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 Article VIII, 

Section 2, of the Texas Constitution. 

The pertinent part of S.B. 212 reads as follows: 

"Article 12.03. Corporations exempt. 

The franchise tax Imposed by this Chapter 

shall not apply to any insurance company, 

surety, guaranty or fidelity company, 

transportation company or sleeping, 

palace car and dining car company now 

required to pay an annual tax measured 

by their gross receipts, or to any corporation organized as 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 exclusive purpose of promoting the 

public interest of any county, city, or 

town, or other area wlthln the State or 

to corporations organized for the purpose 

of religious worship or for providing 

places of burial not for private profit, 

or to corporations organized for the purpose of holding agricultural fairs and 

encouraging agricultural pursuits, or 

for strictly educational purposes, or 

for purely public charity, or to Statechartered building and loan associations; 

or to any mutual Investment company 

registered under the Federal Investment 

Company Act of 1940, as from time to 

time amended, which holds stocks, bonds 

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Honorable H. J. Blanchard, Page 2 (No. C-46) 

or other securities of other companies 

solely for mutual Investment purposes 

for nonprofit corporations having no 

capital stock organized for the purpose 

of the education of the public in the 

protection and conservation of 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 

recreational facilities." 

This bill with a few amendments reads the same as Acts 

1907, 30th leg., 1st C.S., p. 503. The bill Is Identical with 

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 nonprofit water supply 

or sewer service corporations organized 

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 

recreational facilities." 

Section 1 of Article VIII of the Texas Constitution 

authorizes the Legislature to impose occupation taxes, both 

upon natural persons and upon corporations other than municipal. 

Section 2 of Article VIII of the Constitution provides: 

"All occupation taxes 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 

corporation for exercising the privilege 

of carrying on Its business must be classed 

as an occupation tax. . . .' 

40 Tex.Jur. 82, Taxation, Sec. 53 provides: 

I, . . . The occupation tax laws Include 

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Honorable H. J. Blanchard, Page 3 (No. C-46) 

a tax of one per cent. of the products of 

. . . a corporate franchise tax, . ~ el' 

Both of these Texas Jurisprudenee quotations cite 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 construction of an act of the 29th 

Legislature, &an. maws 1905, pe 336, c. 141, the caption of 

which reads as follows: 

"An act imposing a tax upon railroad 

corporations, the receivers thereof, 

and other persons, firms, and associations of persons, owning, operatfng, 

managing or controlling any 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 collection and 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 corporation can carry 

on no business except that for which it 

holds a franchise from the state> it 

follows that any tax levied upon a 

corporation in this state for exercising the privilege of carrying on 

its business must be classed as an 

occupation tax 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 interstate commerce and did not change 

the ruling as to the construction of franchise tax being an 

occupation tax. Texas Jurisprudence, Taxation, Section 40, 

supra, also cites the case of State v. Texas 8e P. Py Co., 

100 Tex. 279, 98 S.W. 834 (3.907). In this case the Supreme 

Court cited the Galveston case, 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 Galveston case, supra, as authority for 

their holding, In which they had the following to say: 

"The tax provided for in the law of 

1903 is undoubtedly a tax allowing mutual 

insurance companfes to pursue their business 

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Honorable Ii. J. Blanchard, Page 4 (No. C-46) 

in Texas, an occupation tax, and it is 

not an ad valorem tax on property." 

The statute under construction in the Millers' Mutual 

case, supra, reads as follows: 

"Each and every mutual Insurance company operating under 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 

officers and agents, except such fees 

shall be paid to the commissioner of 

insurance as Is required by law." 

All of the tax statutes referred 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 franchise taxes within the meaning of the franchise 

tax as used in Senate Bill 212, supra, here under consideration. A corporate franchise tax Is a tax on the privilege of 

doing business and Is due whether or not the corporation does 

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 occupation tax, In 

reality, there was no franchise tax Involved In such cases and 

the statements of the Courts amounted to dictum and should not 

be regarded as controlling the question before us at this time. 

The franchise tax Is not an occupation tax within the 

meaning of Article VIII, Sections 1 and 2 of the Texas Constitution, as construed by Attorney Qeneral's Opinion No. V-1027 

dated April 3, 1950, a copy of which Is enclosed herewith, and 

as interpreted for many years by the Legislature In allocating 

the funds derived from franchise taxes. The Legislature has 

consistently allocated the franchise tax to the General Revenue 

Fund. If It is an occupation tax, one-fourth of such revenue 

under the Constitution would have to be placed In the Available 

School Fund. Section 3, Article VII, Constitution of Texas. 

Moreover, the Secretary of State, the Comptroller of Public 

Accounts, the State Treasurer and the Attorney General for a 

long period of years have uniformly and consistently construed the franchise tax as not being an occupation tax. 

The Supreme Court of Texas in speaking of departmental 

construction has stated: 

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Honorable H. J.,Blanchard, Page 5 (No. C-46) 

"This long-continued administrative 

construction is entitled to great weight, 

especially In view of the fact that the 

statute was 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 indicate a contrary intent." 

Burroughs v. Lyles, 181 

‘(1944). 

The franchise tax is not a 

terms of Section 2 of Article VIII 

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 franchise taxes are . . . . not occupation taxes nor property taxes, tnen the provlslons 

of Section 2 of Article VIII do not apply to this law. 

Since this bill classifies different types of corporations, the question arises as to whether or not it 1s contrary 

to other provisions of the Constitution such 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 arbitrary as 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 individual stores pointed out: 

quantity buying, ability to pay cash and receive discounts, 

skill In buying, warehousing, and distribution from single 

warehouses, capital, unified advertfsing9 superior management, 

standard form of display, concentration of management in special lines, and standardization. These distinctive features 

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 definite holding that merchants may be divfded into classes and 

the classes taxed in different amounts 

and according to different standards; 

that the aonsfderatfons upon which such 
Honorable H. 3. Blanchard, Page 6 (NO. C-46) 

classlflcations are based are primarily 

within the discretion of the Legislature; 

and that courts can interfere only when 

it Is made clearly to appear that there 

is no reasonable basis 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 differences In methods 

of conducting businesses have long been 

recognized in 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 occupation taxes on Itinerant merchants and peddlers. The difference 

between their occupations and that of 

an ordinary merchant Is not great, but 

It would hardly be contended at this 

time that It is not sufficient to support a separate classification." 

Mfference in profits derived, In extent of consumption of articles, and other conditions that might be.supposed, 

can properly be taken into consideration by the Legislature in 

making classifications and In determining amount of occupation 

taxes to be laid on each. 

The mere fact that discrimination Is made in classifications for occupation taxes proves nothing against classlfication which 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 jection was 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 Implies power In 

the Legislature to classify the subjects of occupation taxes 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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Honorable H. J.~‘Blanchard, Page 7 (No. c-46) 

occupation, 8.9,' for Instance, merchants, 

may thus be divided Into classes, and 

the classes may be taxed in different 

amounts and according to different 

standards. Merchants may be divided 

Into .wholesalers and retailers, and, 

If there be reasonable grounds, 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 primarily within the 

discretion of the Legislature. The 

courts, under the provisions relied on, 

can only interfere when it Is made clearly 

to appear that an attempted classification 

has no reasonable basis in the nature of 

the businesses classified, and that the 

law operates unequally upon subjects 

between whlch'there is no real difference 

to justify the separate treatment of them 

undertaken by 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 Article VIII, Section 2, 

In that it was not equal and uniform because pay toilets and 

drinking cup vending machines were exempted. He also complained because the tax on marble machines was 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 subdivided or 

reclassified where reason exists 

therefor. Particular attention Is 

called to this because there are 

commodities and commodities, amusements and amusements, services and 

services; and, if reason exists therefor, the Legislature may subdivide or 

reclassify commodity vending machines, 

service vending machines, and amusement 

vending machines. In Quong Wing v. 

Klrkendall, 223 U.S. 59, It Is laid 

down that a state enactment may make 

dlscrlminatlons, if founded on dlstlnctions not unreasonable or purely arbltrary." 

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Honorable H. J. Blanchard, Page 8 (No. C-46) 

That the Courts have nothing to do with the policy, 

wisdom, expediency or propriety of legislative enactments Is 

almost a maxim. Ollre v. State, 123 S.W. 1116 (Tex.Crlm. 

1909 1. 

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 corporations for franchise tax 

exemptions as provided In S.B. 212 and that It Is not In conflict with Section 2 of Article VIII of the Texas Constitution. 

We are further of the opinion that since the classification is 

a reasonable one and cannot be said to be discriminatory nor 

arbitrary, It is not In conflict with any other provisions of 

the State Constitution. 

SUMMARY 

Senate Bill No. 212, 9th Legislature, 

does not violate the provisions of Article VIII, 

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 

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