Source: https://supreme.justia.com/cases/federal/us/294/550/
Timestamp: 2019-04-22 18:08:44+00:00

Document:
1. In determining the validity of a state tax under the Federal Constitution, this Court is not concluded by the name or description found in the Act, but must ascertain for itself the nature and effect of the tax. P. 294 U. S. 555.
1%; a different and increasing rate applied to each additional $100,000 of gross sales up to $1,000,000; the rate on sales over $1,000,000 was 1%. Held, the classification of sales for the purpose of the tax was arbitrary, and violated the equal protection clause of the Fourteenth Amendment. P. 294 U. S. 557.
3. A tax on sales is, in effect, a tax on the goods sold. P. 294 U. S. 556.
4. The tax cannot be sustained as an excise on the privilege of merchandising, for there is no reasonable relation between the amount of the tax and the value of the privilege; there is no such relation between gross sales -- the measure of the tax -- and net profits as will justify the discrimination between taxpayers. P. 294 U. S. 557.
5. The contention that the graduation of the tax was adjusted with reasonable approximation to the net earnings of the taxpayers, based upon a claimed relation between gross sales and net profits, held not supported by the evidence. P. 294 U. S. 558.
6. Convenience of administration does not justify the State in employing this method of taxing gains and ignoring the consequent inequalities of burden. P. 294 U. S. 559.
7. The claim that the tax, in its actual operation, is not shown to be unduly burdensome or harmful to any of the complaining taxpayers, or to amount to confiscation of their property, held irrelevant to the issue of inequality, and contradicted by the record. P. 294 U. S. 561.
8. Parties challenging the validity of a state statute under the Fourteenth Amendment are not to be denied relief by resort to a forecast of possible amelioration of their situation by the state courts. P. 294 U. S. 561.
9. The unrestricted power of a state legislature to determine the amount of an otherwise valid tax applies to excises, as well as to other forms of taxation. P. 294 U. S. 562.
10. Clark v. Titusville, 184 U. S. 329; Metropolis Theater Co. v. Chicago, 228 U. S. 61, and recent chain store tax cases distinguished. Pp. 294 U. S. 564-566.
ground that complainants had an adequate remedy at law, which judgments were reversed and remanded on appeals to this Court. 287 U. S. 9.
These are four suits heard by a specially constituted District Court in Kentucky to enjoin state officers from enforcing an act of that Commonwealth imposing a gross sales tax. The plaintiffs are, respectively, a domestic corporation conducting a department store in Louisville, a partnership operating a similar store in the same city, a Delaware corporation having 21 department stores in Kentucky, and an Ohio corporation maintaining 289 grocery stores within the Commonwealth. Nineteen individuals, partnerships, and corporations, proprietors of one or more stores selling various lines of merchandise, intervened as plaintiffs. Interlocutory injunctions issued, but the District Court of three judges dismissed the bills for want of equity, being of opinion there was an adequate remedy at law. Upon appeal, this Court reversed the decrees and remanded the causes. [Footnote 1] At final hearing, the District Court found the remedy at law inadequate, but sustained the act and dismissed the bills. [Footnote 2] The present appeals are upon the merits.
$400,000 of annual gross sales is one-twentieth of one percent. The rate increases on each additional $100,000 of sales between $400,000 and $1,000,000, inclusive, being seventeen-twentieths of one percent in the last bracket. On sales over $1,000,000, the rate is one percent. The increased rates are applicable, however, only in respect of sales in each successive bracket, and therefore the tax burden attributable to $1,100,000 of sales is not one percent, but a composite ascertained by adding the total tax for the sales falling within the various brackets, and dividing by the dollar value of all sales. Thus, the act requires the merchant to pay in the total .05 percent on $400,000 of sales, .305 percent on $1,000,000 of sales and .96 percent on $15,000,000 of sales.
The appellants charge that the statute violates several sections of the Constitution of Kentucky and several provisions of the Federal Constitution. We shall not stop to enumerate these, since we must sustain the claim that the classification made by § 2 denies the appellants the equal protection of the laws assured by the Fourteenth Amendment.
The trial court's relevant findings are: the act is essentially a revenue measure. The tax is on gross sales, not on gross collections from vendees. Sales made by merchants taxed under any of the brackets of the act are made in competition with like sales of the same character of merchandise by those who are taxed under other brackets. As a general proposition, increased volume of sales results in increased profits and increased ability to pay the tax. The rate of profit from retail sales generally varies with the character of the goods sold. The management of a store or stores is one of the fundamental factors in determining whether or not a profit is realized and the amount of profit. As a general proposition, those merchants doing the largest amount of trade are enabled to secure the highest type of management.
In the light of these findings, does the act tax sales in an unequal and arbitrary way, classifying them for the imposition of different rates without reference to any real or substantial distinction, as appellants insists; or does it impose an excise upon the conduct of retail business, reasonably adjusted in amount with regard to substantial differences in the nature of the privilege exercised, as appellees contend?
"It is impossible to conceal from ourselves, that this is varying the form, without varying the substance. . . . All must perceive that a tax on the sale of an article, imported only for sale, is a tax on the article itself."
". . . Nor is it an occupation tax, except as it is imposed upon the very carrying on of the business of exporting merchandise. It operates to lay a direct burden upon every transaction in commerce by withholding, for the use of the state, a part of every dollar received in such transactions."
"Sale and purchase constitute a transaction by which the tax is measured and on which the burden rests. . . . To use the number of gallons sold . . . as a measure of the privilege tax is, in substance and legal effect, to tax the sale."
And in Indian Motocycle Co. v. United States, 283 U. S. 570, a federal tax upon motorcycles "sold . . . by the manufacturer" was held to be an excise on the sale, and the doctrine of the Panhandle case was reaffirmed.
Thus understood, the operation of the statute is unjustifiably unequal, whimsical, and arbitrary, as much so as would be a tax on tangible personal property -- say cattle -- stepped up in rate on each additional animal owned by the taxpayer, or a tax on land similarly graduated according to the number of parcels owned.
to deduce such a relation from the alleged fact that a merchant's net income and his consequent ability to pay increase as the volume of his sales grows. The argument does not advance the case for the validity of the statute. Even in this aspect, the classification is arbitrary, for the claimed relation of gross sales -- the measure of the tax to net profits fails to justify the discrimination between taxpayers.
"The difference in effect between a tax measured by gross receipts and one measured by net income, recognized by our decisions, is manifest and substantial, and it affords a convenient and workable basis of distinction between a direct and immediate burden upon the business affected and a charge that is only indirect and incidental. A tax upon gross receipts affects each transaction in proportion to its magnitude, and irrespective of whether it is profitable or otherwise. Conceivably it may be sufficient to make the difference between profit and loss, or to so diminish the profit as to impede or discourage the conduct of the commerce. A tax upon the net profits has not the same deterrent effect, since it does not arise at all unless a gain is shown over and above expenses and losses, and the tax cannot be heavy unless the profits are large."
and that gross and net profits vary with the character of the business, as well as its volume. The trial court made no finding that the relation between gross sales and net profits, or increase of net worth, was constant, or even that there was a rough uniformity of progression within wide limits of tolerance. Expert witnesses, using data assembled from various reporting agencies, endeavored to establish that net profits or net worth grow with increased sales. But their testimony not only indicated great variations within each class selected for comparison, but also showed that, in some of the classes representing the greater amount of sales, the net profit or addition to net worth is smaller than in a class having less aggregate sales. The best that can be said for this evidence is that, averaging the results of the concerns making the reports, it is true, "generally speaking," as the court below put it, that profits increase with sales. The ratio of increase, however, differs in different lines of activity and even as between concerns carrying on the same business, and so many exceptions and reservations must be made that averages are misleading. The proofs submitted are insufficient to support the appellees' contention that the graduation of the tax was adjusted with reasonable approximation to the net earnings of the taxpayers, and that such minor and incidental inequalities as may be found are those always incident in the application of any valid general rule of classification. We think the graduated rates imposed were not intended to bear any relation to net profits. The argument based upon the asserted analogy to a tax upon net income graduated in accordance with the size of the income is unconvincing, for the exaction here demanded is not of that kind.
Kentucky for these reasons is at liberty to choose this form and to ignore the consequent inequalities of burden in the interest of ease of administration. The argument is, in essence, that it is difficult to be just, and easy to be arbitrary. If the Commonwealth desires to tax incomes, it must take the trouble equitably to distribute the burden of the impost. Gross inequalities may not be ignored for the sake of ease of collection.
The assertion that a graduated income tax, like the graduated sales tax under consideration, ignores the varying rates of return upon investment of those carrying on similar enterprises is obviously inaccurate. An income levy, by its very nature, assures equality of treatment, because the burden of the exaction varies with increase or decrease of return on capital invested and with the comparative success or failure of the enterprise. If, as argued, larger merchants are more efficient, their efficiency will be correspondingly reflected in their net earnings. If, as claimed, they are able to procure better management, a tax upon gains will uniformly reflect the effects of such management. And the same principle holds true of every advantage said to adhere in the magnitude of a business.
sales totaling less than $400,000, and this taxpayer had in Kentucky in that year a net income of approximately $172,000. The figures for 1931 and 1932 exhibit a like disparity. In the latter year, the company last mentioned, though having sales in Kentucky amounting to $11,447,611, would, after payment of the tax, have shown a net loss of over $6,000. To assert that a law thus operating reasonably equates the exaction to net income is to ignore the facts.
The appellees say there is no showing that the tax in its actual operation is unduly burdensome or harmful to any of the appellants, or amounts to confiscation of their property. The assertion is irrelevant to the issue of inequality, and is, moreover, contradicted by the record. In the case of one plaintiff whose sales in Kentucky in 1930 were over $14,500,000, in 1931 over $13,400,000, and in 1932 over $11,400,000, the net profits in the same state, after deducting the sales tax, would have been in 1930, $48,677, in 1931, $39,358, and 1932 would have shown a loss of $9,023. In the light of this demonstration, it is difficult to follow the argument that the Constitution of Kentucky, as construed by her courts, is a shield against any tax law imposing an excise the effect of which is to extinguish all profits when we are told by appellees, in the next breath, that this very statute has been upheld by the Supreme Court of Kentucky against constitutional attack. [Footnote 7] But if that court had not spoken on the subject, these appellants are not to be denied relief under the Fourteenth Amendment by resort to a forecast of possible amelioration of their situation by the state courts.
with confidence invoke the Fourteenth Amendment. [Footnote 8] The position seems to be that different principles govern various forms of taxation, and that what has been held with respect to the unrestricted power of a legislature to determine the amount to be exacted by other forms of taxation has no application to an excise. We are unaware of any such distinction in logic, and the authorities sanction none. Every taxing law must pass the constitutional test applied by the courts to the method of imposition, but the measure of the impost rests in the discretion of the legislature.
"if a lawful tax can be defeated because the power which is manifested by its imposition may, when further exercised, be destructive, it would follow that every lawful tax would become unlawful, and therefore no taxation whatever could be levied."
P. 178 U. S. 60. See also Magnano Co. v. Hamilton, 292 U. S. 40; Fox v. Standard Oil Co., ante, p. 294 U. S. 87.
Once the lawfulness of the method of levying the tax is affirmed, the judicial function ceases. He deludes himself by a false hope who supposes that, if this Court shall at some future time conclude the burden of the exaction has become inordinately oppressive, it can interdict the tax.
The appellees refer to certain decisions of this Court, but none of them rules this case. Those claimed to be particularly pertinent will be briefly noted.
In Clark v. Titusville, 184 U. S. 329, the tax levied consisted of a flat fee exacted for a license which entitled the merchant to conduct business for the ensuing year. The lowest fee was $5 for a merchant who, during the year preceding that covered by the license, has made sales not in excess of $1,000. A $10 fee applied to one who had sales between $1,000 and $2,500, a $15 fee to one having sales between $2,500 and $5,000, a $25 fee to one whose sales were between $5,000 and $10,000, and so on to a fee of $100 for the seller of $60,000 worth or more. It is important to note the grounds of attack. One was that the classes were so defined that a merchant with sales of $2,499 would pay at one rate and another with sales of $2,501 would pay at a higher rate; that a merchant whose sales were $1,001 would pay the same fee as one whose sales were $2,499. In overruling this objection, the Court relied upon the principle that some injustice is bound to result from any general rule of classification, and equal protection demands only reasonable uniformity in dealing with parties similarly circumstanced. A second objection was that the percentage of tax to sales was greater in the lower than in the higher brackets -- that is, that a merchant selling goods for $60,000 or more paid a less percentage of his sales by way of tax than the smaller merchant who sold only $1,000 worth of goods. The objection was unavailing, because the tax did not purport to be fixed upon a percentage of sales. The purpose was to charge a larger license fee to a larger business. Any tax measured by a fixed and uniform percentage of gross sales would impose a heavier burden on the taxpayer having the greater volume of sales. The excise here involved is not of that sort, the sum exacted from the merchant doing the larger business being not only greater in gross amount, but larger in proportion to sales, than that demanded of his smaller competitor.
"It will immediately occur upon the most casual reflection that the distinction the theater itself makes is not artificial, and must have some relation to the success and ultimate profit of its business. In other words, there is natural relation between the price of admission and revenue, some advantage, certainly, that determines the choice. . . . The reason for it must therefore be substantial, and if it be so universal in the practice of the business, it would seem not unreasonable if it be adopted as the basis of governmental action."
The case falls within the principle that even a small difference in the method of conducting business may be availed of by government in imposing different taxes. It furnishes no support for a tax upon the sales of merchants at rates varying per sale or per dollar with the amount of their respective gross sales.
organization and the method of conducting business. The taxable class is retail merchants, whether individuals, partnerships, or corporations; those who sell in one store or many; those who offer but one sort of goods and those who through departments deal in many lines of merchandise. The law arbitrarily classifies these vendors for the imposition of a varying rate of taxation, solely by reference to the volume of their transactions, disregarding the absence of any reasonable relation between the chosen criterion of classification and the privilege the enjoyment of which is said to be the subject taxed. It exacts from two persons different amounts for the privilege of doing exactly similar acts because the one has performed the act oftener than the other.
We hold the act unconstitutional, and reverse the judgment.
7 F.Supp. 438; 8 F.Supp. 396.
"An Act relating to revenue and taxation, imposing an excise or license tax on retail merchants, as the words 'retail merchants' are used in this act; providing for the collection of such tax; the distribution and use of the revenue derived therefrom; the administration of said law, fixing fines and penalties for the violation of this act; declaring an emergency to exist, and repealing all laws in conflict with the provisions of this act."
"Be it Enacted by the General Assembly of the Commonwealth of Kentucky:"
"§ 1. The words 'retail merchant,' as used in this act, shall mean and include every person, firm, association, co-partnership or corporation opening, establishing, operating or maintaining any 'store,' as defined herein, for the purpose of and selling goods, wares or merchandise at retail in this State, except those actually engaged in gardening or farming and selling garden or farm products raised by them in this State. The term 'store,' as used in this act, shall be construed to mean and include any store or stores or any mercantile establishment or establishments in this State which are owned, operated, maintained or controlled by the same 'retail merchant,' as defined herein, either domestic or foreign, in which goods, wares, or merchandise of any kind are sold at retail. The provisions of this act shall be construed to apply to every 'retail merchant' and 'store,' as defined herein, which is controlled or held with others by majority stock ownership or ultimately controlled or directed by one management of association of ultimate management."
"§ 2. Every retail merchant, as defined herein, shall pay an annual license tax for the opening, establishing, operating or maintaining of any store or stores, as defined herein, determined by computing the tax on the amount of gross sales as follows:"
"One-twentieth of one percent of the gross sales of Four hundred thousand ($400,000.00) Dollars or less; two-twentieths of one percent on the excess of the gross sales over Four hundred thousand ($400,000.00) Dollars and not exceeding Five hundred thousand ($500,000.00) Dollars; five-twentieths of one percent on the excess of the gross sales over Five hundred thousand ($500,000.00) Dollars and not exceeding Six hundred thousand ($600,000.00) Dollars; eight-twentieths of one percent on the excess of the gross sales over Six hundred thousand ($600,000.00) Dollars and not exceeding Seven hundred thousand ($700,000.00) Dollars; eleven-twentieths of one percent on the excess of the gross sales over Seven hundred thousand ($700,000.00) Dollars and not exceeding Eight hundred thousand ($800,000.00) Dollars; fourteen-twentieths of one percent on the excess of the gross sales over Eight hundred thousand ($800,000.00) Dollars and not exceeding Nine hundred thousand ($900,000.00) Dollars; seventeen-twentieths of one percent on the excess of the gross sales over Nine hundred thousand ($900,000.00) Dollars and not exceeding One million ($1,000,000.00) Dollars; one percent on the excess of the gross sales over One million ($1,000,000.00) Dollars."
§ 3 provides for annual returns to the state tax commission, assessment and payment of the tax. § 4 allows certain credits for other taxes. § 7 makes it a misdemeanor, punishable by fine or imprisonment, to fail to file returns and pay the tax.
Galveston, H. & S.A. Ry. Co. v. Texas, 210 U. S. 217, 210 U. S. 227; Choctaw, O. & Gulf R. Co. v. Harrison, 235 U. S. 292, 235 U. S. 298; Crew Levick Co. v. Pennsylvania, 245 U. S. 292, 245 U. S. 294; Shaffer v. Carter, 252 U. S. 37, 252 U. S. 55; Dawson v. Kentucky Distilleries Co., 255 U. S. 288, 255 U. S. 292; St. Louis Cotton Compress Co. v. Arkansas, 260 U. S. 346, 260 U. S. 348.
Postal Telegraph Cable Co. v. Adams, 155 U. S. 688, 155 U. S. 698.
Franchise taxes measured by net income have been sustained as not constituting a tax on income. Educational Films Corp. v. Ward, 282 U. S. 379. Compare Macallen Co. v. Massachusetts, 279 U. S. 620; Pacific Co., Ltd. v. Johnson, 285 U. S. 480.
See Moore v. State Board of Charities and Corrections, 239 Ky. 729, 40 S.W.2d 349.
By Public Act No. 24, Laws of 1933, Vermont imposed a graduated gross sales tax increasing from one-eighth of one percent on sales of from fifty thousand to one hundred thousand dollars to 4 percent on sales above two million dollars. A levy of a similar sort applied in Kentucky, as shown by the facts proved in the present record, would have deprived many merchants in various tax brackets of all net income from their stores. We were informed at the argument that this statute has been held unconstitutional by a court of first instance.
Arizona, Laws 1933, c. 18; California Laws, c. 1020; Georgia, Code 1930, Supplement, Act of 1929, § 993(316) et seq.; Illinois, Act of June 28, 1933, Laws 58th Gen. Assembly, p. 924; Indiana, Burns' Ind. Stats.1933, c. 26, § 64-2601; Iowa, c. 82, Laws 45th Gen.Assem.Extra Sess., § 37ff; Kentucky, c. 25, Ky.Acts, Special Sess., 1934; Michigan, Public Acts, Sess. 1930, No. 167; Mississippi, G.L. 1934, c. 119; Missouri Laws, Extra Sess. 1934, p. 155; New York, Cahill's Consol.Laws, 1933 Supp. c. 61, art. 17, § 390, p. 144; North Carolina, Sess. 1933, c. 445, p. 768; Ohio, Page's Ohio General Code, § 5546-1, p. 859; Oklahoma, First Spec.Sess. 1933, c.196, p. 456; Pennsylvania, Act Aug.19, 1932, Special Sess.1932, § 3, p. 92; South Dakota, Laws, 1933, § 184; Utah, Laws, 1933, c. 63, as amended by c. 20, Second Special Sess.1933; Washington, Laws, 1933, c.191, p. 869; West Virginia, Act of May 26, 1933, Extra Session, c. 33, p. 219.
State Board of Tax Commissioners v. Jackson, 283 U. S. 527; Louis K. Liggett Company v. Lee, 288 U. S. 517; Fox v. Standard Oil Co., ante, p. 294 U. S. 87.
The prevailing opinion commits the court to a holding that a tax upon gross sales, if laid upon a graduated basis, is always and inevitably a denial of the equal protection of the laws, no matter how slight the gradient or moderate the tax.
In the view of the majority, the relation between the taxpayer's capacity to pay and the volume of his business is, at most, accidental and occasional. In the view of the Legislature of Kentucky and of its highest court (Moore v. State Board of Charities and Correction, 239 Ky. 729, 40 S.W.2d 349), the relation, far from being accidental or occasional, has a normal or average validity, attested by experience and by the judgment of trained observers. The one view discovers in the attempted classification an act of arbitrary preference among groups essentially the same. T he other perceives in the division a sincere and rational endeavor to adapt the burdens of taxation to the teachings of economics and the demands of social justice.
A theory readily intelligible, whether it be sound or unsound, underlies the adoption of the graduated levels. Economically, the theory is that there is a minimum of size for business units below which efficiency is less on the average than expansion would tend to make it; that there are intermediate levels within which efficiency is subject on the average to progressive development, and that there is an ultimate level beyond which efficiency, even if promoted, goes forward more slowly and at a diminishing ratio. Socially, the theory is that, just as in taxes upon income or upon transfers at death, so also in imposts upon business, the little man, by reason of inferior capacity to pay, should bear a lighter load of taxes, relatively as well as absolutely, than is borne by the big one. For the purposes of retail business, the first or less efficient class is identified by the Kentucky statute with merchants whose gross sales are $400,000 or less; the six intermediate classes begin at that point and end with a million dollars; the final class is made up of those whose sales are over a million. For the first class, the effective rate is one-twentieth of one percent; for the last it gradually approaches, though it can never quite reach, one percent, this by reason of the fact that the taxpayer in the higher brackets gets the benefit of the application of the lower rates to those parts of the gross sales that fall within the lower levels.
MS.). Perhaps the chief reason is the rapidity of turnover in large scale enterprises; the effect of this mobility being to reduce the value of the property that must be kept on hand at tax day as well as at other times. Tables in the record bear witness in a striking way to the resulting inequality. Upon the basis of a property tax, a merchant with sales of $10,000,000 was found to pay less than one-half as much tax per dollar of sales as did a merchant whose sales were $150,000 or less. Cf. Tolman, loc. cit., supra; also Statutes of Kentucky, § 4189-2. More concretely, Kroger, one of the petitioners, with gross sales of many millions, paid a tax upon the old basis of only 137/1000 of one percent in proportion to its sales in comparison with an average of 934/1000 of one percent paid by the 16,535 merchants whose sales were less than $400,000 annually. Tolman, loc. cit., supra. Kentucky is not chargeable with oppressive discrimination in superseding such a method of taxation by one more nearly equal in its burdens.
The choice of a new method made it necessary for the legislature to strike a balance of advantage. Tolman, op. cit. supra at 90; Haig and Shoup, The Sales Tax in the American States, Columbia University Press (1934) p. 159 et seq. For a time, there was a suggestion of a tax on chain stores only, but a lower federal court had held that method to be unlawful, Jackson v. State Board of Tax Comm'rs, 38 F.2d 652, and the decision of this Court to the contrary, State Board of Tax Commissioners v. Jackson, 283 U. S. 527, had not yet been announced. To be sure, there was the possibility of a tax upon gross sales at a flat rate without graduated levels, but a burden so imposed might be subject to new objections. In the view of serious students of the problem, a flat tax upon gross sales is not always shifted to the consumer. It is often absorbed more or less by the seller, for a time, even if not permanently, to prevent the falling off of sales.
may be lacking, unless choice can be found to be so void of rationality as to be the expression of a whim, rather than an exercise of judgment.
"The policy prevailing throughout the United States, so far as retail merchandising department stores are concerned, is to get as large a volume as possible with a small percentage of profit, allowing the volume to produce the net profit."
of course, there are. The law builds upon the probable, and shapes the measure of the tax accordingly.
It is no answer to say that, as between one business and another, or even as between one person and another engaged in the same business, there will be varying rates of return upon the amount of the investment. This is true also of a tax on net income. Net earnings of $100,000 may represent for one man a return on a capital of $2,000,000 and for another a return on a capital of double that amount, yet the tax will be the same for each. So also it is no answer to say that, in the administration of this statute, two merchants whose sales are very large are subject to as heavy a tax as many thousands of merchants whose sales are in the lowest brackets. One might as well compare the federal income tax of a banker whose net earnings are in the millions with that of a thousand clerks who, by reason of exemptions, are to pay no tax whatever. The comparison proves nothing unless it be the obvious fact that taxpayers are few when the count is at the highest level. Once more, it is no answer to say that, though capacity to pay is enlarged on the average by an increase of the sales, there are times when sales increase, and yet the outcome is a loss. No loss has been suffered by any of the petitioners, unless it be in one instance as the result of inefficiency, and so the findings show. Insofar as the statute fails to make allowance for the contingency of loss, it is certainly not arbitrary in its operation as to those realizing a gain, and they will not be heard to complain that it is arbitrary as to others. Hatch v. Reardon, 204 U. S. 152, 204 U. S. 160; Keeney v. New York, 222 U. S. 525, 222 U. S. 536; Hendrick v. Maryland, 235 U. S. 610, 235 U. S. 621; Oliver Iron Mining Co. v. Lord, 262 U. S. 172, 262 U. S. 180. But the result will not be changed if their standing be assumed. The law has regard in these matters not to invariable sequences, but to probabilities and tendencies.
rough accommodations -- illogical, it may be, and unscientific."
Metropolis Theater Co. v. Chicago, 228 U. S. 61, 228 U. S. 69. "The fact that a better taxing system might be conceived does not render the law invalid." Salomon v. State Tax Commission, 278 U. S. 484, 278 U. S. 491. At the very least, an increase of gross sales carries with it an increase of opportunity for profit, which supplies a rational basis for division into classes at all events when coupled with evidence of a high decree of probability that the opportunity will be fruitful.
Many a pertinent analogy reinforces this conclusion. The tax upon a long chain of stores is often at a higher rate than the tax upon a short one (State Board of Tax Commissioners v. Jackson, supra), yet it may happen that, in lean years, still more in financial crises, the greater the number of stores, the less the actual gain (Fox v. Standard Oil Co., ante, p. 294 U. S. 87). The presence of such a possibility does not make the graduation wrongful. The theater charging a high price for tickets of admission may be taxed at a higher rate than one whose admission price is low. A showing that the revenue of the high-priced theaters is less than that of some of the others will not cause the tax to fail. Metropolis Theater Co. v. Chicago, supra. McKenna, J., sagely pointed out in that case that the choice between high and low prices had been made by the theater itself, and made in response to its own conception of advantage. A conception good enough for the taxpayer was thought to be good enough for the government. So here under the challenged statute. Larger and larger sales are sought for by business, and sought for with avidity. They are not the products of whim and fancy. They represent a conception of probabilities and tendencies confirmed by long experience. The conception is no more arbitrary in the brain of a government official than it is in the mind of a company director.
The striving to expand being so general, there is no occasion for surprise at the discovery of a relation between profit and expansion when expansion is kept within the bounds of moderation. In tracing that connection, it will not do to compare the profits of one line of business with those of a different one viewed in isolation. Many factors enter to make one kind of enterprise more gainful than another. Cf. Tolman, op. cit. supra, at 112. Moreover, the rule is undoubted that different occupations may be taxed in different ways. Bell's Gap R. Co. v. Pennsylvania, 134 U. S. 232, 134 U. S. 237; Stebbins v. Riley, 268 U. S. 137, 268 U. S. 142; Ohio Oil Co. v. Conway, 281 U. S. 146, 281 U. S. 159; Union Bank & Trust Co. v. Phelps, 288 U. S. 181. Comparison must be between large and small enterprises in the same line of business, or in many lines of business viewed in combination. This comparison being made, large sales will be found in the main to have the advantage over small ones. There are those who hold that growth may be so large as to make the business clumsy and inefficient, destroying unity of management, but enterprises swollen to that extent are not the common run that fix the patterns of a statute. It is significant that graduation stops, according to the plan of the Kentucky statute, before size becomes inordinate.
and sales are moderate. Epstein, Industrial Profits in the United States, pp. 45, 46, 131, 132. On the other hand, they are not hostile to the doctrine that, on the average, the net earnings of a business increase absolutely, though not proportionately, as the sales increase in volume. [Footnote 2/3] Even as to percentages, the lawmakers of Kentucky were at liberty to reach their own conclusion in the face of these conflicting judgments pronounced by men of learning. If their conclusion is not arbitrary, it is not for us to set them right.
its men, having regular training schools and diplomas." As already pointed out, the scheme of the Kentucky statute puts a stop to graduation before size becomes immoderate. From all this it comes about that many avenues of profit closed to the little dealer are open to his big competitor.
"statements of profits are affected both by accounting methods are by the optimistic or pessimistic light in which the future is viewed at the time when the accounts are made up."
of profits, and yet likely in the long run to work out approximate equality, it ought not to be denied the power to frame its laws accordingly.
For answer to all this, the thrust will not avail that "it is difficult to be just, and easy to be arbitrary." The derogatory epithet assumes the point to be decided. There is nothing arbitrary in rescuing a vast body of taxpayers from the labor and expense of preparing elaborate reports, at best, approximately accurate. There is nothing arbitrary in rescuing a government from the labor and expense of setting up the huge and unwieldy machinery of an income tax department with a swarm of investigators and accountants and legal and financial experts. To frame a system of taxation in avoidance of evils such as these is no act of sheer oppression, no abandonment of reason, no exercise of the general will in a perverse or vengeful spirit. Far from being these or any of them, it is a pursuit of legitimate ends by methods honestly conceived and rationally chosen. More will not be asked by those who have learned from experience and history that government is, at best, a makeshift, that the attainment of one good may involve the sacrifice of others, and that compromise will be inevitable until the coming of Utopia.
"The tax hereby imposed is not to be collected if the result will be to wipe out the profits of a business conducted with ordinary efficiency, or to reduce the profits to a level unreasonably low."
act or any other as long as the Constitution of Kentucky continues what it is today.
Telephone Co. v. Fuller, 229 U. S. 322; Heisler v. Thomas Colliery Co., 260 U. S. 245; Brown-Forman Co. v. Kentucky, 217 U. S. 563; Postal Telegraph Cable Co. v. Adams, 155 U. S. 688. See also Louisville Gas & Electric Co. v. Coleman, 277 U. S. 32, 277 U. S. 43-44, which brings the precedents together. Other cases could be added.
In fine, there may be classification for the purpose of taxation according to the nature of the business. There may be classification according to size and the power and opportunity of which size is an exponent. Such has been the teaching of the law books at least until today.
I am authorized to state that MR. JUSTICE BRANDEIS and MR. JUSTICE STONE join in this opinion.
The problem is discussed by Stone, J., with a reference to many treatises on finance, in his dissenting opinion in Indian Motocycle Co. v. United States, 283 U. S. 570, 283 U. S. 581.
"While noticeable differences appeared in net profit for stores grouped according to volume of sales, these differences were even greater in the case of total net gain both as a percentage of net sales and as a percentage of net worth. In each instance, these figures varied directly with the volume of sales, and a distinctly more favorable showing was made by the larger firms."
Another set of tables includes stores whose sales were under a million dollars. Among these, the most favorable net profit showing was that of the group with volume of sales between one-quarter and one-half million. Between half a million and a million, the ratio of increase declined. Even there, however, the showing was more favorable than for stores under a quarter of a million, where the average was one of loss. Bulletins 78, 83, and 85 state the operations for later years with results not greatly different. Even in years of loss, the percentage of loss had, in the main, a tendency to be lower as the volume of the sales increased.
"It is quite clear that the larger stores operated on a distinctly more satisfactory basis than the smaller stores, and that success as measured by earnings varies directly with size."
The prevailing opinion in effect concedes "that, averaging the results of the concerns making the reports, it is true, generally speaking,' as the court below put it, that profits increase with sales."
A loss of $9,023 would have been suffered by one of the petitioners if the tax had been paid in 1932, but the finding is that for that year the business was conducted without reasonable skill, and that with a change of the methods of management the loss was turned into a profit. At most, the operations of that year might call under the Kentucky decisions for a modification of the judgment. The petitioners seek an injunction that will annul the statute altogether.

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