Comptroller of Treasury v. American Can Co.

Henderson, J., delivered the opinion of the Court. This appeal under Code (1951), Art. 81, sec. 348 is from an order of the Baltimore City Court reversing the Comptroller’s denial of the refund of a tax paid under protest. The question presented is whether the Maryland Use Tax can properly be imposed upon raw materials, purchased in another state by a manufacturer and there transformed into machinery and replacement parts, when such machinery and replacement parts are subsequently imported into Maryland for use in manufacturing operations of the same manufacturer in its plants in this State. The facts are stipulated and may be briefly stated.

The appellee, a New Jersey corporation qualified to do business in Maryland, engages in two types of manufacturing, the first being the manufacture of specialized machinery and replacement parts to make food containers, and the second being the manufacture of such containers. The company has no plants in Maryland of the first type, but some of the machinery and parts manufactured outside the State are leased or sold to other manufacturers in the canning and packing industries in Maryland and ²⁰⁶ elsewhere, who make their own containers. . The tax-ability of such transactions is not here involved or contested. It also operates plants of the second type, at least two of which are located in Maryland, and supplies them with the necessary machinery and parts for making containers which are sold to the trade.

During the period here in question certain replacement parts manufactured by the Company in another state were delivered to its Maryland can-making plants upon requisition. It is not contended that this constituted a sale, and it is conceded that the parts were not readily obtainable, or obtainable at all, in Maryland, since the Company has exclusive ownership of the special jigs, patterns, dies and designs through which the parts are'made, and the various processes and products are protected by patents owned and used exclusively by it. On the other hand, it is conceded that the Company purchases, in other states, rough metal castings, which are made by foundries from the Company’s patterns, and bar metal. These materials are machined into the finished product and assembled into complete machines or retained as repair or replacement parts, but none of these manufacturing processes are performed in Maryland.

The Comptroller contends that the metal constituting the raw materials, purchased outside the State, is taxable when delivered for use in Maryland in the finished form of replacement parts, in an amount representing the cost of the raw materials. It is conceded that such raw materials are readily obtainable in Maryland. Code (1951), Art. 81, sec. 369, provides: “(Imposition of tax.) An excise tax is hereby levied and imposed on the use, storage or consumption in this State of tangible personal property, purchased from a vendor within or without this State on or after the effective date of this Act, for use, storage or consumption within this State. The tax imposed by this section shall be paid by the purchaser * * Sec. 370 provides: “(Exemptions.) The use, storage or consumption in this State of the follow ²⁰⁷ ing tangible personal property is hereby specifically exempted from the tax imposed by this sub-title: * * * (f) Tangible personal property not readily obtainable in Maryland which is stored, used or consumed in this State by a person engaged in * * * manufacturing * * *, if such tangible personal property enters into the processing of or becomes an ingredient or component part of the product * * * which is manufactured * * (Sec. 370 (f) was repealed by Ch. 332, Acts of 1955, but was in effect when the transactions in the instant case took place.) Rule 62 of the Comptroller interprets or expands this qualifying clause by declaring that “property will be considered as entering into the processing of the product * * * which is manufactured * * * if the property is employed either directly or indirectly in the manufacturing * * * of property for sale * * Sec. 379 provides that to prevent evasion of the tax it shall be presumed “that the tangible personal property sold by any person for delivery in this State, however made or carried, is sold for use, storage or consumption in this State.

A like presumption shall apply to all tangible personal property delivered without this State and brought into this State by the purchaser thereof.” It is perfectly clear that the finished product is the only property actually used in Maryland. The raw materials would be utterly useless for the purpose of making containers. To interpret the use of the finished product as a use of the raw materials