Untitled Texas Attorney General Opinion

November 12, 1965 Honorable Robert S. Calvert Opinion No. C-543 Comptrollerof Public Accounts Austin, Texas Re: Whether distributingagents, now defined in H.B. No. 474, Section &A, who qualify as distributors,will be required, under this Article, to affix cigarette stamps or meter impressionsto all unstamped cigarettes stored in such a person's place of business that are designated for dis- tribution or first sale to other distributors wholesalersand retailers that now hold permits within the State of Texas, before such cigarettes Dear Mr. Calvert: leave their place of business. You have requested the opinion of this office on the following questions: "1 . Will distributingagents, now defined in H.B. No. 474, Section 4A, who qualify as distributorsbe required-underthis Article to affix cigarette stamps or meter impressionsto all unstamped cigarettes stored in such a person's place of business that are designated for dls- tribution or first sale to other distributors, wholesalersand retailers that now hold permits within the State of Texas, before such cigarettes leave their place of business? “2 . As Section 4H of H.B. No. 474 repeals Section 2 of 7.23, what effect will this have on 7.01 (16) and 7.23 (1) (3) (4)?” -2595- Hon. Robert S. Calvert, page 2 (C-543) Section 4A and 4B of,House Bill No. 479, Acts 1965, 59th Legislature,.Chapter 580, Tage 1262, reads as follows: "Sec. 4A. Section (1) of Article 7.23, Title 122A Taxation-General Revised Civil Statutes of Texas, 1925, is hereby amended to read as follows: "'(1) Every distributingagent who stores cigarettes in the State for delivery in this State except to an exempt consignee shall be treated as a "distributor"and shali be, except as in this Section provided, sub- ject to the provisions of this Chapter regulating "distributors"and cigarettes stored in such a person's place of business for distributionIn this State shall be considered possessed for the purposes of making a "first sale" In Texas with- in the meaning of this Chapter and such a person shall pay the taxes assessed by this Chapter and affix the stamps as for a "first sale" in the manner provided in this Chapter, except that such a person shall be required to affix said stamps only prior to the time that such cigarettes shall leave the warehouse of such a person for a delivery in this State except to an exempt consignee. Such a dis,tributing agent shall be subject to the licensing provisions applicable to a distributoras provided in Article 7.09 of this Chapter, as amended, except that persons holding a valid permit as a dis- tributing agent at the effective date of this law may continue In business under such permits, subject to the terms and regulations of this ~.law, until the expiration,thereof at which time such a distributingagent must obtain a dis- tributor's permit under the terms and conditions set forth In Article 7.09 of this Chapter, as amended, and no persons subject to this Article who are lawfully engaged in the business as a distributingagent on the date of the enactment _ of this law shall be denied the right to carry on such business pending reasonable opportunity to make application for permit and final action thereon.' -25% Hon. Robert S. Calvert, page 3 (c-543) "Sec. 4B. 'Section(2) of Article 7.23, Title 122A, Taxation-General,Revised Civil Statutes of Texas, 1925, is repealed." The term "distributingagent" is defined in Article 7.01 (16) of Taxation-Generalof Vernon's Civil Statutes, which is a part of what is commonly known as the Cigarette Tax Law. Such Section reads as follows: “(1.6) ~DistributingAgent' shall mean and include every person in this State who acts as an agent of any person outside the State by re- ceiving cigarettes in interstate commerce and storing such cigarettes subject to distribution or delivery upon order from said pe'rsonoutside the State to distributors wholesale dealers and retail dealers. . . :" The rate of tax is specified by Article 7.02 and Article 7.06 of the Cigarette Tax Law and is imposed upon "all cigarettesused or otherwise disposed of in this State for any purpose whatsoever." Such Articles further provide that: "The said tax shall be paid only once by the person making the 'first sale' In this State and shall become due and payable as soon as such cigarettes are subject to a 'first sale' in Texas, . . .' The term "first sale" is defined in Article 7.01 (8) of the Cigarette Tax Law, which reads as follows: “(8) 'First Sale' shall mean and include the first sale or distribution of cigarettes in intrastate commerce, or the first use or con- sumption of cigarettes within this State." Article 7.02 (3) of the Cigarette Tax Law provides as follows: "(3) The impact of the‘tax levied by this Chapter is hereby declared to be on the vendee, user, consumer or possessor of cigarettes in this State and when said tax is paid by any other person, such payment shall be considered as an advance payment and shall thereafterbe -2597- Hon. Robert S. Calvert, page 4(C-543) added to the price of the cigarettes and recover- ed from the ultimate consumer or user. . . ." Article 7.08 (2) of the Cigarette Tax Law requires that the State Treasurer supply stamps to persons required to stamp cigarettesat a discount of 2-l/4$ of the face value of such stamps. All cigarettes sold and'consumedin Texas are manu- factured outside the State and shipped into this State by the manufacturer. The cigarettesare manufacturedby: American Tobacco Company; Brown and Williamson Tobacco Company; Liggett and Meyers Tobacco Company; P. Lorillard Company; Phillip Morris, Inc.; and R. J. Reynolds Tobacco Company, all of which are foreign corporationswith a certificateof authority to transact business within the State of Texas. At the present time there are ten warehouses within the State which are licensed as distributingagents and which receive and distri- bute cigarettes on behalf of the manufacturingcompanies. Each of the manufacturersemploy a number of persons in Texas who promote the sale of cigarettes within the State and who occasionallyreceive orders for cigarettes which in turn are relayed by them to a wholesale dealer or distributor. All orders for cigarettes are sent to the home office of the out-of-statemanufacturerfor approval and acceptance. Representativesof the Comptroller'sOffice-have inquired into and ascertained the details involved in the shipment to, and distributionfrom, Universal Terminal Warehouse located in Houston, Texas. The facts revealed by this inves- tigation will be taken as typical of the operation of all ware- houses in Texas now holding permits as distributingagents. Except for an insignificantnumber of "drop shipments" specificallycovered by Article 7.01 (9) of the Cigarette Tax Law, all cigarettes sold within this State are shipped into the State by the manufacturer in railroad freight cars or common carrier trucks. The cigarettes are shipped pursuant to bills of lading showing the shipment to be from the manu- facturer, consigned to the manufacturerin care of a particu- lar distributingagent warehouse. The manufacturerretains title to the cigarettes. Upon arrival at the warehouse of the distributingagent, the cigarettes are unloaded, placed in the warehouse, and a check sheet verifying the arrival of the shipment of cigarettes is returned to the manufacturer. -2598- Hon. Robert S. Calvert, page 5 (c-543) No warehouse receipt is issued. Once the cigarettesenter the warehouse of the distributingagent they are removed only pursuant to the order of the manufacturer. All orders direct- ing the distribution of the cigarettes are transmittedfrom the manufacturer to the distributingagent by mail, teletype or telephone. Distributionsfrom the warehouse are on bills of lading from the manufacturer to the purchaser. Shipping charges are paid by the manufacturerdirect to the carrier and the purchaser is billed for the cigarettes by the manu- facturer. The distributingagent ships the cigarettes from the warehouse on a "first in - first out" basis and is com- pensated for its services according to the volume of cigarettes handled, calculated on a flat rate per hundred weight. Frequent audits of the cigarette stocks on hand in the warehouses of ! the distributingagents are made at unscheduled times by the manufacturers. The Comptroller'sinvestigationof Universal Terminal Warehouse disclosed that the average supply of cigarettes in such warehouse at all,times is sufficient to meet average daily demands for 13 working days. The Comptroller'sOffice has made an analysis of the inventory of cases of cigarettes on hand at each of the ten distributingagents for the month of December, 1964, in order to show a typical monthly operation of these facilities. The average days supply on hand and the average daily deliveries are based upon a monthly delivery period of twenty-one days. Rather than naming the distributingagents we are for convenience simply numbering them from 1 to 10 in the table that follows. In relating the quantities of cigarettes listed in this table to shipments into the State, we are informed that a carload of cigarettes consists of approximately1,250 cases of cigarettes. WAREHOUSE CASES DELIVERY DAILY CASE NUMBER OF CASES AVERAGE DAYS NUMBER DECRMBER, 1964 DELIVERIES ON HAND OF SUPPLY ON DECEMBER, 1964 HAND AVAILABLE, FOR DELIVERY 418 6,309 15 z,‘ 401 i 11,661 3,798~58/6o 12,385 :‘3 30-1/2 31: 907 1,044 5,232-14/60 12,465 11,759-W/60 :z 11 2,157 2;,;$-45/60 11 154 1,664 211613-22/60 191 -2599- Hon. Robert S. Calvert, page 6 (C-543) The cigarettes are shipped by the manufacturerin cardboard containers known as cases. Each case contains 60 cartons of cigarettes;each carton contains 10 packages of cigarettes;and each package contains 20 cigarettes. The Cigarette Tax Law requires that the tax stamp be affixed on each package of cigarettes. In order to accomplish this, it is necessary that the cases be opened and the cartons placed upon a machine which opens the cartons, affixes the stamp to each package, and reseals the cartons which are then replaced in the cases and the cases resealed. The tax imposed by the Cigarette Tax Law is, by Article 7.02 (3), declared to be a tax imposed upon the ulti- mate consumer or user of cigarettes within this State, and when the tax is paid by any other person it is to be considered an advance payment and must be added to the price collected from the ultimate consumer or user. This tax is clearly a use tax. A formidable line of decisions by the Supreme Court of the United States have sustained the imposition of use taxes against the challenge of the commerce clause and the due process clause of the United States Constitution. Scripto v. Carson, 362 U.S. 207 (1960); General Trading Co. v. Tax Commissioner,322 U.S. 335 (1944); Nelson v. Montgomery Ward, 312 U.S. 73 (1941); Nelson v. Sears, Roebuck & Co., 312 U.S. 59 (19417 * McGoldrick v. Berwind-WhiteCoal Co., 309 U.S. 33 ?1939); So&hern Pacific Co. v. Gallagher, 306 U.S. 167 (1939); Felt & Tarrant Mfg Co. v. Gallagher_,306 U.S. 62 (1939); Henneford v. Silas'Mason Co 300 U.S. 577 (1937);- Monamotor Oil Co. v. Johnson, 292 U.S:'86 (1934). Although these cases are not completely determinative of the question before us---because of the restrictivedefini- tion of "first sale" in the Cigarette Tax Law---we nevertheless feel that a discussion of these cases, with relevant quotations, is essential to an understandingof taxes of this nature and their relation to the interstate commerce clause of the United States Constitution. For a comprehensivestudy of the decisions of the Supreme Court of the United States on the subject of state powers of taxation and regulation as they relate to the commerce clause see: Hartman, State Taxation of Interstate Commerce, 46 Virginia Law Review 1051 (1960). In each of the above cited cases the tax was levied upon the use, consumption,storage, or transfer of possession of tangible personal property within the taxing state. The ultimate burden of the tax was imposed upon the purchaser of the property. -2600- Hon. Robert S. Calvert, page 7 (c-543) Southern Pacific Co. v. Gallagher, 306 U.S. 167 d upon the use or storage of property purchased out-of-statewhich was required to be paid to the State by the purchaser. Southern Pacific Company purchased materials and supplies out-of-stateand brought them into California for use in the operation of its interstate railroad business; Silas Mason Company purchased machinery out-of-statewhich was brought into Washington for use in the constructionof the Grand Coulee Dam, In both Instances the Court upheld the tax against the contention that it was a tax on Interstate commerce. I, .State taxes upon national commerce or its'incidentsdo not depend for their validity upon a choice of words but upon the choice of the thing taxed. It is true the increased cost to the interstate operator from a tax on installationis the same as from a tax on con- sumption or operation. This is not significant. The prohibited burden upon commerce between the states is created by state interferencewith that commerce, a matter distinct from the expense of doing business. A discriminationagainst it, or a tax on its operationsas such, is an interference. A tax on property or upon a tax- able event in the state, apart from operation, does not interfere. This is a practical adjust- ment of the right of the state to revenue from the instrumentalitiesof commerce and the obliga- tion of the state to leave the regulation of interstateand forei n commerce to the Congress." 306 U.S. 167, 177-17 8 . "The tax is not upon the operations of interstate commerce, but upon the privilege of use after commerce is atan end. II . . .The privilege of use is only one attribute, among many, of the bundle of privi- leges that make up property or ownership. Nashville. C. & St. L. them all collectively,or to separate the -2601- Hon. Robert S. Calvert, page 8 (C-543) faggots and lay the charge distributively,Ibid, Calling the tax an excise when It is laid &my upon the use (VancouverOil Co. v. Hennef'ord, 183 Wash. 317; 49 P.(2dJ 14) does not make the power to impose it less, for anything the commerce clause has to say of it6 validity, than calling it a property tax and laying it on ownership. . . .A tax upon the privilege of use or storage when the chattel used or stored has ceased to be in transit is now an impost so common that its validity has been withdrawn from the arena of debate. . . .'I 3oo U.S. 577, 582-583. Script0 v. Carson, 362 U.S. 207 (1960); General Trading Co. v. Tax Commissioner, 322 U.S. 335 (1944);mson v. Montgomery Ward, 312 U.S. 373 (1941); Nelson v. Sears, Roebuck & Co., 312 U.S. 359 (1941); McGoldrick v. Berwind-White Coal Co., 309 U.S. 33 (1940); Felt & Tarrant Mfg Co. v. 306 U.S. 62 (1939) and Monamotor Oil Co. v. Johnson, 6 (1934) also involved the the statutes of the state of the residence of the purchaser. These cases differed from the Southern Pacific Company case and Silas Mason Company case in that under the provisions of the statutes the seller was required to remit the amount of the use tax to the state and collect from the user who had purchased the property. In each instance, under varying facts, the use tax and method of collection was upheld by the Court. In Nelson v. Montgomery Ward, su ra and Nelson v. Sears. Roebuck,& Co.*,su ra each company-+ma ntained retail stores in Iowa, yet bo+h did large mail order businesses on orders mailed by Iowa residents to out-of-statebranches of the stores which were filled and shipped directly to the purchaser. .The fact that under Iowa law the sale is made outside of the state does not mean that the power of Iowa 'has nothing on which to oper- ate.' Wisconsin v. J. C. Penney Co., supra. The purchaser is in Iowa and the tax is upon the use in Iowa. The validity of such a tax, so far as the purchaser is concerned, 'has been withdrawn from the arena of debate.' Henneford v. Silas Mason Co., 300 U.S. 577, 583; Southern -2602- Hon. Robert S. Calvert, Page 9 (C-543) Pacific Co. v. Gallagher, supra. . . .Use in Iowa is what is taxed regardless of the time and place of passing title and regardless of the time the tax is required to be paid. Cf. McGoldrick v. Berwind-WhiteCoal Mining Co., 309 U.S. 33, 49 .” 312 U.S. 359, 3b3. “Respondent,however, insists that the duty~of tax collection placed on it constitutes a regulation of and substantialburden upon interstate commerce and results In an impairment of the free flow of such commerce. .Respond- ent further stresses the cost to it’of making these collectionsand its probable loss as a result of Its inability to collect the tax on all sales. But cost and inconvenienceinhered in the same duty imposed on the foreign corpora- tions In the Monamotor and Felt & Tarrant cases. And so far as assumed losses on tax collections are concerned, respondentis in no position to found a constitutionalright on the practical opportunitiesfor tax avoidance which Its method of doing business affords Iowa residents, or to claim a constitutionalimmunity because it may elect to deliver the goods before the tax is paid." 312 U.S. 359, 365. In speaking of the tax and the method of collection’ under considerationin Monamotor Oil Co. v. Johnson, 292 U.S. 86 (1933) the Court stated at page 95 of its opinion: .The statute obviously was not ln- tended'& reach transactionsin interstate commerce, but to tax the use of motor fuel after it had come to rest in Iowa, and the re- quirement that the appellant as shipper into Iowa shall, as agent of the state, report and pay the tax on the gasoline thus coming Into the state for use by others on whom the tax falls, imposes no unconstitutionalburden either upon interstate commerce or upon the appellant. I, .The distributor does not pay the tax; the-user does. . . ." -2603- Hon. Robert S. Calvert, page 10 (C-543) McGoldrick v. Berwind-WhiteCoal Mining Co. 309 U.S. 33 (1940) upheld a New York City tax levied upon the transfer of possession of coal mined by Berwind-Whitein Pennsylvania, sold by contract to residents of New York City and delivered by Berwind-Whiteto the purchaser. The Court further upheld the provision of the statute which made Berwind-White liable to the City for the tax due and required them to collect such tax from the purchaser. The opinion of the Court contains an excellent discussion relating to the balancing of the tax- ing powers of the states with the regulatory power of Congress over interstate commerce. Script0 v. Carson, 362 U.S. 207 (1960); General Trading Co. v. Tax Commissioner,322 U.S. 335 (1944)mFelt & Tarrant Mfg. Co. v. Gallagher, 306 U.S. 62 (1939) all isv- ed taxes levied upon the use of property within the taxing state for which the out-of-stateseller was made liable to the taxing state and was required to collect from the purchaser. Scripto, General Trading Company and Felt & Tarrant Manufactur- ing Company were all corporationschartered under the laws of states other than the taxing state and neither of them were authorized to transact business within such states nor did they maintain any office, warehouse or stock of merchandise within the taxing state. General Trading Company employed traveling salesmen who solicited orders for merchandise; Scripto received orders for merchandise from jobbers and whole- salers under a commissionagreement; and Belt & Tarrant Company employed general agents who obtained orders for their merchan- dise. In all three cases the orders were subject to approval and acceptance at the home office of the company and, when accepted, the merchandise was shipped from the home office to the purchaser. Payment was remitted directly from the pur- chaser to the company. The Court upheld the taxes and method of collection in all three cases against contentions that they were in violation of the commerce clause and the due process clause of the United States Constitution. The Felt & Tarrant Company case was based squarely upon the decisions in Henneford v. Silas Mason Co., supra; Monamotor Oil Co. v. Johnson, supra; and Bowman v. Continental 011 Company, 25b U.S. 642 (192ir In General Trading Co. v. Tax Commissioner,supra, the Court made Its position clear in a terse manner at page 338: s -2604- Hon. Robert S. Calvert, page 11 (C-543) II .The exaction Is made against the . . ultimate consumer---theIowa resident who is paying taxes to sustain hi9 own state govern- ment. To make the distributor the tax collector for the State is a familiar and sanctionedde- vice. Monamotor Oil Co. v. Johnson, 292 U.S. 86, 931194;Felt & Tarrant Co. v. Gallagher, supra. at page 337-338: .We agree with the Iowa Supreme Court that Felt &,Tarrant Co. v. Gallagher, 306 U.S. 62; Nelson v. SeaX.~~Roebuck & Co., &prra; and Nelson v. Montgomery Ward, gupra. are control- .Anzh,";l$a;h;;,case isdistinguishable. ling . at in Sears. Roebuck and Mot&gomery Ward cases the intersta'te 'vendor also had ret;n stores in Iowa, whose sales were appropriatelysubjected tj the sales tax, is constitutionallyIrrelevant to the right of Iowa sustained in those cases to exact a use tax from purchasers on mail order goods forwarded into Iowa from without the State. All these differentiationsare without constitutionalsignificance." Script0 v. Carson, 362 U.S. 207 (1960) was affirmed squarely upon the basis of the decision in General Trading Co. v. Tax Commissioner,supra, and involved similar facts. The foregoing cases clearly hold that a state statute which requires an out-of-statevendor to remit to the state the amount of a use tax imposed upon the vendee and collect such tax from the vendee is not invalid under the interstate commerce clause or the due process clause of the United States Constitution. Upon the basis of the above cited cases, we hold that the use tax imposed by the Cigarette Tax Law is a valid exercise of the state taxing power and were it not for the restrictivedefinition of "first sale" contained in the Cigarette Tax Law we would sustain the method of collection upon these authorities. However, since by definition of "first sale" the events upon which payment of the tax is predicatedmust be in intrastate commerce we must pursue this aspect of the transactionsfurther. -2605- Hon. Robert S. Calvert, page 12 (C-543) The tax imposed by the Cigarette Tax Law is required to be paid by the person making the "first sale" in this State and the payment of such tax is to be evidenced by affixing a tax stamp to each package of cigarettes. House Bill No. 474, Section 4A, Acts 1965, 59th Legislature,declares that cigarettes received by distributingagents shall be deemed possessed for purposes of making a "first sale" and requires that they pay the tax and affix the tax stamp to the packages of cigarettes, "First sale" is defined by Article 7.01 (8)'to "mean and include the first sale or distributionof cigarettes in intrastate commerce, or the first use or consumptionof ciga- rettes within this State." (Emphasisadded.) From the plain wording of this provision it is apparent that the duties imposed upon distributingagents by Section 4A of House Bill No. 474 must be performed only in the event that the activities of the distributingagent constitute a first sale or distribu- tion of cigarettes in Intrastate commerce. Even though the cigarettesare by the terms of Section 4A of House Bill No. 474, declared $0 be possessed by the distributingagent for purposes of making a first sale within the meaning of the Cigarette Tax Law, the test of whether they are possessed for that purpose is a question to be ultimately determined by federal decisions relating to the subject of what is and what is not interstate commerce for purposes of state regulation. If the cigarettes distributedby the distributingagent are, under federal decisions, in interstate commerce then no declaration to the contrary by our Legislature can take them out of such commerce for purposes of bringing them within the definition of "first sale." We turn now to the determinationof the status of the cigarettes in the hands of the distributingagent. At the outset we wish to make It clear that we do not consider cases such as Binderup v. Pathe Exchange, 263 U.S. 291 (1923); Stafford v. Wallace, 258 U.S. 495 (1922); Swift & co. v. U.S., 196 U.S. 375 1905); and Walling v. Jacksonville Paper Co., 317 U.S. 5 4 (1943) to be in point upon the question before us. These cases arose under either the Sherman Anti-Trust Act, Packers and Stockyards Act, or the Fair Labor Standards Act. The question in those cases is the extent of the power of Congress to regulate interstate commerce and those business activities and practices which pertain thereto. This is a different question from that of whether a particular exercise of state power is, in view of -2606- Hon. Robert S. Calvert, page 13 (C-543) its nature and operation, considered to be in conflict with the authority of Congress under the commerce clause. The aower of Conaress extends to activities which. when considered beparately,are intrastate but which have a Glose,and sub- stantial relation to interitate commerce. Santa Cruz Co. v. Labor Board, 303 U.S. 453 (1938); Atlantic Coast Line Ry. Co. V. Standard Oil Co., 12 F.2d 541 (4th Cir. 1926) reasoning and conclusionsapproved in 275 U.S. 257 (1927); Bacon v. Illinois, 227 U.S. 504 (1913); Minnesota v. Blasius, 290 U.S. 10. Neither do we consider those cases dealing with the original package doctrine or the power of the states with re- spect to the export-importclause determinativeof the question before us. That provision of the United States Constitution which declares that "No state shall, without the consent of Congress, lay any imposts or duties on imports or exports" does not refer to articles brought into one state from another, it refers onlv to articles imoorted from foreinn countries into the Unit&d States. Brow; v. Houston, 114-U.S. 622 (1885); Woodruff v. Parham, 8 Wall. 123 (1868); Sonneborn Bros. v. Cureton, 262 U.S. 506 (1923). The "original package doctrine" is also limited in application to articles imported from foreign countries. The distinction is that the Immunity from state taxation attaches to the import before sale, while an article in interstate commerce is immune to state regulation or taxa- tion only if it regulates or burdens interstate commerce. Sonneborn Bros. v. Cureton, s;pra. We also point out that Standard Oil Co. v. ffraves 2 9 U.S. 389 (1919) Askren v. Continental Oil Co.. 252 UTS. 444 11920) and Bowman v. Conti- nental Oil Co_, -U.S. 6&(19213 have been overrul Led inso- far as the-purport to extend the protection of the "original package doctrine" to articles brought from one state into another. Sonneborn Bros. v. Cureton, supra, page 520. After considerationof the decisions of the Supreme Court of the United States dealing with the question of when articles in interstate commerce have come to rest for purposes of state taxation or regulation,we are of the opinion that once the cigarettes have arrived at the warehouse of the distributingagent they are no longer the subject of interstate commerce. American Steel & Wire Co. v. Speed, 192 U.S. 500 (1904); General Oil Co. v. Crain, 209 U.S. 211 (1938); Bacon v. Illinois, 227 U.S. 504 (19135; Independent Warehouses v. 331 U S 70 (1947); Minnesota v. Blasius 290 U.S. m,* SusqGeianna Coal Co. v. City of South Akboy, 228 U.S. 665'(P913). While it is contended by the manufacturer that when a carload of cigarettes leaves its plants destined for the -2607- Hon. Robert S+ Calvert, page 14 (c-543) warehouse of the distributingagent in Texas there are contracts covering 50% oftthe carload and upon arrival at the warehouse W-98$ of such cigarettes have been sold under additional contracts entered into while the car was in transit, the fact remains that upon arrival at the warehouse the cigarettes are the property of the ,manufacturer.They are billed from the manufacturer to the manufacturerand at the time of shipment and arrival have no ascertainabledestination beyond the warehouse. It is only upon the subsequent order of the manufacturer that the distributingagent rebills the cigarettes to purchasers. Although the manufacturermay, at the time a given carload arrives at the warehouse, have accepted and approved orders calling for the delivery of a quantity of cigarettes equal in number to 97-98s of such carload, none of the cigarettes in a given carload are definitely committed to a particular purchaser. The manufacturer is free to fill such orders from cigarettes already on hand in the warehouse to which the carload was sent or from any other warehouse in which it may have cigarettes stored. The figures submitted by the Comptroller'sOffice indicate that the manufacturers keep on hand at the various warehouses presently acting as distributingagents a supply of cigarettes sufficient to meet daily demands of from 9 to 30-l/2 days. Good business practice dictates that cigarettesalready in the warehouse be used to fill orders rather than the fresh stock just arrived from the factory. Cigarettes are In fact distributedfrom the warehouse on a "first in - first out" plan, and, at the time the cigarettesare shipped from the factory of the manufacturer no particular case or carton of cigarettes can be pointed to as being destined for any place other than the warehouse of the distributingagent. This method of operation is solely for the business purposes of the manufacturer in facilitatingthe sale and delivery of its products and to secure the economic advantage of lower freight rates on carload shipments. The facts do not present a case where a delay In transit to the destination is occasioned bv the necessities of safets or in furtherance of interstate transportationas was the case in Champlain Co. v. Brattleboro,260 U.S. 366 (1922). The facts before us are surprisinglysimilar to the S;;;;,in American Steel & Wire Co. V.-Speed, 192 U.S. 500 . In that case. the Wire Comoanv was a New Jersey corporation which had'made an agreement with a Memphis," Tennessee warehouse company whereby the warehouse company would receive the Wire Company's products shipped from its factory and billed to itself, warehouse such shipments and -2608- Hon. Robert S. Calve&, page 15 (C-543) deliver them upon the order of the Wire Company to persons who had purchased the products. The Wire Company contended that the products were merely in transit from the point of manufacture outside Tennessee to persons who had previously purchased them and were thus not subject to a merchant's tax and merchant's privilege tax. In rejecting this contention and holding that such products as were in the warehouse were not in interstate commerce, the Court stated at page 519: "With these facts in hand we are of opinion that the Court below was right in deciding that the goods were not in transit, but, on the con- trary, had reached their destination at Memphis and were there held in store at the risk of the Steel Company, to be sold and delivered as con- tracts for that purpose were completely consum- mated. . . ." In General Oil Co. v. Grain, 209 U.S. 211 (1908) the company conducted an oil business in Memphis, Tennessee where it gathered shipments of oil from other states, placed it in storage tanks and distributedit to purchasers. Part of the oil was placed in a tank marked for distribution pursuant to orders for oil already sold in other states. The Court held that the first shipment had ended with the storage at Memphis for subsequent distributionand was "for the business purposes and profit of the company"; that the tank in Memphis had merely become a depot in the oil business of the company for preparing the oil for another interstate journey. The language at page 230-231 of the opinion in the General Oil Co. case is especially relevant to the case before us. I, .The company was doing business in the State and its property was receiving the protection?of the State. Its oil was not in movement through the State. It had reached the destination of its first shipment, and it was held there, not in necessary delay or accommodationto the means of transportation, . . . but for the business purposes and profft of the company. It was only there for distri- bution, it is said, to fulfill orders already received. But to do this required that the property be given a locality in the State be- yond a mere halting in its transportation. It -2609- Hon. Robert S. Calvert, page 16 (c-543) required storage there---the maintenance of the means of storage, of putting it in and taking it from s'torage. The bill takes pains to allege this. 'Complainantshows that it is impossible, in the coal oil business, such as complainant carries on, to fill separately each of these small orders directly from the railroad tank cars, because of the great delay and expense in the way of freight charges incident to such a plan, and for the further reason that an ex- tensive plant and apparatus is necessary, in order to properly and convenientlyunload and receive oil from said tank cars, and it would be impracticable,if not impossible, to have such apparatus and machinery at every point to which complainant ships said oil,' "This certainly describes a business--- describes a purpose for which the oil is taken from transportation,brought to rest in the State and for which the protection of the State is necessary, a purpose outside of the mere transportationof the oil. The case, therefore, comes under the principle announced in American Steel & Wire Co. v. Speed, 192 U.S. 5007 It was held in Susquehanna Coal Co. v. South Amboy 228 U.S. 665 (1918) that the storage for distribution of coal, under facts similar to the American Steel & Wire and General Oil Co. cases, was not within the protection of the 1Bt.e commerce clause. See also Independent Warehouses v. Scheele, 331 U.S. 70 (1947). As a general rule, where the owner of property with- draws it from the stream of interstate commerce for his own benefit and business purposes and brings it to rest within the state under his control and subject to disposal at his direction, such property becomes a part of the mass of proper- ty within the state and Is subject to regulation. Brown v. Hmston, 114 U.S. 622 (1885); Bacon V. Illinois, 227 U.S. 504, m Minnesota v. Blasius, WT. We therefore hold that shipments from the warehouse by the distributingagent upon the order of the manufacturer are distributionsor sales in intrastate commerce within the meaning of the definition of "first sale" in Article 7.01 (8) and are not protected from state regulation by the interstate -2610- , Hon. Robert S. Calvert, page 17( C-543) commerce clause. As to the question of whether the exaction of the payment of the tax from the distributingagent and the ensuing cost of affixing the tax stamp to the packages of cigarettes deprives the distributingagent of property without due pro- cess, we hold that it does not. Under the facts before us, we consider the distri- buting agent to be exactly what the term Implies---anagent of each manufacturer of cigarettes which it contracts to serve. While, as the facts reveal, each of the 13 distribut- ing agents now operating in this State are public warehouses, this fact does not change their relationshipwith the cigarette manufacturers. Each of these public warehouses have contracted, with the respective cigarettes manufacturerswhich they serve, to receive shipments of cigarettes belonging to the manufactur- er, unload them from boxcars, sort and store them in their warehouse, and, upon the subsequent order of the manufacturer, rebill and deliver to carriers specified quantities of cigarettes for purchasers located in Texas who have placed their orders directly with the manufacturer. That the contracts between the warehouses and the manufacturermay by their terminologydesignate the relationshipas something other than that of principal and agent or the fact that the warehouse may serve any number of principals does not affect the legal significance of the relationshipas one of agency. Any doubt in this respect is specificallyresolved by Article 7.01 (16) which makes those persons performing the services rendered by the warehouses in question agents of the out-of-statemanu- facturers. The payment of the tax is occasionedby the performance of acts which are within the scope of the agency relationship. If the warehousemandoes not act as the agent of a cigarette manufacturer then no payment of the tax is exacted from him. No one is compelled to act as a distributingagent for the manufacturerand should anyone choose to so act they should assure themselves that they will be reimbursed by their principal for the taxes paid in the cwrse of such agency. Bowman v. Continental Oil Co. 256 U.S. 642 (1921); Monamotor Oil Co. v. Johnson, 292 U.S. 66 (1934); Felt & Tarrant Mfg Co. v. Gallagher, 306 U.S. 62 (193g);Nelson v. Sears, Roebuck & Co 312 U.S. 359 (1941); Nelson v. Montgomery Ward, 312 U.S. 373 ci941); Wisconsin v. J. C. Penney Co., 311 -2611- . . . Hon. Robert S. Calvert, page 18 (C-543) U.S. 435 (1940: and Qeneral Trading Co. v. Tax Commissioner, 322 U.S. 335 (1944) are all directly opposed to the contention that the impositionupon an out-of-statevendor of personal liability for the collection of use taxes exacted by the state of the vendee violates the,due process clause of the 14th Amendment to the United States Constitution. We can perceive of no reason why the rationale of these decisions would not apply with equal force where the collection of such tax is made through the agent of the vendor. The fact that a aubstan- tial expense is involved in the rental of machines and employ- ment of operators necessary to affix the stamps to the cigarettes does not alter our decision upon this question. Reliable figures furnished to us by the Comptroller indicate that the 2-l/4$ discount allowed those who are required to purchase and affix stamps to cigarettes not only offsets the expense of such operation but affords a substantial profit. Under such circumstancesthere is no denial of due process. In answer to your first question, you are hereby advised that under the provisions of Section 4A of House Bill No. 474, Acts 1965, 59th Legislature,distributingagents are required to pay the taxes assessed by the Cigarette Tax Law and affix the tax stamps to all cigarettes distributed by such agent prior to the time the cigarettes leave the warehouse of the distributingagent for delivery within this State to anyone other than an exempt consignee. In this connection,you are further advised that the term "exempt consignee" has reference to those persons who are authorized to receive and distribute or sell unstamped cigarettes. When cigarettes leave the warehouse of a distri- buting agent under a bill of lading, "consigned to" a person authorized to receive and distribute or sell unstamped cigarettes,the distributingagent Is not required to pay the tax or affix the stamps to such cigarettes. Any other constructionof the term “exempt consignee” would be in direct conflict with the other provisions of Section 4A which pro- vide that every distributingagent shall be treated as a “distributor”and the distributingagent shall pay the taxes assessed by this Chapter and affix the stamps. Your second question inquires as to what effect Section 4B of House Bill 474 will have upon Article 7.01 (16) and Article 7.23 (l), (3) and (4). -2612- Hon. Robert S. Calvert.,page 19 (C-93) Section 4H of House Bill No. 474 merely repeals Section 2 of Article 7.23 and has no effect upon the other provisions of the Cigarette Tax Law which you mention In your second question. We wish to point out, however that Section &A of House Bill No. 474 by amending Section (1) of Article 7.23 "to read as follows" completely replaces such section. SUMMARY The tax imposed by the Cigarette,TaxLaw is a valid use tax. Section 4A of House Bill No. 474, Acts 1965, 59th Legislature,is constitutionaland by its terms "distributingagents" are required to pay the tax assessed by the Cigarette Tax Law and affix the tax stamps to all cigarettes prior to the time such cigarettes leave the warehouse for delivery in this State; provided that no tax need be paid or stamp affixed to cigarettes which leave such warehouse for de- livery within this State on a bill of lading "consignedto" a person who is authorized under the law to receive and distribute or sell un- stamped cigarettes. Section 4B of House Bill No. 474, Acts 1965, 59th Legislature,merely repeals Article 7 2 (2) and has no effect u on Article 7.01 (id or Article 7.23 (l), (37 and (4). Very truly yours, WAGGONER CARR Attorney General W. 0. Sh Assistan wos :ml -2613- -/ . Hon. Robert S. Calvert, @age 20, (C-543) APPROVED: OPINION COMMI~EE W. V. Geppert, Chairman Kerns Taylor John Reeves Arthur Sandlin John Banks Bill Allen APPROVED FOR THE ATTORNEY GENERAL BY: T. Ei.Wright -2614-