Title: Smith Kline & French Laboratories v. Tax Commission

State: oregon

Issuer: Oregon Supreme Court

Document:

Reversed June 16, 1965.
Petition for rehearing denied July 14, 1965.
*51 James H. Clarke, Portland, argued the cause for appellant. With him on the briefs were Koerner, Young, McColloch & Dezendorf, James C. Dezendorf and Marshall C. Cheney, Jr., Portland.
Theodore W. deLooze, Assistant Attorney General, Salem, argued the cause for respondent. With him on the brief were Robert Y. Thornton, Attorney General, Salem, and William M. Ferguson, Attorney General, State of Kansas, Topeka, as amicus curiae in support of respondents, on behalf of the State of Kansas.
William D. Dexter, Assistant Attorney General, Lansing, Michigan, argued the cause and filed a brief amici curiae. With him on the brief were Attorneys General of Alaska, Arizona, Georgia, Hawaii, Kansas, Michigan, Minnesota, Missouri, South Dakota, Washington, and the Commonwealth of Pennsylvania.
Halfpenny, Hahn and Ryan and Harold T. Halfpenny, Richard F. Hahn, James F. Flanagan and Mary M. Shaw, Chicago, Illinois, filed a brief as amicus curiae, representing National Association of Wholesalers and Automotive Service Industry Association.
*52 Charles H. Schreyer, Bloomfield, Connecticut, as amicus curiae, filed a brief for 22 state associations.
MacLean, Seaman & Laing, Lansing, Michigan, filed a brief amicus curiae on behalf of Michigan Retailers Association.
Before McALLISTER, Chief Justice, and PERRY, SLOAN, O'CONNELL, GOODWIN, DENECKE and HOLMAN, Justices.
REVERSED.
DENECKE, J.
We adopt the following portion of the opinion of the Oregon Tax Court (1 OTR Adv Sh 491 (1964)):
Defendant Commission in its brief and oral argument contends: "Public Law 86-272 is an unconstitutional attempt by Congress to adopt new rules of `nexus' or due process under the authority of the Commerce Clause, usurping the power of the judiciary." The Commission argues that the Supreme Court has held that certain minimum contacts between a business and a state are a sufficient nexus to enable the state to tax a portion of the income of that business without violating the Due Process Clause but that Congress, by P.L. 86-272, has increased the minimum contacts justifying a state tax and, therefore, Congress is attempting to determine what is due process and this is in violation of the court's exclusive domain.
1, 2. We find the congressional action not to violate the doctrine of separation of powers or the Due Process Clause. The minimum contacts for jurisdictional nexus have not been changed by P.L. 86-272. Congress cannot change the requirements of the Due Process Clause. Instead, Congress has found that it is wise, for the protection of certain business activities from the possible burdens of multistate taxation, to limit state taxation of interstate commerce. The Congress has the power, under the Commerce Clause, to remove or alleviate state-imposed burdens on interstate *57 commerce. The boundaries of the federal commerce power do not coincide with the due process limits of state taxing power. Instead, the two powers overlap, and in the area of concurrence, the states may act unless Congress specifically prohibits.
3. The remaining question, then, is whether P.L. 86-272 is in excess of the power of Congress to regulate commerce.[1] The Tax Court held the law invalid upon these grounds.
The roots of defendant's argument and of the passage of P.L. 86-272 are Spector Motor Service v. O'Connor, 340 US 602, 71 S Ct 508, 95 L ed 573 (1951), and Northwestern Cement Co. v. Minnesota, 358 US 450, 79 S Ct 357, 3 L ed2d 421, 67 ALR2d 1292 (1959). The earlier case decided that a Connecticut corporate excise tax could not be collected from a foreign corporation whose entire income was from the carriage of goods in interstate commerce. The state only attempted to assess the tax upon income determined by an apportionment formula which was not discriminatory. The Connecticut court found that the tax was solely upon the privilege of doing business in the state. The Supreme Court stated: "They [the states] delegated to the United States the exclusive power to tax the privilege to engage in interstate commerce * * *." 340 US at 608.
Eight years later, in the Northwestern Cement case, the Court upheld the validity of a Minnesota net income tax upon a foreign corporation whose entire *58 income was from operations in interstate commerce. The Spector case was distinguished upon the ground that in Spector the state tax was upon the privilege of engaging in interstate commerce. The Court held: "`[a] tax on net income from interstate commerce, as distinguished from a tax on the privilege of engaging in interstate commerce, does not conflict with the commerce clause.' * * *. The taxes are not regulations in any sense of that term." 358 US at 461.
P.L. 86-272 was passed because of concern with the possible effects of this decision.
The essence of the Tax Court's and the Commission's argument is: In Spector the state excise tax based upon net income was an undue burden on interstate commerce; in Northwestern Cement the state income tax was not an undue burden upon interstate commerce. Therefore, the Tax Court opined:
This is an "either-or" approach; if the judiciary decides that the state tax is not in violation of the federal power to regulate commerce, the federal legislature has no power under the Commerce Clause to prohibit such taxation. Under this theory, there is no zone of overlap in which states can tax until and unless the Congress, acting under its commerce power, legislates to the contrary.
*59 4. We cannot agree with the decision of the Tax Court or the contention of the Commission. In the field of the regulation of commerce, as distinguished from the taxation of commerce, judicial approval of state action does not thereby exclude subsequent, or even contemporaneous, federal legislative action. In Kelly v. Washington, 302 US 1, 58 S Ct 87, 82 L ed 3 (1937), Foss Company sought to have a Washington statute relating to the regulation of tugs declared invalid as an encroachment upon the federal power to regulate commerce, particularly as Congress had already enacted laws regulating these same tugs. The Court held the state and federal laws were not in complete conflict and that some of the state laws were valid. The Court stated:
This principle was recently approved in Florida Avocado Growers v. Paul, 373 US 132, 83 S Ct 1210, 10 L ed2d 248, 256 (1963).
There is no reason why the same principle should not be applicable in the field of the taxation of interstate commerce. In Northwestern Cement the Court simply held that a state income tax upon revenues derived from interstate commerce "does not offend constitutional limitations upon state interference with such commerce." 358 US at 459. The Court was deciding the extent of the restrictions imposed by the unexercised delegation of power made by the Commerce Clause. In the instant case the power delegated has been exercised. The views of the Court about the *60 constitutionality of P.L. 86-272 seem to be revealed in this general observation made in the Northwestern Cement opinion:
Northwest Airlines v. Minnesota, 322 US 292, 64 S Ct 950, 88 L ed 1283, 153 ALR 245 (1944), held that the domiciliary state could levy a personal property tax upon commercial airliners. However, in the opinion by Mr. Justice Frankfurter he stated:
In Mr. Justice Jackson's concurring opinion he stated:
5, 6. A state can levy an income tax upon revenues derived from interstate commerce. This is not because *61 such tax is in a different area than the congressional power "to regulate commerce"; it is because, in the absence of congressional action to the contrary, both the state and federal legislatures can legislate in this area. In the absence of congressional action to the contrary, the only restriction upon the states is judicially imposed,  state action must not unduly burden interstate commerce. Congress now has acted; its statute is contrary to the state action; the federal statute is valid and the state statute must yield.[2]
Reversed.
[1]  The Commission also contends that the federal statute "is in violation of the Fifth Amendment of the United States Constitution, because it is arbitrary in nature, and discriminatory against the local competitors of those granted an exemption under the terms of the statute." This ground was not alleged in the pleadings and, therefore, will not be considered.
[2]  The Tax Court was concerned:

"* * * If, as interstate commerce Congress can prohibit a state tax on net income derived from interstate commerce, then, Congress can prohibit all state taxation under its broad power to regulate intrastate affairs affecting interstate commerce. * * *. Stripped of the power to tax, the sovereignty of states is a hollow shell. * * *" 1 OTR Adv Sh at 509.
Whether this prediction is well founded or not, we are convinced by the decisions of the United States Supreme Court, new and old, that the congressional power over the taxation of the revenues of interstate commerce is supreme.
International Shoe Company v. Cocreham, 246 La 244, 164 S2d 314, cert den sub nom Mouton v. International Shoe Co., 379 US 902, 85 S Ct 193, 13 L ed2d 177 (1964), and State ex rel. Ciba Pharmaceutical Products, Inc. v. State Tax Commission, 382 SW2d 645 (Mo 1964), held P.L. 86-272 valid.