Peoples Gas & Electric Co. v. State Tax Commission

Smith, J.

(dissenting) — I disagree fundamentally with much of the reasoning of the majority opinion and would affirm the decision of the trial court.

I. Section 423.1, Iowa Code, 1946, is the first section of chapter 423 devoted to- “Use Tax.” The pertinent part of it provides:

“423.1 Definitions. The following words, terms, and phrases when used in this chapter shall have the meanings ascribed to them in this section:

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“1. ‘Use’ means and includes the exercise by any person of any right or power over tangible personal property incident to the ownership *

*

* except that it shall not include processing, or the sale * * * in the regular course of business. Property used in ‘processing’ * * * shall mean and include * * * (c)

industrial materials and equipment, which are not readily obtainable in Iowa, and which are directly used in the actual

* # *

manufacturing, or servicing .of tangible personal property intended tobe sold ultimately at retail.”

(Italics supplied.)

Section 423.2 imposes an excise tax “* * * on the use in this state of tangible personal property purchased * * * for use in this state * * I think all the above-quoted language should be strictly construed as a tax law. Section- 423.1(1), is not, in form or substance, a tax-exemption statute, but-is one predefining and limiting the subject to be taxed.'

The majority opinion says the language of section 423.2 which imposes the tax is “broad and unlimited.” If there were no subsection 1 of section 423.1, that might be accurately said. But the legislature carefully defines the word “use” before levying the tax upon it. The language of section 423.2 is therefore

not

“broad and unlimited.” The word “use” does

not

have an all-inclusive meaning. It has already been limited by the definition. There was never any purpose to tax “use” except such “use” as is defined in section 423.1.

We are- apparently agreed the use-tax law (chapter 423, Code, 1946) is a revenue measure designed to supplement the sales-tax law by producing revenue from certain transactions not taxable under the latter. It does incidentally afford Iowa dealers a measure of protection from untaxed competition. Dain Mfg. Co. v. Iowa State Tax Comm., 237 Iowa 531 , 22 N. W. 2d 786 .

But that incidental or secondary purpose does not divest it of its character as a revenue or taxing law. Even were the secondary purpose “remedial” in character'we should still hold the act to be a revenue measure (see Moorman Mfg. Co. v. Iowa Unemployment Comp. Comm., 230 Iowa 123 , 296 N. W. 791 ) and as such subject to the rule of strict construction against the defendant Commission. See, also, Palmer v. State Board of

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Assessment and Review, 226 Iowa 92, 94 , 283 N. W. 415 ; Dain Mfg. Co. v. Iowa State Tax Comm., supra; Moorman Mfg. Co. v. Iowa Unemployment Comp. Comm., supra.

This rule of strict construction of tax laws rests upon a fundamental consideration:

“The courts have been most liberal in construing the constitutional extent of the powers of taxation of the states. With the state practically all-powerful in its selection of the subjects of taxation and the amount of tax which shall be levied, the helplessness of the citizen demands, for his protection, that if the Legislature intends to tax him, it shall at least be required to say so, in clear and unmistakable terms.” Converse v. Northern Pac. Ry. Co., 8 Cir., N. D., 2 F. 2d 959, 960 .

See, also, 61 C. J., Taxation, section 119(b), note 13[a]; 51 Am. Jur., Taxation, section 308 (and cases cited in notes 17, 18), and section 316. The makers of our state Constitution recognized the importance of this when they provided:

“Every law which imposes, continues, or revives a tax,

shall distinctly state the tax, and the object to which it is to be applied *

* Article VII, section 7. (Italics supplied.)

This rule of strict construction is the judicial shield of the taxpayer against administrative oppression beyond the clear intent or permission of’ the legislature.

It must be remembered that however the statute be construed the burden of proof is still upon the taxpayer to show he is not within its terms. Sections 423.16 and 422.55(3), Code, 1946. This is his burden. That fact perhaps lends emphasis to the necessity for strict construction of the language of the statute under which it is sought to make him liable for the tax.

But it is said section 423.1 (1c) provides for an exemption and should therefore be strictly construed against the taxpayer. The contention ignores the very nature of the “exemptions” which are held to be so construable. The term “exemption from taxation” is said to have two meanings, one broad and the other narrow. 51 Am. Jur., Taxation, section 495. The broad definition would make it apply to any freedom from

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taxation. In that sense any untaxed property is “exempt.”

But in its narrower or technical meaning the term presupposes a liability and a grant of immunity therefrom. 61 C. J., Taxation, section 382. It is said to. imply a “grant of immunity, express or implied, to particular, persons or corporations, or to persons or corporations of a particular, class, from a tax upon property or an excise which persons and corporations generally within the same taxing district are1 obliged to pay.” 51 Am. Jur., Taxation, section 495. It is exemptions in this latter sense that are subject to the rule of strict construction against the taxpayer. The property is not merely

uni axed

but

exempted.

Code section 423,1 (1c) is obviously not ,a provision of this character. The avowed purpose of all of section 423.1 is to define terms used later in the chapter. Subsection 1 undertakes to define the

thing

— the “use” — that is proposed to be taxed. Clearly, the lawmakers did not start out to tax “uses” as such, but only those uses that represent or result from certain untaxable sales in competition with taxable sales; that is, sales (or purchases) of goods outside the state which, if consummated in Iowa, would be taxable under the Iowa sales-tax law. This statement may not be broad enough to describe every taxable use but.it is sufficiently accurate for our purpose here.

The legislature in defining the “use” that was to be taxed found it easier to describe what uses

were not

than to enumerate those that

were

to be taxed. This did

not. exempt

the former from the tax in the legal sense. It merely omitted or excluded them from among the uses that were to be taxed, not as a favor to any particular taxpayer or class of taxpayers but because the purpose of the legislature required that the tax be levied only upon certain uses.

The purpose of construction is therefore to détermine what uses are to be taxed and what left untaxed. It is a part of the- taxing process and doubts should be resolved against the taxing authority. I can see no logic in saying a taxing law must be strictly construed

against,

but that the definition of the thing to be taxed shall be liberally interpreted

in favor of,

the taxing body.

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Tbe opinion in Kennedy v. State Board of Assessment and Review, 224 Iowa 405, 408 , 276 N. W. 205, 207 , cited by tbe majority opinion, does not discuss tbe question of strict or liberal construction. Tbe 1937 amendment to tbe definition section of tbe sales tax statute bad enlarged tbe “processing” exelusion from taxation by adding thereto sales of commercial fertilizer. Tbe opinion merely says tbe amendment was a legislative determination that “the original act did not exempt” such sales and that tbe amendment was not retroactive. Tbe word “exempt” is plainly used in its broad, popular sense and not with any idea of determining whether to apply a rule of strict construction against tbe taxpayer.

Eddington v. Northwestern Bell Tel. Co., 201 Iowa 67 , 202 N. W. 374 , involved tbe Workmen’s Compensation Act, which is always construed as remedial and subject to liberal interpretations. It is not in point here where is involved a tax law which must always be strictly construed.

Other cases cited by the majority should be distinguished upon the same principle, e. g., Garrison v. Gortler, 234 Iowa 541 , 13 N. W. 2d 358 ; Heiliger v. City of Sheldon, 236 Iowa 146 , 18 N. W. 2d 182 ; Wood Bros. Thresher Co. v. Eicher, 231 Iowa 550 , 1 N. W. 2d 655 .

The majority opinion does not cite, nor have I found, any case involving construction of a tax law which holds an exclusionary exception by way of definition to be construable strictly against the taxpayer. In Greene County Rural Elec. Co-Op. v. Nelson, 234 Iowa 362, 366 , 12 N. W. 2d 886, 888 , we conceded without argument 'the Tax Commission’s demand for strict construction and held the taxpayer met “its requirements.” The question there was immaterial for that reason. And in Hale v. State Board of Assessment and Review, 223 Iowa 321, 325 , 271 N. W. 168, 170 , the real holding is that “The statutory definition of income is clearly broad enough to include the income in question” (interest on nontaxable municipal securities). The only exemption statute discussed was the

general ‘property exemption

statute, section 6944, Code, 1935 (now section 427.1, Code, 1946), which makes untaxable the securities themselves but not the interest from them. Of

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course, it was held that statute did not apply to the interest from exempt securities or make such interest exempt from income tax.

The language in Palmer v. State Board, supra, 226 Iowa, at page 94 , 283 N. W., at page 416 , may have been “inadvertent” and perhaps unnecessary to the actual decision, inasmuch as the statute was held not subject to construction. But it states what I conceive to be the correct principle:

“The reason upon which is founded the rule of construction urged by the appellant, Board of Review, is that a proviso or exemption in any statute in derogation of its general enacting clause must be strictly construed. * * * In the case at bar, however, the claim that the out-of-state rent is nontaxable is not a claim of exception or exemption under a proviso or exemption provision of the statute but is based upon the contention that it was not included in the general provisions of the statute.”

So here the uses described in section 423.1 (le) are not included in the uses that are taxed by section 423.2.

II. The majority opinion states that the statute “is not ambiguous in the sense that its meaning is doubtful”; that “there was no failure on the part of the legislature to clearly express its intent”; and that “it merely elected to do so by general language and to charge the Commission with the duty of promulgating rules and regulations which would operate in the range of legislative purpose and design.” Does this mean that it is for administrative officials and not the court to define the language “not readily obtainable in Iowa, and * * * directly used in the actual fabricating, compounding, manufacturing, or servicing of tangible personal property intended to be sold ultimately at retail”?

In 1937 the Commission interpreted “readily obtainable in Iowa” to mean: “* * * kept in Iowa for sale or manufactured in Iowa for sale as distinguished from being obtainable by giving an order to an agent in Iowa for delivery * * * from some point outside * * *.” Under the pronouncement of the majority opinion here would that rule have operated

“in

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the range of the legislative purpose and design” í

(Italics supplied.) And when in 1942 tbe Commission adopted an exactly contrary interpretation did it also so operate?

We said in tbe Dain case, supra, that tbe earlier interpretation more nearly expressed the legislative intent. Are we now overruling the Dain case or are we saying that it is for the Commission to determine what is “in the range of the legislative purpose and design” and that its decision either way is final?

I cannot subscribe to the theory that the legislature may provide in “general” (i.e., ambiguous) terms for a tax to be levied and may delegate to administrative officials the unlimited power of determining (by rule or regulation) what shall and what shall' not be taxed in order to accomplish an assumed purpose. As said in Converse v. Northern Pac. Ry. Co., supra, 8 Cir., N. D., 2 F. 2d 959, 960 , it is the duty of the legislature to prescribe “in clear and unmistakable terms” the “subjects of taxation”; or as our Constitution provides:

“distinctly state the tax, and the object to' which it is to be applied.”

Article VII, section 7. (Italics supplied.)

We have no right to assume here, in the face of this constitutional mandate, that the legislature intended merely to prescribe an elastic

“range of the legislative purpose and design,”

leaving to the tax officials the discretion of determining what use shall be taxed in order best to effectuate the supposed legislative purpose. We should, on the contrary, interpret the language of the statute strictly and so as to require that ihe tax be applied only to such uses as come

clearly

within it. If this cannot be done we should declare the statute unworkable. See Davidson Bldg. Co. v. Mulock, 212 Iowa 730, 751 , 235 N. W. 45 .

Of course, it is for the administrative body in the first instance to interpret the law which it must administer. But I am not prepared to concede that such interpretation when made is not subject to judicial review. It is a mistake to characterize the language of the statute above quoted as “general” and subject only to administrative construction by rules and regulations. There is

ambiguity

and it is for the court to determine

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under the well-established rules of construction upon what uses the legislature intended the tax to be levied and whether, under the record, the use to which the 'items in question here were to be put was such use as was intended to be taxed.

III. Over four hundred items of property purchased by plaintiffs-appellees outside .of Iowa are claimed by them to have been “not readily obtainable in Iowa” and also to have been “directly used in the actual * # * manufacturing, or servicing of tangible personal property intended to be sold ultimately at retail. ” Section 423.1 (lc). The ultimate products sold by. them were electric energy, hot-water heat, and gas. Section 423.1(4) Code, 1946, defines “tangible personal property” to include gas, electricity, and water.

The trial court upheld the Commission’s order as to nine items used in furnishing hot-water heat > on the ground .that heat or the furnishing of heat was not within the definition of “tangible personal property.” Plaintiffs have not appealed from this part of the decree' and there seems to be no doubt of its correctness. The same principle might also apply to the items used in furnishing street lighting if the electricity is not metered and sold as such but the light furnished and paid for

as light.

“Light” as such is not included in the definition of tangible personal property any more than is “heat.” However, this proposition is apparently not raised and the record does not show the facts as to the basis on which the street lighting is furnished. ■

Of the remaining items nineteen were held to be readily obtainable in Iowa and ten not directly used in the actual manufacturing or servicing of property for actual retail sale. There is no appeal from this.

Approximately three hundred sixty-eight items were adjudged by the district court to have been bought for nontaxable use. These are the ones in dispute here. The Commission claims the decision is erroneous as to all, some because the material was in fact readily obtainable in Iowa and others because the material was not directly used in preparing property for sale at retail within the meaning of the statute.

It is, of course, impracticable and unnecessary to discuss these items in detail. It will suffice here to consider the general

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principles which apply to the several categories into which they fall.

IV. Appellant urges various propositions as grounds foi-ré versal involving the question of “ready obtainability.” Not all apply to all items but they may be classified into the following categories: (1) Material not stocked in Iowa in the quantity ordered but no good-faith showing of need is made for quantity greater than actually stocked; (2) identical product, not obtainable in Iowa but comparable product is so obtainable and there is no showing of material difference; (3) product regularly dealt in by Iowa dealer but temporarily out of stock; (4) material not of a character to be regularly stocked in Iowa but regularly procured and sold by Iowa dealers as part of normal business; and (5) material not regularly stocked in Iowa but handled by factory branches, resident agents, salesmen, jobbers, or dealers as part of their normal business.

I think all these contentions were properly denied upon the considerations hereinafter referred to.

V. Concerning the meaning of “not readily obtainable in Towa,” the trial court properly says:

‘ ‘

I have tried to find an interpretation of these Avords which would at the same time be (a) within the usual and ordinary meaning of the words used, (b) be within the apparent intent of the Act, and (c) be reasonably susceptible to easy administration. * * 45 Failing to find such an ideal solution, it is my duty to give the words used their ordinary meaning, and if inconsistent or even ridiculous situations result, the remedy is Avith the legislature and not in the court.”

I would agree in general with the trial court’s pronouncement that: “* * * goods are readily obtainable in Iowa when they are usually and ordinarily kept for sale in Iowa in quantities sufficient to meet the usual and ordinary needs of the buyer.” They are not readily obtainable in Iowa merely because they can be had by being “ordered from or through an Iowa dealer for delivery from a point without the State.”

In other words, “obtainable

in Iowa”

should not be construed to mean “obtainable

outside

Iowa through an agent or

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dealer or other middleman," unless some compelling'consideration requires such construction. No such necessity is apparent. Assuming, as has been often said, that an important purpose of the legislation is to protect Iowa dealers from competition with butside dealers not burdened by the sales tax, it does not follow that they were intended to be protected when they step into a role of broker, procuring from out the state something they do not carry in stock. The very words of the statute seem to exclude them in such role from its protection. Appellant’s 1937 interpretation (already referred to) was sound and should be adhered to.

I would agree, too, with the trial court that in order to be readily obtainable in Iowa the material must be available in quantity sufficient to meet the buyer’s reasonable needs but that he may not

‘ ‘

avoid the tax by pooling orders or anticipating future needs in order to secure a price advantage.”

This proposition was recognized by us in the Dain case, supra, though in that case the plaintiff had not met the burden of proof necessary to bring itself within the statute.

In the Dain case we also said quality could not be disregarded in determining whether the presence in Iowa of other and similar material usable for the same purpose would meet the test of “ready obtainability. ” In that case it was stipulated that the product obtainable in Iowa was not of quality equal to that of the article purchased outside and therefore did not meet the test.

We did say at page 537 of 237 Iowa, page 790 of 22 N. W. 2d:

“The purchaser’s whims or opinion or pretense is not enough. But * * * if proof fairly establishes that there is an actual, material difference between the domestic and the foreign article, the purchaser of the latter is not liable for use tax.”

That is perhaps as near an approach to a workable formula as is possible. There are probably in some lines mere differences in brand of article of equal quality and interchangeable in practical use. And again, in other lines, a change of brand or make might necessitate material changes and adaptations in use.

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In examining the trial court’s analysis of items held not readily obtainable in Iowa we find the question of usability of other items of comparable quality was not a material consideration. No such articles reasonably obtainable in Iowa were involved.

I think the court correctly defined the words “readily obtainable in Iowa” and correctly applied the definition to the various items in question.

VI. The statute excludes from taxation use of industrial material “not readily obtainable in Iowa”

only

when it is “directly used in the actual * * * manufacturing or servicing of tangible personal property intended to be sold ultimately at retail.”

I have already indicated approval of the trial court’s interpretation of the words “not readily obtainable in Iowa.” There remains the further question whether the use of the items in controversy came within the meaning of the last-above-quoted language.

These items consisted principally of poles, wires, transformers, and other equipment used not only in distribution of electric energy to the consumer but also in preparing it for use; and similar or comparable equipment and material used in the processing and distribution of gas to the consumer. The record shows (and it may be said to be a matter of general knowledge) that electricity can only be conveyed or distributed as a practical matter at voltages too great for use by the consumer. The high tension necessary to be generated in order to furnish electrical energy at a point distant from the place of generation must be “transformed” to lower voltage in order to render it suitable for use. Sometimes it must be changed to higher voltage in order to attain the necessary distance to the point where it is to be made, usable.

It seems immaterial whether this transmission and transforming operation be called “manufacturing” of new electricity Or “servicing” of the original energy. It is in neither ease comparable to the use of a knife “to slice off the part of a load (of unpackaged commodity) for customer use” as said by the majority opinion. In fact it has no analogy or reference to

qnwn-tity.

It is rather a process necessary in order to change the

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nature of the “commodity” or to make it over into a new “commodity” suitable for consumer use. Its connection with the problem of distribution is incidental.

I cannot subscribe to the definition of “servicing of tangible personal property” in the Commission’s Rule 172 as quoted by the majority opinion. I find no warrant in the language of the statute for saying that “servicing” must be “something done to the property * ■* #

during the manufacturing process”

or that it ‘ ‘ does not mean anything done to the property manufactured, in .connection with its distribution and sale after the property shall have been manufactured.” (Italics supplied.) This is not

strict construction

of the statute but amendment and addition to it.

The apparatus and equipment necessary in preparing gas for distribution and use are, in my judgment, analogous to the electric equipment already discussed. As to all these items for servicing gas and electricity for ultimate sale at retail I would uphold the decision' of the trial court.

The majority opinion reaches a contrary result by applying the rule of strict construction against the taxpayer. This I believe to be fundamentally wrong.

. The difficulties confronting the Commission in administering the use-tax statute should not be minimized. Rut these difficulties are only multiplied when the language of the law is stretched beyolid its reasonable meaning. They should not be made the occasion for doing away with the fundamental safeguards which the courts and our own state Constitution have erected for the protection of taxpayers against administrative zeal in collecting revenue. As said in the Dain case, the law is apparently drawn with the purpose of avoiding double taxation. Use by resale (which would ordinarily be subject to sales tax) and use by “processing” for the production of ultimate sale at retail (also taxable) are carefully excluded from the operation of the act. The sale of products produced and distributed by appellees is subject to the sales tax. There seems no justification in the language of the use-tax act for burdening the industry with further taxation.

I would affirm.

MaNTz, J., joins in this dissent.