Opinion
No. 72-479
Decided July 11, 1973.
Taxation — Tangible personal property — Exemption — Section 10, Article I, Constitution — Prohibition against state tax on exports — Test — Machines designed and built exclusively for foreign consumers — Exempt as "exports."
APPEAL from the Board of Tax Appeals.
This is an appeal by The National Cash Register Company from a decision of the Board of Tax Appeals, the effect of which was the upholding of a tax assessment made by the Tax Commissioner with respect to the company's 1968 inter-county corporation return of taxable property.
In that return, and before the Board of Tax Appeals, National Cash Register (NCR) contended that certain of its machines had, at the time they were included in the company's taxable inventory and their value assessed for tax purposes by the Tax Commissioner, become irrevocably committed to exportation and had commenced the journey which would lead necessarily and undeniably to their exportation from the United States. Therefore, NCR contended, the inclusion of the machines in the taxable inventory pursuant to Ohio personal property tax law was a violation of Section 10, Clause 2 of Article I of the United States Constitution, the Import-Export Clause.
NCR, a Maryland corporation, has its world headquarters, main production facility and warehouse in Dayton, Ohio. For many years it has engaged in the manufacture of cash registers, accounting machines and electronic data processing systems, which it markets throughout the United States and in 120 foreign countries. For marketing purposes, the company is organized into two major divisions, domestic and international, each totally separated from the other. The international marketing division has its own chief executive, a "group vice-president" responsible only to the president of NCR, and its own accounting staff, sales force, product line, and physical facility. With respect to inventory, the division maintains its own record control system and packaging processes for its products.
At the hearing before the Board of Tax Appeals, the international division's vice-president described the general marketing process, as follows:
"* * * The first thing that the salesman would have to do, of course, is to get the customer's interest and secure the permission of the customer to discuss his business with him, with the ultimate objective of being able to make a detailed survey of the customer's business to find out if there was a need for our product.
"Once that need had been established, the salesman would decide how best to take an NCR product * * * and build that product to meet the customer's individual requirements * * *."
He testified further that if an order is placed it is sent to the factory in Dayton, where the product is then manufactured. NCR maintains no inventory of machines which are available to meet incoming orders from foreign customers. An order form from a foreign customer will indicate the class of machine and the individual model to be purchased, the basic construction of the individual machines, the number of machines ordered, their destination, and the terms of the sale. Each order is accompanied by a building instruction sheet, prepared by the individual salesman in the foreign country with the assistance of technical people in that country, which specifies, primarily, the individual functions the machines are to perform according to the peculiar commercial and individual requirements of the customer. No order is accepted in Dayton without a building instruction sheet attached to it.
When the order and the building instruction sheet are received by NCR, a factory work order is prepared. The work order contains the necessary production language to enable the factory to build the machine to the exact specifications of the customer. A work order covers every machine manufactured. After a machine has been produced it goes to final inspection for determination that it has been built to specification, and finally is packed and crated to withstand the unusual rigors of export shipment.
The crated machines are then taken to an NCR warehouse in Dayton to await shipment. It was the Tax Commissioner's assessment of the items in that international inventory as of December 31, 1967, tax lien date, which gave rise to this action.
The record reveals that NCR maintains an international inventory for several reasons. Many countries will not allow a partial shipment, so when a large order has been placed and the production cycle is only two or three machines a day, the machines must be consolidated and stored prior to shipment. In the electronic data processing area, the component parts of a system may be produced at several different locations, which also necessitates a consolidation prior to shipment. In many instances, NCR is unable to obtain an importation license from the country to which the machines are to be shipped at the time the shipment is ready, even though the country of destination may have agreed to supply one at the time the order was placed. Importation licenses are usually tied to the foreign exchange situation in the particular country, which is often impossible to predict. In one instance, a license was delayed for three years due to a balance-of-payments problem. Related difficulties involve local fluctuations in currency value, availability of foreign currency and unforeseen delays in obtaining letters of credit. The pitfalls in the operation of the international division are numerous, complicated and completely beyond the ability of NCR to predict with any degree of consistency.
The uncontroverted record establishes that no piece of equipment built for the international division has ever gone into any area other than the international division; that there is no recorded instance where a machine sold to a foreign purchaser was returned; and that no exported item has ever found its way back into the United States market. Likewise, it was uncontroverted that due to unique construction and special adaptation for foreign use, machines marketed by the international division were not merely noncompetitive in the United States market, but were not saleable there. The reasons for this include complex technical variations in keyboards, wiring, detents and motors; and, specifically as to cash registers, variations in dispensers, the amount of characters on the keys and in the windows and in the decimal point placement. There was evidence that electrical current varied from country to country, even in parts of the same country, in terms of standard voltage and cycles and, in some instances, as between AC and DC current. There was also testimony that the degree of merchandizing control in the retailing field in the United States was technically superior to that of other countries by ten years, making machines produced for foreign customers obsolete in the domestic market.
Further, an NCR export product could not economically be converted for domestic sale. Against the company's profit margin of approximately five percent per unit, the changeover cost would be approximately 16 percent per unit, rendering the possibility of a changeover totally unfeasible.
Upon the basis of all those factors, NCR urged that the machinery in the international inventory enjoyed an export status and should not be taxed. However, based mainly upon federal cases, the Board of Tax Appeals in its decision said:
"* * * two judicially articulated criteria * * * must exist concurrently for personal property to be exempt from state taxation as an export:
"(1) the property must have started on its journey to a foreign destination
"(2) the property must be irrevocably committed to export."
Unable to find any evidence that NCR had met the first test, or that compliance with the second test alone was enough, the board affirmed the assessment order with respect to the international inventory.
The cause is now before this court pursuant to an appeal as a matter of right by NCR.
Messrs. Dargusch Day and Mr. Roger F. Day, for appellant.
Mr. William J. Brown, attorney general, Mrs. Maryann B. Gall and Mr. Peter Stratigos, for appellee.
Section 10, Clause 2 of Article I of the United States Constitution provides: "No state shall, without the consent of the Congress, lay any imposts or duties on imports or exports * * *." This case requires us to determine whether the machines in NCR's international inventory, which were assessed by the Tax Commissioner, were "exports" within the meaning of that clause.
In answering that question, the Board of Tax Appeals applied a mechanistic, two-fold formula which it culled from phrases found in the leading "export" cases. Coe v. Errol (1886), 116 U.S. 517; A.G. Spalding Bros. v. Edwards (1923), 262 U.S. 66; Richfield Oil Corp. v. State Board of Equalization (1946), 329 U.S. 69; Joy Oil Co. v. State Tax Commission (1949), 337 U.S. 286; Empresa Siderurgica v. County of Merced (1949), 337 U.S. 154; Hugo Neu Corp. v. County of Los Angeles (1970), 7 Cal.App.3d 21, 86 Cal. Rptr. 332; Rice Growers' Assn. of California v. County of Yolo (1971), 17 Cal.App.3d 227, 94 Cal.Rptr. 847; Cargill of California v. County of Yolo (1972), 26 Cal.App.3d 704, 103 Cal.Rptr. 257. A majority of this court, however, is of the opinion that the instant case is particularly ill-fitted for a mechanical disposition.
The cases from which the two criteria for immunity from taxation were extrapolated by the board embraced products which were completely fungible or were viewed as such. In that situation, we can agree that nothing less than delivery to a carrier, marking the commencement of movement in the export stream, will suffice to guarantee that the process of exportation has been irreversibly initiated. This case, on the other hand, involves cash registers, accounting machines, and electronic data processing systems which have been ordered, designed and built exclusively to serve the peculiar needs of specific foreign consumers. It is uncontradicted on the record that, in every material respect, the machines involved herein are useless in the domestic market and never find their way there. Of all the cases examined, we were unable to find any situation where the "certainty of export" has been more clearly demonstrated than in this case; the degree of certainty here exemplified is fully equivalent to that which attends the delivery of fungible goods to a carrier for the start of a journey to a foreign destination.
Of perhaps equal certainty was the DDT in Montrose Chemical Corp. v. County of Los Angeles (1966), 243 Cal.App.2d 300, 52 Cal.Rptr. 209 (cert. den. 386 U.S. 1004). But, see, Rice Growers' Assn. of California v. County of Yolo (1971), 17 Cal.App.3d 227, 94 Cal. Rptr 847.
The decision of the Board of Tax Appeals is reversed, except as to that portion of the assessment which relates to items destined for sale in the possessions or territories of the United States. As to such latter assessment, the decision of the board is affirmed.
Decision reversed in part and affirmed in part.
HERBERT, CORRIGAN, STERN, CELEBREZZE and W. BROWN, JJ., concur.
O'NEILL, C.J., and P. BROWN, J., dissent.
I dissent on authority of R.C. 5709.01 and the cases decided by the United States Supreme Court involving Section 10, Clause 2 of Article I of the United States Constitution. See Coe v. Errol (1886), 116 U.S. 517; A.G. Spalding Bros. v. Edwards (1923), 262 U.S. 66; Richfield Oil Corp. v. State Board of Equalization (1946), 329 U.S. 69; Joy Oil Co. v. State Tax Commission (1949), 337 U.S. 286; Empresa Siderurgica v. County of Merced (1949), 337 U.S. 154.
R.C. 5709.01 provides, in pertinent part:
"* * * All personal property located and used in business in this state * * * [ is] subject to taxation * * *." (Emphasis added.)
This tax applies to all property manufactured to order and "then taken to * * * [a] warehouse * * * to await shipment," whether that shipment is to be made to Columbus, Buffalo, San Francisco, or a foreign country.
The revenue raised by the tax imposed upon this property is used in accordance with law to pay for the local services of government by counties, municipalities, townships and health districts and for the operation of schools provided for the benefit of all private and corporate businesses and the citizens of the local communities in which those businesses are located.
The appellant in this case understandably would like to be relieved of its share of the taxes for the support of schools and local government upon its inventory awaiting shipment. Appellant contends that it is in a different position from all other manufacturers of products for both domestic and foreign shipment.
The only basis on which the appellant can claim immunity from this tax on its personal property inventory "stored prior to shipment" or "taken to an NCR warehouse in Dayton to await shipment" is that the tax imposed by the General Assembly of Ohio upon all personal property is unconstitutional under the provisions of Section 10, Clause 2 of Article I of the United States Constitution as to appellant's property, even though it is valid as to all other manufacturers' property awaiting shipment in warehouses.
No case decided by the United States Supreme Court supports appellant's position. In my opinion, it is easy to determine why this is true.
The sole issue in this case is: When does the exemption from taxation provided in the export-import clause of the United States Constitution attach to the goods?
The controlling rule of law in this regard is succinctly stated by Mr. Justice Frankfurter in Joy Oil Co. v. State Tax Comm. (1949), 337 U.S. 286, at page 288, as follows:
"The Export-Import Clause was meant to confer immunity from local taxation upon property being exported, not to relieve property eventually to be exported from its share of the cost of local services. See Coe v. Errol, 116 U.S. 517, 527-28."
As Justice Frankfurter said in Joy Oil Co., supra:
"The circumstances which tended, at the time when the tax was assessed, to establish petitioner's intent to export the gasoline and the fact that the gasoline was eventually exported are not enough, by themselves, to confer immunity from local taxation. See, e. g., Cornell v. Coyne, 192 U.S. 418; Empresa Siderurgica v. County of Merced, 337 U.S. 154."
So in the instant case, the circumstances which tended, at the time the tax was assessed, to establish (1) petitioner's intent to export, (2) the certainty of export if a profit was to be made from the manufacture of the property, and (3) the fact that all similar property manufactured by the company in the past had been exported eventually are not enough, by themselves, to confer immunity from local taxation.
The appellant places emphasis upon the argument that many of the United States Supreme Court cases holding goods not immune from local taxes have so held because of possible diversion of the goods to the domestic market. It is asserted that those cases involved fungible goods, while the machines in the instant case, because of their character, were not saleable in the domestic market, were not fungible, and were not divertible, and, therefore, should be exempt from local taxation. Such a fungible-goods argument may have some validity once the process of exportation has started and the exemption has attached to the goods. Then and only then, under the cases, does the question arise as to the certainty of the goods completing the process and reaching the foreign destination as against the possibility of being diverted to the domestic market. See, e. g., Joy Oil Co., supra; Empresa Siderurgica, supra. However, the fungible-goods argument is not relevant to the question presented in the instant case.
The factual question of fungible or nonfungible goods plays no part in a determination of when the process of exportation begins, i. e., when the exemption initially attaches. See A.G. Spalding Bros. v. Edwards (1923), 262 U.S. 66.
The intent to export clearly is not sufficient to commence that process and change a machine stored awaiting shipment into an export. E. g., Joy Oil Co., supra. The certainty of export is not sufficient to convert property in a warehouse awaiting shipment to an export. Empresa Siderurgica, supra (cement plant parts crated awaiting shipment overseas held not exports and not immune from local taxes). The fact that the machines were made to order for a foreign market or that such machines have always been shipped overseas eventually does not make a product stored in a warehouse awaiting shipment an export exempt from taxation. Cf. Coe v. Errol, supra; Hugo Neu Corp. v. County of Los Angeles (1970), 7 Cal.App.3d 21, 86 Cal. Reptr. 332.
If the above were true, the argument could be made with equal logic and force that all property stored in the factory awaiting manufacture of a machine, or certainly all property in process of manufacture into a machine, is exempt. No doubt the General Assembly could exempt such property from local taxes for local services, but it has not done so.
Argument is advanced by the appellant, in brief, that a change in the law extending the exemption from taxes would serve a useful purpose with regard to national monetary or trade policy. For this court to ground its decision upon such unexpressed reasons is contrary to the settled law that acts of the General Assembly are presumed to be constitutional unless clearly in violation of constitutional provisions. R.C. 1.47(A); State, ex rel. Dickman, v. Defenbacher (1955), 164 Ohio St. 142, 128 N.E.2d 59.
The machines in this case meet the requirement of goods destined for foreign commerce. They were ordered by a foreign customer. Once the process of exportation is commenced, a persuasive argument could be made that they are certain to be exported and, therefore, exempt.
However, at the time the tax was assessed the exemption had not attached to the articles as required by law because they were simply stored awaiting shipment — title and possession was in the appellant, payment had not been made, no export license issued, no letter of credit authorized, and the machines were in complete control of appellant; but, most important, there was no movement of goods, no shipment, no process of exportation. There is no certainty of export. The record establishes that some machines have remained stored in the warehouse awaiting shipment for three years. The orders could be cancelled, the export license might never issue, the financing may fail to materialize, the machines could be destroyed, dismantled or sold for scrap. These machines were no different from any other mass of goods in a warehouse awaiting shipment. They were not an export exempt from local taxes until they moved — in plain language, until they were shipped or at least moved to or into a means of transportation. Empresa Siderurgica v. County of Merced, supra; Joy Oil Co., supra.
The objection is made that this is a "mechanistic" concept. (See dissenting opinion in Empresa Siderurgica, supra.) I can not agree. The court has held that the exemption attaches to the articles or the goods. The time at which it attaches must be established. A.G. Spalding Bros. v. Edwards, supra. The rule expressed by the majority fails to deal with this fundamental question. It leaves vague and unanswered the real question in the case which is: At what point did the machines become "exports" exempt under the Export-Import Clause?
P. BROWN, J., concurs in the foregoing dissenting opinion.