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Crane Co. v. Arizona State Tax Commission

Supreme Court of Arizona

November 9, 1945

CRANE CO., a Corporation, Appellant,
ARIZONA STATE TAX COMMISSION, a Body Corporate and Politic, D. C. O'NEIL, THAD M. MOORE, and JOE HUNT, as Members of the Arizona State Tax Commission, Appellees

APPEAL from a judgment of the Superior Court of the County of Maricopa. Howard C. Speakman, Judge.

Judgment affirmed in part, reversed in part, and case remanded with directions.

Messrs. Snell, Strouss & Wilmer, for Appellant.

Mr. John L. Sullivan, Attorney General, Mr. Earl Anderson, Assistant Attorney General, for Appellees.

Messrs. Cunningham & Carson, Mr. Orme Lewis, Amici Curiae.

Morgan, J. LaPrade, J., concurs. Stanford, C. J. (dissenting).


Morgan, J.

Page 657

[63 Ariz. 429] Appellant-plaintiff brought this action to enjoin appellees-defendants from assessing or attempting to levy or assess a tax against it based upon gross sales by it of materials to contractors, or based upon gross sales or transactions by it in interstate commerce. The cause below was submitted to the court on an agreed statement of facts, the material portions of which we quote:

"The parties hereto further stipulate and agree that the defendants, during the months of July and August, 1943, made, or caused to be made, an audit or investigation of plaintiff's gross sales in its Phoenix and Tucson stores for the period of July 1, 1941, to June 30, 1943, both inclusive; that a copy of said audit was delivered to plaintiff by defendants or their agents; that said audit finds and sets forth additional sales tax in the aggregate amount of $ 41,240.84 due from plaintiff for the said period of July 1, 1941, to June 30, 1943, both inclusive, under the Excise Revenue Act of the State of Arizona, in excess of and in addition to the sales tax heretofore reported and paid by plaintiff for and covering said period in accordance with the provisions of said Excise Revenue Act.

"That said additional sales tax, in the amount of $ 36,270.03, is shown by said audit to be based upon and is based upon the gross sales by plaintiff during the aforesaid period to contractors of materials used by said contractors in the performance of contracts and going into and becoming a part of the projects constructed under said contracts. . . .

"That said additional tax in the amount of $ 4,970.81 is based upon sales by plaintiff during the aforesaid period, at its Phoenix and Tucson stores, of merchandise or materials manufactured and located outside the State of Arizona and delivered from the point without the State directly to the

Page 658

purchaser within the state and which could not be obtained within the State of Arizona."

It was also stipulated that on January 18, 1939, the State Tax Commission, by a motion approved and passed, instructed its sales tax department not to place [63 Ariz. 430] any tax on materials sold to contractors, except such materials as shovels, picks, tools, or other equipment used and consumed by contractors. This rule remained in force until repealed by a regulation of the commission adopted January 1, 1943. On July 31, 1939, the commission adopted a resolution exempting from the provisions of the privilege sales tax sales of material by residents of Arizona delivered from without the state directly to the buyer within the state or to the seller for immediate delivery to the buyer, on the ground that such sales should be considered as made in interstate commerce, upon condition, however, that records of such shipments were properly kept, and that the commodity sold could not be obtained within the state. This rule continued in effect until April 5, 1943. The plaintiff and other licensees were advised of these actions by the tax commission, and thereafter, while the motion and regulation remained in effect, no taxes were included in the sales price of such materials or collected from purchasers. The transactions are all closed and the plaintiff cannot pass on to the buyers or otherwise recoup for any taxes involved in this action which it may now be required to pay.

The trial court entered judgment enjoining defendants from levying any tax against plaintiff based upon the sales of materials to contractors on or after March 1, 1943. The injunction was dismissed as to sales occurring prior to March 1, 1943, and as to the sales of merchandise from without the state of Arizona. The parties made respective appeals from that portion of the judgment adverse to them.

The questions for determination are:

(1) Under the provisions of Section 73-1303(d), Arizona Code Annotated 1939, does a merchant have to pay a two per cent sales tax on merchandise sold to contractors who used the material purchased in construction for others?

[63 Ariz. 431] (2) Are sales made by merchant within the state of Arizona of merchandise or materials manufactured and located without the state and delivered from without the state directly to purchasers within the state, and which could not be obtained within the state, subject to the tax?

(3) Are the defendants estopped to levy or assert a tax based upon sales made while the motion and regulation of the tax commission referred to, continued in effect?

(4) Do the courts have power to enjoin the assessment or the levy of a tax attempted to be imposed under the provisions of the Excise Revenue Act, Art. 13, chap. 73, Arizona Code Annotated 1939?

The solution of the first question depends entirely on whether a sale to a contractor, under the circumstances stipulated, constitutes a sale at retail or wholesale. If the former, the plaintiff in this case would be required to pay the two per cent tax in the amount as found by the commission (unless estoppel applies to prevent collection). If the latter, no tax could be legally assessed, levied or collected.

Section 73-1303(d), supra, imposes a tax equal to two per cent of the gross proceeds of sales or gross income from the business of every person engaging in "Selling any tangible personal property whatsoever at retail, except bonds and stock." Section 73-1302, Arizona Code Annotated 1939, defines a retail sale as follows: "'Retail sale' or 'sale at retail' means a sale for any purpose other than for resale in the form of tangible personal property, . . ." The terms "wholesale sale" or "sale at wholesale" are not defined by the statute, but we find the following under Section 73-1302, supra: "'Wholesaler' or 'jobber' means any person who sells tangible personal property for resale and not for consumption by the purchaser."

[63 Ariz. 432] Under (d)1 of section 73-1303, it is provided that when a person is engaged in the business of selling tangible personal property at both wholesale and retail, the retail rate, that is, the two per cent, shall be applied only to the gross proceeds of sales made other than at wholesale, provided the merchant's books are kept in such a manner as to show separately the gross proceeds of sales of each class. In the case at bar, there is no contention on the part of defendants that the books of the plaintiff were not kept so as to show the proceeds of sales of each class.

From the various provisions of the statute, it seems to be apparent that there are many retail sales made which are not taxable

Page 659

as such. Casual sales are not taxed. Section 73-1302. Those engaged in mining, timbering, etc., are not taxable on a retail sale basis. Section 73-1303(c)1. Restaurants, hotels, etc., retailing articles in a cooked or prepared form, (d)1, are assessed under (e) at one per cent. Nor may a retailer be taxed for a transaction unless it in fact constitutes a retail sale. (d)1. The question at issue is: Were the sales made by plaintiff to the contractors sales at retail? It is conceded that all the various items of personal property sold by plaintiff to the contractors were for use and were used in construction for others by the contractors. If the use and placement of this personal property in the various structures and buildings by the contractors constitute a resale of the property, and the contractors themselves were not the ultimate consumers, the plaintiff's sales were not at retail, and were not subject to the tax assessed.

Whether or not a sale to a contractor, under the conditions mentioned, constitutes a sale at retail is a troublesome question, and one upon which the courts are fairly well divided.

This court, in Moore v. Pleasant Hasler Const. Co., 50 Ariz. 317, 72 P.2d 573, opinion by Justice Ross, [63 Ariz. 433] concurred in by Chief Justice McAlister, Justice Lockwood dissenting, reviewed the authorities, and held that the contractors under these conditions purchased for resale, were not consumers, and that the contractor was required to pay the two per cent retail tax. On rehearing, in 51 Ariz. 40, 76 P.2d 225, opinion by Chief Justice McAlister, concurred in by Justice Lockwood, Justice Ross dissenting, it was held that chapter 2, Section 2, First Special Session, Laws of 1937, appearing as Section 73-1303(h), amending the original law by imposing a tax on the business of contracting, must be accepted as a legislative construction that the provisions of subsection (d) of Section 73-1303 were inapplicable to contractors. While the latter opinion holds that no tax on the basis of retail sales may be imposed on contractors, it does not hold nor decide that a contractor who buys tangible personal property for use, and actually used, in construction, is not buying for resale. Neither is it held that the contractor is the consumer. The original opinion, therefore, insofar as its reasons and conclusions are concerned with the question before us, still stands. As we read the opinion, the effect of the second decision is that regardless of the source of the income, whether from retail sales or otherwise, the contractors were not taxable until the amendment of 1937, and thereafter only on the basis of one per cent.

We, therefore, face the present inquiry with a ruling of this court that contractors are not ultimate consumers and that the purchase and placement of tangible personal property in structures by contractors, under contracts for others, constitute a resale of such property. It is true that we have a right to overrule such a holding, and it is our duty to do so if cogent reason exists for the abolishment of the announced rule. An examination of the opinions of other courts on this question will be helpful in determining whether [63 Ariz. 434] the views expressed in the Pleasant Hasler case should remain as the guide to the construction of the statute.

The supreme court of Michigan, in Boyer-Campbell Co. v. Fry, 271 Mich. 282, 260 N.W. 165, 171, 98 A. L. R. 827, considered the effect of a definition for retail sale which, like ours, defined a retail sale as one other "than for resale in the form of tangible personal property." The court said:

"The statute imposes a tax upon that which is consumed and used and exempts only that which is sold for resale; the basis of classification is the disposition of the goods made by the buyer, not the character of the business of the seller or buyer."

The position of the seller that sales to manufacturers of tangible personal property, which entered into and became an ingredient or component part of the tangible personal property which was manufactured and produced for sale, were not taxable, was sustained. The effect of the decision was that when the manufacturer purchased from the seller, and the tangible personal property so purchased was used by the manufacturer and became a component part of the tangible property which it manufactured and sold, the original sale was for resale.

In Bradley Supply Co. v. Ames, 359 Ill. 162, 194 N.E. 272, it was held that sales of plumbing and heating supplies to contractors were not sales at retail, within the meaning of the Illinois act. That ...

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