W. R. Grace & Co. v. Comptroller of the Treasury

Barnes, J., delivered the opinion of the Court. The appellant, W. R. Grace & Co., Davison Chemical Division (Grace), petitioner below, challenges the validity of an assessment for use taxes by the appellee, Comptroller of the Treasury, Retail Sales & Use Tax Division, upon two airplanes owned by Grace and used by it regularly and exclusively for the transportation of passengers and property, primarily executives and customers of Grace, across state lines and national boundaries to various Grace plants throughout the North American continent. Grace, a Connecticut corporation, operates its Davison Chemical Division in Maryland. The assessment was made by a notice from the Comptroller dated July 12, 1966, for the period June 14, 1961, to March 8, 1966, in the aggregate amount of $33,481.60, including interest and penalties.

The Comptroller’s hearing officer, following a hearing on December 1, 1966, filed an opinion dated March 28, 1967, sustaining the assessment. ⁵⁵³ The Maryland Tax Court by its order of June 27, 1968, affirmed the Comptroller’s determination. On appeal to the Baltimore City Court (Sodaro, J.), the decision of the Maryland Tax Court was affirmed by an opinion and order filed January 22, 1969. A timely appeal was taken from the order of January 22, 1969, to this Court. There is no dispute in regard to the essential facts.

Grace, by purchase orders dated in October, 1960, and February, 1961, ordered an Aero Commander from Aero Design and Engineering Co., Bethany, Oklahoma, through its distributor Holladay-Aero, Inc. of Arlington, Virginia. The purchase price was $119,557. Certain electronic installations were made on the airplane at the maintenance shop of Holladay-Aero at Byrd Field, Richmond, Virginia at a cost of $42,295. George W. Welsch, a pilot for Grace, took delivery of the Aero Commander on .June 19, 1961, at Byrd Field, Richmond, Virginia and flew it to White Sulphur, West Virginia on the business of Grace.

On the same day, the airplane was flown on company business to Owensborough, Kentucky and to Baltimore, Maryland. The following day, June 20, it was flown to Richmond, Virginia, Tri-City, Tennessee and Denton, Ohio. On June 21 it was flown to Baltimore, Maryland and on June 22 to Watertown, New York and Mingan, Province of Quebec, Canada. The lower court found that this airplane “has since been used regularly and exclusively in transporting property and passengers, primarily executives and customers of Grace, across state lines and national boundaries to various Grace plants throughout the continent.” The logs of the Aero Commander were introduced into evidence and showed that almost every flight of the airplane occurred between airports of different states.

During the period of assessment, June 14, 1961, to March 8, 1966, the airplane made successive take-offs and landings at the same airport in Maryland on only five occasions and these five occasions related to the testing and training activities incidental to the interstate and international use of the airplane. Only six flights involved ⁵⁵⁴ successive take-offs and landings at two airfields within Maryland and on five of those six occasions, the landings constituted an immediate part of an interstate flight. There was only one occasion, August 28, 1963, during the entire five-year period of assessment, when the airplane made a round trip between Ocean City, Maryland and Friendship Airport in order to transport one of the employees of Grace to and from a conference in Baltimore City. The portions of the interstate and foreign flights of the airplane which occurred in Maryland ranged from between 25 and 155 miles and between 15 and 40 minutes, depending upon the direction of the flight.

In 1965, Grace acquired a company engaged in the sale of seeds. Most of the locations of the newly acquired company were located west of the Mississippi River, some being in the far West and on the West Coast. Grace then decided to purchase a second airplane in order to service these more distant locations. By purchase order agreements dated May 24 and September 3, 1965, Grace ordered from Aero Commander, Division of Rockwell-Standard Corporation, Bethany, Oklahoma, through its distributor Reading Aviation Service, Inc., an Aero Jet for the purchase price of approximately $609,500.

Certain electronic equipment was installed by Reading Aviation Service, Inc. at Reading, Pennsylvania at a cost of $179,700. The purchase price was paid by checks to the seller, dated June 3 and November 4, 1965; the installation costs were paid to Reading Aviation Service, Inc. by checks dated December 15, 1965, and March 8, 1966. After the Aero Jet was manufactured in Oklahoma City, Oklahoma, it was transferred sometime around November, 1965, to Reading Aviation Service in Reading, Pennsylvania for several months during which installation work was performed and test flights made, including interstate flights. During the period of the assessment, the Aero Jet entered Maryland on only four oc ⁵⁵⁵ casions — February 7, 13, 21 and 23, 1966.

On the first three occasions, the airplane was flown by a Mr. Bertolet from Reading, Pennsylvania to Baltimore, where Mr. Welsch either embarked or disembarked and immediately on the same day the aircraft was returned to Reading, Pennsylvania. On the fourth occasion the airplane was flown from Reading to Baltimore and on the same day continued to Oklahoma City. Prior to April 6, 1966, the date of delivery of the airplane, the Aero Jet had entered Maryland on only three other occasions, i. e., on March 9, 10 and 11, 1966; and each of these flights was part of an interstate flight. All of these flights were test flights as an aftermath of which, because of certain matters not satisfactory to Grace, the aircraft was returned to the factory at Oklahoma City for various adjustments.

After the adjustments were made, Grace through Mr. Welsch took delivery at Oklahoma City on April 6,1966. The lower court found that the Aero Jet after its delivery to Grace “was employed regularly and exclusively in interstate and foreign commerce in the transportation of passengers and property of W. R. Grace.” On four occasions, the airplane took off and landed at the same airport but this occurred only at the Reading, Pennsylvania airfield. On each occasion that the Aero Jet took off from an airfield in Maryland, the immediately successive landing occurred in another State and on every occasion on which it landed in Maryland the immediately preceding point of departure took place outside of Maryland. The Maryland portions of interstate and foreign flights of the Aero Jet ranged from between 25 and 155 miles and between 5 and 20 minutes depending upon the flight directions.

All major maintenance work performed for both airplanes has been conducted exclusively at Oklahoma City, Williamsport, Pennsylvania, or Reading, Pennsylvania. Fuel for their operations has been purchased from time to time at various airports located throughout the United States. Although certain minor maintenance work has ⁵⁵⁶ been performed at Friendship Airport near Baltimore, this same type of work is performed at airports in all other States when found to be necessary. There was testimony that it was estimated that the airplanes are used for company business approximately 20 days out of each month.

On days not used, they are left at Friendship Airport. Grace advances three propositions before us: 1. During the period of the assessment, the two airplanes were used exclusively as instruments of interstate commerce and the privilege of such use is not subject to local taxation. 2. As properly construed, the language of the Comptroller’s Rule 64 (c) exempts the airplanes from taxation. 3.

The imposition of the use tax on the two airplanes, when other carriers are afforded an exemption for the use of vehicles in interstate commerce, would deny Grace the equal protection of the laws as prohibited by the Fourteenth Amendment to the Constitution of the United States. As we agree with the first two propositions of Grace, we shall reverse the order of the Baltimore City Court without finding it necessary to pass upon the interesting arguments urged upon us in regard to the third proposition. 1. We have concluded that during the period of the assessment, the two airplanes were used exclusively as instruments of interstate commerce and the privilege of such use is not subject to local taxation because of the provisions of Article 1, Section 8, Clause 3 of the Constitution of the United States giving Congress the power to “regulate commerce with foreign nations and among the several States” and the cases construing this constitutional provision. It should be observed, in limine, that although there was some suggestion in the opinion of the Maryland Tax ⁵⁵⁷ Court that the transactions in the acquisition of the two airplanes were subject to the Maryland sales tax, this possible issue was apparently not pressed by the Comptroller before the lower court and was not passed upon by it.

Nor was it briefed or argued by the Comptroller before us so that we deem that possible issue waived. Maryland Rule 831 c 2, 4. See Harmon v. State Roads Commission, 242 Md. 24 , 217 A. 2d 513 (1966). In any event, it is clear to us that the sales tax had no application to the purchase of the two aircraft inasmuch as the evidence demonstrates that the delivery of the Aero Commander was taken at Richmond, Virginia and the delivery of the Aero Jet was taken in Oklahoma.

The evidence also establishes that both airplanes were ordered directly from a non-resident vendor, not from a place of business of the vendor in Maryland but from the non-resident vendor’s place of business in Oklahoma. The last section of the Comptroller’s Rule 64 provides that under these circumstances, the sales tax would not be applicable even if delivery of the aircraft had been made by the seller in Maryland. The applicable portion of the Rule provides: “* * * jf a Maryland purchaser orders goods directly from a non-resident vendor who maintains no place of business in this State, the sales tax does not apply to goods sold pursuant to the order if they are shipped into Maryland from points outside thereof. However, it must be borne in mind that such sales may be subject to the Use Tax.” The question before us is, therefore, whether or not the use tax applies.

The Maryland Use Tax, Code (1957), Art. 81, §§ 372-401, and the Maryland Retail Sales Tax, Art. 81, §§ 324-371 are complementary. See Comptroller of the Treasury v. American Cyanamid Co., 240 Md. 491, 502-503 , 214 A. 2d 596, 602-603 (1965) and cases therein cited. ⁵⁵⁸ Art. 81, Sec. 375 provides for the following exemption of the use, storage or consumption of tangible personal property in Maryland from the Maryland Use Tax: “(b) Tangible personal property expressly exempted from the retail sales tax imposed by this State under the terms and provisions of § 326 of this article.” By virtue of Art. 81, Sec. 326 the following exemption from the sales tax is provided: “(f) Sales which are not within the taxing power of this State under the Constitution of the United States.” In considering the validity of local taxation under the Commerce clause of the United States Constitution, the nature of the tax must be considered. If properly apportioned, a property tax may be imposed upon a commercial aircraft which merely lands or takes off within the taxing state on regular and repeated scheduled flights. Braniff Airways, Inc. v. Nebraska State Board of Equalization, 347 U. S. 590 , 74 S. Ct. 757 , 98 L. Ed. 967 (1954).

The tax being apportioned, merely requires interstate commerce to bear its fair share of the local tax burden and is not an “undue burden” on interstate commerce. As pointed out by Mr. Justice Reed in Braniff, apportionment of the property tax is still generally required, notwithstanding the decision of the Supreme Court in Northwest Airlines v. Minnesota, 322 U. S. 292 , 64 S. Ct. 950 , 64 L. Ed. 1283 (1944), which, in effect, is confined to the facts in that case, there being no majority of the Supreme Court agreeing on any one theory for sustaining the application of the general State property tax in that case to aircraft having a “home port” in Minnesota and there being no evidence that the aircraft was taxable in any other State. After the decision in Northwest Airlines, the State amended its statute to provide for apportionment of the property tax. ⁵⁵⁹ See also Standard Oil Co. v. Peck, 342 U. S. 382, 384 , 72 S. Ct. 309 , 96 L. Ed. 427 (1952) and the comment of Mr. Justice Douglas in regard to Northwest Airlines. A local use tax, however, is not imposed upon the article itself nor upon its sale, but upon the privilege of using, storing or consuming the article in question within the State.

Lane Construction Corp. v. Comptroller of the Treasury, 228 Md. 90, 94 , 178 A. 2d 904, 906 (1962). Use taxes may not, therefore, be constitutionally imposed upon the privilege of engaging in an aspect of interstate commerce, but may only be imposed if the article to be taxed is employed in a separate local activity. The applicable law is well summarized by Mr. Justice Clark in Michigan-Wisconsin Pipe Line Co. v. Calvert, 347 U. S. 157, 166 , 74 S. Ct. 396, 401 , 98 L. Ed. 583 , 591 (1954) as follows: “ Tt is now well settled that a tax imposed on a local activity related to interstate commerce is valid if, and only if, the local activity is not such an integral part of the interstate process, the flow of commerce, that it cannot realistically be separated from it.’ ” Michigan-Wisconsin Pipe Line Co. v. Calvert, 347 U. S. 157, 166 (1954). See also e.g., Joseph v. Carter and Weeks Stevedoring Co., 330 U. S. 422 (1947).

In Michigan-Wisconsin Pipe Line Co. v. Calvert, supra, the Supreme Court held invalid a tax upon the privilege of “gathering” gasoline within the State, because the activity upon which the tax fell, i.e., receiving gasoline into the taxpayer’s interstate pipe line, was not sufficiently separable from the interstate activity. In an earlier Supreme Court case, Helson & Randolph v. Kentucky, 279 U. S. 245 , 49 S. Ct. 279 , 73 L. Ed. 683 (1929) involving the validity of a state tax upon the sale of gasoline to be used within the State by a ferry boat engaged in interstate commerce and in which the Supreme Court held that the application of the tax was an ⁵⁶⁰ invalid burden upon interstate commerce. Mr. Justice Sutherland stated: “The tax is exacted as the price of the privilege of using an instrumentality of interstate commerce. It reasonably cannot be distinguished from a tax for using a locomotive or a car employed in such commerce.

A tax laid upon the use of the ferry boat, would present an exact parallel. And is not the fuel consumed in propelling the boat an instrumentality of commerce no less than the boat itself? A tax, which falls directly upon the use of one of the means by tohich commerce is carried on, directly burdens that commerce. If a tax cannot be laid by a state upon the interstate transportation of the subjects of commerce, as this Court definitely