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 

Honorable Bob Bullock 

Comptroller of Public Accounts 

P. 0. Box 2243 

Austin, Texas 78767 

Opinion No..JM-83 

Re: Constitutionality of 

section 182.042 of the Tax 

Code 

Dear Mr. 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 incorporated outside this state only and 

not on Texas companies engaged in identical activities. We agree and 

conclude that a court would declare that section 182.042 of the Tax 

Code violates the equal protection clause of the fourteenth amendment 

to the United States Constitution. 

Section 182.041 of 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) 'Car company' means a person who: 

(A) owns a stock car, refrigerator or 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 

charging mileage for the use of the car. 

Section 182.042 of the Tax Code provides the following: 

p. 349 
Honorable Bob Bullock - Page 2 (JM-83) 

S182.042. Imposition and Rate of Tax 

(a) A tax is imposed on each car company 

residing or incorporated outside this state on the 

gross receipts from business done in this state. 

(b) The tax rate is three percent of the gross 

receipts. (Emphasis added). 

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 enactments are substantially identical; 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 Southern Life Insurance Company v. State Board of 

Equalization of California, 451 U.S. 648 (1981) [hereinafter Western], 

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 

companies doing business in California, also imposed a retaliatory tax 

on a foreign insurer when that insurer's state of incorporation 

imposed higher taxes on California insurers doing business in that 

stats than California would otherwise impose on that state's insurers 

doing business in California. 

A line of early Supreme Court cases held that a state may attach 

essentially any conditions it chooses upon the grant of the privilege 

to do business within that state. See, e.g., New York V. Roberts. 171 

U.S. 658 (1898); Horn Silver Mining Company V. New York, 143 U.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 

Company V. Kansas, 216 U.S. 56 (1910); Western Union Telegraph Company 

v. Kansas, 216 U.S. 1 (1910). While acknowledging that a line of 

subsequent cases apparently resurrected the Paul V. Virginia doctrine, 

see, Prudential Insurance Company V. Benjamin, 328 U.S. 408 (1946); 

Lincoln National Life Insurance Company V. Read, 325 U.S. 673 (1945), 

p. 350 
Honorable Bob Bullock - Page 3 (JM-831 

the Court in Western, 451 U.S. 664, quoting Hanover Fire Insurance 

Company V. Harding, 272 U.S. 494. 511 (1926), declared that, 

[wlith respect to the general tax burden on 

business, 'the foreign corporation stands equal, 

and is to be clsssified with domestic corporations 

of the same kind.' 

The Court in Western, 451 U.S. 664-65, then restated the doctrine 

first set forth in Frost 8 Frost Trucking Company V. Railroad 

Commission of Texas, 271 U.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 conditions as 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 

constitutional right as a condition of its favor. 

it may, in like manner, compel a surrender of all. 

It is inconceivable that guaranties embedded in 

the Constitution of the United States may thus be 

manipulated out of existence. 

The Court in Western imposed a traditional equal 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 other burdens 

on foreign corporations than those imposed on 

domestic corporations, unless the disrrimination 

between foreign and domestic corporations bears a 

rational relation to a legitimate state purpose. 

451 U.S. at 667-68. 

The test was formulated in the following way: 

In determining whether a challenged classification 

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 

p. 351 
Honorable Bob Bullock - Page 4 (JM-83) 

reasonable for the law makers to believe that use 

of the challenged classification would promote 

that purpose? 

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 182.042 fails 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 

discriminatory or 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 to maintain 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 

interstate business 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 a means to regulate the entry of foreign car companies into 

the state and to provide a means to generate revenue for the state. 

We think it significant that the tax imposed by section 182.042 

only upon foreign car companies does not serve to equalize or 

compensate the tax burden already borne by Texas car companies. 

*, Southern Railway Company v. Greene, supra. 

See, 

For example, the 

franchise tax is imposed on foreign and domestic corporations alike. 

Tax Code, §§lll.OOl et seq. See Colonial Pipeline Company v. 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 

doing business in Texas: the taxes are imuosed on foreien and domestic 

corporations or 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 foreign car companies only, while not imposing a 

tax on Texas companies engaged in identical activities, violates the 

p. 352 
Honorable Bob Bullock - Page 5 (JM-83) 

equal protection clause of the fourteenth amendment to the United 

States Constitution and is unconstitutional. 

SUMMARY 

Section 18sL.42 of the Tax Code, which imposes 

a gross receipts tax on car companies residing 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 

Constitution and is unconstitutional. 

JIM MATTOX 

Attorney General of Texas 

TOM GREEN 

First Assistant Attorney General 

DAVID R. RICHARDS 

Executive Assistant Attorney General 

Prepared by Jim Moellinger 

Assistant Attorney General 

APPROVED: 

OPINION COMMITTEE 

Rick Gilpin, Chairman 

Jon Bible 

Colin Carl 

Susan Garrison 

Jim Moellinger 

Nancy Sutton 

p. 353