108 A. 154 | Conn. | 1919
Lead Opinion
It is necessary in the first place to determine the nature of the tax complained of. The State contends that it is in the nature of an excise tax, the plaintiff that it is a tax on property, and the brief filed by the amicus curiae that it is an income tax. We think the State is right in its characterization of the tax. It is not a tax on property; the plaintiff pays a separate local tax on its property. This tax falls on income and *55 not on property. If the plaintiff had made no net income for the year 1915, it would have escaped this tax altogether, although its taxable property in Connecticut on July 1st, 1915, remained the same as before.
It is not an income tax, as such, because it is assessed only if and when the corporation does business within the State, and in the case of domestic corporations doing business in this and other States there is no attempt to assert personal jurisdiction for the purpose of taxing their entire income. Foreign and domestic corporations are treated alike, and the entire income is not taxed unless the entire business of the corporation is done within the State. It is apparent, therefore, that the basis of the tax is not jurisdiction over the property or over the person of the corporation, but jurisdiction over its business; and that it is a tax in the nature of an excise tax levied against domestic and foreign corporations alike, for the privilege of doing business in a corporate capacity within this State. In 1917 the General Assembly (Chap. 298, § 6, General Statutes, § 1401) characterized the tax as follows: "The tax . . . shall be in lieu of all other taxes upon the franchises of the domestic corporations included in the companies defined in said Part IV, except the tax on capital stocks provided by section 61 of Chapter 194 of the Public Acts of 1903 [General Statutes, § 3506], and shall be in lieu of all other taxes on the privilege of doing business within this State upon the foreign corporations included in the companies defined in said Part IV." The legislative construction thus put upon Part IV of the Act, although not in itself conclusive, is consistent with its practical consequences, and accords with the conclusion already stated. The fact that the tax is measured by a percentage of net income, or, in the case of a corporation engaged in interstate commerce, by a percentage of a part of its net income proportioned to the amount *56 of its tangible property in this State, does not, of course, prevent it from being an excise or privilege tax.
The next question is whether the tax, regarded as an excise or privilege tax is, in its application to the plaintiff corporation, an unlawful restraint on interstate commerce. This question appears to us to have been answered in the negative by the recent case ofUnited States Glue Co. v. Oak Creek,
The plaintiff contends that the Glue Co. case is authority for the taxation of net incomes of domestic corporations only. But this ignores the plain statement above quoted, that a tax which is in form a tax for the privilege of exercising its franchise within the State may be levied upon a corporation whether foreign or domestic engaged in interstate commerce, if the ascertainment of its amount is made dependent in fact on the value of its property within the State, and if it does not exceed the sum which might be leviable directly thereon.
Of course, no tax at all can be laid by any State which is in form or effect a direct tax on interstate commerce. And for the purposes of this case the significance of the quotation from page 329 of the opinion is that the tax on net income — as distinguished from a tax on gross receipts, condemned in Oklahoma v. Wells,Fargo Co.,
As we read the opinion in the Glue Co. case it decides that within the limitations stated a State may tax the entire net income of a domestic corporation engaged in interstate commerce; and it points out as a logical consequence of this decision that a State may, under the form of a privilege tax, tax some fractional part of the net income of a foreign corporation engaged in interstate commerce, provided the apportionment is made dependent in fact on the value of its property situated within the State, that the amount of the tax is not excessive regarded as a tax on property within the State, and that there is no discrimination against interstate commerce in the admeasurement or enforcement of the tax.
The tax in question complies with every requisite pointed out. It is made dependent in fact on the value of the plaintiff's tangible property in Connecticut at the close of its fiscal year next preceding the assessment; and in determining its reasonableness from the jurisdictional standpoint, the fact should be regarded that all corporations deriving profits principally from the sale of tangible personal property, and most, if not all, corporations deriving profits principally from the use of such property, will almost necessarily have on hand at any given time and place but a small part of the property which constituted their entire local stock in trade for the year.
It is so in this case, for the schedules show that the plaintiff's typewriter products manufactured in this State and sold during the year 1915, brought approximately six millions of dollars over and above manufacturing costs. All of this property was within the protection and the taxing jurisdiction of Connecticut for some part of the year 1915; and the plaintiff was not otherwise taxed in this State on any part of it, except the relatively small part which happened to be *59 on hand on the day when its property was valued for local taxation in Hartford. Adding this value, or any reasonable part of it, to the agreed value of the plaintiff's tangible property in this State on January 1st, 1916, the tax complained of cannot amount to two-tenths of one per cent of the plaintiff's total taxable property located in this State during the year 1915.
The payment of the tax is not made a condition precedent to the right to carry on the business, but its enforcement is left to the ordinary means for the collection of taxes, and there is evidently no discrimination against interstate commerce or foreign corporations.
Since we rest our decision, so far as the commerce clause of the Federal Constitution is concerned, squarely on the opinion in the Glue Co. case, it is useless for us to review the authorities whose aggregate effect is authoritatively summed up in that opinion. It is enough to say that no later decision of that court has been brought to our attention which in any way qualifies or restricts the fundamental proposition that a State tax which is otherwise within the constitutional and jurisdictional limits of its taxing power, is not unconstitutional because it takes the form of a tax on the entire net income of a domestic corporation engaged in interstate commerce, nor because it takes the form of a tax on a part of the net income of a foreign corporation engaged in interstate commerce.
It may be added that the provisions for the apportionment of net income according to the relative value of tangible property within and without the State, distinguish our statute from those which were under consideration in Western Union Tel. Co. v. Kansas,
The case of Baldwin Tool Works v. Blue, 240 F. 202, may be briefly referred to for it is directly in point. In that case the West Virginia statute, which was upheld, required every corporation doing business both in and out of the State to pay a percentage tax on a part of its net income apportioned according to the value of all its property within and without the State.
The brief filed by the amicus curiae calls attention to the fact that Professor Powell has criticised the opinion in Baldwin Tool Works v. Blue. 31 Har. Law Rev. 760-765. But in a later article the learned author admits that the United States Glue Co. case "shakes the criticism heretofore passed upon Baldwin ToolWorks v. Blue," and explains in a footnote that his former criticism assumed that there was no distinction to be drawn between an excise measured by net profits and one measured by gross receipts. 32 Har. Law Rev. 645.
The first question submitted to us also raises the issue that the tax complained of violates the
The real question is whether a privilege tax of 2% on 47% of the plaintiff's net income, is a tax on its business done, or its property located, outside of this State. Speaking generally, the situation is that the plaintiff carries on its entire manufacturing business within this State. Its gross receipts from the sale of its products manufactured in this State amount to about 90% of its total receipts, and after deducting manufacturing costs its gross profits from the sale of this product amount to about 80% of its total receipts from all sources. Its selling business is managed from its main offices in New York, to which all orders for the sale and rental of typewriters and other products are forwarded. The plaintiff's officials at its main office direct its factory managers in Hartford to ship typewriters and other products direct to the various branch offices for the purposes of making deliveries to the purchasers and lessees thereof. It thus appears that the bulk of the plaintiff's products is also warehoused in Connecticut until sold, and in that way receives additional protection from the State.
It is plain that a privilege tax, if otherwise reasonable, might be levied upon every dollar of net income derived from the sale of goods thus manufactured, or manufactured and warehoused, in Connecticut, without justifying the complaint that the plaintiff is taxed upon business done or property located outside of the State.
Regarded as a tax on property, no claim can well be made that the tax is so unreasonable in amount as to justify the complaint that it practically results in taxing property without the State; it amounts to less than *62 two-tenths of 1% of the market value of the plaintiff's typewriter products manufactured in Connecticut after charging off manufacturing costs. Regarded as a tax on the privilege of doing business in this State, the same answer applies to any complaint that the tax is in substance a tax on business done without the State. A corporation whose manufacturing business produces an annual product exceeding $6,000,000 in market value, cannot reasonably complain that a privilege tax of $12,000 is too large to be reasonably allocated to that part of its business.
The argument against the constitutionality of the statutory apportionment must come, we think, to the point of successfully showing that 47% of the plaintiff's net income cannot reasonably be attributed to its manufacturing and warehousing and shipping operations in Connecticut. Incidentally the plaintiff also received about $100,000 from sales and rentals in Connecticut. But laying that aside, the plaintiff's argument on this branch of the case carries the burden of showing that 47% of its net income is not reasonably attributable, for purposes of taxation, to the manufacture of products from the sale of which 80% of its gross earnings was derived after paying manufacturing costs. Upon this record the plaintiff has made no attempt to shoulder such a burden and if it had been possible, by expert evidence or otherwise, to lay any basis of evidence for such a claim, we should suppose that the plaintiff would have, at least, attempted to do so. As the record stands we are asked to take judicial notice of the fact that 47% of the net income of the plaintiff corporation cannot reasonably be attributed to its operations in Connecticut, and to declare the statute unconstitutional upon the bare assertion that the statutory method of apportionment as applied to the plaintiff's income, taxes property and business without *63 the State, although 53% of the plaintiff's income is exempted by the apportionment.
The only specifications which the plaintiff's brief furnishes in support of its charge that the statutory apportionment results in the taxation of its property and business in other States, are based upon the allegation that the income taxed necessarily includes receipts from repairs made in other States, from profits on the sale of adding machines manufactured by third parties, from dividends, discounts and interest received outside of Connecticut and from the sale of desks, etc., manufactured outside of this State. The receipts from these items aggregate less than 10% of the plaintiff's total gross receipts, and except for the items of dividends and interest the extent to which they produced net income is wholly uncertain. As to the other 90% of the plaintiff's gross receipts, it is tacitly admitted that some part of them, and therefore some part of the net income resulting therefrom, is attributable to the plaintiff's property and business in Connecticut. On this record the amount of the plaintiff's net profit attributable to its operations in Connecticut cannot be ascertained. It is a matter of estimate and approximation rather than of mathematics. The most that can be expected is that a statutory rule should be laid down intended and adopted to produce a fair and constitutionally lawful apportionment. Then the rule must be tested by the results which it produces, but with due regard to the impossibility of producing anything but approximate results; in the present instance, it seems clear that the result is not unreasonable, oppressive or unconstitutional.
Some general criticisms of the rule of apportionment are made. It is said that the real defect in the law is that the income is apportioned with reference to the value of tangible property in Connecticut as compared *64 with tangible property elsewhere; whereas the apportionment should have been founded on the proportionate holdings of property of all kinds within and without the State. It is pointed out that if intangibles were included in the comparisons foreign corporations would fare better, since their intangible assets would have asitus at the domicil. But the suggestion that the rule was adopted for the purpose of getting the largest possible return from corporations engaged in interstate commerce is not tenable, because the rule applies to domestic as well as to foreign corporations. If the object of the legislature had been to get the largest return, it would have resorted to its personal jurisdiction over domestic corporations and taxed their entire net income from business wherever carried on.
A more reasonable explanation of the rule is to be found in the nature of the tax and in the class of corporations to which the particular rule in question is applied. As already pointed out, the tax is a tax on the privilege of doing business in a corporate capacity in this State. The legislature evidently intended to make the tax proportionate to the value of the privilege. Accordingly, it divided miscellaneous corporations doing an interstate business, without making any distinction between domestic and foreign corporations, into two classes (a) those deriving profits principally from the sale or use of tangible personal property, and (b) those deriving profits principally from the holding or sale of intangible property. As to class (a) the rule of apportionment is based on tangible property within and without the State, and as to class (b) on gross receipts within and without the State. The attempt to do substantial justice is manifest. The plaintiff's theory is that the real producing elements of net income depend on the executive management of the corporation, rather than on its plant. But the ordinary *65 trading or manufacturing corporation is commonly supposed to make its profit from the intelligent use and sale of tangible property, and other things being equal it is not unjust to allocate its net income, for purposes of estimating the value of the privilege of doing business here, with reference to the value of its tangible property in this and other jurisdictions.
A suggestion that the rule works injustice in this case is based on the plaintiff's return to the Tax Commissioner showing paid up capital stock of $13,000,000. The agreed fair cash value of the entire tangible property of the plaintiff within and without the State is only $6,300,000, and the plaintiff's brief assumes that the difference of $6,700,000 represents intangible assets of that value now owned by the plaintiff. There is, of course, no presumption that paid up capital represents existing assets, and except for the receipt of dividends and interest amounting to about $38,000 there is nothing in the record to show that the plaintiff owned any intangible assets on the taxing date in question.
These considerations dispose of the first and second questions submitted.
The third question requires no discussion. The Federal Income Tax Law is a domestic statute. No delegation of legislative authority is involved in adopting its definition of net income. It is a matter of convenience to taxpayers and economy to the State not to set up a separate standard and another administrative establishment for the measurement of taxable net income. No constitutional privilege of corporations is violated by requiring the production of the plaintiff's return to the Collector of Internal Revenue.
The first, second and third questions are answered in the negative and the Superior Court is advised to render judgment for the defendant.
Dissenting Opinion
The opinion of the majority holds that the tax in question, as authorized by the statute of Connecticut, "is a tax in the nature of an excise levied against domestic and foreign corporations alike for the privilege of doing business in a corporate capacity within this State," and as such is not in violation of the commerce clause or the due process clause of the United States Constitution.
The case before us concerns a tax levied upon a foreign corporation doing a local business in Connecticut.
There are two classes of so-called privilege or excise taxes upon a foreign corporation. One is a privilege tax in name and fact, — a tax levied for the privilege of doing business in a State other than that of the corporate domicil, and in no sense levied because of, or in relation to, property value. The other is a privilege or excise tax in name, but in fact a property tax levied upon a corporation doing business in a State other than that of its domicil, to compel payment of a tax upon the value of its property or business in that State as a going concern in relation to or in connection with its other property or its entire business, and not covered by the local tax upon the physical property within the State.
The privilege tax proper is a tax upon the right of the foreign corporation to carry on a local business outside the State of its origin.
The foreign corporation engaged partly or chiefly in interstate business, may be required to pay a privilege tax in respect of that business in any State other than that of its domicil where it does a local business. This tax may be a given sum, or it may be measured by its entire capital, or property, or receipts, or sales, or gross *67 profits, or net profits, provided the payment of the tax be not made a condition of the granting of the privilege, and provided further that it appears from the circumstances that the tax is reasonable, that is, that it is what it purports to be, a mere privilege or excise tax, and not a tax which actually has the effect of hampering commerce or taxing property beyond the jurisdiction of the State imposing the tax.
A privilege tax as such, measured by the entire property, or capital, or receipts, or profits, gross or net, of a foreign corporation engaged in a local business within a State other than that of its origin, reaches all its property, its receipts or its profits, including that in other States, and hence must be held unconstitutional, unless the circumstances show that the tax is a reasonable one and laid not upon the property but upon the right of the corporation to carry on a local business. And one of the ways in which the reasonableness and the ultimate purpose of the tax may be determined, is the fixing in the statute of a maximum base sum beyond which amount the percentage cannot be allowed to realize. Such a tax will be held prima facie reasonable unless the circumstances compel another conclusion. An instance of a privilege or excise tax measured by a percentage on capital stock uncontrolled by a named maximum sum and held a violation of the commerce clause, is found in International Paper Co. v. Massachusetts,
The majority opinion reiterates that "the tax is a tax on the privilege of doing business in a corporate capacity in this State." Our statute provides no maximum. The greater the real estate and tangible property here to that elsewhere, the greater the amount of tax; and the greater the intangible property outside Connecticut, the greater the tax. The amount to be realized in this case is $12,000; in another case it might be $100,000. Such a tax cannot be held reasonable. The decisions to which I have referred conclusively establish this.
If the majority opinion rested upon this proposition, I might rest my discussion upon what has been said, with the single addition of a discussion of the case ofUnited States Glue Co. v. Oak Creek,
Such a tax, though called a privilege tax, is in truth a species of property tax. It is based upon the value of its property within the State; it increases or diminishes as that increases or diminishes. The tax attacked in this proceeding is one laid upon the net income of the plaintiff, a foreign business corporation, engaged in carrying on a local business in Connecticut. The plaintiff does all of its manufacturing in this State, and most of its sales and all of its financial business it transacts outside of this State. Practically, the production side of its business is here, and the commercial side outside Connecticut. All of its property here, and all of its business here, and all of its earnings here, may be taxed separately or in connection with or in relation to the business as a whole, and to the business as a going concern, provided the amount on which the tax is levied fairly represents the value of its property here, or its earnings made here. When the tax under consideration was authorized, the plaintiff's taxes in this State were confined to a direct property tax on its real estate, plant and tangible property on hand at the levy of the tax. Throughout the year preceding the tax levy, the corporation continued manufacturing its goods and sending its product to its different branches outside our State, where it was sold or rented. While these goods were in process of manufacture, or held in stock, or in course of transit, in this State, they were subject to a State tax, justified upon the basis of all taxes, the protection afforded the goods and the business by the taxing government. And the local business may have *70
a value beyond the mere property here, because it is a part of an interstate business. Connecticut should have and does have, the right to levy a tax proportioned to the protection afforded by it to the local business of the foreign corporation. This may be accomplished in a case like this by a tax upon all the product made, or upon the earning power of its business located here, or upon the net income derived from the property made here, based upon the value of the property and business here as a part of and in relation to a going concern engaged in interstate business. United States ExpressCo. v. Minnesota,
As I understand the opinion of the court it finally holds that the State may tax "some fractional part of the net income of a foreign corporation engaged in interstate commerce, provided the apportionment is made dependent in fact on the value of its property situated within the State, that the amount of the tax is not excessive regarded as a tax on property within the State, and that there is no discrimination against interstate commerce in the admeasurement or enforcement of the tax." All of the net income may be taken as the measure of a tax upon the value of the property of a foreign corporation in a State where it is doing a local business. With this qualification I am in substantial accord with this proposition.
With that part of the opinion upholding this tax as a privilege tax, as a tax on the privilege of doing business in a corporate capacity in this State, I am not in accord. As a privilege tax as such, the tax cannot be sustained. If the purpose and effect of our statute was to make the tax dependent upon the value of the plaintiff's property here as a going concern, and to measure the tax by the entire net income, I should readily agree *72
that the tax was valid. But whatever its purpose, its effect is not this; and in the final analysis the real difference between the majority and minority of the court is in the holding that the apportionment of this tax is in fact made dependent on the value of its property within our State. The tax should be proportioned to the value of the property and business in our State, for it is to these our State affords protection. The entire net income of a corporation is taxable at its domicil. But that does not prevent Connecticut from levying a tax for the protection it affords to the local business of the plaintiff, and from using the entire net income to measure this by. The value of the property here must limit the tax here, otherwise the tax would be laid on property outside our State, and, as a consequence, burden interstate commerce. "It is, of course, entirely settled that a State cannot, consistently with the Federal control of interstate commerce, lay such taxes, either upon property rights or upon franchises or privileges, as in effect" either directly or by its necessary operation "to burden such commerce."Ohio Tax Cases,
Similarly it follows that the income earned by property of the corporation outside of Connecticut cannot be taxed here. To tax this income would be to tax property without our jurisdiction and over which our State never acquired jurisdiction, and for which it never furnished protection. The net income of the plaintiff from the goods sold came in part from the work, material, management and capital at its factory plant, and in part from the maintenance of its branches, *73
the sale of its goods, the collection of its accounts, the financing of its business and the maintenance of its purchasing department, and all of these were without this State. Each State where the various parts of this extensive business were carried on had the right to tax the net income from the business earned by that part of the business transacted within it. The goods manufactured in our State and sold outside were taxable here upon their value then; or upon the proportion of the gross or net income which the goods made here had earned. American Mfg. Co. v. St. Louis,
The portion of the net income upon which the tax is to be laid under our statute in the case of a company like the plaintiff, deriving profits principally from the sale or use of tangible personal property, is such proportion as the fair cash value of its real estate and tangible personal property in this State at the close of the fiscal year next preceding, is to the fair cash value of its entire real estate and tangible personal property then owned by it.
In the case at bar, the finding does not specifically detail all of the property of the plaintiff outside the State. But we know that it was a large amount, from the sales made, and we know that a business of its volume will have a large cash balance and open accounts and bills receivable, and patents and contracts, aggregating thousands and probably millions in value.
The interest earned, $29,456, showed that the plaintiff carried a large cash balance. The dividends received indicated a substantial investment account. These intangible assets enabled the plaintiff to do its business in Connecticut and to do a business outside of Connecticut, aggregating gross profits from rentals in the fiscal year of over $600,000; from repairs of over $452,000, and gross profits from merchandise of over $190,000.
All of these elements of gross profits and the income from intangible assets earned outside the State, helped make up the net income upon which the plaintiff's tax was measured.
Omitting the intangible property of the plaintiff outside of Connecticut, diminishes the denominator of the fraction by which the proportion of the net income is found, and as a consequence, since the numerator remains *75 stationary, gives to the State a greater proportion of the net income on which to levy the tax than it is entitled to, for this gives it a proportion of the net income earned by the assets outside our State. The tax laid upon that part of the net income earned outside the State is a tax laid upon the property of a foreign corporation located outside the State, and necessarily burdens commerce.
If the real estate and tangible personal property comprised all of the property of the plaintiff, this proportion would ordinarily measure the tax without discrimination, and if the tax was general and not unreasonable in amount or rate, it would approximate a fair result. But the proportion fixed by the statute holds, although a substantial part, perhaps half or more, of the property from which the net income has been earned, is outside the State. This is the vice of the statute. It permits taxes upon net income earned outside the State.
The majority opinion says the tax imposed in this case is insignificant, only two-tenths of 1% of the gross income, about $12,000, and that such a sum for so great a corporation is a trifle. I do not follow all of the mathematics of the opinion of the court. But whether the figures are correct or not, is not important in this connection. The smallness of the tax does not make the tax constitutional, if in fact it taxes property outside the State levying the tax. Mr. Justice VanDevanter, in International Paper Co. v. Massachusetts,
The court rests its decision, so far as the commerce clause is concerned, upon United States Glue Co. v.Oak Creek,
I do not find this doctrine announced in the Glue Co.
case. That opinion does not, as I think, change or attempt to change the law, which had become practically settled with Western Union Tel. Co. v. Kansas,
The only point decided was thus stated by Mr. Justice Pitney, on page 326: "Stated concisely, the question is whether a State, in levying a general income tax upon the gains and profits of a domestic corporation, may include in the computation the net income derived from transactions in interstate commerce without contravening the commerce clause of the Constitution of the United States." The issue concerned the commerce clause, and the due process clause issue, also raised in this case, is quite independent of the commerce clause.International Paper Co. v. Massachusetts,
The Wisconsin tax on net income was one substantially in lieu of all other taxes except those on real estate. It included all other forms of property tax, and also all forms of excise tax. The reasoning of Mr. Justice Pitney, that the tax on the net income of this domestic corporation engaged in interstate business is an indirect burden upon commerce and hence valid, does not seem to be applicable to the tax on the net income of a foreign corporation arising from its interstate commerce. And certainly it can have no application to the net income of this corporation which was earned upon that part of the property or business located here.
I conceive that the fundamental justification for a tax upon the net income of a foreign corporation is that the income taxed is subject to the State's jurisdiction and that the tax laid does not hamper commerce. The fact that the tax is merely an indirect burden on commerce, will not save it if the property or income taxed be that of a foreign corporation and the property be located, or the income be earned, outside the State.
The language of Mr. Justice Pitney which the opinion *78
of the court quotes and relies upon as decisive of this case, should be read in connection with the entire opinion, and as read it should be remembered that it was said in reference to a domestic corporation, and of a tax upon income derived from business transacted and property located within the State, and is to be applied to the sole question involved, whether the tax was a burden on commerce. Read and applied as our court reads and applies the Glue Co. case, as it seems to me, it practically treats as overruled the authorities from Western Union Tel. Co. v. Kansas (1909),
All taxes upon a foreign corporation engaged in local business outside its domicil, are indirect burdens on commerce. When levied on property physically within the State, or imposed upon the privilege of doing business in the State, or levied upon the value of property of the corporation within the State, such taxes may be valid exactions. But when levied upon property outside a State, or when the tax exaction is unreasonable, they are invalid; and it makes no difference whether the measure of the tax be net income or gross income.
The tax on the net income in Peck Co. v. Lowe,
A tax on net income of a foreign corporation proportioned *79 to the earnings in the State imposing the tax does not burden commerce. When the tax goes beyond this and taxes earnings made outside that State, it is a tax upon property outside its jurisdiction and violates the "due process" clause, and as a consequence necessarily burdens commerce.
The authorities from Western Union Tel. Co. v.Kansas,
I am of the opinion that questions one and two, upon which our advice is asked, should be answered "Yes."
