Case Name: FREEMAN, TRUSTEE, v. HEWIT, DIRECTOR OF GROSS INCOME TAX DIVISION
Court: Supreme Court of the United States
Jurisdiction: United States
Decision Date: 1946-12-16
Citations: 329 U.S. 249
Docket Number: No. 3
Parties: FREEMAN, TRUSTEE, v. HEWIT, DIRECTOR OF GROSS INCOME TAX DIVISION.
Judges: Mr. Justice Black dissents.
Reporter: United States Reports
Volume: 329
Pages: 249–286

Head Matter:
FREEMAN, TRUSTEE, v. HEWIT, DIRECTOR OF GROSS INCOME TAX DIVISION.
No. 3.
Argued November 8, 1944. Reargued October 14, 1946.—
Decided December 16, 1946.
Gath P. Freeman argued the cause for appellant and filed a brief on the original argument, and also filed a brief on the reargument.
Harry T. Ice reargued the cause and filed a brief for appellant.
Winslow Van Horne, Deputy Attorney General of Indiana, argued the cause on the original argument for ap-pellee. With him on the brief were James A. Emmert, Attorney General, John J. McShane, Deputy Attorney General, Robert Hollowell, Jr., Cleon H. Foust, John H. Fetterhoff and Fred C. McClurg.
John J. McShane, Deputy Attorney General, reargued the cause for appellee. With him on the brief were James A. Emmert, Attorney General, John H. Fetterhoff and Fred C. McClurg, Deputy Attorneys General.

Opinion:
Mr. Justice Frankfurter
delivered the opinion of the Court.
This case presents another phase of the Indiana Gross Income Tax Act of 1933, which has been before this Court in a series of cases beginning with Adams Mfg. Co. v. Storen, 304 U. S. 307. The Act imposes a tax upon "the receipt of the entire gross income" of residents and dom-iciliaries of Indiana but excepts from its scope "such gross income as is derived from business conducted in commerce between this state and other states of the United States . to the extent to which the State of Indiana is prohibited from taxing such gross income by the Constitution of the United States." Indiana Laws 1933, pp. 388, 392, as amended, Laws 1937, pp. 611, 615, Burns' Ind. Stat. Anno. § 64-2601 et seg.
Appellant's predecessor, domiciled in Indiana, was trustee of an estate created by the will of a decedent domiciled in Indiana at the time of his death. During 1940, the trustee instructed his Indiana broker to arrange for the sale at stated prices of securities forming part of the trust estate. Through the broker's New York correspondents the securities were offered for sale on the New York Stock Exchange. When a purchaser was found, the New York brokers notified the Indiana broker who in turn informed the trustee, and the latter brought the securities to his broker for mailing to New York. Upon their delivery to the purchasers, the New York brokers received the purchase price, which, after deducting expenses and commission, they transmitted to the Indiana broker. The latter delivered the proceeds less his commission to the trustee. On the gross receipts of these sales, amounting to $65,214.20, Indiana, under the Act of 1933, imposed a tax of 1%. Having paid the tax under protest, the trustee brought this suit for its recovery. The Supreme Court of Indiana, reversing a court of first instance, sustained the tax on the ground that the situs of the securities was in Indiana. 221 Ind. 675, 51 N. E. 2d 6. The case is here on appeal under § 237 (a) of the Judicial Code, 28 U. S. C. § 344 (a), and has had the consideration which two arguments afford.
The power of the States to tax and the limitations upon that power imposed by the Commerce Clause have necessitated a long, continuous process of judicial adjustment. The need for such adjustment is inherent in a federal government like ours, where the same transaction has aspects that may concern the interests and involve the authority of both the central government and the constituent States.
The history of this problem is spread over hundreds of volumes of our Reports. To attempt to harmonize all that has been said in the past would neither clarify what has gone before nor guide the future. Suffice it to say that especially in this field opinions must be read in the setting of the particular cases and as the product of preoccupation with their special facts.
Our starting point is clear. In two recent cases we applied the principle that the Commerce Clause was not merely an authorization to Congress to enact laws for the protection and encouragement of commerce among the States, but by its own force created an area of trade free from interference by the States. In short, the Commerce Clause even without implementing legislation by Congress is a limitation upon the power of the States. Southern Pacific Co. v. Arizona, 325 U. S. 761; Morgan v. Virginia, 328 U. S. 373. In so deciding we reaffirmed, upon fullest consideration, the course of adjudication unbroken through the Nation's history. This limitation on State power, as the Morgan case so well illustrates, does not merely forbid a State to single out interstate commerce for hostile action. A State is also precluded from taking any action which may fairly be deemed to have the effect of impeding the free flow of trade between States. It is immaterial that local commerce is subjected to a similar encumbrance. It may commend itself to a State to encourage a pastoral instead of an industrial society. That is its concern and its privilege. But to compare a State's treatment of its local trade with the exertion of its authority against commerce in the national domain is to compare incomparables.
These principles of limitation on State power apply to all State policy no matter what State interest gives rise to its legislation. A burden on interstate commerce is none the lighter and no less objectionable because it is imposed by a State.under the taxing power rather than under manifestations of police power in the conventional sense. But, in the necessary accommodation between local needs and the overriding requirement of freedom for the national commerce, the incidence of a particular type of State action may throw the balance in support of the local need because interference with the national interest is remote or unsubstantial. A police regulation of local aspects of interstate commerce is a power often essential to a State in safeguarding vital local interests. At least until Congress chooses to enact a nation-wide rule, the power will not be denied to the State. The Minnesota Rate Cases, 230 U. S. 352, 402 et seq.; S. C. Hwy. Dept. v. Barnwell Bros., 303 U. S. 177; Union Brokerage Co. v. Jensen, 322 U. S. 202, 209-12. State taxation falling on interstate commerce, on the other hand, can only be justified as designed to make such commerce bear a fair share of the cost of the local government whose protection it enjoys. But revenue serves as well no matter what its source. To deny to a State a particular source of income because it taxes the very process of interstate commerce does not impose a crippling limitation on a State's ability to carry on its local function. Moreover, the burden on interstate commerce involved in a direct tax upon it is inherently greater, certainly less uncertain in its consequences, than results from the usual police regulations. The power to tax is a dominant power over commerce. Because the greater or more threatening burden of a direct tax on commerce is coupled with the lesser need to a State of a particular source of revenue, attempts at such taxation have always been more carefully scrutinized and more consistently resisted than police power regulations of aspects of such commerce. The task of scrutinizing is a task of drawing lines. This is the historic duty of the Court so long as Congress does not undertake to make specific arrangements between the National Government and the States in regard to revenues from interstate commerce. See Act of July 3, 1944, 58 Stat. 723; H. Doc. 141, 79th Cong., 1st Sess., "Multiple Taxation of Air Commerce"; and compare 54 Stat. 1059, 4 U. S. C. § 13 et seq. (permission to States to extend taxing power to Federal areas). Considerations of proximity and degree are here, as so often in the law, decisive.
It has been suggested that such a tax is valid when a similar tax is placed on local trade, and a specious appearance of fairness is sought to be imparted by the argument that interstate commerce should not be favored at the expense of local trade. So to argue is to disregard the life of the Commerce Clause. Of course a State is not required to give active advantage to interstate trade. But it cannot aim to control that trade even though it desires to control its own. It cannot justify what amounts to a levy upon the very process of commerce across States lines by pointing to a similar hobble on its local trade. It is true that the existence of a tax on its local commerce detracts from the deterrent effect of a tax on interstate commerce to the extent that it removes the temptation to sell the goods locally. But the fact of such a tax, in any event, puts impediments upon the currents of commerce across the State line, while the aim of the Commerce Clause was precisely to prevent States from exacting toll from those engaged in national commerce. The Commerce Clause does not involve an exercise in the logic of empty categories. It operates within the framework of our federal scheme and with due regard to the national experience reflected by the decisions of this Court, even though the terms in which these decisions have been cast may have varied. Language alters, and there is a fashion in judicial writing as in other things.
This case, like Adams Mfg. Co. v. Storen, supra, involves a tax imposed by the State of the seller on the proceeds of interstate sales. To extract a fair tithe from interstate commerce for the local protection afforded to it, a seller State need not impose the kind of tax which Indiana here levied. As a practical matter, it can make such commerce pay its way, as the phrase runs, apart from taxing the very sale. Thus, it can tax local manufacture even if the products are destined for other States. For some purposes, manufacture and the shipment of its products beyond a State may be looked upon as an integral transaction. But when accommodation must be made between state and national interests, manufacture within a State, though destined for shipment outside, is not a seamless web so as to prevent a State from giving the manufacturing part detached relevance for purposes of local taxation. American Mfg. Co. v. St. Louis, 250 U. S. 459; Utah Power & L. Co. v. Pfost, 286 U. S. 165. It can impose license taxes on domestic and foreign corporations who would do business in the State, Cheney Brothers Co. v. Massachusetts, 246 U. S. 147; St. Louis S. W. Ry. v. Arkansas, 235 U. S. 350, 364, though it cannot, even under the guise of such excises, "hamper" interstate commerce. Western Union Tel. Co. v. Kansas, 216 U. S. 1; Pullman Co. v. Kansas, 216 U. S. 56 (particularly White, J. concurring at p. 63); Henderson, The Position of Foreign Corporations in American Constitutional Law (1918) 118-23, 128-31. It can tax the privilege of residence in the State and measure the privilege by net income, including that derived from interstate commerce. U. S. Glue Co. v. Oak Creek, 247 U. S. 321; cf. Atlantic Coast Line v. Daughton, 262 U. S. 413. And where, as in this case, the commodities subsequently sold interstate are securities, they can be reached by a property tax by the State of domicil of the owner. Virginia v. Imperial Sales Co., 293 U. S. 15, 19; and see Citizens National Bank v. Durr, 257 U. S. 99.
These illustrative instances show that a seller State has various means of obtaining legitimate contribution to the costs of its government, without imposing a direct tax on interstate sales. While these permitted taxes may, in an ultimate sense, come out of interstate commerce, they are not, as would be a tax on gross receipts, a direct imposition on that very freedom of commercial flow which for more than a hundred and fifty years has been the ward of the Commerce Clause.
It is suggested, however, that the validity of a gross sales tax should depend on whether another State has also sought to impose its burden on the transactions. If another State has taxed the same interstate transaction, the burdensome consequences to interstate trade arq undeniable. But that, for the time being, only one State has taxed is irrelevant to the kind of freedom of trade which the Commerce Clause generated. The immunities implicit in the Commerce Clause and the potential taxing power of a State can hardly be made to depend, in the world of practical affairs, on the shifting incidence of the varying tax laws of the various States at a particular moment. Courts are not possessed of instruments of determination so delicate as to enable them to weigh the various factors in a complicated economic setting which, as to an isolated application of a State tax, might mitigate the obvious burden generally created by a direct tax on commerce. Nor is there any warrant in the constitutional principles heretofore applied by this Court to support the notion that a State may be allowed one single-tax-worth of direct interference with the free flow of commerce. An exaction by a State from interstate commerce falls not because of a proven increase in the cost of the product. What makes the tax invalid is the fact that there is interference by a State with the freedom of interstate commerce. Such a tax by the seller State alone must be judged burdensome in the context of the circumstances in which the tax takes effect. Trade being a sensitive plant, a direct tax upon it to some extent at least deters trade even if its effect is not precisely calculable. Many States, for instance, impose taxes on the consumption of goods, and such taxes have been sustained regardless of the extra-State origin of the goods, or whether a tax on their sale had been imposed by the seller State. Such potential taxation by consumer States is but one factor pointing to the deterrent effect on commerce by a superimposed gross receipts tax.
It has been urged that the force of the decision in the Adams case has been sapped by McGoldrick v. Berwind-White Co., 309 U. S. 33. The decision in McGoldrick v. Berwind-White was found not to impinge upon "the rationale of the Adams Manufacturing Co. ease," and the tax was sustained because it was "conditioned upon a local activity, delivery of goods within the state upon their purchase for consumption." 309 U. S. at 58. Compare McLeod v. Dilworth Co., 322 U. S. 327. Taxes which have the same effect as consumption taxes are properly differentiated from a direct imposition on interstate commerce, such as was before the Court in the Adams case and is now before us. The tax on the sale itself cannot be differentiated from a direct unapportioned tax on gross receipts which has been definitely held beyond the State taxing power ever since Fargo v. Michigan, 121 U. S. 230, and Philadelphia Steamship Co. v. Pennsylvania, 122 U. S. 326. See also, e. g., Galveston, H. & S. A. R. Co. v. Texas, 210 U. S. 217; Kansas City, Ft. S. & M. R. Co. v. Kansas, 240 U. S. 227, 231; Puget Sound Co. v. Tax Commission, 302 U. S. 90, 94; and compare Wallace v. Hines, 253 U. S. 66. For not even an "internal regulation" by a State will be allowed if it directly affects interstate commerce. Robbins v. Shelby Taxing District, 120 U. S. 489, 494.
Nor is American Mfg. Co. v. St. Louis, 250 U. S. 459, or Harvester Co. v. Dept. of Treasury, 322 U. S. 340, any justification for the present tax. The American Mfg. Co. case involved an imposition by St. Louis of a license fee upon the conduct of manufacturing within that city. It has long been settled that a State can levy such an occupation tax graduated according to the volume of manufacture. In that case, to lighten the manufacturer's burden, the imposition of the occupation tax was made contingent upon the actual sale of the goods locally manufactured. Sales in St. Louis of goods made elsewhere were not taken into account in measuring the license fee. That tax, then, unlike this, was not in fact a tax on gross receipts. Cf. Cornell v. Coyne, 192 U. S. 418. And, if words are to correspond to things, the tax now here is not "a tax on the transfer of property" within the State, which was the basis for sustaining the tax in Harvester Co. v. Dept. of Treasury, supra, at 348.
There remains only the claim that an interstate sale of intangibles differs from an interstate sale of tangibles in respects material to the issue in this case. It was by this distinction that the Supreme Court of Indiana sought to escape the authority of Adams Mfg. Co. v. Storen, supra. Latin tags like mobilia seguuntur personam often do service for legal analysis, but they ought not to confound constitutional issues. What Mr. Justice Holmes said about that phrase is relevant here. "It is a fiction, the historical origin of which is familiar to scholars, and it is this fiction that gives whatever meaning it has to the saying mobilia sequuntur personam. But being a fiction it is not allowed to obscure the facts, when the facts become important." Blackstone v. Miller, 188 U. S. 189, 204. Of course this is an interstate sale. And constitutionally it is commerce no less and no different because the subject was pieces of paper worth $65,214.20, rather than machines.
Reversed.
Mr. Justice Black dissents.
Compare Report of the (Australian) Royal Commission on the Constitution (1929) pp. 260, 322-24, and Report of the (Canadian) Royal Commission on Dominion-Provincial Relations (1940), bk. II, pp. 62-67, 111-21, 150-62, 216-19. See Australia, Act No. 1, 1946, repealing Act No. 20, 1942, and Act No. 43, 1942; South Australia v. Commonwealth, 65 C. L. R. 373; also Proposals of the Government of Canada, Dominion-Provincial Conference on Reconstruction, pp. 47-49; Proceedings of the Dominion-Provincial Conference (1945) passim, particularly the statement of Prime Minister Mackenzie King, p. 388, and the discussion following. And see Maxwell, The Fiscal Impact of Federalism in the United States (1946) cc. II, XIII, XIV.