# The Attorney General of Texas

October 28, lV83 JIM MATTOX Attorney General

Supreme Court Building P. 0. aox 12546 Austin. TX. 78711-2548 5121475-2501 Telex 9101674-1367 Telecopier 51214750266

1607 Main St.. Suite 1400 Dallas. TX. 75201-4709 2141742J3944

4624 Alberta Ave., Suite 160 El Paso. TX. 79905-2793

- 9151533-3464

,--II Dallas Ave., Suite 202 Hws,on, TX. 77002-6986 7131650-0666

606 Broadway. Suite 312 Lubbock. TX. 79401-3479 6061747.5238 HonorableBob Bullock Comptrollerof PublicAccounts P. 0. Box 2243 Austin,Texas 78767 OpinionNo..JM-83 Re: Constitutionality of section 182.042 of the Tax Code
DearMr. Bullock: YOU ask whether section 182.042 of the TSX Code is constitutional. The section imposes s gross receipts tax on foreign car companies on business done in this state. Citing the recent United States Supreme Court case of Western and Southern Life Insurance Company V. State Board of Equalization of California, 451 U.S. 648 (1981).you assert that section 182.042 of the Tax Code is unconstitutional on its face because it imposes a gross receipts tax on car companies residing or incorporatedoutside this state only and not on Texas companies engaged in identicalactivities. We agree and conclude that a court would declare that section 182.042 of the Tax Code violates the equal protection clause of the fourteenthamendment to theUnited StatesConstitution. Section 182.041of the Tax Code sets forth the following:

4309 N. Tenth. Suite B McAllen. TX. 78501.1665 51216624547 9182.041. Definitions
In this subchapter:

200 Main Plaza. Suite 400 San Antonio. TX. 76205-2797 512/225-4191

An Equal Opportunity/ Affirmative Action Employer (1) 'Carcompany'means a personwho: (A) owns a stock car, refrigeratoror fruit car of any kind, tank car of any kind, coal car of any kind, furniture car, cormnon box csr, or flat car; and (B) leases or charges mileage for the use of the car. (2) 'Business' mean6 the leasing of or chargingmileage for theuse of the car. Section 182.042of the Tax Codeprovides the following:

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S182.042. Impositionand Rate of Tax (a) A tax is imposed on each car company residingor incorporatedoutside this stateon the gross receipts frombusiness done in this state. (b) The tax rate is threepercent of the gross receipts. (Emphasisadded). Sections 182.041 and 182.042 of the Tax Code are merely the codification of an occupation tax first enacted at Acts 1907, Thirtieth Legislature. 1st Called Session, at page 479, as article 7062,V.T.C.S. Article 7062, V.T.C.S.,was subsequently repealed and re-enacted as section 11.04 of Title 122 "Taxation" at Acts 1959, Fifty-sixth Legislature, 3rd Called Session, chapter 1, at page 303. The three enactmentsare substantiallyidentical;each imposes the tax upon foreign car companies only and not on Texas companies engaged in identical activities. There has been no court challenge to the statute's constitutionality; the issue here, then, is one of first impression.
In Western and SouthernLife InsuranceCompanyv. State Board of Equalizationof California,451 U.S. 648 (1981) [hereinafterWestern], the United States Supreme Court upheld the constitutionality of a California retaliatory insurance ;ax against the charge that it violated the equal protection clause of the fourteenth amendment to the United States Constitution. The state of California, in addition to imposing a premiums tax on both foreign and domestic insurance companiesdoingbusiness in California,also imposeda retaliatorytax on a foreign insurer when that insurer's state of incorporation imposed higher taxes on California insurers doing business in that stats than Californiawould otherwise impose on that state's insurers doingbusiness in California.
A line of early Supreme Court casesheld that a statemay attach essentiallyany conditions it choosesupon the grant of the privilege to do businesswithin that state. See, e.g.,New York V. Roberts. 171 U.S. 658 (1898);Horn SilverMining CompanyV. New York, 143U.S. 305 (1892); Pembina Consolidated Silver Mining & Milling Co. v. Pennsylvania, 125 U.S. 181 (1888). Philadelphia Pine Association V. New York, 119 U.S. 110 (1886);Paul V. Virginia, 75 U.S. 168 (1869). HOWaVer, this doctrine, first enunciated in Paul V. Virginia, supra, "as rejected shortly after the turn of the century. see, e.g., Southern Railway Company V. Greene, 216 U.S. 400 (1910); Pullman CompanyV. Kansas, 216 U.S. 56 (1910);WesternUnion TelegraphCompany v. Kansas, 216 U.S. 1 (1910). While acknowledging that a line of subsequentcases apparentlyresurrectedthe PaulV. Virginia doctrine, see, Prudential Insurance Company V. Benjamin, 328 U.S. 408 (1946); Lincoln National Life InsuranceCompanyV. Read, 325 U.S. 673 (1945),

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the Court in Western, 451 U.S. 664, quoting Hanover Fire Insurance CompanyV. Harding, 272U.S. 494. 511 (1926),declared that,

[wlith respect to the general tax burden on business, 'the foreign corporation stands equal, and is tobe clsssifiedwith domestic corporations of the samekind.' The Court inWestern, 451 U.S. 664-65, then restated the doctrine first set forth in Frost 8 Frost Trucking Company V. Railroad Commissionof Texas, 271U.S. 583, 593-94 (1926):

It is not necessary to challenge the proposition that, as a general rule, the state, having power to deny a privilege altogether,may grant it upon such conditionsas it sees fit to impose. But the power of the state in that respect is not unlimited; and one of the limitations is that it mY not impose conditions which require the relinquishment of constitutional rights. If the state m=Y compel the surrender of one constitutionalright as a condition of its favor. itmay, in likemanner, compela surrenderof all. It is inconceivable that guaranties embedded in the Constitution of the United Statesmay thus be manipulated out of existence. The Court in Western imposed a traditionalequal protection "rational basis" test:

We consider it now established that,whatever the extent of a State's authority to exclude foreign corporations from doing business within its boundaries, that authority does not justify imposition of more onerous taxes or otherburdens on foreign corporations than those imposed on domestic corporations, unless the disrrimination between foreign and domestic corporationsbears a rationalrelation to a legitimatestatepurpose. 451 U.S. at 667-68. The testwas formulatedin the followingway: In determiningwhether a challengedclassification IS rationally related to achievement of a legitimate state purpose, we must answer two questions: (1)Does the challenged legislation have a legitimate purpose?, and (2) Was it

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reasonable for the lawmakers to believe that use of the challenged classification would promote thatpurpose? 451 U.S. at 668. The Court went on to answer both questions in the affirmative. We believe, however, that a court, employing this same test in a challenge to section 182.042 of the Tax Code would not so find. We conclude that section 182.042fails the first test. In Western, the Court declared that the purpose of the retaliatory insurance tax was to promote the interstate business of domestic insurers by deterring other states from discriminatoryor excessive taxes. enacting

Since the amount of revenue raised by the retaliatory tax is relatively modest
. . . and impetus for passage of the tax comes from the nationwide insurance industry, it is clear that the purpose is not to generate revenue at the expense of out-of-state insurers, but to apply pressure on other States tomaintain low taxes on California insurers. 451 U.S. 669-70. The court concluded that there could be no doubt that the promotion of domestic industry by deterring barriers to interstatebusiness is a legitimate state purpose. In this instance, however, we have discovered no indication from any source that the occupation tax at issue seeks to deter barriers to interstate commerce. In fact,we can discern no purpose for the tax other than to provide ameans to regulate the entry of foreign car companies into the state and to providea means to generaterevenue for the state. We think it significant that the tax imposedby section 182.042 only upon foreign car companies does not serve to equalize or compensate the tax burden alreadyborne by Texas car companies. *, Southern Railway Company v. Greene, supra. See, For example, the franchise tax is imposed on foreign and domestic corporationsalike. Tax Code, §§lll.OOlet seq. See ColonialPipelineCompanyv. Traigle, 421 U.S. 100 (1975); Ford Motor Company v. Beauchamp, 308 U.S. 331 (1940). reh'g denied 388 U.S. 640 (1945). Indeed, none of the remaining business taxes impose a tax on only foreign corporations doingbusiness in Texas: the taxes are imuosedon foreienand domestic corporationsor activities alike. See g' enerally,Tax Code, §§151.001 through 203.001. We conclude that section 189.042 of the Tax Code, by imposing a gross receipts tax on foreigncar companiesonly,while not imposinga tax on Texas companies engaged in identical activities,violates the

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equal protection clause of the fourteenth amendment to the United StatesConstitutionand is unconstitutional. SUMMARY Section 18sL.42 of the Tax Code, which imposes a gross receipts tax on car companiesresiding or incorporated outside this state only and not on Texas companies engaged in identical activities, violates the equal protection clause of the fourteenth amendment to the United States Constitutionand is unconstitutional.

JIM MATTOX Attorney General of Texas TOM GREEN FirstAssistantAttorneyGeneral
DAVID R. RICHARDS ExecutiveAssistantAttorney General Preparedby Jim Moellinger AssistantAttorneyGeneral APPROVED: OPINION COMMITTEE Rick Gilpin,Chairman Jon Bible Colin Carl Susan Garrison Jim Moellinger Nancy Sutton

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