Opinion
No. 8 June Term 1973, Docket No. 54,428.
Decided December 18, 1973.
Appeal from Court of Appeals, Division 1, Holbrook, P.J., and T.M. Burns and Danhof, JJ., affirming Wayne, Neal Fitzgerald, J. Submitted June 6, 1973. (No. 8 June Term 1973, Docket No. 54,428.) Decided December 18, 1973.
42 Mich. App. 698 reversed.
Complaint by Production Steel Strip Corporation against the City of Detroit, the Board of Education of the City of Detroit, Wayne County, the Treasurer of the City of Detroit, and the Treasurer of Wayne County for refund of a portion of personal property taxes. Judgment for plaintiff. Defendants appealed to the Court of Appeals. Affirmed. Defendants appeal. Reversed and remanded to circuit court for further proceedings.
Shapero, Shapero Cohn, for plaintiff.
Michael M. Glusac, Corporation Counsel, and Lawrence W. Morgan and Arthur Yim, Assistants Corporation Counsel, for defendants City of Detroit and its City Treasurer.
Aloysius J. Suchy, Corporation Counsel, and William F. Koney, Assistants Corporation Counsel, for defendants County of Wayne and its County Treasurer.
Ostrowski, Wilson, Belanger Bowman, P.C., for defendant Board of Education of the City of Detroit.
The principal question presented by this case is whether and to what extent plaintiff Production Steel Strip Corporation has so acted upon the materials which it has imported for use in its manufacturing operations as to cause them to lose their distinctive character as imports and their immunity from property taxation within the meaning of "imports" as used in the Import-Export Clause, Art I, § 10, c1 2 of the United States Constitution.
Article I, § 10, cl 2 of the United States Constitution provides in pertinent part:
"No State shall, without the Consent of Congress, lay any Imposts or Duties on Imports or Exports, except what may be absolutely necessary for executing its inspection Laws * * *."
I — FACTS
Stipulated facts as pertinent are:
"Plaintiff, Production Steel Strip Corporation's business is in part (1) to purchase hot roll steel coils and by descaling, cold reducing, annealing and skin rolling, to produce cold roll strip of restricted tolerances and specialized steel finishes, * * *.
"The hot roll steel coils purchased by Taxpayer are a standard product. Such product when imported from foreign mills is identical with, interchangeable with, and cannot be differentiated so far as utility is concerned from steel acquired from domestic mills. Such steel coils are produced to the same specifications and have the same properties.
"Plaintiff purchased its steel coils from domestic mills and from foreign mills. During the Great Lakes navigation season (April 1 of each year to November of such year), a substantial portion of its needs for steel coils in 1965, 1966 and 1967 was obtained from foreign mills and was delivered to Taxpayer at Detroit on an average of a two and one-half months lead time after same was ordered. A substantial portion of such imports were, on December 31, 1965, stored outside of the boat dock, not under customs warehouse bond, some was stored in Taxpayer's warehouse on Humboldt Street near the dock, and small amounts were on tax date stored at other warehouses. Such imported steel is transported to Taxpayer's plant at 20001 Sherwood, fourteen (14) miles from the dock, when there is room at Taxpayer's plant on Sherwood. On tax date Production Steel Strip, Inc. had sufficient steel coils at its plant on Sherwood for its needs for about two months.
"After the close of navigation season between November of 1965 and April 1, 1966 and between November 1966 and April 1, 1967, Taxpayer purchased its supply of steel coils from domestic mills only and not from foreign mills. The time elapsing from date of Order to date of Delivery of such purchases from domestic mills during such periods between November 1965 and April 1, 1966 and between November 1966 and April 1967 was one-half month."
Defendants are the local governmental authorities who annually assess, levy and collect personal property taxes on such property as is within their corporate limits on the tax date, December 31 of each year. The assessments in question are for the tax years 1966 and 1967. The following facts are not stipulated but are of record as indicated.
The 1966 assessment, made on the basis of property on hand December 31, 1965, was made by both the local Board of Assessors and the State Tax Commission on the basis "that a 2 1/2 month usage was `essential to current requirements.'" (In re Appeal No. 1155 of Production Steel Strip Corporation, 1967, Michigan State Tax Commission, paragraph 5; and see complaint, paragraph 6, answer, paragraph 6.) The State Tax Commission stated:
"2. That the city of Detroit has stated that the appellant is the importer of the steel inventories in question but because of the action of taxpayer in processing this steel a portion of the inventory of steel should nevertheless be added to its assessment, representing that part,
"`. . . essential to current manufacturing requirements . . .' Youngstown Sheet Tube Co. vs Bowers, 358 U.S. 534, 79 S Ct 383 [ 3 L Ed 2d 490 (1959)]."
The 1967 assessment was more complicated. The Board of Assessors assessed on the basis that, and the State Tax Commission affirmed that the amount of imported inventory that had lost its constitutional immunity and was taxable "was the entire amount of such imports and was not limited to two and one-half (2-1/2) months processing and shipment." (Complaint, ¶ 6; answer, ¶ 6, Production Steel Strip Corp v City of Detroit, No 121450; In re Appeal No 1377 of Production Steel Strip Corp, 1968, Michigan State Tax Commission.) The State Tax Commission noted:
"The Commission is in accord with the city of Detroit in relying on the recent court decision of Virtue Bros. vs County of Los Angeles, [ 239 Cal.App.2d 220] 43 Cal. Reporter 505 [1966], with certiorari denied by the United States Supreme Court on October 10, 1966."
While the Board of Assessors and State Tax Commission originally adopted the formula of taxing all the imported steel present on December 31, 1966, on appeal to the circuit court, prior to final judgment, the defendants abandoned this position, principally on the basis of the Court of Appeals case of Knight Newspapers, Inc v Detroit, 16 Mich. App. 438; 168 N.W.2d 318 (1969). The defendants resumed their 1966 assessment position "that a 2 1/2 months usage was `essential to current requirements.'" Plaintiff, of course, continued to argue for a 1/2 month basis. (Affidavit in support of motion for partial summary judgments, September 1, 1970, No 121450, supra.)
Not a part of the facts of this case but of interest, for the 1969 assessment, the State Tax Commission used a three months figure as "essential to current requirements." (In re Appeal No 1515 of Production Steel Strip Corporation, 1970).
The circuit court relying on Denver v Denver Publishing Co, 153 Colo. 539; 387 P.2d 48 (1963); Orr Felt Blanket Co v Schneider, 3 Ohio 2d 14; 209 N.E.2d 150 (1965) and Knight Newspapers, Inc v Detroit, 16 Mich. App. 438 (1969) accepted plaintiff's 1/2 month replenishment from domestic sources formula.
Defendant taxing authorities appealed this judgment to the Court of Appeals. The Court of Appeals with a divided Court affirmed holding that 14 days was the correct replenishment time to be used in computing the taxpayer's current operational needs. 42 Mich. App. 698, 703; 202 N.W.2d 719. The minority opinion stated:
"We are here considering the taxable status of the plaintiff's foreign inventory, and I cannot see why the fact that the plaintiff satisfies some of his needs domestically should make any difference." 42 Mich. App. 698, 705.
We granted leave to appeal. 388 Mich. 808 (1972).
II — STATE TAXATION OF IMPORTS — UNITED STATES SUPREME COURT ANALYSIS OF ART I, § 10, CL 2
As this is a case involving the interpretation of the United States Constitution and a case of first impression before this Court, an analysis of controlling United States Supreme Court decisions is essential.
In any historical analysis of the decisions relating to state taxation of imports from a foreign country, we must begin with the opinion of Chief Justice Marshall in Brown v Maryland, 25 US (12 Wheat) 419; 6 L Ed 678 (1827), the landmark case dealing with art I, § 10, cl 2 of the United States Constitution. Brown was concerned with a Maryland statute declaring that importers of foreign goods by the bale or package must secure a license in order to sell their goods. The Court held that the statute levied a prohibited impost on imports and was, therefore, unconstitutional and in the course of the opinion Chief Justice Marshall stated that "there must be a point of time when the prohibition ceases, and the power of the State to tax commences." Having stated the premise, he elaborated on the vexatious nature of it:
"The constitutional prohibition on the States to lay a duty on imports, a prohibition which a vast majority of them must feel an interest in preserving, may certainly come in conflict with their acknowledged power to tax persons and property within their territory. The power, and the restriction on it, though quite distinguishable when they do not approach each other, may yet, like the intervening colours between white and black, approach so nearly as to perplex the understanding, as colours perplex the vision in marking the distinction between them. Yet the distinction exists, and must be marked as the cases arise. Till they do arise, it might be premature to state any rule as being universal in its application. It is sufficient for the present to say, generally, that when the importer has so acted upon the thing imported, that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import, and has become subject to the taxing power of the State; but while remaining the property of the importer, in his warehouse, in the original form or package in which it was imported, a tax upon it is too plainly a duty on imports to escape the prohibition in the constitution." (Emphasis added.) 25 US (12 Wheat) 419, 439.
Chief Justice Marshall also elaborated on some acts or conduct of the importer which would cause the goods to be "mixed up with the mass of property in the county [and to lose] its distinctive character as an import". He held that the goods lose their character as imports when the importer (1) "sells them," or (2) "[breaks] up his packages, and [travels] with them as an itinerant pedlar," or (3) that the goods brought into this country by an importer "for his own use" and here "used" by him are to be regarded as a part of "the common mass" of property and are not immune from state taxation. 12 Wheat 419, 443.
Thus, Marshall's discourse went beyond the scope of the question actually presented in Brown, but the United States Supreme Court subsequently applied the principle that imported goods themselves cannot be taxed by the states while held in the importer's warehouse in the original package for resale. See Low v Austin, 80 US (13 Wall) 29; 20 L Ed 517 (1871); License Cases, 46 US (5 How) 504; 12 L Ed 256 (1847).
The United States Supreme Court has recognized, as had Chief Justice Marshall, that the point comes when an import loses its constitutional immunity by ceasing to be an import. They have stated that immunity is lost when:
(1) the original package is broken;
Cook v Pennsylvania, 97 U.S. 566; 24 L Ed 1015 (1878); May Co v New Orleans, 178 U.S. 496; 20 S Ct 976; 44 L Ed 1165 (1900).
(2) the goods are sold; (3) the character of the goods imported is changed by subjecting them to a manufacturing process; (4) by making use of the goods.
Waring v The Mayor, 75 US (8 Wall) 110; 19 L Ed 342 (1869) (the initial importer had entered into a contract of sale prior to the landing of the goods, but, since under the contract he was responsible for any loss or damage, his vendee was held not to take his place as importer). License Cases, supra, 575; Low v Austin, supra, May Co v New Orleans, supra.
Gulf Fisheries Co v MacInerney, 276 U.S. 124; 48 S Ct 227; 72 L Ed 495 (1928) (imported raw fish processed prior to the imposition of the tax). But see Low v Austin, supra (imported champagne not subject to taxation while in the possession of the importer although during such time it was aging).
Southern Pacific Co v Calexico, 288 F 634 (SD Cal, 1923) (imported goods pledged to secure a loan held to be taxable because put to use). See also Brown v Maryland, 25 US (12 Wheat) 419, 443 (1827) (dictum) (referring to plate of furniture used by the importer).
In Hooven Allison Co v Evatt, 324 U.S. 652; 65 S Ct 870; 89 L Ed 1252 (1945) the Supreme Court considered the validity of an Ohio ad valorem tax levied on imported bales of hemp and other fibers which were stored in the manufacturer's warehouse in their original packages prior to their use in the manufacture of cordage and similar products. The Ohio Supreme Court had held the tax valid on the ground that imports for use, as opposed to imports for sale, lost their constitutional immunity upon storage in their original packages because they had become intermingled with the common mass of property within the state. The United States Supreme Court held that the tax violated the Import-Export Clause. The Court held that the mere storage of hemp anticipatory to its being placed in the manufacturing process did not itself constitute a "putting to use" and thus held the tax upon hemp invalid. Justice Stone, speaking for a majority of the Court, stated:
See the note on this case by Thomas Reed Powell, State Taxation of Imports — When Does an Import Cease to be an Import in 58 Harv L Rev 858 (1945).
"It cannot be said that the fibers were subjected to manufacture when they were placed in petitioner's warehouse in their original packages. And it is unnecessary to decide whether, for purposes of the constitutional immunity, the presence of some fibers in the factory was so essential to current manufacturing requirements that they could be said to have entered the process of manufacture, and hence were already put to use for which they were imported, before they were removed from the original packages. Even though the inventory of raw material required to be kept on hand to meet the current operational needs of a manufacturing business could be thought to have then entered the manufacturing process, the decision of the Ohio Supreme Court did not rest on that ground, and the record affords no basis for saying that any part of petitioner's fibers, stored in its warehouse, were required to meet such immediate current needs. Hence we have no occasion to consider that question." 324 U.S. 652, 667. (Emphasis added.)
Thus, the Hooven Court specifically stated that it left open the question as to whether the presence of some fibers in the factory were so essential to "current manufacturing requirements" that they could be said to have entered the process of manufacture and hence had already been "put to the use" for which they were imported.
That precise question was faced by the United States Supreme Court in the companion cases of Youngstown Sheet Tube Co v Bowers and (United States Plywood Corp v Algoma), 358 U.S. 534; 79 S Ct 383; 3 L Ed 2d 490 (1959).
For a discussion of the Youngstown case see 73 Harv L Rev 84, 176-179 (1959); 34 Notre Dame Law 593, 594-596 (1959); 1959 Wis L Rev 330, 335-336 (1959).
The question posited by the Youngstown Court also was the basis of their new standard. The Court asked:
"Do the facts as stipulated and found in the cases before us, when considered in the light of applicable legal principles, show that these manufacturers have so acted upon the imported materials as to cause them to lose their distinctive character as `imports' by irrevocably committing them, after their importation journeys have definitely ended, to `use in manufacturing' at the plant and point of final destination, and by `entering' and `using' them `in manufacturing' at that place?" 358 U.S. 534, 543. (Emphasis added.)
In the Youngstown case, 166 Ohio St. 122; 140 N.E.2d 313 (1957) (which involved ores shipped in bulk), the Ohio Supreme Court upheld an ad valorem tax on imported iron ores (used in the process of manufacturing iron and steel) which were stored in "ore yards" in storage piles according to country of origin and grade adjacent to the manufacturing facilities of the importer. A portion of the foreign ores was periodically removed from these "ore yards" to "stock bins" or "stock houses" located close to the furnaces. These "stock bins" held a one or two day's supply and were the source from which the furnaces were fed ores. This repetitive removal to the "stock bins" gradually depleted the stock piles of ores in the "ore yards" which in turn were replenished by new imports of bulk iron ores from foreign sources. This resulted in a commingling of old and new shipments of iron ores in the "ore yards". The Supreme Court of Ohio held that the:
"[P]rotection [of the Import-Export Clause] cannot extend to such iron ore (1) after it has been commingled with other iron ore imported at a different time, even though such iron ore is of the same grade and was imported from the same place, and (2) after portion of such ore have been removed for use in manufacturing." 166 Ohio St. 122; 140 N.E.2d 313, 314-315.
Similarly, in the United States Plywood Corporation case, 2 Wis.2d 567; 87 N.W.2d 481 (1958), the Wisconsin Supreme Court held that raw materials imported from foreign countries and stored at the importer's factory in their original packages are not immune from a general property tax when such goods are "put to the use for which acquired" in the sense of being essential to the current manufacturing requirements of the importer. The goods involved in this case were imported lumber and veneers. The lumber imported in bulk was unloaded from railroad cars and stacked in piles adjacent to the importer's plant to air dry. Since most of the lumber was imported in a "green" condition, it had to be dried before it could be used for manufacturing purposes. This air-drying was a preliminary step to a subsequent kiln drying operation. The Wisconsin Supreme Court readily found that the dominant purpose of the stacking was to air dry the lumber so that it had "entered the process of manufacture" and was thus "put to the use for which [it was] imported." The City of Algoma imposed a property tax on one-half of the lumber and veneer on the ground that that portion was committed for immediate use in manufacturing. The Wisconsin Supreme Court upheld the tax on the same ground. This finding, not contested on appeal, was affirmed by the United States Supreme Court.
The veneers in the Plywood case were imported in bundles secured by metal straps or in wooden crates and kept in such packages in the importer's warehouse until used in the manufacturing process. The Wisconsin Supreme Court approved the lower court's findings that one-half of the amount of the veneers on hand was necessary to meet the importer's current operational needs and therefore had lost constitutional immunity since the veneers were "in substance being put to the use for which the raw materials were imported, even though not yet removed from their wrappings or subjected to any physical or chemical change." The United States Supreme Court affirmed this holding using as its principal authorities Brown v Maryland and Hooven Allison Co v Evatt.
Perhaps of particular significance in this case because of the opinions and arguments below and on appeal are the formulas used in Youngstown and United States Plywood by Ohio and by Wisconsin. There is nothing in either the report of Youngstown in the Ohio Supreme Court or in the United States Supreme Court to indicate that Ohio did not tax the entire amount of imported ore present on tax day. The only clue to the amount of ore then present is that "Youngstown endeavors to maintain `a supply of imported ores to meet its estimated requirements for a period of at least three months.'" 358 U.S. 534, 537. In United States Plywood, "[t]he Assessor of the City of Algoma, believing that one-half of the lumber and veneers on hand on the taxing date was necessarily required to be kept on hand to meet the current operating needs of petitioner's manufacturing plant, assessed an ad valorem tax upon the value of that one-half of the lumber and veneers." 358 U.S. 534, 547.
Quite simply in Youngstown it appears that the assessor assessed all the imports that were there, which probably was in the neighborhood of a three months supply. In United States Plywood, the assessor judged half of what was on hand was necessary for "current operating" needs.
There is no mention and no evidence of interest in Youngstown in the specifics of daily or monthly usage or of replenishment time which have figured so largely in the arguments and opinions in the instant case.
Without any such evidence, the United States Supreme Court concluded: "[T]he facts as stipulated and found in the cases before us, when considered in the light of applicable legal principles, show that these manufacturers have so acted upon the imported materials as to cause them to lose their distinctive character as `imports' by irrevocably committing them, after their importation journeys have definitely ended, to `use in manufacturing' at the plant and point of final destination, and by `entering' and `using' them `in manufacturing' at that place [.]" 358 U.S. 534, 543. (Emphasis added.)
The United States Supreme Court deals with the "current operational needs" test of Hooven as follows:
"Unlike Hooven, these are not cases of the mere storage in a warehouse of imported materials intended for eventual use in manufacturing but not found to have been essential to current operational needs. Here the Ohio and Wisconsin courts have in effect held that the stipulated and found facts show that the imported materials that were taxed by those States were so essential to current manufacturing requirements that they must be said to have entered the process of manufacture, and those courts have rested their judgments, in major part at least, on that ground. Our question therefore is precisely the one which the Court did not reach or consider in the Hooven case." 358 U.S. 534, 544. (Emphasis added.)
A fair conclusion to be drawn from Youngstown is that the United States Supreme Court grants the states a reasonable amount of latitude in determining what "current operational needs" are once it is clear that the "manufacturers have so acted upon the imported materials as to lose their distinctive character as `imports'". 358 U.S. 534, 543. (Emphasis added.)
Same conclusion reached, In re Asheville Citizen-Times Publishing Co, 281 N.C. 210, 220; 188 S.E.2d 310, 316 (1972).
We turn now to determining whether and to what extent the hot roll steel coils in the instant case had lost "their distinctive character as `imports'" under the standards established in Youngstown.
III — YOUNGSTOWN PRODUCTION STEEL
We begin a comparative analysis of Youngstown and Production Steel with a transitional quotation from Youngstown:
"And inasmuch as `the reconciliation of the competing demands of the constitutional immunity and of the state's power to tax, is an extremely practical matter' (Hooven Allison Co. v. Evatt, supra, at 668), we must approach the question whether these materials had been `put to the use for which they [were] imported' ( id., at 657) with full awareness of realities and treat with them in a practical way." 358 U.S. 534, 545.
Following the above quotation the United States Supreme Court finds that "the ores were not only needed, imported, * * * irrevocably committed to supply * * * [and] entered the manufacturing process * * * and to have lost their distinctive character as `imports' and all tax immunity as such" ( 358 U.S. 534, 546) from the following facts:
"The stipulation in the Youngstown case shows that the imported ores were essential to the operation of Youngstown's Ohio plant; that Youngstown had imported them `for use in manufacturing' and `to meet its estimated [manufacturing] requirements' at that plant; that the ores had arrived at their destination, had been placed in `piles' in the `ore yards' of that plant, and their importation journey definitely had ended; that the ores were irrevocably committed to `use in manufacturing' at that plant and point of final destination; and that the daily ore needs of the plant were conveyed from the `piles' in the `ore yards' to `stock bins' or `stock houses,' holding one or two days' supply, from which they were fed into the furnaces." 358 U.S. 534, 545-546.
In Production Steel, there is no question but that "the imported [steel coils] were essential to the operation" of plaintiff's plant, that the steel coils in issue were imported "for use in manufacturing" and "to meet estimated requirements"; and that the steel coils' "importation journey definitely had ended" and were "irrevocably committed to `use in manufacturing at that plant and point of final destination.'" No question at all about this.
The service of supply in Production Steel does not consist of "`piles' in the `ore yards' to `stock bins'" exactly. But the flow of material from boat docks and surrounding warehouses to the factory curtilage and into the factory itself is certainly the same kind of manufacturing materials feeding process with which almost everyone in Michigan is generally familiar. So the supply line in Production Steel is strictly comparable to Youngstown.
The aforementioned comparative analysis brings Production Steel within the Youngstown rule relative to losing the "distinctive character of imports", etc.
What about Hooven's "current operational needs"?
This is a point we considered specifically above and concluded that once the importer has irrevocably committed imports at their journey's end to use in manufacturing, the states have a reasonable amount of latitude in determining "current operational needs".
The fact of the matter appears to be that the Board of Assessors and the State Tax Commission have not been entirely sure what the legal guidelines should be in determining "current operational needs". They have employed at least two formulas, the first assessing all imports present on the taxing date, the second assessing of the imports present on the taxing date the equivalent of daily requirements multiplied by the number of days needed to replenish such requirements from the foreign source derived.
There may be justification for the first formula in Youngstown and the California case, for which the United States Supreme Court denied certiorari, which upheld assessing all imported property present on the taxing date. (Virtue Bros v Los Angeles County, 239 Cal.App.2d 220; 48 Cal.Rptr. 505, cert den, 385 U.S. 820; 87 S Ct 45; 17 L Ed 2d 58.)
See also American Smelting Refining Co v Contra Costa County, 271 Cal.App.2d 437; 77 Cal.Rptr. 570 (1969); In re Asheville Citizen-Times Publishing Co, 281 N.C. 210; 188 S.E.2d 310 (1972).
However, since defendants have receded from that position and since that matter was not argued before us, we leave the question open and express no opinion.
As to the second assessment formula that the "current operational requirements" are 2-1/2 months usage with a patent or latent reference to the replenishment time from abroad, certainly there is nothing in Youngstown that precludes approving this formula. As a matter of fact, Production Steel's 2-1/2 months usage compares favorably with Youngstown's attempted maintenance of 3 months requirements, and, of course, we have no comparable standard from United States Plywood.
If we look to the facts further we find that on the taxing date plaintiff had about nine months usage on hand (derived from Exhibit V, Stipulation of Facts). Recognizing the facts of life of Great Lakes shipping, this would suggest that plaintiff had established a manufacturing service of supply sufficient to meet its operational requirements until the reopening of navigation. Since plaintiff freely admitted the cost advantage of such imports, it would appear that plaintiff had prudently established a manufacturing supply line to meet its operational needs which would advantage it most.
See comments of Chief Justice Taft in Wheeling Steel Corp v Porterfield, 14 Ohio St.2d 85, 100; 236 N.E.2d 652, 661 (1968) on the impact of Great Lakes shipping on "current operational needs." The Ohio Supreme Court reversed a tax on the whole stockpile until renewal of the navigation season.
In the face of such a general fact situation, it certainly cannot be said that defendants' judgment as to "current operational requirements" was excessive whatever theoretical argument might be made that replenishment of usage was possible in 1/2 month. As Youngstown held "we must approach the question whether these materials had been `put to the use for which they [were] imported' [Hooven, p 657] with full awareness of realities and treat them in a practical way." 358 U.S. 534, 545.
It certainly seems very artificial and a strange commentary on plaintiff's business acumen to insist that a 14 day supply was sufficient for its current operational needs when in fact it had a supply almost 20 times that.
We therefore mindful of the injunction in Youngstown ( 358 U.S. 534, 550) not to "impute to Framers of the Constitution a purpose to make such a discrimination in favor of materials imported from other countries as would result if we approved the views pressed on us by the manufacturers" hold that defendants were quite within their authority in assessing plaintiff's imported steel coils on a formula of 2-1/2 months usage.
IV — KNIGHT AND DENVER
The courts below, the State Tax Commission and counsel's arguments have referred significantly to Knight Newspapers, Inc v Detroit, 16 Mich. App. 438 (1969) and Denver v Denver Publishing Co, 153 Colo. 539; 387 P.2d 48 (1963). We will therefore comment briefly on their applicability to this case.
Insofar as Knight adopts "[t]he rule and formula used in the Denver Case" as the rule in Michigan, 16 Mich. App. 438, 442, it is disapproved and overruled. This Court prefers to, and must rely on the original and basic authority of Youngstown. However, whether the decision reached in Knight is correct or incorrect is not before us. As Denver says, "[t]here is no rigid and inflexible rule which can be laid down to determine the `current operational needs' of a taxpayer. This is an area where in the policy of the law dictates ad hoc determinations based on the facts presented in each particular case." 153 Colo. 539, 548-549; 387 P.2d 48, 53. Knight appears to raise the question of assessing the entire import or of an "arbitrarily set" 15 days' supply standard. 16 Mich. App. 438, 440. We have expressly reserved the question of assessing the entire import and, of course, we do not have before us the record to judge whether or not the 15 day standard was arbitrary or reasonable.
As to Denver, we have reserved the question on which it rules, namely whether the whole import is assessable, and we see no purpose in limiting the broad general rules of Youngstown by raising "the distinction between `current operational needs' and good business practices dictated by prudent management," if indeed there necessarily is any distinction. In any event, Denver's comment, quoted above, against a "rigid and inflexible rule" in these cases, we believe the better lesson from this case. Furthermore, it is not at all certain that the decision does not support defendant's formula as it is based on replenishment from Canada although the taxpayer also had a domestic source. See Beall Pipe Tank Corp v State Tax Commission, 254 Or. 195, 200; 458 P.2d 420, 423 (1969) interpreting Denver as determining "current operational needs on the basis of the length of time required to secure additional supply from the foreign source."
The Court of Appeals and the circuit court are reversed. The case is remanded to circuit court for further proceedings consistent with this opinion. No costs, a public question.
T.M. KAVANAGH, C.J., and T.E. BRENNAN, and SWAINSON, JJ., concurred with WILLIAMS, J.
The immunity from state taxation of imports under the United States Constitution "survives their arrival in this country and continues until they are sold, removed from the original package, or put to the use for which they are imported." Hooven Allison Co v Evatt, 324 U.S. 652; 65 S Ct 870; 89 L Ed 1252 (1945).
We know from Hooven that commodities imported for use in manufacturing, like commodities imported for other uses, retain their immunity until they are
— "used" by the importer, per Chief Justice Marshall in Brown v Maryland, 25 US (12 Wheat) 419; 6 L Ed 678 (1827), or
— "put to the use for which they are imported," per Chief Justice Stone in Hooven Allison Co v Evatt, supra. Youngstown Sheet Tube Co v Bowers, 358 U.S. 534; 79 S Ct 383; 3 L Ed 2d 490 (1959), distinguished Hooven on the basis that the imported commodities in the consolidated Youngstown cases had been "found to have been essential to current operational needs", and had been "used"/"put to use".
Youngstown does not, however, support the intimation in the opinion of the Court in this case that "all imports present on the taxing day" might be subject to taxation. Youngstown, while distinguishing Hooven, was decided within its framework and holding described in Youngstown as follows (p 542):
The opinion of the Court, in accordance with the stipulation of the parties, limits taxation in the year 1967 (see fn 9) as well as the year 1966 to 2-1/2 months' usage.
"In Hooven [citation omitted] it was held that goods imported for `use' share the same immunity as goods imported for `sale,' and that goods imported `for manufacture [do not] lose their character as imports any sooner or more readily than imports for sale' (id., at 667); but when [the imported goods are] used for the purpose for which they are imported, they cease to be imports and their tax exemption is at an end.' Id., at 665." (Brackets by the Court.)
The question then is how does one determine when goods imported for manufacture are "used for the purpose for which they are imported," or, as the Youngstown Court elsewhere phrased the question: "Do the facts as stipulated and found in the cases before us, when considered in the light of applicable legal principles, show that these manufacturers have so acted upon the imported materials as to cause them to lose their distinctive character as `imports' by irrevocably committing them, after their importation journeys have definitely ended, to `use in manufacturing' at the plant and point of final destination, and by `entering' and `using' them `in manufacturing' at that place?" (Emphasis by the Court.) Youngstown, supra, p 543.
The phrase "so acts upon the imported materials as to lose their distinctive characteristics as `imports'" is derived from words written by Chief Justice Marshall in Brown v Maryland, 25 US (12 Wheat) 419, 441; 6 L Ed 678 (1827): "so acted upon the thing imported, that it has become incorporated and mixed up with the mass of property in the country". This concept of "so acting upon" the import has been applied in both subsequent import for sale and import for use cases down through the latest United States Supreme Court decision, Youngstown, where the Court began its opinion by stating the "principal question presented" in those terms.
I
The Detroit taxing authorities read the Youngstown case — at least for the purposes of this case — as subjecting Production's inventory of imported steel to state taxation to the extent only of its "current operational needs." Both the taxing authorities and Production have agreed, as stated in the brief filed by the taxing authorities, that "`current operational needs' are to be measured by the replenishment time of the steel in question."
The Court of Appeals stated the question as follows:
"Therefore the question we are called upon to decide is whether or not replenishment time for the application of `current operational needs' formula is to be measured by the replenishment time from foreign sources or by the actual replenishment time immediately after the tax date." Production Steel Strip Corp v Detroit, 42 Mich. App. 698, 702; 202 N.W.2d 719, 721 (1972).
The "replenishment time" test is derived from Denver v Denver Publishing Co, 153 Colo. 539; 387 P.2d 48 (1963), and was adopted by the Court of Appeals in Knight Newspapers, Inc v Detroit, 16 Mich. App. 438; 168 N.W.2d 318 (1969).
The replenishment time test was also adopted and followed in Orr Felt Blanket Co v Schneider, 3 Ohio St.2d 14; 209 N.E.2d 150 (1965); Beall Pipe Tank Corp v State Tax Commission, 254 Or. 195; 458 P.2d 420 (1969); Emhart Corp v Town of West Hartford, 28 Conn. Sup. 134; 253 A.2d 670 (1968).
Other courts have permitted taxation of the entire inventory without regard to the replenishment time where "indiscriminate portions of the whole" were used or were commingled with other supplies. Virtue Bros. v Los Angeles County, 239 Cal.App.2d 220, 231; 48 Cal.Rptr. 505 (1966); In re Asheville Citizens-Time Publishing Co, 281 N.C. 210, 220; 188 S.E.2d 310, 316 (1972).
See, generally, Glander, A Practical Approach to the Tax Immunity of Imports for Use in Manufacturing, 18 Nat'l Tax J 328 (1965); Note, Imports for Sale v Imports for Manufacture, 24 La L Rev 909 (1964); Note, States May Tax Imports Held in Bonded Smelting and Refining Warehouses, 23 Vand L Rev 437 (1970).
Without the benefit of adversary presentation on the appropriateness of this test, the opinion of the Court declares that "[i]nsofar as Knight adopts `[t]he rule and formula used in the Denver Case' as the rule in Michigan, 16 Mich. App. 438, 442, it is disapproved and overruled."
The Court so rejects the replenishment time test after explaining its reversal of the Court of Appeals' decision on a basis neither briefed nor argued, nor mentioned in the decisions and opinions filed by the circuit and appeals courts.
The parties having agreed that the pertinent inquiry is Production's "current operational needs" and that those needs are to be measured by the replenishment time test, the question before us, again as stated by the taxing authorities, is whether the taxing authorities have "a right to assess foreign steel inventory in the amount of 2 1/2 months' usage based on a 2 1/2 month replenishment lead time from foreign suppliers" or whether Production is correct in contending that "only 1/2 month's usage is necessary to satisfy current operational needs and only that amount is assessable, because on tax day Production could replenish steel from domestic sources within 1/2 month."
Foreign and domestic steel are functionally ("so far as utility is concerned"), or at least the parties so stipulate, the same. Although Production was using foreign steel both during the 1/2 month replacement period (contended for by Production) and the 2-1/2 months period (contended for by the taxing authorities), it could have satisfied all its operational needs throughout the 2-1/2 months period with domestic steel having a replacement lead time of 1/2 months.
Indeed, Production's argument might be extended to support the conclusion that none of the inventories of imported steel were subject to taxation since it is apparent that Production could have supplied from domestic steel on hand on the tax day all its needs during the first 1/2 of January as well as the balance of the 2-1/2 months period.
The replenishment time test is a two-factor test: (i) time required to obtain additional supplies of the commodity, and (ii) quantity used during that period.
While the parties disagree on whether the applicable time is the time required to obtain additional supplies from foreign sources or from domestic sources, in their stipulation they have computed the quantity factor based on the actual amounts of foreign steel used after the tax day (December 31) during the 1/2 month and 2-1/2 months periods.
The parties, thus, are in apparent agreement that the term "current operational needs" refers not to the importer-manufacturer's entire need for supplies of the commodity but rather to so much of his need as is filled with foreign supplies, and that the quantitative amount of his foreign supply needs is to be determined by his actual usage of foreign supplies during the relevant replacement time period.
The quantitative amount of foreign supply usage so determined would not be affected by the fact that the importer-manufacturer's needs could be met with functually equivalent supplies of the commodity purchased domestically.
Turning to the time factor, both parties urge us to look at the "actual" time of replacement. Production contends that the actual time of replacement is the 1/2 month lead time required for acquiring the domestic supplies of steel Production was actually purchasing and receiving in the January-March period. The taxing authorities contend that the actual time of replacement is the time required to obtain a new supply from the foreign sources actually being used by the importer-manufacturer, in this case, by stipulation, 2-1/2 months.
We are persuaded that the taxing authorities have the better of the argument.
The agreed-upon inquiry is current operational needs. The agreed-upon test for determining current operational needs is replenishment time. The agreed-upon quantity factor to be used in applying that test is actual usage during the relevant replacement time of December 31 inventory acquired from foreign sources.
It seems more consonant with the concept of a test designed to measure current operational needs — by stipulation meaning the importer-manufacturer's usage of foreign supplies during the relevant replacement period — to determine the time portion of the equation based on the time required to obtain replacement supplies from the foreign sources actually being used.
While Production might have covered with domestic steel its customer requirements during the 2-1/2 months agreed-upon time for acquiring new supplies of foreign steel, it chose, for whatever reasons, to meet those requirements with steel purchased abroad.
"Current operational needs" — assuming as the parties do that it is the relevant criterion — does not seek to measure the importer-manufacturer's need for domestic supplies but rather the quantities of foreign supplies required to maintain the segment of his manufacturing operations he chooses to stoke with foreign supplies. Under the replenishment time test, if an importer-manufacturer meets his needs from domestic supplies during the relevant replacement time period, if he does not actually use his foreign inventories during that period, the quantity factor of the two-factor replenishment time test would be zero and, therefore, none of his foreign inventories would be subject to taxation. In such a case it would make no sense to allow the tax collector to substitute the manufacturer's actual domestic usage on the ground that the manufacturer might have met his customer requirements out of his foreign inventories.
Similarly, we reason that it would be inconsistent with the function of the replenishment time test, as a measure of the quantity of foreign supplies used and time required to obtain replacement supplies, to multiply foreign inventory usage times a replacement time for supplies which are not actually used to displace foreign supplies in meeting customer requirements.
In Orr Felt Blanket Co v Schneider, 3 Ohio St.2d 14, 24; 209 N.E.2d 150, 156; 32 Ohio Opinions 2d 13 (1965), the Ohio Supreme Court, faced with a similar question, said:
"[A]lthough the evidence indicates that the taxpayer could have secured a new supply of imported grease wool from eastern importers within 30 days, the taxpayer chose to import its own grease wool from foreign countries * * *.
"The taxpayer having made this choice, the rule applied to the taxpayer should be that the amount of grease wool removed from the bonded warehouse and in inventory which is required to meet `current operational inventory needs' for the length of time it takes to secure an additional supply from the foreign source which the taxpayer has selected to supply its grease wool is taxable." (Emphasis supplied.)
Production distinguishes this case on the ground that, in contrast with the taxpayer in the Ohio case, it was actually buying steel on the tax date from domestic sources. While that is true, it was not meeting its relevant operating needs with the domestic supplies so purchased. If it were, then the amount of the quantity factor would, to that extent, have been reduced.
If Production had met all customer requirements from domestic supplies, if domestic supplies replaced dependence on the December 31 inventory of foreign supplies, then, as of the end of the 1/2 month period Production would have us adopt, the quantity factor of the two-factor equation would be zero and Production would have achieved by its own method of operation what it seeks to accomplish by this action.
We conclude, subject to the agreed-upon computations set forth in the stipulation of the parties, that the portion of Production's December 31 inventory of foreign steel subject to taxation is the amount needed to cover Production's actual usage of foreign steel in the 2-1/2 months agreed-upon time required to obtain new supplies of foreign steel.
II
This Court, without briefing or argument directed to the question of the propriety of the replenishment time test, rejects that test and derives its own which at once both begs the question and seems to leave the matter at large in the discretion of the tax assessor subject to the supervision of the State Tax Commission. This Court writes:
"A fair conclusion to be drawn from Youngstown is that the United States Supreme Court grants the states a reasonable amount of latitude in determining what `current operational needs' are once it is clear that the `manufacturers have so acted upon the imported materials as to lose their distinctive character as "imports"'. 358 U.S. 534, 543." (Emphasis supplied.)
This Court thereby treats "current operational needs" as a concept separate from "so act[ing] upon the imported materials as to lose their distinctive character as `imports'". But the rationale of Youngstown was that because of the proven current operational needs of the importer-manufacturers, they would, on the facts, record and findings in the consolidated cases, be deemed to have so "acted upon" the imported materials.
The distinction which Chief Justice Marshall said exists and "must be marked as the cases arise", Brown v Maryland, supra, p 441, ceases to exist as a perceptible rule of law insofar as commodities imported for use in manufacturing in Michigan are concerned if as soon as the commodity hits the dock it becomes, apparently as a matter of law, part of the "supply line", and, ergo, "irrevocably committed to `use in manufacturing' at [the] plant" for which it is destined. Cf. Beall Pipe Tank Corp v State Tax Commission, 254 Or. 195; 458 P.2d 420 (1969).
The opinion of the Court states:
"The service of supply in Production Steel does not consist of `"piles" in the "ore yards" to "stock bins"' exactly. But the flow of material from boat docks and surrounding warehouses to the factory curtilage and into the factory itself is certainly the same kind of manufacturing materials feeding process with which almost everyone in Michigan is generally familiar. So the supply line in Production Steel is strictly comparable to Youngstown.
"The aforementioned comparative analysis brings Production Steel within the Youngstown rule relative to losing the `distinctive character of imports', etc."
In Youngstown the Court distinguished Hooven on the ground that "these are not cases of the mere storage in a warehouse of imported materials intended for eventual use in manufacturing". Clearly then a line must yet be drawn between mere storage for "eventual use" and "use"/"putting to use"/"acting upon". The courts of other states have taken varying approaches in their linedrawing efforts, and the several approaches (see fn 4) are each arguably correct.
Sometimes it is difficult to evaluate the significance of statements and phrases in a lengthy opinion of the United States Supreme Court, whether they are merely descriptive or are limiting or are intended to lay down a rule. We would reserve until a case where the question is briefed and argued any attempt to explicate Youngstown or to generalize about where the line should be drawn.
Reasoning from one analogy to another can carry one into infinity. Merely because the Youngstown Court upheld the taxation of all the ores at Youngstown's plant and said it could see no valid basis for distinguishing between the ores in stock bins containing one or two days' supply located in close proximity to the furnaces (conceded by Youngstown to be subject to taxation) and ores in the ore yard piles a short distance further away (claimed not to be taxable), does not mean that the Court would hold to be taxable separately identifiable steel coils located, not at the plant but at the waterfront, coils perhaps part of an unbroken lot or order or, indeed, an unbroken shipment.
In Youngstown, the imported iron ore had been "commingled with other iron ore imported at a different time." "[P]ortions of such iron ore [had] been removed for use in manufacturing." (Emphasis supplied.) "[I]ndiscriminate portions of the whole" importation of veneers were actually being used. Thus, in a sense, in the consolidated cases dealt with in Youngstown, the larger "package" — the "whole" — had been broken. Similarly, see In re Asheville Citizens' Time Publishing Co, 281 N.C. 210, 220; 188 S.E.2d 310, 316 (1972); Virtue Bros v Los Angeles County, 239 Cal.App.2d 220, 231; 48 Cal.Rptr. 505 (1966).
Steel coils are not, like iron ore or lumber, a fungible mass (received in "bulk" or as "loose, individual pieces"), one piece indistinguishable from another. Steel coils, in contrast with ores or lumber or veneer, vary from one another in guage, width, length, alloy, other components, finishes and quality.
Of course, as the opinion of this Court emphasizes, the foreign steel was imported by Production "for use in manufacturing", "to meet its estimated [manufacturing] requirements" at the plant. Youngstown, supra, p 546. That is true of every importation of supplies for manufacturing purposes; all commodities imported for use in manufacturing are imported to supply manufacturing needs and upon unloading, indeed even before unloading, are a part of the "supply line".
The coils still warehoused near the dock, 14 miles from Production's plant, had not "arrived at their destination". Youngstown, supra, p 546. Production did not concede, the circuit court, therefore, could not and did not find, that the imported steel was "essential to the operation" or "irrevocably committed to `use in manufacturing' at that plant and point of final destination" within the meaning of Youngstown, supra, pp 545-546. Production stipulated, rather, to try this case on certain agreed-upon facts and a narrow issue — replenishment time.
It appears that $974,070 of imported steel was located at Production's plant on December 31, 1965. The value of imported steel found to be taxable by the assessors in 1966 was $1,053,000 or $79,000 more than the value of such steel located at the plant.
The stipulation states that "[o]n the tax date Production Steel Strip, Inc. had sufficient steel coils [imported or domestic or both?] at its plant on Sherwood for its needs for about two months."
The order of the State Tax Commission for tax year 1966 does state that "[t]he amount of inventory valued in the appraisal [of the commission's staff] was determined by estimating that a 2-1/2 month usage was `essential to current requirements.'"
It further appears from Production's complaint in the circuit court for tax year 1967 that the "amounts so determined by the Assessors to have so lost its exemption was the entire amount of such imports and was not limited to two and one-half (2 1/2) months processing and shipment".
The actions now before us, seeking a refund of taxes paid for tax years 1966 and 1967, were, however, tried on a stipulation of facts which does not concede the correctness of such determinations.
We would dispose of this case on the stipulated facts and issues which able counsel on both sides framed.
T.G. KAVANAGH and M.S. COLEMAN, JJ., concurred with LEVIN, J.