Opinion
July 8, 1968.
Imports — Tax exempt status — "Current operational needs"
1. A formula to determine current operational needs on the basis of length of time required to replenish the manufacturer's supply from a foreign source was applied to determine the taxable portion of manufacturer's inventory of imported steel on hand on assessment date.
Trial had May 6, 1968, in Multnomah County, Portland, Oregon.
Eugene E. Feltz, Portland, Oregon, represented plaintiff.
Donald C. Seymour, Assistant Attorney General, Salem, represented defendant.
Decision in part for plaintiff and in part for defendant rendered July 8, 1968.
Affirmed 89 Adv Sh 167, 458 P.2d 420 (1969).
The tax commission held that plaintiff's inventory of coil steel which was on hand on January 1, 1967, was not exempt from taxation under Article I, § 10, clause 2, of the United States Constitution, and plaintiff appealed to this court.
U.S. Const. Art. I, § 10, cl. 2, provides:
"No State shall, * * * lay Imposts or Duties on Imports or Exports, except which may be absolutely necessary for executing it's inspection Laws * * *."
Plaintiff, a manufacturer of welded steel pipe, both imports coil steel from Japan and purchases steel from domestic companies in the United States. On January 1, 1967 the plaintiff had an inventory of Japanese coil steel valued at $493,991.00. The imported wire is bound in a coil and kept in a storage area near plaintiff's main assembly building but separate from the domestic steel. Approximately 12 coils or $40,000 worth of imported steel are kept at all times in the assembly building behind the tube mill so that the operation of the tube mill will not be interrupted.
It requires approximately three months from the time an order is placed by plaintiff with the Japanese manufacturer until the shipment arrives from Japan. The inventory of Japanese steel on hand on January 1, 1967, constituted a ten-month supply. Plaintiff used ten percent of this imported steel inventory in January, six percent in February and 10.8 percent in March, 1967. Under normal circumstances an order for plaintiff's steel products can be filled within two weeks' time.
The plaintiff is primarily engaged in manufacturing steel products but it has occasionally sold some of its steel inventory to other companies.
The rule concerning the ability of states to tax imports was first announced in Brown v. Maryland, 12 Wheat 419, 6 L ed 678 (1827). Chief Justice Marshall remarked that the constitutional prohibition on the states to tax imports might come into conflict with the power of the states to tax property within the state jurisdiction and said:
"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."
In Hooven Allison Co. v. Evatt, 324 U.S. 652, 65 S Ct 870, 89 L ed 1252 (1944), the United States Supreme Court, through Chief Justice Stone, interpreted the words of Chief Justice Marshall to mean that "* * * things imported are imports entitled to the immunity conferred by the Constitution; that the immunity survives their arrival in the country and continues until they are sold, removed from the original package, or put to the use for which they are imported. [Citing cases.]" 89 L ed 1259. (Emphasis supplied.) The Supreme Court left undecided the question of whether the imported goods which were to be used in manufacturing, some of which had been placed in the taxpayer's factory, were "so essential to current manufacturing requirements that they could be said to have entered the process of manufacture and hence were already put to the use for which they were imported."
In Youngstown Sheet Tube Co. v. Bowers and United States Plywood Corp. v. City of Algoma, (decided together) 358 U.S. 534, 79 S Ct 383, 3 L ed 2d 490 (1959), the United States Supreme Court was presented with the question of whether imported goods that were essential to current manufacturing requirements had lost their character as imports. In Youngstown the court found that the stipulated facts showed that the imported iron ore was used and irrevocably committed to supply, and was actually supplying the daily requirements of the plant. In the United States Plywood case the city assessor taxed only one-half of the taxpayer's inventory of imported lumber and veneer on the basis that that amount was needed to meet the current operating needs of the manufacturer. The trial court found that the inventory taxed by the assessor had been irrevocably committed to manufacturing and was needed to meet the current operational needs of the manufacturer. Because of the stipulation in Youngstown and the findings in United States Plywood the Supreme Court held in both instances that the imported goods had lost their character as imports and were taxable by the local taxing authority.
The Supreme Court of Colorado in City and County of Denver v. Denver Publishing Co., 153 Col 396, 387 P.2d 48 (1963), held that Youngstown "does not stand for the proposition that foreign goods stored for eventual use in manufacturing are automatically to be equated with goods required to be kept on hand to meet 'current operational needs'." In deciding what portion of imported newsprint was taxable as an import the court approved a formula for finding current operational needs of the publisher by using the length of time required to replenish the supply from its source in Canada. The court found the publisher used 60 tons of newsprint per day, and as it took six days for shipment, allowed 360 tons for "current operational needs."
The Supreme Court of Ohio has followed the decision in the Denver Publishing Co. case and is now firmly committed to the rule that only the amount of the importer's imported and stored material required for current operational needs is taxable. ORR Felt Blanket Co. v. Schneider, 3 Ohio St.2d 14, 209 N.E.2d 150 (1965); Wheeling Steel Corp. v. Porterfield, 14 Ohio St.2d 85, 236 N.E.2d 652 (1968). The court in both cases followed the formula used by Colorado for determining current operational needs as the length of time it takes to secure an additional supply from the foreign source.
California has rejected completely the formula used by the Ohio and Colorado courts for determining current operational needs of an importer-manufacturer. In Virtue Bros. v. County of Los Angeles, 239 Cal.App.2d 220, 48 Cal Rptr 550, cert. denied 385 U.S. 820 (1966), the California court held that the total inventory of various importer-manufacturers was taxable. In doing so the court summarily rejected the formula used by Colorado and Ohio by flatly stating: "We think that the formula applied by the Colorado and Ohio courts is defective." The court also interpreted Youngstown to require "that the full inventory in the possession of plaintiffs, committed to the purpose of manufacture * * * is subject to tax." In rejecting the current operational needs test the California court is, in effect, holding that all imported products to be used in manufacturing are subject to taxation. This is contrary to the decision of the United States Supreme Court in Hooven and Youngstown where the result of both decisions appears to be that things imported are immune from taxation unless they are part of the current operational needs of the manufacturer.
1. The formula used by Colorado and Ohio to determine current operational needs on the basis of the length of time required to secure an additional supply from the foreign source is reasonable. In the instant case it is clear that only a portion of plaintiff's inventory on hand on January 1, 1967, was needed for plaintiff's current operational needs. Two shiploads of steel happened to arrive three days before the assessment date and altogether this amounted to about ten months' supply of Japanese steel. The testimony showed that it required about 90 days to secure delivery of an order from the mills in Japan. There was also testimony that the plaintiffs used a total of 26.8% of the January 1 inventory during the first 90 days of 1967. Applying the formula used by the Colorado and Ohio courts, 26.8% of $493,991 or $132,389.59 had been committed to plaintiff's current manufacturing needs and is taxable and the balance of $361,601.41 is immune from taxation as an import.