3d 164, 98 Cal.Rptr. 473, 490 P.2d 1161, hypothecation is equated with sale; in either event the importer ‘so acts upon the goods as to incorporate them into the mass of property in the state.’
FRANSON, Associate Justice.
GEO. A. BROWN, P. J., and GINSBURG,** J., Assigned, concur.