Westinghouse Electric Corp. v. State Tax Commission

Collins, J., delivered the opinion of the Court. This is an appeal from an order affirming an assessment against Westinghouse Electric Corporation, (Westinghouse), appellant, for personal property taxes for the calendar year 1953, made by the State Tax Commission of Maryland, (Commission). Westinghouse in its tax return of personal property as of January i, 1953, reported as the average monthly value of merchandise and products manufactured by it in Maryland for the calendar year 1952,' the amount of $9,132,961.00, of which amount $6,191,162.00 had a taxable situs in Baltimore County. In its return it was asserted that of this amount, $4,027,910.00 was exempt from assessment and taxation in Baltimore County for the reason that the sovereign immunity -of the United ³⁹⁵ States of America, (the Government),.to State and local taxation, had attached to merchandise and products of that value.

On November 13,1953, the Commission made a tentative assessment against appellant of personal property subject to taxation in Baltimore County of $.6,053,570.00. This assessment thereby granted .tp Westinghouse an average monthly exemption of $137,592.00 of the total average monthly exemption of $4,027,910.00 claimed. After a protest was filed, a hearing was held before the Commission on December 10, 1953. As a result of that hearing, on December 16, 1953, the Commission made a final assessment, in which it fixed the average monthly assessment for manufactured products of raw materials subject to State and local taxation in Baltimore County at $5,820,480.00.

The Commission thereby granted to the appellant a portion of the claimed exemption, but denied the balance of the exemption in the amount of $3,627,350.00. From that assessment the appellant, under the provisions of Code, 1951, Article 81, Section 255(b), filed an appeal in Circuit Court No. 2 of Baltimore City. After hearing, that court entered an order affirming the assessment by the Commission. From that order appellant appeals here.

Westinghouse, incorporated in Pennsylvania, has its principal office in Pittsburgh. Its business consists of the manufacture, sale and installation of electrical and steam apparatus. It carries on such business in Baltimore City; Friendship Airport, Anne Arundel County, Maryland; and Lansdowne, Baltimore County, Maryland. The operation in Baltimore City is principally the manufacture of X-ray equipment for hospitals and radiologists.

The manufacturing for Government sales there is comparatively small. The same kind of articles are manufactured in Baltimore City for Government sale as are manufactured for industrial, private and hospital use. At Friendship Airport, Anne Arundel County, appellant manufactures, solely military products. At Lansdowne, Baltimore County, both commercial equipment and equipment for the military services of the United ³⁹⁶ States are manufactured.

No substantial amount of merchandise of commerciál design manufactured there is sold to the Government. The large proportion of the manufacturing' at Lansdowne is for the military services. In most cases the equipment there is pecularily designed .for military needs and has no use in industry or in civilian life. The appellant admits that it buys and pays for the parts and materials in the process of manufacture, pursuant to contracts with the Government.

On account of national security many provisions of appellant’s contracts with the Government remain secret. However, the appellant introduced in evidence examples of parts of contracts relating to payment and acceptance by the Government. Such contracts provide: “Seventy-five percent (75%) of the total contract price for such items shall be paid as partial payments in accordance with the provisions of this paragraph * * There is a further provision that the contractor may request partial payments on account. The amount of the partial payments are figured upon a percentage of value, by comparison with the total contract. price, of the work finished during the interval for which the particular partial payment is made.

In, the examples offered the percentages, are. seventy-five and eighty-five. The balance or final payment is to be paid upon delivery and final acceptance. The sample contracts also contain the following clause: “In the event that the Contractor shall procure or maintain insurance upon any materials or other property upon which a lien exists in favor of the Government pursuant to the terms of this'clause, the policy or policies sháll contain a loss payable clause making losses payable to the Secretary of the Navy or order. Any payments thereunder shall inure to the benefit of the Government to the extent of any loss suffered by the Government and to the Contractor as to any remaining bálance.

The foregoing provisions shall not be deemed -to require that the Contractor procure or maintain any such insurance.” ³⁹⁷ Under the provision of Code, 1951, Article 81, Section 7(2), a tax is imposed on tangible personal property according to the rates fixed from time to time by the State and its political sub-divisions. A corporation’s tangible personal property is valued and assessed by the Commission pursuant to the authority vested in it by Code, 1951, Article 81, Section 12(b)(5). Before the Commission, and at the hearing in the Circuit Court, Westinghouse took the position that the personal property for which it claimed exemptions was held by it under- one of the following four types of contracts: “1. Contracts which had been terminated and which by their terms vested legal title to the property manufactured thereunder in the United States; 2.

Contracts which provided for the making of progress payments as the work progressed and which also provided thát upon the making of a progress payment, title to the property in its then state and thereafter should vest in the Ünited States; 3. Contracts which provided for the making of progress payments as the work progressed and which specifically created a lien on the property in the course of manufacture in favor of the United States upon the making of a progress payment; and 4. Contracts which provided for the making of progress payments as. the work progressed but which contained no specific provision either vesting title or creating a lien upon the property in. the course of manufacture in favor of the United States upon the making of a progress payment.” The Commission and the Court held that property manufactured under paragraphs 1 and 2, supra, was exempt from assessment and taxation because the sovereign immunity of the Government to State and local taxation ³⁹⁸ had attached- thereto, but that property manufactured under'paragraphs ³ and-4; swpra, was not so exempt. The-Commission,- appellee, points out that there- is a fifth class of personal property manufactured by appellant for which no exemption is claimed and that is the type'of contract which'does not provide for progress payments from the Government.

Appellant says that this ’Class developed the day the case was presented to the’ Commission. Mr. Frank W. Godsey, Jr., -general manager of the Baltimore division of appellant corporation, testified that until about a year ago there-was-an advantage to appellant in not receiving progress payments for the reason that the type of contract, which required the progress payments, afforded a lower profit to the corporation than those which did not require progress payments. This profit advantage no longer exists-and, therefore, appellant now presses for the type of contract .which requires progress payments. . The question,, therefore, before us is whether personal property, manufactured, under .the contracts in paragraphs 3 and 4, supra, should be exempt from assessment and taxation because of the sovereign immunity of the Government.

The appellant claims immunity for several reasons. It claims that the material ordered by the Government can be, sold to and used, by the Government alone. It admits that its own funds were used to finance the manufacture of this equipment at least until such times as it becomes entitled to progress payments. If the Government rejects the materials, ’they must be reworked or scrappéd and the salvage value of their component parts credited to the Government.

It contends that it is subject to the most rigid system of supervision and control and the Government has removed from appellant its customary dominion and control over these products. Of course, the Government is immune to State and local taxation. M’Culloch v. Maryland, (1819), 4 Wheat. (U. S;) 316, 4 L. Ed. 579 ; United States v. County of Allegheny, (1944), 322 U. S. 174 , 88 L. Ed. 1209 , (the ³⁹⁹ Mesta case).

In early cases the Supreme Court of the United States gave a rather broad scope of immunity. This immunity has recently been narrowed. Helvering v. Mountain Producers Corp., 303 U. S. 376 , 82 L. Ed. 907 ; Graves v. New York, 306 U. S. 466, 477 , 83 L. Ed. 927, 931 ; Oklahoma Tax Commission v. Texas Co., 336 U. S. 342 , 93 L. Ed. 721 . In the early cases it had been held that because of its economic incidence on the Government the tax was an unconstitutional interference by a state with the functions of the Federal Government.

The Supreme Court of the United States has receded from that position. James v. Dravo Contracting Co., 302 U. S. 134 , 82 L. Ed. 155 . It was held by this Court in Meade Heights v. Tax Commission of Maryland, 202 Md. 20 , 95 A. 2d 280 , that a property interest, less than a fee, is not exempted under the constitutional immunity and is subject to taxation in this State. The apellant claims that, although the Government does not have legal title to the property, it does have equitable title or such dominion, control and ownership over that property that it amounts to equitable title.

It relies strongly on United States v. County of Allegheny, (the Mesta case), supra. In that case the State of Pennsylvania levied a tax upon the real estate of the Mesta Corporation. Assessed as part of the value thereof was certain machinery owned by the United States and leased to Mesta for use in Government contracts. It was there admitted that title to the machinery was in the Government'.

In that case the Supreme Court of the United States said, Justices Roberts and Frankfurter dissenting: “We hold that Government-owned property, to the full extent of the Government’s interest therein, is immune from taxation, either as against the Government itself or as against one who holds it as a bailee.” The appellant also relies on Kern-Limerick, Inc. v. Scurlock, (1954), 347 U. S. 110 , 98 L. Ed. 546 . In that case private contractors constructed for the United States a naval ammunition depot. The State of Arkansas attempted to collect a sales tax on certain trac ⁴⁰⁰ tors procured from Kern-Limerick, Inc., a local dealer. It was conceded that Kern-Limerick would be liable for a sales tax if the real purchaser were not the United States.

There, the Government was named as the purchaser' of the material. The contract under which the work was done provided that the contractor, was to act as purchasing agent and that title to the material and equipment was to pass directly from the vendor to the Government,-which was obligated to reimburse the contractor for the purchases. It was there held in an opinion written by Mr. Justice Reed, speaking for six members of the Supreme Court, that “* * * it is clear that the Government is the disclosed purchaser and that no liability of the purchasing agent to the seller arises from the transaction.”- Chief Justice Warren and Justices Black and Douglas dissented on the ground, that the Government could not delegate to private persons authority to buy goods for the Government. In that opinion the majority of the Supreme-Court distinguished that case from Alabama v. King & Boozer, 314 U. S. 1 , 86 L. Ed. 3 , on the ground that the Alabama courts made the “purchaser” liable for the tax to. the seller and under the contract in that case.

King and Boozer were the purchasers, while under the contract in Kern-Limerick, Inc., supra, the Government was the purchaser. We cannot agree with appellant’s claim that Kern-Limerick, Inc., supra, reverses King & Boozer, supra. The appellant also relies strongly on the case of Johns Hopkins University v. County Commissioners of Montgomery Co., (1946), 185 Md. 614 , 45 A. 2d 747 . In that case the Government asked Johns Hopkins University to undertake and carry out certain operations relating to the then war efforts of the Government.

It entered into a contract with Hopkins under which it purchased for the Government forty acres of land in Montgomery County, Maryland,