Earl Warren: Number 488, Doris Daniel and Rosaline Kyles, Petitioners, versus Euell Paul Jr., etcetera.
Speaker: May it please the Court. I move the admission of Mr. Conrad K. Harper of New York for the purpose of arguing in this case. I'm satisfied, he has the necessary qualification.
Earl Warren: Motion is granted. Mr. Harper?
Conrad K. Harper: Mr. Chief Justice and may it please the Court. This case concerns two black ladies who were refuse service at the recreational facility called Lake Nixon Club located just outside the Little Rock, Arkansas. The respondents are the owners of Lake Nixon Club, Mr. and Mrs. Paul. Following the refusal of that facility to serve, the petitioners, black ladies, they brought class action in a District Court sitting in Little Rock for injunction -- injunctive relief. The District Court following that trial held that Lake Nixon was not a facility subject to Title II of the 1964 Civil Rights Act. Specifically holding that the food facilities at Lake Nixon were no embraced within the statute and also that Lake Nixon was not a place of entertainment or exhibition within the ambit of the statute. The District Court hold also summarily rejected the claim made by respondents below that Lake Nixon Club was a bonafide private club. On appeal, the Eighth Circuit affirmed on all grounds with one judge dissenting. This Court grant a certiorari not only to determine questions relating to cover John to Title II of the 1964 Act, but additionally, on the question whether the 1866 Civil Rights Act now portionally cutified as 42 U.S.C. Sections 1981 and 1982 acted to bar discrimination in this facility. The petitioners make two -- I should say three principal arguments. First, that Lake Nixon food facilities where such as to bring the whole of Lake Nixon within the ambit of Title II, second, that Lake Nixon in its entire tables of place of entertainment or exhibition within the terms of Title II, and thirdly, that 1981 and 1982 insofar as a granted an equal right to contract and have an interest in property, granted petitioners the right to have access to Lake Nixon. The facts in this case are relatively simple and not in dispute. Lake Nixon is a 232-acre site located not far from the Lit Rock, Arkansas which has facilities for boating and swimming and picnicking and miniature golf. It also has a snack bar which serves sandwiches and softdrinks and milk, and it also has in that snack bar a jukebox. Lake Nixon also advertises its facility. Specifically, the record shows that during its normal season which runs from May until September of every year, Lake Nixon ran in 1966, three advertisements every week on a radio station Little Rock as well as utilized the facilities of another Little Rock radio station for similar kind of announcement. Those announcements incidentally, the record reflects were addressed to all members of Lake Nixon, and one could purchase on membership so-called in this facilities simply by paying a quarter for each season. Lake Nixon also advertise --
Earl Warren: A quarter for each time they come there, each time they -- with just a quarter for --
Conrad K. Harper: Quarter for the entire season Your Honor; in other words, for May until September. And after obtaining this admission card, one then had to pay an additional money if he wanted to buy something at snack bar, but he might not pay anything if you want simply to get picnicking or swimming. Lake Nixon also advertise its facilities in a magazine distributed locally showing facilities open called Little Rock Today, that was done once the record shows in 1966, and also once in 1966 Lake Nixon distributed an advertisement in a publication which was distributed at the air force base located in Jacksonville, Arkansas.
Potter Stewart: Are those advertisements in the appendix, the text to the advertisement?
Conrad K. Harper: No Your Honor. What is on file for the court but not printed is a copy of a radio copy used in the radio announcements. The announcements with reference to the magazines are not printed in the appendix or not a part of the record in this case, simply testimony that such will run.
Potter Stewart: Does the record indicate whether or not those ads, the one in the military magazine, the publication and the one in the publication distributed by the Chamber of Commerce or it was in the hotels where also purportedly addressed at quote “members”?
Conrad K. Harper: There's not specific testimony on that, what there is it's a general statement by Mr. Paul as I recall which says that all advertisements are addressed to all members of Lake Nixon. Now, Title II has a comprehensive scheme for coverage of public accommodations as defined, specifically with regard to the food facilities. It says that a food facility maybe covered if it serves or offers to serve in a state travelers or a substantial portion of the food which it serves move in commerce. The evidence shows here as we've just been talking that Lake Nixon during 1966 advertised its facilities and the evidence fairly show -- also shows that Lake Nixon was opened to the general white public. Having advertised its facilities to the public and general, it seems clear to us that Lake Nixon was in fact offering it services to members of the interstate public, and therefore for purposes of Title II, Lake Nixon's food facilities were opened to persons in the general public. That being so that statute then provides that all other facilities which are opened to the people patronizing the food facility are opened pursuant to Title II. The District Court took a different view in this particular question. The District Court found that there had been no offer to serve interstate travelers as such. We believe that's a misconstruction of the statute. Congress had in mind simply an offer to serve people in general and if there were not any evidence of a prohibition on interstate travelers or in this case, no inquiry even as to where people came from. Indeed, Mr. Paul didn't even know how many members there were, although he estimated about a 100,000. We think that sufficient to bring this lunch counter, and therefore the hold of Lake Nixon in the ambit of the statute. Also with regard to food facilities, there is the test that a substantial portion of the food moved in commerce. The evidence on this issue was simply that Lake Nixon and its snack bar serve hamburgers, hotdogs, softdrinks and milk. The District Court made a specific finding that the ingredients used in the softdrinks and ingredients used in the bread were such as at moved in interstate commerce. However, he deemed that insufficient for coverage under Title II. The Eighth Circuit not disturbing that finding made an additional finding that in its view, the milk at least was locally produced. We submit that since Lake Nixon sole only four principal items, three of which, that is the hamburgers, hotdogs and softdrinks contained out of state ingredients. This was sufficient to meet any kind of reasonable substantiality test, and therefore, Lake Nixon as a whole was covered by Title II. The District Court took the view that that was not the case and the Eighth Circuit similarly took a view. In part, said that District Court, Lake Nixon was a whole facility, not principally engage in selling food for consumption on the premises. We of course disagree with that on the grounds that Lake Nixon's snack bar at least principally was engaged in serving food for consumption on that premises, and therefore the hold of Lake Nixon was covered. An additional ground of Title II is the claim that Lake Nixon was an entertainment or -- a facility or place engaged in giving exhibitions. We specifically note here that the jukeboxes were found by the District Court to have been acquired for outside State of Arkansas. That being the case, it seems to us the jukeboxes nationally source of entertainment for persons who may listen or perhaps dance to it, and therefore, this was sufficient for purposes of coverage to say that Lake Nixon was placed, that had entertainment or exhibitions, which in moved in commerce. Additionally however, the evidence shows that Lake Nixon had so-called surf boards or yachts which were purchased from an Oklahoma company. And furthermore that from the same Oklahoma company, Lake Nixon had least certain paddle boats. We think this is sufficient again to show that Lake Nixon's sources of entertainment had affected commerce, and therefore, Lake Nixon as a whole was subject to the ambit or Title II. And what we've mentioned here as another and further ground for showing that Lake Nixon was a place of entertainment or exhibition, that local people might well come there to be entertained either by their family or by their friends or exhibiting their prows in any given area of Lake Nixon's facilities. For the Fifth Circuit seating on bunk in the Miller case, this kind of activity was sufficient to define a place of entertainment and we submit the same was true here.
Potter Stewart: Wasn't there a -- it didn't -- on the advertisements indicate there an orchestra there, music --
Conrad K. Harper: That --
Potter Stewart: -- at least on the weekends?
Conrad K. Harper: That's right. Dances were given every Friday or Saturday at Lake Nixon. The evidence however does show further that the musicians who played live at those dances apparently were only from Pulaski County, and therefore, were not in commerce within the meaning of the statute.
Potter Stewart: No, I'm just thinking about whether or not it was place an entertainment, I --
Conrad K. Harper: Oh, yes. We certainly ask some additional source for showing a place of entertainment. That being so with regard to Title II, we turn into possible coverage under the 1866 Civil Rights Act. 1981 was specifically pleaded in this case in the complaint, now that the courts below passed upon it because this Court's decision in Jones versus Meyer Company did was not handed down to that of the Eighth Circuit denied rehearing in this case. We think it manifest that this was an ordinary kind of contractual arrangement, one paid money and in return had the option for bailing himself of services located at Lake Nixon, and the evidence is uncontroverted that the petitioners in this case were denied that right, that contractual right if you will on the grounds have raise. We think nothing could be clearer as violative in 1981. With regards to 1982 which provides for equal property rights and no denial thereof on ground of raise, we think could clear also that what really was involved here was, one, have the opportunity to use the property of Lake Nixon, either its jukeboxes or its miniature golf or its swimming facilities, and therefore, the rational of the Jones case would indicated that this kind of property should not be denied to persons on grounds or breaks.
Potter Stewart: 1982 is not they relied on in the pleadings, wasn't it?
Conrad K. Harper: That's right, it was not pleaded below and none of the courts below ruled upon the issue. However, this Court granted certiorari and we think that there's ample authority for this Court to dispose of the case on that ground if it wishes.
Byron R. White: Well, it would be enough I suppose to get your result just to claim that you had that negroes had the right to buy a food in this refreshment stand.
Conrad K. Harper: Under Title II you mean or under 1981?
Byron R. White: 1981.
Conrad K. Harper: Oh yes, or any of the facilities, but that's true.
Byron R. White: At least you have the right to buy personal property right there, the other people.
Conrad K. Harper: That's right, that's our position.
Byron R. White: And you also think you have -- under that statute, you have the right to buy whatever it is you can sell --
Conrad K. Harper: Which open to the general public, except Negroes, that's right. There are no further questions, I shall reserve the balance of my time.
Earl Warren: You may. Mr. Leonard?
Jerris Leonard: Mr. Chief Justice and may it please the Court. I suppose that the first question that would come to anyone's mind in our appearance here is why the central Government should be interested in the case which might appeared be of relatively minor importance. May well be that on the facts as such it is that there are three very important reasons why the federal Government is concerned about not only the issues in this case but the case itself. First of all, Little Rock, Arkansas has an air force base located there in which there are some 15,000 military civilian personnel and the dependence of those people. In a county, the size of Pulaski County which is roughly 285,000 according to the census figures, this is a rather substantial population and it gives to the federal Government or rather substantial interest in seeing to it that the people at work for the federal Government are in fact recorded all of their due according to federal law if in fact federal law applied. So, we have that kind of an interest in our employees. Secondly, Title II specifically Section 204 of the Act of '64 gives some unusual obligations to the Attorney General with respect to the question of public accommodations. And we are therefore interested in the case because of that admonition in Title II. And thirdly, we are concerned and interested because we believe that the principal in this case is one on which we would like to have some settlement, some opinion, a decision by this Court so that we will get some guide to future action in this kind of case. We feel very strongly that our nation has made and is making great progress and the area of bringing equal voting, equal employment, equal housing, and other equal opportunities to our Negro citizens. Negroes in greater numbers than ever before, all be it. There are still too few in number are beginning to share the fruits of our free economy. But first class citizenship doesn't mean just a good job or the right to votes or sending your youngster to a desegregated school. We think that first class citizenship means much more than that. It means the sharing of in all the fruits of our free society. It means taking mama out to dinner on Sunday and be able to seat in any place in the restaurant, or go to any restaurant, or taking the kids for a swim on a hot Sunday, or taking your daughter out to begin the teacher the basics of golf at the Lake Nixon miniature golf course. So, from the philosophical point of view, we have a very deep interest in what the court decides in this particular case. Let me just briefly analyze what our feeling is with respect to the opinions below. The District Court we feel got hang up so to speak on the issue of a single enterprise. The fact that these were not the enterprises at the Lake Nixon were not separate units that the snack bar was not owned by someone else, the swimming facilities and so on. We would submit to the court that that's immaterial to the customer. He doesn't care whether one person owns all the facilities or whether a group of people own each one of the separate and individual facilities. And that further that that concept, it finds no rational basis in Section 201 of the Act. There's nothing in there that indicates that Congress said that intent, and if did, it could have put some verbiage in it which would a very easily delineated that intention such as principally engaged in this or under separate ownership or some verbiage that would have given a clue that one could come to the kind of conclusion that the District Court came to. And thus, we feel the District Court was an error in a way it apply the law to these particular facts. The circuit Court of Appeals, it used the hook that there was no effect on interstate commerce. Well, I would submit to the Court that this runs contrary to common knowledge and common understanding. Little Rock, Arkansas is not a sleepy little hamlet back out in the woods some place. It has a major military installation in, it is the hub of a great state, it is on traffic routes, both north and south and east and west, so it isn't very back in the woods. And the issue whether is whether or not there was an offer to serve, any of these facilities assuming that they are covered under the provisions of Section 201 (b), but the circuit Court of Appeals took to view that it wasn't like consider that question because it did not feel there was any effect on commerce and that it labored over the issue of what percentage of the ingredients in the food or the soda water, whatever else might come on -- might have come to Lake Nixon under pursuant to interstate commerce. We would ask the Court to reject that idea. There's ample evidence. This Court can used its knowledge, its common sense, things that are of common knowledge to come to a very ready conclusion that advertising three nights a week on the radio station in Little Rock, Arkansas with 15,000 people just that the military installation alone plus the travels that there were bound to be people who were attracted by the ad. Common knowledge also would tell you that a family staying in a motel might well ask the motel proprietor whether or not his motel has any arrangement with Lake Nixon to use its facilities and certainly it became knowledge, common knowledge are on the air force base that trans inter, if you are white, you could use the facilities at Lake Nixon, but if you were black, you couldn't. And I submit to this Court that now, common knowledge tells us that there were -- that most of the people who were at Little Rock Air Force Base were transits, not in the sense that they were there for a few days, but in the sense that they were residence of another state. And they are just as much in interstate commerce as are the people who are driving through -- the truck driver, the family on vacation; the salesman would have not, and they are entitled just as much for the protection of the law and the constitution. Now, then, let's get to the more difficult issue, the issue of whether or not we can in fact find coverage in Section (b) in either three under the entertainment and exhibition provision, or under four as what I term a combine enterprise. I believe this Court can find justification in this case under both these theories, and I would urge the court to consider the possibility of finding its decision on both of these theories because both will then become useful. Look at the decisions in the Evans case which the circuit Court of Appeals below used to rule against the plaintiffs. I would point out to you that the Evans case, that Fazzio, that the Miller case are amusement cases and what they in effect say is that Congress wanted -- enacted this section and use that particular as specific verbiage in 201 (b) (3), or other place of exhibition or entertainment meant that a roller-skating ring was a place of entertainment, that a bowling alley was a place of entertainment, that a golf course was a place of entertainment, and when one looks at the Evans decision particularly, the District Court said, I find that because that this is a place of entertainment and that because a team comes once a year from Washington D.C. to Virginia to play golf, that that brought it within the per view of the Act. What I say that the District Court was really saying and really doing was saying that a golf course is a place of entertainment because it seems to me not logical to assume that there's going to be very many people who come to watch an amateur golf team play the -- its counterpart from the rural golf club. That's not going to attract any droves unto any of the fairways except maybe some of their friends who may be waiting at the 18th hole. So I say that that's not an exhibition in the term that we ordinarily think of a football game, a basket game and the like. And that Section 201 (b) (3) specifically assumed and those cases clearly indicate this kind of entertainment, entertainment one gets out or participate as suppose to exhibit. I will urge the court to consider also finding that the provisions o 201 (b) (4), the combined establishment theory clearly apply here. The Congress could have used different verbiage if it didn't mean that you have one of the facilities that are covered under two in four, the whole thing is covered, and that make sense. I think that's reasonable to believe that Congress wanted to do that, at least say a whole line of cases whether it be department stores or bowling alleys or what it is. So on that theory also, we believe that there is coverage. Mr. Harper went into the issue of the coverage under the 1866 Act, we should -- would simply urge the court to consider that as --
Byron R. White: (Voice Overlap) make the same argument that there was just a vending machine there, vending candy bars.
Jerris Leonard: Well, I don't see Your Honor how you make a contract with the vending machine, the way you do with a -- the way you do with somebody selling hotdogs or --
Byron R. White: I know but (Voice Overlap) --
William O. Douglas: Suppose you don't get you dime back.
Jerris Leonard: Well, I suppose they have a right to sue.
Byron R. White: But you think the volume of merchandise of the lunch counter sole is wholly irrelevant issue?
Jerris Leonard: I think it's an either or a situation --
Byron R. White: (Voice Overlap) consider enterprise of --
Jerris Leonard: It's irrelevant where (Voice Overlap) to serve.
Byron R. White: -- instead of solve the 100 to 1% of the total gross when you still make this argument.
Jerris Leonard: Yes, I would because you either have to sell merchandise which move in interstate commerce so you have to serve people.
Byron R. White: Well, this was a theory that lower court wasn't it that the eating establishment didn't really amount too much in terms of the overall gross as it?
Jerris Leonard: The overall gross was 23%, but the District Court did not attempt to find nor was there evidence offered at District Court at level with respect to what percentage of that actually move in interstate commerce.
Byron R. White: I know, I'm thinking about -- didn't make a point that the eating establishment really didn't wasn't very important in terms of the overall operation --
Jerris Leonard: If Your Honor please, I'd like to point out two important statements that the trial court judge said that this was a necessary adjunct to this business. Mr. Paul himself testified at page 85 of the appendix -- no, I'm sorry, it's in the District Court record. He said that this -- that the lunch counter was a necessity. Now, what -- there was --
Byron R. White: Did the Court of Appeals say this was a covered establishment under Section 4?
Jerris Leonard: The Court of Appeals didn't answer that question because they simply said there was, it had no affect on commerce, it did not offer a serve interstate travelers, and therefore, it wasn't necessary to decide whether --
Byron R. White: How about the District Court?
Jerris Leonard: District Court said that it was not a covered establishment under either category three or four, or category two. The lunch counter itself was not covered, so it never got to the issue of whether or not there was an effect in interstate commerce, but it said, the District Court said let us recall that -- that it is of -- at page 57 of course, it is probably true that some out of state people spending time in and around Little Rock have utilized one or both facilities. I think that combined with the air force base, combined for that the nature of Little Rock, the nature of the advertising, and by the way, I'd like to just close on that point. The court if anything should use the air that seems to me against the defendant because of the fact that they had the audacity to advertise this member situation knowing full well it was a sham. It was arouse and a sham and they admitted under oath that it was arouse and a sham. They didn't put it into effect until after the time the '64 Act came into be. Thank you Your Honor.
Earl Warren: Mr. Gallman?
James W. Gallman: Mr. Chief Justice and may it please the Court. Lake Nixon used to be called the Nixon Farm. It's 223 acres, mostly of hillside. You get to it by following a street called 12th Street at Little Rock which becomes a country road, pave and at a point if you know exactly of where it is, you can turn right without a help of a sign, you can climb a steep hill and you can come down and you can find Lake Nixon. The 232 acres as I say --
Hugo L. Black: (Voice Overlap) to the lake Mr. Gallman?
James W. Gallman: Sir, (Voice Overlap) no sir. It's made by a dam put in a small creek which doesn't run the year around and the road way, traverses the top of the dam. And this is how you arrive at the Nixon Farm.
Potter Stewart: There's no sign on the --
James W. Gallman: Not on the highway.
Potter Stewart: -- on the highway.
James W. Gallman: There is a way to come in from the back and perhaps that road is paved now. The last time I was there, you could not get in from the rear, that is from the west and north because the road was too rocky and it would -- you just couldn't be sure you make it. Now, this mere little valley two hills comes down to the small lake which I would guess the swimming area is perhaps two acres. I wouldn't stick with that, but it is a relatively small area. There are some shallow back water to the south and west from the where the creek comes that has -- now, it is usually kind of green and lousy and not attractive. And after you go over, after you come in on the dam, you can turn right and go out to what's about authority or 50-acre pasture I would guess where Mr. Nixon used to keep his cows and where I used to shoot birds. Now, Mr. Nixon disposed of this I learn from the record about 1962. Since then, it's been operated by Mr. and Mrs. Paul. If as I say is a shallow little lake, it has a place where you drafts rather small little building. This lunch counter or dining room we're talking about is I guess 8 by 12 feet perhaps. It has -- I've never seen the miniature golf course if they have that, and I assume it does. But mostly, there is a little spit of land that runs out into these 2 acres of water on which people sung and from which they can top off and get wet. Now, except near the dam, the water is not to my knowledge over your head. As I say it is a shallow lake, it's particularly unattractive in the late summer because of health reasons and because of lack of fresh water coming into it.
Abe Fortas: Is there any estimate of how many people go there during the --
James W. Gallman: The record says a 100,000 which surprises me. I haven't seen it since the Paul's have had it.
Abe Fortas: How to get there in there, by helicopter?
James W. Gallman: They sure would have to come in there bumper to bumper because I'd been in there I think in the years in the five months time. It only operates from sometime in May until school starts about Labor Day of that thing. I think what we're dealing with here is an incidentally, I have little apprehension that Little Rock Air Force Base would find this place, I don't think they could. First place is 15 miles in the city limits of Little Rock, you go through Little Rock and then you go northwest of Little Rock some 15 miles further to get to the Little Rock Air Force Base which should make somewhere near 45 to 50 miles before you get from the air force base to this little farm.
Potter Stewart: It was advertised in the publication over there.
James W. Gallman: I understand that from the record that it appeared at least in once a year in the air force magazine at the -- or the newspaper at the air base. I understand it appeared once in Little Rock Today, I understand --
Thurgood Marshall: What the Negroes on 9th Street, they don't know where he talks to you, don't they?
James W. Gallman: Yes sir, they do.
Thurgood Marshall: They can find their way.
James W. Gallman: I believe they could. I didn't say they could.
Earl Warren: We'll recess now Mr. Gallman.


Warren E. Burger: We'll hear arguments next in Westinghouse Electric against Tully. Mr. Dodyk, I think you may proceed whenever you're ready.
Paul M. Dodyk: Mr. Chief Justice, and may it please the Court: in this appeal, Westinghouse Electric Corporation challenges the constitutionality of the way in which the State of New York taxes the income of a domestic international sales corporation or DISC. A DISC is not a typical business corporation. It is a vehicle established under the Internal Revenue Code to permit the deferral of income taxes with respect to certain income from exports. The income which may be attributed to a DISC and on which tax may be deferred is determined by a formula set forth in the Internal Revenue Code such as 50 percent of net income or 4 percent of gross receipts derived from exports. DISCs typically perform no functions, own no property, have no employees. A DISC is essentially an accounting segregation of a portion of a taxpayer's export-related income for purposes of tax deferral. The export-related income so segregated is essentially pure income separated from the costs which generate that income. Those costs remain on the books of the business entities whose exports are in question. Under the Internal Revenue Code as it was in effect during the relevant period, a taxpayer was essentially permitted to defer federal taxes on 50 percent of income allocated to the DISC until that income is distributed to the parent. Turning to Westinghouse, Westinghouse and its affiliates are engaged in a variety of businesses, some of which exports products, a portion of the income from which during the relevant period was allocated by Westinghouse to the DISC. During the years here in question, 1972 and 1973, approximately 75 to 80 percent of the Westinghouse DISC income was derived from Westinghouse exports, approximately 20 to 25 percent from affiliates of Westinghouse. The record in this case establishes that the affiliates of Westinghouse did no business in New York. It further establishes that the affiliates are autonomous, independently managed, and deal with Westinghouse on an arm's length basis. The State of New York does not treat these affiliates as unitary with Westinghouse and has not attempted to tax their income in recognition of the fact that they do not do business in the State of New York. The tax practices here at issue arise from New York's taxation of accumulated DISC income. The particular tax involved is the New York corporate income tax. The New York corporate income tax is a formula apportioned tax. In determining the amount of income which the State of New York taxes, it first attempts to determine the taxpayer's total income. It then multiplies it by a fraction which is determined by the relationship of the taxpayer's New York property, payroll and revenue to the total payroll, property and revenue of the taxpayer. In determining the amount of a taxpayer's income to be apportioned to New York, the state in this case added to the income of Westinghouse the total income of its DISC, including the amount on which federal taxes were deferred, and including the amount derived by reason of exports by Westinghouse non-New York affiliates. Having determined the income apportioned to New York, the state then applied a tax rate of 9 percent to that income as allocated to the State of New York. In computing the tax actually due, however, the court took another step, and that is, it permitted a credit with respect to 70 percent of the tax due on accumulated DISC income. And it is that credit which is at issue in this case, because the State of New York, although it permits that credit, it permits it only with respect to exports which are shipped from a regular place of business in the State of New York. More specifically, in calculating the credit, the New York statute requires the taxpayer to multiply its accumulated DISC income by a fraction of which the numerator is gross receipts shipped from New York, and the denominator gross receipts from exports shipped from all sources. In this case the result was to limit the credit permitted Westinghouse to approximately 5 percent of the accumulated DISC income which New York taxed. Of course, with respect to other corporations which have their base of operations in New York, such as General Electric, the credit is much greater. The basic result of New York's limitation on the availability of the credit is that if a firm ships exports from New York, it will pay a tax of 2.7 percent on accumulated DISC income attributed to that shipment, but if it ships that export from New Jersey or any state other than New York, it will pay a tax of 9 percent. But in terms of dollars, if you assume a corporation with $100 million of accumulated DISC income, 50 percent of which is apportioned to the State of New York, that taxpayer will pay to the State of New York a tax in the amount $4,500,000 if it ships from non-New York facilities, but if it ships from New York facilities, its tax bill will only be $1,350,000.
William H. Rehnquist: Mr. Dodyk, what you're saying is basically that the federal Constitution requires the credit New York extends you to be larger than it was calculated to be under the statute.
Paul M. Dodyk: That is correct, Your Honor.
William H. Rehnquist: I suppose you could win on that point and still be worse off financially if the case went back to the New York Court of Appeals after reversing, and the New York Court of Appeals decided that the New York legislature never would have enacted the credit at all if it knew that this was going to be the result.
Paul M. Dodyk: Well, I guess in that case my client, Westinghouse, would be a very altruistic enforcer of constitutional principle. Or some would have said I would have succeeded in shooting myself in the foot. But in any event, that's something for the Court of Appeals on remand to determine.
Byron R. White: If you win.
Paul M. Dodyk: Yes, of course. Our argument is essentially a simple one, and that is, that any tax scheme which works that difference, which imposes a higher rate of tax on shipments which are made outside the taxing state than it does on the same equivalent shipment made inside the State of New York is an unconstitutional burden on the commerce clause because it discriminates against interstate commerce. In this particular case we believe that the operation of the credit and its unconstitutionality is exacerbated by the fact that the State of New York requires the taxpayer to add to its income base the entire amount of DISC income, but excludes from the denominator of the apportionment formula the property, payroll and revenue of the non-New York affiliates whose shipments accounted for 20 to 25 percent of the DISC income involved in this case.
John Paul Stevens: Let me ask right there, the shipments that originated in New York, were all of them made in interstate commerce?
Paul M. Dodyk: Yes, Your Honor.
John Paul Stevens: So then it's really not a discrimination against interstate commerce; it's a discrimination between two kinds of interstate commerce.
Paul M. Dodyk: In a sense that is true. And much the same was the case, of course, in the Boston Stock Exchange case where the Court observed, I guess for the first time, that even if one is dealing with a discrimination between two forms of interstate commerce, that is still a form of discrimination which the commerce clause proscribes. Essentially, we believe that this case is governed by the Boston Stock Exchange case and Maryland v. Louisiana. In Boston Stock Exchange, New York imposed a tax on any transfer of securities which had certain defined connections or contacts with the state of New York. That tax scheme, however, included a deduction or I should say a credit and a limitation which was applicable if the transfer was executed on a New York Stock Exchange, so that the effect was that a transfer which was executed on the Boston Stock Exchange or some other stock exchange would bear a higher rate of tax than a transfer which was executed on the New York Stock Exchange. And we submit that this case is no different. In the Boston Stock Exchange case if you executed that transfer, you paid a higher rate of tax if that transfer was executed in Boston as opposed to New York, so here, if you ship the export from the port of Boston, you pay a higher rate of tax than you do if you ship that export from New York. Similarly, in Maryland v. Louisiana, the State of Louisiana imposed a tax on the first use of natural gas coming into the state from wells located on the federal offshore properties, and it then built into the tax scheme a series of limitations in deductions which effectively limited the incidence of that tax to gas which was shipped out of Louisiana to out-of-state users, and this Court held that set of limitations to work an unconstitutional discrimination against interstate commerce. Although obviously Appellees do not accept our characterization of their tax as discriminatory, they do not deny, they have never denied and cannot deny that the effect of that tax, economic effect, is to impose a higher rate of tax if an export is shipped from a non-New York facility as compared to one which is shipped from a New York facility. Appellees have not cited a single case in which this Court has sustained a state tax which has that differential geographical impact, and to our knowledge there are no cases which do so. Appellees' response really consists of two basic arguments. One is justification by reference to apportionment, and one is argument by analogy. They say that the constitutionality of the taxes was deemed because the tax is a properly apportioned income tax. That argument, I submit, fails for two reasons. First, as we have pointed out, the tax is not properly apportioned; and second, and equally important, apportionment is irrelevant to the reason why we are urging that the tax is unconstitutional. The reason that the New York tax is unconstitutional is that it results in a higher tax rate if property is shipped from a non-New York source than if the property is shipped from a New York source.
Speaker: Both owned by the same--
Paul M. Dodyk: Pardon?
Warren E. Burger: --Both owned by the same entity?
Paul M. Dodyk: Yes. Both owned by the same entity. So even if the base of the tax were proper--
Harry A. Blackmun: Mr. Dodyk, does that always follow? Your income tax might well go up if you ship from New York, might it not?
Paul M. Dodyk: --Well, it might well go up in the sense that you would have added payroll and property to the numerator if you established the facility in New York as opposed to having the facility established in New Jersey. But I submit, Your Honor, that effect is going to be infinitesimal, because all you're talking about here is establishing a warehouse and handling facility, the property and payroll of which are but a small fraction of the property and payroll which came together into the manufacture and shipment of the product in question. So to the extent that the state relies on an offsetting increase, I submit that the underlying economics will not support the argument. Now, the reason why the formula apportionment defense I think fails is because we're not attacking at this point the tax based on its basis. We're not saying that formula apportionment is wrong; we're saying that what's wrong is allowing a credit to a taxpayer which turns on the locus from which the export is shipped. And because that is the source of the unconstitutionality, we submit that the basis of the tax is simply irrelevant. Or to put it another way, if you take a look at the Boston Stock Exchange case, which to my mind involved a very similar form of discrimination which was struck down, there was no question but that the State of New York could tax that stock transfer which was executed on the Boston Stock Exchange. The Court accepted that there were sufficient contacts with the State of New York to permit the tax, but the unconstitutionality arose from the difference in the rate of tax applied because of where the transfer was executed. Similarly, in Maryland v. Louisiana, the taxable incident was first use of natural gas within the state. The federal government did argue that the first use also made the tax unconstitutional, but this Court rejected that argument and said for purposes of the opinion it assumed that the State of Louisiana had sufficient contact with the first use to permit it to impose a tax. So that in both Boston Stock Exchange and Maryland v. Louisiana, the basis of the tax was a valid basis, just as the Appellees here argue formula apportionment constitutes a valid basis. Now, the Appellees seek to avoid the governing force of Maryland v. Louisiana and Boston Stock Exchange by suggesting a distinction, and the distinction is that in Boston Stock Exchange and Maryland v. Louisiana you were dealing with a transactional tax in a sense, whereas here we're not dealing with a transactional tax but with a formula apportioned income tax. It's true that distinction does exist in the facts of the cases, but Appellees have never suggested any reason why the difference in the tax base should make any constitutional difference. And, again, I submit that difference, the difference between formula apportionment and transaction is irrelevant because the source of the unconstitutionality is the discriminatory impact which results from the application of the credit. The argument by analogy, Appellees in amicus argue that since they could constitutionally take a variety of other steps to reduce the impact of state taxation that they should likewise be permitted to implement the credit scheme here at issue. Appellees' only authority for that proposition is an off-repeated quotation which they take from the Boston Stock Exchange case to the effect that states may use their taxing power to compete with other states for a share of interstate commerce. And then Appellees in amicus go on to cite as alternative measures which they might constitutionally take: providing police and fire protection, providing investment subsidies, reduced taxation of exports, abolition of DISC income taxation, and indeed, abolition of the corporate income tax altogether. I submit that the phrase relied upon from Boston Stock Exchange is far too vague to provide this Court with informed guidance for the resolution of the particular constitutional questions presented here. To say that states may generally use their taxing power to compete for interstate commerce is to say nothing about the legality of a tax which results in higher rates being imposed on out-of-state export shipments as compared to in-state export shipments. Moreover, that language appears only as a general reservation in the context of an opinion in which this Court struck down a taxing scheme which is very similar to the one we have here at bar. The various alternative tax and incentive schemes which New York adduces as being... justifying analogy are all distinguishable in that none of them involves a tax which weighs more heavily on out-of-state shipments than in-state shipments. Of course, a state may choose to abolish taxes on DISC income, on export income or on corporate income altogether; but in none of those cases does the state create a tax, the rate of which differs depending on the location from which the export is shipped. Were New York to exempt a certain category of income such as DISC income or export income from tax, that income would be exempt from New York State tax whatever the point of origin. Here, however, the undeniable and undenied effect of the New York credit scheme is to impose a tax which is levied at a rate of 9 percent on DISC income derived from out-of-state shipments and a rate of 2.7 percent on New York-based shipments. None of the hypothetical constitutionally permissible analogies suggested by Appellees involve any such discriminatory effect. None of the authorities relied upon by Appellees sanction such discrimination. To the contrary, as I have said, Boston Stock Exchange and Maryland v. Louisiana, the principles of which are governing here, mandate the invalidation of any tax scheme which results in a state levying heavier taxes on a transaction because of its out-of-state locale. Thank you, Your Honor.
Warren E. Burger: Mr. Schiff.
Peter H. Schiff: Mr. Chief Justice, and may it please the Court: My view of the case that Mr. Dodyk has argued is very different from what I understand the case to be and what the facts to be. As a matter of fact, it seems to me a good part of what Mr. Dodyk has argued are the issues on which you relate to the second issue in the jurisdictional statement with respect to which you dismissed it for being insubstantial. It seems to me it's the law of the case that the... New York was perfectly proper in viewing Westinghouse and the Westinghouse DISC on a unitary basis. Nevertheless, a good part of the argument that I've heard just now and in their briefs seems to challenge the application of the unitary principle. Admittedly, it is done by the back door in relation to the credit, but it seems to underlie the claim that somehow New York is taxing out-of-state income or is... because they claim that we are... about the credit, that the measurement of the credit is wrong because we base it on DISC income related to shipments from a place of business in New York, but that we don't give it credit if the shipments are from a place outside New York, assumes that we are somehow taxing income that is outside the state. Now, what New York has done here in applying the three-factor business allocation formula which this Court so recently reaffirmed in the Container case, was to only tax New York income. Now, once it's determined what the overall amount of New York income is, we submit that it was reasonable for New York to apply a credit only to that portion of the accumulated DISC income, and that's the DISC income for which the federal government provides a tax break, is to try to ascertain what of the total amount of DISC income is reasonably attributable to New York. Because in the first place in applying the business allocation formula, as our Court of Appeals has said, New York is only taxing New York income. And I think it would be a strange policy indeed, whether the commerce clause or any other provision of the Constitution, to say that we have to give a credit on income that we have never taxed in the first place.
Byron R. White: Well, isn't that upside down, though, really? If... if all of the DISC income had arisen from shipments from New York, there had been the same unitary income but the tax would... you wouldn't have had any tax on the DISC.
Peter H. Schiff: No. The... the credit is only--
Byron R. White: Well, anyway... anyway your credit would have applied to all the DISC income, wouldn't it?
Peter H. Schiff: --Well, no, no. The credit applies... well, it might if everything is from New York and if all the DISC income is--
Byron R. White: That's what I said. That was my hypothetical.
Peter H. Schiff: --Well, that's--
Byron R. White: So you would have collected less tax if all of the DISC income had been from New York.
Peter H. Schiff: --Well, the objective--
Byron R. White: Wouldn't... wouldn't you?
Peter H. Schiff: --I think probably so. The objective--
Byron R. White: Well, probably. That's the whole purpose of the credit.
Peter H. Schiff: --The objective of the credit is to some degree track the credit that's being given by the federal government, but that--
Byron R. White: It sounds peculiar... it sounds peculiar that your credit is trying to identify the income attributable to New York so you can tax it, when in fact you find out the income attributable to New York, and you don't tax it. You give it a credit.
Peter H. Schiff: --Well, we give it a lesser rate, but I don't see what's peculiar about that. I mean we can only... we would only--
Byron R. White: Well, usually when you identify income as originating in the state, that's when you tax it.
Peter H. Schiff: --But we're only taxing income in the state in the first place, Your Honor.
Byron R. White: Oh, I understand that.
Peter H. Schiff: And the question then is do we have to tax the DISC income at the same rate as all other New York income, and that's all that the division here involves. Other business income which... that's related to New York which isn't DISC income we rate... we tax at the 9 percent level. If it is DISC income or if we have an investment tax credit or some other credit, it is a somewhat lesser rate. Now, let me also point out that the credit here... Mr. Dodyk keeps talking about we tax it at 2.7 percent. If he had used the figures in the record as applied to Westinghouse rather than deriving hypothetical examples throughout his brief, the effective tax rate on the accumulated DISC income which is derivable from the record in 1972, one of the years in question here, was approximately 8.69 percent; in 1973 it was about 8.65 percent... the fact reflected by the actual size of the credit here. The size of the credit in 1975 that they are objecting to and apparently they want to pay more is about $2,500. In 1973 it was about $6,000, even though Westinghouse was paying an overall corporate income tax in New York of about a million dollars for the two years combined. And I suggest in response to a question that Justice Rehnquist asked that the... that if Westinghouse were to win in this case, that it would be, in terms of the questions that have been left open by this Court, an invalidation of a DISC credit in its entirety with the result that yes, indeed, Mr. Dodyk would be shooting himself in the foot because his client would be paying about $10,000 more for the two years here in question. Whether he could then change the New York legislature's way of determining the credit I do not know, but I don't think it is a legislative question. The issue here is whether the DISC credit is invalid or not and not how it was computed. They did not preserve any arguments, as far as I can see, in this Court or even in the court below.
John Paul Stevens: While you're pausing, is it correct that the purpose of the credit is to make the... or to provide a motive for these special export companies to have as much business originate in New York as possible?
Peter H. Schiff: Yes, absolutely.
John Paul Stevens: In other words, the purpose--
Peter H. Schiff: Or at least to not lose any more business than necessary.
John Paul Stevens: --The purpose is to have a direct impact on the way goods are shipped overseas.
Peter H. Schiff: Well, in terms of the goods that are shipped, Your Honor--
John Paul Stevens: Well, at least that the business transactions--
Peter H. Schiff: --It's a question of really of where... I would say it's a question of where Westinghouse does it business, because the question isn't really where it is shipped.
Speaker: --Your purpose is to--
Peter H. Schiff: We are... obviously, the purpose of the credit.
Thurgood Marshall: --Are you trying to escape the word "commerce"?
Peter H. Schiff: No. I think I'm trying--
Thurgood Marshall: That it would affect commerce?
Peter H. Schiff: --Well, it may affect commerce. I think any credit does. And the differentiation between state taxes in one state and another always is liable to affect commerce. New York, unfortunately, is a state which has some of the highest taxes in the country, and recognizing that the--
Byron R. White: But at least those high taxes normally affect everybody the same.
Peter H. Schiff: --Well, I think they affect everybody the same.
Byron R. White: But this one doesn't.
Peter H. Schiff: Oh, yes, it does. It does.
Byron R. White: Well, I don't know--
Peter H. Schiff: Everybody who is doing business--
Byron R. White: --I know you pay more taxes if you ship from New Jersey than you do if you ship from New York.
Peter H. Schiff: --No, not to New York. You don't pay it to New York, because you're not paying any taxes on what is being shipped from New Jersey. That would be an incident of the New Jersey taxation, not an incident of New York taxation. Now, this is... could I--
Byron R. White: That... that... but in your unitary scheme you attribute all that income to the parent, and you take all that DISC income into--
Peter H. Schiff: --We're applying the unitary principle just the way it's been applied regularly.
Byron R. White: --So you're taxing the DISC income that originates in New Jersey at a higher rate than if it originated in New York.
Peter H. Schiff: Well, Justice White, if--
Byron R. White: Well, isn't that so?
Peter H. Schiff: --No, no. Not--
Byron R. White: Why isn't it?
Peter H. Schiff: --I mean I think... I think that the--
Byron R. White: Well, you give a credit to one and not another.
Peter H. Schiff: --Well, if I understood what you were just saying, when you apply the apportionment principle, of course, in some sense, as Mr. Dodyk points out in his reply brief, if the 5 percent business allocation formula is applied, you could say your taxing some New Jersey income, some California income.
Byron R. White: Well, that isn't the point.
Peter H. Schiff: But that's... that's not the point.
Byron R. White: No. I wasn't trying to make that point. Wouldn't... wouldn't Westinghouse have paid less tax to New York if all of its shipments, all of its DISC shipments had been from New York?
Peter H. Schiff: If all of its DISC income and all of its--
Byron R. White: All of the... all of the... all of the... all of the shipments in international trade had been made from New York.
Peter H. Schiff: --If the... there had been a place of business... that is, a manufacturing company or a warehouse that Westinghouse was... through which it was generating its income, if that is where the exports are coming from, yes.
Speaker: If they... if they ship--
Peter H. Schiff: But it's not a question of where the port of embarkation is.
Byron R. White: --No. If they ship... if they... if instead of having a warehouse in Delaware they had one in New York and made the shipments from there, they would have paid less tax.
Peter H. Schiff: If all the incidents were in New York, I think as we point out in our brief, it is likely that there would be more income to New York. There would also be more cost. New York might or might not make more or less tax. And one of the problems we have with Westinghouse's presentation is they have made absolutely no factual showing on this record. They've been purely hypothetical. Now, I think the teaching of this Court--
John Paul Stevens: Yes, but, Mr. Schiff, can I interrupt you again? At page 26 of your brief you say, "The purpose of giving the tax credit is to prevent export business being driven out of New York. " You say, "The credit is designed to maintain export business in New York. "
Peter H. Schiff: --Absolutely. It's totally--
John Paul Stevens: Well, then, it must... it must make a difference where the export business is.
Peter H. Schiff: --Well, the hope is... well, if they do some New York export--
John Paul Stevens: You stand by those statements, I take it.
Peter H. Schiff: --Of course. If they do some New York export business, if they are generating some of their income from New York business, and that's being exported... because that's the only thing that the DISC credit relates to... we will then apply a lower tax rate to that income, which we think is totally consistent with this Court's language in the Boston Stock Exchange case and other cases like the Bowers case which permit states to give credit to try to compete. Now, there is a major difference between our tax and the credit in this case and the Boston Stock case and the Maryland against Louisiana case. In those cases... in the Boston case it was clear that New York was... while it was... it was attempting to tax extraterritorially, I think. We are imposing a tax on the stock transfer, but we oppose the full tax, but it varied depending on whether the transfer was being accomplished through an out-of-state stock exchange or a... the New York Stock Exchange. There was, however, enough incidents to tax it in New York because the transfer of the stock certificate, I think, was happening there, so that we were discriminating depending on where part of the transaction happened. In this case the only thing that we tax in applying the unitary principle is New York income, and then we only apply credit to the New York income. As a matter of fact, it's a very, very conservative credit because we use these two percentages, which means that the credit boils down to something like a quarter of one percent.
Harry A. Blackmun: Of course, that doesn't make it valid or invalid, does it?
Peter H. Schiff: No, it doesn't, except that in terms of the effect on commerce, the degree of it is also relevant. It's not done in pure abstract terms, Your Honor. It is done in practical terms. But in any event, we are not taxing extraterritorially, and the same thing was true in Maryland against Lousiana. There, Louisiana--
Byron R. White: I didn't think that was the issue in the case. I thought--
Peter H. Schiff: --In which case?
Byron R. White: --This one. About whether you're taxing extraterritorially.
Peter H. Schiff: I think... I think... well, I have to--
Byron R. White: If you want to get an... you might have something if you want to set up that straw man, but I thought it was a case of discrimination.
Peter H. Schiff: --Well, but I... I, with all due respect, I do not see how we get to discrimination in this case if we are not taxing, as they suggest, extraterritorial values in the first place, or giving a credit extraterritorially. The statement made is that we should not be giving a credit to New York DISC income because we are taxing... would be taxing out-of-state DISC income at a higher level. Now, that seems to me to assume that we are taxing something out of state in the first place, and we are definitely not doing that. I must admit, and this may be my problem, I have had difficulty in understanding what the issue in this case is, because from our perspective the formula applied after... to the total income means that we are only taxing New York income.
William H. Rehnquist: What is... what is the formula upon which you include the income of the DISC within your tax?
Peter H. Schiff: It's the three factor business allocation formula, Your Honor.
William H. Rehnquist: And it... but it... it's treated as being... the whole outfit is unitary, isn't it?
Peter H. Schiff: It's treated as if the... it's really combined, I guess, but it's the Westinghouse Electric and Westinghouse DISC are treated as being unitary.
Byron R. White: Except you don't include... does that include DISC?
Peter H. Schiff: Well, we include everything, all the income and all of the property, receipts and payroll of those companies. What Westinghouse would have us do is to go behind the companies that are being treated in the combined income, which is something that is not done in application of the business allocation formula. Now, we do, if Westinghouse claims that by not going behind it there is something unfair in the application of the business allocation formula, which is, I think, truly what they are arguing here. New York tax laws, we have pointed out in our brief, would have permitted them to try to show some unfairness as it relates to the facts of this case. They haven't made any effort to do that. They--
William H. Rehnquist: Well, is your position basically that your formula that includes the DISC within the income that's taxed to Westinghouse is supposed to compute out only New York income?
Peter H. Schiff: --That is exactly our position.
William H. Rehnquist: And, therefore, when you're giving credit, you ought to be able to credit only on the basis of New York income.
Peter H. Schiff: That is exactly our position. You said it much better than I. But that is our... our position in a nutshell. And--
Sandra Day O'Connor: But isn't New York in fact, even though it's calculating a total tax on all the company's business in New York, isn't New York multiplying that by the fraction of the company's total export business that's conducted in New York rather than simply the fraction of the company's New York business that's export-related?
Peter H. Schiff: --Well, in terms of the original allocation, the only formula that's used to determine what income is taxable is the business allocation formula, and then in determining the DISC credit, we multiply it by both fractions. It's a very conservative way of doing it, but as far as I have been able to figure it out is that we want to make sure that, a) we're only taxing New York income, and that we're only applying the credit to New York income; and b) that the income with respect to which we give a credit is only DISC income as opposed to income generated from other sources. Now, I have to tell you that the net result is a very small credit. I think we could have given a larger credit. And I think that's what Westinghouse wants, but frankly, that doesn't amount to any constitutional infirmity. But that's exactly what we do, Justice O'Connor. I did want to distinguish the Maryland-Louisiana case because there, too, Louisiana was taxing extraterritorially and giving a credit solely to Louisiana so that the tax really wasn't being paid in Louisiana but was paid on the same gas every place else. But there was no question that there was an extraterritorial tax which could only be done if it was in a nondiscriminatory fashion. Here, as I have said, there is no extraterritorial tax. The credit is... I think the concept of it is perfectly reasonable as well as its application. For these reasons I ask for an affirmance of the court below.
Warren E. Burger: Do you have anything further, Mr. Dodyk?
Paul M. Dodyk: Just a moment, Your Honor. I think the central thrust of Appellees' argument is that because the income which is being taxed here is in some sense New York income as determined by formula apportionment, they can proceed from that basis to structure credit which clearly discriminates against non-New York shipments. I submit to the Court that the transaction in Boston Stock Exchange was accepted by the Court as a New York transaction; that the first use tax in Maryland v. Louisiana was accepted by the Court as a Louisiana transaction, but that did not justify in grafting on to that properly based tax a set of limitations which had a geographically discriminatory effect. Thank you, Your Honor.
Warren E. Burger: Thank you, gentlemen. The case is submitted.