I am unable to agree with the majority opinion in holding that the contract entered into between respondents and Lindeman Power Equipment Company, as set out on pp. 695 and 696, did not provide for the payment of royalties.
The majority opinion states: "The case at bar concerns complete, patented, hop-picking machines sold by respondents." True, but why does the majority ignore the other provisions of the contract, which provide that the machine cannot be used except the purchaser pay a royalty? The majority do not contend that the contract is contrary to public policy. All they have done is simply rewritten the contract for the parties.
The contract, valid in itself, provides for the payment of patent royalties for use and not for ownership of the machines. That the owners of patented machines have a right to charge royalties on machines sold is not subject to denial. That proposition is made conclusive by the decisions of the courts in this country.
It is my position that royalties cannot be taxed save in the state of domicile of the owner. It is agreed that the domicile of respondents is in the state of California.
The case of Newport Co. v. Tax Comm., 219 Wis. 293,261 N.W. 884, 100 A.L.R. 1204, approved by the United States supreme court, which denied certiorari in Wisconsin Tax Comm. v. NewportCo., 297 U.S. 720, 80 L.Ed. 1004, 56 S.Ct. 598, is exactly in point. The plaintiff in that case was a Delaware corporation, licensed to do business in the state of Wisconsin. The question with which the court was concerned was whether the plaintiff owed certain claimed taxes *Page 771 to the state of Wisconsin, particularly with reference to the profits realized by the sale of certain patent rights arising from inventions made by the company at its manufacturing plant in Wisconsin. That case was not as strong as this in favor of the taxpayer, because here there is no question but that these inventions were made in the state of California and did not arise from any research work or manufacturing activities in this state, although that was the situation in Wisconsin. In passing upon the questions presented, the Wisconsin court said:
"With respect to tangible property, it is well settled that the state may not impose a tax upon real or personal property located beyond the boundaries of the state. Frick v. Pennsylvania,268 U.S. 473, 45 Sup. Ct. 603; Union Refrigerator Transit Co. v.Kentucky, 199 U.S. 194, 26 Sup. Ct. 36. With respect to intangibles, the supreme court, in Blackstone v. Miller,188 U.S. 189, 23 Sup. Ct. 277; Frick v. Pennsylvania, supra; Creamof Wheat Co. v. Grand Forks County, 253 U.S. 325,40 Sup. Ct. 558; and other decisions, had intimated that intangible property, unlike tangible property, might have more than one situs for taxation. By a series of decisions, beginning with Farmers' Loan Trust Co. v. Minnesota, 280 U.S. 204, 50 Sup. Ct. 98; Beidlerv. South Carolina Tax Comm., 282 U.S. 1, 51 Sup. Ct. 54;Baldwin v. Missouri, 281 U.S. 586, 50 Sup. Ct. 436; FirstNational Bank v. Maine, 284 U.S. 312, 52 Sup. Ct. 174; theBlackstone Case and the cases following it were expressly repudiated. In the Farmers Loan Co. Case, it was held that `while debts have no actual territorial situs, . . . a state may properly apply the rule mobilia sequuntur personam and treat them as localized at the creditor's domicile for taxation purposes,' and that they are `entitled to enjoy an immunity against taxation at more than one place similar to that accorded to tangibles.' In First National Bank v. Maine, supra, a resident of Massachusetts died there owning shares in a Maine corporation, most of the property of which was in Maine. A Massachusetts tax was assessed and paid on legacies and distributive shares principally made up of the proceeds of this stock. A like tax was assessed in Maine, from which the amount of the Massachusetts tax was deducted. It was held that the Maine tax was invalid under the due process clause. The court applied the rule of the Farmers Loan Co. Case to shares of stock. *Page 772 While the Farmers Loan Co., Beidler, and Baldwin Cases all dealt with bonds, notes, and credits, the court pointed out that the rule of immunity from taxation in more than one state was broader than the application thus far made of it. The rule was extended to corporate stocks, and the decision is broad enough to extend the rule to all intangibles. . . .
"It thus appears to be the rule, established by the United States supreme court, and heretofore recognized by this court, that as to nonresidents there may be no imposition of income taxes upon income derived from property or business located without the state; that the situs of such intangibles as corporate stock is the domicile of the owner; that since property of this character, owned by a foreign corporation, is not located within the state of Wisconsin, it is not subject to an income tax levied by this state.
". . . It seems evident to us that a state may not, by definition, construction, or other process, domesticate a person or corporation in fact domiciled elsewhere, in order to avoid the application of constitutional principles established by the supreme court of the United States relative to jurisdiction for purposes of taxation. To say that it may do so is to contend that the limits of the state's jurisdiction to tax are wholly self-imposed. . . .
"The next contention of the taxpayer is that the profit realized by the sale of patent rights during the year 1928 is not subject to the Wisconsin income tax. The facts with respect to this contention are as follows: In connection with its manufacturing plant in Wisconsin, the taxpayer maintained a research laboratory for the purpose of discovering and perfecting processes, formulae, and methods applicable to its various lines of manufacture. As a by-product of this research, chemists at this laboratory discovered and developed a formula entitled, `A process of preventing the dissolution of iron and steel in sulphuric acid and pickling baths.' Letters patent were issued to the taxpayer covering this formula. During the years 1927 and 1928, sales of American, Canadian, and European rights to this patent were made to the American Chemical Paint Company, and a net profit realized amounting to $127,052.78. The taxpayer contends that these come under the description of sec. 71.02(3) (c), which provides that income derived from patent royalties or from the sale of similar intangible property shall follow the residence of the recipient. It is the contention of the state that since the *Page 773 discovery was the result of ordinary activities of the taxpayer, associated with and indispensable to its manufacturing operations in this state, it falls within the exception to the general rule, for the reason that it has a business situs in Wisconsin. Except for this claim, the contention here is fully governed by what has been said concerning the profit realized from the sale of stock. If this patent did not have a business situs in Wisconsin by reason of the circumstances of its discovery and development, then its business situs, by the terms of the statute, and by rules of law heretofore discussed, was at the residence of the recipient of the income from its sale, and from that point on the matter is governed by the same considerations that are applicable to profits from the sale of stock. The question is a troublesome one. The operation of the research laboratories certainly is closely identified with the manufacturing operations, in the sense that it has for its purpose the perfecting of the final product. While profits from the sale of discoveries made in that laboratory would seem to be somewhat outside the scope of the manufacturing business engaged in, it may reasonably be contended that the incidental discovery of a product or process having no relation to the products usually manufactured, or perhaps no use except in some other trade, might be considered to be one of the normal by-products of its activities. If the incidental discovery in this case resulted in the manufacture of some new product, wholly dissociated from those customarily produced by this company, it might reasonably be held that income from this source was earned by ordinary business operations within the state. The difficulty is created by the fact that the discovery in this case culminated in the issuance of letters patent, — in the creation of intangible property the income from which is by statute given a situs at the residence of the owner or recipient, and which is said by the United States supreme court to have a situs at the domicile of the owner. May this patent be treated, by reason of the place and circumstances of its discovery, as having a situs in Wisconsin? We think not. The taxpayer was not engaged in Wisconsin in the business of dealing in letters patent. The intangible known as a patent had no more existence in Wisconsin than any other intangible has existence at the location of the tangible property to which it evidences rights. We see no way in which the business situs doctrine can be applied to the letters patent." *Page 774
The same general rule has been adopted by this state. InSuburban Transp. System v. King County, 160 Wn. 364,295 P. 124, this court applied the principle contended for by respondents when it stated:
"It is also a well settled general rule of law that personal property is taxable in the district of the residence of its owner. The rule is well stated in the text of 26 R.C.L. 273, as follows:
"`Mobilia sequuntur personam was a well established maxim of the common law, and the situs of personal property of every description, wherever it was actually kept or located, was held to be at the domicil of the owner and the property was subject to the jurisdiction of the owner's sovereign. The principle was applicable to the taxation of personal property and it was for many years the universally accepted rule that personal property was taxable at the domicil of the owner. While certain exceptions and qualifications to the rule have been developed in recent years, it is still the basic principle on which the taxation of personal property rests, and the law of taxation of personal property depends largely upon the question of domicil, for it is still held that personal property unless it has acquired a definite situs in another state or unless other provision is made by statute is taxable to the owner in the city or town in which he lives and has his domicil.'"
Accord: Pacific Cold Storage Co. v. Pierce County, 85 Wn. 626,149 P. 34; and First Nat. Bank v. Maine, 284 U.S. 312,76 L.Ed. 313, 52 S.Ct. 174, 77 A.L.R. 1401.
As I have indicated before, the patent royalties were not part of the selling price. The written agreement between respondents and Lindeman Power Equipment Company, clearly indicates that it contained two contracts in one instrument; first, the contract for the sale of the machine; and, second, a license contract for the use of patents embodied therein, and an agreement to pay royalties to respondents in consideration therefor.
Bearing upon this question is the uncontradicted testimony given by Mr. Thys:
"Q. Was there ever any intention on your part, or the part of Thys Miller, that these royalties should be deemed or considered part of the purchase price, selling price of *Page 775 these hop picking machines? A. No. Title to the machines were given regardless of the payment of royalties. Q. Under these contracts when was the title to these machines passed to the purchasers of the machines? A. At the time the machines were delivered, and they were delivered when the purchaser made his last payment on the machine. Q. You never have filed any of these contracts as conditional sales contracts or anything of that kind, have you? A. No. Q. You never have considered you reserved any title or interest in the machine after delivery, have you? A. No. . . .
"Q. Do you, or Thys Miller, have or claim, or have you ever claimed any interest in these machines that have already been delivered to hop growers? A. No. Q. Were these actually bona fide sales of these machines that were entirely completed and consummated when the machines were delivered? A. Yes, certainly. Q. The only things that you, by reason of the patents, you claim certain royalties as provided in the contract? A. That is right. Q. Has any machine ever been delivered to a purchaser or hop grower unless the full amount of the purchase price was paid, either prior to or at the time of the delivery of the machine? A. No. Q. That is, it has always been paid either then or previously? A. Yes. . . .
"Q. When you say the interest you had in the use of the machine, did you ever have or claim any interest in the machine itself after it was delivered? A. No, not in the machine. Q. You were interested in receiving later royalties? A. Yes."
Mr. Julius Bauman, respondents' general manager, testified:
"Q. Are these royalties considered part of the purchase price of the hop picking machine? A. No. Q. When is the final payment of the purchase price of the hop picking machine paid? A. It is made at the time of delivery of the machine to the grower. Q. Has Thys Miller ever had or claimed any interest in any of these hop picking machines after the delivery of the machine and making of that payment at that time? A. No. Q. The claim for royalty was based on these patents held by Thys Miller, was it? A. That is correct."
In Rotorite Corp. v. Commissioner of Internal Revenue,117 F.2d 245, the court recognized the distinction between *Page 776 patent royalties and purchase-money payment. In that case, it appears that the license contract contained an option for the licensee to purchase a patent. During the tax year, the licensee exercised the option and purchased the patent. The court held that the payments made during the year were, therefore, purchase-money payments rather than royalties, and were not taxable as income to payee. In doing so, the court recognized the fundamental distinction between royalties and purchase-price payments.
It seems to me that Bloxom v. Henneford, 193 Wn. 540,76 P.2d 586, directly supports my contention. In discussing the revenue act under question here, we stated:
"The purchase price, as that phrase is employed in the definition of gross earnings in § 8, chapter 180, Laws of 1935, means the purchase price paid by the jobber to the person from whom he bought the goods. The cost of transportation to the purchaser's place of business, whether freight, drayage, or other costs paid by the purchaser after he bought the goods, can not, without doing violence to the language of the statute, be included within the phrase `purchase price.' It should be borne in mind that the cost of transportation and other costs are paid on the goods by the jobber after the jobber becomes the owner. The statute does not provide that the jobber shall be entitled to a deduction from his gross sales of the cost of the merchandise to him. The statute specifically, definitely limits the deduction or exemption to only one kind of cost — the purchase price.
"The tax imposed is an occupation tax for the act or privilege of engaging in business activity. It is measured by a percentage of the respondents' gross proceeds of sales less a deduction orexemption of the amount of the purchase price paid by the respondents for the agricultural products purchased by them. The costs or charges paid by the jobber to the railroad company or to the refrigerator car company do not come within any fair definition of the phrase `purchase price.'"
It seems clear to me that, if the freight and cost of transportation of imported fruit, paid by the purchaser subsequent to the foreign purchase thereof, does not constitute a part of the purchase price, even though exceeding the original cost, it must follow that the royalties subsequently *Page 777 paid by the purchasers of the hop-picking machines could not constitute part of the purchase price or selling price within the meaning of the same revenue act. Accord: Ford J. Twaits Co. v.Utah State Tax Comm., 106 Utah 343, 148 P.2d 343; WhitehillSand Gravel Co. v. State Tax Comm., 106 Utah 469,150 P.2d 370; Dain Mfg. Co. v. Iowa State Tax Comm., 237 Iowa 531,22 N.W.2d 786; and Standard Oil Co. v. State Tax Comm'r,71 N.D. 146, 299 N.W. 447, 135 A.L.R. 1481.
The respondents in this case will certainly have to pay an income tax the same as we have here, at the place of their domicile, this tax being based upon the royalties they received from Lindeman Power Equipment Company and the various other purchasers of the hop-picking machines in the state of Washington. That will make a double taxation. Their only recourse, of course, is to appeal to the United States supreme court.
ROBINSON and MILLARD, JJ., concur with SIMPSON, J.