Appeal of HANES DYE AND FINISHING COMPANY, WINSTON-SALEM, North Carolina, and 106 of its Customers from a Decision of the State Board of Assessment Regarding the Taxable Situs and Valuation of Cloth Goods Owned by the 106 Customers but in Hanes' Possession in Winston-Salem on January 1, 1972.
No. 44.Supreme Court of North Carolina.
August 30, 1974.*734 P. Eugene Price, Jr., Winston-Salem, for Forsyth County, appellant.
Hudson, Petree, Stockton, Stockton & Robinson by W. F. Maready, Winston-Salem, and John V. Hunter, III, Raleigh, for Hanes Dye and Finishing Company and 106 of its Customers, appellees.
BOBBITT, Chief Justice.
We assume, without deciding, it was Hanes's legal duty under G.S. § 105-315(a) to report the facts to the Forsyth County Tax Supervisor concerning the goods owned by its 106 customers but in its custody on 1 January 1972. By the terms of G.S. § 105-315(b), any person who is required to file such a report but fails to do so becomes obligated for any unpaid portion of the tax assessed plus a penalty of $250.00. However, upon filing the report prescribed by G.S. § 105-315(a), Hanes discharged its legal obligation. No statutory provision has been cited which purports to make Hanes liable for the taxes assessed on these goods or restrict in any way Hanes's right to dispose of these goods as directed by the owners thereof. However, Hanes would be affected substantially in these respects: (1) A tax required of a potential customer would adversely affect Hanes's position in a highly competitive field; and (2) both *735 Hanes and its customers would suffer inconveniences incident to obtaining accurate data as to the ownership of the goods on hand on January 1st and as to the precise condition of the goods of each customer as of that date.
We consider first whether North Carolina statutes authorize the taxation of goods which (1) are owned by nonresident converters, and (2) are shipped from outside North Carolina to Hanes for processing and reshipment to these converters or to their customers at designated places outside of North Carolina. Whether the goods of all the 102 nonresident converters are in this category will be discussed in the latter portion of this opinion.
Prior to 1972, there had been no taxation of goods of nonresidents in the custody of Hanes under substantially the same conditions on the particular day prescribed for the listing of tangible personal property for ad valorem taxes.
The State Board held that the goods owned by the 102 nonresident converters had a tax situs in Forsyth County on 1 January 1972.
G.S. § 105-274(a), cited by the State Board, provides: "All property, real and personal, within the jurisdiction of the State shall be subject to taxation unless it is: [Defined exclusions and exemptions not pertinent to this appeal.]" We note that a provision to this effect has been a part of our statutory law at least since 1939. See Public Laws of 1939, Chapter 310, Section 303. In determining whether goods such as those now under consideration are to be taxed for the first time for 1972 taxes, decision depends upon interpretation of the portion of the 1971 Act now codified as G.S. § 105-304. We note that the State Board based its decision on G.S. § 105-304(d)(1) and (2).
G.S. § 105-304, as now codified, was enacted in 1971. It is captioned, "Place for listing tangible personal property," and consists of subsections (a) through (h). Subsection (a) provides for the listing of all taxable tangible personal property that has a tax situs in this State, the place in this State in which such property is taxable to be determined according to the rules prescribed in subsections (c) through (h).
Subsection (b) provides:
"(b) Definitions.For purposes of this section:
"(1) `Situated' means more or less permanently located.
"(2) `Business premises' includes, for purposes of illustration, but is not limited to the following: Store, mill, dockyard, piling ground, shop, office, mine, farm, factory, warehouse, rental real estate, place for the sale of property (including the premises of a consignee), and place for storage (including a public warehouse)."
Subsection (d) of G.S. § 105-304 provides:
"(d) Property of Taxpayers With No Fixed Residence in This State.
"(1) Tangible personal property owned by an individual nonresident of this State shall be taxable at the place in this State at which the property is situated.
"(2) Tangible personal property owned by a domestic or foreign taxpayer (other than an individual person) that has no principal office in this State shall be taxable at the place in this State at which the property is situated."
The State Board's decision rests primarily upon its finding and conclusion that the goods owned by the 102 out-of-State converters were in Hanes's possession on 1 January 1972 for "a very substantial business purposethat of being dyed, finished or otherwise processed"; that these goods were in North Carolina for the length of time necessary for completion of this manufacturing process; and that the phrase, "more or less permanently located," used to define "situated" in G.S. § 105-304(b)(1), does not apply to the facts in the present case.
It was stipulated that the work done in Hanes's plant for the out-of-State converters added a value to the cloth dyed or *736 otherwise finished. Citing this fact, the brief for Forsyth County draws the conclusion that not only Hanes but the out-of-State converters were engaged in manufacturing in North Carolina at Hanes's plant. As support for this view, Forsyth County cites Bleacheries Co. v. Johnson, Comr. of Revenue, 266 N.C. 692, 147 S.E.2d 177 (1966), and Bedford Mills v. United States, 59 F.2d 263, 77 Ct. Cl. 190 (1932).
In Bleacheries Co., the plaintiff, a Rhode Island corporation, operated a textile finishing plant in North Carolina. Its business operations were closely analogous to those of Hanes. It was held that plaintiff's operations constituted manufacturing within the meaning of the statutes relating to its income and franchise taxes. Unquestionably, in respect of the goods it finished for its customers on a contractual basis, Hanes was a manufacturer. Whether the out-of-State converters were manufacturers as contended by Forsyth County is an entirely different matter.
In Bedford Mills, the plaintiff, a New York corporation, was a converter. The controversy related to its liability in respect of federal income and excess profits taxes. The precise question was whether its inventories, consisting of goods in various stages of manufacture short of the final finished product, were to be valued in accordance with the regulations applicable to a trader as contended by Bedford Mills or under the regulations applicable to a manufacturer as contended by the Commissioner of Internal Revenue. Seemingly, Bedford Mills is authority only for the proposition that, for the purpose of computing federal taxes, these goods are to be inventoried as unfinished goods in process of manufacture rather than as completed products available for sale as merchandise. Obviously, the Commissioner of Internal Revenue was not concerned at all with the tax situs for ad valorem taxes of goods owned by Bedford Mills in the possession of a finishing mill.
Although Hanes was engaged in manufacturing when processing the goods of its customers, Forsyth County's contentions (1) that the out-of-State converters were also engaged in manufacturing in North Carolina, and (2) that the "business premises" of Hanes were also the business premises of the out-of-State converters, are unrealistic and without merit. Hanes was not an agent of the out-of-State converters.
In In re Publishing Co., 281 N.C. 210, 188 S.E.2d 310 (1972), cited by Forsyth County, the question was whether all of the newsprint owned by the publishing company, a North Carolina corporation, and in its possession in Buncombe County on January 1st, was subject to ad valorem taxes. The publishing company had imported the newsprint. It contended it would take only six days to get an additional supply from its Canadian suppliers; and, therefore, an ad valorem tax on the portion of the newsprint in excess of a six-day supply would be a State tax on imports in violation of Article I, Section 10, of the United States Constitution. The Court held that all newsprint on hand on January 1st was subject to ad valorem taxes in Buncombe County, North Carolina, upholding the finding of the State Board of Assessment that the entire supply of newsprint on hand on January 1st constituted "current operational needs."
The opinion of Justice Branch in In re Publishing Co., supra, quotes the following from the opinion of Chief Justice Marshall in Brown v. Maryland, 25 U.S. (12 Wheat.) 419, 441-442, 6 L. Ed. 678, 686 (1827): "It is sufficient for the present to say, generally, that when the importer has so acted upon the thing imported, that it has become incorporated and mixed up with the mass of property in the country, it has, perhaps, lost its distinctive character as an import, and has become subject to the taxing power of the State. . . ." Chief Justice Marshall noted that the act of an importer who imports goods into this country for "his own use" and here uses them for the purpose for which they are imported indicates the article has lost its character as an import.
The factual situation now before the Court is quite different. Greige goods *737 shipped into North Carolina for finishing by Hanes and then shipped out of North Carolina do not become incorporated and mixed up with the mass of property in North Carolina. None of it is owned by Hanes for any purpose. The identity of each specific lot and the owner thereof are carefully preserved at all times. Pursuant to a contractual arrangement in respect of each lot, it is more accurate to say that Hanes simply performs a service for which it receives a commission.
The State Board held that the term, "more or less permanently located," used to define "situated" in G.S. § 105-304(b)(1), is applicable only when it becomes necessary to determine which of two or more locations has the greater degree of permanence with reference to the particular property under consideration. It asserts this term had its origin in In re Freight Carriers, 263 N.C. 345, 139 S.E.2d 633 (1965), in which the question was whether certain motor vehicles owned by Pilot Freight Carriers were taxable in Forsyth County, where Pilot, a North Carolina corporation, had its principal place of business, or in Mecklenburg County, where Pilot maintained a terminal. It asserts the Court in that case expanded the definition of "situated" by saying that it did not mean "a mere temporary presence." Our research indicates that the term, "more or less permanently located," did not have its origin in In re Freight Carriers, supra. Nor does it appear that the generally accepted definition of this term was expanded therein.
The general use and significance of the term, "more or less permanently located," is set forth in 71 Am.Jur.2d, State and Local Taxation §§ 660 and 661.
§ 660 provides: "Before tangible personal property may be taxed in a state other than the domicile of the owner, it must have acquired a more or less permanent location in that state, and not merely a transient or temporary one. Generally, chattels merely temporarily or transiently within the limits of a state are not subject to its property taxes. Tangible personal property passing through or in the state for temporary purposes only, if it belongs to a nonresident, is not subject to taxation under a statute providing that all real and personal property in the state shall be assessed and taxed. . . A criterion is whether the property is there for an indefinite time or some considerable definite time, and whether it is used or exists there to be used in much the same manner as other property is used in that community. . . ."
§ 661 provides: "Permanency in the sense of permanency of real estate is not essential to the establishment of a taxable situs for tangible personal property. It means a more or less permanent location for the time being. The ownership and uses for which the property is designed, and the circumstances of its being in the state, are so various that the question is often more a question of fact than of law. In the final analysis, the test perhaps is whether or not property is within the state solely for use and profit there. . . ."
Also, see Annotation, "Situs as between different states or countries of tangible chattels for purposes of property taxation," 110 A.L.R. 707, 717, 723 (1937), and supplemental decisions. At p. 717, the author states: "The courts are all agreed that before tangible personal property may be taxed in a state other than its owner's domicil, it must acquire there a location more or less permanent. It is difficult to define the idea of permanency that this rule connotes. It is clear that `permanency,' as used in this connection, does not convey the idea of the characteristics of the permanency of real estate. It merely involves the concept of being associated with the general mass of property in the state, as contrasted with a transient statusviz., likelihood of being in one state today and in another tomorrow."
Although each involved a factual situation different from that now under consideration, we note that the term, "more or less permanently located," either verbatim or in essence, appears in Mecklenburg *738 County v. Sterchi Bros. Stores, 210 N.C. 79, 83-84, 185 S.E. 454, 457 (1936); Credit Corp. v. Walters, 230 N.C. 443, 446, 53 S.E.2d 520, 522 (1949); Montague Brothers v. Shepherd Co., 231 N.C. 551, 554, 58 S.E.2d 118, 121 (1950). If it be considered that the meaning of the word "situated" as used in In re Freight Carriers, supra, to wit, "Clearly, situated connotes a more or less permanent location," was expanded by the next sentence, to wit, "It does not mean a mere temporary presence," the definition of "situated" in subsection (b) of G.S. § 105-304 was incorporated in our statutory law by Chapter 806, Session Laws of 1971, presumably with full knowledge of what the State Board called the expanded meaning of the term.
In Transfer Corp. v. County of Davidson, 276 N.C. 19, 170 S.E.2d 873 (1969), the plaintiff, a North Carolina corporation having its principal office and place of business in Davidson County, was a common carrier of freight. It contended Davidson County was entitled to assess ad valorem taxes only on the proportion of the value of the vehicles engaged in interstate commerce which the number of miles traveled in this State bore to the total miles traveled by these vehicles. The plaintiff failed to show either that its vehicles were operated along fixed routes and on regular schedules into, through, and out of the nondomiciliary states, or that its vehicles were habitually situated and employed in other states throughout the year. The Court held the entire value of these vehicles was subject to taxation by Davidson County. The decisions cited relate to analogous properties, e. g., ships, railroad cars and aircraft. The analyses of these decisions by Justice Huskins in his opinion for this Court disclosed that to acquire a tax situs in a nondomiciliary state it must be shown that the property had a permanent situs or be habitually employed therein. Also, see In re Trucking Co., 281 N.C. 375, 393, 189 S.E.2d 194, 206 (1972).
The State Board was of the opinion that any determination of the tax situs of tangible personal property must take into account the nature of the property involved. We agree.
Each of the decisions cited by Forsyth County and by Hanes has been considered. Suffice to say, none is deemed authoritative or persuasive with reference to the present factual situation. Most involve factual situations in which the same property, e. g., motor vehicles, passed back and forth between states. Others involve property, e. g., road machinery, used in a nondomiciliary state in the prosecution of the owner's business.
We are considering now the goods of nonresident converters shipped from outside of North Carolina to Hanes for processing and reshipment to these converters or to their customers at designated places outside of North Carolina. Presumably, the greige goods shipped to Hanes for finishing had been in existence as greige goods a comparatively short time before being shipped to Hanes. Whether they had been taxed as greige goods during 1971 in the state where they were manufactured does not appear. The present case involves 1972 taxes. The goods in possession of Hanes on January 1st, whether still greige goods or partially or completely finished, were in its possession for a single purpose and for a fixed and limited time. Their temporary presence in North Carolina was for the sole purpose of enabling Hanes in the prosecution of its business to perform a service. After this service had been completed, the goods were shipped as directed by the converters, ordinarily to the new owners thereof, such as manufacturers of automobiles and of clothing, who would incorporate them in their completed manufactured articles. To what extent, if any, these same goods, in the same form or after being incorporated into the final product of the new owner, were subject to 1972 ad valorem taxes in the state of the new owner does not appear. We note that the dates for listing tangible personal property for ad valorem taxation differ from state to state. The question here is not whether the greige *739 goods in the possession of Hanes on January 1st were subject to taxation on that date in the states where the owners thereof on that date resided. The sole question is whether the goods had a tax situs in Forsyth County on January 1st.
Ultimate decision depends upon whether the stipulated facts establish that these goods of nonresident owners were more or less permanently located in Forsyth County on January 1st. Obviously, the words more or less permanently exclude the necessity of establishing unqualified permanency such as actual and continuous presence in the State. On the other hand, any degree of permanency would seem to require more than a temporary presence of limited duration within the State for a specific service pursuant to a scheduled arrangement as to time of entrance and departure.
We hold these goods were not "situated" or "more or less permanently located" in Forsyth County on 1 January 1972, and therefore did not have a tax situs in Forsyth County on that date. Hence, with reference to these goods, our decision is in accord with that of Judge Armstrong.
Attention is directed to the following portions of the stipulations:
Paragraph 4 in part states: "[T]he converter then buys cloth known as `greige goods' from a greige mill. Most of such mills are located in the Southern States. During 1971, approximately 10% of the greige goods shipped to Hanes came from greige mills in North Carolina. This percentage is closely representative of the past 3 or 4 years."
Paragraph 12 in part states: "During 1971, approximately 95.4% of all work done by Hanes was for customers having their principal office and place of business outside the State of North Carolina. The remaining 4.6% of the work was done for corporations having their principal office and place of business in North Carolina. The [4] North Carolina corporations and their principal office and place of business were as follows: [Names and addresses omitted.] Approximately 95% of the goods shipped from Hanes during 1971 were shipped out of the State of North Carolina."
Whether all of the four North Carolina corporations are converters rather than manufacturers of greige goods is unclear. Certainly, greige goods manufactured in North Carolina, shipped to Hanes for processing, and owned by a North Carolina corporation when in Hanes's custody on January 1st, are subject to ad valorem taxes in North Carolina. The same is true in respect of goods owned by a North Carolina corporation but in Hanes's possession on January 1st without regard to whether the North Carolina corporation purchased the goods from a greige mill in North Carolina or from a greige mill outside the State and had them shipped to Hanes for processing. In respect of a North Carolina corporation, its tangible personal property located in North Carolina on January 1st is subject to ad valorem taxation without reference to whether it is in the custody of Hanes or in the actual custody of the North Carolina corporation. Whether such property is taxable in the county where the principal office and place of business is located or the county where the property is physically situated is a matter for determination by the State Board of Assessment. In re Freight Carriers, supra.
The quoted portions of the stipulations give rise to uncertainty as to what goods, if any, owned by nonresident converters but in Hanes's possession on January 1st had been purchased from North Carolina greige mills and shipped to Hanes for processing and reshipment to the converter or its customer at a destination outside of North Carolina. In our view, the goods, if any, in this category, are subject to ad valorem taxation by Forsyth County. In a decision cited by Forsyth County, to wit, Standard Oil Company v. Combs, 96 Ind. 179, 49 Am.Rep. 156 (1884), the holding is accurately and succinctly stated in the headnote (Am.Rep.) as follows: "Chattels purchased in one state by a citizen of another, *740 and remaining in the former to receive a finishing process of manufacture, are taxable in the state where purchased."
The quoted portions of the stipulations also give rise to uncertainty as to what portion, if any, of the goods owned by nonresident converters but in Hanes's possession on January 1st had been purchased from greige mills outside of North Carolina and shipped to Hanes for processing and for reshipment by Hanes in accordance with the nonresident converters' instructions to customers in North Carolina. We are inclined to the view that goods in this category, if any, would be subject to taxation by Forsyth County. However, absent a clarification of the facts relating to such a situation, we make no definitive ruling.
In view of his adjudication that none of the goods of the 106 customers were subject to ad valorem taxes, Judge Armstrong made no decision with reference to the basis on which the goods, if subject to ad valorem taxes, should be appraised. This question will be for consideration by the superior court if and when it is determined that any of these goods were subject to ad valorem taxes.
The foregoing leads to these conclusions: With reference to goods of nonresident converters shipped from outside of North Carolina to Hanes for processing and reshipment to these converters or to their customers at designated places outside of North Carolina, the judgment of Judge Armstrong is affirmed. With reference to goods, if any, in the other categories discussed above, the cause is remanded for clarification of the facts and for further consideration in a manner not inconsistent with this opinion.
Affirmed in part, modified and remanded.
HIGGINS, Justice (dissenting from that part of the opinion which modifies and remands the proceeding for further consideration).
In my opinion the subject property was never more or less permanently situated in North Carolina and, therefore, did not acquire a tax status in this State. The stipulated facts fail to bring the subject property into the ambit of North Carolina taxing statutes and Judge Armstrong's judgment dismissing the action should be affirmed.