November 12, 

### 1965

HonorableRobert S. Calvert Comptrollerof PublicAccounts Austin, Texas OpinionNo. C-543

Re: Whether distributing agents, now defined in H.B. No. 474, Section &A, who qualify
as distributors,

will be required,under this Article, to affix cigarettestamps or meter impressionsto all unstamped cigarettes stored in such a person's place of business that
are designatedfor distribution 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. Dear Mr. Calvert:

You have requested the opinion of this office on the followingquestions:

"1

. Will distributingagents, now defined in H.B. No. 474, Section 4A, who qualify as distributorsbe required-under this Article to affix cigarette stamps or meter impressionsto all unstamped cigarettesstored in such a person's place of business that are designatedfor dlstribution or first sale to other distributors, wholesalersand retailersthat 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 distributing agent who stores cigarettesin 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,subject to the provisionsof this Chapter regulating "distributors"

and cigarettesstored in such a person'splace of business for distributionIn this State shall be consideredpossessedfor the purposes of making a "first sale" In Texas within 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 cigarettesshall 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 licensingprovisions applicableto a distributoras provided in Article 7.09 of this Chapter,as amended, except that personsholding a valid permit as a distributingagent at the effectivedate of this law may continue In businessunder such permits, subject to the terms and regulationsof this

~. law, until the expiration, thereof at which time such a distributingagent must obtain a distributor'spermit 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 applicationfor permit and final action thereon.'

-25%Hon. Robert S. Calvert, page

"Sec. 4B. 'Section3 (c-543)

(2) of Article 7.23, Title 122A, Taxation-General, Revised Civil Statutes of Texas, 1925, is repealed."

The term "distributing agent" is defined in Article 7.01 (16) of Taxation-General of Vernon's Civil Statutes, which is a part of what is commonlyknown as the Cigarette Tax Law. Such Section reads as follows:

“(1.6) ~Distributing Agent' shall mean and include every person in this State who acts as an agent of any person outside the State by receiving cigarettesin interstatecommerceand storing such cigarettessubject to distribution
or deliveryupon order from said pe'rson outside the State to distributors and retail dealers.

. . :" wholesaledealers

The rate of tax is specifiedby Article 7.02 and Article 7.06 of the CigaretteTax Law and is imposedupon "all cigarettesused or otherwisedisposed 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 'firstsale' In this State and shall become due and payable as soon as such cigarettesare subject to a 'firstsale' in Texas,

. . .'
The term "first sale" is defined in Article 7.01 (8) of the CigaretteTax Law, which reads as follows:

“(8) 'FirstSale' shall mean and include the first sale or distributionof cigarettesin intrastatecommerce,or the first use or consumption of cigaretteswithin this State."
Article 7.02 (3) of the CigaretteTax 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 possessorof cigarettesin 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 cigarettesand recovered 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 cigarettessold and'consumedin Texas are manufactured outside the State and shipped into this State by the manufacturer. The cigarettesare manufacturedby: American Tobacco Company;Brown and WilliamsonTobacco Company; Liggett and Meyers Tobacco Company; P. Lorillard Company; Phillip Morris, Inc.; and R. J. ReynoldsTobacco Company,all of which
are foreign corporations with a certificateof authorityto transactbusinesswithin the State of Texas. At the present time there are ten warehouseswithin the State which are licensed as distributingagents and which receive and distribute cigaretteson behalf of the manufacturingcompanies.

Each of the manufacturersemploy a number of persons in Texas who promote the sale of cigaretteswithin the State and who occasionally receive orders for cigaretteswhich in turn are relayed by them to a wholesaledealer or distributor. All orders for cigarettesare sent to the home office of the out-of-state

manufacturerfor approval and acceptance. Representatives

of the Comptroller's Office-have inquired into and ascertainedthe details involved in the shipment to, and distributionfrom, UniversalTerminalWarehouse located in Houston, Texas. The facts revealedby this investigationwill be taken as typical of the operationof all warehouses in Texas now holding permits as distributing agents.
Except for an insignificant number of "drop shipments" specificallycovered by Article 7.01 (9) of the CigaretteTax Law, all cigarettessold within this State are shipped into the State by the manufacturerin railroad freight cars or common carrier trucks. The cigarettesare shipped pursuant to bills of lading showing the shipment to be from the manufacturer, consignedto the manufacturerin care of a particular distributingagent warehouse. The manufacturerretains title to the cigarettes. Upon arrival at the warehouse of the distributingagent, the cigarettesare unloaded, placed in the warehouse,and a check sheet verifying the arrival of the shipment of cigarettesis 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 distributing agent they are removed only pursuant to the order of the manufacturer. All orders directing the distributionof the cigarettesare transmittedfrom the manufacturerto the distributing agent by mail, teletype or telephone. Distributionsfrom the warehouseare on bills of lading from the manufacturerto the purchaser. Shipping charges are paid by the manufacturerdirect to the carrier and the purchaser is billed for the cigarettesby the manufacturer. The distributingagent ships the cigarettesfrom the warehouse on a "first in - first out" basis and is compensated for its servicesaccording to the volume of cigarettes handled, calculatedon a flat rate per hundred weight. Frequent audits of the cigarette stocks on hand in the warehouses of ! the distributing

agents are made at unscheduledtimes by the manufacturers. The Comptroller'sinvestigationof Universal Terminal Warehousedisclosed that the average supply of cigarettesin such warehouseat all, times is sufficientto meet average daily demands for 13 working days.

The Comptroller's Office has made an analysis of the inventory of cases of cigaretteson hand at each of the ten distributingagents for the month of December, 1964, in order to show a typicalmonthly operation of these facilities. The average days supply on hand and the average daily deliveries
are based upon a monthly delivery period of twenty-onedays. Rather than naming the distributingagents we are for convenience simply numberingthem from 1 to 10 in the table that follows. In relating the quantitiesof cigaretteslisted in this table to shipments into the State, we are informed that a carload of cigarettesconsists 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 

# z,‘i
401 31: 907 1,044 2,157 154 1,664 6,309

11,661 3,798~58/6o 12,385 5,232-14/60 12,465 11,759-W/60 2;,;$-45/60
211613-22/60 15 

# :‘3

30-1/2 

# :z
11 11

191

-2599-Hon. Robert S. Calvert,page 6 (C-543)

The cigarettesare shipped by the manufacturerin cardboard containersknown as cases. Each case contains 60 cartons of cigarettes;each carton contains 10 packages of cigarettes;and each package contains 20 cigarettes. The CigaretteTax Law requires that the tax stamp be affixed on each package of cigarettes. In order to accomplishthis, it is necessarythat the cases be opened and the cartons placed upon a machine which opens the cartons, affixes the stamp to each package, and reseals the cartonswhich are then replaced in the cases and the cases resealed.

The tax imposed by the CigaretteTax Law is, by Article 7.02 (3), declared to be a tax imposedupon the ultimate consumer or user of cigaretteswithin 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 decisionsby the Supreme Court of the United States have sustainedthe impositionof use taxes against the challengeof 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. MontgomeryWard, 312 U.S. 73

?59 (1941

7 (1941); Nelson v. Sears, Roebuck & Co., 312 U.S. * McGoldrickv. Berwind-WhiteCoal Co., 309 U.S. 33 1939); So&hern Pacific Co. v. Gallagher, 306 U.S. 167 (1939); Felt & Tarrant Mfg Co. v. Hennefordv. Silas'MasonCo Gallagher_,

306 U.S. 62 (1939); 300 U.S. 577 (1937);Monamotor Oil Co. v. Johnson, 292 U.S:'86 (1934). -

Although these cases are not completelydeterminative of the questionbefore us--- because of the restrictivedefinition of "first sale" in the CigaretteTax 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 interstatecommerce 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 regulationas 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 personalpropertywithin 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 propertypurchased out-of-state which was required to be paid to the State by the purchaser. Southern Pacific Company purchasedmaterials and supplies out-of-state and brought them into Californiafor use in the operationof its interstate railroadbusiness; Silas Mason Company purchasedmachinery out-of-state

which was brought into Washington for use in the constructionof the Grand Coulee Dam, In both Instances the Court upheld the tax against the contentionthat it was a tax on Interstatecommerce.

I, .Statetaxes upon national commerce or its'incidents

do 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 interstateoperator from a tax on installationis the same as from a tax on consumption or operation. This is not significant. The prohibitedburden upon commercebetween the states is created by state interference with that commerce, a matter distinct from the expense of doing business. A discrimination against it, or a tax on its operationsas such, is an interference. A tax on property or upon a taxable event in the state, apart from operation, does not interfere. This is a practicaladjustment of the right of the state to revenue from the instrumentalities of commerceand the obligation 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 operationsof interstatecommerce,but upon the privilege of
use after commerce is atan end.
II

. . .Theprivilege of use is only one attribute,among many, of the bundle of privileges 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 privilegeof use or storage when the chattelused or stored has ceased to be in transit is now an impost
so common that its validityhas been withdrawn from the arena of debate.

. . .'I 582-583. 3oo U.S. 577,

Script0 v. Carson, 362 U.S. 207 (1960);General Trading Co. v. Tax Commissioner, 322 U.S. 335 (1944);mson
v. MontgomeryWard, 312 U.S. 373 (1941);Nelson v. Sears, Roebuck & Co., 312 U.S. 359 (1941);McGoldrickv. Berwind-White Coal Co., 309 U.S. 33 (1940);Felt & Tarrant Mfg Co. v.

6306 U.S. 62 (1939)and Monamotor Oil Co. v. Johnson, (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 provisionsof the statutes the seller was required to remit the amount of the use tax to the state and collect from the
user who had purchasedthe property. In each instance,under varying facts, the use tax and method of collectionwas upheld by the Court.

In Nelson v. MontgomeryWard, su ra and Nelson v. Sears. Roebuck,& Co.*, su ra each companyma ntained retail + -+ stores in Iowa, yet bo h did large mail order businesseson ordersmailed by Iowa residentsto out-of-state branches 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 'hasnothing on which to operate.' Wisconsinv. J. C. Penney Co., supra. The purchaseris in Iowa and the tax is upon the use in Iowa. The validity of such a tax, so far as the purchaser is concerned, 'hasbeen 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 regardlessof the time and place of passing title and regardless of the time the tax is required to be paid. Cf. McGoldrickv. Berwind-WhiteCoal Mining Co., 309 U.S. 33, 49 .” 312 U.S. 359, 3b3. “Respondent,

however, insists that the duty~of tax collectionplaced on it constitutes
a regulationof and substantialburden upon interstatecommerceand results In an impairment of the free flow of such commerce. .Respondent further stresses the cost to it’of making these collectionsand its probable loss as a result of Its inabilityto collect the tax on all sales. But cost and inconvenienceinhered in the same duty imposed on the foreign corporations 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 constitutional right on the practical opportunitiesfor tax avoidancewhich Its method of doing business affords Iowa residents,or to claim a constitutional immunitybecause 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 obviouslywas not lntended'& reach transactionsin interstate commerce,but to tax the use of motor fuel after it had come to rest in Iowa, and the requirement that the appellantas 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 unconstitutional burden either upon interstatecommerce or upon the appellant. I, .Thedistributordoes tax; the-user does.

. . ." not pay the

-2603-Hon. Robert S. Calvert,page 10 (C-543)

McGoldrickv. Berwind-WhiteCoal Mining Co. 309 U.S. 33 (1940)upheld a New York City tax levied upon the transfer of possessionof 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 statutewhich made Berwind-Whiteliable to the City for the tax due and required them to collect such tax from the purchaser. The opinion of the Court contains
an excellentdiscussionrelating to the balancing of the taxing powers of the states with the regulatorypower of Congress over interstatecommerce.

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 isved taxes levied upon the use of propertywithin 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 & TarrantManufacturing Company were all corporationscharteredunder the laws of states other than the taxing state and neither of them were authorized to transactbusinesswithin such states nor did they maintain any office,warehouse or stock of merchandise within the taxing state. GeneralTrading Company employed traveling salesmenwho solicitedorders for merchandise; Scripto received orders for merchandisefrom jobbers and wholesalers under a commissionagreement; and Belt & Tarrant Company employed general agents who obtained orders for their merchandise. In all three cases the orders were subject to approval and acceptanceat the home office of the company and, when accepted, the merchandisewas shipped from the home office to the purchaser. Paymentwas remitted directly from the purchaser to the company. The Court upheld the taxes and method of collectionin all three cases against contentionsthat 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 Hennefordv. 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 ultimate consumer---the paying taxes to sustain Is made against the Iowa residentwho is hi9 own state government. To make the distributorthe tax collector for the State is a familiarand sanctioneddevice. 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.
control62; Nelsonv. SeaX.~~ Roebuck & Co., &prra; and Nelson v. MontgomeryWard, gupra. are ling

. .Anzh,";l$a;h;;,

case is
Mot&gomeryWard cases the intersta' also had ret; distinguishable. at in Sears. Roebuck and

te 'vendor
n stores in Iowa, whose sales
were appropriatelysubjected tj the sales tax, is constitutionally Irrelevantto the right of Iowa sustained in those cases to exact a use tax from purchaserson mail order goods forwarded into Iowa from without the State. All these differentiations are without constitutional

significance." Script0 v. Carson, 362 U.S. 207 (1960) was affirmed squarelyupon the basis of the decision in GeneralTrading Co.
v. Tax Commissioner,supra, and involved similar facts.

The foregoing cases clearly hold that a state statute which requiresan out-of-state vendor 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 imposedby the CigaretteTax Law is a valid exercise of the state taxing power and were it not for the restrictivedefinitionof "first sale" contained in the CigaretteTax Law we would sustain the method of collection upon these authorities. However, since by definitionof "first sale" the events upon which payment of the tax is predicatedmust be in intrastatecommercewe must pursue this aspect of the transactionsfurther.

-2605-Hon. Robert S. Calvert, page 12 (C-543)

The tax imposed by the CigaretteTax 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 evidencedby affixing a tax stamp to each package of cigarettes. House Bill No. 474, Section 4A, Acts 1965, 59th Legislature,declares that cigarettes receivedby distributing agents 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 cigarettesin intrastatecommerce, or the first use or consumptionof cigarettes within this State." (Emphasisadded.) From the plain wording of this provision it is apparent that the duties imposedupon distributingagents by Section 4A of House Bill No. 474 must be performedonly in the event that the activities of the distributing agent constitutea first sale or distribution of cigarettesin Intrastatecommerce. Even though the cigarettesare by the terms of Section 4A of House Bill No. 474, declared $0 be possessedby the distributing agent for purposes of making a first sale within the meaning of the CigaretteTax Law, the test of whether they are possessedfor that purpose is a question to be ultimatelydeterminedby federal decisions relating to the subject of what is and what is not interstatecommerce for purposes of state regulation. If the cigarettesdistributedby the distributingagent are, under federal decisions,in interstatecommerce then no declarationto the contraryby our Legislaturecan take them out of such commerce for purposes of bringing them within the definitionof "first sale."

We turn now to the determinationof the status of the cigarettesin 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. JacksonvillePaper Co., 317 U.S. 5 4 (1943) to be in point upon the questionbefore us. These cases arose under either the ShermanAnti-TrustAct, Packers and StockyardsAct, or the Fair Labor StandardsAct. The question in those cases is the extent of the power of Congress to regulate interstate
commerce and those businessactivitiesand practiceswhich pertain thereto. This is a differentquestion from that of whether a particularexercise of state power is, in view of

-2606-Hon. Robert S. Calvert,page 13 (C-543)

its nature and operation,consideredto be in conflictwith the authority of Congressunder the commerce clause. The aower of Conaress extends to activitieswhich. when considered beparately,are intrastate but which have a Glose,andsubstantial relation to interitatecommerce. 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, 10. 227 U.S. 504 (1913);Minnesotav. Blasius, 290 U.S.

Neither do we consider those cases dealing with the originalpackage doctrine or the power of the states with respect 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);SonnebornBros. v. Cureton, 262 U.S. 506 (1923). The "originalpackage doctrine" is also limited in applicationto articles imported from foreign countries. The distinctionis that the Immunity from state taxation attaches to the import before sale, while an article in interstatecommerce is immune to state regulation or taxation only if it regulates or burdens interstatecommerce. SonnebornBros. v. Cureton, s;pra. We also point out that Standard Oil Co. v. ffraves 2 9 U.S. 389 (1919)Askren v. ContinentalOil Co.. 252 UTS. 444 11920)and Bowman v. Continental Oil Co_, Led insofar as the -U.S. 6&(19213 have been overrul

-purport to extend the protectionof the "original package doctrine" to articles brought from one state into another. SonnebornBros. 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 interstatecommerce have come to rest for purposes of state taxation or regulation,we are of the opinion that
once the cigaretteshave 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; IndependentWarehousesv.

331 U S 70 (1947);Minnesotav. Blasius 290 U.S. m,* SusqGeiannaCoal Co. v. City of South Akboy, 228 U.S. 665'(P913).

While it is contendedby the manufacturerthat when
a carload of cigarettesleaves its plants destined for the -2607-Hon. Robert S+ Calvert,page 14 (c-543)

warehouse of the distributing agent in Texas there are contracts covering 50% oft

the carloadand upon arrival at the warehouse W-98$ of such cigaretteshave been sold under additional contractsentered 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 manufacturerto the manufacturerand at the time of shipment and arrival have no ascertainable destinationbeyond the warehouse. It is only upon the subsequentorder of the manufacturerthat the distributing agent 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 cigarettesequal in number to 97-98s of such carload,none of the cigarettesin a given carload are definitelycommitted to a particularpurchaser. The manufactureris free to fill such orders from cigarettesalready on hand in the warehouse to which the carloadwas sent or from any other warehouse in which it may have cigarettesstored. The figures submitted by the Comptroller'sOffice indicate that the manufacturers keep on hand at the various warehousespresentlyacting as distributingagents a supply of cigarettes sufficientto meet daily demands of from 9 to 30-l/2 days. Good business practice dictates that cigarettesalready in the warehousebe used to fill orders rather than the fresh stock just arrived from the factory. Cigarettesare In fact distributedfrom the warehouse on a "first in - first out" plan, and, at the time the cigarettesare shipped from the factory of the manufacturerno particularcase or carton of cigarettescan be pointed to as being destined for any place other than the warehouse of the distributingagent.

This method of operationis solely for the business purposes of the manufacturerin facilitatingthe sale and delivery of its products and to secure the economicadvantage of lower freight rates on carload shipments. The facts do not present a case where a delay In transit to the destination is occasionedbv the necessitiesof safets or in furtherance of interstatetransportation as was the case in ChamplainCo.
v. Brattleboro,260 U.S. 366 (1922).

The facts before us are surprisinglysimilar to the S;;;;,inAmerican Steel & Wire Co. V.-Speed, 192 U.S. 500

. In that case. the Wire Comoanv was a New Jersey corporationwhich had'madean agreement with a Memphis," Tennesseewarehouse companywhereby the warehouse company would receive the Wire Company'sproducts shipped from its factory and billed to itself, warehouse such shipmentsand

-2608-Hon. Robert S. Calve&, page 15 (C-543)

deliver them upon the order of the Wire Company to persons who had purchasedthe products. The Wire Company contended that the productswere merely in transit from the point of manufactureoutside Tennessee to persons who had previously purchasedthem and were thus not subject to a merchant'stax and merchant'sprivilegetax. In rejecting this contention and holding that such productsas were in the warehousewere not in interstatecommerce, 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 contrary, had reached their destinationat Memphis and were there held in store at the risk of the Steel Company, to be sold and delivered as contracts for that purposewere completelyconsummated.

. . ."

In General Oil Co. v. Grain, 209 U.S. 211 (1908) the company conductedan 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 shipmenthad ended with the storage at Memphis for subsequentdistributionand was "for the business purposesand 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 especiallyrelevant to the case before
us. I, .The company was doing business in the State and its propertywas receiving the protection?

of the State. Its oil was not in movement through the State. It had reached the destinationof its first shipment,and it
was held there, not in necessarydelay or accommodationto the means of transportation,

. . . but for the business purposes and profft of the company. It was only there for distribution, it is said, to fulfill orders already received. But to do this required that the propertybe given a locality in the State beyond a mere halting in its transportation. It

-2609-Hon. Robert S. Calvert, page 16 (c-543)

required storage there ---themaintenance of the means of storage, it from s'torage. of putting it in and taking

The bill takes pains to allege this. 'Complainant shows that it is impossible, in the coal oil business, such as complainant carries on, to fill separatelyeach 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 extensive plant and apparatus is necessary, in order to properlyand conveniently unload and receive oil from said tank cars, and it would be impracticable,if not impossible,to have such apparatusand machinery at every point to which complainantships said oil,'
"This certainlydescribesa 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 transportation

of the oil. The case, therefore, comes under the principleannounced in American Steel & Wire Co. v. Speed, 192 U.S. 5007

It was held in SusquehannaCoal Co. v. South Amboy 228 U.S. 665 (1918) that the storage for distributionof coal, under facts similar to the American Steel & Wire and General Oil Co. cases, was not within the protectionof the 1Bt.e commerce clause. See also IndependentWarehousesv. Scheele, 331 U.S. 70 (1947).

As a general rule, where the owner of propertywithdraws it from the stream of interstatecommerce 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 propertybecomes a part of the mass of property 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 thereforehold that shipments from the warehouse by the distributingagent upon the order of the manufacturer
are distributionsor sales in intrastatecommercewithin the meaning of the definition of "first sale" in Article 7.01 (8) and are not protectedfrom state regulationby the interstate

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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 distributing agent and the ensuing cost of affixing the tax stamp to the packages of cigarettes deprives the distributing agent of propertywithout due process, we hold that it does not.

Under the facts before us, we consider the distributing agent to be exactly what the term Implies---an agent of each manufacturerof cigarettes which it contracts to serve. While, as the facts reveal, each of the 13 distributing agents now operatingin this State are public warehouses, this fact does not change their relationship with the cigarette manufacturers. Each of these public warehouseshave contracted, with the respectivecigarettesmanufacturers which they serve, to receive shipments of cigarettesbelongingto the manufacturer, unload them from boxcars, sort and store them in their warehouse,and, upon the subsequentorder of the manufacturer, rebill and deliver to carriers specified quantitiesof cigarettesfor purchaserslocated in Texas who have placed their orders directlywith the manufacturer. That the contracts between the warehousesand the manufacturer may by their terminologydesignatethe relationship as something other than that of principaland agent or the fact that the warehouse may serve any number of principalsdoes not affect the legal significanceof the relationship as one of agency. Any doubt in this respect is specifically resolved by Article 7.01 (16) which makes those persons performingthe services rendered by the warehouses in questionagents of the out-of-statemanufacturers.

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 manufacturerthen no payment of the tax is exacted from him. No one is compelledto act as a distributingagent for the manufacturerand should anyone choose to so act they should
assure themselvesthat they will be reimbursedby their principalfor the taxes paid in the cwrse of such agency.

Bowman v. ContinentalOil Co. 256 U.S. 642 (1921); Monamotor Oil Co. v. Johnson, 292 U.S. 66 (1934); Felt & Tarrant Mfg Co. v. Gallagher, Sears, Roebuck & Co 306 U.S. 62 (193g);Nelson v. 312 U.S. 359 (1941);Nelson v. Montgomery Ward, 312 U.S. 373 ci941);Wisconsinv. J. C. Penney Co., 311

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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-state vendor of personal liability for the collectionof use taxes exacted by the state of the vendee violates the,dueprocess clause of the 14th Amendment to the United States Constitution. We can perceive of no reason why the rationale of these decisionswould not apply with equal force where the collectionof such tax is made through the agent of the vendor. The fact that a aubstantial expense is involved in the rental of machines and employment of operatorsnecessary to affix the stamps to the cigarettes does not alter our decisionupon this question. Reliable figures furnished to us by the Comptrollerindicate that the 2-l/4$ discountallowed those who are required to purchase and affix stamps to cigarettesnot only offsets the expense of such operationbut affords a substantialprofit. Under such circumstances there is no denial of due process.

In answer to your first question,you are hereby advised that under the provisionsof Section 4A of House Bill No. 474, Acts 1965, 59th Legislature,distributingagents are required to pay the taxes assessed by the CigaretteTax Law and affix the tax stamps to all cigarettesdistributedby such agent prior to the time the cigarettesleave 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 authorizedto receive and distribute or sell unstamped cigarettes. When cigarettesleave the warehouse of a distributing agent under a bill of lading, "consignedto" 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 “exemptconsignee”would be in direct conflictwith the other provisions of Section 4A which provide that every distributing agent shall be treated as a “distributor”

and the distributingagent shall pay the taxes assessed by this Chapter and affix the stamps.

Your second question inquiresas to what effect Section 4B of House Bill 474 will have upon Article 7.01 (16) and Article 7.23 (l), (3) and (4).

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Section 4H of House Bill No. 474 merely repeals Section 2 of Article 7.23 and has no effect upon the other provisionsof the CigaretteTax 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" completelyreplaces such section.

SUMMARY
The tax imposed by the Cigarette,Tax Law is a valid use tax.

1965, Section 4A of House Bill No. 474, Acts 59th Legislature,is constitutional and by its terms "distributing agents" are required to pay the tax assessedby the CigaretteTax Law and affix the tax stamps to all cigarettes prior to the time such cigarettesleave the warehouse for delivery in this State; provided that no tax need be paid or stamp affixed to cigaretteswhich leave such warehouse for delivery within this State on a bill of lading "consignedto" a person who is authorizedunder the law to receive and distribute or sell unstamped cigarettes.

1965, Section 4B of House Bill No. 474, Acts 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

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.

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

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