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 question
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
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.
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.
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
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 $24,266.02
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
The statute under which the commission assessed the tax in question
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,
In State Tax Commission v. Murray Co. of Texas, Inc.,
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 jurisdictions
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.
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.
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.
first materials contract $ 1,437,921.32 first labor contract 141,911.93 second materials contract 1,478,995.45 second labor contract 128,407.14
* * * * *
"That a condition of sale is that said steam generating units must perform as set forth in the specifications, and that until required performance of said steam generating units is shown by the seller, purchaser makes no final acceptance of said equipment."
* * * * *
"That because of the use of component parts and sub-assemblies to create a steam generating unit of the size involved and because of the necessity to construct a 110' high X 40' wide steel framework upon which to attach said component parts or sub-assemblies, it must of necessity be said that said steam generating units are `constructed' upon the jobsite from the parts involved rather than `assembled or re-assembled' as a manufactured item."