The opinion
November 12, 1965
Honorable Robert S. Calvert Opinion No. C-543
Comptrollerof Public Accounts
Austin, Texas Re: Whether distributingagents,
now defined in H.B. No.
474, Section &A, who qualify
as distributors,will be
required, under this Article,
to affix cigarette stamps
or meter impressionsto
all unstamped cigarettes
stored in such a person's
place of business that
are designated for dis-
tribution or first sale
to other distributors
wholesalersand retailers
that now hold permits
within the State of Texas,
before such cigarettes
Dear Mr. Calvert: leave their place of business.
You have requested the opinion of this office on the
following questions:
"1 . Will distributingagents, now defined
in H.B. No. 474, Section 4A, who qualify as
distributorsbe required-underthis Article to
affix cigarette stamps or meter impressionsto
all unstamped cigarettes stored in such a person's
place of business that are designated for dls-
tribution or first sale to other distributors,
wholesalersand retailers that now hold permits
within the State of Texas, before such cigarettes
leave their place of business?
“2 . As Section 4H of H.B. No. 474 repeals
Section 2 of 7.23, what effect will this have
on 7.01 (16) and 7.23 (1) (3) (4)?”
-2595-
Hon. Robert S. Calvert, page 2 (C-543)
Section 4A and 4B of,House Bill No. 479, Acts 1965,
59th Legislature,.Chapter 580, Tage 1262, reads as follows:
"Sec. 4A. Section (1) of Article 7.23,
Title 122A Taxation-General Revised Civil
Statutes of Texas, 1925, is hereby amended
to read as follows:
"'(1) Every distributingagent who
stores cigarettes in the State for delivery
in this State except to an exempt consignee
shall be treated as a "distributor"and shali
be, except as in this Section provided, sub-
ject to the provisions of this Chapter regulating
"distributors"and cigarettes stored in such a
person's place of business for distributionIn
this State shall be considered possessed for the
purposes of making a "first sale" In Texas with-
in the meaning of this Chapter and such a person
shall pay the taxes assessed by this Chapter
and affix the stamps as for a "first sale" in
the manner provided in this Chapter, except
that such a person shall be required to affix
said stamps only prior to the time that such
cigarettes shall leave the warehouse of such a
person for a delivery in this State except to
an exempt consignee. Such a dis,tributing agent
shall be subject to the licensing provisions
applicable to a distributoras provided in
Article 7.09 of this Chapter, as amended, except
that persons holding a valid permit as a dis-
tributing agent at the effective date of this
law may continue In business under such permits,
subject to the terms and regulations of this
~.law, until the expiration,thereof at which time
such a distributingagent must obtain a dis-
tributor's permit under the terms and conditions
set forth In Article 7.09 of this Chapter, as
amended, and no persons subject to this Article
who are lawfully engaged in the business as a
distributingagent on the date of the enactment _
of this law shall be denied the right to carry
on such business pending reasonable opportunity
to make application for permit and final action
thereon.'
-25%
Hon. Robert S. Calvert, page 3 (c-543)
"Sec. 4B. 'Section(2) of Article 7.23,
Title 122A, Taxation-General,Revised Civil
Statutes of Texas, 1925, is repealed."
The term "distributingagent" is defined in Article
7.01 (16) of Taxation-Generalof Vernon's Civil Statutes,
which is a part of what is commonly known as the Cigarette
Tax Law. Such Section reads as follows:
“(1.6) ~DistributingAgent' shall mean and
include every person in this State who acts as
an agent of any person outside the State by re-
ceiving cigarettes in interstate commerce and
storing such cigarettes subject to distribution
or delivery upon order from said pe'rsonoutside
the State to distributors wholesale dealers
and retail dealers. . . :"
The rate of tax is specified by Article 7.02 and
Article 7.06 of the Cigarette Tax Law and is imposed upon "all
cigarettesused or otherwise disposed of in this State for any
purpose whatsoever." Such Articles further provide that:
"The said tax shall be paid only once by
the person making the 'first sale' In this State
and shall become due and payable as soon as such
cigarettes are subject to a 'first sale' in
Texas, . . .'
The term "first sale" is defined in Article 7.01 (8)
of the Cigarette Tax Law, which reads as follows:
“(8) 'First Sale' shall mean and include
the first sale or distribution of cigarettes in
intrastate commerce, or the first use or con-
sumption of cigarettes within this State."
Article 7.02 (3) of the Cigarette Tax Law provides
as follows:
"(3) The impact of the‘tax levied by this
Chapter is hereby declared to be on the vendee,
user, consumer or possessor of cigarettes in
this State and when said tax is paid by any
other person, such payment shall be considered
as an advance payment and shall thereafterbe
-2597-
Hon. Robert S. Calvert, page 4(C-543)
added to the price of the cigarettes and recover-
ed from the ultimate consumer or user. . . ."
Article 7.08 (2) of the Cigarette Tax Law requires
that the State Treasurer supply stamps to persons required to
stamp cigarettesat a discount of 2-l/4$ of the face value of
such stamps.
All cigarettes sold and'consumedin Texas are manu-
factured outside the State and shipped into this State by the
manufacturer. The cigarettesare manufacturedby: American
Tobacco Company; Brown and Williamson Tobacco Company; Liggett
and Meyers Tobacco Company; P. Lorillard Company; Phillip
Morris, Inc.; and R. J. Reynolds Tobacco Company, all of which
are foreign corporationswith a certificateof authority to
transact business within the State of Texas. At the present
time there are ten warehouses within the State which are
licensed as distributingagents and which receive and distri-
bute cigarettes on behalf of the manufacturingcompanies.
Each of the manufacturersemploy a number of persons
in Texas who promote the sale of cigarettes within the State
and who occasionallyreceive orders for cigarettes which in
turn are relayed by them to a wholesale dealer or distributor.
All orders for cigarettes are sent to the home office of the
out-of-statemanufacturerfor approval and acceptance.
Representativesof the Comptroller'sOffice-have
inquired into and ascertained the details involved in the
shipment to, and distributionfrom, Universal Terminal Warehouse
located in Houston, Texas. The facts revealed by this inves-
tigation will be taken as typical of the operation of all ware-
houses in Texas now holding permits as distributingagents.
Except for an insignificantnumber of "drop shipments"
specificallycovered by Article 7.01 (9) of the Cigarette Tax
Law, all cigarettes sold within this State are shipped into
the State by the manufacturer in railroad freight cars or
common carrier trucks. The cigarettes are shipped pursuant
to bills of lading showing the shipment to be from the manu-
facturer, consigned to the manufacturerin care of a particu-
lar distributingagent warehouse. The manufacturerretains
title to the cigarettes. Upon arrival at the warehouse of
the distributingagent, the cigarettes are unloaded, placed
in the warehouse, and a check sheet verifying the arrival of
the shipment of cigarettes is returned to the manufacturer.
-2598-
Hon. Robert S. Calvert, page 5 (c-543)
No warehouse receipt is issued. Once the cigarettesenter
the warehouse of the distributingagent they are removed only
pursuant to the order of the manufacturer. All orders direct-
ing the distribution of the cigarettes are transmittedfrom
the manufacturer to the distributingagent by mail, teletype
or telephone. Distributionsfrom the warehouse are on bills
of lading from the manufacturer to the purchaser. Shipping
charges are paid by the manufacturerdirect to the carrier
and the purchaser is billed for the cigarettes by the manu-
facturer. The distributingagent ships the cigarettes from
the warehouse on a "first in - first out" basis and is com-
pensated for its services according to the volume of cigarettes
handled, calculated on a flat rate per hundred weight. Frequent
audits of the cigarette stocks on hand in the warehouses of !
the distributingagents are made at unscheduled times by the
manufacturers. The Comptroller'sinvestigationof Universal
Terminal Warehouse disclosed that the average supply of
cigarettes in such warehouse at all,times is sufficient to
meet average daily demands for 13 working days.
The Comptroller'sOffice has made an analysis of
the inventory of cases of cigarettes on hand at each of the
ten distributingagents for the month of December, 1964, in
order to show a typical monthly operation of these facilities.
The average days supply on hand and the average daily deliveries
are based upon a monthly delivery period of twenty-one days.
Rather than naming the distributingagents we are for convenience
simply numbering them from 1 to 10 in the table that follows.
In relating the quantities of cigarettes listed in this table
to shipments into the State, we are informed that a carload
of cigarettes consists of approximately1,250 cases of cigarettes.
WAREHOUSE CASES DELIVERY DAILY CASE NUMBER OF CASES AVERAGE DAYS
NUMBER DECRMBER, 1964 DELIVERIES ON HAND OF SUPPLY ON
DECEMBER, 1964 HAND AVAILABLE,
FOR DELIVERY
418 6,309 15
z,‘
401
i 11,661
3,798~58/6o
12,385
:‘3
30-1/2
31:
907
1,044
5,232-14/60
12,465
11,759-W/60
:z
11
2,157 2;,;$-45/60 11
154
1,664 211613-22/60 191
-2599-
Hon. Robert S. Calvert, page 6 (C-543)
The cigarettes are shipped by the manufacturerin
cardboard containers known as cases. Each case contains 60
cartons of cigarettes;each carton contains 10 packages of
cigarettes;and each package contains 20 cigarettes. The
Cigarette Tax Law requires that the tax stamp be affixed on
each package of cigarettes. In order to accomplish this, it
is necessary that the cases be opened and the cartons placed
upon a machine which opens the cartons, affixes the stamp to
each package, and reseals the cartons which are then replaced
in the cases and the cases resealed.
The tax imposed by the Cigarette Tax Law is, by
Article 7.02 (3), declared to be a tax imposed upon the ulti-
mate consumer or user of cigarettes within this State, and
when the tax is paid by any other person it is to be considered
an advance payment and must be added to the price collected
from the ultimate consumer or user. This tax is clearly a
use tax. A formidable line of decisions by the Supreme Court
of the United States have sustained the imposition of use
taxes against the challenge of the commerce clause and the
due process clause of the United States Constitution. Scripto
v. Carson, 362 U.S. 207 (1960); General Trading Co. v. Tax
Commissioner,322 U.S. 335 (1944); Nelson v. Montgomery Ward,
312 U.S. 73 (1941); Nelson v. Sears, Roebuck & Co., 312 U.S.
59 (19417 * McGoldrick v. Berwind-WhiteCoal Co., 309 U.S. 33
?1939); So&hern Pacific Co. v. Gallagher, 306 U.S. 167 (1939);
Felt & Tarrant Mfg Co. v. Gallagher_,306 U.S. 62 (1939);
Henneford v. Silas'Mason Co 300 U.S. 577 (1937);-
Monamotor
Oil Co. v. Johnson, 292 U.S:'86 (1934).
Although these cases are not completely determinative
of the question before us---because of the restrictivedefini-
tion of "first sale" in the Cigarette Tax Law---we nevertheless
feel that a discussion of these cases, with relevant quotations,
is essential to an understandingof taxes of this nature and
their relation to the interstate commerce clause of the United
States Constitution. For a comprehensivestudy of the decisions
of the Supreme Court of the United States on the subject of
state powers of taxation and regulation as they relate to the
commerce clause see: Hartman, State Taxation of Interstate
Commerce, 46 Virginia Law Review 1051 (1960).
In each of the above cited cases the tax was levied
upon the use, consumption,storage, or transfer of possession
of tangible personal property within the taxing state. The
ultimate burden of the tax was imposed upon the purchaser of
the property.
-2600-
Hon. Robert S. Calvert, page 7 (c-543)
Southern Pacific Co. v. Gallagher, 306 U.S. 167
d upon the use or storage of
property purchased out-of-statewhich was required to be paid
to the State by the purchaser. Southern Pacific Company
purchased materials and supplies out-of-stateand brought them
into California for use in the operation of its interstate
railroad business; Silas Mason Company purchased machinery
out-of-statewhich was brought into Washington for use in the
constructionof the Grand Coulee Dam, In both Instances the
Court upheld the tax against the contention that it was a tax
on Interstate commerce.
I, .State taxes upon national commerce
or its'incidentsdo not depend for their validity
upon a choice of words but upon the choice of
the thing taxed. It is true the increased
cost to the interstate operator from a tax on
installationis the same as from a tax on con-
sumption or operation. This is not significant.
The prohibited burden upon commerce between the
states is created by state interferencewith
that commerce, a matter distinct from the expense
of doing business. A discriminationagainst
it, or a tax on its operationsas such, is an
interference. A tax on property or upon a tax-
able event in the state, apart from operation,
does not interfere. This is a practical adjust-
ment of the right of the state to revenue from
the instrumentalitiesof commerce and the obliga-
tion of the state to leave the regulation of
interstateand forei n commerce to the Congress."
306 U.S. 167, 177-17 8 .
"The tax is not upon the operations of
interstate commerce, but upon the privilege of
use after commerce is atan end.
II
. . .The privilege of use is only one
attribute, among many, of the bundle of privi-
leges that make up property or ownership.
Nashville. C. & St. L.
them all collectively,or to separate the
-2601-
Hon. Robert S. Calvert, page 8 (C-543)
faggots and lay the charge distributively,Ibid,
Calling the tax an excise when It is laid &my
upon the use (VancouverOil Co. v. Hennef'ord,
183 Wash. 317; 49 P.(2dJ 14) does not make the
power to impose it less, for anything the
commerce clause has to say of it6 validity,
than calling it a property tax and laying it
on ownership. . . .A tax upon the privilege of
use or storage when the chattel used or stored
has ceased to be in transit is now an impost
so common that its validity has been withdrawn
from the arena of debate. . . .'I 3oo U.S. 577,
582-583.
Script0 v. Carson, 362 U.S. 207 (1960); General
Trading Co. v. Tax Commissioner, 322 U.S. 335 (1944);mson
v. Montgomery Ward, 312 U.S. 373 (1941); Nelson v. Sears,
Roebuck & Co., 312 U.S. 359 (1941); McGoldrick v. Berwind-White
Coal Co., 309 U.S. 33 (1940); Felt & Tarrant Mfg Co. v.
306 U.S. 62 (1939) and Monamotor Oil Co. v. Johnson,
6 (1934) also involved the
the statutes of the state of the residence of the
purchaser. These cases differed from the Southern Pacific
Company case and Silas Mason Company case in that under the
provisions of the statutes the seller was required to remit
the amount of the use tax to the state and collect from the
user who had purchased the property. In each instance, under
varying facts, the use tax and method of collection was upheld
by the Court.
In Nelson v. Montgomery Ward, su ra and Nelson v.
Sears. Roebuck,& Co.*,su ra each company-+ma ntained retail
stores in Iowa, yet bo+h did large mail order businesses on
orders mailed by Iowa residents to out-of-statebranches of
the stores which were filled and shipped directly to the
purchaser.
.The fact that under Iowa law the sale
is made outside of the state does not mean that
the power of Iowa 'has nothing on which to oper-
ate.' Wisconsin v. J. C. Penney Co., supra.
The purchaser is in Iowa and the tax is upon
the use in Iowa. The validity of such a tax,
so far as the purchaser is concerned, 'has been
withdrawn from the arena of debate.' Henneford
v. Silas Mason Co., 300 U.S. 577, 583; Southern
-2602-
Hon. Robert S. Calvert, Page 9 (C-543)
Pacific Co. v. Gallagher, supra. . . .Use in
Iowa is what is taxed regardless of the time
and place of passing title and regardless of
the time the tax is required to be paid. Cf.
McGoldrick v. Berwind-WhiteCoal Mining Co.,
309 U.S. 33, 49 .” 312 U.S. 359, 3b3.
“Respondent,however, insists that the
duty~of tax collection placed on it constitutes
a regulation of and substantialburden upon
interstate commerce and results In an impairment
of the free flow of such commerce. .Respond-
ent further stresses the cost to it’of making
these collectionsand its probable loss as a
result of Its inability to collect the tax on
all sales. But cost and inconvenienceinhered
in the same duty imposed on the foreign corpora-
tions In the Monamotor and Felt & Tarrant cases.
And so far as assumed losses on tax collections
are concerned, respondentis in no position to
found a constitutionalright on the practical
opportunitiesfor tax avoidance which Its method
of doing business affords Iowa residents, or
to claim a constitutionalimmunity because it
may elect to deliver the goods before the tax
is paid." 312 U.S. 359, 365.
In speaking of the tax and the method of collection’
under considerationin Monamotor Oil Co. v. Johnson, 292 U.S.
86 (1933) the Court stated at page 95 of its opinion:
.The statute obviously was not ln-
tended'& reach transactionsin interstate
commerce, but to tax the use of motor fuel
after it had come to rest in Iowa, and the re-
quirement that the appellant as shipper into
Iowa shall, as agent of the state, report and
pay the tax on the gasoline thus coming Into
the state for use by others on whom the tax
falls, imposes no unconstitutionalburden either
upon interstate commerce or upon the appellant.
I, .The distributor does not pay the
tax; the-user does. . . ."
-2603-
Hon. Robert S. Calvert, page 10 (C-543)
McGoldrick v. Berwind-WhiteCoal Mining Co. 309 U.S.
33 (1940) upheld a New York City tax levied upon the transfer
of possession of coal mined by Berwind-Whitein Pennsylvania,
sold by contract to residents of New York City and delivered
by Berwind-Whiteto the purchaser. The Court further upheld
the provision of the statute which made Berwind-White liable
to the City for the tax due and required them to collect such
tax from the purchaser. The opinion of the Court contains
an excellent discussion relating to the balancing of the tax-
ing powers of the states with the regulatory power of Congress
over interstate commerce.
Script0 v. Carson, 362 U.S. 207 (1960); General
Trading Co. v. Tax Commissioner,322 U.S. 335 (1944)mFelt
& Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939) all isv-
ed taxes levied upon the use of property within the taxing
state for which the out-of-stateseller was made liable to the
taxing state and was required to collect from the purchaser.
Scripto, General Trading Company and Felt & Tarrant Manufactur-
ing Company were all corporationschartered under the laws of
states other than the taxing state and neither of them were
authorized to transact business within such states nor did
they maintain any office, warehouse or stock of merchandise
within the taxing state. General Trading Company employed
traveling salesmen who solicited orders for merchandise;
Scripto received orders for merchandise from jobbers and whole-
salers under a commissionagreement; and Belt & Tarrant Company
employed general agents who obtained orders for their merchan-
dise. In all three cases the orders were subject to approval
and acceptance at the home office of the company and, when
accepted, the merchandise was shipped from the home office to
the purchaser. Payment was remitted directly from the pur-
chaser to the company. The Court upheld the taxes and method
of collection in all three cases against contentions that
they were in violation of the commerce clause and the due
process clause of the United States Constitution.
The Felt & Tarrant Company case was based squarely
upon the decisions in Henneford v. Silas Mason Co., supra;
Monamotor Oil Co. v. Johnson, supra; and Bowman v. Continental
011 Company, 25b U.S. 642 (192ir
In General Trading Co. v. Tax Commissioner,supra,
the Court made Its position clear in a terse manner at page
338: s
-2604-
Hon. Robert S. Calvert, page 11 (C-543)
II
.The exaction Is made against the
. .
ultimate consumer---theIowa resident who is
paying taxes to sustain hi9 own state govern-
ment. To make the distributor the tax collector
for the State is a familiar and sanctionedde-
vice. Monamotor Oil Co. v. Johnson, 292 U.S.
86, 931194;Felt & Tarrant Co. v. Gallagher,
supra.
at page 337-338:
.We agree with the Iowa Supreme Court
that Felt &,Tarrant Co. v. Gallagher, 306 U.S.
62; Nelson v. SeaX.~~Roebuck & Co., &prra; and
Nelson v. Montgomery Ward, gupra. are control-
.Anzh,";l$a;h;;,case isdistinguishable.
ling .
at in Sears. Roebuck and
Mot&gomery Ward cases the intersta'te 'vendor
also had ret;n stores in Iowa, whose sales
were appropriatelysubjected tj the sales
tax, is constitutionallyIrrelevant to the
right of Iowa sustained in those cases to
exact a use tax from purchasers on mail order
goods forwarded into Iowa from without the
State. All these differentiationsare without
constitutionalsignificance."
Script0 v. Carson, 362 U.S. 207 (1960) was affirmed
squarely upon the basis of the decision in General Trading Co.
v. Tax Commissioner,supra, and involved similar facts.
The foregoing cases clearly hold that a state statute
which requires an out-of-statevendor to remit to the state
the amount of a use tax imposed upon the vendee and collect
such tax from the vendee is not invalid under the interstate
commerce clause or the due process clause of the United States
Constitution.
Upon the basis of the above cited cases, we hold
that the use tax imposed by the Cigarette Tax Law is a valid
exercise of the state taxing power and were it not for the
restrictivedefinition of "first sale" contained in the
Cigarette Tax Law we would sustain the method of collection
upon these authorities. However, since by definition of
"first sale" the events upon which payment of the tax is
predicatedmust be in intrastate commerce we must pursue this
aspect of the transactionsfurther.
-2605-
Hon. Robert S. Calvert, page 12 (C-543)
The tax imposed by the Cigarette Tax Law is required
to be paid by the person making the "first sale" in this State
and the payment of such tax is to be evidenced by affixing a
tax stamp to each package of cigarettes. House Bill No. 474,
Section 4A, Acts 1965, 59th Legislature,declares that cigarettes
received by distributingagents shall be deemed possessed for
purposes of making a "first sale" and requires that they pay
the tax and affix the tax stamp to the packages of cigarettes,
"First sale" is defined by Article 7.01 (8)'to "mean
and include the first sale or distributionof cigarettes in
intrastate commerce, or the first use or consumptionof ciga-
rettes within this State." (Emphasisadded.) From the plain
wording of this provision it is apparent that the duties
imposed upon distributingagents by Section 4A of House Bill
No. 474 must be performed only in the event that the activities
of the distributingagent constitute a first sale or distribu-
tion of cigarettes in Intrastate commerce. Even though the
cigarettesare by the terms of Section 4A of House Bill No.
474, declared $0 be possessed by the distributingagent for
purposes of making a first sale within the meaning of the
Cigarette Tax Law, the test of whether they are possessed for
that purpose is a question to be ultimately determined by
federal decisions relating to the subject of what is and what
is not interstate commerce for purposes of state regulation.
If the cigarettes distributedby the distributingagent are,
under federal decisions, in interstate commerce then no
declaration to the contrary by our Legislature can take them
out of such commerce for purposes of bringing them within the
definition of "first sale."
We turn now to the determinationof the status of
the cigarettes in the hands of the distributingagent.
At the outset we wish to make It clear that we do
not consider cases such as Binderup v. Pathe Exchange, 263
U.S. 291 (1923); Stafford v. Wallace, 258 U.S. 495 (1922);
Swift & co. v. U.S., 196 U.S. 375 1905); and Walling v.
Jacksonville Paper Co., 317 U.S. 5 4 (1943) to be in point
upon the question before us. These cases arose under either
the Sherman Anti-Trust Act, Packers and Stockyards Act, or
the Fair Labor Standards Act. The question in those cases is
the extent of the power of Congress to regulate interstate
commerce and those business activities and practices which
pertain thereto. This is a different question from that of
whether a particular exercise of state power is, in view of
-2606-
Hon. Robert S. Calvert, page 13 (C-543)
its nature and operation, considered to be in conflict with
the authority of Congress under the commerce clause. The
aower of Conaress extends to activities which. when considered
beparately,are intrastate but which have a Glose,and sub-
stantial relation to interitate commerce. Santa Cruz Co. v.
Labor Board, 303 U.S. 453 (1938); Atlantic Coast Line Ry. Co.
V. Standard Oil Co., 12 F.2d 541 (4th Cir. 1926) reasoning
and conclusionsapproved in 275 U.S. 257 (1927); Bacon v.
Illinois, 227 U.S. 504 (1913); Minnesota v. Blasius, 290 U.S.
10.
Neither do we consider those cases dealing with the
original package doctrine or the power of the states with re-
spect to the export-importclause determinativeof the question
before us. That provision of the United States Constitution
which declares that "No state shall, without the consent of
Congress, lay any imposts or duties on imports or exports"
does not refer to articles brought into one state from another,
it refers onlv to articles imoorted from foreinn countries
into the Unit&d States. Brow; v. Houston, 114-U.S. 622 (1885);
Woodruff v. Parham, 8 Wall. 123 (1868); Sonneborn Bros. v.
Cureton, 262 U.S. 506 (1923). The "original package doctrine"
is also limited in application to articles imported from foreign
countries. The distinction is that the Immunity from state
taxation attaches to the import before sale, while an article
in interstate commerce is immune to state regulation or taxa-
tion only if it regulates or burdens interstate commerce.
Sonneborn Bros. v. Cureton, s;pra. We also point out that
Standard Oil Co. v. ffraves 2 9 U.S. 389 (1919) Askren v.
Continental Oil Co.. 252 UTS. 444 11920) and Bowman v. Conti-
nental Oil Co_,
-U.S. 6&(19213 have been overrul Led inso-
far as the-purport to extend the protection of the "original
package doctrine" to articles brought from one state into
another. Sonneborn Bros. v. Cureton, supra, page 520.
After considerationof the decisions of the Supreme
Court of the United States dealing with the question of when
articles in interstate commerce have come to rest for purposes
of state taxation or regulation,we are of the opinion that
once the cigarettes have arrived at the warehouse of the
distributingagent they are no longer the subject of interstate
commerce. American Steel & Wire Co. v. Speed, 192 U.S. 500
(1904); General Oil Co. v. Crain, 209 U.S. 211 (1938); Bacon
v. Illinois, 227 U.S. 504 (19135; Independent Warehouses v.
331 U S 70 (1947); Minnesota v. Blasius 290 U.S.
m,* SusqGeianna Coal Co. v. City of South Akboy, 228
U.S. 665'(P913).
While it is contended by the manufacturer that when
a carload of cigarettes leaves its plants destined for the
-2607-
Hon. Robert S+ Calvert, page 14 (c-543)
warehouse of the distributingagent in Texas there are contracts
covering 50% oftthe carload and upon arrival at the warehouse
W-98$ of such cigarettes have been sold under additional
contracts entered into while the car was in transit, the fact
remains that upon arrival at the warehouse the cigarettes
are the property of the ,manufacturer.They are billed from
the manufacturer to the manufacturerand at the time of
shipment and arrival have no ascertainabledestination beyond
the warehouse. It is only upon the subsequent order of the
manufacturer that the distributingagent rebills the cigarettes
to purchasers. Although the manufacturermay, at the time a
given carload arrives at the warehouse, have accepted and
approved orders calling for the delivery of a quantity of
cigarettes equal in number to 97-98s of such carload, none
of the cigarettes in a given carload are definitely committed
to a particular purchaser. The manufacturer is free to fill
such orders from cigarettes already on hand in the warehouse
to which the carload was sent or from any other warehouse in
which it may have cigarettes stored. The figures submitted
by the Comptroller'sOffice indicate that the manufacturers
keep on hand at the various warehouses presently acting as
distributingagents a supply of cigarettes sufficient to meet
daily demands of from 9 to 30-l/2 days. Good business
practice dictates that cigarettesalready in the warehouse be
used to fill orders rather than the fresh stock just arrived
from the factory. Cigarettes are In fact distributedfrom
the warehouse on a "first in - first out" plan, and, at the
time the cigarettesare shipped from the factory of the
manufacturer no particular case or carton of cigarettes can
be pointed to as being destined for any place other than the
warehouse of the distributingagent.
This method of operation is solely for the business
purposes of the manufacturer in facilitatingthe sale and
delivery of its products and to secure the economic advantage
of lower freight rates on carload shipments. The facts do
not present a case where a delay In transit to the destination
is occasioned bv the necessities of safets or in furtherance
of interstate transportationas was the case in Champlain Co.
v. Brattleboro,260 U.S. 366 (1922).
The facts before us are surprisinglysimilar to the
S;;;;,in American Steel & Wire Co. V.-Speed, 192 U.S. 500
. In that case. the Wire Comoanv was a New Jersey
corporation which had'made an agreement with a Memphis,"
Tennessee warehouse company whereby the warehouse company
would receive the Wire Company's products shipped from its
factory and billed to itself, warehouse such shipments and
-2608-
Hon. Robert S. Calve&, page 15 (C-543)
deliver them upon the order of the Wire Company to persons
who had purchased the products. The Wire Company contended
that the products were merely in transit from the point of
manufacture outside Tennessee to persons who had previously
purchased them and were thus not subject to a merchant's tax
and merchant's privilege tax. In rejecting this contention
and holding that such products as were in the warehouse were
not in interstate commerce, the Court stated at page 519:
"With these facts in hand we are of opinion
that the Court below was right in deciding that
the goods were not in transit, but, on the con-
trary, had reached their destination at Memphis
and were there held in store at the risk of the
Steel Company, to be sold and delivered as con-
tracts for that purpose were completely consum-
mated. . . ."
In General Oil Co. v. Grain, 209 U.S. 211 (1908)
the company conducted an oil business in Memphis, Tennessee
where it gathered shipments of oil from other states, placed
it in storage tanks and distributedit to purchasers. Part
of the oil was placed in a tank marked for distribution
pursuant to orders for oil already sold in other states. The
Court held that the first shipment had ended with the storage
at Memphis for subsequent distributionand was "for the
business purposes and profit of the company"; that the tank
in Memphis had merely become a depot in the oil business of
the company for preparing the oil for another interstate
journey. The language at page 230-231 of the opinion in the
General Oil Co. case is especially relevant to the case before
us.
I, .The company was doing business in
the State and its property was receiving the
protection?of the State. Its oil was not in
movement through the State. It had reached
the destination of its first shipment, and it
was held there, not in necessary delay or
accommodationto the means of transportation,
. . . but for the business purposes and profft
of the company. It was only there for distri-
bution, it is said, to fulfill orders already
received. But to do this required that the
property be given a locality in the State be-
yond a mere halting in its transportation. It
-2609-
Hon. Robert S. Calvert, page 16 (c-543)
required storage there---the maintenance of the
means of storage, of putting it in and taking
it from s'torage. The bill takes pains to allege
this. 'Complainantshows that it is impossible,
in the coal oil business, such as complainant
carries on, to fill separately each of these
small orders directly from the railroad tank
cars, because of the great delay and expense
in the way of freight charges incident to such
a plan, and for the further reason that an ex-
tensive plant and apparatus is necessary, in
order to properly and convenientlyunload and
receive oil from said tank cars, and it
would be impracticable,if not impossible, to
have such apparatus and machinery at every
point to which complainant ships said oil,'
"This certainly describes a business---
describes a purpose for which the oil is taken
from transportation,brought to rest in the
State and for which the protection of the State
is necessary, a purpose outside of the mere
transportationof the oil. The case, therefore,
comes under the principle announced in American
Steel & Wire Co. v. Speed, 192 U.S. 5007
It was held in Susquehanna Coal Co. v. South Amboy
228 U.S. 665 (1918) that the storage for distribution of coal,
under facts similar to the American Steel & Wire and General
Oil Co. cases, was not within the protection of the 1Bt.e
commerce clause. See also Independent Warehouses v. Scheele,
331 U.S. 70 (1947).
As a general rule, where the owner of property with-
draws it from the stream of interstate commerce for his own
benefit and business purposes and brings it to rest within
the state under his control and subject to disposal at his
direction, such property becomes a part of the mass of proper-
ty within the state and Is subject to regulation. Brown v.
Hmston, 114 U.S. 622 (1885); Bacon V. Illinois, 227 U.S. 504,
m Minnesota v. Blasius, WT.
We therefore hold that shipments from the warehouse
by the distributingagent upon the order of the manufacturer
are distributionsor sales in intrastate commerce within the
meaning of the definition of "first sale" in Article 7.01 (8)
and are not protected from state regulation by the interstate
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,
Hon. Robert S. Calvert, page 17( C-543)
commerce clause.
As to the question of whether the exaction of the
payment of the tax from the distributingagent and the ensuing
cost of affixing the tax stamp to the packages of cigarettes
deprives the distributingagent of property without due pro-
cess, we hold that it does not.
Under the facts before us, we consider the distri-
buting agent to be exactly what the term Implies---anagent
of each manufacturer of cigarettes which it contracts to
serve. While, as the facts reveal, each of the 13 distribut-
ing agents now operating in this State are public warehouses,
this fact does not change their relationshipwith the cigarette
manufacturers. Each of these public warehouses have contracted,
with the respective cigarettes manufacturerswhich they serve,
to receive shipments of cigarettes belonging to the manufactur-
er, unload them from boxcars, sort and store them in their
warehouse, and, upon the subsequent order of the manufacturer,
rebill and deliver to carriers specified quantities of
cigarettes for purchasers located in Texas who have placed
their orders directly with the manufacturer. That the contracts
between the warehouses and the manufacturermay by their
terminologydesignate the relationshipas something other than
that of principal and agent or the fact that the warehouse
may serve any number of principals does not affect the legal
significance of the relationshipas one of agency. Any doubt
in this respect is specificallyresolved by Article 7.01 (16)
which makes those persons performing the services rendered
by the warehouses in question agents of the out-of-statemanu-
facturers.
The payment of the tax is occasionedby the performance
of acts which are within the scope of the agency relationship.
If the warehousemandoes not act as the agent of a cigarette
manufacturer then no payment of the tax is exacted from him.
No one is compelled to act as a distributingagent for the
manufacturerand should anyone choose to so act they should
assure themselves that they will be reimbursed by their
principal for the taxes paid in the cwrse of such agency.
Bowman v. Continental Oil Co. 256 U.S. 642 (1921);
Monamotor Oil Co. v. Johnson, 292 U.S. 66 (1934); Felt &
Tarrant Mfg Co. v. Gallagher, 306 U.S. 62 (193g);Nelson v.
Sears, Roebuck & Co 312 U.S. 359 (1941); Nelson v. Montgomery
Ward, 312 U.S. 373 ci941); Wisconsin v. J. C. Penney Co., 311
-2611-
. . .
Hon. Robert S. Calvert, page 18 (C-543)
U.S. 435 (1940: and Qeneral Trading Co. v. Tax Commissioner,
322 U.S. 335 (1944) are all directly opposed to the contention
that the impositionupon an out-of-statevendor of personal
liability for the collection of use taxes exacted by the state
of the vendee violates the,due process clause of the 14th
Amendment to the United States Constitution. We can perceive
of no reason why the rationale of these decisions would not
apply with equal force where the collection of such tax is
made through the agent of the vendor. The fact that a aubstan-
tial expense is involved in the rental of machines and employ-
ment of operators necessary to affix the stamps to the cigarettes
does not alter our decision upon this question. Reliable
figures furnished to us by the Comptroller indicate that the
2-l/4$ discount allowed those who are required to purchase
and affix stamps to cigarettes not only offsets the expense
of such operation but affords a substantial profit. Under
such circumstancesthere is no denial of due process.
In answer to your first question, you are hereby
advised that under the provisions of Section 4A of House Bill
No. 474, Acts 1965, 59th Legislature,distributingagents are
required to pay the taxes assessed by the Cigarette Tax Law
and affix the tax stamps to all cigarettes distributed by such
agent prior to the time the cigarettes leave the warehouse of
the distributingagent for delivery within this State to anyone
other than an exempt consignee.
In this connection,you are further advised that
the term "exempt consignee" has reference to those persons
who are authorized to receive and distribute or sell unstamped
cigarettes. When cigarettes leave the warehouse of a distri-
buting agent under a bill of lading, "consigned to" a person
authorized to receive and distribute or sell unstamped
cigarettes,the distributingagent Is not required to pay
the tax or affix the stamps to such cigarettes. Any other
constructionof the term “exempt consignee” would be in direct
conflict with the other provisions of Section 4A which pro-
vide that every distributingagent shall be treated as a
“distributor”and the distributingagent shall pay the taxes
assessed by this Chapter and affix the stamps.
Your second question inquires as to what effect
Section 4B of House Bill 474 will have upon Article 7.01 (16)
and Article 7.23 (l), (3) and (4).
-2612-
Hon. Robert S. Calvert.,page 19 (C-93)
Section 4H of House Bill No. 474 merely repeals
Section 2 of Article 7.23 and has no effect upon the other
provisions of the Cigarette Tax Law which you mention In your
second question. We wish to point out, however that Section
&A of House Bill No. 474 by amending Section (1) of Article
7.23 "to read as follows" completely replaces such section.
SUMMARY
The tax imposed by the Cigarette,TaxLaw
is a valid use tax.
Section 4A of House Bill No. 474, Acts
1965, 59th Legislature,is constitutionaland
by its terms "distributingagents" are required
to pay the tax assessed by the Cigarette Tax
Law and affix the tax stamps to all cigarettes
prior to the time such cigarettes leave the
warehouse for delivery in this State; provided
that no tax need be paid or stamp affixed to
cigarettes which leave such warehouse for de-
livery within this State on a bill of lading
"consignedto" a person who is authorized under
the law to receive and distribute or sell un-
stamped cigarettes.
Section 4B of House Bill No. 474, Acts
1965, 59th Legislature,merely repeals Article
7 2 (2) and has no effect u on Article 7.01
(id or Article 7.23 (l), (37 and (4).
Very truly yours,
WAGGONER CARR
Attorney General
W. 0. Sh
Assistan
wos :ml
-2613-
-/ .
Hon. Robert S. Calvert, @age 20, (C-543)
APPROVED:
OPINION COMMI~EE
W. V. Geppert, Chairman
Kerns Taylor
John Reeves
Arthur Sandlin
John Banks
Bill Allen
APPROVED FOR THE ATTORNEY GENERAL
BY: T. Ei.Wright
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