Alpha Portland Cement Co. v. Commonwealth

Rugg, C. J.

This is a petition under G. L. c. 63, § 77, by a foreign corporation having a place of business in this Commonwealth for the abatement of taxes which it contends were illegally exacted for the year 1921. The case was submitted on agreed facts and reserved for our determination. The petitioner is a corporation organized under the laws of New Jersey. Its business is the manufacture and sale of cement. Its principal office is at Easton, Pennsylvania. Its mills are located in several other states outside of Massachusetts, from which shipments are made to various parts of the United States and to foreign countries. It maintains an office in Boston in charge of a district sales manager, with a clerk, where its correspondence and other natural business áctivities in connection with the receipt of orders and shipments of goods for the New England states are conducted. The office is used as headquarters for travelling salesmen, who solicit orders in Massachusetts and the other New England states. Orders so taken are transmitted at the Boston office by mail to the principal office at Easton, Pennsylvania, where exclusively they are passed upon, and if accepted, the goods are shipped and invoices sent directly to the customer. Remittances usually are made to the petitioner at Easton, though in exceptional instances prepayments or collections are made by the salesmen and immediately transmitted to Easton. No samples or other merchandise are kept in this Commonwealth. The only property of the petitioner in Massachusetts is its office furniture, valued at $573. It maintains no bank account here, its salaries and office rent being paid from its principal office. Incidental expenses are paid from an account not exceeding $1,000 kept by the district sales manager in his own name. No corporate books, records, or meetings are in Massachusetts. There is no controversy as to the facts, valuations or computation of the tax. The issues between the parties relate solely to the correct interpretation of our corporate tax law as to foreign corporations and to the constitutionality of that law in its application to the petitioner.

The tax here in question was assessed under our corporation tax law now embodied in G. L. c. 63, and a slight additional tax under St. 1921, c. 493. The record shows that the amount of the tax was not affected by St. 1921, c. 361.

Domestic and foreign business corporations as distinguished from banking and insurance corporations and from public service corporations are defined and provision made for their taxation in G. L. c. 63, §§ 30-43, those relating particularly to foreign corporations being §§ 39-43. See also § 52. These relevant sections and St. 1921, c. 493, are printed above.

It is manifest from an examination of these sections (first enacted in St. 1919, c. 355) that the Legislature, departing from earlier corporation tax laws, has attempted to adopt a general principle whereby domestic and foreign corporations shall be treated with fairness on the same footing as to taxation. These •sections constitute an effort on the part of the General Court to .avoid on the one hand a basis for taxation of foreign corporations offensive to limitations imposed upon the power of the State Iby the Constitution of the United States, International Paper Co. v. Massachusetts, 246 U. S. 135, Cheney Brothers Co. v. Massachusetts, 246 U. S. 147, and to minimize on the other hand the preferences in favor of foreign corporations revealed by the practical operation of corporation tax laws hitherto in force. S. S. White Dental Manuf. Co. v. Commonwealth, 212 Mass. 35, 48, 49. Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, 52. This tax law, placing as it does both domestic and foreign ■corporations on common ground as to taxation except so far as essential differences require different treatment in details, follows the policy established in this Commonwealth for many years of levying an excise instead of a property tax on corporate franchises and corporate transaction of business. Eaton, Crane & Pike Co. v. Commonwealth, 237 Mass. 523.

The general scheme of this tax law is that an excise is levied on both domestic and foreign business corporations doing business in this Commonwealth. Real estate and machinery used in manufacture by such corporations alone are subject to a local property tax in the city or town where situated. All other personal property, whether tangible or intangible, is exempt from direct or local taxation. The amount of the excise tax is measured as to a foreign corporation, § 39, by the sum of “An amount equal to five dollars per thousand upon the value of the corporate excess employed by it within the Commonwealth,” and “An amount equal to two and one half per cent of that part of its net income, as defined in section thirty and in this section, which is derived from business carried on within this Commonwealth,” with a further provision that a minimum tax of not less than one twentieth of one per cent of such proportion of the fair cash value of its shares of capital stock as its assets employed in business in this Commonwealth bear to its total assets employed in business. "Corporate excess employed within the Commonwealth” by a foreign corporation is defined by § 30, cl. 4, to be such proportion of the fair cash value of all its shares of capital stock as the value of its real and personal assets employed in business within the Commonwealth bears to the value of its total assets on a specified date less the value of (a) real estate and machinery with other structures not here material owned by it within the Commonwealth and subject to local taxation, and (b) securities held within the Commonwealth, the income of which if held by a natural person would not be subject to taxation with certain exceptions. “Net income” means in general the net income for the taxable year required to be returned to the federal government by the federal revenue act of nineteen hundred eighteen, less interest received on bonds, notes and certificates of indebtedness of the United States. § 30, cl. 5.

The statute is an attempt to measure the excise on foreign corporations solely by the property and net income fairly attributable to the business done within this Commonwealth. This excise tax is in place of any other tax on personal property within the Commonwealth from which, except as to machinery used in manufacture or in supplying and distributing water, foreign corporations (and also domestic corporations) are expressly exempted by G. L. c. 59, § 5, cl. 16. Comparison of the sections of the tax act relating to the taxation of domestic corporations with those relating to foreign corporations shows that the same general definitions, exemptions and principles are followed as to both, except as the inherent differences as to domicil and as to allocation of residue of net income and of corporate excess require dissimilar provisions.

It is rightly conceded by the Attorney General that the petitioner was engaged in this Commonwealth exclusively in interstate commerce. Marconi Wireless Telegraph Co. of America v. Commonwealth, 218 Mass. 558, 567 to 569. Cheney Brothers Co. v. Massachusetts, 246 U. S. 147, 153.

The question to be decided is whether a foreign corporation having a usual place of business in this Commonwealth used for interstate commerce alone is subject to taxation under the tax law. The precise point now presented for decision was left open in Judson Freight Forwarding Co. v. Commonwealth, 242 Mass. 47, although the act in general was there held to be constitutional.

As matter of verbal construction it is plain that the tax law includes a foreign corporation such as the petitioner. Confessedly the petitioner “has a usual place of business in this Commonwealth” and is actually carrying on business here. The petitioner •comes within the description of § 30, cl. 2, where foreign corporation is defined as including every corporation “chartered under laws other than those of the Commonwealth, for purposes for which domestic corporations may be organized under chapter one hundred and fifty-six, which has a usual place of business in this Commonwealth.” Whether these statutory words are to be interpreted so as to include foreign corporations engaged here •exclusively in interstate commerce depends upon the further inquiry whether as thus construed the statute would be constitutional. Attorney General v. Electric Storage Battery Co. 188 Mass. 239, 240, 241. Baltic Mining Co. v. Commonwealth, 207 Mass. 381, 390. This controversy can be settled finally only by the Supreme Court of the United States. But it must be dealt with by this court and considered in the light of decisions of that tribunal, as we understand them.

The present tax act differs in its essential characteristics from those hitherto enacted respecting foreign corporations. The ■effect of St. 1903, c. 437, § 75, and St. 1909, c. 490, Part III, § 56, was to impose excises which prescribed the terms and conditions on which foreign corporations could do business within the Commonwealth, and which were in the nature of license fees as conditions precedent to the doing of such business. They were taxes upon the privilege of having an establishment for business in Massachusetts. They were not property taxes. The right to do business depended upon the payment of the tax, and prohibitive penalties followed failure to comply with the statutes and to make the specified payments. Baltic Mining Co. v. Commonwealth, 207 Mass. at page 388. Since the several States under the Constitution of the United States have no right to impose restrictions or regulations upon interstate commerce, it was held that these tax statutes did not apply to corporations engaged solely in interstate commerce at a place of business within the Commonwealth. Marconi Wireless Telegraph Co. of America v. Commonwealth, 218 Mass. 558, 561, 563-565, 567-569, and cases there collected. Old Dominion Co. v. Commonwealth, 237 Mass. 269.

The present tax act imposes the excise with respect to the carrying on of business by foreign corporations within the Commonwealth. It is an excise for the privilege of having a place of business under the protection of our laws and with the financial,, commercial and other advantages flowing therefrom, measured solely by the property and net income fairly attributable to the business done here by a foreign corporation. The excise is measured by two factors, (1) the value of the corporate excess employed within the Commonwealth, and (2) the net income derived from business within the Commonwealth.

1. The value of the corporate excess employed in the Commonwealth as a factor of the tax is not measured by the capital stock of the corporation. If it were, it would be invalid. International Paper Co. v. Massachusetts, 246 U. S. 135. It is measured by the value of the property of the foreign corporation, including its franchise, employed in the Commonwealth, after certain deductions are made. It seems to us that this factor of the tax stands under the protection of several decisions of the Supreme Court of the United States.

The right of a State to tax tangible property of a foreign corporation, not in transit but located within its borders, no matter what may be its use, is well settled. The petitioner has a small amount of tangible personal property permanently within the Commonwealth, upon which it pays no tax except by way of this factor of the excise.

The petitioner exercises within the Commonwealth its franchise to do business as a corporation. It did whatever was necessary to conduct a business yielding according to its return annual gross receipts assignable to Massachusetts of $424,982.70. The facts in Western Union Telegraph Co. v. Massachusetts, 125 U. S. 530, were that an excise was levied upon a telegraph company exercising a franchise in many States by virtue of laws of the United States and having poles and wires in this Commonwealth. It there was said that the State law attempted “to ascertain the just amount which any corporation engaged in business within its limits shall pay as a contribution to the support of its government upon the amount and value of the capital so employed by it therein. . . . The tax ... is in effect a tax . . . on account of property owned and used ... in the State of Massachusetts.” It was said in Pullman’s Palace Car Co. v. Pennsylvania, 141 U. S. 18, a case involving the taxation of cars used in interstate commerce, at page 25, “The tax now in question is not a license tax or a privilege tax; it is not a tax on business or Occupation; . . . The tax is imposed equally on corporations doing business within the State, whether domestic or foreign, and whether engaged in interstate commerce or not.” See also Pullman Co. v. Richardson, 261 U. S. 330. In Atlantic & Pacific Telegraph Co. v. Philadelphia, 190 U. S. 160, at page 163, occur these words: “The franchise of a corporation, although that franchise is the business of interstate commerce, is, as a part of its property, subject to State taxation, providing at least the franchise is not derived from the United States.” In United States Express Co. v. Minnesota, 223 U. S. 335, at page 345, it was said, “The State must be allowed to tax the property and to tax it at its actual value as a going concern. On the other hand the State cannot tax the interstate business. The two necessities hardly admit of an absolute logical reconciliation. Yet the distinction is not without sense. When a Legislature is trying simply to value property, it is less likely to attempt to or effect injurious regulation than when it is aiming directly at the receipts from interstate commerce. A practical line can be drawn by taking the whole scheme of taxation into account.”

It is manifest as matter of common business knowledge that commerce within this Commonwealth yielding to the petitioner annual gross receipts of $424,982.70 must have involved credits, bills receivable and obligations to it of considerable amounts. No contention to the contrary has been urged by the petitioner. Such credits, bills receivable and obligations might be made subject to direct taxation within the Commonwealth by appropriate legislation under numerous decisions of the United States Supreme Court. Such credits, bills receivable and obligations constitute a part of “the value of the assets” of the petitioner “employed in . . . [Its] business within the Commonwealth” used as the basis of ascertaining “the corporate excess” of the petitioner “employed within the Commonwealth” upon which this factor of the excise is calculated.

This branch of the case seems to us to come within the scope of these words in Shaffer v. Carter, 252 U. S. 37, at page 52: “This is consonant with numerous decisions of this court sustaining State taxation of credits due to non-residents, New Orleans v. Stempel, 175 U. S. 309, 320, et seq.; Bristol v. Washington County, 177 U. S. 133,145; Liverpool & London & Globe Ins. Co. v. Orleans Assessors, 221 U. S. 346, 354; and sustaining federal taxation of the income of an alien non-resident derived from securities held in this country, De Ganay v. Lederer, 250 U. S. 376.” Blackstone v. Miller, 188 U. S. 189, 205, 206.

It appears to us that under the principle deducible from all these decisions the tax, so far as it relates to the value of corporate excess of the petitioner, rightly may be levied.

2. The tax, as measured by the net income from business transacted in Massachusetts as a factor, is dependent upon net profits derived solely from interstate commerce. But there is no discrimination in the statute against interstate commerce. This net income is used as a measure applicable to all corporations alike. While not an income tax according to strict definition, in substance it affects net income alone, is measured by net income alone, is reasonable in amount and incidence, and is payable out of net income.

It was settled by Travis v. Yale & Towne Manuf. Co. 252 U. S. 60, that the income of non-residents was subject to taxation within the State where earned or accruing. That result was reached on the ground that, except in the particular restrictions imposed by the Federal Constitution, the States have complete dominion over persons, business and property within their borders, are charged with the duty of maintaining order and establishing security for such persons, business and property, and consequently may resort to any proper form of taxation of those derivingbenefits from their protection in order to defray expenses of government. In Peck & Co. v. Lowe, 247 U. S. 165, question arose as to the right of Congress, in view of the constitutional prohibition against laying a “tax or duty ... on articles exported from any State,” to tax net income derived by a domestic corporation chiefly from shipping goods to foreign countries and there selling them. It was said, page 174, “The tax in question is unlike any of those heretofore condemned. It is not laid on articles in course of exportation or on anything which inherently or by the usages of commerce is embraced in exportation or any of its processes. On the contrary, it is an income tax laid generally on net incomes. And while it cannot be applied to any income which Congress has no power to tax . . . , it is both nominally and actually a general tax. It is not laid on income from exportation because of its source, or in a discriminative way, but just as it is laid on other income. The words of the act are ‘net income arising or accruing from all sources.’ There is no discrimination. At most, exportation is affected only indirectly and remotely.” In Shaffer v. Carter, 252 U. S. 37, a State statute taxing a non-resident for income derived from property and business within the State, was assailed. It was said at page 57, “It is urged that, regarding the tax as imposed upon the business conducted within the State, it amounts in the case of appellant’s business to a burden upon interstate commerce, because the products of his oil operations are shipped out of the State. Assuming that it fairly appears that his method of business constitutes interstate commerce, it is sufficient to say that the tax is imposed not upon the gross receipts, as in Crew Levick Co. v. Pennsylvania, 245 U. S. 292, but only upon the net proceeds, and is plainly sustainable even if it includes net gains from interstate commerce. U. S. Glue Co. v. Oak Creek, 247 U. S. 321. Compare Peck & Co. v. Lowe, 247 U. S. 165.” In United States Glue Co. v. Oak Creek, 247 U. S. 321, the distinction was pointed out between an invalid tax based on gross revenue and a valid tax based on net profits. It was said at pages 328, 329, “The correct line of distinction is so well illustrated in two cases decided at the present term that we hardly need go further. In Crew Levick Co. v. Pennsylvania, 245 U. S. 292, we held that a State tax upon the business of selling goods in foreign commerce, measured by a certain percentage of the gross transactions in such commerce, was by its necessary effect a tax upon the commerce, and at the same time a duty upon exports, contrary to §§ 8 and 10 of Art. 1 of the Constitution, since it operated to lay a direct burden upon every transaction by withholding for the use of the State a part of every dollar received. On the other hand, in Peck & Co. v. Lowe, ante, 165, we held that the Income Tax Act of October 3, 1913, c. 16, § 2, 38 Stat. 166,172, when carried into effect by imposing an assessment upon the entire net income of a corporation, approximately three-fourths of which was derived from the export of goods to foreign countries, did not amount to laying a tax or duty on articles exported within the meaning of Art. 1, § 9, cl. 5 of the Constitution. The distinction between a direct and an indirect burden by way of tax or duty was developed, and it was shown that an income tax laid generally on net incomes, not on income from exportation because of its source or in the way of discrimination, but just as it was laid on other income, and affecting only the net receipts from exportation after all expenses were paid and losses adjusted and the recipient of the income was free to use it as he chose, was only an indirect burden. The difference in effect between a tax measured by gross receipts and one measured by net income, recognized by our decisions, is manifest and substantial, and it affords a convenient and workable basis of distinction between a direct and immediate burden upon the business affected and a charge that is only indirect and incidental. A tax upon gross receipts affects each transaction in proportion to its magnitude and irrespective of whether it is profitable or otherwise. Conceivably it may be sufficient to make the difference between profit and loss, or to so diminish the profit as to impede or discourage the conduct of the commerce. A tax upon the net profits has not the same deterrent effect, since it does not arise at all unless a gain is shown over and above expenses and losses, and the tax cannot be heavy unless the profits are large. Such a tax, when imposed upon net incomes from whatever source arising, is but a method of distributing the cost of government, like a tax upon property, or upon franchises treated as property; and if there be no discrimination against interstate commerce, either in the admeasurement of the tax or in the means adopted for enforcing it, it constitutes one of the ordinary and general burdens of government, from which persons and corporations otherwise subject to the jurisdiction of the States are not exempted by the Federal Constitution because they happen to be engaged in commerce among the States.” In Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113, at page 119, it was said, “Payment of the tax is not made a condition precedent to the right of the corporation ■to carry on business, including interstate business. Its enforcement is left to the ordinary means of collecting taxes. St. Louis Southwestern Ry. Co. v. Arkansas, 235 U. S. 350, 364; Atlantic & Pacific Telegraph Co. v. Philadelphia, 190 U. S. 160, 163. The statute is, therefore, not open to the objection that it compels the company to pay for the privilege of engaging in interstate commerce. A tax is not obnoxious to the commerce clause merely because imposed upon property used in interstate commerce, even if it takes the form of a tax for the privilege of exercising its franchise within the State. Postal Telegraph Cable Co. v. Adams, 155 U. S. 688, 695. This tax is based upon the net profits earned within the State. That a tax measured by net profits is valid, although these profits may have been derived in part, or indeed mainly, from interstate commerce is settled. United States Glue Co. v. Oak Creek, 247 U. S. 321; Shaffer v. Carter, 252 U. S. 37, 57.” Hump Hairpin Manuf. Co. v. Emmerson, 258 U. S. 290, 294. Attorney General v. Bay State Mining Co. 99 Mass. 148.

It seems to us that the constitutionality of the statute in the particulars here assailed is sustained by the decisions of the United States Supreme Court already cited and from some of which quotations have been made. The principles there declared, as we understand them, support the validity of the tax act here involved. In reaching that conclusion we are not unmindful of all that has been said and decided in Western Union Telegraph Co. v. Kansas, 216 U. S. 1, Looney v. Crane Co. 245 U. S. 178, Meyer v. Wells Fargo & Co. 223 U. S. 298, International Paper Co. v. Massachusetts, 246 U. S. 135, Wallace v. Director General of Railroads, 253 U. S. 66, Gillespie v. Oklahoma, 257 U. S. 501. The case at bar appears to us to be governed by the other line of decisions. See 32 Harvard Law Rev. 634-640, 646-649, and cases, there collected and reviewed. Superior v. Allouez Bay Dock Co. 166 Wis. 76, 80. The principle that the States can impose no direct burden upon interstate commerce, illustrated by cases like McCall v. California, 136 U. S. 104, Norfolk & Western Railroad v. Pennsylvania, 136 U. S. 114, International Text Book Co. v. Pigg, 217 U. S. 91, Crenshaw v. Arkansas, 227 U. S. 389, and Rogers v. Arkansas, 227 U. S. 401, appear to us to be inapplicable to the case at bar in that they related to statutes which imposed, that which in essence was a license fee as a condition prerequisite to doing interstate commerce.

The tax considered as a whole with both its main factors is general in nature and reasonable in amount. The tax upon the-petitioner in substance and effect, so far as concerns the factor off its corporate excess employed within the Commonwealth, is levied, upon its tangible personal property within the Commonwealth, upon the credits due it from debtors within this Commonwealth, and upon the exercise of its franchise within this Commonwealth, and, so far as concerns the factor of its income, upon the net income derived from business in this Commonwealth after all losses and expenses have been paid. It is not directed against interstate commerce or property outside the State but is confined to business done, property located, capital employed and net income earned within the Commonwealth. It affects interstate commerce indirectly and is not an immediate burden upon it. It affords to the State only a fair and reasonable revenue for the maintenance of the government, the benefits from the protection of which the petitioner enjoys. Our conclusion is that the law thus construed, as applying to a foreign corporation using a part of its property exclusively for interstate commerce within the Commonwealth, violates no guaranty established by the Constitution of the United States. The tax statute, therefore, is interpreted as applying to a corporation engaged in business within the Commonwealth as is the petitioner.

It is doubtful whether the remaining point argued by the petitioner is open under the last paragraph of the agreed facts, viz., “The amount of the tax assessed is not questioned, but may be referred to as bearing on the questions of law presented. No question of valuation is involved.” This appears to preclude inquiry now into the details of the computation or the methods of calculation, and to leave open only questions whether the statute on its face, according to its correct interpretation, is unconstitutional in its application to the facts under which the petitioner does business.

But if the matter be treated on its merits, the contention of the petitioner that its property outside the Commonwealth has been included in the tax and hence that it has been deprived of its property without due process of law, contrary to the Fourteenth Amendment to the United States Constitution, seems to us without substantial merit. This contention is founded on the method of allocation adopted by the commissioner. In the case of a foreign corporation not transacting its entire business within the Commonwealth, the tax is based, so far as concerns the proportion of net income allocated to this Commonwealth on (1) percentage of tangible assets in Massachusetts to all tangible assets, (2) percentage of wages assignable to Massachusetts to total wages, and (3) percentage of gross receipts assignable to Massachusetts to gross receipts from all its business. There is in this problem no reference to stocks, bonds or intangible securities, except bonds, notes and certificates of indebtedness of the United States. Such assets do not enter into the calculation or allocation. It seems to us that the question in this connection is not whether a subsidiary percentage standing alone may impinge upon property-outside the Commonwealth, but whether the use of all the percentages makes the final result a tax which violates constitutional guarantees. The several percentages are not taxes levied upon the terms employed. They are used in combination to ascertain a sum which in amount as applied to all corporations may be reasonable. The tax so far as concerns this factor is measured upon net income alone and is only payable out of net income. Excises may be measured to some extent by property not subject to direct taxation. Commonwealth v. Hamilton Manuf. Co. 12 Allen, 298, 306, 307. Hamilton Manuf. Co. v. Massachusetts, 6 Wall. 632, 639; 640. Flint v. Stone Tracy Co. 220 U. S. 107, 165. The aim of the statute in this particular is to reach only-profits earned within the State. The total net income for the year was $1,148,041.70, of which $15,370.06 was allocated to Massachusetts. The gross receipts assignable to Massachusetts, according to the petitioner’s return, were $424,982.70, out of a, total of $12,774,825.05. The facts do not appear to us to show that the proportion of net income ultimately allocated to this Commonwealth was in excess of the just amount. We think that the case in this respect is within the authority of Underwood Typewriter Co. v. Chamberlain, 254 U. S. 113. Our statute in its phrase, is different from that under consideration in People v. Knapp, 230 N. Y. 48; 231 N. Y. 516.

The same reasoning applies to the suggestion that the tax is invalid because wages paid in connection with the Massachusetts office included in part services rendered by travelling salesmen, going to other States as well as Massachusetts.

Petition dismissed with costs.

Case Details

Case Name: Alpha Portland Cement Co. v. Commonwealth

Court Name: Massachusetts Supreme Judicial Court

Date Published: Apr 16, 1923

Citation: 139 N.E. 158

Court Abbreviation: Mass.