Century Distilling Co. v. Defenbach , 61 Idaho 192 ( 1940 )

After the tax commissioner of the state of Idaho made demand upon respondent, Century Distilling Company, an Illinois Corporation, to file a state Income Tax Return for the years 1935 and 1936, respondent instituted this suit under the provisions of Chapter 70, 1933 Session Laws, the Declaratory Judgment Act, asking for a judgment declaring respondent's rights and liabilities under chapter 103, 1935 Session Laws, and amendatory acts, the Liquor Control Act, respondent praying for an injunction against the tax commissioner restraining him from proceeding under chapter 24, Title 61, I. C. A. Appellant moved to quash the service of summons on the ground the action was against the state which motion was denied and answer was then filed attacking jurisdiction on this same ground and further that respondent was a foreign corporation, never having complied with the statutes of the state of Idaho to do business in the state. From a judgment restraining and enjoining the tax commissioner from levying and collecting an income tax upon respondent this appeal was taken.

The detailed manner and method by which respondent and the Idaho Liquor Control Commission transacted their business and other pertinent facts are set forth in a stipulation of facts agreed upon by the parties hereto and are set forth in part in the appended note.¹

The procedure followed in shipping and selling respondent's liquors to the commission and the manner in which payment is received, using forms furnished by the commission, is set forth in detail in the stipulated facts, which procedure may be summarized as follows: Respondent makes application by mail, deposited in the postoffice in Peoria, Illinois, to the commission for permission to list with the commission alcoholic liquors and distilled spirits for sale to the commission. Upon receipt of permission respondent executes in its office at Peoria and forwards by mail, Form ILCC P-17 "Vendors specifications" listing liquors respondent desires to sell. Thereafter respondent, upon Form ILCC P-1 Rev. 300, makes application to the commission for permission to ship liquors listed on Form P-17 into Idaho, "to one of the three warehouses designated by the Idaho Liquor Control Commission for the exclusive use of and sale to the Idaho Liquor Control Commission." Permission is granted by the execution by the commission of Form ILCC P-2, "Vendor's Permit to Ship Merchandise into the State of Idaho for the Exclusive Use of the Idaho Liquor Control Commission," delivered to respondent by U.S. Mail at Peoria, and such liquors are then shipped in accordance with the following "notice" contained in the permit:

"NOTICE: The above merchandise shall be consigned to the vendor in care of the Idaho Liquor Control Commission and is to remain the property of the Vendor until withdrawn by the Commission for sale in their stores and agencies."

When the commission desires to withdraw alcoholic liquors from any warehouse in the state in which liquor has been stored by direction of the commission, the commission executes a purchase order, ILCC P-4, "Liquor Purchase Order," addressed to respondent at its office in Peoria, which however is delivered to the warehouseman in charge of the warehouse and a copy is sent to respondent. The liquor listed is released to the commission, which, still retains the right to test and inspect such liquors and to reject any that do not meet with its requirements, the purchase order specifically providing that: "title to merchandise does not pass to the Idaho Liquor Control Commission until acceptance of delivery by the Commission."

Upon receipt of the "Purchase Order," at its office in Peoria, respondent makes out an Invoice and Bill of Lading, upon Form ILCC W-101, and mails the same to the Commission and the store manager or agent of the commission acknowledges by signature receipt of the liquors invoiced. The commission prepares a claim, Form ILCC No. 117, which when executed by respondent at its office in Peoria is transmitted to the commission and by it transmitted to the state treasurer and the claim is then paid out of the "Liquor Control Act Fund," the warrant being transmitted by mail to respondent at Peoria, respondent having no office, place of business, nor agent to receive payment within the state of Idaho.

As heretofore stated respondent sought a declaratory judgment interpreting the Property Relief Act of 1931 with reference to respondent's method and manner of transacting its business as heretofore set forth, the judgment entered restraining and enjoining the tax commissioner from levying and collecting an income tax upon respondent.

Appellant's specifications of error one and two raise the point that appellant cannot be sued under the Declaratory Judgment Act for the reason that he is an officer of the state, and that the action against him in his official capacity is an action against the state, not properly maintainable, absent statutory authority. Respondent's position is that the action being one to construe a statute alleged to be, as to respondent, unconstitutional, is not one against the state, and that proceedings under the Declaratory Judgment Act are proper in this type of case, it not being necessary to resort to administrative procedure prior to the institution of suit.

It is settled doctrine that a suit against individuals, for the purpose of preventing them, as officers of the state, from enforcing an alleged unconstitutional enactment, to the injury of the rights of the plaintiff, is not a suit against the state. (Ex parte Young, 209 U.S. 123, 28 Sup. Ct. 441,52 L.ed. 714, 14 Ann. Cas. 764, 13 L.R.A. (N.S.) 932; Smyth v.Ames, 169 U.S. 466, 18 Sup. Ct. 418, 42 L. ed. 819; Reagan v.Farmers' Loan T. Co., 154 U.S. 362, 14 Sup. Ct. 1047,38 L.ed. 1014; Western Union Tel. Co. v. Andrews, 216 U.S. 165,30 Sup. Ct. 286, 54 L. ed. 430; Home Tel. Tel. Co. v. LosAngeles, 227 U.S. 278, 33 Sup. Ct. 312, 57 L. ed. 510; Looneyv. Crane Co., 245 U.S. 178, 38 Sup. Ct. 85, 62 L. ed. 230;White Eagle Oil Refining Co. v. Gunderson, 48 S.D. 608,205 N.W. 614, 43 A.L.R. 397, and cases cited in note, 43 A.L.R., p. 408; State Highway Com. v. Younger, 170 Okl. 614,41 P.2d 686; State ex rel. Robinson v. Superior Court forKing Co., 182 Wash. 277, 46 P.2d 1046.) And see FirstSecurity Bank v. Enking, 54 Idaho 735, 35 P.2d 266, wherein a declaratory judgment was entered against public officers and sustained by this court, and, Garrett Transfer Storage Co. v. Pfost, 54 Idaho 576,33 P.2d 743; Johnson v. Diefendorf, 56 Idaho 620,57 P.2d 1068; Geo. B. Wallace, Inc., v. Pfost, 57 Idaho 279,65 P.2d 725, 110 A.L.R. 613; Independent School Dist. v. Pfost,51 Idaho 240, 4 P.2d 893, 84 A.L.R. 820; City of Burleyv. Pfost, 51. Ida. 255, 4 P.2d 898; Smallwood v. Jeter,42 Idaho 169, 244 P. 149; J. C. Penney Co. v. Diefendorf, 54 Idaho 374,32 P.2d 784, where injunctive relief was sought against state officers to restrain enforcement of statutes alleged to be unconstitutional and void.

While the Income Tax Act has been held to be constitutional in certain situations (Diefendorf v. Gallet, 51 Idaho 619,10 P.2d 307) such fact does not determine that all provisions are constitutional in all situations. The sections of the law involved, if applicable to respondent, may as to respondent, be unconstitutional and void. A statute may be invalid as applied to one state of facts and yet valid as applied to another. (Dahnke-Walker Mill. Co. v. Bondurant, 257 U.S. 282,42 Sup. Ct. 106, 56 L. ed. 239; Bell City Mfg. Co. v. Frizzell, 11 Idaho 1,81 P. 58.) That portion of the act sought to be enforced is alleged to be unconstitutional if applied to respondent. If it be so the use of the name of the state to enforce it is a proceeding without the authority of, and one which does not affect, the state in its sovereign or governmental capacity, but it is simply an illegal act upon the part of a state official, attempting, by the use of the name of the state, to enforce a legislative enactment which is void because unconstitutional. My conclusion is that this action is not one to be classed as an action against the state.

Appellant's remaining assignments of error raise the question of whether respondent is subject to the Income Tax Statutes and required to make a return of its net profits and pay the tax prescribed. Appellant's claim is that the transactions above detailed make respondent amenable to the Foreign Corporation Act as one "doing business" in the state of Idaho, while respondent's contention is that its business is entirely interstate, that it is not "doing business" within the state of Idaho and that a tax from its net income would be a burden on interstate commerce and in violation of the commerce clause of the federal Constitution. (Art. 1, sec. 8, Constitution of the United States.) The two questions thus presented are:

1. Does the method and manner in which respondent sells its merchandise to the Idaho Liquor Control Commission constitute the doing of business in this state, as that term is used in the statute concerning foreign corporations? (Sec. 29-501, I. C. A.; sec. 10, art. 11, Const.) and:

2. If the same does not constitute the "doing of business" is respondent's net income subject to the income tax law of this state? (Title 61, I. C. A.)

A number of authorities cited by appellant in which courts have held that the parties were "doing business" in a state, or were engaged in intrastate commerce, by reason of the fact that goods were sold or parties engaged in business with various individuals after the goods came to rest within the limits of the state, are inapplicable to a state of facts such as is here presented.

There is no claim made herein that respondent was "doing business" with anyone other than the state of Idaho and the only business transacted with it was that necessary to transfer the merchandise of respondent to the Idaho Liquor Control Commission and receive compensation therefor. It may be conceded that respondent is "doing business" with the state of Idaho through the Liquor Control Commission, but it is not doing business within the state of Idaho. In fact the Liquor Control Act prohibits the importing of liquors from without the state into the state of Idaho by anyone other than the commission. The act absolutely prohibits anyone except the state from transporting intoxicating liquors into the state of Idaho. Therefore if the liquors are being transported into the state by respondent they are being so transported in violation of law. While respondent's product is stored in warehouses in Idaho, it is so stored at the request of the commission "in warehouses selected and designated by the Commission, and over which the (respondent) has no control or supervision." The warehouseman designated by the state or the commission is not the agent of respondent but is the agent of the state to receive and hold the liquor imported by order of the state Liquor Control Commission. While the warehousemen are paid their charges by respondent, the state pays fifteen cents per case bailment charge to respondent. The warehousemen do not act for or on behalf of respondent but under direct and positive directions given by the Liquor Control Commission of the state. There is, and can be, but one purchaser of liquor from respondent, namely the Idaho Liquor Control Commission, that is the state of Idaho, as the law and the stipulation disclose. (Laws 1935, chap. 103, p. 222.) Respondent cannot store liquor in Idaho except when requested by the commission, and cannot withdraw the stored liquor except under order of the commission. While naked title to the merchandise remains in respondent, until the commission has withdrawn it from the warehouse, has tested it and accepted it, the contract of purchase is made at respondent's office at Peoria, Illinois, and payment is likewise made by warrant of the state sent to respondent's office. The only part respondent has in the transaction is performed by it outside of the state of Idaho. After respondent's merchandise reaches the state of Idaho respondent loses all control over it, except only, that it holds the naked legal title thereto subject to disposal as the commission, only, may determine. In effect the transaction is that of a sale made at the Illinois place of business of respondent, with the privilege of selection, acceptance or rejection entirely in the commission. No one else can buy, respondent may not sell to another. The commission may accept all or any part or reject all or any part and a return of the merchandise to respondent can only be had after consent by the commission to its withdrawal, in effect a rejection of the merchandise. The method and manner in which respondent is required to transact its sales of liquor to the Idaho Liquor Control Commission does not constitute doing business in this state, but is purely interstate commerce. The limited control or indicia of ownership respondent has over its merchandise after it reaches the state of Idaho or the designated warehouses does not amount to the. "doing of business" within the state. (Bluebell Importing Corp. v. George S. Myers et al., (No. 2836, Circuit Court of Appeal of Franklin County, Ohio, May 9, 1938), unreported; Vermont Farm Machinery Co. v. Hall,80 Or. 308, 156 P. 1073; Marshall Milling Co. v. Rosenbluth,231 Ill. App. 325; Thomas Mfg. Co. v. Thede, 186 Ill. App. 248; Rock Island PlowCo. v. Peterson, 93 Minn. 356, 101 N.W. 616; Caldwell v. NorthCarolina, 187 U.S. 622, 23 Sup. Ct. 229, 47 L. ed. 336; Heymanv. Hays, 236 U.S. 178, 35 Sup. Ct. 403, 59 L. ed. 527;Continental Assur. Co. v. Ihler, 53 Idaho 612,26 P.2d 792.) And see Belle City Mfg. Co. v. Frizzell, supra:

"A foreign corporation that manufactures farm machinery in another state and sells the same to citizens of this state upon orders to be approved by it, taken either by a local or transient agent, and if approved the machinery to be shipped into the state pursuant to such order, . . . . is simply interstate commerce . . . . and not the 'doing of business.' "

See, also, Greek-American Sponge Co. v. Richardson Drug Co.,124 Wis. 469, 102 N.W. 888, 109 Am. St. 961.

While appellant contends that the state may tax net income of a foreign corporation within the state which is owned or operated by nonresidents; and, may tax net income of a foreign corporation doing business within its taxing jurisdiction, and may include therein a portion of such net income arising from interstate commerce properly apportionable to the state, appellant likewise apparently concedes that under the doctrine announced in Diefendorf v. Gallet, 51 Idaho 619,10 P.2d 307; Shaffer v. Carter, 252 U.S. 37, 40 Sup. Ct. 221,64 L. ed. 445; United States Glue Co. v. Oak Creek, 247 U.S. 321,38 Sup. Ct. 499, 62 L. ed. 1135, Ann. Cas. 1918E, 748, and other cases, that if respondent is not "doing business" within the state of Idaho it is not amenable to tax on net income, stating in the brief of appellant:

"From the doctrine announced in the foregoing authorities it is our contention that this case does not center upon the question of whether the respondent is doing an interstate or intrastate commerce. The question to be determined by this court is whether or not under the facts of this case the respondent is engaged in carrying on and doing business within the state of Idaho. If our position is correct in this connection, then the court must determine what constitutes doing business within the state of Idaho which will subject the respondent to the payment of income taxes under our laws, and in this determination the question of whether the business is interstate or intrastate is beside the point."

It is settled that a state may not directly hinder interstate commerce either by taxation or otherwise and this court so held at an early date. (Belle City Mfg. Co. v. Frizzell, supra.) The distinction between taxation that amounts to interference with interstate commerce and taxation which merely affects such commerce indirectly, and upon which the question of apportionment of taxation depends, as applicable to respondent, is well pointed out in United States Glue Co. v. Town of OakCreek, 161 Wis. 211, 153 N.W. 241, Ann. Cas. 1918A, 421, the opinion of the Wisconsin court in United States Glue Co. v. OakCreek, supra, as follows:

"'if an income be taxed the recipient thereof must have a domicile within the state, or the property or business out of which the income issues must be situated within the state so that the income may be said to have a situs there. . . . . The Income Tax Law does not seek to reach property or an interest in property as such, but to reach incomes having a situs in the state, or growing out of a privilege exercised, or occupation conducted within the state.' . . . . . The plaintiff, as recipient of its corporate income, whatever its source, has a domicile in this state, and the principal part of its property and its business which is employed in the transaction out of which the income issues is located in this state. The fact that the business so conducted may involve transactions in interstate commerce cannot affect the situs of the income."

The state under the law as it now exists, wisely or otherwise, has a monopoly on the sale of intoxicating liquors throughout the state. The primary purpose of the law was to minimize the use of liquor and control its sale and distribution. Section 1 of the Liquor Control Act provides:

"This Act . . . . shall be deemed an exercise of the police power of the state, for the protection of the welfare, health, peace, morals and safety of the people of the state, and allits provisions shall be liberally construed for theaccomplishment of that purpose, and it is declared to be thepublic policy that the traffic in alcoholic liquors is soaffected with a public interest that it should be regulated tothe extent of prohibiting all traffic in them, except ashereinafter provided for in this Act through the medium of an Idaho Liquor Control Commission bythis Act created, . . . ." (Emphasis inserted.)

It would appear that the legislature, with the above purposes in mind, made provision that only the commission could import liquor, and further with such provisions and purposes in mind the commission adopted rules and regulations such as have heretofore been set out with the view that no person or corporation could lawfully import liquor and therefore purchases by the commission should be made without the state of Idaho, the commission importing the liquors. Not only did the legislature by this statute provide that no one but the liquor commission could lawfully import alcoholic liquor into this state, but it prohibited anyone other than the liquor commission from engaging in the business of selling such liquor within this state. Nor can the liquor commission authorize anyone other than itself to engage in the business of selling alcoholic liqour within this state. To hold now that the rules and regulations the commission has promulgated and the method and manner in which it directs liquor to be handled in this state constitutes the doing of business in this state on the part of the manufacturer from whom it buys, is in direct contradiction of the intent, purpose, spirit and letter of the statute.

In my opinion respondent is not required to make a return and is not subject to the income tax statutes of this state and the judgment of the trial court should therefore be affirmed.

¹ (Portions of agreed statement of facts.) "That the plaintiff, Century Distilling Company, is now and was at all times mentioned in the amended complaint on file herein a corporation organized and existing under and by virtue of the law of the State of Illinois with its office and principal place of business at Peoria in the state of Illinois, and is now and at all times mentioned in said amended complaint has been a citizen and resident of the State of Illinois and does not now and has not at any time herein or in the amended complaint referred to maintained or operated an office or place of business in the State of Idaho, and has not qualified as a foreign corporation to do business in said state.

"That the State of Idaho is engaged in the retail sale of alcoholic liquors and distilled spirits under and pursuant to the provisions of Chapter 103, Idaho Session Laws of 1935, known as the 'Idaho Liquor Control Act'; and that the plaintiff, Century Distilling Company, is now and for more than one year last past and during the years 1935, 1936, and 1937, has been engaged in the business of selling alcoholic liquors and distilled spirits to the Idaho Liquor Commission, which are shipped into the State of Idaho from points without the state, pursuant to the provisions of said Idaho Liquor Control Act and the rules and regulations promulgated by said Idaho Liquor Control Commission pursuant to the provisions of said Liquor Control Act.

"That the plaintiff does not sell alcoholic liquors and distilled spirits to any person, firm, or corporation in the State of Idaho other than the Idaho Liquor Control Commission, and the storage of alcoholic liquors and distilled spirits by the plaintiff in the State of Idaho is required by the Commission to be and is in warehouses selected and designated by the Commission and over which the plaintiff has no control or supervision. Charges for storage facilities are paid by the plaintiff.

"That all alcoholic liquors and distilled spirits shipped by the plaintiff into the State of Idaho are shipped by the plaintiff to warehouses selected and designated by the Idaho Liquor Control Commission for the sole and exclusive use of said Commission, and the procedure whereby the plaintiff stores such alcoholic liquors and distilled spirits in such warehouses in the State of Idaho is for the benefit and convenience of the Commission for the purpose of making available to the Commission at all times a sufficient quantity of plaintiff's merchandise and enabling the Commission to keep its stores and dispensaries in the State of Idaho supplied with merchandise without the necessity of investing large sums of money in liquor stocks prior to the time that the same are needed by stores and dispensaries for sale to the public. Such an arrangement likewise makes readily available a supply of plaintiff's merchandise for sale to the Idaho Liquor Control Commission."

ON PETITION FOR REHEARING. (February 21, 1940.)