Honorable Ii. J. Blanchard **OpiniOn NO.**  C- 46 Chairman, Sub-committee on Senate Bill 212 Re: Constitutionality of The Senate of The State of Texas Senate Bill No. 212 Austin, Texas
Dear Sir:

This is In answer to your request for an opinion as to whether or not Senate Bill No. 212 of the 58th Legislature is contrary to the constitutional provisions of ArticleVIII, Section 2, of the Texas Constitution.

The pertinentpart of S.B. 212 reads as follows: "Article12.03. Corporations exempt. The franchisetax Imposedby this Chapter shall not apply to any insurance company, surety, guaranty or fidelity company, transportation

company or sleeping, palace car and dining car companynow required to pay an annual tax measured by their gross receipts, or to any corporation organizedas a railway terminal corporation and having no annual net income from the business done by It, or to corporations having no capital stock and organized for the exclusivepurpose of promoting the public interest of any county, city, or town, or other area wlthln the State or to corporationsorganized for the purpose of religiousworship or for providing places of burial not for private profit, or to corporationsorganized for the purpose of holding agriculturalfairs and encouragingagricultural pursuits, or for strictlyeducational purposes, or for purely public charity, or to Statecharteredbuilding and loan associations; or to any mutual Investmentcompany registeredunder the Federal Investment Company Act of 1940, as from time to time amended,which holds stocks,bonds

-204-HonorableH. J. Blanchard, Page 2 (No. C-46)

or other securitiesof other companies solely for mutual Investment purposes for nonprofit corporations having no capital stock organizedfor the purpose of the education of the public in the protectionand conservationof fish, game and other wildlife, grass lands and forests, or for nonprofit corporations having no capital stock organized for the purpose of providing or operating recreationalfacilities." This bill with a few amendmentsreads the same as Acts 1907, 30th leg., 1st C.S., p. 503. The bill Is Identicalwith Article 12.03, Title 122A, Taxation-@eneral, Vernon's Civil Statutes,with the exception that the last clause of Article 12.03 as amended by Acts 1961, 57th Leg., p. 41, ch. 27, Sec. 1, which reads as follows:

11

. . . or to nonprofitwater supply or sewer service corporationsorganized on behalf of cities or towns pursuant to Acts of 1933, 43rd Legislature,1st Called Session, Chapter 76, as amended.",

was deleted and the following clause was added:

11

. . . or for nonprofit corporations having no capital stock organized for the purpose of providing or operating recreationalfacilities." Section 1 of ArticleVIII of the Texas Constitution authorizesthe Legislatureto impose occupationtaxes, both upon natural persons and upon corporationsother than municipal.

Section 2 of ArticleVIII of the Constitution provides: "All occupationtaxes shall be equal and uniform upon the same class of subjects within the limits of the authority levying the tax;
. . .' 36 Tex.Jur.2d 627, Licenses, Sec. 34 makes this statement: I,

. . . Moreover,any tax levied on a corporationfor exercisingthe privilege of carrying on Its businessmust be classed as an occupationtax.
. . .' 40 Tex.Jur. 82, Taxation, Sec. 53 provides: I,

. . . The occupationtax laws Include

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a tax of one per cent. of the products of

. . . a corporate franchisetax,
. ~ el' Both of these Texas Jurisprudenee quotationscite as authority the case of State v. Galveston,H, &,S. A. Ry. Co., 100 Tex. 153, 97 S.W. 71 (1906) The Supreme Court in this case had before It the constructionof an act of the 29th Legislature,&an. maws 1905, pe 336, c. 141, the caption of which reads as follows:

"An act imposinga tax upon railroad corporations,

the receivers thereof, and other persons, firms, and associations of persons, owning, operatfng, managing or controllingany line of railroad fn this state, for the transportation of passengers, freight, and baggage or either, equal to one per cent. of their gross receipts,and providing for the collectionand payment thereof, and repealing the existing tax on the gross passenger earnings of railroads." The Court in its opinion had the following to say: t,

. * D Since a corporationcan carry on no business except that for which it holds a franchise from the state> it follows that any tax levied upon a corporationin this state for exercising the privilege of carrying on its business must be classed as an occupationtax under OUP Constftutfon, II 0

. D The United States Supreme Court, 210 U.S. 217, reversed the decision of the Texas Supreme Court, but only on the grounds that it was a burden on interstatecommerceand did not change the ruling as to the constructionof franchise tax being an occupationtax. Texas Jurisprudence, Taxation, Section 40, supra, also cites the case of State v. Texas 8eP. Py Co., 100 Tex. 279, 98 S.W. 834 (3.907). In this case the Supreme Court cited the Galvestoncase, supra, as authority in construing the same tax statute.

The Court in the case of Millers"Mut. Fire Ins. Co. v. City of Austin, 210 S.W. 825 (Tex.@iv.App. 1919, no writ history), cltefihe Galvestoncase, supra, as authority for their holding, In which they had the followingto say:

"The tax provided for in the law of 1903 is undoubtedlya tax allowing mutual insurance companfesto pursue their business

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in Texas, an occupationtax, and it is not an ad valorem tax on property." The statuteunder constructionin the Millers' Mutual case, supra, reads as follows:

"Each and every mutual Insurancecompany operatingunder this act shall pay to the Insurance commissioner annually on the 31st day of December, one-half of one per cent. of all the gross premiums received during the year, and no other tax shall be required of such mutual insurance companies,their officersand agents, except such fees shall be paid to the commissionerof insuranceas Is required by law." All of the tax statutesreferred to in these three cases cited above are gross receipts taxes or a tax based on the amount of business done by the different corporations and are not franchisetaxes within the meaning of the franchise tax as used in Senate Bill 212, supra, here under consideration. A corporate franchisetax Is a tax on the privilege of doing business and Is due whether or not the corporationdoes any business and is not a tax based on the amount of business done by the corporation.

Although the Courts made the statement In the decisions above cited that the franchise tax is an occupationtax, In reality, there was no franchisetax Involved In such cases and the statementsof the Courts amounted to dictum and should not be regarded as controllingthe questionbefore us at this time.

The franchisetax Is not an occupationtax within the meaning of ArticleVIII, Sections 1 and 2 of the Texas Constitution, as construedby Attorney Qeneral'sOpinion No. V-1027 dated April 3, 1950, a copy of which Is enclosedherewith, and as interpretedfor many years by the LegislatureIn allocating the funds derived from franchisetaxes. The Legislaturehas consistently

allocated the franchisetax to the General Revenue Fund. If It is an occupationtax, one-fourthof such revenue under the Constitution would have to be placed In the Available School Fund. Section 3, ArticleVII, Constitution of Texas. Moreover, the Secretaryof State, the Comptrollerof Public Accounts, the State Treasurerand the Attorney General for a long period of years have uniformlyand consistentlyconstrued the franchise tax as not being an occupationtax.

The Supreme Court of Texas in speaking of departmental construction

has stated: -207-HonorableH. J.,Blanchard,Page 5 (No. C-46)

"This long-continued administrative constructionis entitled to great weight, especially In view of the fact that the statutewas amended as late as 1943 and the Legislature,

whfch is presumed to have been aware of the interpretation, made no changes fn the language that would indicatea contrary intent." Burroughsv. Lyles, 181 ‘(1944). The franchisetax is not a terms of Section 2 of ArticleVIII but is an excise tax levfed on the tlon to do business in Texas.

We are of the opinion that

. s.w.2a 570

property tax within the of the Texas Constitution, privilege for the corporasince franchisetaxes are

. . . . not occupationtaxes nor property taxes, tnen the provlslons of Section 2 of Article VIII do not apply to this law.

Since this bill classifiesdifferent types of corporations, the questionarises as to whether or not it 1s contrary to other provisions of the Constitutionsuch as due process or equal protection of the laws.

There are many Texas cases fn which the courts have held that the Legislature has authority to classify different types of business for purpose of taxation so long as the leglslation is not discrfminatory nor arbitraryas between the same or like classes of business.

In the case of Hurt v. Cooper, 130 Tex. 433, 110 S.W.2d 896, 901 (1937),the Court In speaking of a greater tax per store on chain stores than on individualstores pointed out: quantitybuying, ability to pay cash and receive discounts, skill In buying,warehousing,and distributionfrom single warehouses,capital,unified advertfsing9superiormanagement, standard form of display, concentration of management in special lines, and standardization. These distinctivefeatures were held to beg

interrelated

and interdependent in the chain store business.

In the opinion in Hurt v, Cooper, supra, the Court said at page 900:

"That is a definiteholding that merchants may be divfded into classes and the classes taxed in differentamounts and according to different standards; that the aonsfderatfons upon which suchHonorableH. 3. Blanchard,Page 6 (NO. C-46)

classlflcations

are based are primarily within the discretionof the Legislature; and that courts can interfereonly when it Is made clearly to appear that there is no reasonablebasis for the attempted classlflcatlon. If there is a reasonable basis or, to express It differently,If it cannot be said that the Legislature acted arbitrarily,the courts will **not** Interfere. Mere differencesIn methods of conductingbusinesseshave long been recognizedin this state as sufficient to support the classification of merchants for the purpose of levying occupation taxes. For instance,our statutes (see article 7047, as amended Vernon's Ann. Clv. f St. art. 70471) evy occupationtaxes on Itinerantmerchants and peddlers. The difference between their occupationsand that of an ordinarymerchant Is not great, but It would hardly be contendedat this time that It is not sufficientto support a separate classification." Mfference in profits derived, In extent of consumption of articles,and other conditionsthat might be.supposed, can properly be taken into consideration by the Legislaturein making classifications and In determiningamount of occupation taxes to be laid on each.

The mere fact that discrimination Is made in classifications for occupationtaxes proves nothing against classlficationwhich is not on Its face an arbitrary,unreasonable or unreal one.

The Court in rendering Its opinion in Texas Co. v. =%- loo wx. 628, 103 s.w. 481, 484 (lgO7), In which an o jectionwas made that a statute discriminates between persons pursuing occupations which belong to the same claea, said:

. . The very language of the Constit&ion of the state Impliespower In the Legislatureto classify the subjects of occupationtaxes and only requires that the tax shall be equal and uniform upon the same class. Persons who, in the most general senae, may be regarded as pursuing the same

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occupation,8.9,'

for Instance,merchants, may thus be divided Into classes,and the classesmay be taxed in different amounts and according to different standards. Merchantsmay be divided Into .wholesalers

and retailers,and, If there be reasonablegrounds, these may be further divided according to the particular classes of business in which they may engage. The considerations upon which such classifications shall be based are primarilywithin the discretionof the Legislature. The courts,under the provisionsrelied on, can only interferewhen it Is made clearly to appear that an attempted classification has no reasonablebasis in the nature of the businesses classified,and that the law operates unequallyupon subjects between whlch'thereis no real difference to justify the separatetreatment of them undertakenby the Legislature.

. 0 .'
In Rx Parte IZay,

76 S.W.2d 1.060,

Tex.Crlm. (1934), ADDellant was convicted on comolalnt of not having license for coin-operated

handkerchle'f-vending machines. -He claimed that Article 7047A-1 was violative of ArticleVIII, Section 2, In that it was not equal and uniform because pay toilets and drinking cup vending machineswere exempted. He also complained because the tax on marble machineswas greater than, and measured bx different standard than "other similar amusement machines. Relief was denied.

We quote from page 1064:

. . . businesses of the same general class may be properly subdividedor reclassified

where reason exists therefor. Particularattention Is called to this because there are commoditiesand commodities,amusements and amusements, servicesand services;and, if reason exists therefor, the Legislaturemay subdivideor reclassifycommodityvending machines, servicevending machines,and amusement vending machines. In Quong Wing v. Klrkendall,223 U.S. 59, It Is laid down that a state enactmentmay make dlscrlminatlons,

if founded on dlstlnctions not unreasonableor purely arbltrary." -210..HonorableH. J. Blanchard,Page 8 (No. C-46)

That the Courts have nothing to do with the policy, wisdom, expediencyor propriety of legislative enactments Is almost a maxim. Ollre v. State, 123 S.W. 1116 (Tex.Crlm. 19091. We are of the opinion that In compliance with the rule laid down In the above cases, the Legislature has authority to classify the various types of corporationsfor franchisetax exemptionsas provided In S.B. 212 and that It Is not In conflict with Section 2 of ArticleVIII of the Texas Constitution. We are further of the opinion that since the classification is a reasonableone and cannot be said to be discriminatory nor arbitrary, It is not In conflictwith any other provisions of the State Constitution.

SUMMARY
Senate Bill No. 212, 9th Legislature, does not violate the provisions of ArticleVIII, Section 2, or other provisions of the Texas Constitutlon.
Yours very truly,
WAGGONER CARR Attorney General of Texas

H. Broadhurst

JHB:pw Enclosure
APPROVED: OPINION COMMITTEE W. V. Qeppert,Chairman W. 0. Shultz Bill Allen Arthur Sandlln
APPROVED FORTHEATTORNEY QENERAL By: Stanton Stone -211-