The question here presented is one of statutory construction. Under the provisions of the Sales Tax Act (N.D. Laws 1937, chap. 249), a tax is imposed "upon the gross receipts from all retail sales of tangible personal property." Section 4 of the act in so far as it is applicable reads: "The provisions of this act shall not apply to sales of . . . any product upon which the state of North Dakota now or may hereafter impose a special tax, either in the form of a license tax, stamp tax or otherwise."
The Liquor Control Act, initiated in 1936, imposes an excise tax upon all alcohol and alcoholic beverages sold at retail. The tax is a stamp tax and stamps representing the tax are required to be affixed to the containers of alcoholic beverages by the wholesalers before delivery to the retailers. Alcoholic beverages are products upon which the state of North Dakota imposes a special tax and as such they are not subject to the retail sales tax levied by chapter 249, supra.
The tax commissioner contends, however, that when substances other than alcoholic beverages are combined therewith and the resulting product is sold as a mixed drink, it is the duty of the mixer-seller to collect from his customer the sales tax upon the gross sales price of the nonalcoholic ingredients contained in the drink and make an accounting to the state therefor according to law. Both the trial court and the majority of this court have rejected the statutory construction contended for by the tax commossioner. The view adopted is that a mixed drink is an entirely new product, that alcoholic beverages incorporated into a mixed drink lose their tax-exempt character and that the seller of a mixed drink is required to collect sales tax upon the full sales price of the drink. I do not agree. In my opinion the Legislature had in mind the precise problem which gave rise to this litigation when it enacted Subdivision (c) of § 1 of chapter 249, supra, *Page 514 which defined retail sales as follows: "`Retail sale' . . . means the sale . . . for any purpose, other than for processing or for resale. . . . The sale of an item of tangible personal property for the purpose of incorporating it in or attaching it to other . . . personal property otherwise exempt from the sales tax shall . . . be considered as a sale . . . for a purpose other than processing." This section means, 1. A sale for resale is not taxable; 2. A sale for processing is not taxable; 3. A sale of property, for the purpose of incorporating it in or attaching it to other property which is tax exempt, is taxable when sold to the person who buys it for the purpose of incorporating it in or attaching it to the exempt property.
As I view it, the legislature contemplated that taxable property, when attached to or incorporated in tax-exempt property in such a manner that it became an integral part of the tax-exempt property, assumed the tax-exempt character of the property of which it had become a part and in order that the tax on the sale of that property might not be lost to the state, provided that the tax should be paid upon the last sale made before it was so incorporated or attached. The application of the statute to the facts of the instant case seems clear. In concocting a mixed alcoholic drink the bartender mingles nonalcoholic and alcoholic ingredients. As a result of the mixing, the raw liquor may be diluted and flavored so that the shock to the consumer's palate and digestive tract is minimized but the mixture still remains an alcoholic beverage. In other words, the nonalcoholic ingredients have been incorporated into the tax-exempt alcoholic beverage. They have lost their identity in the blending, and have become an integral part of the tax-exempt alcoholic whole. The sales tax upon such ingredients however is not lost to the state. Under the express language of the statute, the proprietor of a liquor store must pay the sales tax on all substances which he purchases for the purpose of incorporating in alcoholic beverages.
It was urged upon the argument that this construction of the statute would bring about the absurd result that any item of personal property could be made exempt from the sales tax simply by adding to it a few drops of some alcoholic beverage. This does not follow at all. If a tax-exempt alcoholic beverage is incorporated into property subject *Page 515 to the sales tax, the whole is subject to the sales tax. The test as to which substance has been incorporated into the other is what remains after the mixing has been completed. If, after mixing there remains an alcoholic beverage then the other substances have been incorporated into it. If on the other hand something other than an alcoholic beverage results from the mixing then the alcoholic beverage has been incorporated into other substances.
I think the order sustaining the demurrer to the complaint should be reversed. I am authorized to state that Judge Christianson agrees with the views here expressed.