Opinion
No. 1990
March 2, 1937
SALES TAX — PURCHASE OF OIL TRANSPORTATION THROUGH PIPE LINE FOR WHOLESALE SALE — SALES TAX EXEMPTION.
1. Purchase of services for transportation of crude oil through pipe line from producing oil field to terminus of line where it was delivered to company engaged in business of refining held "wholesale sale" exempt from sales tax, since transportation to refineries was a service which was used in production or entered into process of the refineries' products (Laws 1935, c. 74, § 2(b, d-f), 4).
APPEAL from the District Court, Laramie County; SAM M. THOMPSON, Judge.
For the plaintiff and appellant, there was a brief by Ray E. Lee, Attorney General; Thomas F. Shea, Deputy Attorney General, and William C. Snow, Assistant Attorney General, all of Cheyenne, and oral argument by Mr. Lee.
There is no question as to the nature of the services rendered or the payment of the consideration involved in this case. The only question is, with reference to all of the defendants with the exception of the Continental Oil Company, as to whether or not such service is exempt under the sales tax statute. Transportation service does not enter into or become a component part of any commodity. Such service is not a part of the product of crude oil. The Michigan statute provides that the term "sale at retail" means any transaction transferring the ownership of tangible personal property. Act of May 24, 1935. Rule 37, established by the Michigan Board of Tax Administration, requires a sales tax to be paid upon machinery, tools, supplies, and electrical current used in the production of ore. We believe that the term "actually used in the production of or becomes an ingredient or component part of," found in our state, should be construed to have the same meaning and application as is given to the Michigan statutes above referred to. Boyer-Campbell Co., et al. v. Frey, 260 N.W. 165. The point was carefully reviewed and sustained by the Michigan court in the above case. The Supreme Court of the United States in the case of Eastern Air Transport Corporation v. Tax Commission, 285 U.S. 147, recognized the application of the rule of taxation for which we are contending, namely: That materials, equipment and services purchased for operating a non-taxable business, are taxable. Interstate commerce is a non-taxable business, but the property and equipment used in furnishing interstate transportation may be taxed. In the present case, the manufacturing of the gasoline and other petroleum products is exempt, but the equipment and means used in the process of manufacturing we think are taxable when sold to the manufacturer as the ultimate consumer. With reference to the contention of the Continental Oil Company, it is our opinion that the transportation of oil by pipe line from the oil fields to the railroad is an independent transaction and is taxable. Wiloil Corporation v. Commonwealth, 294 U.S. 169; Oil Company v. State, ex rel. Knox, 280 U.S. 390; Edelman v. Boeing Air Transport, Inc., 289 U.S. 249. We think that our sales tax is a tax upon the privilege of operating a retail business in this state, and that the tax here objected to is not upon interstate commerce. State v. Regan, 298 S.W. 747; Viquesney v. Kansas City, (Mo.) 266 S.W. 700; St. Charles, ex rel. Palmer v. Schulte, (Mo.) 264 S.W. 654; Seven Springs Company v. Kennedy, 299 S.W. 792; Bradley Supply Company v. Ames, 194 N.E. 272; Franklin County Coal Company v. Ames, 194 N.E. 268. It is submitted that the transactions involved in this case are taxable under the provisions of our Emergency Sales Tax Act.
For the defendants and respondents, The Stanolind Oil and Gas Company, Standard Oil Company of Indiana, White Eagle Oil Corporation and Continental Oil Company, there was a brief by Hagens Wehrli of Casper and oral argument by G.R. Hagens.
The mere fact that transportation services are used up and consumed by the owner of the oil transported, and do not become a component or ingredient part in tangible form of the gasoline and other petroleum products manufactured therefrom, does not lift the sale of such services out of the exemption provided by section 2(f) of the act. In support of appellant's contention, its counsel have cited the case of Boyer-Campbell Company v. Frey, (Mich.) 260 N.W. 165. That case however was decided under the Michigan statute, which is entirely different from the statute in Wyoming. The Wyoming statute, section 2(f), exempts not only the sale of property but also the sale of service used in producing as well as in processing and also property and service which become an ingredient or component part of some article, substance, service or commodity manufactured or produced. Appellant's contention would nullify the express provisions of the statute. The provisions of section 2(d) of the act, which define "Wholesale Sales" as sales of tangible personal property to "Merchants, Jobbers, Dealers or other Wholesalers for resale," and exclude from the definition of the term, sales by "Wholesalers to Users or Consumers," do not nullify the exceptions contained in section 2(f) of the act. State v. Barrett, (Ind.) 87 N.E. 7; Campbell v. Jackson Bros., (Ia.) 118 N.W. 755; Merchants National Bank v. United States, 214 Fed. 200; Schuyler v. Southern Pacific Co., (Utah) 109 P. 458. The plaintiff, State Board of Equalization, has adopted numerous rules and interpretations of the Emergency Sales Tax Act of 1935, all to the effect that sales of services and intangible personal property are exempt when sold and consumed or used in making or producing other articles which themselves are subject to the tax. Such interpretations adopted by the board charged by the statute with its administration, are entitled to great weight and should not be overturned unless clearly erroneous. Boyer-Campbell Co. v. Fry, 260 N.W. 165; 25 R.C.L. 1042; 25 R.C.L. 1043; 59 C.J. 1025; People v. R.R. Co., (Ill.) 112 N.E. 700; Tyler v. Treasurer, (Mass.) 115 N.E. 300; Petition of Zogbaum, 32 F.2d 911; Furniture Company v. Commissioner, (Miss.) 133 So. 652; Peterson v. Guernsey, (Wyo.) 183 P. 645; State v. Krause, (Wisc.) 202 N.W. 319; U.S. v. Philbrick, 120 U.S. 52; Kern River Co. v. U.S., 257 U.S. 148; National Bank v. Missouri, 263 U.S. 641; Riley v. Thompson, (Cal.) 227 P. 772. The emergency sales tax provided by the 1935 act is clearly intended to be paid by the ultimate consumer. It was not the intention of the legislature that the ultimate consumer should be put to the necessity of paying this tax more than once, nor that he could be compelled to pay a tax upon a tax. 61 C.J. 137, 139; In re Arrott's Estate, (Pa.) 185 A. 697. The Emergency Sales Tax Act of 1935 provides for a retail sales tax. The title to the act shows that it was the intention of the legislature that this tax should apply only to retail sales in the popular sense. Commonwealth v. Milling Co., (Pa.) 167 A. 307; Buck Glass Co. v. Gordy, (Pa.) 185 A. 886; Ward v. Commissioners, (Wyo.) 256 P. 1039; Oil Company v. People, 202 P. 180; Texas Company v. State, (Ariz.) 254 P. 1060; Oil Co. v. Brodie, (Ark.) 239 S.W. 753; Pierce Oil Co. v. Hopkins, 264 U.S. 137; Standard Oil Company v. Jones, (S.D.) 205 N.W. 72. Tax statutes must be strictly construed in favor of the citizen and against the government, if there is doubt, the doubt must be resolved in favor of the tax payer. 59 C.J. 1131; 25 R.C.L. 1092; Life Assur. Soc. v. Thulemeyer, 52 P.2d 1223; U.S. v. Hurst, 2 F.2d 73; In re Stechler's Est., (Cal.) 233 P. 972; Middleton v. Lincoln County, (Miss.) 84 So. 907; Texas Co. v. Amos, (Ala.) 81 So. 471; Mills v. State, (Ga.) 125 S.E. 728; Greene v. Weller Sons, (Ky.) 195 S.W. 422. The authorities all hold that the base to be used for computing the amount of the tax to be paid, must include all items of cost such as transportation and other items that enter into and make up the ultimate cost to the consumer purchaser. State v. Motor Company, (La.) 139 So. 61; Gee Coal Co. v. State of Illinois, 361 Ill. 293; Collins-Dietz-Morris Co. v. State Corp., (Okla.) 7 P.2d 123. In order that "labor and material" may become a component part of the ultimate structure built, and be protected under the provisions of the Federal "Heard Act," it is not necessary that such "Labor and Material" enter into the structure in tangible form or be directly incorporated therein. Any labor or material used, which directly or indirectly contributes to the completion of the work becomes a part of the finished product and comes within the meaning of the statute. U.S.F. G. v. U.S., 58 L.Ed. 200; U.S. v. Hegman, (Pa.) 54 A. 344; U.S. v. Morgan, 111 Fed. 474; U.S. v. Quarry Company, 272 Fed. 698; Surety Co. v. Davis Company, 244 U.S. 377; Taylor v. Connet, 277 Fed. 945; Brogar v. Surety Co., 246 U.S. 258; U.S. v. Lawrence, 252 Fed. 122; U.S. v. Taylor Co., 268 Fed. 635; Guaranty Co. v. Crane, 219 U.S. 24; State v. Storm, (Ida.) 287 P. 689. Similarly, under the Wyoming statutes, providing for bonds on public works, labor and materials actually used or consumed directly or indirectly in the completion of the work, come within the meaning of the statute. Sec. 95-201, R.S. 1931; Franzen v. Surety Co., (Wyo.) 246 P. 30; Inv. Co. v. Casualty Co., (Utah) 293 P. 611; Eagle Oil Co. v. Altman, (Okla.) 263 P. 666. As to the Continental Oil Company, the tax does not apply as to interstate movements of freight and therefore no tax can be imposed upon the transportation charges collected for carrying oil from the Salt Creek Oil Field to the railroad at Casper, where said oil was thence carried to its originally intended destination in Denver, Colorado. 5 R.C.L. 712; 12 C.J. 25; United States v. Stockyards Co., 181 Fed. 625; Illinois C.R. Co. v. DeFuentes, 236 U.S. 158; U.S. v. Illinois Central R. Co., 230 Fed. 940; Ry. Co. v. Dreyfuss Well Co., (Ky.) 150 S.W. 321; Mill Creek Coal Co. v. Pub. Ser. Comm., (W.Va.) 100 S.E. 557. We have carefully examined the cases cited by plaintiff and are unable to see wherein they have application to the present case. The decision of the trial court should be affirmed.
For the defendants and respondents The Texas Compan, there was a brief by Y.A. Land of Denver, Colorado, and A.D. Walton of Cheyenne, Wyoming, and oral argument by Mr. Land.
The principal question involves a determination of whether or not the transportation services alleged to have been rendered to this defendant are subject to a two per cent sales tax under the provisions of the Emergency Sales Tax Act, Chapter 74, Session Laws 1935. Defendant asserts that they are exempt from said tax by the express provisions of said act. The purchases of service, such as are here involved, are expressly exempt from the taxation under subdivision (f) of section 2 of the Wyoming Sales Tax Law. The Michigan statute referred to in Boyer-Campbell v. Fry, 260 N.W. 165, cited by plaintiff, is not similar to the Wyoming statute. The $116.77 and $116.45 items represent the tax claimed on account of transportation services performed by The Stanolind Oil and Gas Company in transporting its own oil, and the Sales Tax Law of Wyoming makes no provision for a tax in such instances. Converse v. Ry Co., 2 F.2d 959; Express Co. v. Riley, 284 P. 663; Haines v. Territory, 3 Wyo. 167; State v. Hall, (Wyo.) 194 P. 476; Brown v. Jarvis, (Wyo.) 256 P. 336. With respect to the oil purchased by The Texas Company from The Stanolind Oil and Gas Company under contract, no transportation charge as such was paid by, or is due from, The Texas Company in connection with the moving of said oil; therefore, no transportation charge tax is due by The Texas Company. The tax, if it applies, can only be collected by the state from the vendor, and not from the vendee, and that with respect to purchases here involved The Texas Company is the vendee. Sections 4, 5, 8, 9, 11, 12, 13, 14, 16 and 17 of the Sales Tax Act cover the administrative features and requirements of the law. The California Sales Tax Act was construed in the case of Construction Co. v. Corbett, 7 F. Supp. 616, and is here referred to for the reason that the California law is similar to that of Wyoming, also the Arkansas law construed in Wiseman v. Phillips, 84 S.W.2d 91. As neither the defendant The Texas Company nor the defendant The Stanolind Oil and Gas Company seeks herein a determination of the question of The Texas Company's liability to The Stanolind Oil and Gas Company, such issue is not before the court and should not be decided herein merely on plaintiff's prayer for such determination, the real question before the court being whether plaintiff can itself collect the alleged tax from either or both defendants. See annotations in volume 50 A.L.R. 45. The title of the Wyoming Sales Tax Law does not clearly express transactions of the kind here involved, as is required by Article 3, Section 24 of the State Constitution. Sec. 112-101, R.S. 1931 prescribes the rule of construction of statutes. The title should clearly express the purpose of the act. 59 C.J. 804.
For the defendant and respondent, Sinclair Wyoming Oil Company, there was a brief and oral argument by C.R. Ellery of Cheyenne.
This defendant has stipulated with plaintiff board as to the facts. Under subdivision (f) of section 2 of the "Emergency Sales Tax Act of 1935" where a refiner purchases crude oil in the field and has such crude oil transported by a pipe line company to its refinery where it is manufactured into gasoline and other petroleum products, the purchase of such transportation service is a wholesale sale, and is not subject to a sales tax. The courts take judicial notice that refineries are usually constructed and operated many miles from their source of supply. Kretni Development Company v. Oil Corporation, 74 Fed. 497. Subdivision (f) of section 2, chapter 74 of the Sales Tax Act of 1935 provides that every purchase of personal property or service used in the production of a manufactured or processed article, substance or commodity, shall be exempt from a sales tax. Franzen v. Southern Surety Co., (Wyo.) 246 P. 30-35; Davis v. Mial, (N.J.) 90 A. 315; Ins. Co. v. Material Co., (Ohio) 172 N.E. 152; Fowler Co. v. Roy Co., (Nebr.) 151 N.W. 942; Portland v. Casualty Co., (Ore.) 152 P. 253; Lumber Co. v. Paper Mills Co., 130 N.W. 866; Grain Company v. Ryan Company, (Nebr.) 193 N.W. 609. The contention that the legislature intended to exempt from the sales tax only such purchased transportation, telephone or telegraph service as became an ingredient or component part of a manufactured commodity, seems almost preposterous. The legislature was dealing with two main cost items of manufacturing, i.e., tangible personal property making up the raw material and transportation services involved in getting the raw material to the manufacturing plant. The policy of the law is against the pyramiding of such taxes, with the result that the ultimate consumer is required to pay an accumulation of this type of taxes. Mining Co. v. State Board, (N.J.) 103 A. 79; Water Co. v. County, (Cal.) 141 P. 38; Boyer-Campbell Co. v. Fry, 260 N.W. 165. The Boyer-Campbell Co. v. Fry case cited by appellant construed a Michigan statute entirely different from the Wyoming statute. Subdivision (d), section 2 of the act defines wholesale sales, and subdivision (e), section 2, defines retail sales. It is apparent that appellant's rule was adopted by reason of the opinion of the attorney general of April 26, 1935, which is erroneous in principle.
The case under the Declaratory Judgments Act is companion to State Board of Equalization v. Oil Well Supply, No. 1989, decided this day. The question is whether the transportation of crude oil from the producing field to the refinery is a taxable service under the Emergency Sales Tax Act of 1935 (Ch. 74, Sess. Laws of 1935). The case was heard on the pleadings and agreed statements of facts. The judgment of the trial court declares that purchases of the services (transportation) in question were "wholesale sales" as defined by section 2(f) of the act, and therefore not taxable. The plaintiff board appeals.
All the transactions described in the agreed statements are not alike, but for the purposes of this opinion there is no need to distinguish one from another, as the material facts are common to all. In each transaction crude oil was transported through a pipe line from the producing oil field to the terminus of the line where it was delivered to a company engaged in the business of refining. The owner and operator of the pipe line was paid for the service of carrying the oil to the refiner, and the refiner used the oil in the production and manufacture of gasoline.
The Emergency Sales Tax Act, as stated in its title, imposes "a tax upon retail purchase of certain commodities, admissions and services." Transportation, telephone service and telegraph service are the only services made subject to the tax. Sec. 4. The tax on transportation is imposed by section 4 by these words: "There is hereby levied and there shall be collected and paid: * * * (b) A tax equivalent to two per cent. of the amount paid: (1) to carriers * * * for all transportation."
Section 2(b) declares that the term "sale" or "sales" includes, among other things, the sale of services. Sections 2(d) and 2(e) define "wholesale sale" and "retail sale"; but these definitions refer only to sales of tangible personal property. It is only in section 2(f) that we find a basis for distinguishing wholesale sales from retail sales in the case of services. This section declares:
"(f) Each purchase of tangible personal property or service made by a person engaged in the business of producing, furnishing, manufacturing, or compounding for sale, profit or use, any article, substance, service or commodity which is actually used in the production of, or enters into the processing of, or becomes an ingredient or component part of the article, substance, service, or commodity which he manufactures, or compounds, produces or furnishes, * * * shall be deemed a wholesale sale and shall be exempt from taxation under this act."
Omitting the parts that are not material in the consideration of contentions in the present case, the section reads:
"Each purchaser of * * * service * * * which is actually used in the production of, or enters into the processing of, or becomes an ingredient or component part of the * * * commodity which [the purchaser] manufactures or * * * produces, * * * shall be deemed a wholesale sale and shall be exempt from taxation under this act."
The argument that the definition does not apply unless the purchased service becomes a physical part of the commodity manufactured or produced by the purchaser is even less tenable here than in the companion case which involved sales of tangible property. We cannot imagine how any service taxable under the general provisions of section 4 of the act could ever become "an ingredient or component part" of a manufactured commodity. Section 2(f) of the bill (H.B. 124) for the act, when introduced, applied only to "each purchase of tangible personal property or product" which entered into and became an ingredient or component part of the commodity manufactured or compounded by the purchaser. The section was made to apply to purchases of service by amendment which substituted the word "service" for the word "product." At the same time and by the same procedure, as more fully described in the companion case, the definition was further enlarged by making it apply to each purchase of property or service which is "actually used in the production of, or enters into the processing of" the commodity produced or manufactured by the purchaser. (See Senate Journal, 1935, pp. 432, 517, House Journal, p. 622.) There can be no doubt that these amendments show the intention to exempt purchases of transportation service which the legislature thought might either be "used in the production" or "enter into the processing" of a manufactured commodity. This is evidently on the theory that in an economic sense the exempted service is resold by the purchaser when he sells the commodity which he produces or manufactures. See State Board v. Oil Well Supply Co., supra.
To give effect to the legislative intention, we must hold that the purchases of the transportation services in question in this case are within the exemption of section 2(f). To hold otherwise would seem to nullify the section in so far as it applies to purchases of services. We have had no suggestion of any case in which such exemption could be granted if it should be denied in the present case. The transported crude oil was actually used in the production of gasoline and other products into which it was converted by the process of refining. Transportation from the field to the refinery was one of a series of acts necessary to make the oil marketable in its destined form. Sales of the oil were wholesale sales under the act, and no tax could be collected on the purchase price. The transportation charges may reasonably be considered a part of the purchase price of the oil at the refinery. See Franzen v. Southern Surety Co., 35 Wyo. 15, 31, 246 P. 30, 35. We think the view that the transportation of the crude oil to the refineries was a service which was used in the production or entered into the processing of the refiners' products finds support in cases under mechanic's lien and contractor's bond statutes, holding in effect that transportation of materials is a service that enters into the construction of a building or highway. Franzen v. Southern Co., supra; Davis v. Mial, 86 N.J.L. 167, 90 A. 315, Ann. Cas. 1916E, 1028; Indemnity Ins. Co. v. Portsmouth etc. Co., 122 Oh. St. 439, 172 N.E. 152; Maryland Casualty Co. v. Ohio River Gravel Co., 20 F.2d 514.
The judgment of the district court is affirmed.
BLUME, Ch. J., and RINER, J., concur.