COMBUSTION ENGINEERING v. ARIZONA STATE TAX COM'N

LOCKWOOD, Justice.

This is an appeal by Combustion Engineering Inc., a Delaware Corporation, hereafter referred to as the company, and a cross appeal by the Arizona State Tax Commission, from a summary judgment granting the company a partial recovery of taxes it had paid under protest.

The facts stipulated by the parties were in substance as follows: The company has its principal offices in New York City, sales offices in twenty-six United States cities, representatives in the territories and many foreign countries, and seven manufacturing plants in the United States and Canada. During the audit period in question1 the company had no office, employee, plant, soliciter, warehouse, dealer or representative of any type in Arizona.2 The company designs, manufactures and sometimes performs the complete field erection of steam generating equipment for power plants,3 its units (or boilers) having capacities ranging up to 3,000,000 pounds of steam per hour, steam temperatures up to 1200 degrees Fahrenheit, and pressure up to 5,000 pounds per square inch.4 A large boiler requires two or more years from the time manufacture begins to the time it is assembled, tested, and in operation at the customer's power plant of which it becomes a major component. The primary raw material is steel and the most important market for the boilers is the electric utility industry. The boilers are not stock items but are engineered by the company to the customer's specifications from the ground up. However the company's vice president stated in an affidavit that they also manufacture a small package boiler which functions like the large one but is regularly shipped completely assembled and is not custom made. For the smaller boiler there is no need, as there is for the larger ones, to have brick or insulation work done at the jobsite for this is done at one of the factories.

The instant case involves the sale of two of the large boilers to Arizona Public Service Company for its Saguaro Power Plant near Tucson, Arizona. Four contracts were entered into in New York City, "* * * being placed there by Ebasco Services Incorporated (as agent) for the Arizona Public Service Company, the purchaser, and the plaintiff Company, as seller." The contracts and supplements thereto were in the form of purchase orders or offering letters accepted by the company.

The first contract was entered into on March 12, 1951 and called for the company to furnish two boilers together with a limited amount of labor with respect thereto. By a supplement dated December 19, 1952 one of the boilers was cancelled, and the labor was excluded; thus the contract as supplemented dealt only with the materials for a single boiler. The second contract provided that the company should:

Supplements to the second contract provided that: 1) the purchaser did not choose to have the company perform the complete field erection of the boiler; 2) the company was authorized to furnish a radiographer, welding technician and qualified welders; and 3) the company could award the erection of brickwork and insulation to two named contractors. The third contract dated August 12, 1952 covered materials for a second boiler which was to be a duplicate of the first, and the fourth contract as supplemented dealt with the same matters covered by the second contract but was applicable to the boiler ordered under the third contract. The first and third contracts will hereafter be referred to as the "materials contracts", and the second and fourth as the "labor contracts".

The equipment manufactured by the company under the materials contracts was shipped f.o.b. point of origin, each point being at a plant outside of Arizona, and in every case freight was paid by the purchaser. Payment for work done and materials purchased under the contracts was transmitted by the purchaser to the company's offices in New York. In each case, however, the contract provided that the last ten per cent of the contract price or the balance due should be paid "after successful demonstration of all performance guarantees but not later than six months after completion of erection provided seller has fulfilled all other terms and conditions of the contract." The materials contracts accounted for ninety-one per cent of the cost of the first boiler and ninety-two per cent of the second, and accordingly the labor contracts constituted nine per cent of the cost of the first and eight per cent of the second.5

The purchaser employed Ebasco, the general contractor it used to build its entire power plant, to perform the field erection of the boilers. The company, in compliance with the labor contracts, supplied a superintendent of erection and furnished the radiographer, welding technician and qualified welders to work for the purchaser's contractor.6 Ebasco's work on each unit consisted of erecting a structural steel support from which the 110 X 40 foot, 2500 ton unit was to be hung; hanging a forty foot drum and the headers which had been completely fabricated by the company at its Chattanooga, Tenn. plant; and installing the supply drum, also fabricated in Chattanooga. The next operation was to install the water wall tubing which was also prefabricated in Chattanooga, but since much of it was too long to be completely assembled and shipped from there, it was welded together at the jobsite. Although both the welding and the installation was done by Ebasco, the company supplied about ten certified welders to the contractor because of the critical nature of that job. Ebasco next installed superheaters fabricated in Chattanooga and air preheaters and fans purchased by the company from firms outside Arizona. Air and gas ducts were then constructed by Ebasco and finally the brick and insulation work around the outside of the unit was done by the subcontractor employed by the company.7

On November 1, 1955 the Arizona State Tax Commission assessed the company $26,553.20 as taxes on the proceeds received from the four contracts. The commission was acting pursuant to A.C.A. § 73-1303 (g) (1939) as amended which reads:

The company petitioned for a correction or redetermination and protested the assessment except for that part applicable to the labor contracts ($417.91) for which it submitted a check. The commission, after a hearing, denied the company's petition; therefore the company paid the balance of the assessment under protest, protested the $417.91 and brought suit in superior court for a refund.

The company contended: 1) that it had not engaged in contracting in Arizona within the meaning of the statute, 2) that if it had, all contracts were relevant and appropriate to interstate commerce and therefore wholly immune from state taxation and 3) at the very most the tax would have to be limited to the Arizona activities, thereby excluding the income attributable to the materials purchased outside the state. The case was submitted by both parties to the trial court for summary judgment on the basis of the pleadings, fact stipulation and affidavits.

The court made findings of fact that: a) "By reason of the activities performed by the Company under all of the contracts, the Company engaged in the business of `contracting' within the state of Arizona * * *." b) "The activities of the Company under the labor contracts were `relevant and appropriate' to the sale of the materials by the Company under the materials contracts." and c) "It was the intention of the parties, sufficiently expressed in the contracts when considered as a whole, that title to these goods pass outside of the State of Arizona, and title did so pass outside * * *."

In its conclusions of law the trial court stated that there was no absolute immunity of interstate commerce from state taxation but that a transaction taking place outside the state could not be taxed. It concluded that the receipts of the company from the materials, title to which passed outside Arizona, could not be taxed, but the business of contracting measured by the gross income arising from construction activities within the state could be, even though the latter was relevant and appropriate to the interstate transaction. The court entered judgment for the commission to the extent of $417.91 and for the company in the amount of $24,266.029 plus interest and costs.

Each party makes only one assignment of error. The company urges that the court was wrong in holding that a state could levy a tax upon the privilege of engaging in interstate commerce, and the commission makes the general assignment of error that the trial court's judgment against it was contrary to the evidence. Under these assignments, the real questions presented for our determination by the appeal and cross appeal are whether, in the transaction set out in detail above, the tax assessed by the commission: should be measured by the company's gross receipts derived from all four contracts, should be measured only by receipts from the two labor contracts, or should fail altogether.

We disagree with the company's contention that we are bound by the trial court's findings of fact in this case. No testimony was adduced, and the summary judgment was based upon the pleadings, the stipulation of facts, the contracts made a part thereof by reference and affidavits not raising any conflicts of facts. What were labeled "findings of fact" are in reality conclusions of law, and therefore we are not bound by them, but are at liberty to draw our own legal conclusions from the admitted facts before us.10

The statute under which the commission assessed the tax in question11 is part of the Excise Revenue Act of 1935, as amended, which act has on many occasions been held to be "a tax on the privilege or right to engage in business and * * * not a sales tax."12 "* * * [B]oth in practical and legal effect the tax is upon the person conducting a business and not upon the transaction, the sale."13

Although Mr. Justice Clark in delivering the opinion of the Supreme Court in Northwestern States Portland Cement Co. v. Minnesota, 358 U.S. 450, 79 S.Ct. 357, 3 L.Ed.2d 421 (1959) stated that there was need for clearing up the tangled underbrush of past cases dealing with the taxing power of the states, he also said (at 458, 79 S.Ct. at 362) that "it is beyond dispute that a State may not lay a tax on the `privilege' of engaging in interstate commerce." The leading U.S. Supreme Court case on the subject is Spector Motor Service v. O'Connor, 340 U.S. 602, 71 S.Ct. 508, 95 L.Ed. 573 (1951). There Connecticut sought to tax the company for the privilege of doing business in that state. Although the company was engaged only in interstate commerce in the state, the tax was apportioned to that part of the net income attributable to the business activities within the state and it neither discriminated against, nor placed an undue burden upon, such interstate commerce. The court, however, held the tax to be invalid because the Connecticut court had said it was a privilege tax. The Supreme Court said:

Thus in order to uphold, in this case, a tax which we have many times said is a privilege tax, we must find that at least some of the activities of the company were intrastate.

This court has on two occasions been called upon to decide if installation work constituted interstate or intrastate commerce. In Weber Showcase & Fixture Co. v. Co-Ed Shop,14 the question was whether the installation of office fixtures by the out of state seller was intrastate so that the legislature could condition the seller's right of access to state courts. In holding that it was not, the following rule was set forth:

In State Tax Commission v. Murray Co. of Texas, Inc.,15 we held that the company was not engaged in sufficient localized activities for the imposition of "a transaction privilege tax as provided for under the provisions of A.R.S. § 42-1301 et seq." In that case the company: 1) consigned a stock of cotton gin repair parts to an Arizona Corporation, 2) had a sales representative soliciting orders within the state for gins and steel buildings, 3) provided an expert in assembling and installing gins16 and 4) furnished a superintendent and a helper for the construction of steel buildings shipped in a knocked down condition. We said:

We held that the sales of the gins and steel buildings being interstate transactions, the company's "other business activities did not convert such sales into intrastate transactions." 89 Ariz. at 62, 358 P.2d at 168.

The decisions from other jurisdictions17 are consistent with the policy set forth in the Weber and Murray case. Thus where the installation activities have been held to be intrastate it has been attributed either to the fact that such work was over and above that required by the inherent nature of the subject matter of the contract,18 or that such work constituted a substantial part of the performance of the whole contract.19 On the other hand where the local activities have been a small but essential part of the interstate contract for the sale of equipment, such activities have been held to be a completion of the manufacturing that had begun outside, and thus a part of the interstate transaction.20

In the instant case over ninety-one per cent of the payment received by the company under the four contracts was attributable to its work outside Arizona for materials and in fabricating the various component parts of the boiler. Thus less than nine per cent was due to its supervising, welding, etc. in Arizona. We believe that nine per cent is not so substantial a part of the whole transaction as to take these activities out of interstate commerce.21

That the company's Arizona activities were required by the inherent nature of the subject matter of the contracts made in interest commerce is evidence from the facts set forth above. The contracts were made in New York, all of the component parts with which we are concerned were fabricated in Tennessee, Indiana and elsewhere outside Arizona. The purchaser was buying and the company was selling "boilers" and just the parts. Whereas small boilers were shipped intact and the insulation and brickwork done at the factory, it was physically impossible to ship the large ones preassembled, thus some of the work had to be done in Arizona. If, upon the completion of the assembly and erection, the boilers had not met with all the specifications set out in the contract, they could have been rejected by the purchaser. Even if, as the affidavit of an engineer on behalf of the commission states,22 everything the company did might have been done by a local firm, nevertheless the company considered the erection a complex enough operation so that in never permitted the final assembly and erection to be done without its supervision, expert welders, etc. In view of all the time and money that had been expended by this stage of the operation, it would not have been sound business practice for the company to pull out and risk a slip up and the resulting rejection by the purchaser. Thus we do not believe that the activities of the supervisor, welders, radiologist, and insulation and brick contractors in Arizona constituted the local construction of boilers from materials contracted for and fabricated in interstate commerce. Instead these were activities "necessary to put the goods sold into condition for the use for which they were destined,"23 because "[u]ntil such machinery is assembled and installed it is incapable of application to the use for which it was manufactured."24 The Arizona activities were the completion of the manufacture of boilers begun outside the state and thus a "relevant and appropriate" part of the interstate sale.

Since: 1) the entire transaction was interstate commerce, 2) a state cannot impose a tax on the privilege of engaging in interstate commerce and 3) the tax in question is a privilege tax; therefore the decision of the lower court is affirmed insofar as judgment was rendered in favor the company and reversed insofar as judgment was for the commission.

BERNSTEIN, C.J., UDALL, V.C.J., and STRUCKMEYER and JENNINGS, JJ., concur.