Opinion
For Opinion on Hearing, see 98 Cal.Rptr. 473, 490 P.2d 1161.
Opinion on pages 361 to 377 omitted
HEARING GRANTED
See 5 Cal.3d 898 for opinion that appeared on pages 361 to 366.
See 6 Cal.3d 164 for opinion that appeared on pages 367 to 377.
[94 Cal.Rptr. 722] Charles W. Tuckman, Tuckman, Wertheimer & Phillips, San Francisco, for plaintiff-appellant.
Thomas M. O'Connor, City Atty., John J. Doherty, Deputy City Atty., San Francisco, for defendant-respondent.
SIMS, Associate Justice.
Plaintiff importer has appealed from a summary judgment which ordered the dismissal of its complaint seeking refund of a general property tax which it paid under protest and which it alleges was void, illegal and unconstitutional because it contravened the provisions of article I, section 10, paragraph 2 of the Constitution of the United States exempting imported property from state and local taxation. The importer made a motion for summary judgment supported by the declarations discussed below and by its memorandum of points and authorities. In its answering points and authorities the city requested the entry of judgment in its favor, and the court's memorandum opinion indicates that the parties had stipulated that a summary judgment be entered in favor of one side or the other.
The city filed no declaration in opposition. Consequently the facts as set forth in the declaration filed by plaintiff may be taken as established. It is uncontroverted that the importer has paid under protest $5,990.24 in taxes for personal property assessed on the 1968/1969 unsecured assessment roll of defendant city. The goods in question were imported from Japan at a cost of $272,286 and on the basis of that actual cash value were assessed for $68,071.
The issue is properly that phrased by Chief Justice Marshall in Brown v. Maryland (1827) 12 Wheat. [25 U.S.] 419, 6 L.Ed. 678, where he states, '* * * 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.' (12 Wheat. [25 U.S.] at p. 441.)
Hooven & Allison Co. v. Evatt (1945) 324 U.S. 652, particularly pp. 658-664, 65 S.Ct. 870, 89 L.Ed. 1252, and Johnson v. County of Los Angeles (1939) 31 Cal.App.2d 579, particularly pp. 582-584, 88 P.2d 725, indicate that the fact there is an outstanding security interest for the purchase price of the goods does not relieve imported goods in the original package of their status as imports. Although it is often suggested that a nondiscriminatory tax on imported goods should not offend the constitutional prohibition, the cases have uniformally applied the exemption to goods in their original packages. (See Dept. of Revenue v. James Beam Distilling Co. (1964) 377 U.S. 341, 343, 84 S.Ct. 1247, 12 L.Ed.2d 362; Sterling Liquor Distributors, [94 Cal.Rptr. 723] Inc. v. County of Orange (1970) 3 Cal.App.3d 510, 512-513, 83 Cal.Rptr. 571 [hearing in S.Ct. den. Jan. 15, 1970, cert. den. (1970) 400 U.S. 822, 91 S.Ct. 43, 27 L.Ed.2d 50]; Simon v. County of Los Angeles (1956) 141 Cal.App.2d 74, 81, 296 P.2d 381; Parrot & Co. v. City & County of S. F. (1955) 131 Cal.App.2d 332, 341, 280 P.2d 881; Phillippine Ref. Co. v. Contra Costa (1938) 24 Cal.App.2d 665, 668-669, 76 P.2d 163; Imperial Development Co. v. Calexico (1920) 47 Cal.App. 666, 669-671, 191 P. 50; Powell, State Taxation of Imports--When Does An Import Cease to be an Import? (1945) 58 Harvard L.Rev. 858.)
On the other hand, Southern Pac. Co. v. City of Calexico (S.D.Cal.S.D. 1923) 288 F. 634 (particularly p. 641), and State v. Harper (Tex.Civ.App.1945) 188 S.W.2d 400, particularly p. 403, indicate that when a new security interest is created in the goods after importation, the goods lose their exemption as in the case of a sale. 'For a purpose beneficial to himself an equitable disposition of the property was had in the pledge created. This giving of a lien upon the property, arising out of a beneficial use thereof, served to divest it of its character as an import and subject it to the jurisdiction of the state.' (288 F. at p. 641.) Similarly, when at the time of the assessment, goods, which have been imported, are being used in a practical sense for the purpose for which they have been imported, those goods are subject to state and local taxation even though still in the form in which they were imported. (See Youngstown Sheet & Tube Co. v. Bowers (1959) 358 U.S. 534, 549, 79 S.Ct. 383, 3 L.Ed.2d 490; Sugarman v. State Board of Equalization (1958) 51 Cal.2d 361, 370, 333 P.2d 333; American Smelting etc. Co. v. County of Contra Costa (1969) 271 Cal.App.2d 437, 445-454, 77 Cal.Rptr. 570 [hearing by S.Ct. den., dis'm. (1970) 396 U.S. 273, 90 S.Ct. 553, 24 L.Ed.2d 462]; Virtue Bros. v. County of Los Angeles (1966) 239 Cal.App.2d 220, 221-231, 48 Cal.Rptr. 505 [hearing by S.Ct. den., (1966) cert. den. 385 U.S. 820, 87 S.Ct. 45, 17 L.Ed.2d 58]; and Cominco Products, Inc. v. State Tax Commission (1966) 243 Or. 165, 174, 411 P.2d 85, 89 (cert. den. 385 U.S. 830, 87 S.Ct. 64, 17 L.Ed.2d 65).)
As the trial judge astutely noted, '* * * the facts in this case lie in a grey area in between.' The declaration filed by the importing taxpayer states, in part, as follows:
'Halo Sales Corporation (hereinafter referred to as HALO) is a California Corporation whose principal business is the importation and sale of candles and related merchandise from Japan. HALO's assets consist almost wholly of inventory and accounts receivable which are pledged to Walter E. Heller & Company (hereinafter referred to as HELLER) as HELLER provides at all times approximately 80% of HALO's working capital requirements. HALO's business increases annually, so that its debt requirement ratio remains fairly constant.
'The cost of debt to HALO is a significant element of expense, and HALO accordingly continually seeks the lowest cost for its necessary continuing borrowings. On February 10, 1967, HALO and HELLER contracted for the financing of HALO's accounts receivable and inventory, and that contract is still in effect. In brief, HALO maintains a continuing debt to HELLER of approximately 80% of its accounts receivable and inventory, and HALO pledges all of its accounts receivable, inventory, and other property to HELLER as security for that debt.
'HALO imports candles from Japan under the following program:
'1. A letter of credit for the account of suppliers is opened by the United California Bank (hereinafter referred to as UCB):
'2. When the original shipping documents are received by UCB, it pays its foreign correspondent bank for the drawing [94 Cal.Rptr. 724] on the letter of credit and charges that amount to HALO's 'advance account';
'3. Original documents are forwarded to customs broker, Hoyt, Shepston & Sciaroni, and shipment is cleared through customs;
'4. Upon clearance from customs, the merchandise is delivered direct to Lawrence Warehouse, San Francisco, where warehouse receipts are prepared to the order of Walter E. Heller & Company;
'5. Upon delivery of the warehouse receipt to HELLER, it pays UCB the amount charged to HALO's 'advance account' corresponding to each individual shipment;
'6. HELLER adds the amount paid to UCB to the balance of its continuing overall loan to HALO.'
The declaration signed by the president of the financing institution, Walter E. Heller & Company, states in part: 'HELLER does not generally provide letter of credit financing for the importation of goods from foreign counties because its charges for such financing exceed charges of banks. In order to accommodate its customers, it cooperates with the major banking institutions which issue letters of credit in the regular course of their businesses * * *. HELLER at all times during the importation process has a security interest in the goods themselves, subject to the prior security interest of the United California Bank. When the candles arrive at Lawrence Warehouse, warehouse receipts are issued to HELLER, and HELLER, in turn, pays to the United California Bank the amount specified by HALO and becomes the holder of the first security interest in place of United California Bank.'
A declaration signed by a representative of United California Bank, the bank furnishing the letter of credit, recites: 'UCB is familiar with the business of Halo Sales Corporation (hereinafter referred to as 'HALO') and provides letter of credit financing to HALO for HALO's purchase and importation of candles from Japan. As a condition for the issuance of such letters of credit, UCB relies upon the lending agreements between Walter E. Heller & Company (hereinafter referred to as 'HELLER') and HALO. A copy of the letter of credit agreement used by UCB and HALO is attached to this Declaration.
'In brief, UCB advances the purchase money to HALO which buys candles in Japan and imports them into the United States. By the terms of the letter of credit, the imported goods are at all times until payment therefor pledged to UCB as security for UCB loans to HALO. Payment is due to UCB when the goods arrive locally and are placed in a public warehouse.
'HALO's imports are stored at Lawrence Warehouse, which in turn issues warehouse receipts to HELLER. HELLER pays UCB and is substituted for the bank as pledgeholder of the imported goods.'
A letter of agreement from Heller to UCB states: '* * * It is our intention to continue to lend money to [Halo] and to have a security interest in its accounts receivable and in its inventories after the inventories reach a Lawrence or other warehouse. It is your intention to continue to finance * * * [Halo's] imports and to have a security interest in the merchandise which it imports prior to the time that such merchandise reaches such warehouse.' By this letter Heller subordinated any claims under its general security interest in Halo's accounts receivable and inventory to any security interest of the bank in imported goods prior to the time that the goods reached a domestic warehouse. In return, the bank agreed to waive any claim to Halo's accounts receivable or inventories, on or after the date the goods reached a domestic warehouse, subject the following provision, 'In the event, however, that prior to the time when any such merchandise reaches such warehouse you advise us in writing that an amount is owing to you with respect to such merchandise, then it is agreed that notwithstanding the foregoing, your security interest in such merchandise shall continue until we have paid directly to you the amount so specified by you, whereupon your security interest shall automatically terminate.'
[94 Cal.Rptr. 725] The foregoing facts sustain the importer's contention that the goods in question were constantly hypothecated, from the time of the contract under which they were purchased to any including the lien date, and that they would remain so until they were released for sale in the regular course of business by paying the amount of the purchase price for which they were hypothecated. The question is whether the shift of Heller's security from subordinate to prime destroyed the character of the imported goods in the original packages so that they lost the immunity from local taxation conferred by the import clause.
The trial court seized upon Heller's statement that it was its intention to continue to lend money to Halo and to have a security interest in its accounts receivable and in its inventories after the inventories reach a Lawrence or other warehouse. The judge, in his memorandum opinion, concluded: '* * * it is apparent that the security agreement on the property, after it comes to rest is a different one than that in transit and this, in the opinion of the Court, brings the facts at Bar within the Calexico case.'
In the Calexico case it was recognized, however, that the creation of lien for storage, or for transportation into the United States, would not affect the status of the goods, the court said: '* * * if such a lien [for warehousing charges] did exist, it was purely incidental to the required storage and safekeeping of the property, and did not arise out of any beneficial use thereof as in the case of the pledge. Moreover, to hold that the incidental creation of such a lien extinguished the character of the property as an import would be to hold that the lien for the carriage charges of the carter who brought it across the line likewise extinguished its character as an import. Such a contention overlooks the intent and purpose back of the thing done.' (Southern Pac. Co. v. City of Calexico, supra, 228 F. 634, 642-643.)
An examination of the transaction in this case reveals no beneficial use of the imported goods by the importer. The shift in priority of the Heller lien was the result of a prearranged intent and purpose to facilitate the purchase and importation of the foreign goods, and as such should no more serve to destroy the tax immunity of those goods, than would the incurring of the liens for carriage and storage referred to in the Calexico case. In either case the burden of taxation on the goods would have the result of burdening foreign commerce in a manner proscribed by the United States Constitution as interpreted in Brown v. Maryland and the cases first cited herein.
It should be noted that the agreement between Heller and the importer provides for a general hypothecation of all accounts receivable and inventories, and that Heller obligates itself to lend up to 60 percent of the lower of the cost or market price of Halo's inventories. Under this provision it could be argued that the imported goods, after the issuance of the warehouse receipts to Heller, stand hypothecated for more than their purchase price, and therefore furnish the importer a benefit in the form of an increased basis for credit, whether or not further advances are actually made. If such were the case the principle of Calexico, if valid, would apply.
Examination of the agreements reflects that no such benefits accrue to the importer. In the first place, it has already received 100 percent of the cost of the goods at the time the goods were shipped, so there is no obligation on Heller to lend more. Secondly, according to the agreement of the parties, unless the importer is in default, which he is not shown to be, he is entitled to withdraw the goods on paying 60 percent of their value, which in this case appears to be their cost. The importer can make no equitable disposition of the property, under the preexisting agreements, until he has paid off Heller. He has not acquired any beneficial use of the property other than as importer, since from the time this order is accepted until the tax date he was subject to the outstanding lien for the amount [94 Cal.Rptr. 726] of the purchase price. The fact that he was able to obtain services, and a more favorable interest rate from the bank, while the goods were in transit by deferring Heller's lien, should not render the pay-off of the bank an interruption of the importing process. Such an analysis exalts form above substance, and would merely serve to drive the importer to other forms of financing which would afford legitimate tax avoidance. Such steps might of themselves lessen local commerce if they resulted in foreign or out-of-state commitments for financing.
The judgment is reversed with instructions to enter judgment for the plaintiff taxpayer.
MOLINARI, P. J., concurs.
ELKINGTON, Associate Justice (dissenting).
I dissent.
The majority, in my opinion, correctly say that the applicable law is expressed by Southern Pac. Co. v. City of Calexico, D. C., 288 F. 634. That case holds that the hypothecation of imported goods by the importer or owner after their arrival in the United States divests them of their constitutional immunity from state taxation.
The question then before us is whether the subject merchandise of Halo was financed, or refinanced, and hypothecated after it came to rest in San Francisco. In this inquiry we should be guided by Hooven & Allison Co. v. Evatt (1945) 324 U.S. 652, 65 S.Ct. 870, 89 L.Ed. 1252 (cited in the majority opinion) which tells us that 'in determining the meaning and application of the constitutional provision [art. I, § 10, 2d cl.], we are concerned with matters of substance not of form. When the merchandise is brought from another country to this, the extent of its immunity from state taxation turns on the essential nature of the transaction, considered in the light of the constitutional purpose, and not on the formalities with which the importation is conducted or on the technical procedures by which it is effected. * * *' (P.663, 65 S.Ct. p. 876.)
We should therefore look to the substance, rather than to the form, of Heller's loan to Halo and the hypothecation by Halo to Heller of the subject goods.
The majority have examined the transaction and find that the goods were 'constantly hypothecated' to Heller from the time of their purchase, and that the transaction here in dispute was a mere 'shift of Heller's security from subordinate to prime.' It was all according to a 'prearranged intent and purpose to facilitate the purchase and importation of the foreign goods,' and Halo received no benefit from the loan made by Heller after the arrival of the merchandise in the San Francisco warehouse. This results, they conclude, in no 'purpose beneficial to' Halo after the good's importation, and the nonapplicability of Southern Pac. Co. v. City of Calexico, supra.
As I view these transactions Heller made its loan to Halo and acquired its real security interest in the goods only after their arrival in San Francisco. If the majority holding be the law, then Halo has nevertheless avoided taxation (as demanded by Southern Pac. Co. v. City of Calexico, supra) by a very simple and transparent device. Far in advance of any transaction Halo has given Heller a lien on all goods to be purchased abroad. The lien was to be subordinate to the lien of the bank (UCB) which latter lien would secure the full amount of the purchase price. The second lien of Heller would obviously be of no value as security. Indeed, Heller considered that it had no security interest at that time, for in a letter to UCB it declared 'It is our intention * * * to have a security interest in [Halo's] inventories after the inventories reach' a warehouse in San Francisco. (Emphasis added.)
The following are uncontradicted facts of the record.
On a continuing basis Heller furnished approximately 80 percent of Halo's working capital requirements. As security therefor Heller received from Halo a continuing pledge of all its accounts receivable, inventory and other property 'now or hereafter [94 Cal.Rptr. 727] owned or acquired.' However, Halo used letter of credit services of UCB to pay the Japanese vendors and finance its imports from the time of their purchase in Japan to their arrival in a San Francisco public warehouse. During that period UCB held a first security interest in the imported merchandise. When the merchandise arrived at the warehouse Heller paid the bank the amount of its previous financing as 'specified by Halo.' At that time warehouse receipts for the goods were issued to Heller whose security interest thereupon became prime. Heller then added the amount of its payment to UCB to the balance of its continuing overall secured loan to Halo. Heller charged higher interest rates to Halo than did the bank, whose services were not available for Halo's domestic financing. Halo always sought 'the lowest cost for its necessary continued borrowings.'
Looking to the substance rather than to the form of the subject transactions, the first question appears to be whether the loan by Heller was made to Halo after the arrival of the goods in the United States.
Heller did not in any way purchase or otherwise take an assignment of Halo's obligation to UCB; Heller insisted on the higher interest rate of a new loan. UCB would not continue its loan after the arrival of the goods in the United States. Instead, at that time the bank required payment of the entire amount due from Halo. Halo was thus obliged to secure a new loan which it did under its arrangement with Heller. Halo 'specified' to Heller the amount of the new loan and Heller then paid off UCB in that amount. The loan was added to Halo's total obligation to Heller.
It must be said that both in form and substance Heller's loan to Halo was made after the arrival of the subject imported goods in the United States.
The next inquiry is into the question whether Eller's lien on the imported goods antedated their arrival in this country.
As pointed out, Heller did not succeed by assignment, or otherwise, to the lien formerly held by UCB. It was upon Heller's new loan to Halo that warehouse receipts were first issued, and they were issued to Heller.
The only pretense of a previous lien by Heller lay in the continuing pledge of all of Halo's accounts receivable, inventory, and other property 'now or hereafter owned or acquired.' But this lien was of questionable value or effect, for the goods were already pledged to UCB for their full value, or at least their full purchase price. And, as indicated, Heller itself seems to have considered that in substance it had no security interest in the goods being imported for it had declared, 'It is our intention * * * to have a security interest in [Halo's] inventories after the inventories reach' San Francisco. (Emphasis added.) It was not until Heller made its loan to Halo after the imported goods had come to rest in San Francisco, that a meaningful lien was acquired.
Assuming, arguendo, some trace of an earlier lien in Heller, it would be a questionable rule indeed that would allow an importer, by simply giving an inferior and valueless paper lien on goods later to be imported, to a prospective financer of the goods in this country, to thereby accomplish an immunity in the goods from state taxation, even after their domestic financing and hypothecation.
Stated more simply, the record before us shows that Halo's merchandise was refinanced after if came to rest in San Francisco, by the making of a new loan and the giving of a new security interest. Such financing was necessary, for otherwise the bank could be expected to exercise its lien. This clearly was a disposition of the imported goods by Halo 'for a purpose beneficial to itself.' Under the rule of Southern Pac. Co. v. City of Calexico, supra, 288 F. 634 the merchandise thereupon lost its exemption from state taxation.
Halo also points out that the refinancing of its imports by Heller resulted unfavorably, [94 Cal.Rptr. 728] for it thereby became obligated to pay a higher interest rate. It seems to urge that this resulted in an 'equitable disposition' which was in no way beneficial. It is manifest that whether or not the sale, hypothecation, or other equitable disposition of imported goods results in a profit or other advantage cannot limit or expand the scope of the import's exemption from state taxation. Furthermore, as indicated, Halo was in fact advantaged by Heller's loan; it was in need of this financing, for the record shows that UCB's loan would not be continued.
For the reasons stated I would affirm the judgment of the superior court.